Article: Utah's New Income Tax Reimbursement Statute

JurisdictionUtah,United States
CitationVol. 36 No. 6 Pg. 35
Publication year2023
Article: Utah's New Income Tax Reimbursement Statute
Vol. 36 No. 6 Pg. 35
Utah Bar Journal
December 2023

November 2023


Utah’s New Income Tax Reimbursement Statute

by William J. Whitaker and L. Stanford McCullough

In the 2023 Utah legislative session, legislators amended Utah Code Section 75-7-505, giving more flexibility to Utah estate planners and their clients. The new amendment helps keep certain irrevocable trust property outside a person's taxable estate for federal estate tax purposes, consistent with the person's intent.

Before this amendment, the property of an irrevocable trust that was intended to be outside the taxable estate of the creator of the trust (commonly called the "grantor" or "settlor" of the trust) may have nevertheless been included in the settlor's estate if the trust contained a special clause, commonly called a "discretionary income tax reimbursement clause," that allows the trustee, in the trustee's discretion, to reimburse the settlor for income taxes attributable to trust property.

Background - Income Tax and Estate Tax Inclusion

This amendment affects each Utah irrevocable trust that (1) is intended to be outside the taxable estate of the settlor of the trust; (2) has a discretionary income tax reimbursement clause; and (3) is treated as owned by the settlor for income tax purposes, (i.e., it is a grantor trust). Because the federal income tax rules are separate and distinct from the federal gift, estate, and generation skipping transfer (GST) tax rules, there are differences in the treatment of trust property for the different tax purposes.

For example, depending on how the trust instrument is drafted, trust property could be treated as the settlor's, or not the settlor's, whether for income tax purposes or for estate tax purposes, leaving four general categories of trusts:

WILLIAM J. WHITAKER is an estate planning attorney who enjoys working with clients and professionals on tailored estate plans. Bill is a partner with Fabian VanCott in Salt Lake City, and is licensed in Utah, Idaho, and South Dakota.

• Income tax: Yes

• Estate tax: Yes

Example: fully revocable trust, certain Utah Domestic Asset Protection Trusts (UDAPTs)1

• Income tax: No

• Estate tax: Yes

Example: irrevocable non-grantor incomplete gift trust (sometimes called an "ING" trust), certain UDAPTs

• Income tax: Yes

• Estate tax: No

Example: irrevocable grantor trust (sometimes called an "intentionally defective grantor trust") of which settlor is not a beneficiary and has no retained interest; referred to below as an "Irrevocable Grantor Gift Trust"

• Income tax: No

• Estate tax: No

Example: irrevocable non-grantor trust of which settlor is not a beneficiary and has no retained interest

There are many other names for various types of trusts, but most trusts should fit into one of the four categories above. The examples noted in the table above are not exhaustive.

The focus of the amendment, and this article, is on the trusts that are intended to be the settlor's for income tax purposes, but outside of the settlor's estate for estate tax purposes (see the third section in the table above). For convenience, this article refers to such trusts as "Irrevocable Grantor Gift Trusts."

L. STANFORD McCULLOUGH is a tax attorney at the McCullough Group. He is also Treasurer Secretary of the Tax Section of the Utah State Bar.

Irrevocable Grantor Gift Trusts

Many individuals who wish to engage in estate tax planning are advised to set up an Irrevocable Grantor Gift Trust. One of the many potential benefits of such a trust is...

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