What tax rate do MLPs pay inside an irrevocable trust?

Irrevocable trusts reach the top federal income tax bracket (37%) at approximately $15,200 of taxable income under IRC §1(e). An MFJ couple does not reach that rate until $731,200. MLP K-1 income inside a non-grantor irrevocable trust is taxed at these compressed rates, making the effective tax burden significantly higher than direct individual ownership once K-1 taxable income climbs above roughly $20,000 per year.

Do MLPs generate UBTI in irrevocable trusts?

Yes. MLP ordinary business income (K-1 Box 1, when positive) constitutes Unrelated Business Taxable Income under IRC §512. The first $1,000 is exempt under §512(b)(12). Amounts above $1,000 are taxed at trust rates and the trust must file Form 990-T. Selling MLP units inside the trust triggers §751 recapture, which is also UBTI.

Do MLPs in an IDGT get §1014 step-up?

Generally no. The purpose of an Intentionally Defective Grantor Trust is to remove assets from the gross estate. Because the assets are outside the estate, they typically do not qualify for §1014 basis step-up at the grantor's death. For MLP positions with significant basis erosion and §751 recapture, this means all accumulated deferred tax passes to beneficiaries unreset.

At what estate size does an IDGT make sense for MLPs?

The IDGT makes mathematical sense for MLP positions only when estate tax savings (40% rate on assets above the exemption) exceeds the income tax cost of losing §1014 step-up. With the current federal exemption at $13.61M, estates below this threshold receive zero estate tax benefit on MLPs. For a long-held midstream MLP at basis ~0, the step-up cost is roughly 24% of FMV.

I have MLPs in a bypass trust from before 2012. What are my options?

Options include: distributing income using the §663(b) 65-day election, distributing MLP units in-kind if trust terms permit, selling MLPs inside the trust (triggering §751 at trust rates once), trust decanting, or petitioning for court modification. With portability now available, the bypass trust may no longer serve its original estate tax purpose.

Should I put MLPs in a dynasty trust?

Generally no. Dynasty trusts hold assets indefinitely — but MLP income inside a dynasty trust faces compressed tax rates perpetually, with no §1014 reset mechanism. Over 50-100 years, the cumulative cost can be enormous. Dynasty trusts work well for growth stocks. They work poorly for MLPs.

Can I remove MLPs from an irrevocable trust?

Potentially, depending on trust terms and state law. Options include: the §675(4) substitution power (swap MLPs out for equal-value assets — common in IDGT documents), trust decanting (~40 states), court-ordered modification, in-kind distribution, or trust termination with consent. Check the trust document for the swap power first.

Does an irrevocable trust holding MLPs need to file Form 990-T?

Only if UBTI exceeds $1,000 annually. Aggregate UBTI across multiple MLPs often crosses the threshold, requiring Form 990-T, $500-1,500 in additional CPA costs, and tax at trust-compressed rates. The sale of MLP units inside the trust can trigger significant UBTI in the sale year due to §751 recapture.

I'm setting up a new irrevocable trust. Should I include MLPs?

No, unless the estate tax math specifically justifies it. Hold MLPs directly in a taxable brokerage account or a revocable living trust to preserve §1014 step-up. Transfer stocks, real estate, and cash into the irrevocable trust — keep MLPs out.

How much does it cost to hold MLPs in an irrevocable trust?

Annual costs: trust-rate compression (material above $15,200 of income), UBTI / 990-T CPA prep ($500-1,500), and trust K-1 administration ($1,500-3,000/year beyond normal individual filing). Total premium above direct ownership: typically $2,000-6,000/year depending on portfolio size.

What is the §675(4) swap power?

The §675(4) swap power lets the grantor substitute assets of equivalent value in and out of an IDGT. For MLPs, the grantor can swap units OUT of the IDGT (into a taxable account, restoring §1014 step-up eligibility) and swap Treasury bonds or cash IN. Trust value unchanged, estate tax benefit preserved, step-up restored. Most IDGT documents include this provision.

What happens to §751 recapture when a trust sells MLP units?

Accumulated §751 recapture realizes all at once as UBTI under §512. For positions held 10-15+ years, this can be $20,000-50,000+ of ordinary income, taxed at compressed trust rates, reported on Form 990-T. This is the "§751 time bomb" — it grows silently each year the trust holds the MLPs and detonates at sale.

Does the trust's state affect taxes on MLP income?

Yes. California taxes trust income up to 13.3%; New York up to 10.9%. Delaware, Nevada, South Dakota, Florida, Texas, Wyoming, Alaska, and Washington have no trust income tax. A California-domiciled trust holding MLPs can face a combined effective rate approaching 50%. Changing situs to a no-income-tax state can eliminate the state layer.

Should MLPs be in a revocable or irrevocable trust?

For most MLP investors, a revocable living trust is significantly better. It preserves §1014 step-up, avoids trust-rate compression, creates no UBTI, and requires no Form 990-T. Irrevocable trusts offer creditor protection and potential estate tax reduction — but for estates under $13.61M, the estate tax benefit is $0 while income tax cost accumulates annually.

What is the §663(b) 65-day election?

Under IRC §663(b), a trust can treat distributions made in the first 65 days of a year as made on the last day of the prior year. For MLP-holding trusts, this lets the trustee pull income out to beneficiaries at individual rates instead of letting it accumulate at compressed trust rates. The election is made annually on Form 1041.

MLPs in an Irrevocable Trust: When the Tax Shelter Becomes the Tax Problem

Irrevocable trusts plus MLPs: 37% trust tax at $15,200 of income, UBTI on Form 990-T, and possibly no §1014 step-up. Computed side-by-side with direct ownership — with the rescue paths for positions already trapped.

By Lucas Andersen — Masters in Finance, proprietary energy trader, direct MLP holder

Last updated: April 5, 2026

This article is for educational purposes. Trust law varies significantly by state, and the interaction between trust structures and partnership taxation is complex. Consult a qualified CPA and estate planning attorney before making decisions about MLPs in trust structures.

Key Takeaways

Irrevocable trusts hit the top 37% federal bracket at $15,200 of income — individuals don’t reach that rate until $731,200 (MFJ). MLP K-1 income inside a trust is taxed at these compressed rates under §1(e).
MLP income inside irrevocable trusts can generate UBTI under §512, triggering Form 990-T filing, additional CPA costs, and tax at compressed trust rates. §751 recapture at sale is also UBTI.
IDGTs may NOT receive §1014 step-up at death — meaning all accumulated basis erosion and §751 recapture survive, passing to beneficiaries unreset. For estates under the $13.61M exemption, the IDGT saves $0 in estate tax but costs the full step-up.
The §675(4) swap power is the one-phone-call fix. Most IDGT documents include it. Swap MLPs OUT of the trust into your taxable account, swap Treasuries or cash IN. Step-up restored, estate tax plan preserved.
Options exist for MLPs already trapped: §663(b) 65-day distributions, §675(4) swap power, trust decanting, in-kind distribution, court-ordered modification, or selective liquidation.

37% at $15,200: Why Trust Tax Brackets Punish MLP Income

Irrevocable trusts use compressed federal brackets under IRC §1(e). The top 37% rate hits at $15,200. An MFJ couple doesn’t reach 37% until $731,200 — roughly 48x higher. 2024 trust brackets: 10% to $3,100 · 24% to $11,150 · 35% to $15,200 · 37% above. For a trust with $30,000 of taxable income, the trust tax is approximately $9,135 (30.5% effective) versus roughly $7,200 at individual 24% — $1,935/year of compression cost, $19,350 over a decade. Compression becomes a real drag once aggregate trust income climbs above $15,200.

The Same Portfolio, Two Trust Types

Revocable trust during grantor’s life: individual rates, no UBTI, no 990-T, full §199A QBI, full §1014 step-up at death. Irrevocable non-grantor trust: compressed trust rates, UBTI above $1,000, 990-T required, limited QBI, step-up DEPENDS on trust type. For the canonical 5-MLP Y15 portfolio ($164,770 FMV), the revocable structure eliminates ~$39,406 in federal tax and ~$84,000 in §751 recapture at death. The irrevocable non-grantor trust may eliminate none of it. For estates under the $13.61M exemption, the irrevocable trust provides $0 in estate tax savings on the MLP portion.

The IDGT Trap: When Step-Up Disappears

An Intentionally Defective Grantor Trust is designed to be defective for income tax (grantor pays tax on trust income) but effective for estate tax (assets outside the gross estate). For stocks, this is a good deal — 40% estate tax saved outweighs 15-20% LTCG paid later. For MLPs, it fails: because IDGT assets are outside the estate, they may NOT receive §1014 step-up. All accumulated basis erosion survives. All §751 ordinary-income recapture survives. The deferred tax liability §1014 would have eliminated passes to beneficiaries unreset. For a long-held midstream MLP position at basis ~0, the step-up cost is roughly 24% of FMV. For estates under $13.61M, the IDGT provides zero estate tax savings on MLPs while costing the full step-up — pure loss.

The Phone Call That Fixes Everything: §675(4) Swap Power

Most IDGTs include a §675(4) substitution power allowing the grantor to swap assets of equivalent value in and out of the trust. For MLPs trapped in an IDGT, this is the escape hatch. Swap EPD units OUT of the IDGT into your taxable account; swap Treasury bonds of equal value INTO the IDGT. Trust value unchanged. Estate tax planning preserved. MLPs now in taxable account → §1014 step-up restored at death. One transaction, one phone call. For a long-held midstream MLP position, step-up value restored is ~24% of FMV: ~$40,000 on a $164,770 portfolio, ~$120,000 on a $500K portfolio. Phone script for the attorney: “I’d like to exercise the swap power under §675(4). I want to swap [MLP units] out of the trust and replace them with [Treasuries] of equal value. Can you confirm the trust document includes the provision and coordinate with the trustee?”

16-Year IDGT Autopsy

John and Mary set up an IDGT in 2010. Transferred 2,000 EPD units at $25/unit. For 16 years, annual tax was IDENTICAL to direct ownership (grantor trust → income on John’s personal return). By 2025, basis had eroded to ~$0, §751 accumulated to ~$44,000. John dies in 2026. Divergence: in a taxable account, §1014 step-up resets basis to $75,000 FMV, eliminates §751, child sells at ~$0 tax. In the IDGT, no step-up: basis stays $0, §751 survives. Child sells at $75,000: $31,000 LTCG at 18.8% = $5,828 + $44,000 §751 at 32% = $14,080, total ~$20,908 federal tax. Estate tax saved (estate under $13.61M exemption): $0. Net cost of the IDGT structure on this position: $20,908 wasted.

The §751 UBTI Time Bomb

When a non-grantor irrevocable trust sells MLP units, accumulated §751 recapture — ordinary-income-in-disguise from years of depreciation — is realized all at once as UBTI under §512. At trust-compressed rates. In a single year. On Form 990-T. For 2,000 EPD units held 15 years: ~$60,000 of accumulated §751, roughly $21,500 in federal tax at trust rates (after the $1,000 §512(b)(12) exemption), plus $500-1,500 in 990-T CPA prep. The same position held directly and inherited at step-up would owe $0. This is the UBTI problem most advisors warn about for IRAs — identical mechanics, just in a trust instead of an IRA, and almost nobody flags it.

Bypass Trusts and Dynasty Trusts

Pre-2012 bypass / credit shelter trusts were standard estate planning — use both spouses’ exemptions via an irrevocable B trust at first death. Since 2012 portability, they’re often unnecessary. MLPs stuck in these trusts bleed basis at compressed rates. Options: §663(b) 65-day distributions, in-kind distribution, selective liquidation, decanting (~40 states allow), court modification. Dynasty trusts face a worse problem: perpetual compression with no §1014 reset mechanism, because the trust doesn’t die. Over 100 years, a $500K MLP portfolio in a dynasty trust costs approximately $460,000 more in cumulative tax than direct ownership with generational step-ups. Dynasty trusts work for growth stocks. They work poorly for MLPs.

Rescue Playbook

If in an IDGT: check for §675(4) swap power first — swap MLPs out today. If no swap power, evaluate decanting or modification. If in bypass trust: use §663(b) annually, consider in-kind distribution, consider selective liquidation. If in dynasty trust: use §663(b) aggressively, liquidate complex MLPs first (ET: 3 K-1s, 40+ states), quantify ongoing cost. If planning a new irrevocable trust: don’t put MLPs in. Hold them directly in a taxable account or grantor trust that will be included in the gross estate. Transfer stocks and real estate into the irrevocable trust; keep MLPs out.

State Trust Income Tax

No trust income tax: Delaware, Nevada, South Dakota, Alaska, Wyoming, Florida, Texas, Washington. Highest rates: California 13.3% (trustee, beneficiary, OR administration triggers nexus), New York 10.9%, New Jersey 10.75%. For a trust in California holding MLPs, combined federal trust rates plus state approach a 50% effective rate. Changing trust situs to a no-income-tax state can eliminate the state layer — requires appointing a trustee in the new state and meeting nexus rules. Consult an attorney.