The Right Trust Can Yield Tax Advantages For Wealthy Clients

APRIL 30, 2018 • JEFF STIMPSON

High-net-worth clients with estates worth more than $11.18 million per taxpayer must still pay estate taxes under reform. Such clients looking to pass on wealth may now want to look at non-grantor trusts, potentially more attractive due to the Tax Cuts and Jobs Act.

In a non-grantor arrangement, the trust owns the assets in the trust and is responsible for taxes for income retained by the trust. This differs from a grantor trust, in which the donor who established the trust retains control of the assets but also pays the necessary i

The possible benefit of a non-grantor trusts “is new, complicated and very different. Almost no clients or taxpayers have a clue of any of this,” said attorney Martin Shenkman, an estate planner in Fort Lee, N.J., and founder of Shenkman Law firm.

Opinions differ on the effectiveness of these strategies, and client circumstances are key to using the right trust.

“If the client has wealth above the estate exemption amount … using an irrevocable grantor trust is still probably the best vehicle to transfer the most wealth to the next generation,” said Larry Powell, CPA, CFP and shareholder with Clark Schaefer Hackett in Dayton, Ohio. But tax reform did affect trust planning in connection with new $10,000 deduction limits on state, local and real estate (SALT) taxation, Powell and others agreed.

Ideal income tax savings come on the state and local side, said Lisa Rispoli, a CPA and partner-in-charge of trust and estate services with Grassi & Co. in Jericho, N.Y. “A trust that isn’t mandated to distribution income will greatly benefit if established as a resident trust of a state with no income tax,” she said, adding that residency rules differ drastically state to state.

“Non-grantor trusts established in states with no income tax are the ideal situation for HNW clients,” Rispoli said.

A wealthy client in a high-tax state might also conceivably bypass the SALT limitation by putting ownership of a residence into bifurcated non-grantor trusts. For example, said Shenkman, if one non-grantor trust owns three vacation homes, one used by each of one of the three trust beneficiaries, will the property taxes on those homes be limited to a single $10,000 deduction?

“SALT issues would be based on the federal treatment, so I feel there are no special tax advantages when considering state and local taxes,” countered Edward Mendlowitz, a CPA and partner at WithumSmith+Brown in East Brunswick, N.J. The state where the trust or one of its beneficiaries is located has no effect on federal tax issues for a trust, Mendlowitz stressed.

Though use of these trusts isn’t and shouldn’t be tax-driven, he said, the two types of trusts come with tax differences. Generally, the income is reported using the grantor’s Social Security or taxpayer identification number. No returns need be filed specifically by the trust.