Temporary regs. modify definition of "grantor" for grantor trust purposes.

• Author: Dumont, Robert
• Position: IRS regulations

The IRS issued Temp. Regs. Sec. 1.671-2T, which modifies the definition of "grantor" for purposes of applying the Code's grantor trust provisions. The temporary regulations make three important changes to the existing rules.

Nominal Creators

Temp. Regs. Sec. 1.671-2T(e)(1) generally provides that a grantor includes any person, to the extent that such person either creates a trust or directly or indirectly makes a gratuitous transfer of property to a trust. However, a person who creates a trust as an accommodation party (e.g., an attorney for a client) will not be treated as the owner of any portion of the trust if the accommodation party is reimbursed within a reasonable period of time, although such party will be treated as a grantor for purposes of reporting transfers to foreign trusts. A "gratuitous transfer" is any transfer other than a transfer for fair market value.

Trusts Created by Partnerships or Corporations

If a partnership or corporation makes a gratuitous transfer to a trust, the partners or shareholders will be treated as the grantors, unless the transfer is made for a business purpose of the partnership or corporation (Temp. Regs. Sec. 1.671-2T(e)(4)). The gratuitous transfer will be treated as a distribution by the partnership (or corporation) to the partner or shareholders, followed by a transfer by the partners or shareholders to the trust. For example, if a partnership or corporation transfers property to a trust for the benefit of a partner's or shareholder's family members, the transfer will be treated as a distribution by the partnership to the partner or shareholder, followed by a transfer by the partner or shareholder to the trust. The partner or shareholder (not the partnership or corporation) will be treated as the trust's grantor. However, if a partnership or corporation transfers property to a trust under a security or compensation arrangement related to its business (e.g., a rabbi trust), the partnership Or corporation will be treated as the grantor.

If a partnership or corporation is deemed to have...