Tax Planning With Trusts for High Net Worth: Grantor Trusts, SLATs, GRATs, and IDGT Sales

The most common tax planning with trusts high net worth setup we’re seeing right now is a pair of asymmetric SLATs — one funded by each spouse for the other — combined with an IDGT sale of a business interest or concentrated stock position, all completed before December 31, 2025 to capture the full $13.99M per-spouse estate exemption before the 2026 sunset cuts it roughly in half. This combination shows up in maybe 70% of the engagements we’ve taken since June 2025, and the pace has accelerated every month as the deadline closes in.

The SLAT pair is the foundation. One spouse — call her Spouse A — funds a SLAT for Spouse B and their descendants using $8-13M of her exemption. Spouse B then funds a different SLAT, with different terms, different funding amounts, different beneficiary classes, and a different trustee, for Spouse A and the descendants. The trusts are structured as grantor trusts to the funding spouse, which means the funding spouse pays the trust’s income tax on her own 1040 — and that tax payment is itself a tax-free gift to the trust beneficiaries. Both trusts have an independent corporate trustee to avoid §2036/2038 inclusion problems, and both use HEMS distribution standards plus a discretionary distribution power.

The IDGT sale layers on top. After the SLATs are funded and have been operating for at least six months (to establish independence), one of the SLATs — or a separate IDGT — purchases a business interest, a real estate partnership stake, or a concentrated stock position from the funding spouse. The purchase is funded by a promissory note bearing interest at the applicable federal rate (around 4.5-5% currently). Because the trust is a grantor trust, the sale doesn’t trigger income tax under Rev. Rul. 85-13. The asset moves out of the grantor’s estate at the price reflected in the note, and all future appreciation belongs to the trust.

Valuation discounts amplify the result. A $25M family business interest, after a typical 30-35% combined discount for lack of control and lack of marketability, transfers at a value of $16-17M. So the SLAT funding might use $8M of exemption to receive an asset worth $12M in undiscounted terms, and the IDGT sale might transfer another $15M of business value for a $10M note — moving $5M of value out of the estate immediately, plus all future appreciation.

Tax planning with trusts high net worth families are doing this because the math is overwhelming. A married couple with $30M of net worth can permanently shelter $14M of additional value (the difference between 2025 and 2026 exemptions for two spouses) by acting before year-end. At 40% estate tax, that’s $5.6M of permanent tax savings — assuming the family lives long enough to die after the sunset, which actuarially most HNW couples in their 50s or 60s will. The downside of acting is using exemption you might not have needed if the law extends; the downside of inaction is losing it forever if it doesn’t.

Tax planning with trusts high net worth families also pair these structures with GRATs for the assets too volatile or uncertain to commit to a permanent SLAT. A $5M tranche of pre-IPO equity going into a 2-year rolling GRAT is a ‘free option’ — if the IPO happens at a higher value, the appreciation passes out of the estate; if it doesn’t, the GRAT unwinds and the asset returns. We typically layer 3-5 rolling GRATs per year for clients with concentrated public stock positions or pre-liquidity-event founder equity.

The drafting and funding window is narrow. SLATs require 4-6 weeks to draft properly, business interest appraisals add another 4-8 weeks, and the funding paperwork has to clear by December 31. Anything starting after October 2025 is genuinely at risk of missing the deadline. We’ve already declined SLAT engagements that came in after Halloween 2025 because the math on appraisal turnaround, trust drafting, and clean funding doesn’t work in the remaining time.

If you’re sitting on a substantial estate and haven’t started this conversation yet, the time is now. Reach out through our New Client Inquiry form and we can coordinate with your estate attorney to map the full structure in the next two weeks.

The 2026 estate exemption sunset is the single biggest driver of tax planning with trusts high net worth families are doing right now. The Tax Cuts and Jobs Act of 2017 doubled the federal estate and gift tax exemption from roughly $5.5M per individual to $11.18M, indexed for inflation. By 2025, that exemption has grown to about $13.99M per individual, or $27.98M for a married couple using portability. On January 1, 2026, that exemption automatically reverts to the pre-TCJA level adjusted for inflation — projected to be approximately $7M per individual, or $14M per couple.

The math is unforgiving. A married couple loses roughly $14M of combined estate exemption overnight. At the 40% federal estate tax rate, that’s $5.6M of potential estate tax that the family could permanently avoid by using the exemption before December 31, 2025. The IRS confirmed in final regulations at Treas. Reg. §20.2010-1(c) — issued in November 2019 — that gifts made under the higher exemption before the sunset will not be ‘clawed back’ if the donor dies after the exemption decreases. So using the exemption in 2025 locks it in, even if death occurs in 2030 under a lower exemption.

Tax planning with trusts high net worth families are responding in three ways. First, fund SLATs before year-end to use the full exemption per spouse. Second, fund dynasty trusts with both gift and GST exemption to lock in multi-generational shelter. Third, accelerate IDGT sales of business interests to move appreciation outside the estate at today’s valuations and discounts, before any congressional response to the sunset changes the discount rules under §2701-2704.

There’s political uncertainty layered on top. A Republican Congress and White House in 2025 could pass an extension before the sunset hits — early 2025 budget reconciliation talks suggested some form of extension might be in play. But Congress has not yet passed any extension, and even if an extension comes, it might be partial, temporary, or paired with other changes that reduce the value of techniques like GRATs, valuation discounts, or grantor trust status. The risk of waiting is asymmetric: if no extension passes, families lose $14M of exemption; if an extension passes, families have used up some exemption early but with no permanent tax cost (just the loss of optionality).

Our recommendation to tax planning with trusts high net worth clients is to act as if no extension is coming. The estate planning community has been burned before — the 2010 sunset was extended at the last minute, the 2013 sunset was made permanent at higher levels, but waiting until December 30 to find out is not a strategy. Better to complete the structures in October or November, have them in place by year-end, and adjust the family’s overall plan if Congress extends the law later.

Specific opportunities are bigger than the headline exemption number. GST exemption is aligned with the estate exemption — so using $13.99M of GST exemption to fund a dynasty trust before year-end shelters that amount plus all future appreciation from estate and GST tax forever. Valuation discounts on closely held business interests remain available under current law but have been on the Treasury greenbook chopping block for years — using them now while they’re available is part of the urgency. Grantor trust status remains available under current law but has also been threatened by proposed legislation that would eliminate the IDGT sale technique by treating the grantor and the trust as one taxpayer for income but two for estate tax.

What if the sunset is extended and you’ve already used exemption? You’ve used exemption you might not have needed. There’s no out-of-pocket tax cost — you just have less remaining exemption for future gifts. But the trade-off is favorable: families who acted early and lost optionality have permanent shelter; families who waited and were caught by an unchanged sunset have permanent additional tax. We’d rather have clients in the first category.

Run your numbers now. If you have a net worth above $10M and you haven’t talked to your CPA and estate attorney about the sunset, the next 60 days are the window. After that, drafting and funding timelines get tight and quality starts to suffer. Reach out to The Reed Corporation through our New Client Inquiry form and we’ll coordinate with your existing attorney or recommend one if you don’t have an estate planning team yet.

The IDGT sale is one of the most powerful techniques in tax planning with trusts high net worth families use, and it’s worth walking through the mechanics in detail because the structure is technical but the result is dramatic. Done right, an IDGT sale can move tens of millions of dollars of business or real estate value out of the taxable estate with little or no use of gift exemption.

Step 1: The grantor creates an irrevocable trust drafted as a grantor trust under IRC §§671-679. The grantor trust triggers usually include a §675(4) power of substitution — the grantor’s right to swap assets in and out of the trust for assets of equivalent value. This single power is enough to make the trust grantor as to income while keeping the assets out of the grantor’s estate for transfer tax purposes. The trust beneficiaries are typically the grantor’s descendants, sometimes via a continuing dynasty trust structure.

Step 2: The grantor makes a ‘seed’ gift to the trust. This is typically 10% of the eventual transaction value, though the 10% rule is more convention than statute. The seed gift establishes the trust as an independent entity with its own assets, which is necessary to give the IRS a reason to respect the subsequent sale as a real arm’s-length transaction rather than a disguised gift. For a $20M planned IDGT sale, the seed gift would typically be $2M, which uses $2M of the grantor’s gift exemption.

Step 3: The trust buys an appreciating asset from the grantor in exchange for a promissory note. The purchase price is the appraised fair market value, ideally with applicable valuation discounts for lack of control and lack of marketability. The note bears interest at the applicable federal rate (AFR) for the appropriate term length — currently around 4.5-5% depending on whether the term is short, mid, or long. The note can be interest-only with a balloon at maturity, or amortizing — interest-only is more common because it preserves cash flow in the trust.

Why no income tax is triggered. Under Rev. Rul. 85-13, transactions between a grantor and his own grantor trust are ignored for income tax purposes. The trust and the grantor are treated as the same taxpayer for income purposes. So the sale generates no capital gain to the grantor, the trust takes the seller’s basis in the asset, and the interest payments from the trust back to the grantor are also ignored for income tax. The grantor continues to pay all of the trust’s income tax on his own 1040 — and that tax payment is itself a tax-free gift to the trust beneficiaries.

Tax planning with trusts high net worth families gravitate to IDGT sales for assets with three features. First, a strong valuation discount story — closely held business interests, family limited partnership interests, real estate partnership interests, minority stakes in private companies. Second, strong cash flow — the trust needs cash to service the note interest payments. Third, expected appreciation above the AFR — the whole point is to capture appreciation in the trust, so a 15% expected return on a business interest at a 5% AFR generates 10 points of annual appreciation that lands outside the estate.

The risks are real and manageable. The biggest risk is the IRS attacking the transaction under §2036, arguing that the grantor retained an interest in the transferred property (the right to interest payments could be characterized as such). The defense: structure the transaction as a true sale with arm’s-length terms, ensure the trust has economic substance through the seed gift and independent assets, and document the cash flow projections that support the trust’s ability to service the note. Tax planning with trusts high net worth families work with experienced tax counsel on these structures — this is not a DIY technique.

The second risk: the asset doesn’t perform as expected. If the asset earns less than the AFR over time, the trust ends up paying the grantor more in interest than the asset generates, slowly grinding the trust’s value back toward zero. This is uncommon but possible. Mitigation: choose assets with realistic expected returns well above AFR, model multiple scenarios before funding, and consider hedging or insurance for catastrophic downside cases. We’ve never had a client need to unwind an IDGT sale because of poor asset performance, but we model that risk explicitly in every engagement.

State income tax is often the second biggest tax bill HNW families face after federal income tax, and tax planning with trusts high net worth families do for state income tax avoidance — particularly DING (Delaware Incomplete Non-Grantor) and NING (Nevada Incomplete Non-Grantor) trusts — can save hundreds of thousands of dollars annually on investment income. For a New York City resident in the top brackets, state and local income tax adds roughly 14.8% on top of federal rates. On $5M of investment income, that’s $740,000 of state and local tax every year. Eliminate that bill through a properly structured DING or NING and the savings compound dramatically over time.

The mechanics. The trust is established in Delaware, Nevada, or another state with no state income tax on non-source trust income. The trustee is in that state — typically a corporate trustee or trust company licensed in Delaware or Nevada. The trust is irrevocable. The grantor makes a transfer to the trust but structures it as an incomplete gift for federal gift tax purposes, meaning no gift tax is owed and no gift exemption is used. The trust is a non-grantor trust for income tax purposes, meaning the trust pays its own income tax on Form 1041 rather than the income flowing through to the grantor’s 1040.

The incomplete-gift feature is what distinguishes DING/NING from a typical irrevocable trust. Under Treas. Reg. §25.2511-2(b), a gift is incomplete if the grantor retains a power that prevents the gift from being completed for federal gift tax purposes. In a DING/NING, the grantor typically retains a limited testamentary power of appointment over the trust assets — meaning the grantor can direct, by will, who eventually receives the trust assets at death. This power keeps the gift incomplete, so no gift exemption is used at funding.

Why it works for state income tax. New York taxes resident trusts on all income, regardless of source. A trust is a New York resident trust if it was created by a New York domiciliary AND the trust has a New York trustee, New York assets, or other New York connections. By placing the trustee in Delaware or Nevada, holding assets that aren’t New York-source (investment portfolios, out-of-state real estate, etc.), and avoiding other New York connections, the trust escapes New York resident status. Delaware and Nevada don’t tax non-source trust income. So the trust pays no state income tax anywhere.

Tax planning with trusts high net worth families use DING/NING structures for investment portfolios, out-of-state private equity interests, hedge fund investments, and other non-source income. The technique does NOT work for income that has a New York source — a New York operating business pays New York source income tax regardless of who owns it; New York real estate generates New York-source rental income; New York-based partnerships generate New York-source income to their partners. So a DING/NING is a portfolio income tool, not a business income tool.

California killed DING/NING in 2023 with SB 131, which treats DING/NING trusts as grantor trusts for California income tax purposes — meaning the California resident grantor is taxed on the trust’s income regardless of where the trustee sits. New York has been aggressive in audit but hasn’t passed equivalent legislation as of mid-2025. Tax planning with trusts high net worth families in New York should monitor this closely — a New York equivalent of California SB 131 has been proposed in past legislative sessions and could return.

The distribution committee is a key drafting feature. The IRS has issued PLRs (PLR 201310002, PLR 201410001, and others) approving DING/NING structures where distributions back to the grantor are at the discretion of a distribution committee of adverse parties — typically the grantor’s adult children. This structure lets the grantor receive distributions from the trust if needed, which preserves access to the money. The distribution committee can also choose to accumulate income in the trust at the state-tax-free rate or distribute it to beneficiaries who pay tax at their own (often lower) state rates.

Setup costs and ongoing administration. A DING/NING trust typically costs $15,000-$40,000 to establish, depending on complexity, plus annual trustee fees of $5,000-$25,000 depending on assets under management. The break-even point — annual tax savings exceed annual costs — is typically reached at $500K-$1M of non-source investment income. Below that level, the structure may not be worth the complexity. Tax planning with trusts high net worth families with $5M+ of portfolio income see break-even in the first year and substantial savings thereafter. Reach out to The Reed Corporation if you want us to run the break-even math for your specific situation.

The compressed bracket trap is one of the biggest unforced errors in tax planning with trusts high net worth families make, and it’s entirely avoidable with active distribution planning. The issue: non-grantor trusts hit the top 37% federal income tax bracket at just $15,200 of undistributed income in 2025, plus 3.8% net investment income tax at the same threshold, plus state income tax in states like New York. A trust that accumulates $100K of income pays roughly 41% federal tax (37% + 3.8% NIIT) plus state tax, compared to potentially 22-24% if the same income were distributed to an adult beneficiary in a lower bracket.

The structural reason is intentional. Congress wants trusts to be conduits for distributing income, not vehicles for accumulating it tax-free at low brackets. The original purpose of compressed trust brackets — added in 1986 — was to prevent wealthy families from creating dozens of small trusts each accumulating income at the lowest brackets. Today, with brackets compressed to top out at $15,200, the message is clear: distribute or pay the full freight.

Distributable net income (DNI) planning is the workaround. When a trust distributes income to a beneficiary in a tax year, the distribution carries out DNI to the beneficiary, who then pays tax on it at their personal brackets. The trust gets a corresponding deduction, reducing or eliminating the trust’s taxable income. So $100K of trust income distributed to an adult beneficiary with otherwise modest income might be taxed at 22% on the beneficiary’s 1040 instead of 41% on the trust’s 1041 — saving 19 percentage points, or $19,000 on that $100K.

The 65-day rule under IRC §663(b) provides flexibility for tax planning with trusts high net worth families. A trustee can elect to treat distributions made within the first 65 days of a calendar year (through March 5 or 6, depending on leap years) as if they were made in the prior tax year. This lets the trustee look at the trust’s full-year income after year-end, calculate the optimal distribution amount, and make the distribution in February or early March of the following year while still applying it to the prior year. We use the 65-day rule almost every year for non-grantor trust clients to clean up bracket arbitrage retroactively.

Capital gains are typically trapped. Under default rules, capital gains are allocated to corpus (the principal of the trust) rather than to DNI. This means even if all income is distributed, capital gains remain in the trust and are taxed at the trust’s 20% + 3.8% NIIT rate. Tax planning with trusts high net worth families address this by drafting the trust document to allow the trustee to allocate capital gains to DNI in the trustee’s discretion, or by relying on state law (Delaware and New York both have provisions permitting this in certain circumstances). Once capital gains can be allocated to DNI, the same distribution strategy applies — distribute gains to beneficiaries in lower brackets to save tax.

Charitable distributions provide another release valve. Under IRC §642(c), a trust can deduct amounts paid to charity from gross income pursuant to the trust document. The deduction is uncapped — unlike the percentage-of-AGI limits that apply to individual charitable deductions. So a non-grantor trust with $200K of income and a charitable giving directive can pay $200K to charity and zero out its taxable income entirely. Tax planning with trusts high net worth families with charitable goals often use non-grantor trusts as efficient charitable giving vehicles for exactly this reason.

The beneficiary’s tax bracket matters more than the amount. Distributing $50K to a beneficiary in the 37% bracket saves nothing — the trust would have paid 37% anyway. Distributing $50K to a beneficiary in the 22% bracket saves 15 percentage points, or $7,500 per year. Tax planning with trusts high net worth families look at every beneficiary’s brackets each year — kids early in their careers, retired family members in low brackets, beneficiaries in low-tax states — and direct distributions to the lowest-bracket beneficiaries first to capture the maximum spread.

The kiddie tax limits the benefit somewhat. Children under 19 (or 24 if full-time students) pay tax at the parents’ marginal rate on unearned income above ~$2,600. So distributing trust income to minor grandchildren doesn’t actually shift the tax rate — it just changes whose return shows it. Tax planning with trusts high net worth families use this for adult beneficiaries primarily, with some attention to college-age beneficiaries who have earned income that can absorb additional income at low brackets. We run the math every December as part of year-end planning for non-grantor trust clients — reach out through our New Client Inquiry if you’d like us to do the same for your family’s trust structure.