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Sunday, November 15, 2015

Article Abstract - The New Estate Planning Lexicon: SUGRITs and Other Grantor-Retained Interest Step-Up Trusts


The New Estate Planning Lexicon: SUGRITs and Other Grantor-Retained Interest Step-Up Trusts




Journal of Taxation, November 2015



ABSTRACT (Key Points & Discussions)

    • Discusses alternative lifetime trusts for married couples that seek to allow for a basis-step up in trust property at death of first spouse, regardless of order of death, so as to achieve basis step-up parity at death of first spouse to spouses in community property jurisdictions. Referred to as GRISUTs - grantor retained interest step up trusts.
    • SUPRT - step up QPRT. A standard QPRT, but with one spouse (or his or her estate) as remainderman, and funding settlor spouse retaining an interest that continues until death of first spouse to die. Nonsettlor spouse provides for return of trust property to settlor in his or her own estate planning documents if nonsettlor spouse dies first. Allows for gift tax marital deduction to match remainder gift on formation, basis step-up regardless of order of death, and the marital deduction for estate tax purposes. It does not achieve any estate tax savings, unlike a regular QPRT.
    • SUGRIT - step up grantor retained income. This is a retained income trust set up by one spouse with the other spouse as remainderman, that does not meet the requirements for avoiding Section 2702(a) 100% gift treatment (i.e., unlike a QPRT). This leads to a partial taxable gift on formation and use of unified credit of settlor spouse, while again achieving full basis step up regardless of order of death. For couples who will likely not use up their full unified credit. But may also be of use to wealthier couples due to reasonable likelihood that use of unified credit on formation of the trust will be undone at death of the spouses.
    • Tangible personal property SUGRIT. This is similar to a QPRT such that unlike the SUGRIT discussed above there is no taxable gift or use of unified credit on formation per qualification as a remainder only gift under Section 2702. Only nondepreciable personal property can be used.
    • SUGRUT and SUGRAT. Uses qualified GRATs and GRATs to avoid an upfront gift by also qualifying as a remainder only gift under Section 2702. Useful for properties other than residences and qualified tangible personal property. One negative is that there may not be 100% estate inclusion and basis step-up if settlor spouse dies first.
    • The death of the remainderman spouse within one year of formation may not allow for a basis step-up under Section 1014(e).
    • The benefits and risks of each spouse creating a GRISUT for the other are discussed, including the application (and possible nonapplication) of the reciprocal trust doctrine.



Basis step up


An excellent overview of the key tax issues in using these trusts to achieve a favorable income tax benefit (in lieu of an estate tax benefit). Such trusts provide an alternative to similar "estate trusts" whereunder one spouse creates an inter vivos trust for the other spouse so as to achieve a basis step-up in trust property regardless of order of death - such estate trusts are different than those discussed in the article because the settlor spouse does not retain a direct interest in the trust. Note that both such trust arrangements need to go beyond tax issues and address divorce aspects, including who ends up with trust property upon divorce or subsequent death of a spouse, and how estate taxes will be paid if there is no marital deduction at the death of the first spouse.


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