A favorite estate planning transaction used by many sophisticated estate planning attorneys across the country involves the use of an “intentionally defective grantor trust” (IDGT).  The “grantor trust” rules of the Internal Revenue Code instruct that a grantor trust is not taxed as an entity separate from the grantor (the person creating the trust) and that the assets transferred to a grantor trust still belong to the grantor for income tax purposes.  The result of transferring assets to a trust that qualifies as a grantor trust is that the person has not made a transfer for income tax purposes.  Many estate planning attorneys use the grantor trust rules to their advantage and they carefully draft a trust that is “intentionally” drafted to qualify as a grantor trust for income tax purposes, yet the carefully drafted trust can also be treated as a completed transfer for the gift tax and estate tax.  Therefore by using an IDGT and transferring appreciated assets to a trust a person can shift the value of the asset from his or her taxable estate for estate tax purposes while at the same time the transfer will not count as a taxable transfer for income tax purposes that could trigger capital gains.

The Obama Administration’s revenue proposal for 2013 recommends a change to the long-standing grantor trust rules.  The proposal would require more consistent treatment of transfers to a grantor trust and would eliminate the powerful estate tax planning that can be accomplished using the IDGT.  The proposal would include assets in a grantor trust in the grantor’s taxable estate and would therefore take away the advantage described above.  The proposal does not purport to affect grantor retained annuity trusts, qualified personal residence trusts, and grantor retained income trusts. 

It is possible that a grantor trust created and funded prior to a change in the law could be “grandfathered” into existing law.  This could bring some great advantage to someone willing to establish an IDGT under current law and fund that trust with sufficient assets this year in order to hedge against any possible changes to the law. 

Luckily, this is only a proposed change in the law that is presented by the Department of the Treasury and hopefully this proposal will never make it into ourlegislative system.  We will be watching this topic carefully and we hope that the favorable laws that apply to IDGTs can continue on for many more of our clients and that the IDGT will not become an estate planning endangered species. 

Attorney Jason Walker

People are often confused about the differences between a Last Will, a Living Trust and a Living Will.  Although these things may sound alike, they all serve different purposes. 

A Last Will lets you dictate who receives your property, provides instruction for the handling of your remains upon death, and if you are a parent of a minor child allows you to nominate a guardian.

A Living Trust, like a Last Will, allows you to dictate who receives your property.  The major difference between a Living Trust and a Last Will is that a Living Trust typically avoids Probate upon the death of the Settlor – the creator of the Living Trust.  Thus, the property you place in a Living Trust passes free of court involvement to your beneficiaries.  A Living Trust is also known as Revocable Trust or a Family Trust.

A Living Will has nothing to do with the distribution of your property.  Rather a Living Will indicates your wishes as it relates to artificial life support.  During times of incapacity, the Living Will may provide peace of mind to your loved ones as they will know your wishes relating to end of life treatments.  A Living Will is also known as an Advanced Directive or Directive to Physicians.

The attorneys at JEFFREY BURR have extensive experience implementing these documents into a person’s estate plan.  Please feel free to contact our offices for a free 30 minute consultation.

-A. Collins Hunsaker

Many of our clients have residences in or spend a significant amount of time in both Nevada and California.  Although the state of Nevada has no income tax, the state of California taxes non-residents on any California taxable income and California residents on all income.  If individuals are not careful, they may be considered residents of California and therefore subject to California income tax on all of their income.  Fortunately, the California Franchise Tax Board has issued some guidelines for determining resident status.

FTB publication 1031 sets out the test for determining residency as follows:

“A resident is any individual who meets any of the following:

• Present in California for other than a temporary or transitory purpose.
• Domiciled in California, but outside California for a temporary or transitory purpose.”

The publication further explains, “[t]he underlying theory of residency is that you are a resident of the place where you have the closest connections.” The Franchise Tax Board Publication also provides the following partial list of factors that the state may consider in determining whether a person is a resident or non-resident:

• Amount of time you spend in California versus amount of time you spend outside California.
• Location of your spouse and children.
• Location of your principal residence.
• State that issued your driver’s license.
• State where your vehicles are registered.
• State in which you maintain your professional licenses.
• State in which you are registered to vote.
• Location of banks where you maintain accounts.
• The origination point of your financial transactions.
• Location of your medical professionals and other healthcare providers, accountants, and attorneys.
• Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
• Location of your real property and investments.
• Permanence of your work assignments in California.

If a person is treated as a resident of California, it may subject them to potentially large income tax consequences.  Aside from the tests and factors outline, there are many other things to consider when determining or evaluating residency.  Should you have any questions regarding your residency status, please contact our office. 

Attorney – Corey J. Schmutz