A Sample Case Study


Mr. Jones, a real estate owner, was out of options with regard to his estate planning. He had too much money. A Gifting Program would barely scratch the surface. Maximum gifts to an Insurance trust would not provide enough Life Insurance to solve his family's estate planning needs. A distress sale of his real estate to meet his tax obligation would be a disaster. Mr. Jones owned $50,000,000.00 of shopping centers.


We had an appraisal firm appraise his real estate at $35,000,000.00 as we had some flexibility with regard to this valuation. We then implemented a Family Limited Partnership in which Mr. Jones was a 1% General Partner and a 99% Limited Partner. (An LLC may be implemented in order to facilitate this technique as well). Mr. Jones then formed a Defective Grantor Trust in which his children, grandchildren, and future generations were the beneficiaries. (Please note that there may be a discount available when selling a Limited Partnerís interest as there is no marketability in this interest.) We then sold his 99% limited interest to the Defective Grantor Trust for a Note Payable taking a 40% discount which for the record may be somewhat aggressive. The interest rate on the Note Payable was 3.16% (AFR/ Applicable Federal Rate) set by the Fed. Thus 99% of the real estate was transferred to the Trust for his familyís benefit for a Note in the amount of $21,000,000.00 which was an asset of Mr. Jonesí estate.

Calculation of $50,000,000.00 Note

Real estate was liberally valued at $35,000,000.00. The 99% Limited Interest of $35,000,000.00 was sold to Defective Grantor Trust taking a 40% discount. This equates to a Note Payable in the approximate amount of $21,000,000.00. The annual interest on this note is $663,600.00.


  1. Real estate worth $50,000,000.00 is now in the Family Trust.
  2. Trust was drafted in New Jersey which is a state where there is no rule against perpetuities. Thus, the Trust may stay in existence indefinitely at the Trustee's discretion. Trust may be drafted liberally if desired.
  3. A discounted Note in the amount of $21,000,000.00 is in the estate in lieu of $50,000,000.00 of real estate.


The real estate is throwing off annually a 12% cash flow which equates to $6,000,000.00 (12% of $50,000,000.00). This income is in the Trust as the Trust now owns the real estate. The Trust is paying Mr. Jones, the limited partner, 3.16% (AFR) on his $21,000,000.00 Note or $663,600.00 per Year. There is thus a net of $5,336,400.00 left in the Trust. All or a percentage of this balance, left in the Trust, could be used to purchase Life Insurance on Mr. Jones or Mr. Jones and his wife if applicable. Twenty five million of Life Insurance was purchased using a portion of the Trust's income. The balance over and above the cost of Life Insurance was invested in the Trust as an asset of the Trust. Please note that it was Mr. Jones' desire to reduce his estate to the fullest extent in favor of his family. As such, the make-up of a Defective Grantor Trust is such that its income is taxed to the Grantor and not the Trust itself. Thus, the Trust grows without the burden of paying tax. Mr. Jones pays the income tax on the Trust's income which allows him to further reduce his estate by the amount of income tax paid.


Without this strategy Mr. Jones could not have gifted enough money to his Family's Trusts to purchase the much needed Life Insurance to afford proper estate liquidity. In addition, the actual amount of Life Insurance needed was greatly reduced as a result of the discounts created by the use of this planning technique.

Based on several recent tax issues, future planning was implemented with regard to Mr. Jones' General (controlling) Partnership Interest. In addition, it is important to note that his Defective Grantor Trust was partially funded prior to the implementation of this planning. Additional techniques are available which may fully cancel out the note owed to Mr. Jones from the Defective Grantor trust at Mr. Jones' ultimate death.