Running Head: Estate Planning – Trust 1
Milestone Two: Trust
Estate Planning – Trust 2
Subject: Utilization of intentionally defective grantor trust
Trusts can be incorporated into real estate planning since they can serve as vital tools
that can help in the reduction of the estate tax with the passage of time. It has been argued that
two vital mechanisms that can be integrated into real estate planning for the purpose of reducing
the tax base are intentionally defective grantor trusts (IDGTs) and family-controlled entities
(Hemel & Lord, 2021).
In case the client intends to use a family limited partnership for his real estate, using a
trust, especially the utilization of an intentionally defective grantor trust, is an appropriate
choice. An intentionally defective grantor trust is a trust that is specifically tailored to meet the
exact needs of the grantor relating to their transfer requirements (Perez, 2023). By strategically
using the IDGT, it is possible for the client to get tax benefits since the value of the assets can be
frozen, which will help to reduce the tax burden. One of the distinguishing features of
intentionally defective grantor trusts is that while the income is normally taxed to the grantor,
the contributed assets are not included in the estate of the grantor for taxation purposes. As a
result of the exclusion, the grantor can ensure that he pays tax on the income but does not have
to pay tax on assets in the estate. Thus, by using the IDGT trust in real estate planning, it is
possible to make sure that an ethical and accountable approach is adopted to handle the taxation
obligations and that there is no breach of law in any manner. f f
If the client makes the decision to transfer the family limited partnership assets, it will be
considered to be a comprehensive transfer for the estate as well as gift tax purposes. On the
other hand, such a transfer will be considered to be partial or incomplete from the perspective of
income tax. As a result of this, the inclusion of the intentionally defective grantor trust will help
to reduce the total amount of tax that has to be paid by the client. According to the AICOA Code
of professional conduct, it is essential to demonstrate responsible behavior while carrying out
one’s duties by exercising moral and professional judgements (Aicpa Code of Professional
Estate Planning – Trust 3
Conduct). In the specific context involving the client, the integration of IDGT is a moral
behavior that will enable to reduce the tax base by not considering the asset value. It has been
argued that estate planning involves the confrontation of one’s morality (Rojeck , 2019). In
client must carefully make decisions on how to use IDGT so that he can derive taxation benefits
in a moral and ethical way.
By incorporating a trust (IDGT) into the estate plan, the client will be responsible to pay
the taxable income on the income generated from the trust. When the client will pay the income
tax on the outstanding income that is generated from the trust, he will be able to capable of
making extra transfers to his children on which tax will not be applicable. In this case, the tax
will not be applicable on the transfers that are made to the children since the grantor has already
been paying tax on the income from the trust. The income that will be generated from the family
limited partnership will be considered as that of the trust since the FLP is a segment of the trust.
The value of the real estate firm of the client is USD 1 billion. Due to the high value, he
will have to establish one or more trusts for the estate. A viable recommendation for the client is
to initially establish a single trust and then selling the family limited partnership to the
intentionally defective grantor trust. Based on the transaction, the client is entitled to receive an
interest-bearing promissory note (Perez, 2023). Such an exchange will ensure that no tax will be
applicable. The sale price of the FLP will be based on lower value due to the absence of
marketability and not based on its assets (Feinleib, 2022). After the acquisition, the trust will
have complete control over the interest of the partnership. In case the client makes the decision
to gift the assets to the intentionally defective grantor trust, no gift tax will be applicable in this
case. The income that is generated as a result can be withheld by the trust which can later be
passed on to the children of the client.
If the client decides to gift the family limited partnership, it is instrumental in having an
insight into the concept of Crummey power. It is a technique that allows an individual to receive
Estate Planning – Trust 4
a gift that does not have eligibility for gift-tax exclusion. It is a vital tool used as an effective
estate planning tool to withdraw gifts (Adler, 2020).
Reference
Adler, R. J. (2020). Crummey Powers: Still a Powerful Estate Planning Tool. Prob. & Prop.,
34, 24.
Aicpa Code of Professional conduct. Available at:
https://us.aicpa.org/content/dam/aicpa/research/standards/codeofconduct/downloadable
documents/2014december15contentasof2016august31codeofconduct.pdf (Accessed: 18
May 2023).
Feinleib, T. E. (2022). Estate Planning for Ranch Owners. Est. Plan. & Cmty. Prop. LJ, 15, 1.
Hemel, D. J., & Lord, R. (2021). Closing Gaps in the Estate and Gift Tax Base. University of
Chicago Coase-Sandor Institute for Law & Economics Research Paper, (937).
Perez, K. (2023). Grantor Trusts: The MVP of the IRC. Estate Planning & Community
Property Law Journal, 15(1), 92-136.
Rojeck, R. P. (2019). Estate Planning. Wealth: The Ultra-High Net Worth Guide to Growing
and Protecting Assets, 7-24.
