Letter Ruling 201039010 — The Latest Beneficiary Grantor Trust Ruling


A beneficiary grantor trust — an irrevocable trust treated as owned by the beneficiary for income tax purposes but not for estate tax purposes — can be a very useful tool. For example, your client owns a business that is expanding. Her mother creates a beneficiary grantor trust, making a $5,000 gift. The trust forms a limited liability company (LLC). The LLC makes a deal with the business — the LLC builds the building, and the business will rent the building from the LLC. The LLC takes the lease to a lender and obtains financing for the purchase of land and construction of the building.

Over time, the LLC uses the rental income to pay down the mortgage, acquiring equity in the building. When the mortgage is retired, the trust continues receiving rental income and gaining equity. The annual income taxes the beneficiary pays reduces the beneficiary's estate. Eventually the beneficiary might get to the point where her other assets are depleted, so that her estate is reduced to the estate tax applicable exclusion amount. She can then live off the trust comfortably, without having a conflict between having plenty of retirement income and avoiding estate tax, because her primary source of income — the trust — is outside of the estate tax system.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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