> Thanks again. What I want to accomplish is to make the
>> bypass trust a grantor trust. There are substantial income
>> and estate tax advantages. I'm still not convinced it isn't
>> already--i.e. that the beneficiary could be the "owner" for
>> income tax purposes under 674, 675, etc.
> Section 673(a): "The *grantor* shall be treated as the owner..."
> Section 674(a): "The *grantor* shall be treated as the owner..."
> Section 675: "The *grantor* shall be treated as the owner..."
> Section 676(a): "The *grantor* shall be treated as the owner..."
> Section 677(a): "The *grantor* shall be treated as the owner..."
> Section 678(a): "A person other than the grantor shall be treated > as the owner..." >
> It seems pretty clear that the grantor is the only person
> who can be treated as the owner under any of the normal
> grantor trust rules, except under section 678.
>
> Just in case there is any doubt:
>
> Reg 1.671-2(e)(6), Example 4: "A creates and funds a trust,
> T. A does nto retain any power or interest in T that would
> cause T to be treated as an owner of any portion of the
> trust under sections 671 through 677. B holds an
> unrestricted power, exercizable solely by B, to withdraw
> certain amounts contributefd to the trust before the end of
> the calendar year and to vest those amounts in B. B is
> treated as the owner of the portion of T that is subject to
> the withdrawal power under section 678(a)(1). However, B is
> not a grantor of T under paragraph (e)(1) of this section
> because B neither created T nor made a gratuitous transfer
> to T."
>
> This does leave open the possibility of having the husband
> be a grantor if teh husband makes a gratuitous transfer to
> the trust. This could have estate and gift tax
> ramifications, though...I'll have to give it some thought.
>> In addition, the surviving spouse is the trustee and the
>> trustee's power to appoint to the SS is subject to an
>> ascertainable standard to avoid 2041. Theoretically the
>> ss/trustee could appoint income and corpus to himself in any
>> amount and anytime he decided he needed $ for HEMS in his
>> sole discretion. There is no ascertainable standard in 678,
>> and already we know that lapse of 5 and 5 powers results in
>> partial grantor trust status.
> "Ascertainable standard" means that there is supposed to be
> an objectively determinable amount that needs to be
> distributed to the surviving spouse for health, education,
> maitenance, and support. There is no "discretion" in the
> ascertainable standard amount. If the surviving spouse
> ignores the ascertainable standard and instead treats this
> as a general power of appointment, then you get to have your
> grantor trust status under 678, but the trust is also
> included in the surviving spouse's estate under 2041.
>> If it truly is not already a grantor trust, then I would
>> like to take action to make it one. Suggestions would be
>> appreciated. Possibilities include (1) Beneficiary borrows
>> from the trust w/o adequate security--even though 675 says
>> "grantor"
> But 675 does say "grantor". Once you can convince Congress
> to change 675, then this might a possibility.
>> (2) Appoint a foreign, e.g. Canadian Bank,
>> trustee--679 says the "transferor" is the owner
> You haven't created a new trust here, so you don't create a
> grantor trust. What you have done is just made the trust a
> foreign trust, triggering tax under section 684. If you
> transferred the assets to a new trust with a foreign
> trustee, you still have the 684 problem (which is probably
> not a huge issue with the step-up in basis), but the new
> trust is treated as a grantor trust owned by the appointing
> trust, not owned by the trustee husband. See Reg
> 1.671-2(e)(6), example 8.
>> (3) reform
>> the trust (with court approval) to include one or more
>> powers that make it a grantor trust w/o making it subject to
>> estate tax (By your analysis, it would have to be a 678
>> power--Q. Is there a way to give a 678 power to achieve GT
>> status w/o 2041 concerns?) Obviously #2 and #3 are more
>> trouble, cost more, have additional reporting, etc.
> With 678 and 2041, I don't think you can have it one way
> without creating problems on the other end.
>
> I think the only way around this would be to have the
> husband and wife both be grantors of the trust (i.e., both
> would transfer assets into the trust when it is set up).
> Then when one dies, the other remains as a grantor.
The ultimate goal here is to take gains in the trust, have them taxed to the beneficiary at his lower rate (he has a carryforward loss that is of no use after at death, since he will get a step-up in basis anyway). With the grantor trust, you don't have to make a distribution from the trust which would be undesirable for future estate tax and liability reasons. Here's where I'm coming out on this. This is a "regular" testamentary trust. Strict reading of the statute says it's probably a GT under 678, since 678 has no "standard"--there are a couple of old conflicting PLR's and one court case---U.S. v. De Bonchamps??, I think, that says if there is a reasonably definite standard, then it's not a grantor trust. (9th circuit, left coast) And that's what most practitioners go by. Apparently nobody wants to challenge it, including the IRS. It seems ome are just filing as grantor trusts anyway. From what I understand 1041's are never audited, and if you "wrongfully" assume it's a grantor trust from the beginning, you wouldn't get an EIN and you wouldn't file a 1041. Re Sec. 679 grantor trust--if there is a "foreign" trustee with the power to make one single "significant" decision (like what to call income and what to call principal) without getting "vetoed" by the US trustee(s), it's not a domestic trust and therefore a foreign trust. See sec.
301-7701. If it has a US beneficiary then it's a grantor trust for the "transferor", and sec 684 does not apply since being a grantor trust under 671-679 is one of the exceptions. (In my case, even if sec 684 applied, I'd do it because I want to take the gain in the Trust.) Thanks again to all of you who have weighed in on this, and I'd appreciate any further thoughts. Surely someone has been down this road before. P.S. Even if you don't want to sell assets and take gains, etc--once it's a grantor trust, high basis assets in the surviving spouses estate can be swapped for low basis assets in the trust. It's not a sale--there's no gain or loss--it gets the assets in the right place to maximize step-up. I'm sure there are other reasons/applications as well.
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