Laws, Regulations & Annotations

C

220.0000 CHANGE IN OWNERSHIP

Annotation 220.0811

220.0811 Trusts—Defective Grantor Trust. For federal income tax purposes, in exchange for an installment note, Grantor will transfer real property which is not used as his principal residence into an irrevocable intentionally defective grantor trust (IDGT). Once such property is transferred to the IDGT, Grantor would no longer have the power to sell or substitute the property. Grantor will not be a present or future beneficiary of the IDGT. Until the note to Grantor is repaid in full, although income may accumulate, no income may be paid out of the IDGT to any beneficiary. Once the IDGT has repaid the note, the IDGT trustee has discretion to distribute (or not distribute) income and/or principal to the beneficiary (or beneficiaries).

In this situation, Grantor proposes to transfer property to an IDGT of which he is not a beneficiary. Pursuant to Property Tax Rule 462.160(a), a transfer to the IDGT (an irrevocable trust) will result in a change in ownership unless an exclusion applies. For purposes of determining whether any exclusion(s) is available, the present beneficiaries of the IDGT will be regarded as the owner(s) of the property. A person may be the present beneficiary of a trust if current income may be paid to such beneficiary or accumulated in the trustee's discretion as long as no other person presently has a right to income or principal. If the present beneficiaries of the IDGT cannot receive distributions from the IDGT until the note has been repaid, they are nevertheless the present beneficiaries since no other person has the right to income or principal from the IDGT.

If Grantor's wife is the sole present beneficiary of the IDGT, then the interspousal exclusion would apply and no change in ownership would occur when the property is transferred to the IDGT. If Grantor has not used his $1 million exclusion and Grantor's children become the present beneficiaries (upon the death of Grantor's wife or upon formation of the IDGT), by filing the appropriate claim forms the Grantor's children could utilize the parent-child exclusion. By contrast, if Grantor's nieces and nephews are the IDGT beneficiaries, no exclusion is available and a change in ownership would occur when Grantor transfers the property into the IDGT or when the nieces and nephews become the present beneficiaries of the trust or receive the remainder interest in the property upon wife's death. C 8/1/2012.