Is My Grantor Trust Safe?
The current Congress is mulling making major changes to grantor trust rules. These changes would likely make future grantor trusts have little or no estate or gift tax value. But most everyone assumes that current grantor trusts that have been created will be safe from any changes.
This is likely true for non-operating assets such as stocks, bonds, and perhaps real estate. However, what happens if a farmer has placed farm operating assets into a grantor trust or more likely has sold a farm to an intentionally defective grantor trust. We know that the proposals will make any new gifts into the trust subject to an additional gift tax at the owner’s estate or during lifetime or both.
So it is very important to make sure that the grantor trust stays clean during the grantor’s life. However, what happens if the grantor continues to be the farmer and makes a guarantee of the farm operating, equipment or real estate loan and is not fully compensated by the farm inside of the grantor trust. Does this become a gift? What if the farmer works for the farm and does not charge fair market value for his/her services? What if the farmer rents ground to the farm for less than fair market value? All of these items could be asserted by the IRS as being a gift and the assertion could be done when the farmer passes away and is no longer around to defend themselves.
Also, many of these grantor trusts contain clauses allowing the farmer to substitute property with equal value. This now becomes likely a taxable gift of the transfer of the asset inside of the trust and makes the new asset put into the trust taxable in their estate.
Many grantor trusts have been created this year by farmers that don’t understand all of the nuances and possible risks. If you have created a grantor trust to get around the new rules make sure you understand them and know how to not create problems down the road.
These trusts can be helpful in reducing your estate tax but they can also make your life more complex and if you don’t follow the rules you can end up owing more tax than planned.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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