Gifting of QOFs to Grantor Trusts
By Detelina Staneva, Kutchins, Robbins & Diamond, Ltd.
The Taxpayer Cuts and Jobs Act created tax incentives to encourage investment in certain disadvantaged communities called Qualified Opportunity Zones (QOZ), and taxpayers may utilise those incentives by investing in a qualified opportunity fund (QOF).
The benefits provided by QOZs include the ability to defer gain on a sale of property to a third party until the earlier of the disposition of the property or 31 December 2026. If the taxpayer holds its investment for at least five years prior to that inclusion date, the gain that needs to be recognised will be reduced by 10%, and by an additional 5% if the property is held for at least seven years. Finally, taxpayers who have held the investment for ten or more years, upon its sale can make an election to increase its basis to its then fair market value.
When it comes to the investor’s estate, there are several inclusion events that would require the deferred gain to be included in income. Such events would be a transfer of an interest in a QOF by gift, a change in status of a trust owning a QOF from a grantor trust to a non-grantor trust (unless by reason of death) or vice versa. Important exceptions are gifts to grantor trusts, and death.
Since the deferred gain in a QOF is not eligible for basis step-up at death under sec. 1014, and is considered income in respect of a decedent, it would be preferable to gift the QOF interest to a grantor trust and retain in the estate assets that are eligible for step up. The holding period of the successor in interest in the grantor trust upon death includes the decedent’s holding period. So, if the QOF stays in the trust, once the gifted assets meet the ten-year holding period, the donee will be eligible for the basis step up on the sale that eliminates all gain other than the deferred gain. This also eliminates one of the drawbacks that grantor trusts have – the inability to utilise step up in basis.
Detelina StanevaGGI member firm
Kutchins, Robbins & Diamond, Ltd. (KRD)
Auditing and Accounting, Tax, Advisory, Corporate Finance, Fiduciary and Estate Planning
Chicago (IL), USA
T: +1 847 240 1040
KRD Ltd. is a CPA firm that offers a full range of client services, including accounting and software consulting, audit and assurance, tax strategy and preparation, business valuations, and financial planning advisory services. Their team of 80 members have been serving clients in Chicago and the surrounding areas for 30 years.
Detelina Staneva is a Tax Manager with KRD Ltd., where she specialises in providing middle-market companies and individuals with expert tax guidance and planning opportunities. Her practice includes US, state, and local tax planning and compliance, identifying tax credits and incentives, family wealth, and succession planning.
Published: Trust & Estate Planning Newsletter, No. 07, Spring 2021 l Photo: Iuliia Sokolovska - stock.adobe.com