Idioms & Grantor Trusts: Having It Both Ways (For Now)

Idioms & Grantor Trusts: Having It Both Ways (For Now)

You can’t eat your cake and have it, too! 

We’ve all said it many times and in every case we were talking about more than just desserts.  Layered within the phrase is the more subtle and intended message that you can’t have it both ways; or that to get something you’ve got to give up something else.

Our conversations are peppered with idioms, those oft-used little word-packages whose literal meaning have nothing to do with what they actually communicate.  For the outsider struggling to learn the language, idioms can cause more roadblocks to understanding that all the other irregularities of grammar and spelling that attend the King’s English.  And it gets more confusing when an idiomatic truth proves unreliable; as in the case of grantor trusts.

These grantor/intentionally-defective/irrevocable/lay in the house that Jack built/life insurance trusts turn the idiom on its head by allowing, from at least a tax perspective, a taxpayer to have it both ways.

Consider the advantages a grantor trust can provide if all is properly done:
  • For estate tax purposes:  All property in the trust is not included in the trust-maker’s taxable estate, offering significant tax savings on both the original principal and on appreciation after transfer to the trust.
  • For income tax purposes:  The consequences of all that takes place in the trust flow back to the personal return of the trust-maker.  This a) allows more control over the severity of the tax – especially if the maker has certain tax advantages in play, and b) avoids depletion of assets in the trust to make tax payments and, by paying the trust’s tax, allows for a gift tax-free benefit to the trust by the maker.
Let’s keep the ball rolling.  While the maker is enjoying the best of both tax worlds, he or she also benefits in that:
  • Assets in the trust are protected from the claims of the maker’s creditors.
  • If the maker is married, he or she can maintain remarkable degrees of vicarious control over and access to property in the trust by establishing a life estate in the spouse.

If you want to hide a barn you shouldn’t paint it red.  It’s no surprise that a planning device with this many advantages has caught the attention of the lawmakers.

If lack of familiarity with common idioms is hampering you then it’s time you pulled yourself up by your own bootstraps, put your nose to the grindstone, and began to get the lay of the land on such things.  Or simply contact me with questions that come up in your casework concerning grantor trusts, at 706-354-0401 or tom@cpsadvancedmarkets.com.  When we are done you will know your noodles.

By the way, my Mother never quite got the hang of making cakes from scratch.  Her marble cakes were always so hard we just took them for granite.