Keystone State Strengthens Its Irrevocable Trusts With Grantor Trust Rules By Lisa S. Presser, Esq. and Brian M. Balduzzi, Esq., LL.M. (Tax), MBA, CFP®, CEPA®1 Lisa S. Presser and Brian M. Balduzzi provide a synopsis of Pennsylvania’s new grantor trust and income tax rules. The authors also provide practical guidance for estate planners and advisors in light of the new law. Grantors of Pennsylvania irrevocable trusts may now elect to pay the income taxes on the trusts’ income under the recently-signed Act 64 of 2023, provided that such trusts qualify as “grantor trusts” under federal tax law. For decades, Pennsylvania has deviated from federal income tax laws by specifically
prohibiting grantor trust tax status for irrevocable trusts. This new Act simplifies the rules for irrevocable trusts to mirror those in other jurisdictions, and it provides an opportunity for grantors to plan for new irrevocable trusts, and for grantors, trustees, and beneficiaries to review certain existing irrevocable trusts. Historical and New Treatment for State Income Taxation of PA Irrevocable Trusts Since 1971, Pennsylvania and federal laws have differed in their tax treatment for irrevocable trusts, even when the grantor retained certain powers under the trust instrument. Under federal law, a grantor of an irrevocable trust (or another person) can be taxed on the trust income to the extent that the grantor (or such other person) is deemed the “owner” of such trust under the Internal Revenue Code (the “Code”) sections 671 through 679 (the “grantor trust powers”), regardless of whether such income is distributed to the beneficiaries or accumulated. Under prior Pennsylvania law, however, a Pennsylvania Resident Trust (or Non-Resident Trust, to the extent of its sources within the Commonwealth) was subject to tax on its income received during the trust’s taxable year at a rate of 3.07%, regardless of whether the grantor (or another person) held such grantor trust powers. This difference between Pennsylvania and federal law applied to a trust unless the grantor trust was a wholly revocable trust.
Published in eReport, Spring 2024 © 2024 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.
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