Drawn from Steve Gorin’s 1st quarter 2022 newsletter, this course discusses trust modifications to receive a basis step-up in light of a recent letter ruling, avoiding high fiduciary income tax rates by treating the beneficiary as the deemed owner, and income tax advantages of preferred partnership interests. Letter Ruling 202206008 held that adding a formula general power of appointment caused estate inclusion only to the extent the beneficiary exercised the power. We will examine less or more risky formulas and tax and legal risks and benefits of modifying trusts in this manner. The segment on BDOT by Trust Distribution responds to high fiduciary income rates (actual and threatened) on business interests held in trust, as well as on accelerated distributions from IRAs under the SECURE Act.  

We will start with how a trustee can cause income to be taxed to the beneficiary without actually distributing it, review the rules on lapsing withdrawal rights without the lapse constituting a gift, and discuss how a GST-exempt trust can acquire assets from a GST-nonexempt trust using similar principles. Finally, we will examine using preferred partnership interests.  

After reviewing the basics of preferred partnerships, we will see how they may be better than a sale to an irrevocable grantor trust, how giving a service partner a preferred profits interest may benefit both the partnership and the service partner, how family offices might use this idea to avoid unfair tax rules, and how an old-and-cold preferred partnership can generate better tax results than an inter vivos charitable lead trust. 

Learning Objectives:

• List the tax and legal effects of modifying a trust to add a formula general power of appointment 


• Define "crediting” a beneficiary to carry out taxable income to the beneficiary


• Determine how a GST-exempt non-grantor trust can create a GST-exempt beneficiary deemed-owned trust to acquire the assets of a GST-nonexempt non-grantor trust


• Identify when a preferred partnership is better than a sale to an irrevocable grantor trust or a payment of fees to a partner


• Recognize how a family office can structure investment management services to avoid unfair tax treatment of investment expenses