Delaware Termination of Grantor Retained Annuity Trust in Favor of Existing Life Insurance Trust
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FAQ
IlIts will qualify as grantor trusts if income may be distributed to or accumulated for the grantor's spouse, or may be used to pay life insurance premiums.
Most states but not all recognize the federal rules of grantor trust status for income tax purposes. Of note, Alabama, Tennessee, Pennsylvania, Louisiana, and the District of Columbia do not follow in all regards federal law with respect to grantor trust taxation.
If an irrevocable trust has its own tax ID number, then the IRS requires the trust to file its own income tax return, which is IRS form 1041. During the lifetime of the grantor, any interest, dividends, or realized gains on the assets of the trust are taxable on the grantor's 1040 individual income tax return.
A Delaware APT usually will be a grantor trust for federal income-tax purposes, which means that the clientnot the trustmust pay all income taxes on interest and dividends that the trustee receives and on capital gains that the trust incurs.
If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.
In other words, if the grantor (or a non-adverse party) has the power to revoke any part of a trust and reclaim the trust assets, then the grantor will be taxed on the trust income.
For all practical purposes, the trust is invisible to the Internal Revenue Service (IRS). As long as the assets are sold at fair market value, there will be no reportable gain, loss or gift tax assessed on the sale. There will also be no income tax on any payments paid to the grantor from a sale.
One easy way to terminate a life insurance trust, the grantor to stops making the premium payments, known as gifts, to the trust. If the grantor stops making payments to the trust, then the policy will lapse. This causes the purpose of the trust to be eliminated.
Delaware trust laws give grantors more flexibility in terms of what can be invested. DE Code § 3302 (b) allows trusts to acquire any type of investment or asset as part of their investment portfolio. Stocks, bonds, mutual funds, and alternative investments can be included in your Delaware grantor trust.
A grantor trust is considered a disregarded entity for income tax purposes. Therefore, any taxable income or deduction earned by the trust will be taxed on the grantor's tax return.