Cutting Edge Estate Planning Techniques

1. Cutting Edge Estate Planning Techniques Diana S.C. Zeydel, National Chair Trusts and Estates Greenberg Traurig, P.A. 305-579-0575 zeydeld@gtlaw.com

2. Installment Sales with a Twist • General principles • Application of 2701 or 2702? • Estate tax inclusion if Note is outstanding? • PLR 9535026 • Petter • Debt versus equity issue? • Miller • Rosen • Lockett

3. Lockett Factors • 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

4. Use of Formulas • Purchase price adjustment • King • Petter • Defined value formula • All property is transferred • Non-taxable donee of excess • Charity • Marital Trust • GRAT

5. Twist – Sale to Spouse’s Trust • 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

6. 99-Year GRAT • 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

7. 99-Year GRAT Example • 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

8. Leveraged GRATs • 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

9. Leveraged GRAT • 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

10. Leveraged GRAT • 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

11. Supercharged CSTSM • 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

12. Supercharged CSTSM • 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

13. Supercharged CSTSM • 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

14. Supercharged CSTSM • 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

15. Supercharged CSTSM • 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

16. Split Purchase TrustSM • 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

17. Testamentary CLAT • 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

18. Testamentary CLAT • 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:

19. Testamentary CLAT • 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

20. Testamentary CLAT • 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

21. Testamentary CLAT • No substitute for running the numbers

22. Turner and the Mismatch Problem • 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

23. Turner and the Mismatch Problem • 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

24. Turner and the Mismatch Problem • 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?