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. g g
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
Estate Planning – Trust 3
of Professional 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.
Estate Planning – Trust 4
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 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). g
Thank You
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.
