Will We See More Non-Grantor Trusts?

• May 16, 2018
• Paul Neiffer

I am writing this post on an IPad at 35,000 feet on an airplane. I can see remember when our office got our first fax machine back in the mid 1980s. It was about the size of a small refrigerator, cost about $5,000 and used really funny paper. We thought is was the coolest thing around.

Now I know everyone under 35 is rolling their eyes right now so onto the post.

Now that the lifetime exemption has doubled to slightly over $11 million we will likely start to see some major gifts by farm couples to their kids and grandkids. A lot of these gifts will be in the form of a trust and under the old tax law many of these trusts were “Grantor” trusts.

Even though you had made a completed gift for gift tax purposes the income was still taxed as if you did not make the gift. This allowed you to “sell” farmland or other assets to the trust and not pay tax on the gain. Additionally paying the income tax also reduced your estate.

These rules still apply however Section 199A is allowed for trusts which means we may now want to have the trust not be a grantor trust if you can’t claim the full Section 199A deduction.

Let’s look at an example.

John and Susan have a very successful farm operation growing organic speciality crops. The farm nets $1 million each year and four of their children are actively involved in the farm operation. Each of the kids have spouses that work outside of the farm and every couple has taxable income exceeding $600,000. The farm would normally create a $200,000 Section 199A deduction however there is very little labor paid or qualifying property. 

John and Susan have wanted to gift part of the farm to their kids for several years. They decide to give 15% to each kid in the form of a trust. This allows each of trusts to deduct $30,000 ($150,000 X 20%) of Section 199A against the taxable income of the trust. This reduces overall family income by $120,000.

Since John and Susan have over $500,000 of other income both them and the trust are in the top 37% tax bracket. Therefore the family would save about$44,400 each year (as long as Section 199A is in effect).

There are other non-tax reasons why you may not want to set up a trust so this is something you n Ed to fully vet with your tax advisor but in the right situation it may make a lot of sense.

Please forgive any grammatical mistakes at 35,000 feet.

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