Advanced Estate & Trust Tax Strategies for Real Estate Investors

Real estate investors and syndicators spend most of their time focused on the next deal. Estate planning tends to slide to the back burner because it feels like a compliance task nobody wants to think about.

But when much of your wealth sits in illiquid assets like large buildings or partnership interests, the lack of a plan can leave your family with a big tax bill and few good ways to pay it.

In this episode of the Major League Real Estate Podcast, Nate and Tom continue their estate and trust planning series with a look at some of the more advanced options available.

Grantor vs. Non-Grantor Trusts

A grantor trust is treated as a pass-through, similar to a single-member LLC. You keep control of the assets, you keep paying the tax on them, and they remain part of your estate.

A non-grantor trust works differently. Once assets go in, they are generally out of your estate, and you typically lose control and the ability to benefit from them. Non-grantor trusts also reach the top 37% tax bracket at a very low income level, and the 3.8% net investment income tax kicks in far sooner than it does for individuals.

The Intentionally Defective Grantor Trust

The name sounds like a problem, but an intentionally defective grantor trust (IDGT) is a deliberate planning tool.

You move assets into an irrevocable trust so they leave your estate, but you still pay the income tax on your personal Form 1040. Because individual rates are lower than trust rates, the trust can accumulate income and appreciation while you cover the tax at a better rate.

The Step-Up Trade-Off

When you hold an asset until death, your heirs receive it at fair market value, which can wipe out built-up gain and depreciation recapture. Gifting that same asset to an irrevocable trust means it keeps your original basis.

For example, a property worth $1 million with a $300,000 basis could create a $700,000 gain if the trust sold it right away. The upside is that only the $1 million gift value counts against your lifetime exemption, rather than a much larger value years later.

The goal is to freeze the estate value today, and the cost is the step-up. Many people use a mix, moving some assets out now while keeping others in their estate. Some grantor trusts also include a power to swap in high-basis assets for appreciated ones before death, which can help recover the step-up.

Spousal Lifetime Access Trusts

A SLAT is a trust that removes assets from your estate while naming your spouse as a beneficiary, so your household can still enjoy them. The risks are worth taking seriously.

If you divorce, you lose indirect access to those assets. If your spouse dies first, you lose access as well. If both spouses want a SLAT, the reciprocal trust doctrine prevents you from creating two that mirror each other. Spacing them out and using different assets can help, and an estate planner can guide you on the details.

GRATs and QPRTs

A grantor retained annuity trust (GRAT) lets you transfer an asset while keeping an annuity for a set term. Because your retained interest lowers the value of the gift, the growth can pass to your children at a very low gift tax cost.

A qualified personal residence trust (QPRT) works in a similar way for a home or vacation property. You keep the right to live there for a period, and the remainder passes to your family at a discounted gift value. These strategies fit people with highly appreciated assets and larger estates, and they are not right for every situation.

Dynasty Trusts

Tom described dynasty trusts as perpetual trusts, and he noted that most states limit how long a trust can stay in place.

Historically, trusts that lasted for centuries kept land underused for generations. The main appeal today is avoiding estate tax at each generation, though the generation-skipping transfer tax adds complications.

Start Somewhere and Keep Updating

Tom and Nate agree that the most common mistake is skipping estate planning altogether. Having children or building meaningful wealth is a good signal to start.

Once you do, revisit the plan regularly instead of setting it and forgetting it. Even if you are well under the current exemption, the basics matter, including a trust, a will, a pour-over will, and powers of attorney.

There is also some expectation that future legislation could lower the exemption again, which is another reason to act sooner.

Final Thoughts

Every estate strategy involves trade-offs, especially between saving estate tax and keeping the step-up in basis. If you are married and approaching the exemption thresholds, a SLAT is worth discussing.

Whatever your situation, a conversation with an estate planner is a solid first step.

Schedule a discovery call today.