Grantor Trusts: Income Taxation Under Subpart E (Portfolio 819)

Description

The Bloomberg Tax Portfolio No. 819, Grantor Trusts: Income Taxation Under Subpart E, examines the taxation of grantors and third parties deemed to own the assets of a trust under §§671–679. The planning and drafting of trusts requires a clear understanding of the grantor trust rules in order to ensure that the grantor, trust, and beneficiaries are taxed in the desired fashion.

A grantor trust is any trust which, under §§671–677 and §679, is taxed as if owned in whole or in part by the trust’s creator. A Mallinckrodt trust (sometimes called a “section 678 trust”) is a trust that, under §678, is taxed as if owned in whole or in part by someone other than the grantor. A grantor or third person is required to include in his or her personal income tax computations those items of income, deduction, and credit allocable to any portion of a trust that such grantor or third person is deemed to own under the grantor trust rules.

The grantor trust rules generally delineate those powers and interests that are sufficient to shift the incidence of income taxation from the trust and its beneficiaries to the grantor or third party who holds certain powers or interests in the trust. This Portfolio explores which powers over and interests in a trust that a grantor may retain or third party may hold, whether individually or as a trustee, without being deemed to own the trust. It also examines what powers a trustee (other than the grantor) may hold without causing the trust to be taxed as a grantor trust. This examination includes consideration of the rules relating to reversionary interests, the power to control beneficial enjoyment, administrative powers (including the power to borrow trust assets), the power to revoke, and the use of trust income for the benefit of the grantor. The Portfolio also discusses the special rules that apply to foreign trusts with U.S. beneficiaries.

The grantor trust rules may also be used intentionally to shift the incidence of taxation away from the trust and its beneficiaries and to the grantor or other specific third person. Such intentional grantor trusts provide special planning opportunities, which this Portfolio also explores.

Portions of this Portfolio are taken from Zaritsky, Lane and Danforth, Federal Income Taxation of Estates and Trusts (3d ed. 2001).

This Portfolio may be cited as Danforth and Zaritsky, 819 T.M., Grantor Trusts: Income Taxation Under Subpart E.

Table of Contents

I. Introduction
II. History
III. Section 671: Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
IV. Section 672: Definitions and Rules
V. Section 673: Reversionary Interests
VI. Section 674: Power to Control Beneficial Enjoyment
VII. Section 675: Administrative Powers
VIII. Section 676: Power to Revoke
IX. Section 677: Income for Benefit of the Grantor
X. Section 678: Persons Other Than Grantor Treated as Substantial Owners
XI. Section 679: Foreign Trusts with One or More U.S. Beneficiaries
XII. Intentional Grantor Trusts