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Comment by jeremy_arnold | Hacker News Reader

Most of those instruments retain the initial cost basis. They're a way of getting around gift taxes, not capital gains.

In grantor trusts, transactions between the grantor and the trust are disregarded. So at the end of the trust term the grantor can buy back the appreciated assets and substitute cash in the trust vehicle. That cash (assuming a zeroed out GRAT) represents the delta between the conservative IRS assumed rate and the actual appreciation, passes to heirs gift tax free, and with no embedded capital gains basis.

Again, if you are going to throw punches you ought to make really sure you’ve done your own homework.

We'll start with the meta here. Some of these vehicles have arcane applications that I wouldn't know about. I'm not a CPA, and I pay people for corrections for a reason (which I'm pretty sure I'm about the only person on the internet who does this). If you can demonstrate to me that I've missed something meaningful here, I'm happy to pay off and revise/note my piece accordingly.

As for the concrete, the important thing here is whether those repurchased shares retain their original cost basis or not (to the grantor) from the IRS's POV. If they do, all that's happened is a complicated tax-free cash transfer. If they don't, then cap gains taxes have been avoided.

So far as I understand the rules, it's the former. If I'm wrong, I'm happy to be pointed to a credible source etc.

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