SUCCESSION PLANNING
Talking Taxes

with Matt Donovan, JD, CPA

IDGTs win
Intentionally defective grantor trusts (IDGTs), while frequently used, have been clouded with uncertainty. Rev. Rul. 2004-64 is a favorable ruling for IDGTs. It confirms that: the payment of income tax by the IDGT creator is not an additional gift to the IDGT beneficiary; and the IDGT can reimburse the creator for income taxes without causing estate or gift tax problems if the trust document gives the trustee (who must be independent from the creator) discretion to reimburse the creator. If the trust document requires reimbursement, the IDGT assets are includable in the creator’s taxable estate.

The IRS loses on FLPs
In a big defeat for the IRS, the 5 th Circuit overturned a lower court decision and said that the formation of a family limited partnership (FLP) must be respected for estate tax purposes [ Kimbell v. U.S. , No. 03-10529 (5 th Circuit, 5.20.04)].

The decision says that: (1) even though the formation of an FLP is an “intrafamily” transfer, it is still a bona fide transaction; and (2) the 49% valuation discount on a decedent’s retained interest in the FLP can be allowed for estate tax calculations. The case is significant because it creates a road map for forming, funding and maintaining FLPs so that they will be respected for estate tax purposes.