A Matter of Trust

A recent Wall Street Journal article highlighted increased IRS scrutiny of Grantor Retained Annuity Trusts, or "GRATs.” In one case reported in the article, the IRS is seeking $736 million in taxes and penalties from a couple, alleging that they improperly exchanged assets in their GRATs for promissory notes.

GRATs are one of many types of niche trusts that are designed to help solve a variety of issues: reducing estate tax and capital gains exposure, shielding assets from personal liabilities, etc. The alphabet soup of trust structures (which includes GRATs, SLATs, ILITs, IDGTs, and QPRTs!) is unnecessary for most Americans to consider. However, the broader lesson applies to all types of estate planning: just because a strategy is legal does not mean it is sound planning or even beyond challenge.

Whether a family uses trusts, lifetime gifting, family business succession planning, or other wealth transfer techniques, proper execution matters. Trust documents should be carefully drafted. Asset valuations should be well supported. Fiduciaries should follow the terms of the trust and maintain adequate records.

For most families, the lesson from the recent IRS enforcement activity is not that their estate plans are at risk. Instead, it is a reminder that estate planning works best when it is built on legitimate family, tax, and succession planning objectives and properly implemented.

As laws, regulations, and enforcement priorities continue to evolve, periodic reviews can help ensure that your estate plan remains both effective and durable if ever subjected to scrutiny. The estate planning attorneys at Wright Beamer can help ensure your plan reflects current law and your family's goals.