Diana S.C. Zeydel, National Chair Trusts and Estates Greenberg Traurig, P.A.

305-579-0575 [email protected]

  ◦ ◦ 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 Trust property on behalf of the life tenants and the remainder beneficiary SM holds title to the

  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?