An income tax and estate tax question for a grantor trust?

Question

In an "intentionally defective grantor trust" in which the grantor
retained the power to substitute assets....may the grantor substitute
cash for appreciated stocks owned by the trust so that the appreciated
stocks end up back in his estate and eligible for a step-up in basis
upon his death? (Obviously, the question assums that no capital gains tax is
triggered by substitution itself...if this is a false assumption
please explain.)
If the answer is yes....does it make any difference if the
intentionally defective grantor trust owns the appreciated stocks in
an LLC entity.

Answer 1

You could make a substitution of cash for the stocks. I'm not sure you can do the substitution of cash for stock that is owned by an LLC. I think that this would be considered a sale by the LLC of the stock for the cash. You could probably get around this by distributing the stocks from the LLC to the members and do the substitution. The distribution of stock by the LLC to each member should not trigger a tax. The members would take the LLC basis in the stock.
This is a fairly complex transaction so I would recommend a session with a CPA or tax attorney to verify the answer.

Answer 2

i have had to look into similar problems relating to an annuity that was deleted months ago. my contact had to check with his sources and never got back to me - so, that was include in the file that was placed with those who will act upon my call within a certain time. should they not hear from me, they understand what that means.