Some common uses for trusts
October 24, 2023
By Barbara Bryniarski, for Journal of Accountancy
Trusts are an essential financial planning tool that CPAs should consider for clients with even a modest amount of wealth. By having a thorough understanding of common uses for trusts, practitioners can provide additional value to their clients. Practitioners might consider recommending a trust in the following situations (among others):
- A client wants to safeguard assets so the client can generate income for future generations;
- A client has a disabled relative who will need help after the client is no longer around.
- A client wants to protect assets from creditors while using those assets to generate current income;
- A business owner with no employees wants to accumulate retirement funds while reducing business income and related taxes.
Grantor trusts
Grantor trusts are popular for a couple of reasons. They can be used to hold the stock of an S corporation, thus protecting ownership of the S corporation should an S shareholder be sued. Grantor trusts can be either revocable or irrevocable, with the latter providing greater asset protection from creditors.
Recently, in certain situations, the ability of a grantor's estate to receive a step-up in basis of the assets in a grantor trust upon death was put in doubt when the IRS issued Rev. Rul. 2023-2. In the ruling, the IRS determined that the assets in an irrevocable grantor trust do not receive a stepped-up basis upon the grantor's death if the assets are not included in the grantor's gross estate.
The ruling will likely be challenged in court. Until the courts rule on the matter, practitioners may consider continuing to use these types of grantor trusts to protect a client's assets, but whether a step-up in basis is available for the trust's assets on the client's estate tax return is a discussion to be had with the client. The situation could be handled in one of three ways: (1) taking no step-up in basis; (2) incurring potential penalties by taking the step-up and going against the guidance in Rev. Rul. 2023-2; or (3) taking no step-up on the original estate return and then filing an amended return with the step-up in basis and, if the IRS rejects the amended return, taking it to court.
Special-needs trusts
A special-needs trust may be beneficial for any client with a disabled relative. Such trusts involve working with a financial planner and others to draft the trust, choose assets to fund it, and create an investment plan, which is then used to construct a portfolio that will produce current income to support the individual while also preserving capital for such individual's anticipated life expectancy. Practitioners can then assist with the ongoing bookkeeping services for the trust while working closely with the trustee in processing, accounting, and reporting distributions to the beneficiary.