500 N. Akard St., Suite 2200, Dallas, TX 75201


With the very real possibility that capital gains will be taxed at ordinary income rates for those making $1,ooo,ooo or more, it is time to consider the charitable remainder trust again.  A charitable remainder trust (CRT) is a split-interest trust, with the grantor receiving an income interest and charity receiving the remainder.  If you have a highly-appreciated asset, placing the asset in the CRT before the sale will allow you to defer the tax on the sale.  Taxes are paid on the distributions you receive from the trust.  Advanced structures of the CRT permit deferral for a long period of time.  With a 39.6% tax rate and market returns, it is very possible that you will do much better with the CRT than selling the asset and paying the tax.  If you are in a state with an income tax, the benefit is even greater.  And, of course, you will be making a significant gift to charity at termination.

Depending on insurability, you can use some of the income tax savings to purchase life insurance to replace the amount passing to charity, if desired.

And there is now an established market for the sale of income interests in CRTs, so, if circumstances change and you need to terminate the CRT, you can do so.

You can also roll over your CRT into a new one if you like the CRT and want to continue the deferral.



As I write this, Senate Democrats have made a reconciliation proposal.  Word is that not all Senate Democrats are on board yet, but this is their one shot and I expect something will get done.  My contacts in DC think that reduction in the exemption will be part of the bill, but don’t know if the exemption will be reduced to $3.5 million or an inflation adjusted $5 million.  Word is that action on grantor trusts, the 50 year limit on dynastic trusts and retroactive elimination of BDITs and BDOTs will not be part of the bill.  We will know soon enough.  However, if you have an estate that will be impacted by these changes, time to act is running out.

The recently enacted Secure Act, eliminates the life time stretch of retirement assets for non-spouse beneficiaries, with a few exceptions.  Instead, these assets will now be taxed within ten years.  For the charitably minded client, one idea being touted is a charitable remainder unitrust (CRT).  Based on materials I have seen, the ideal payout rate is 5% and the beneficiary needs to be young enough to expect 25 or more years of distributions.  Of course, because of the 10% remainder interest requirement, young beneficiaries will not be able to qualify.   It is unlikely (but possible) for the client to actually be better off with the CRT than without it..  Accordingly, the client must have a strong charitable intent to commit to this planning.  Having said that, however, assuming a long payout period and historical market returns the client may come close the beneficiary receiving same amount of distributions, and make a substantial charitable donation at the end.

The big risk, of course, is that the beneficiary dies early.  If the beneficiary is insurable, life insurance can be used to mitigate this risk.   The client may want to look into life insurance regardless to offset the amount that will pass to charity.

Congratulations to the Nationals!

With interest rates at near record lows, it is a great time to consider a grantor retained annuity trust (GRAT).  GRATs are a planning technique in the Internal Revenue Code to remove future appreciation in the asset gifted to the GRAT out of the grantor’s estate.  The grantor contributes an asset to the GRAT and retains an annuity for a term.  If the value of the annuity is less than the value of the asset, a taxable gift results for the difference.  Often, the GRAT is structured so that the annuity value and asset value are near equal (called “zeroing out”).  Assets remaining after the GRAT term ends, are out of the grantors estate.   There is minimal valuation risk with a GRAT since, if the value of the asset is found to be higher than reported, the annuity payment increases.  In order to be effective, the grantor must survive the GRAT term.  Accordingly, a GRAT isn’t a good technique for a grantor with health issues, unless a short term is used.

Often a discounted asset is contributed to the asset.  This makes it easier to grow the asset over the annuity payment.  However, the discounted asset doesn’t work so well, if the contributed asset doesn’t produce sufficient cash flow to pay the annuity.  There are ways to address this issue, however, and make the GRAT a potential home run!


The Tax Court in Estate of Aaron U. Jones upheld the use of tax-affecting in the valuation of gifts made of S corporation and limited partnership interests.  The business involved timber, and the income method is typically used to value an ongoing timber business.  Tax-affecting is adjusting the value to reflect an after tax value as if the business was a C corporation.  Tax-affecting for S corporations was in the IRS manual twenty years ago, but was removed after the IRS won a victory against its use in Gross v Commissioner.

It is unclear at this point how broad the Tax Court’s acceptance of tax-affecting will go, but it is certainly a welcome result for the taxpayer.

It is important to point out that the facts were good.  This was no death bed case, and the taxpayer retained a very qualified appraiser in the area of timber.  The IRS appraiser had little or no experience in the area.   This is a great lesson to take away.  Always have the better appraiser when you head into litigation with the IRS.

Some well known planners, such as Stacy Eastland, are recommending consideration of the BDOT for families with significant wealth to plan with the existing $11.2 million exemption.  Most of you are aware of the Beneficiary Defective Inheritor’s Trust (BDIT), which is funded with only $5,000, and provides that all of that $5,000 may be withdrawn when the trust is created.  The problem with the BDIT is engaging in a transaction of significant size with the beneficiary where the trust is funded with only $5,000.

With the BDOT,  the beneficiary of the third-party-created trust is given the unilateral power to withdraw all of the net taxable income of the trust from all of the assets of the trust.  This makes the BDOT a grantor trust with respect to the beneficiary.

These planners argue that the beneficiary can grow the BDOT  without estate inclusion by not withdrawing income from the trust up to the lapse protection (the “5 and 5” protection of IRC Sections 2514(e)(2) and 2041(b)(2)).  If the trust has income in excess of 5% in any year the trust loses the lapse protection at least with respect to the excess.  Accordingly, the beneficiary should withdraw this excess amount.  Additionally, use of hanging powers could mitigate transfer tax concerns.

The main risk with this technique are creditor rights issues.  If a creditor potentially can get to the trust, estate inclusion results.  Accordingly, state law should be reviewed.

Regardless of state law creditor rights issues, a creditor issue will exist if the BDOT enters into a leveraged sale with the beneficiary for less than adequate and full consideration.  Of course, such a sale would raise inclusion issues under Code Section 2036 or 2038.   Accordingly, care should be exercised in determining the selling price, and use of a value adjustment clause should be seriously considered.

For a family willing to take on some planning risk, the BDOT offers the ability for a family of multigenerational wealth to adequately fund a BDOT at the parent level, so that children with significant wealth can transfer that wealth on a leveraged basis to future generations.

Spent several days in San Antonio at the TexFed Tax Institute.  Most of the discussion was about the Tax Cuts and Jobs Act (“TCJA”) after two years.   The main takeaway was how poorly written the law is.  If you recall the law was put together in about three weeks.  While the lowering of the corporate tax rate, has made us more competitive with other countries on the top line, the loopholes and limitations have not resulted in a significant rise in business activity in the United States.

Exciting opportunities created, such as opportunity zones, were drafted without consideration that real estate investment is typically made in pass through entities.  Two versions of regulations later, they still haven’t gotten it right.

Perhaps the worst provision of the TCJA is the elimination of the carryback of NOLs and the limitation of interest deduction to EBITDA now and just EBIT is a couple of years.  This was done because TCJA had to be done via reconciliation, and Congress had to find ways to keep the deficit hit to no more than $1,500,000,000,000 (which is absurd).  The problem is that these provisions will be devastating to distressed companies in the next downturn.  This will be like throwing gasoline on a fire.

Tax laws should be written deliberately with committees formed to develop underlying goals, and careful drafting to ensure consistency.  TCJA is ripe with inconsistencies and confusion.

Hopefully, all of these issues will be cleaned up over the next couple of years.  Or better yet, maybe we tear this one up and start over.

Recently watched a show on Jack Nicklaus, and his ability to hit 1 irons.  There was a segment with current tour pros attempting to hit 1 irons, and it didn’t go well.

I thought I would give it a try.

Trevino said God couldn’t hit a one iron, but Jack and I can.  One was a draw and one was a fade.  Can you tell?

It is happening with more and more frequency…someone knocks on the door and announces him or her self as the child of the man answering the door.  DNA and the rise of Ancestry.com and the like have created this potentially awkward moment over and over again.   In many cases it is a beautiful moment.  I have read cases, where strong bonds have been formed between the man and the child.  I have even read about cases, where the mother and the man have married or are living together.  But what are the legal ramifications to the donor.  Typically, he went to a sperm bank or infertility clinic, and didn’t want to be found out.

State law on the issue varies.  About two-thirds of states (including Texas) have adopted the Uniform Parentage Act (UPA). The UPA establishes that any male who provides sperm under the guidance of a physician for purposes of artificial insemination is not the father unless he is legally married to the recipient. Therefore, if there is no legal marriage, the male who provided the sperm is not legally obligated to perform fatherly duties such as paying child support. However, most states adopting the UPA have not been willing to extend protection to the donor in cases where the insemination process does not involve a physician.

In many cases, the donor is known, and in those cases, an agreement should be put in place so the parties intentions are clear.  Without an agreement (and perhaps even with one if the donor become active in the child’s life) a court will typically rule based on the best interest of the child, and that could mean child support payments.

I have been involved in many premarital agreement situations where the parties got upset and decided the negotiations were hurting their relationship, so they decide to drop it.  In Texas, there is an option, however, for the person of means to pursue that can be done without the knowledge or consent of their fiancee.

The moneyed fiancee can create a limited partnership and contribute the assets he or she wants protected to it.  This should maintain the separate property character of the assets contributed to the partnership during the marriage as long as the assets remain in the partnership.  Distributions from the partnership are thought to be community property, and the moneyed finacee should be aware that some assets, such as royalty payments, are separate property and contributing them to the partnership could convert those payments to community property.

The moneyed finacee also should be aware of the Jensen rule, and pay him or herself reasonable compensation for his labor and services rendered to the partnership to avoid a claim for community reimbursement.

While not as effective as a well-drafted premarital agreement, the use of a  limited partnership offers the moneyed finacee a way to provide significant protection if things don’t work out for better or worse.

About Grady Dickens

I created this blog to comment on items of current interest regarding trusts, estate planning, charitable planning and tax law, and share my knowledge and over thirty years of experience as an attorney practicing in Dallas, Texas.