Law Tips: Hot Tips in Estate & Trust Practice, Part 2

Welcome back to our series on 120 Hot Tips in Estate & Trust Practice. I am pleased to have the continuing participation of Rick Kissel of Taft Stettinius & Hollister LLP to provide his highlights from the trenches on how to better benefit clients. If you missed his valuable input last week, page down for that article as we finish here.

Grantor trusts is the subject for part two of this series. Using his expertise garnered from practicing in the field of estate planning for over 22 years, Mr. Kissel looks at the importance of the use of tax reimbursement clauses in grantor trusts; as well as the diligence necessary as you take a client down this road. Here are some brief pointers he offers to guide you in this area.

Use of Tax Reimbursement Clauses in Grantor Trusts – Effect of Indiana Law.

  • A grantor trust is a trust where the transferor of the property is still charged with paying tax on the income from the property even though the property has been gifted away. See, Internal Revenue Code§§ 671-679.
  • The use of grantor trusts is substantial in estate planning as it allows the donor of the property to continue to pay the income taxes associated with the transferred property without incurring additional gifts.
  • Sometimes grantors want the ability to receive reimbursement for income taxes that they pay on behalf of a grantor trust.
  • Pursuant to Revenue Ruling 2004-64, such a tax reimbursement provision, if in the discretion of the trustee, will not, in of itself, cause estate tax inclusion under Internal Revenue Code § 2036.
  • However, this Revenue Ruling went on to state that a trustee’s discretion, combined with other facts, including but not limited to, an understanding or pre-existing arrangement between the donor and the trustee, a power retained by the donor to remove the trustee and name himself as a successor trustee, or applicable local law subjecting the trust assets to the claims of donor’s creditors may, in fact, cause inclusion.
  • It is unclear whether applicable Indiana law would allow creditors to attach the funds transferred to a trust with a tax reimbursement provision. As such, such provisions should be used with caution.

Thank you again to our faculty participant, Richard Kissel, for contributing his estate and trust expertise for Law Tips. I hope you captured a pointer or two from the trenches that will benefit your clients.


About our Law Tips faculty contributor:
Richard Kissel II practices with Taft Stettinius & Hollister LLP, Indianapolis. He focuses his practice on the areas of business succession, tax, corporate transactions, buy-sell agreements, employee benefits and other matters affecting closely-held businesses. Mr. Kissel has been certified as an Estate Planning and Administration Specialist by the Indiana State Bar Association. He has advised corporate executives, owners of closely-held businesses, and other individuals on a variety of domestic and international tax issues.

About our Law Tips blogger:
Nancy Hurley, Law Tips blogger, has long-standing connections with Indiana lawyers. She was formerly a member of the ISBA and IBF staffs for over 30 years. Nancy’s latest lifestyle venture is with ICLEF. We plan to utilize her exceptional writing and interviewing skills while exploring how her Indiana-lawyer background fits with ICLEF’s needs. When she isn’t ferreting out new topics for Law Tips, her work can be found in our Speaker Spotlight blogs, postings on the ICLEF Facebook page, Twittering and other places her legal experience lends itself.

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