Thanks Dave but I don't think this is correct. Normal income generated in a grantor trust is normally taxed at the grantor level. The twist here is the insurance company demutualized. Per the IRS, the cost basis of the shares is zero (courts disagree) and the cash dividends subsequently paid are income (1099-DIV) and are not added to the cost basis.
The trick here is how to handle stock and dividends received in an irrevocable grantor trust (also known as an Irrevocable Life Insurance Trust or ILIT) as a result of a demutualization. The insurance policies were gifted to the trust and if the company did not demutualize, everything would have been fine. The demutualization creates an issue for who is responsible for the taxes. The shares are registered as being owned by the trust but if the grantor is responsible for taxes when they are sold, s/he should have the right to transfer the shares somewhere else but that causes issues as the stock has to be re-registered.
Thoughts?
Thanks,
Kevin
