Reforming The Grantor Trust Rules

Aaron T. Anderson (J.D. 2023, BYU), Note, Resolving Unfairness in a Fair Way: How the Grantor Trust Rules Should Be Reformed, 48 BYU L. Rev. 2311 (2023): 

Affluent taxpayers often create one or more grantor trusts to achieve significant tax savings. By leveraging mismatches in the rules between the income and estate tax systems, these taxpayers avoid the compressed income tax brackets of trusts while minimizing the property that is included in their estates for estate tax purposes. Some commentators have argued that reform is needed to remove such mismatches. Yet, trusts that rely on the current grantor trust rules abound.

This Note (1) provides a background and history of the rules and use of grantor trusts, (2) argues that harmonizing the estate and income tax systems is the best method for reforming the grantor trust rules, and (3) proposes grandfathering provisions that should be included in any reform of the grantor trust rules to ensure that taxpayers who have relied on current rules are not treated unfairly.

Conclusion
There is a growing possibility that the grantor trust rules will be reformed in the near future. Among the many alternatives for reform, harmonization of the various tax rules using the estate tax definition for a completed transfer best reflects Congressional intent and will ensure the greatest certainty for taxpayers going forward, creating an efficient, unified system related to gratuitous transfers. In any case, reform of the grantor trust rules should have robust grandfathering provisions to ensure that taxpayers who have relied on current grantor trust rules are not penalized. Additionally, any grantor trust reform proposal should ensure that grantor retained annuity trusts established before reform, and irrevocable life insurance trusts generally, are grandfathered in. By doing so, the grantor trust rules, long perceived as unfair, will be reformed in a fair way.