Second-Stage Estate Planning
Among the informational and fascinating sessions at the 2026 Heckerling Institute, my favorite was the panel discussion with Jonathan Blattmachr, Diana Zeydel and Todd Angkatavanich titled “Splitting, Splicing, and Stacking Strategies to Trust Structures.” The speakers focused on second-stage estate planning, after the initial asset transfer plan is initiated and often completed. Specifically, the presentation speaks to the notion that estate planning is a continuous process, where what was done by the taxpayer (and, when applicable, the spouse) should lead to consideration of additional estate-planning opportunities based on personal investment economics, as well as the planning in place for older and increasingly younger generations.
For example, a taxpayer may initiate one or a series of grantor retained annuity trusts (GRATs) for assets that have the possibility of explosive value growth, usually over a 2-year period, followed by a continuing trust that would be a grantor trust as to the taxpayer. Grantor trust status will continue for the life of the settlor (that is, the taxpayer who established the GRAT) and become a non–grantor trust the day after the settlor’s passing. Grantor trust status will require the settlor to pick up the income tax relating to the trust’s investments on the settlor’s personal income tax return, reducing their potential taxable estate without being classified as a taxable gift, while allowing the unfettered growth of trust assets to be for the benefit of a next-generation heir. Further, the assets will likely be protected from potential future creditors of the next-generation heir.
Still, for generation-skipping transfer (GST) tax technicalities, a GRAT isn’t an efficient structure for benefitting future “skip person” generations. Hence, a GRAT’s continuing trust beneficiaries are often the settlor’s children.
As such, assuming the GRAT was economically successful, that is, the investment during the 2-year term exceeded in value growth the Internal Revenue Service monthly mandated rate based on the date the GRAT was established, an investment opportunity exists.
The GRAT’s trustee is aware that the GRAT’s value will be subject to estate tax on the passing of the original settlor’s children. Further, assume the trustee is also the trustee of a dynastic trust (which often can last for 1,000 years or forever) for the benefit of future generations. In that situation, an estate planner may consider suggesting that the GRAT’s continuing trust and the dynastic trust co-invest within a partnership or limited liability company, with the continuing trust receiving a preferred rate of return and the dynastic trust receiving a common participation to the extent the investment’s return exceeds the preference rate. If so, any excess growth can move from one generation to many generations within an asset-protected vehicle. For instance, in terms of asset protection, if an heir wants to purchase and live in a house with the individual they have a relationship with, instead of the trustee making a cash distribution from the dynastic trust for the heir to purchase the house, the trustee of the dynastic trust might buy the house so the trust will own the house. The heir and the heir’s partner might live in the house rent-free. If the relationship is no longer “normative,” the trustee can ask the former partner to leave, potentially without being subject to matrimonial or other litigation.