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Can a Trust Help Avoid Estate Taxes?

Several of our clients who have used the 1031 exchange previously to sell investment property and exchange into a DST, have asked if a “Trust” can be used to avoid estate taxes. The answer to that question depends on the type of trust the client is establishing. 

Two of the most common trust structures individuals use to facilitate the transfer of wealth to heirs are 1) revocable and 2) irrevocable trusts. A revocable trust, sometimes called a living trust, can be changed by the creator of the trust at any time. An irrevocable trust however has very limited options to make changes as compared to a revocable trust.1 However, only irrevocable trusts allow you to potentially shelter assets from estate taxes. While revocable trusts are frequently used to help avoid probate issues, they don’t allow you to pass assets to avoid estate taxes.

How Does an Irrevocable Trust Help Avoid Estate Taxes?

First, it’s important to know there are generally three parties involved in an irrevocable trust:

  1. Grantor (sometimes called a settler) who creates the trust
  2. Trustee who administers the trust
  3. Beneficiary who receives the trust assets upon the grantor’s death

Once an irrevocable trust has been created and the grantor’s assets have been placed into the trust, the trustee assumes control of the trust. The grantor no longer has ownership rights to any of the assets. Since ownership of the assets has been legally transferred to the trust, the grantor has no tax liability created by the assets. The value of the assets has now been removed from the grantor’s estate.

The trust acquires its own tax filing number and, from this point forward, files income taxes and other reporting requirements on behalf of the trust. The grantor can continue contributing assets to the trust but relinquishes ownership rights as those assets are added. 

While the grantor may avoid taxation on the assets in the trust, the trust would be responsible for paying income tax on any undistributed gains. Or if the beneficiary receives income from the trust, they would pay income tax on the money received.

Real Assets and Using an Irrevocable Trust Conduct a 1031 Exchange

Real property and other assets can be held in a trust. That includes any tax-deferred real estate replacement property the grantor may want to pass to heirs. Any appreciation of that property, while held in the trust, remains tax-deferred until the property is sold. 

And if the trustee determines it’s in the trusts and the beneficiary’s best interest to sell the tax-deferred real estate in the trust using another 1031 exchange, they may do so. The rules that apply to conducting an exchange within a trust are basically the same as a traditional exchange.

The replacement property must be of equal or greater value than the relinquished property and must meet like-kind property requirements.

The 45-day replacement property identification rule applies, as does the 180-day transaction completion rule. Since the trust is now the taxpayer, the important factor to remember is that each side of the 1031 exchange transaction must occur within the trust. 

Trusts and Accreditation

Securities including Delaware Statutory Trust DSTs that may be used as replacement properties in a 1031 exchange require that investors must be accredited i.e., meet at least one of the following requirements:

  • Earns sustained annual income of at least $200,000 if single, or $300,000 if combined with their spouse’s income. 
  • Has a net worth of $1 million or more—either individually or in combination with a spouse’s net worth, but excluding the equity value of a primary residence

These same requirements apply when determining if a revocable trust is accredited and thus permitted to invest in securities. 

To qualify for accreditation, an irrevocable trust is required to meet the following general standards:

  • Must have more than $5 million in assets or
  • The trustee or co-trustee is a bank, insurance company, or a qualified registered investment company

Since qualifying for accreditation status is often done on a case-by-case basis, it is best to consult a qualified attorney to assess specific situations. 


If you are considering a 1031 exchange or evaluating moving exchange property into an irrevocable trust, we encourage you to contact our professionals at FGG1031 | First Guardian Group, as well as your tax and legal advisors to help you achieve your overall objectives.

For more information, contact us.

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1. Changes to irrevocable trusts usually require approval by all the beneficiaries and/or a court to that may be granted if beneficiaries can prove that significant changes occurred requiring a change e.g., changed tax laws.

Paul Getty

Paul Getty is a licensed real estate broker in the state of California and Texas and has been directly involved in commercial transactions totaling over $3 billion on assets throughout the United States. His experience spans all major asset classes including retail, office, multifamily, and student, and senior housing. Paul’s transaction experience includes buy and sell side representation, sourcing and structuring of debt and equity, workouts, and asset and property management. He has worked closely with nationally prominent real estate brokerage and investment organizations including Marcus Millichap, CB Richard Ellis, JP Morgan, and Morgan Stanley among others on the firm’s numerous transactions. Paul also maintains a broad network of active buyers and sellers of commercial real estate including lenders, institutions, family office managers, and high net worth individuals. Prior to founding First Guardian Group/FGG1031, Paul was a founder and CEO of Venture Navigation, a boutique investment banking firm specializing in structuring equity investments made by institutions and high net worth individuals. He possesses over 35 years of comprehensive worldwide business management experience in environments ranging from early phase start-ups to multi-billion-dollar corporations. His track record includes participation in IPOs and successful M&A activity that has resulted in investor returns of over $700M. Paul holds an MBA in Finance from the University of Michigan, graduating with honors, and a Bachelor’s Degree in Chemistry from Wayne State University. Paul Getty holds Series 22, 62, and 63 securities licenses and is a registered financial representative with LightPath Capital Inc, member FINRA /SIPC. Paul is a noted speaker, author, and actively lectures on investments, sales, and management related topics. He is author of The 12 Magic Slides, Regulation A+: How the JOBS Act Creates Opportunities for Entrepreneurs and Investors, and Tax Deferral Strategies Utilizing the Delaware Statutory Trust (DST), available on Amazon and other retail outlets.

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