Trust Tax Reimbursement Clauses
Grantor trusts are structured so that the income earned by trust assets can be taxed to the settlor.1 Shifting income tax liability back to the settlor is intentional. It allows trust assets to grow tax-free income for trust beneficiaries, while reducing the value of assets subject to the estate tax on the settlor’s death.
At some point, a settlor may become overburdened by the cost of paying taxes on income the settlor isn’t actually receiving. The “tax burn” that enhances transfer-tax results can erode the settlor’s retained liquidity, sometimes dramatically. While a settlor may want reimbursement from the trust for the taxes paid, practitioners may wish to set parameters to help clients exercise appropriate caution.
Defective Grantor Tr…
