There is no guarantee that the exemption amount will remain as Congress could decide at any time to lower it so the government could collect more estate taxes. Second, the value of the gift of course is counted toward the Grantor’s lifetime estate and gift tax exemption which is currently at $5,250,000 per person. This gets it out of the Grantor’s taxable estate altogether and avoids any increase in value from adding to the estate.
First, the value of the property contributed is contributed to the trust and/or sold to the trust at a fixed amount and possibly a discounted amount. The income tax savings can be significant because the trust income tax rates are considerably higher than individual rates. An IDGT involves setting up a trust that will accumulate income and will purposely give the Grantor a right or power that will cause him to (i) be taxed on the income under the grantor trust rules, IRC§§671-679 but (ii) will not be a power that would cause the trust property to be included in the Grantor’s estate for estate tax purposes. This is commonly known as an IDGT and is used for income and estate tax advantages. WHAT IS AN INTENTIONALLY DEFECTIVE GRANTOR TRUST? Thus, a grantor trust does not typically file any income tax return.
Also, the tax due on such income is paid by the Trustor/Grantor on his personal income tax return, form 1040. The income tax significance is that the taxable income generated by the grantor trust is reported on the income tax return form 1040 of the Trustor/Grantor. Thus, the typical living trust used in estate planning is a revocable trust and hence a “grantor trust”. The power to revoke is a typical retained power that makes a trust a grantor trust. According to the tax laws, IRC §671-679, a “grantor trust” is any trust in which the Trustor/Grantor retains control over the income or principal, or both to such an extent that he is regarded as the substantial owner of the trust property and income.