Favorable PLR on Grantor Trusts

Although a Private Letter Ruling only applies to the taxpayer involved, and cannot be used as precedent, the IRS analysis can be instructive. In PLR 201235006 (August 31, 2012), the IRS stated that a sale of a life insurance policy at its gift tax value from one grantor trust to another grantor trust would not be a "transfer for value" for income tax purposes. While life insurance proceeds are usually exempt from income tax to the beneficiary, if the policy had been sold or was subject to any other "transfer for value," the proceeds are subject to income tax. The IRS also concluded in the PLR that the insured’s power to reacquire the assets of the grantor trust in exchange for assets of equivalent value (a common power included in a trust to make it a grantor trust) would not be considered an incident of ownership over the policy for estate tax purposes. If the insured dies owning any incidents of ownership in a policy on the insured’s life, the proceeds are included in the insured’s estate. This ruling clarified that such a power in an "Irrevocable Life Insurance Trust" would not cause the proceeds to be included in the insured’s estate.