Wealthy taxpayers in high-tax states looking for ways to mitigate the new tax law’s state and local tax deduction limitation might want to create multiple non-grantor trusts to multiply property tax deductions.
“Before this new tax law, talking about non-grantor trust planning . . . was almost never heard of. It was like heresy,” Martin M. Shenkman of Shenkman Law said on a February 27 American Bar Association webinar. “The world has now changed.”
Under the Tax Cuts and Jobs Act (P.L. 115-97), both individual and married taxpayers are now allowed to deduct only up to $10,000 in state and local income or property taxes. “That has really changed the calculus, certainly for people who are in high-SALT states,” said Joy Matak of CohnReznick LLP.
Shenkman and Matak, along with Jonathan Blattmachr of Pioneer Wealth Partners, proposed transferring a house or vacation home to a limited liability company and electing out of partnership status, and then gifting the LLC’s interests to multiple non-reciprocal, non-grantor spousal lifetime access trusts — a proposal they dubbed “SALTy SLATs.”
Ordinarily, a SLAT would be a grantor trust, said Matak, because it’s a trust created by a grantor for the benefit of a spouse, and for income tax purposes, a grantor and a trust are treated as the same person. But Matak explained that structuring a SLAT as a non-grantor trust would enable each trust to qualify for its own $10,000 SALT deduction at the trust level. Using section 672(a) as a guide, Matak said that requiring future distributions from the trust to require the consent of an adverse party, such as an adult child, would allow it to not be characterized as a grantor trust.
The objective is to put sufficient assets in the trust so that it produces around $10,000 of income each year, Blattmachr said. As an example, to get that amount, Blattmachr said that assets that yield 4 percent returns each year would require the client to put $250,000 in assets into the trust. He said that if a client owed $40,000 in real estate taxes, the client could set up four non-grantor trusts that each owns 25 percent of the home, and be able to deduct up to $10,000 in property taxes for each.
As a result, each trust’s Form 1041, “U.S. Income Tax Return for Estates and Trusts,” will show $10,000 in income offset by $10,000 in property tax deduction and thus, zero taxable income, Blattmachr said.
One concern is that using multiple non-grantor trusts may run afoul of section 643(f), which stipulates that two or more trusts created by the same grantor are considered a single trust. But Blattmachr argued that that doesn’t apply because the statute called for Treasury to promulgate regulations to that effect — and despite the statute’s being enacted in 1984, Treasury has yet to issue that guidance.
“That provision probably has absolutely no impact whatsoever because they never issued the regulation. Maybe they will, but right now, there’s effectively no multiple trust rule,” Blattmachr said.
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