Where Are We?

Have you seen the Triumvirate of late? No, not Julius, Pompey, and Crassus.[i] I’m referring to more contemporary political figures, whose names and exploits are not likely to appear in volumes[ii] that will be studied throughout the world for centuries.

The lower cased “t” triumvirate of which I speak consists of President Biden, Senate Majority Leader Schumer, and Speaker of the House Pelosi.[iii] The group’s standings in polls are anemic.[iv] Not a good place for life-long politicians.

Following a meeting of “the three,” Senator Schumer announced last Thursday that “The White House, the House and the Senate have reached an agreement on a framework that will pay for any final negotiated agreement. So the revenue side of this, we have an agreement on.”[v]

It was reported that the agreement represented “an understanding between Senate Finance Committee Chairman Ron Wyden (D-Ore.) and House Ways and Means Committee Chairman Richard Neal (D-Mass.).” It was also reported that “White House officials and congressional leaders have agreed that Wyden and Neal will use the House Ways and Means Committee’s tax proposal combined with a few ‘Senate ideas’ that were left out of Neal’s mark last week.”[vi]

On Friday, Speaker Pelosi announced that she planned to bring the measure to the floor of the House for a vote next week.[vii]

The tax legislation approved by the Ways and Means Committee last week was passed by the House Committee on the Budget on Saturday.[viii] Its next stop: The House Rules Committee, where it is possible that parts of the bill may be rewritten before it is sent to the floor of the House, where it may be amended yet again before being voted upon by that Chamber.[ix]

Grantor Trusts

Among the provisions in the Ways and Means bill on which tax advisors will be keeping a close watch is “Section 138209” which proposes to add a new Chapter 16 to the Code for the purpose of affecting the interplay of the income tax provisions of the “grantor trust” rules[x] and the gift and estate tax consequences[xi] attributable to the use of certain grantor trusts.

Under the Code’s grantor trust rules, the income of a trust will be taxed to the grantor[xii] of the trust under certain circumstances even though the grantor is not treated as a beneficiary of the trust. In general, these circumstances – under which the grantor will be treated as the owner of the trust’s assets, and of the income and gains therefrom, for purposes of the income tax only[xiii] – are as follows:

(1) If a nonadverse party has certain powers over the beneficial interests under the trust (for example, the discretionary power to sprinkle income and corpus among the grantor’s spouse and issue, coupled with the power to add beneficiaries);[xiv]

(2) If certain administrative powers over the trust exist under which the grantor can or does benefit (for example, a power to reacquire the trust corpus by substituting other property of an equivalent value);[xv] or

(3)  If a nonadverse party has the power to distribute income to or for the benefit of the grantor’s spouse.[xvi]

Tax Planning with Grantor Trusts

The use of grantor trusts has enabled taxpayers to remove an asset’s future appreciation from their gross estate for estate tax purposes, while avoiding gift and income taxes.

For example, the taxpayer may sell an asset to a grantor trust of which the taxpayer is the deemed owner (under the grantor trust rules) for income tax purposes. Thus, for income tax purposes, a grantor trust is treated as if the grantor (the deemed owner) had owned the trust assets directly. This results in transactions between the trust and the deemed owner being ignored for income tax purposes; specifically, no capital gain is recognized when an appreciated asset is sold by the grantor to the trust.[xvii]

For gift and estate tax purposes, however, the trust and the grantor are treated as separate persons. Thus, provided the sale of the asset to the trust is made in exchange for full and adequate consideration, no gift transfer has been made for purposes of the gift tax. Moreover, under certain circumstances,[xviii] the fair market value of the trust will not be included in the grantor’s gross estate for estate tax purposes.

Pres. Biden

Following the President’s introduction of his American Families Plan to a Joint Session of Congress in late April of 2021, in which he made no mention of the grantor trust rules,[xix] the Treasury Department released the Green Book for the Fiscal Year 2022 Budget, which included a proposal to change the taxation of trusts.[xx] However, the Green Book made no reference to the “grantor trust issue” at which the Ways and Means Committee has taken aim.

You may recall, among the tax-related provisions approved by Ways and Means,[xxi] was one that sought to restrict the use of so-called “grantor trusts,” generally, and the sale of property to such trusts, specifically.

Ways and Means: Grantor Trusts

As indicated above, grantor trusts – i.e., trusts the income and assets of which are treated, for purposes of the income tax, as “owned” by the individual who created and funded the trust – have played a significant part in gift and estate tax planning, their utility being based in no small part upon the inconsistent treatment accorded the trusts for income tax purposes, on the one hand, and gift tax purposes, on the other.[xxii]

Gross Estate

According to the Ways and Means Committee’s proposal, the gross estate of a deceased grantor will include the value of the portion of any trust with respect to which the grantor is the deemed owner at the time of their death.

Thus, if the grantor held on the date of their death the right to acquire an asset from the trust in exchange for cash or other property of equivalent value, the trust would be included in the grantor’s gross estate.


Furthermore, any distribution (other than to the grantor-owner or their spouse) from such a portion of the trust to one or more beneficiaries during the life of the grantor-owner will be treated as a gift transfer for purposes of the gift tax.

End of Grantor Trust Status

Finally, if at any time during the life of the grantor-owner, the grantor ceases to be treated as the owner of such portion of the trust under the grantor trust rules – for example, by disclaiming the right that caused them to be treated as the owner for income tax purposes – all assets attributable to such portion at such time shall be treated as having been gifted by the deemed owner for purposes of the gift tax.

Under current law, where the trust issued a note to the grantor in exchange for property, or where the grantor transferred property subject to a debt, the termination of grantor trust status should “complete” the sale for income tax purposes.


Significantly, the foregoing proposed changes would not apply to any trust that would already be includible in the gross estate of the grantor-owner. Of course, this would include a revocable trust.

It would also cover an irrevocable grantor trust with respect to which the grantor has retained either some economic interest in the trust property or the right to determine the beneficial enjoyment of such property by others. Thus, a grantor retained income trust (GRIT), a grantor retained annuity trust (GRAT), and a qualified personal residence trust would not be subject to the new rules (as drafted) during the term of the grantor’s retained interest – if the grantor died during such term, the trust would be included in the grantor’s gross estate.[xxiii]

Likewise, an ILIT would not be covered by the new rules, assuming it is treated as a grantor trust,[xxiv] for the three-year period beginning with the insured-grantor’s gift transfer of a life insurance policy to the trust.[xxv]

Sale to Grantor Trusts

The Committee also proposed that, in determining whether the transfer of property between a grantor trust – other than a fully revocable trust[xxvi] – and the grantor-owner of the trust is a sale or exchange for purposes of the income tax, the treatment of the grantor as the owner of the trust will be disregarded.

In other words, the transfer of property between the grantor-owner and the grantor trust in exchange for cash or other property will be taxable to the extent the amount realized by the transferor (either the grantor or the trust) exceeds the transferor’s adjusted basis for the property.[xxvii]

The transfer by a grantor to a grantor trust of property encumbered by debt will be treated as a sale, as would the transfer of a partnership interest to which partnership indebtedness has been allocated.[xxviii]

Assuming the recognition of long-term capital gain, the transferor could be subject to tax at a combined federal rate of almost 32 percent if the rate changes proposed by the Committee are enacted.[xxix]

No Exception?

Interestingly, it appears that the exception described above – for a trust that would be includible in the gross estate of the grantor-owner under current law – does not apply in the case of the proposed rule for a sale to a grantor trust.

Thus, for example, it appears that the transfer of appreciated property to a GRAT may be subject to income tax as a sale in exchange for a private annuity.

Loss Deferral

Consistent with the foregoing sale or exchange treatment, the Committee also proposed that the recognition of losses realized in such transactions between a grantor and their grantor trust be deferred in accordance with the Code’s related party sale rules.[xxx]

Effective Date

If enacted as proposed, the foregoing provisions would apply:

(1) to trusts created on or after the date of the enactment, and

(2) to any portion of a trust established before the date of the enactment which is attributable to a contribution made on or after such date.

N.B. More whispers. Certain organizations that have been in contact with the Committee staff have shared that the above effective date may be “incorrect,” and that the proposal’s reach may be much broader. According to one such whisper, all existing grantor trusts will be covered by the proposed change, not just those formed or funded after the effective date. We should know soon enough.


Assume a grantor is treated as owning all the assets of an irrevocable trust under the grantor trust rules and assume further that the trust is not otherwise includible in the grantor’s gross estate. Under the Ways and Means proposal, any distribution made by the trustee in their discretion from the trust during the life of the grantor (other than to the grantor or their spouse) would be treated as a taxable gift.

If the grantor ceased to be treated as the owner of all or a portion of the trust during their lifetime,[xxxi] the grantor would be treated as having made a gift of the trust assets that the grantor was previously treated as owning.

If the grantor transferred property to the trust in exchange for property already held by the trust or in exchange for cash and/or a note issued by the trust, the grantor would be treated as having engaged in a taxable exchange with the trust or as having sold property to the trust for income tax purposes – the grantor would have to recognize the gain realized.

Upon the grantor’s death, their gross estate would include the trust assets (at their then fair market value) that the grantor was treated as owning under the grantor trust rules at the time of their death.[xxxii]

Grantor Trust Reform: Recent History

The foregoing results may seem harsh to many taxpayers, and difficult to accept for many advisers. However, folks should not be surprised by the inclusion of the above-described provisions in the Ways and Means bill. As in the case of many parts of the President’s tax plan, these provisions last appeared in some of the budgets proposed by the Obama Administration, including the budget for the fiscal year ending September 30, 2017.[xxxiii]

The Green Book for that year explained that the sale to a grantor trust is used for transferring wealth while minimizing the gift and income tax cost of the transfer. According to the report, the greater the post-transaction appreciation, the greater the transfer tax benefit achieved. Even the future capital gains tax can be avoided, it continued, by the grantor’s purchase at fair market value of the appreciated asset from the trust and the subsequent inclusion of that asset in the grantor’s gross estate at death.[xxxiv] The basis in that asset would be adjusted (“stepped up”) to its fair market value at the time of the grantor’s death,[xxxv] often at an estate tax cost that has been significantly reduced or eliminated by the grantor’s exclusion from estate tax.

To redress this situation, the Obama Administration sought to enact rules very similar to those now proposed by Ways and Means.[xxxvi]

Big Difference

However, there is one provision from the Obama Administration’s proposal that differs materially from its counterpart in the bill approved by Ways and Means: the effective date.

As indicated above, the changes proposed by the Committee would apply (1) to trusts created on or after the date of the enactment, and (2) to any portion of a trust that was established before the date of the enactment which is attributable to a contribution made on or after such date.

By contrast, the Obama bill would have applied to trusts that engaged in one of the described transactions on or after the date of enactment – in other words, without regard to when the trust was formed or funded. The IRS would have been granted regulatory authority to create exceptions to this provision.

Back to those whispers again.

What A Way to Legislate

So, what is a taxpayer to do?

Ignore the whispers and assume the effective date will be as stated in the text released by the Committee?

In that case, a taxpayer may want to complete transfers to new or existing grantor trusts before the date of enactment; i.e., sooner rather than later.

In the case of an existing ILIT for which premiums are still owed, will loans rather than gifts (with Crummey rights) suffice? The amount of the loan will be includible in the grantor-lender’s gross estate. Any imputed interest should be treated as a contribution to the trust.

Alternatively, if the taxpayer believes the whispers, a taxpayer who is treated as the owner of a trust may want to consider releasing before the effective date whatever rights they have that cause them to be treated as the owner of a trust’s property for income tax purposes.[xxxvii]

Query whether trusts should be drafted with an ability to toggle grantor trust status on or off.[xxxviii]

As always, stay tuned.

[i] Though, truth be told, it didn’t end well for any of these folks. (Indeed, tragically, in each case.) Only one of their “successors” succeeded: Octavian – Caesar Augustus (Julius’s adopted son) – ruled for forty years and doubled the size of the Roman Empire.

Speaking of successors, where is the Vice President? You may recall that, in March of this year, President Biden tasked the V.P. with addressing the migration issue.

Bonus question: can you name the other members of the second triumvirate?

[ii] Other than those revisionist novels they write about themselves with the assistance of another. That is, of course, when they are not delivering speeches for hefty honorariums.

Ironically, the word “honorarium” means “a payment for service on which custom or propriety forbids a price to be set.” Merriam-Webster.

[iii] If by some chance, albeit very remote, the last of these were to see the order in which they are listed, she’d probably have a fit.

[iv] “[A] man’s character is his fate. And as a student of history, I find this hard to refute. For most of us our stories can be written long before we die. There are exceptions among the great men of history, but they are rare.” William Hundert in The Emperor’s Club. What were we expecting?

[v] The announcement was made at a joint press conference with Speaker Pelosi and Treasury Secretary Yellen.

[vi] https://thehill.com/homenews/senate/573605-schumer-announces-senate-house-deal-on-tax-framework-for-35t-package .

[vii] https://thehill.com/homenews/house/573809-house-dems-set-goal-to-vote-on-infrastructure-and-social-spending-package-next .

Meanwhile, the federal government is still facing a potential shutdown and a potential default on its debt obligations. Although both Parties appear to have agreed on a continuing resolution to keep the government funded and operating, they are still at odds on relaxing the debt ceiling, a measure that the Democrats have attached to the continuing resolution. https://www.bloomberg.com/news/articles/2021-09-24/congress-juggles-agenda-to-avert-government-shutdown-and-default .

[viii] https://budget.house.gov/legislation/markups . The Committee cannot make substantive changes to the bill. https://thehill.com/policy/finance/budget/573948-house-panel-advances-35t-spending-bill

[ix] https://rules.house.gov/about, though I couldn’t find the bill on its calendar.

House Majority Leader Hoyer announced Friday afternoon that it was his “intention to bring it to the Floor next week https://www.majorityleader.gov/content/floor-schedule-update-week-september-27-2021 .

Notwithstanding the movement toward passage in the House, Speaker Pelosi yesterday acknowledged to George Stephanopoulos (“This Week with George Stephanopoulos” on ABC) that it was “self-evident” the final budget bill would be smaller than proposed.

Meanwhile, we’re still waiting for Sen. Wyden, chair of the Senate Finance Committee, to release that Chamber’s proposals for funding the President’s “social infrastructure” programs.

[x] Subpart E of part 1 of subchapter J of Chapter 1 of the Code. IRC Secs. 671 et al.

[xi] Chapters 12 and 11 of the Code, respectively.

[xii] See Reg. Sec. 1.671-2(e) for the meaning of “grantor.” In general, a grantor includes any person to the extent such person either creates a trust, or directly or indirectly makes a gratuitous transfer of property to a trust.

[xiii] Meaning the trust is not included in the grantor’s gross estate for purposes of the estate tax.

[xiv] IRC Sec. 674(a) and (c). https://www.law.cornell.edu/uscode/text/26/674.

[xv] IRC Sec. 675. https://www.law.cornell.edu/uscode/text/26/675.

[xvi] IRC Sec. 677. https://www.law.cornell.edu/uscode/text/26/677. SLATs fall into this category.

[xvii] One cannot sell property to oneself. Rev. Rul. 85-13.

[xviii] Including, for example, the three outlined above.

[xix] https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/28/fact-sheet-the-american-families-plan/.

[xx] The Green Book proposed that transfers of property into a trust, and distributions in kind from a trust, other than a grantor trust that was revocable by the donor, would be treated as gain recognition events for purposes of the income tax.

The deemed owner of a revocable grantor trust would recognize gain on the unrealized appreciation in any asset distributed from the trust to any person other than the deemed owner or the U.S. spouse of the deemed owner. All the unrealized appreciation on assets of a revocable grantor trust would be realized at the deemed owner’s death or at any other time when the trust becomes irrevocable.

[xxi] For a description of those provision that would affect the income tax and transfer tax consequences arising from the disposition of property, please see: https://www.rivkinradler.com/publications/disposing-of-assets-under-the-ways-and-means-committees-proposals/ .

[xxii] For example, a grantor may transfer appreciated property to a grantor trust in exchange for other property or a note; the grantor is treated as having received sufficient consideration for gift tax purposes – no taxable gift has occurred – without incurring any income tax; at the same time, the grantor has preserved their exemption amount.

[xxiii] But see the effective date rule, below. Contributions to a trust that continues as a grantor trust after the retained interest expires will cause the trust to be subject to these rules.

[xxiv] The premium payment provision of IRC Sec. 677(a)(3) alone does not suffice.

[xxv] IRC Sec. 2035 and Sec. 2042.

[xxvi] In the case of a transfer between the grantor and their revocable trust, the gift tax rules are not implicated, and the property transferred is not removed from the grantor’s gross estate.

[xxvii] IRC Sec. 1001. If the sale is made in exchange for an installment obligation (a note), the gain may be reportable under the installment method. IRC Sec. 453.

[xxviii] IRC Sec. 752.

[xxix] Capital gains rate of 25% plus surtax of 3% plus net investment income surcharge of 3.8%.

Add New York State and New York City in the case of a City resident and the rate approaches 50%.

[xxx] IRC Sec. 267. Query whether Congress will extend IRC Sec. 1239 to cover such sales. Sec. 1239 treats as ordinary income the gain realized from the sale of property between related persons where the property is depreciable in the hands of the transferee. Other anti-abuse rules may also be implicated.

[xxxi] Query whether the incapacity of a grantor should suffice. Where the grantor’s right was held in a non-fiduciary capacity, would the existence of a power of attorney avert the loss of grantor trust status if it grants the attorney-in-fact the authority to exercise such right?

[xxxii] Thus, if the grantor transfers property to the grantor trust in exchange for a note, the exchange would be treated as a taxable sale. If the trust continued to be treated as a grantor trust until the time of the grantor’s death, and if the note remained outstanding at that time, the note would be included in the grantor’s estate, as would the value of the trust reduced by the amount of the outstanding balance of the note.

[xxxiii] https://home.treasury.gov/system/files/131/General-Explanations-FY2017.pdf .

[xxxiv] The same gambit was commonly used with QPRTs, but the regulations were amended in 1997 to prohibit the trust from selling or transferring the residence, directly or indirectly, to the grantor, the grantor’s spouse, an entity controlled by the grantor or the grantor’s spouse, another grantor trust of the grantor or the grantor’s spouse, during  the retained term interest of the trust, or at any time after the retained term interest that the trust is a grantor trust. Reg. Sec. 25.2702-5(c)(9).

[xxxv] IRC Sec. 1014.

[xxxvi] The Administration faced the challenge of a split Congress. The Biden Administration is in a slightly better place, except for the fact of the disagreements within the Democratic Party.

[xxxvii] After considering the impact thereof under current law – see above.

[xxxviii] For example, by permitting certain loans to the grantor.