Grantor Trusts. Maine Tax Forum

Grantor Trusts Maine Tax Forum Jeremiah W. Doyle IV Senior Vice President BNY Mellon Private Wealth Management Boston, MA jere.doyle@bnymellon.com (617) 722-7420 November, 2017 1

Grantor Trusts AGENDA Structure of Subchapter J Background/General Rules/Our Focus Strategy Advantages Types of Grantor Powers Most Frequently Used Types of Grantor Trusts Most Frequently Encountered Toggling Termination of Grantor Trust Status Tax Reporting 2

Income Taxation of Trusts and Estates Code Outline PART I, SUBCHAPTER J Subpart A - Sec. 641-646 - General Rules Subpart B - Sec. 651-652 - Simple Trusts Subpart C - Sec. 661-664 - Complex Trusts and CRT Subpart D Sec. 665-668 - Accumulation Distributions Subpart E - Sec. 671-678 - Grantor Trusts Subpart F - Sec. 681-685 - Misc. Rules PART II, SUBCHAPTER J Sec. 691-692 - Income in Respect of a Decedent 3

Grantor Trusts Governed by 671-678 671 says if grantor is treated as owner of trust, he is taxed on trust income Result: All income, expenses and credits flow through and are taxed to the Grantor or beneficiary regardless of whether distributions are made If grantor is treated as the owner of only part of the trust, he is taxed on income of part he owns and the balance of the trust income is taxed under the normal rules of fiduciary income taxation 672 contains definitions 673-678 sets forth powers that will cause grantor (or the beneficiary) to be taxed on trust income Subpart A-D, Subchapter J (rules for taxation of trusts and estates) do not apply to Grantor trusts 4

Grantor Trusts How do you create a grantor trust? Include language in the trust document which triggers one of the grantor trust sections Take certain action which causes the trust to be a grantor trust How do you determine if the trust is a grantor trust? Read the trust document Identify the grantor trust power Review actions taken in administering the trust What are the grantor trust powers? 5

Grantor Trust Powers - 673-678 673 Retains reversionary interest 674 Retains power over beneficial enjoyment 675 Retains certain administrative powers 676 Retains right to revoke trust 677 - Retains benefits from trust income 678 Power of beneficiary to vest income or principal 6

Grantor Trusts - 673-678 67 3 67 4 67 5 67 6 67 7 Grantor Taxable Beneficiary Taxable 67 8 7

Grantor Trusts - Focus Discuss strategy/advantages Won t focus on powers, section by section Will focus on commonly used powers Discuss types of grantor type trusts Discuss Crummey withdrawal powers 8

Grantor Trusts - Strategy Have income taxed to grantor Preserves trust principal Reduces grantor s estate Taxed at lower rates of individuals Are completed gifts Avoid estate tax inclusion Growth occurs outside grantor s estate Appreciation passes to lower generation 9

Grantor Trusts - Advantages Grantor reports trust income for income tax purposes Sales between grantor and trust ignored per Rev. Rul. 85-13 Facilitates sale to defective grantor trust In-kind distributions of appreciated property can be made from GRAT to satisfy GRAT payments without incurring capital gain Per Rev. Rul. 2004-64 (issued July, 2004), payment of trust income tax by grantor is not a gift by the grantor to the trust Preserves trust principal Swap powers don t cause estate tax inclusion. Rev. Rul. 2008-22 Life insurance policies can be transferred to new grantor trust without triggering the transfer for value rule per Rev. Rul. 2007-13 Trust is eligible S stock owner Grantor can take income tax charitable deduction for contribution to charitable lead trust Sale of principal residence owned by grantor trust occupied by grantor qualifies for $250k/$500k exclusion under 121 10

Grantor Trusts Tax Planning Give interest in closely held business to an irrevocable trust fbo child not actively engaged in the business. Income from business interest is subject to the 3.8% surtax neither child nor trustee materially participates in the business. If structured as a grantor trust, and assuming the grantor (parent) is actively involved in the business, income from the business interest will be taxed to the grantor (parent) and will not be subject to the 3.8% surtax. 11

Types of Grantor Powers Used in Defective Grantor Trusts - No Estate Tax Inclusion 674(a) power to add one or more charitable beneficiaries held by a nonadverse party. Madorin v. Commissioner, 84 T.C. 667 (1985) 675(4)(C) power in a person in a nonfiduciary capacity to reacquire trust assets by substituting assets of equivalent value 675(2) power of grantor to borrow assets without either adequate interest or adequate security 675(3) grantor is treated of at least a portion of a trust to the extent the grantor or the grantor s spouse has actually borrowed from the trust and has not completely repaid the amount borrowed before the start of the taxable year. 12

Types of Grantor Powers Used in Defective Grantor Trusts - No Estate Tax Inclusion 677(a)(1) and (2) power to distribute to or accumulate income for grantor s spouse 677(a)(3) power to use trust income to pay premiums on insurance on the life of the grantor or the grantor s spouse Effectiveness to trigger grantor trust status is unclear Should rely on another grantor trust power. 13

674(a) TRUSTEE S POWER TO ALTER BENEFICIAL ENJOYMENT COUPLED WITH RIGHT TO ADD BENEFICIARIES Most likely to produce grantor trust with no estate tax inclusion Facilitates toggling 3 rd party powerholder can release power without violating fiduciary duty (may be issue with trustee) Power must be in nonadverse party other than grantor e.g. an independent trustee Example: give trustee or 3 rd party power to add one or more qualified charities as beneficiaries. Madorin v. Com r, 84 T.C. 667 (1985) If grantor has power, FET inclusion results under 2036 or 2038 Power doesn t have to be in trustee can be given to trust protector 14

675(2) POWER TO BORROW ASSETS WITHOUT ADEQUATE INTEREST OR SECURITY Income and gift tax consequences Don t borrow assets without adequate interest Will trigger 7872 adverse income and gift tax consequences A loan on an unsecured basis will make it a grantor trust Simply having the power will make it a grantor trust 15

675(2) POWER TO BORROW ASSETS WITHOUT ADEQUATE INTEREST OR SECURITY Estate tax consequences Power held by grantor Won t cause inclusion in the grantor s gross estate it is an arm s length transaction. Could be deemed an economic benefit retained by grantor causing FET inclusion under 2036 or 2038 Power held by nonadverse party Won t cause FET inclusion unless nonadverse party acting as grantor s agent 16

675(3) ACTUALLY BORROW ASSETS AND DON T REPAY BY START OF TAXABLE YEAR Trustee actually lends trust assets to grantor or his spouse, and the loan is not fully repaid at the start of the taxable year. Example: On December 28, 2016 the grantor borrows all of trust assets giving the trustee an unsecured promissory note at the AFR. Loan is outstanding on January 1, 2017. Trust is a grantor trust for all of 2017, even if the grantor repays the loan, say, on January 10, 2017. 17

675(4)(C) NONFIDUCIARY POWER TO SUBSTITUTE ASSETS Power in any person (including the grantor) in nonfiduciary capacity to reacquire trust assets by substituting other property of equivalent value Jordahl v. Com r, 65 T.C. 92 (1975) no FET inclusion for power held in fiduciary capacity. See also PLR 200846001 Rev. Rul. 2008-22, 2008-16 I.R.B. 796 substitution power will not cause estate tax inclusion Trustee must be under fiduciary obligation to ensure that property acquired and substituted are of equivalent value Power can t be exercised in a manner to shift beneficial interests 18

Sample Language: Substitution Power The grantor shall have the power, exercisable in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity, to reacquire the trust corpus by substituting other property of an equivalent value. 19

675(4)(C) NONFIDUCIARY POWER TO SUBSTITUTE ASSETS Who can hold the power? Trustee regs presume power held by trustee is exercisable in fiduciary capacity Presumption may be rebutted by clear and convincing proof that power not exercisable primarily in interest of beneficiaries Grantor trust should negate application of fiduciary duty on grantor Third Party how does a third party reacquire trust assets? IRS ignores this issue 20

675(4)(C) NONFIDUCIARY POWER TO SUBSTITUTE ASSETS Income tax consequences Grantor holds power no gain on exchange of assets due to Rev. Rul. 85-13 Third party holds power should be taxable exchange Estate tax consequences Not included in gross estate for FET purposes due to Rev. Rul. 2008-22 21

675(4)(C) NONFIDUCIARY POWER TO SUBSTITUTE ASSETS Caution: Life insurance trusts Grantor s retention, in a nonfiduciary capacity, of a 675(4)(C) power of substitution is not a retention of an incident of ownership in an insurance policy under 2042. Rev. Rul. 2011-28. Closely-held voting stock Exclude right to reacquire shares of voting stock of a closelyheld corporation May cause inclusion under 2036(b) which treats a right to vote shares of controlled (20% ownership) corporation as the retention of beneficial enjoyment of the shares 22

675(4)(C) WHY EXERCISE POWER TO SUBSTITUTE ASSETS? Swap low basis assets in trust for high basis asset owned by grantor to get 1014(a) basis step-up at death. Preserve loss reacquire low basis asset from trust by swapping in an asset in a loss position. Otherwise, basis is stepped-down at death and taxpayer loses the loss. Transfer to grantor trust preserves the loss inside the trust. Swap insurance policy into grantor trust to avoid three year inclusion rule under 2035. Gets policy proceeds out of grantor s gross estate. Three inclusion rule does not apply it is a exchange for full and adequate consideration. Grantor is transacting with himself no transfer for value issue Preserve appreciation inside a GRAT. Swap residence into IDGT to avoid inclusion if residence is in QPRT and grantor doesn t survive the term. Grantor must pay rent to the IDGT, but the rental payments are not a gift and they increase the cash held in the trust. 23

677(a)(1) and (2) POWER TO DISTRIBUTION OR ACCUMULATE INCOME FOR GRANTOR S SPOUSE Even a discretionary power to distribute income to grantor s spouse cause grantor trust status Won t cause FET inclusion in grantor s FET Problem with power: Grantor trust status terminates when spouse dies Won t work if the grantor is single 24

677(a)(3) POWER TO USE INCOME TO PAY PREMIUMS ON INSURANCE ON LIFE OF GRANTOR OR GRANTOR S SPOUSE Will naked authorization to use trust s income to pay life insurance premium cause grantor trust status? FSA 20062701F wholly owned grantor trust where trust simply authorized use of entire funds to buy insurance on grantor s life even though trust didn t own insurance PLR 8852003 power to by life insurance created wholly grantor trust even though trustee might not exercise power What portion of trust is deemed owned by grantor? Uncertainties surrounding power make it unreliable for securing grantor trust treatment 25

677(a)(3) POWER TO USE INCOME TO PAY PREMIUMS ON INSURANCE ON LIFE OF GRANTOR OR GRANTOR S SPOUSE Reliance on the power to use trust income to pay life insurance premiums is risky Despite the broad language of 677(a), an income interest under 677(a) will apparently make the grantor the owner of only the trust income, not the trust principal. Thus, absent another grantor power, capital gains will be taxed to the trust, not the grantor. Reg. 1.671-3(b)(1); Reg. 1.677(a)-1(g), Example 1. 26

Types of Grantor Trusts Revocable trust Defective grantor trust Grantor retained annuity trust (GRAT)/Qualified personal residence trust (QPRT) Powers under 678 Lifetime general power of appointment Right to principal at stated age Irrevocable Life Insurance Trust Issues with Crummey powers Trust to hold S corporation stock Sale to intentionally defective grantor trust 27

Types of Grantor Trusts REVOCABLE TRUST Grantor retains right to alter, amend, revoke or terminate All income, deductions, gains/losses and credits flow through to grantor under 676 Reporting: Form 1041 information return No numbers on Form 1041. Simple statement that trust is a grantor trust under 671-678 Form K-1 lists all income, deductions, gains/losses and credits as being reportable to the grantor 28

Types of Grantor Trusts DEFECTIVE GRANTOR TRUST Contains grantor power that causes income to be taxed to grantor but not estate tax inclusion Grantor pays income tax on taxable income of trust Not an indirect gift from grantor to trust. Rev. Rul. 2004-64 Trust corpus not reduced by income tax Lowers overall income tax Assets escape estate taxation Transactions between grantor and trust are ignored for income tax purposes. Rev. Rul. 85-13 29

Income Tax Benefit of Grantor Trust Separate Taxpayers: Individual Trust Total Taxable Income $100,000 $100,000 Tax $16,290 $37,883 $54,176 Grantor Trust: Taxable Income $200,000 0 Tax $42,597 0 $42,597 Tax Savings $11,579 30

Types of Grantor Trusts GRAT Treated as grantor trust under 677(a) Under 677(a), grantor treated as owner of all or any portion of trust whose income is or may be distributed to grantor or his spouse Ordinary income taxed to grantor Since income in excess of annuity obligation as well as principal of trust may be needed to make future annuity payments, a GRAT should be treated as a complete grantor trust Capital gains also taxed to grantor 31

Types of Grantor Trusts GRAT Possible that income of GRAT may exceed the annuity obligations so that GRAT may be treated only as partial grantor trust GRAT terms may provide for reversion to grantor s estate if grantor dies during annuity term. Unless the grantor is very young, the reversionary interest will violate 673 causing the GRAT to be a complete grantor trust Reversionary power in donor won t cause gains to be taxed to grantor (Rev. Rul. 75-267 says grantor s estate is separate taxable entity from grantor and is not treated as grantor; PLRs say opposite) Reversionary power in grantor s spouse or adverse party will cause gains to be taxed to grantor The draftsman probably included an additional power(s) to ensure that a GRAT is a complete grantor trust such as a 674(a) or 675 (4)(C) power 32

Powers under 678 Person other than grantor treated as owner of trust if: Person has power by himself to vest income or principal in himself or Previously released the power and retained one of the rights which would cause the trust to be taxed to the grantor Typical 678 powers: General power of appointment over marital trust Right to principal distribution at stated age e.g. 1/3 at 30, 1/3 at 35. balance at 40 5 x 5 power Crummey power 33

Lifetime Power of Appointment Spouse treated as Grantor Funding Trust Marital Trust 2056(b)(5) Family Trust - Net income to spouse - Lifetime General Power of Appointment 34

Right to Principal Distribution at Stated Age B is beneficiary of trust Trust provides for discretionary income to be paid to B and principal to be distributed 1/3 at 30, 1/3 at 35 and the balance at 40 B reaches age 30 and does not demand distribution of the 1/3 he is entitled to at age 30 it stays in trust B is treated as the owner of 1/3 of his share of the trust and the income, deductions and credits of his 1/3 share are reported directly to him under 678 35

Types of Grantor Trusts IRREVOCABLE LIFE INSURANCE TRUST 677(a) - If income of trust is or may be used to pay the premiums on life insurance on life of grantor or grantor s spouse, trust is grantor trust to the extent of the premium payments 678 - Crummey powers may render beneficiary taxable on trust income 36

ILIT Crummey Withdrawal Power Holder of power taxed on the portion of the trust over which he has the power to withdraw Issue: How much is he taxed on? Solution: Determine what he has a power over and how long the power lasts 37

ILIT Crummey Withdrawal Power G makes a $140,000 contribution to an irrevocable trust on 1/1/17 B can withdraw up to $14,000 of the annual additions B is deemed to own under 678 1/10 of the trust income and deductions (14,000/140,000) 38

ILIT Crummey Withdrawal Power Consider duration of power G makes a $140,000 contribution to an irrevocable trust on 1/1/17 B has a 30 day right to withdraw up to $14,000 of the annual additions Since B had the power only for 30 days, under 678 B is deemed to own.82% of the trust (14/140 x (30/365)) 39

ILIT Crummey Withdrawal Power What if trust earned $1,000 in the 30 day period? Is grantor taxed on actual income earned during the 30 day period ($1,000) or only.82% (14/140 x (30/365)) of the income for the entire year? No answer 40

ILIT Crummey Withdrawal Power Consider duration of power Exercising early G makes a $140,000 contribution to an irrevocable trust on 1/1/17 B has a 30 day right to withdraw up to $14,000 of the annual additions. He exercises the power on day 5. Since B had the power only for 5 days, under 678 B is deemed to own.0014 of the trust (14/140 x (5/365)) Can limit amount B reports by exercising the power early 41

ILIT Crummey Withdrawal Power What if Grantor is treated as the owner under 673-677 and Beneficiary is treated as the owner under 678 who is treated as the owner? 678(b) says if Grantor holds a power that causes him to own the trust and the Beneficiary holds a 678 power over income, the Beneficiary s power is disregarded and the Grantor is treated as the owner IRS, in a number of PLRs, ignores income language and treats Grantor s power as trumping beneficiary power. Caution: If Beneficiary has power of withdrawal, review trust document to determine if Grantor is also treated as owner of trust if so, Grantor s power trumps Beneficiary power. 42

The EVER EXPANING Crummey Power IRS says if beneficiary lets power lapse, an expanding portion of the trust is a grantor trust IRS deems a lapse of a power of appointment to be a release or other modification. Beneficiary is deemed to contribute to the trust the portion of the lapsed power for which he is not already treated as the owner Since trust accumulates income for later distribution to beneficiary, 677 applies to the lapsed portion that the beneficiary is deemed to contribute to the trust so the beneficiary is taxed on that portion under 677 rather than 678 43

The EVER EXPANING Crummey Power B has a 5 x 5 power over a trust In year 1 B can withdraw $5,000 from a $100,000 trust B is treated in year 1 as the owner of 5% of the trust In year 2 the principal of the trust is $110,000 and A can withdraw $5,500 The increase in B s ownership at the end of year 2 is $5,225 ($5,500 x (95% x 110,000/110,000) At the end of year 2 B is treated as the owner of 9.75% ($5,225/$110,000 + 5%) 44

The EVER EXPANING Crummey Power The IRS s position is stated in PLR 9034004 and other PLRs Many fiduciaries do not follow this method as the IRS has not ruled publicly on this issue Rev. Rul. 67-241 does not mention this issue 45

Trust Holding S Stock S election not blown if stock held by trust entirely owned by grantor Apparently, it must be a 100% grantor trust Doesn t matter which Code section confers grantor trust status 46

Trust Holding S Stock Trusts that can hold S stock: Grantor trust owned by U.S. citizen or resident Grantor trust after death of grantor for 2 years beginning at date of death may continue as QSST or ESBT Testamentary trust for 2 years after stock is transferred to the trust may continue as QSST or ESBT Trust to exercise voting control of stock Qualified Subchapter S Trust (QSST) Electing Small Business Trust (ESBT) 47

Sale to IDGT as an Estate Freeze Purpose: convert appreciating asset into a fixed, nonappreciating asset thru an installment sale to an intentionally defective grantor trust Sell appreciating asset to a IDGT in return for a P/N with a fixed interest rate 48

Step 1 IDGT Establish a IDGT use a grantor power that will cause grantor to be taxed on the trust s income but won t cause federal estate tax inclusion e.g. 675(4)(C) (see Rev. Rul. 2008-22) 49

Step 2 Grantor seed the trust 10% of assets Constitutes gift use exclusion and/or pay gift tax, allocate GST exemption IDGT 50

Step 3 Grantor Sell asset to trust Nontaxable transaction Rev. Rul. 85-13; PLR 200842007 IDGT Consider having seller elect out of installment reporting gain recognized in first year but no income tax under Rev. Rul. 85-13. Death during subsequent year of P/N should be nonevent for tax purposes 51

Step 4 Grantor Take back P/N 7872 rate*, interest only, balloon pymt, term of loan < grantor s LE to avoid 2036 inclusion argument, prepayment permitted, P/N secured by asset sold to trust, recourse note, repay P/N entirely during grantor/seller s life to avoid potential income tax consequences at grantor/seller s death IDGT Income earned by asset sold to IDGT may be used to pay interest on note Interest income nontaxable to grantor per Rev. Rul. 85-13 *Note: short-term (0-3 yr) and mid-term (.3-9 yr) rates usually lower than 7520 rate 52

Result Grantor Income tax paid by grantor on income earned by trust no gift tax consequences per Rev. Rul. 2004-64 Appreciation in trust out of grantor s estate IDGT Trust principal not reduced by income tax Trust assets appreciate outside grantor s estate Held fbo grantor s heirs 53

10% seed funding plus sale of appreciating asset Grantor IDGT P/N Interest Payments 54

Sale of IDGT ESTATE TAX CONSEQUENCES Installment note (P/N) plus any accumulated interest included in grantor/seller s gross estate for FET purposes Fixed, non-appreciating asset Asset sold to IDGT excluded from gross estate Appreciating assets owned by trust Grantor s payment of tax on income earned by IDGT decreases grantor s estate 55

GIFT TAX CONSEQUENCES Sale of IDGT Initial seed constitutes a gift Sale to trust not treated as gift (assuming value of asset sold to trust is correct) Grantor s payment of income tax on IDGT s income not a gift (Rev. Rul. 2004-64) How does grantor pay the income taxes on the trust s income? Possible to have discretionary reimbursement provision in trust see Rev. Rul. 2006-64 If grantor s spouse is discretionary beneficiary of the IDGT, trust could make distribution to spouse in an amount sufficient to pay income taxes payable on a joint return. 56

Sale of IDGT INCOME TAX CONSEQUENCES Initial sale to trust doesn t result in gain recognition. Rev. Rul. 85-13; Rev. Rul. 2007-13 (sale of policy from one wholly owned grantor trust to another wholly owned grantor trust); PLR 200842007 (no gain recognition on grantor s exchange of equivalent assets when grantor owned entire trust) Interest payment not taxable income to grantor. Rev. Rul. 85-13. 57

Sale of IDGT GENERATION SKIPPING TAX CONSEQUENCES If GST exemption allocated to seed gift, no further GST exemption needs to be allocated because the transaction is a sale, not a gift (assuming value of asset sold is correct) 58

REV. RUL. 2004-64 Tax Reimbursement Clause What if Grantor wants to be reimbursed for the income taxes he pays on the income in the grantor trust? Discretionary reimbursement is fine assuming no pre-arranged agreement to reimburse. Mandatory reimbursement deemed to be a retained right causing estate tax inclusion. 59

Toggling WHAT IS TOGGLING Power in grantor or another person to release the power that causes grantor trust status Can also toggle by borrowing and not repaying a loan Ends grantor trust status Trust then taxed as a separate taxpayer under the normal rules governing the taxation of trusts The trust instrument could also give third party the power to re-grant the released power to the grantor or another to revive grantor trust status 60

Toggling REASONS TO TURN OFF GRANTOR TRUST STATUS Grantor doesn t want to pay income tax on income he doesn t receive Grantor wants to avoid large capital gain tax due on sale of appreciated assets Law may change making grantor trust status unattractive 61

Toggling WHO SHOULD HAVE THE POWER TO TURN OFF GRANTOR TRUST STATUS? Grantor No could be 2036(a)(2) retained power for estate tax purposes Spouse No if spouse has power to release and reacquire grantor power, 672(e) will attribute power to grantor so that power would never be deemed released Trustee No could be violation of fiduciary duty But see PLR 9304017 where the Service allowed a trustee to renounce a grantor power irrevocably in writing Third Party Yes power could be given to a trust protector 62

Toggling WHO SHOULD HAVE THE POWER TO REVIVE GRANTOR TRUST STATUS? Person releasing the power should not have the power to turn the power back on Looks like the person has retained a power over the trust if the person turning the power off has the right to turn the power back on Best ways to turn the power back on: Court ordered reformation. See PLR 200848017. Grantor or grantor s spouse actually borrows from the trust and does not paid loan back before the start of the taxable year. 675(3). Give authority to a third party distribution committee. 63

Termination of Grantor Trust Status EFFECT Causes trust to become a separate taxpayer for income tax purposes Termination during grantor s life Treated as transfer by grantor of trust assets to the trust in exchange for any consideration given by the trust to the grantor Problem if any part of an installment note is still unpaid Capital gain is accelerated and taxed to grantor Problem if trust holds assets subject to debts in excess of basis Gain must be recognized Termination at grantor s death No case, regulation or ruling that addresses income tax treatment of termination of grantor trust status at grantor s death 64

Tax Reporting THREE OPTIONS 1041 Alternative 1099 Grantor-TIN Alternative (optional) 1099 Trust-TIN Alternative (optional) 65

Tax Reporting 1041 ALTERNATIVE REG. 1.671-4(a) Trustee applies for TIN for the trust Trustee files Form 1041 information return and attaches a statement of items of income, deductions and credits for the year in question Statement (Form K-1) furnished to grantor for use in preparing his income tax return Traditional method used by most fiduciaries 66

Tax Reporting 1099 GRANTOR-TIN ALTERNATIVE REG. 1.671-4(b)(2)(i)(A) Trustee need not obtain a TIN until either (1) the first taxable year in which the trust or any part of the trust is no longer a grantor trust, or, (2) the first taxable year of the trust in which the trustee does not report using the grantor-tin alternative Trustee provides all payors of reportable income with the name and TIN of the grantor and the address of the trustee Trustee is not required to file either a Form 1041 or Form 1099 with the IRS Payors of income to the trust send Form 1099 to trust showing the reportable income as taxable to the grantor. Trustee delivers Form 1099 to grantor. Trustee must get completed W-9 from grantor Trustee furnishes grantor with detailed statement of income, deductions and credits 67

Tax Reporting 1099 TRUST-TIN ALTERNATIVE REG. 1.671-4(b)(2)(i)(B) Trustee applies for TIN for trust Trustee provides all payors of reportable income with the name, TIN and address of the trust Trustee not required to file Form 1041 but must file Form 1099 Payors of income send Form 1099 to trust showing reportable income as taxable to the trust Trust is required to file Form 1099 with the IRS by the end of February reporting the total interest and dividends received on 1099-INT or 1099-DIV, whichever is applicable Shows trust as payor and grantor as owner of the trust and payee Gross proceeds of sale reported for each sale on 1099-B Copies Form 1099 not sent to grantor trustee instead sends statement of this information to grantor 68

Conclusion Grantor trust rules are COMPLICATED!!! Must read document and review administration of trust Determine the type of power Determine extent of grantor power Grantor taxable on income Grantor taxable on gains Information reporting to grantor 69

Thank You! 70