The US Tax Court on Monday, October 21, 2013 released another Case that I found interesting. In Estate of Helen Trombetta vs. Commissioner, the Tax Court essentially ruled creating a grantor trust with retained interests having a term of 180 months, you better make sure you live for at least 181 months if you want to save on estate taxes.
Helen Trombetta had created a grantor annuity trust and contributed two valuable pieces of real estate to the trust at age 72. In return, the trust agreed to make monthly payments to her for a term of 180 months. After that term ended, the trust assets would then go to her children. At about month 150, Ms. Trombetta was diagnosed with cancer and after reviewing matters with her tax advisor, elected to change the terms of the trust to terminate the month before her death.
Without going into all of the facts and reasons regarding why this case has messy facts (the document to change the term to the month before death actually said the month after death); when a farmer sets up a grantor trust and retains some type of interest in the trust (i.e. a monthly or annual payment); the farmer must make sure to outlive the term of the trust. If he does not live that long, then in most cases, all of the value of the trust will be included in his estate.
In this case since she died in month 156 and this is less than 180, then the estate owed tax on the full value of the real estate less related debt.
There is a fine line between picking a date far enough in the future to reduce your gift for gift tax purposes versus picking too long of a term and have it included in your estate. In this case, Ms. Trombetta picked the wrong term and now her heirs have to pay for it.