PROPOSED REVISION OF THE INCOME TAX "GRANTOR TRUST RULES"AND CORRESPONDING PROVISIONS OF THE ESTATE AND GIFT TAX RULES
IRC §§ 671-679, 2035-2038, AND 2511
Written by Richard S. Kinyon, Esq.1
The purpose of this paper is to examine the way in which the net income (including capital gains) of a domestic trust is taxed for federal income tax purposes during the lifetime of the U.S. resident settlor or grantor of the trust, and to recommend a revision of the so-called "grantor trust rules" in Subpart E of Subchapter J of the Federal Income Tax Law (IRC Sections 671 through 679) and the corresponding provisions of the estate and gift tax rules relating to irrevocable transfers in trust (IRC Sections 2035-2038 and 2511). Primarily as a result of the compression of the income tax rate brackets applicable to estates and trusts and the so-called "kiddie tax" in IRC Sections 1(e) and 1(g), respectively, enacted about 30 years ago, it is submitted that the bulk of those grantor trust rules are no longer needed to prevent the avoidance of income taxes, and ironically, they are now utilized by taxpayers to avoid gift and save estate taxes.