Estate attorneys structure trusts. CPAs file K-1s. Neither profession is trained where the two disciplines collide. MLPs fall in the gap — with computed examples and a collaboration framework that bridges it.
By Lucas Andersen — Masters in Finance, proprietary energy trader, direct MLP holder
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This article is for educational purposes. It does not constitute tax, legal, or investment advice. The professional knowledge gaps described are structural and not a criticism of any individual practitioner. Consult qualified professionals for guidance specific to your situation.
Key Takeaways
(1) MLP basis erodes to zero. Broker statements show purchase price; IRS adjusted basis is near zero after 15 years of distributions. §1014 step-up eliminates the gap — but only if the trust structure permits it. (2) §751 recapture is ordinary income. For long-held positions, $30,000–$50,000+ of ordinary-income exposure that §1014 eliminates at death. Partnership law (Subchapter K) is outside the estate-law curriculum. (3) UBTI triggers Form 990-T. UBTI above $1,000 requires 990-T filing and trust-rate tax — most trust attorneys have never filed one. (4) Trust-rate compression is punitive for MLP income. MLPs generate K-1 income annually; at 37% trust rates above $15,200, compression adds thousands per year. (5) §675(4) swap power has a specific MLP application. It’s in most IDGT documents but rarely used — swapping MLPs OUT restores §1014 eligibility.
(1) Not all irrevocable trusts are the same for step-up. Revocable trusts get step-up. IDGTs probably don’t. Credit shelter trusts do. Dynasty trusts don’t. The CPA needs to ask the attorney. (2) Trust decanting can fix a bad structure. ~40 states permit decanting. The CPA identifies the problem; the attorney executes the fix. (3) §663(b) requires proactive planning. The 65-day election must be flagged by early January, not April. For MLP-holding trusts, thousands per year in savings. (4) §645 election is a 2-year bridge. Treats a post-death trust as part of the estate, avoiding immediate trust-rate compression on MLP income. (5) Trust situs affects state tax. California 13.3% vs. Nevada 0%. The CPA sees the bill; the attorney changes the situs.
Most financial advisors recommend MLPs for yield without understanding the K-1 vs 1099 distinction, don’t track basis erosion, don’t differentiate direct MLPs vs ETFs (AMLP/MLPA) for tax purposes, and can’t compute the breakeven-to-sell price accounting for §751. The advisor who says “sell your MLPs and buy the ETF for simplicity” may cost the client tens of thousands in tax — because the sale triggers §751 recapture that holding would have eliminated via §1014 at death.
Scenario 1: Attorney places 2,000 EPD units in an IDGT. Estate is $8M (under $13.61M exemption). Estate tax saved: $0. Step-up lost: ~$75K FMV at ~$0 basis. §751 passed to heirs: ~$44K ordinary income. Federal tax heir pays on sale: ~$20,908. Scenario 2: CPA doesn’t recommend §663(b) for trust with 5-MLP portfolio. Annual compression: ~$1,935. Five years: ~$9,675. Fix: one memo to the trustee each January. Scenario 3: Advisor recommends selling zero-basis 5-MLP portfolio to “simplify.” Federal tax bill: ~$39,406 (LTCG+NIIT on capital portion + §751 ordinary spread). Same tax §1014 would have eliminated at death: $39,406. Net cost of the “simplification”: $39,406.
Uncoordinated: attorney drafts IDGT, asks client “what assets?”, client says “everything,” CPA never consulted. MLPs in IDGT, no §1014 step-up, heirs pay ~$39,406 in tax. Coordinated: CPA sends attorney one email with three numbers (basis, §751, step-up value). Attorney keeps IDGT for stocks and real estate; MLPs stay in revocable trust. Estate tax result identical ($0 either way — under exemption). MLPs get §1014 step-up. Heirs pay ~$0 on MLPs. Cost of coordination: one email, one phone call. Savings: ~$39,406. The only difference was a 30-minute conversation that almost didn’t happen.
The federal estate tax exemption ($13.61M) is scheduled to drop to ~$7M at TCJA sunset. At $13.61M, most MLP investors are under the exemption — IDGTs provide $0 estate tax savings while costing full step-up. At $7M, many more estates exceed the threshold, changing the IDGT calculus. The lost §1014 step-up cost doesn’t change. Professionals who sort this out for clients now — before the exemption changes — will save real money. Those who wait will be doing it under time pressure.
Client: send two emails (CPA and attorney) referencing this article. Request a 30-minute three-way call. Bring the MLP Portfolio Tax Simulator’s CPA PDF export. Ask the attorney “does my trust preserve §1014 step-up for my MLPs?” and the CPA “what is the annual trust-rate compression cost on my MLP income?” CPA: compute the §1014 step-up value for every MLP-holding client. Flag trust-rate compression annually. Initiate the call to the attorney with three numbers: adjusted basis, §751 exposure, step-up value. Attorney: before drafting a trust for an MLP-holding client, ask the CPA for basis, §751, and K-1 income per position. If significantly eroded, §1014 step-up is often more valuable than the trust. For existing IDGTs, check for §675(4) swap power and exercise it for the MLP positions.
For each MLP-holding client, answer five questions: (1) direct MLPs (not ETFs)? (2) any trust structure in place? (3) IRS-adjusted basis computed? (4) is Form 990-T being filed for UBTI if irrevocable? (5) has §663(b) been discussed? Scoring: 0–1 “no” answers = well-served, verify annually; 2–3 = schedule a review; 4–5 = priority review, client is almost certainly losing money from the knowledge gap.
If the attorney dismisses the concerns, ask two diagnostic questions: “what is the client’s IRS-adjusted basis?” and “what is the approximate §751 exposure?” If they can answer both, they understand the issue. If not, the gap exists — as a specialization question, not a competence question. Options: share the 5-article MLP estate planning series; request a second opinion from an attorney with partnership-taxation experience; bring the simulator’s CPA PDF to quantify the stakes. When the attorney sees “$39,406 in §751 eliminated by step-up vs $0 by this trust type,” the conversation turns quantitative.
Bar exam and CPA exam don’t overlap here — Subchapter A/B and Subchapter K are separate practice areas. MLPs are a small asset class (~1–2M direct holders); most attorneys never encounter the issue. Complexity is asymmetric — regular stocks in trusts are simple, MLPs are the exception. Professionals who understand both are rare and expensive. This gap is why lucasandersen.ai exists: the MLP Portfolio Tax Simulator speaks both languages and computes the interaction in dollar terms both professionals can act on.