[EstGift] Spouses as Joint Grantors

Wed Jul 29 16:38:03 PDT 2020

As to severing the trusts and treating part as coming from one grantor and part as coming from another, I respectfully submit that all of you in community property states routinely do that whenever working with a community property trust and the first spouse dies.

I’ll forward an actec-prac thread and invite you to refute my attempt to rebut the idea that somehow that is different from what is discussed below.
Steve
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From: estgift-bounces at actec.org <estgift-bounces at actec.org> On Behalf Of Pearl, Nicole
Sent: Wednesday, July 29, 2020 6:01 PM
To: Day, Eileen <eileen.day at stinson.com>
Cc: EstGift at actec.org
Subject: Re: [EstGift] Spouses as Joint Grantors

I believe that there are a couple of issues here.

I agree that no gain or loss would be recognized on a transfer of assets in kind in repayment of the note.  This is true because of the grantor trust status as to the grantor spouse’s portion, and because of IRC 1041 as to the non-grantor spouse’s portion. However, 1041 does not avoid interest income recognition by the non-grantor spouse. Presumably, there may be an investment expense deduction that would offset the interest income, but the income must be reported.

The bigger issue is that I don’t think you can sever a trust to create two separate trusts after the first death such that one would be a grantor trust as to the surviving spouse, and one would be a nongrantor trust.  You can do a qualified severance for GST purposes (and create trusts with different inclusion ratios), but you still end up with two separate trusts - each treated as being a grantor trust as to half of the income and a nongrantor trust as to half of the income.  If anyone has authority otherwise, I’d love to see it.
NICOLE M. PEARL
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On Jul 29, 2020, at 2:53 PM, Day, Eileen <eileen.day at stinson.com<mailto:eileen.day at stinson.com>> wrote:
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Question for you all regarding grantor trust status.

We are considering an irrevocable grantor trust where both spouses are grantors by gifts to the trust.  Further assets would be sold to the trust by one or both spouses on a promissory note.   For a number of years there may be little liquidity in the trust and payments on the promissory note may be made by return of the asset sold. So long as the trust is a grantor trust, no gain/loss is recognized on the interest or return of the asset sold in payment of the note.

If one spouse dies, we likely then have a non-grantor trust as to the proportion of the trust represented by the deceased spouse’s contributions, and a grantor trust as to the proportion of the trust represented by the surviving spouse’s contributions.

The idea we are considering is whether at the time of the first death we can bifurcate the trust, making a non-pro-rata allocation of assets and debt so that the non-grantor portion receives assets and no debt, equal to 50% of the trust value and the grantor portion receives the note payable and assets with a net value equal to 50% of the trust value (obviously, more of the assets than the non-grantor portion to offset the debt).

If we make this a GST Trust, I believe we can do a qualified severance of the trust and do a non-prorata allocation of assets so long as the values are equivalent.

Any concerns with that approach that you can see?

Thank you for your thoughts,
Eileen

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