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Converting Grantor Trusts to Non-Grantor Trusts: Tax Benefit Evaluation and Potential Pitfalls

Switching Off Grantor Trust Features in Existing Trusts, Structuring Multiple Trusts to Preserve Deductions

Recording of a 90-minute CLE/CPE video webinar with Q&A

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Conducted on Tuesday, February 14, 2023

Recorded event now available

or call 1-800-926-7926

This CLE/CPE course will provide estate planning counsel with a thorough and practical guide to converting grantor trusts to nongrantor trusts and evaluating the potential tax benefits and disadvantages of such conversion. With the current environment’s continued focus on income tax planning in conjunction with estate tax planning, the panel will cover methods of changing the tax classification from grantor to nongrantor and the issues and effects of this change. The webinar will also consider the risks stemming from conversion, the potential disadvantages of nongrantor trusts, and the risks associated with reverting to grantor trust status in the future in certain scenarios.

Description

Under current tax law, individuals with grantor trusts that have been settled to minimize estate tax exposure may be better served with nongrantor trusts after considering the income tax implications. Converting grantor trusts to nongrantor trusts may also create additional income tax deductions in connection with state income taxes, charitable planning, and the pass-through business income rules.

For higher net worth taxpayers, the loss of these and other deductions often hits much harder than the potential estate tax risk, increasing the federal and state income tax burden on many income-generating assets. Grantor trusts, long the preferred vehicle for settlors looking to minimize or defer wealth transfer taxes, may be less impactful in this lens. However, in some cases, these tax benefits available to nongrantor trusts may come at the expense of certain long-term transfer and income tax benefits available to grantor trusts.

Planners should consider restructuring existing grantor trust vehicles to convert trusts to nongrantor trusts if they determine that the overall tax benefits outweigh potential tax disadvantages when both short-term and long-term planning goals are taken into account.

Listen as our experienced panel provides a practical guide to converting grantor trusts to nongrantor trusts and, to the extent not already done, using up the temporarily increased estate exemption amounts.

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Outline

  1. Converting grantor trusts to nongrantor trusts
    1. Methods for the conversion
    2. Potential pitfalls and tax implications
  2. Potential benefits of nongrantor trusts
    1. Federal and/or state income tax savings and deduction benefits
    2. Cross-border scenarios
    3. Other potential tax benefits
    4. Incomplete gift nongrantor trusts
  3. Potential disadvantages of nongrantor trusts
    1. Weighing long-term disadvantages against short-term benefits (impact on basis planning, loss of certain transfer tax benefits and planning opportunities, etc.)
    2. Cross-border scenarios
  4. Conversion back to grantor trust
    1. Current status of authorities
    2. Potential risks

Benefits

The panel will review these and other relevant topics:

  • Switching off grantor trust status of existing trusts
  • State income tax benefits and treatment of nongrantor trusts
  • Possibility for enhanced deductions
  • Tax impact of complete gift trusts vs. incomplete gift trusts
  • Potential benefits when dealing with Qualified Small Business Stock
  • Potential income and transfer tax disadvantages of nongrantor trusts
  • Using incomplete gift nongrantor trusts (INGs) to minimize state income tax

Faculty

Hatten, Daniel
Daniel Hatten
Partner
McDermott Will & Emery

Mr. Hatten focuses his practice on private client matters, advising clients on a range of estate and wealth planning...  |  Read More

Murray, Elliott
Elliott H. Murray
Partner
Baker & McKenzie

Mr. Murray is head of the US Tax and Wealth Management practice in Geneva and is a partner in the Firm's...  |  Read More

Zhou, Shudan
Shudan Zhou
Partner
Norton Rose Fulbright US

Ms. Zhou focuses her practice on counseling high net worth individuals, trustees, and financial institutions on the...  |  Read More

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