[EstGift] Spouses as Joint Grantors

[Gorin, Steven B.]

I agree with the article and suggest that, generally, portion by value is appropriate if the assets are commingled.

If the trust agreement or applicable state law allows pick-and-choose fractional funding, then trust division is generally nontaxable.  Reg. § 1.1001-1(h); see also Rev. Rul. 69-486.
Steve
======================

Steven B. Gorin
sgorin at thompsoncoburn.com<mailto:sgorin at thompsoncoburn.com>
Phone: 314.552.6151
Fax: 314.552.7151
Mobile: 314.602.6151 (when I’m not in the office)
Fellow, The American College of Trust and Estate Counsel (ACTEC)<https://www.actec.org/directory/profile/Gorin-Steven/5ba22dbd-b79e-484b-ab45-8a4ead92af92/>
https://www.thompsoncoburn.com/insights/blogs/business-succession-solutions/about

Thompson Coburn LLP
505 N. 7th St.
One US Bank Plaza
St. Louis, Missouri 63101
www.thompsoncoburn.com<http://www.thompsoncoburn.com/>
http://thompsoncoburn.com/people/steve-gorin
http://www.thompsoncoburn.com/insights/blogs/business-succession-solutions

From: estgift-bounces at actec.org <estgift-bounces at actec.org> On Behalf Of Day, Eileen
Sent: Thursday, July 30, 2020 8:45 AM
To: 'McCaffrey, Carlyn' <Cmccaffrey at mwe.com>; 'EstGift at actec.org' <EstGift at actec.org>
Cc: Litman, Stephen <stephen.litman at stinson.com>
Subject: Re: [EstGift] Spouses as Joint Grantors

This article discusses FAQs of Grantor Trust Reporting:

Estate Planning Journal 2012 Volume 39, Number 08, August 2012
Frequently Asked Questions on Grantor Trust Tax Reporting, Estate Planning Journal, Aug 2012

The authors make this statement:
As noted above in FAQ 1, one of the challenges when a husband and wife are the joint settlors of a trust
is determining whether one or both are treated as owners of the trust. When only one spouse is the
owner of the trust, no additional issues need to be considered merely because the owner is married. The
items of income, deduction, and credit are attributable to that individual and are subject to standard
reporting obligations, conditioned on whether the couple lives in a community property or common law
state and whether the couple files jointly or separately. When both spouses are treated as owners of the
trust, the filing of a joint return facilitates the reporting of attributed items of income, deduction, and
credit.
For purposes of determining the number of grantors when selecting an alternative method of grantor
trust reporting, a trust that is treated as being wholly owned by a married couple that files jointly is
treated as being owned by a single grantor. 15 If the couple files separately, it is necessary to determine
in what proportion each spouse is treated as the owner of the trust. This will be a function of the value of
the assets that each has transferred to the trust, which may need to be determined on a year-to-year
basis as additional assets are transferred. The items of income, deduction, and credit can then be
allocated to each spouse in proportion to the ownership of the trust.

FN 15: See Reg. 1.671-4(b)(8) which provides:
“(8) Husband and wife who make a single return jointly. A trust all of which is treated as owned by a husband and wife who make a single return jointly of income taxes for the taxable year under section 6013 is considered to be owned by one grantor for purposes of this paragraph (b).”

Reg. 1.671-4(b)(3) provides direction on how to report out income to multiple grantors:

(3) A trust all of which is treated as owned by two or more grantors or other persons -

(i) In general. In the case of a trust all of which is treated as owned by two or more grantors or other persons, the trustee must furnish the name, TIN, and address of the trust to all payors for the taxable year, and comply with the additional requirements described in paragraph (b)(3)(ii) of this section.

(ii) Additional obligations of trustee -

(A) Obligation to file Forms 1099. The trustee must file with the Internal Revenue Service the appropriate Forms 1099, reporting the items of income paid to the trust by all payors during the taxable year attributable to the portion of the trust treated as owned by each grantor or other person, and showing the trust as the payor and each grantor or other person treated as an owner of the trust as the payee. The trustee has the same obligations for filing the appropriate Forms 1099 as would a payor making reportable payments, except that the trustee must report each type of income in the aggregate, and each item of gross proceeds separately. See paragraph (b)(5) of this section regarding the amounts required to be included on any Forms 1099 filed by the trustee.

(B) Obligation to furnish statement.

(1) The trustee must also furnish to each grantor or other person treated as an owner of the trust a statement that -

(i) Shows all items of income, deduction, and credit of the trust for the taxable year attributable to the portion of the trust treated as owned by the grantor or other person;

(ii) Provides the grantor or other person treated as an owner of the trust with the information necessary to take the items into account in computing the grantor's or other person's taxable income; and

(iii) Informs the grantor or other person treated as the owner of the trust that the items of income, deduction and credit and other information shown on the statement must be included in computing the taxable income and credits of the grantor or other person on the income tax return of the grantor or other person.

(2) Except for the requirements pursuant to section 3406 and the regulations thereunder, by furnishing the statement, the trustee satisfies the obligation to furnish statements to recipients with respect to the Forms 1099 filed by the trustee.


COMMENTS:
It seems that Treasury contemplates that you can look at a trust and determine which PORTION is treated as owned by which grantor, so it seems to make sense that you can physically divide the trust to respect such portions and have a wholly grantor trust as to each grantor. The question is what does “PORTION” mean. Is that tracing specific assets, or it is simply portion by value?

If the above is true (that you can divide and have wholly grantor trusts as to each), then my question is if you do the physical division after one grantor dies, and use a non-prorata allocation of trust assets but respect the PORTION by value,  is the risk that you are treated as “trading assets” between the two trusts and could have a recognition event on the division as if you did a completely pro-rata allocation of assets and debt, and then traded assets/debt between the two trusts.

-Eileen


Eileen M. Day
Partner

STINSON LLP
50 South Sixth Street, Suite 2600
Minneapolis, MN 55402
Direct: 612.335.7026  \  Mobile: 612.669.0299  \  Bio<https://www.stinson.com/people-EileenDay>

Assistant: MPL.LAATeam4 at stinson.com<mailto:MPL.LAATeam4 at stinson.com>  \  612.335.1702

STINSON.COM<http://www.stinson.com>
From: McCaffrey, Carlyn <Cmccaffrey at mwe.com<mailto:Cmccaffrey at mwe.com>>
Sent: Wednesday, July 29, 2020 5:09 PM
To: Day, Eileen <eileen.day at stinson.com<mailto:eileen.day at stinson.com>>; 'EstGift at actec.org' <EstGift at actec.org<mailto:EstGift at actec.org>>
Subject: RE: Spouses as Joint Grantors

External Email – Use Caution
I’d be interested in knowing whether you have found any authority that supports the idea that if you split a trust into shares  based on the relative values that each of two grantors contributed to the trust, each of the divided trusts will be treated as if created by only one of the grantors.

CARLYN MCCAFFREY
Partner

McDermott Will & Emery LLP  340 Madison Avenue, New York, NY 10173-1922

Tel +1 212 547 5324  |  Mobile +1 646 416 1060  |  Email cmccaffrey at mwe.com<mailto:cmccaffrey at mwe.com>

Biography<https://protect-us.mimecast.com/s/LGJbC0R9AVH62RNSO8wdY/> | Website<http://www.mwe.com> | vCard<https://dynasend.com/signatures/vcard/cmccaffrey-at-mwe.com.vcf> | Twitter<https://www.twitter.com/McDermottLaw> | LinkedIn<http://www.linkedin.com/company/mcdermott-will-&-emery>

Ellen Schwartzman, Assistant to Carlyn McCaffrey
Tel 212-547-5437  |  Email eschwartzman at mwe.com<mailto:eschwartzman at mwe.com>



From: estgift-bounces at actec.org<mailto:estgift-bounces at actec.org> <estgift-bounces at actec.org<mailto:estgift-bounces at actec.org>> On Behalf Of Day, Eileen
Sent: Wednesday, July 29, 2020 5:51 PM
To: 'EstGift at actec.org' <EstGift at actec.org<mailto:EstGift at actec.org>>
Subject: [EstGift] Spouses as Joint Grantors

[ External Email ]
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

Eileen M. Day
Partner

STINSON LLP
50 South Sixth Street, Suite 2600
Minneapolis, MN 55402
Direct: 612.335.7026  \  Mobile: 612.669.0299  \  Bio<https://www.stinson.com/people-EileenDay>

Assistant: MPL.LAATeam4 at stinson.com<mailto:MPL.LAATeam4 at stinson.com>  \  612.335.1702

STINSON.COM<http://www.stinson.com>

This communication (including any attachments) is from a law firm and may contain confidential and/or privileged information.  If it has been sent to you in error, please contact the sender for instructions concerning return or destruction, and do not use or disclose the contents to others.


*******************************************************************************************************************
This message is a PRIVATE communication. This message and all attachments are a private communication sent by a law firm and may be confidential or protected by privilege. If you are not the intended recipient, you are hereby notified that any disclosure, copying, distribution or use of the information contained in or attached to this message is strictly prohibited. Please notify the sender of the delivery error by replying to this message, and then delete it from your system. Our Privacy Policy<https://www.mwe.com/en/general-content-folder/privacy-policy> explains how we may use your personal information or data and any personal information or data provided or made available to us. Thank you.
*******************************************************************************************************************

Please visit http://www.mwe.com/<http://www.mwe.com/> for more information about our Firm.

________________________________

CONFIDENTIALITY NOTE: This message and any attachments are from a law firm. They are solely for the use of the intended recipient and may contain privileged, confidential or other legally protected information. If you are not the intended recipient, please destroy all copies without reading or disclosing their contents and notify the sender of the error by reply e-mail.

-------------- next part --------------
An HTML attachment was scrubbed...
URL: <http://lists2.fsr.net/pipermail/estgift/attachments/20200730/26db4104/attachment-0001.html>