Feb 1, 2007 12:00 PM, By Deborah V. Dunn, partner, and Lucy K. Park, associate, Kirkland & Ellis LLP, Chicago

By: By Deborah V. Dunn, partner, and Lucy K. Park, associate, Kirkland & Ellis LLP, Chicago

For years, practitioners have employed the estate-planning strategy known as “sale to a grantor trust.”¹ Yet there's still substantial uncertainty and debate about one critical aspect: the detrimental income tax consequences that can result when a grantor dies — thus terminating grantor trust status — before the note issued by his grantor trust to him has been fully discharged. We believe that incomplete gifts can be used to decrease or eliminate the risk that income tax will be triggered when grantor trust status ends. We call this “basis boosting.”

A grantor trust is a trust in which the grantor is usually treated as the owner of the trust's income and principal for income tax purposes. When he is treated as owner, all income and gains of the trust are taxable to the grantor, regardless of whether any income is distributed to him or another person. If carefully drafted, an irrevocable trust can be structured as a grantor trust, yet not be includible in the grantor's gross estate.

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