Transfers to Grantor Trusts Maintain QRP Status

In PLR 200709011 and PLR 20079012, the IRS ruled that the transfer of qualified replacement property (in the context of a Section 1042 ESOP transaction) to a grantor retained annuity trust (GRAT) does not constitute a disposition of the QRP. In the second ruling, the IRS also ruled that the contribution by the GRAT of QRP to a charity would not constitute a disposition. GRATs are trusts designed to provide the grantor with an annuity income until death, at which time the income would go to the beneficiaries. The trust mechanism avoids any transfer taxes unless the donor dies before the end of the trust term.

In these rulings, the IRS said that as long as the grantor retained control of the trust in a nonfiduciary capacity, and did not subject the decisions to anyone in that capacity, then the transfer would not be a disposition, that cash or other QRP could be substituted by the grantor for the assets held in the trust, that annuities paid would not constitute a disposition, and that if the owner dies during the trust term, there will be no recapture of gain. Note that these rulings do not mean that the person selling to the ESOP can avoid paying capital gains taxes when the shares are sold within the grantor trust.