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Income Tax Consequences From A Grantor 's Death

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Income Tax Consequences Resulting From a Grantor’s Death

Allyson d’Abreu de Paulo
Tax LL.M. Seminar Paper 2017

Introduction

While grantor trusts are commonly created as part of an estate plan, estate planners may inadvertently be creating income tax issues that trustees and tax preparers must deal with during the administration. When the grantor of a grantor trust dies, or the grantor trust status terminates during the life of the grantor, for the most part the tax consequences are well established. What is unclear is what happens if the grantor trust had an outstanding liability to the grantor at the death of the grantor. This paper addresses the issue and how it may be treated. Part I of this paper will briefly address the history of…show more content…
The trust was to terminate at the end of five years, at which time the accrued but unpaid income was to be paid to the taxpayer’s wife, and the principal returned to taxpayer. The United States Supreme Court ruled in Helvering v. Clifford that the income earned by the trust would be taxable to the grantor, even though the income was actually distributed to the beneficiary, because of the amount of control retained by the grantor.
The Internal Revenue Service (“IRS”) issued regulations called the “Clifford Regulations” in 1946. The Clifford Regulations formed the basis for Congressional codification of the grantor trust rules in current Subpart E in 1954. While income tax rates today are not as far apart as they were in 1954, and even though the IRS targeted abuses with the grantor trust rules, those rules offer favorable opportunities for taxpayers today.
Although the grantor trust rules generally address the taxability of trust income to the grantor, in some situations the Clifford trust doctrine has been extended to tax the income of a trust to someone other than the grantor. This happens when the powers granted enable a beneficiary to vest the corpus or income in the beneficiary. The seminal case of Mallinckrodt v. Nunan held that income of a trust was taxable to a beneficiary
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