Federal Income Taxation of Estates, Trusts, and Beneficiaries in a Nutshell by Grayson McCouch

Author:Grayson McCouch
Language: eng
Format: epub
ISBN: 9781634603096
Publisher: West Academic
Published: 2017-04-04T04:00:00+00:00

Under § 671, the grantor or another person who is treated as the owner of any portion of a trust may 218

be required to include all or part of the trust’s income in computing his or her taxable income. Before examining the income tax consequences of deemed ownership, it is important to understand who qualifies as a grantor and who may be treated as owning a portion of a trust.

In traditional usage, a grantor is a person who creates a trust or furnishes property to fund a trust—in other words, a settlor or a trustor, terms which are often used interchangeably as synonyms for a grantor. The identity of the grantor or settlor may be material for various purposes, such as interpreting the terms of a trust instrument, satisfying creditors’ claims, or determining marital property rights on death or divorce. Ordinarily there is little difficulty in identifying the grantor when a trust is created and funded by the same person. The situation may be more complicated, however, if a trust is funded indirectly by someone other than the person who nominally created it, or if more than one person contributes property to the same trust.

For purposes of the grantor trust rules, the regulations define a grantor as “any person to the extent that such person either creates a trust, or directly or indirectly makes a gratuitous transfer . . . of property to a trust.” Reg. § 1.671–2(e)(1). For example, if a person creates or funds a trust on behalf of another person, both persons are treated as grantors of the trust. However, the regulations go on to state that “a person who creates a trust but makes no gratuitous transfers to the trust is not treated as an owner of any portion of the trust” 219

under §§ 671–677 or 679. Thus, a grantor will be treated as the owner of all or part of a trust for income tax purposes only if he or she makes a gratuitous transfer to the trust. (In contrast, a person who holds a power of withdrawal described in § 678 will qualify as a deemed owner for income tax purposes even though the power holder did not create the trust or contribute any property to it and therefore by definition cannot be a grantor.) In sum, the income attribution rules of § 671 come into play only if a person is (1) a grantor who makes a gratuitous transfer to the trust and holds (directly or by attribution) a power or an interest described in §§ 673–677, (2) a U.S. grantor who transfers property to a foreign trust with U.S. beneficiaries described in § 679, or (3) a person other than a grantor who holds a power of withdrawal described in § 678.

The distinction between the status of a grantor and that of a deemed owner under the grantor trust rules may be significant if the nominal creator of a trust does not transfer any property to the trust. Such a person will

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