Recent limitations on estate freezes have caused greater reliance upon alternative lifetime giving strategies. Now, however, the IRS, in its rulings, has created a roadblock to making lifetime gifts from a revocable trust. This article examines the IRS' ruling position and how to overcome it.
A grantor retained income trust (GRIT) is an irrevocable trust established by the grantor (the "contributor" of funds to the trust) in which the grantor retains the right to the income from the trust for a term of years (or for a period ending on the first to occur of the grantor's death or the expiration of the term of years).
An individual who is already in a taxable estate situation and who owns property which may appreciate in value (and that will eventually be transferred to some member of his or her family) may be contemplating the future tax consequences with some trepidation. That individual may not be ready to make a present gift of the property because he or she is still not ready to give up the income from or use of the asset. Moreover, even if he or she did make a present outright gift, it would be a taxable transfer to the extent of the whole value of the property. If the individual does not act before dying, thereby allowing the property to become part of his or her gross estate for estate tax purposes, the value of the property will likely have substantially increased, thereby exacerbating the estate tax problem.
A hanging power, whereby the "taxable" part of a beneficiary's power to invade corpus is carried over until it becomes nontaxable, can avoid gift tax consequences, but is likely to meet IRS opposition. This article examines the future use of hanging powers and alternatives to such powers.