February 2024 — In the dynamic landscape of estate planning, staying informed about the latest IRS announcements is paramount. Recently, the IRS released Memorandum Number 202352018, shedding light on the potential gift tax consequences of modifying a Grantor Trust to include income tax reimbursement language.
In this scenario, Grantor sought to modify an irrevocable Grantor trust, with the consent of all beneficiaries, pursuant to state law. The Grantor wanted to add language allowing the Trustee the discretionary power to reimburse the Grantor for income taxes paid as a result of the inclusion of the Trust’s income in the Grantor’s taxable income.
The IRS concluded that this modification constituted a taxable gift by the trust beneficiaries, since they essentially gave up their right to a portion of their respective shares. The IRS further clarified that including such clauses in Grantor trusts from the outset does not trigger a taxable event.
At Lawyers with Purpose, we understand the intricacies of estate planning and the importance of navigating potential tax implications with clients. Our revolutionary Irrevocable Pure Grantor (iPug®) Trust already includes language enabling discretionary payments to taxing authorities for income taxes paid by the Grantor.
This IRS memorandum serves as a reminder to exercise caution when drafting modifications and restatements of irrevocable trusts. Our organization is dedicated to providing valuable insights and resources to help you navigate these complexities successfully.
Lawyers with Purpose is a leading membership organization committed to supporting estate planning and elder law attorneys in running successful and innovative law practices. For more information about Lawyers with Purpose membership, contact our Head of Professional Development, Briana Moriarty at bmoriarty@lawyerswithpurpose.com.
