Tax Tid-Bits

IRS Confirms Use of GRATs with S Corporation Stock

The IRS recently ruled that a grantor retained annuity trust (GRAT) that is taxable as a wholly owned grantor trust can be a shareholder of an S corporation. These identical husband and wife rulings (PLRs 200001013 and 200001015) reinforce the value of GRATs as a vehicle to reduce gift taxes on transfers of S corporation stock.

In both cases, the grantor’s GRAT was considered taxable as a grantor trust based on the grantor’s testamentary power to appoint undistributed capital gains and on the trustee’s discretionary authority to pay the grantor all of the trust’s net income. According to the IRS, this also ensures that the transfer of stock to the trust and the use of the stock to pay the trust’s required annuity payments will not produce taxable income for either the trust or the grantor.

Also, the IRS determined that a trust provision allowing the trust to pay the annuity amount on the anniversary date of the trust without proration during the trust’s first taxable year would not disqualify the trust as a GRAT.