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The SECURE Act's Three Leading Fiduciary Trust Income Tax Planning Strategies

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Since December, thousands of lawyers and CPAs have been developing ideas to address the new 10-Year Rule for the vast numbers of clients with significant retirement plans who also use trusts as the mainstay of their estate plan.  Some solutions focus on financial engineering, such as converting traditional accounts to a Roth account or increasing taxable distributions to move funds to life insurance. Other solutions involve a significant charitable component, such as leaving funds to variations of charitable remainder trusts.  

These are important solutions to consider, but will only appeal to a small minority of clients. Most clients will want a solution that mitigates the income tax burden of the loss of the stretch to the maximum extent possible, while still keeping the most protection in trust from creditors, divorce and estate tax. As a result, the three leading trust/beneficiary income tax strategies to accomplish this are:


  • IRC § 678 beneficiary deemed owner trusts (BDOTs) that can shift income tax to beneficiaries without the need to make distributions depleting the trust. IRC §678 provides that a trust is a grantor trust with respect to the beneficiary when the beneficiary holds a right/power to withdrawal “income.” This idea shifts income from the trust to a beneficiary without the necessity of distributing cash flow.
  • Nevada, Delaware, Wyoming and South Dakota IRA Trusts saving state income taxes for beneficiaries who are in the 35-37% federal tax bracket, but also live in states with high income tax rates. The strategy is to pay an IRA to a trust in a state with no income tax, avoiding or reducing state taxes on future beneficiary distributions.
  • Multi-generational accumulation trusts that can sprinkle income across family members via lifetime limited powers of appointment or trustee powers. The strategy is to name children and grandchildren as beneficiaries of your stand-alone IRA trust. The funds are then withdrawn over an 11-year period and within the same year “sprinkled” to the beneficiaries, carrying out income (DNI) into lower income tax brackets      
In their exclusive LISI Webinar, Bob Keebler and Ed Morrow will cover the following topics related to each of the three income tax planning techniques:

IRC § 678 beneficiary deemed owner trusts (BDOT

·       Why will a beneficiary grantor trust save a family income taxes?

·       State income tax aspects – why these trusts work better when the settlor resided in one of the many so-called “founder states” for state trust residency purposes

·       Asset protection issues and why you may or may not need to use a DAPT state

·       Technical tax reasons why this works

·       The math of § 678 trusts

·       Pros and cons of a part-grantor, part non-grantor trust 

State IRA Income Tax Strategy Trusts

·       Which “home” states allow this strategy

·       How the SCOTUS opinion in Kaestner may impact this strategy

·       How the Minnesota Supreme Court opinion in Fielding impacts this strategy

·       How DNI transfers income from a trust to beneficiaries equally

·       The throwback rules of California and New York

·       Tax treatment of capital gains after IRA withdrawals from both regular and Roth IRAs

Multi-generational Accumulation Trust Sprinkling

·       Non-tax differences between using a trustee power and a lifetime limited power of appointment

·       Gift/Estate/GST differences between using a trustee power and a lifetime limited power of appointment

·       Using a collateral lifetime limited power of appointment

·       The Five-Year, 10-Year and Ghost and Life Expectancy Rules

·       The operation of the DNI Rules of Subchapter J which allow you to shift income

·       The 65-Day Rule

·       The operation of the “Kiddie Tax”

·       Why 10 years is really 11 tax years

·       State law fiduciary accounting income issues

·       State income tax issues

·       The math of sprinkle trust strategies

·       When charities can (in some cases, should?) be added and why

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Edwin Morrow, J.D., LL.M., MBA, CFP®, CM&AA®  is a board certified specialist in estate planning and trust law through the Ohio State Bar Association and a Fellow of the American College of Trust and Estate Counsel (ACTEC). He is based in Cincinnati, Ohio as a Wealth Strategist for the eastern U.S. region of U.S. Bank Private Wealth Management.

Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished) is a partner with Keebler & Associates, LLP and is a 2007 recipient of the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planners & Councils. He has been named by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States and one of the Top 40 Tax Advisors to Know During a Recession. Mr. Keebler is the past Editor-in-Chief of CCH's magazine, Journal of Retirement Planning, and a member of CCH's Financial and Estate Planning Advisory Board. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration. Mr. Keebler frequently represents clients before the National Office of the Internal Revenue Service (IRS) in the private letter ruling process and in estate, gift and income tax examinations and appeals. In the past 20 years, he has received over 250 favorable private letter rulings including several key rulings of "first impression." Mr. Keebler is nationally recognized as an expert in estate and retirement planning and works collaboratively with other experts on academic reviews and papers, and client matters. Mr. Keebler is the author of over 75 articles and columns and editor, author, or co-author of many books and treatises on wealth transfer and taxation, including the Warren, Gorham & Lamont of RIA treatise Esperti, Peterson and Keebler/Irrevocable Trusts: Analysis with Forms. Mr. Keebler is the Chair of the AICPA's Advanced Estate Planning Conference. He is a featured columnist for CCH's Taxes Magazine - "Family Tax Planning Forum," Bob is also a contributing author to the American Bar Association's The ABA Practical Guide to Estate Planning. Robert.Keebler@KeeblerandAssociates.com

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