Diana S.C. Zeydel, National ChairTrusts and Estates

Greenberg Traurig, P.A.305-579-0575

zeydeld@gtlaw.com

General principles◦ Application of 2701 or 2702?◦ Estate tax inclusion if Note is outstanding?

PLR 9535026 Petter

Debt versus equity issue?◦ Miller◦ Rosen◦ Lockett

Promissory note Interest charged Security or collateral Fixed maturity date Demand for payment Actual repayment Transferee had capacity to repay Records of parties consistent with a loan Federal tax reporting consistent with a loan

Purchase price adjustment◦ King

Petter◦ Defined value formula◦ All property is transferred◦ Non-taxable donee of excess

Charity Marital Trust GRAT

Why?◦ Client wants access to the Note and the upside◦ BONUS

Incomplete gift defense Problems

◦ Spouse dies first and grantor trust status shuts off Realization Event?

Why? Because the transaction between the seller and the trust is treated as a gift under Section 1041 when the debt is issued; therefore, the trust has no basis in the note

Possible Solution Nonrecourse debt Guarantees

What’s the Deal?◦ It’s a numbers game

Included property of a GRAT is a function of dividing the amount of the annuity by the 7520 rate

The higher the rate, the lower the inclusion So the bet is that interest rates will go up

Contribute $1 million to a 99-year GRAT when the 7520 rate is 1.2%◦ Annuity is $17,315.87 to zero out◦ If 7520 rate goes to 6%

More than 70% escapes tax $17,315.87/.06=$288,597.83

◦ If 7520 rate only goes to 4% More than 55% escapes tax $17,315.87/.04=$432,896.75

Purpose◦ More valuation protection than with a traditional

installment sale Method

◦ Perform the sale with an entity that is owned by the seller or a wholly grantor trust owned by the seller for income tax purposes that is an incomplete gift trust

Form LLC and fund◦ Rule of Thumb is 10%

Form FLP and fund Perform an installment sale using the LP

interest in the FLP with the LLC Contribute the leveraged LLC to a GRAT

The LLC will hold FLP interest and Note obligation

Valuation protection from the GRAT◦ Annuity will self-adjust if the value of the LLC is

challenged◦ Annuity payment will be relatively small◦ Superior to funding a GRAT directly with the FLP

interest Negative

◦ GST planning is difficult

Objectives◦ Leverage the use of GST exemption◦ Permit the CST for the benefit of the surviving

spouse to be a grantor trust as to the surviving spouse

Why does 678 not work?◦ It does not appear that withdrawal for HEMS is

sufficient to make a credit shelter trust a grantor trust with respect to the surviving spouse

◦ A greater power of withdrawal would make the trust estate tax includible under Section 2041

What is the solution?◦ Start with a QTIP trust created for the benefit of

the less wealthy spouse◦ Make a reverse QTIP election so that GST

exemption can be allocated◦ Upon the death of the donee spouse the trust

splits into a credit shelter trust and a marital deduction trust

What about estate tax inclusion for the donor spouse?◦ Protected from inclusion under the QTIP regs with

respect to Sections 2036 and 2038 Example 11, Treas. Reg. 25.2523(f)-1(f)

Need to avoid creditor’s rights◦ How do you do that?

Use a self-settled asset protection trust jurisdiction Or use a jurisdiction such as FL that specifically says

a marital deduction trust is not available to the creditors of the settlor

The leverage of GST exemption is powerful Grantor trust status creates additional

leverage◦ ADDED BONUS

Spouses can retain an income interest in the trusts Yes, you must navigate the reciprocal trust doctrine BUT maybe not as scary because the trusts are

already estate tax includible

Use of the QPRT rules to acquire residential property

Benefits◦ Retain life use◦ Avoid estate tax inclusion

Caveats◦ May work best with a new acquisition to avoid the

adverse application of 2702◦ The Split Purchase TrustSM holds title to the

property on behalf of the life tenants and the remainder beneficiary

Idea is to substantially reduce the estate tax cost of transferring an interest in a family business at death

Client must also have an interest in benefitting charity

Following a path under the private foundation regulations that permit a sale of the business post death without violating the self-dealing rules◦ Section 53-4941(d)-1(b)(3)

Indirect self-dealing shall not include a transaction with respect to a private foundation’s interest or expectancy in property held by an estate (or revocable trust) IF:

Executor possesses a power of sale or Is required to sell the property under the

terms of an option Transaction is approved by the probate

court Transaction occurs before the estate is

considered terminated for income tax purposes

Estate received amount equal to the FMV PF receives assets at least as liquid

Series of PLRs have approved the transaction◦ BUT no further rulings are being issued

PLR 201129049 held it works even when the sale was for a promissory note◦ Retention of disqualified person’s note and receipt of

payments were not acts of self-dealing Key to success is that the business sold has

sufficient cash flow to amortize the note by the end of the CLAT term◦ Low interest rate environment will make CLAT annuity

payments relatively lower, and perhaps “shark fin” CLAT and a note with a balloon payment can work

No substitute for running the numbers

Decedent established a partnership Decedent made gifts of FLP interests during

his lifetime Leaves remaining units in an optimal

marital deduction estate plan IRS argues 2036 and includes the

underlying partnership assets in the decedent’s gross estate

Two Problems◦ Marital deduction valuation problem

Spousal trust receives partnership units, but included assets are the underlying assets

◦ No marital deduction for the lifetime transfers

Possible solutions to avoid the application of 2036◦ Have one spouse form the FLP and the other

spouse fund the FLP◦ Transfer the FLP units during lifetime

Note there is no 2036 counterpart in the gift tax If all else fails

◦ Can you qualify the underlying assets for a marital deduction?