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1. THE BENEFICIARY DEFECTIVE INHERITOR’S TRUST (“BDIT”) “A Powerful New Wealth Planning Strategy” Michael W. Halloran, AEP ®, CLU ®, CFP ®, ChFC ® 2 ©2010.

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Presentation on theme: "1. THE BENEFICIARY DEFECTIVE INHERITOR’S TRUST (“BDIT”) “A Powerful New Wealth Planning Strategy” Michael W. Halloran, AEP ®, CLU ®, CFP ®, ChFC ® 2 ©2010."— Presentation transcript:

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2 THE BENEFICIARY DEFECTIVE INHERITOR’S TRUST (“BDIT”) “A Powerful New Wealth Planning Strategy” Michael W. Halloran, AEP ®, CLU ®, CFP ®, ChFC ® 2 ©2010 Richard A. Oshins and Robert G. Alexander

3 A Special Acknowledgement The Beneficiary Defective Trust, the original version of the BDIT, was created by attorney Richard A. Oshins in the 1970’s. In the ensuring years, under his tutelage, the concept has gained prominence in estate and asset protection planning among top attorneys around the nation dealing with high-net-worth individuals and families. Grateful acknowledgement is given to his origination and further development of the BDIT and related strategies. ©2010 Richard A. Oshins and Robert G. Alexander 3

4 Topics Primary high-end wealth shifting strategies The BDIT Concept –Benefits Tax Creditor protection Client does not give up control Modern wealth design –Enhancing the value of gifts and bequests ©2010 Richard A. Oshins and Robert G. Alexander 4

5 Topics – cont. The squeeze, freeze and burn Enhanced IDITs for estate tax depletion planning Funded ILIT – the BDIT can buy life insurance on –The client/beneficiary –Others with an insurable interest Life insurance correlation with the BDIT ©2010 Richard A. Oshins and Robert G. Alexander 5

6 Topics – cont. Providing funds for retirement –QRPs –NIMCRUTs –BDIT with CVLI Life insurance as an asset class ©2010 Richard A. Oshins and Robert G. Alexander 6

7 Topics – cont. Clients with business or investment opportunities Planning with pass-through entities Doctors and business owners with equipment leasing Buy-sell strategies ©2010 Richard A. Oshins and Robert G. Alexander 7

8 Topics – cont. Advanced asset protection strategies –Self-settled trusts Income tax strategies Estate planning for professional athletes and entertainers Other planning opportunities ©2010 Richard A. Oshins and Robert G. Alexander 8

9 Primary Planning Choices for High-End Wealth Shifting GRAT – IRC §2702 –Gift to trust in exchange for an annuity substantially equal in value to the transferred property IDIT – Note Sale –Non-controlling interest sold to an income tax defective trust in exchange for an installment note – Generally interest only with a balloon payment ILIT ©2010 Richard A. Oshins and Robert G. Alexander 9

10 Primary Planning Choices for High-End Wealth Shifting These techniques involve moving wealth to trusts created for someone else: –Wealth depletion concerns – no direct access –Control concerns Loss of control IRS exposure with too much retained control A better alternative – the BDIT –“The Beneficiary Defective Inheritor’s Trust” ©2010 Richard A. Oshins and Robert G. Alexander 10

11 Major Causes of Wealth Erosion in the U.S. Bad Investments/management Bad Investments/management Taxes Taxes Divorces Divorces Lawsuits Lawsuits Beneficiary/family problems Beneficiary/family problems Bad economy Bad economy Changes in the law Changes in the law 11 ©2010 Richard A. Oshins and Robert G. Alexander

12 The Client’s “Wish” List Save taxes Creditor and divorce protection Control over the plan - assets and income Full use and enjoyment of the plan assets The right to decide who else uses or gets the property –And when and how they get the property Multi-generation/perpetuity The ability to re-write the plan as needed ©2010 Richard A. Oshins and Robert G. Alexander 12

13 Fundamental Facts of Wealth Planning Trusts enhance gifts and bequests Inheriting in trust is better than inheriting outright –Trusts offer many significant advantages that cannot exists for assets owned outright –Assets received and retained in trust are more valuable to the inheritor than assets received outright ©2010 Richard A. Oshins and Robert G. Alexander 13

14 Fundamental Facts of Wealth Planning - cont. - A trust shelters inherited assets from the beneficiary’s –Taxes Transfer taxes Income taxes –Would be claimants Creditors Divorcing spouses ©2010 Richard A. Oshins and Robert G. Alexander 14

15 The Ultimate Creditor and Creditor Protection Vehicle A discretionary trust with “... the distribution discretion held by an independent trustee... is the ultimate in creditor and divorce claims protection – even in a state that restricts so called ‘spendthrift’ trusts – since the beneficiary himself has no enforceable rights against the trust.” (Emphasis supplied) Frederick R. Keydel “Trustee Selection, Succession, and Removal: Ways to Blend Expertise with Family Control,” 23 U.Miami Inst. On Est. Plan., Ch 4 (1989) at § ©2010 Richard A. Oshins and Robert G. Alexander

16 Overlooked Benefit – Particularly in Today’s Volatile Economic World Trusts enable the beneficiary to borrow for business or investment purposes without exposing trust-owned assets to risk Lending institutions typically require personal guarantees of business owners and their spouses ©2010 Richard A. Oshins and Robert G. Alexander 16

17 Critical Question Can a wealthy client set up and fund a trust for him/herself and protect his/her assets from his/her taxes and creditors? ©2010 Richard A. Oshins and Robert G. Alexander 17

18 The Tax and Creditor Rights Impediments Income Tax – grantor trust Estate Tax – grantor trust Creditor rights – self-settled trust –Estate tax inclusion Creditor rights can create serious income and wealth transfer tax issues! –Also, watch distribution standards and who is (are) the trustees ©2010 Richard A. Oshins and Robert G. Alexander 18

19 The BDIT Solution Anyone other than the client him/herself can set up and fund the trust Key Concept: –The trust must be set up and funded by someone else –The beneficiary cannot make “gifts” to the trust ©2010 Richard A. Oshins and Robert G. Alexander 19

20 Test Your Knowledge Combining the planning opportunities of: –Chapter 13 –IRC §678 –Rev. Rul –Rev. Rul –Rev. Rul ©2010 Richard A. Oshins and Robert G. Alexander 20

21 Question #1 Can I set up a trust for my descendants which will avoid their: –Transfer taxes, and –Creditors, including divorcing spouses –In perpetuity Chapter 13 GSTT rules ©2010 Richard A. Oshins and Robert G. Alexander 21

22 The Typical Inheritor’s Trust A trust set up and funded by someone else –Generally as an accommodation ©2010 Richard A. Oshins and Robert G. Alexander 22

23 Transfer Tax Consequences Measured by the amount of the contribution Subsequent growth of the assets is irrelevant GSTT exempt forever ©2010 Richard A. Oshins and Robert G. Alexander 23

24 Key Concepts A trust created by someone else No gratuitous transfers by the beneficiaries –Sales for FMV are OK ©2010 Richard A. Oshins and Robert G. Alexander 24

25 Question #2 What are the income tax consequences of a gift subject to a Crummey power of withdrawal? IRC §§ 678 and 671 –Beneficiary income tax status –Trust income is taxes to the beneficiary Remember – the income tax provisions and the estate/gift tax provisions of the IRC are not interpreted in paria materia! ©2010 Richard A. Oshins and Robert G. Alexander 25

26 Tax Consequences of an Income tax Defective Trust Including a BDIT Rev. Rul –Non-recognition of gain of sales The “tax burn” ©2010 Richard A. Oshins and Robert G. Alexander 26

27 The “Tax Burn” Concept Estate depletion as a result of paying income tax on trust assets –Less assets exposed to estate taxes –Less assets exposed to creditors Trust assets grow income tax-free during the “Grantor” trust status Over time the wealth compounding is more powerful than discounting ©2010 Richard A. Oshins and Robert G. Alexander 27

28 The Tax Burn - Illustration ©2010 Richard A. Oshins and Robert G. Alexander 28

29 The Tax Burn - Illustration ©2010 Richard A. Oshins and Robert G. Alexander 29

30 Question #3 What are the gift tax implications if I pay income tax as a result of the grantor trust rules? Rev. Rule –No additional gift on payment of income tax ©2010 Richard A. Oshins and Robert G. Alexander 30

31 Question #4 If I make a sale to a trust that is income tax defective to me, do I recognize taxable gain or loss? Rev. Rul –Non-recognition of gain/loss on sales/exchanges with an IDIT ©2010 Richard A. Oshins and Robert G. Alexander 31

32 Question #5 If I own 100% of an entity and I make a gift of a 20% interest to each of my five (5) children, are the gifts of each 20% interest valued as a non-controlling interest? Rev. Rul –No family attribution rules for purposes of discounting ©2010 Richard A. Oshins and Robert G. Alexander 32

33 So What Makes A BDIT Work? Combines the planning opportunities of: #1 - Chapter 13 – GSTT rules #2 - IRC § 678– beneficiary income tax status #3 - Rev. Rul – no additional gift on payment of income tax #4 - Rev. Rul – non-recognition of sales to IDITs #5 - Rev. Rul – no family attribution rules for purposes of discounting purposes of discounting 33 ©2010 Richard A. Oshins and Robert G. Alexander

34 The Ultimate Trust A Beneficiary Defective Inheritor’s Trust Combining: –A third-party settled trust with –Grantor trust income tax status for the beneficiary Finessing the “pipe dream” 34 ©2010 Richard A. Oshins and Robert G. Alexander

35 BDIT Fact Pattern Mom sets up the trust for the benefit of her son and his children –Transfer tax protection for the beneficiaries –Creditor protection for the beneficiaries –In perpetuity Wealthy client (the son) is the grantor for income tax purposes –Income tax planning for the son ©2010 Richard A. Oshins and Robert G. Alexander 35

36 BDIT Fact Pattern – cont. Client’s parent sets up the BDIT funding it with a gift of $5,000 –Parent uses independent funds –Parent is the settlor of the trust for transfer tax purposes and for creditor rights purposes Client (and only the client) is given a Crummey withdrawal power over the entire gift –The withdrawal right is allowed to lapse ©2010 Richard A. Oshins and Robert G. Alexander 36

37 BDIT Fact Pattern – cont. Son owns one-third (1/3) of a pass-through entity Value of 100% of the entity - $50 million Value of son’s one-third (1/3) interest after discounting –$10 million Son sells discountable interests in the entity to the trusts for installment notes Son’s sale to the trust is for “full and adequate consideration” ©2010 Richard A. Oshins and Robert G. Alexander 37

38 A Beneficiary Defective Inheritor’s Trust The trust is defective to the client for income tax purposes –Power of withdrawal – IRC §678(a) –Transactions between the client and the trust are ignored for income tax purposes Rev. Rul ©2010 Richard A. Oshins and Robert G. Alexander 38

39 Variation Spousal Irrevocable Trust (“SIT”) Set up and seeded by the client’s spouse Combines –IRC §677(a) – income tax grantor trust rules –IRC §1041(a) – no tax on transfers between spouses –Rev. Rul ©2010 Richard A. Oshins and Robert G. Alexander 39

40 Spousal Inheritor’s Trust – Cont. Caveats –Settler spouse is the “owner” of the trust income –Subsequent divorce will not terminate grantor trust status IRC §672(e)(2) The settler spouse cannot be a beneficiary –Solution – give the beneficiary spouse a SPA –Support trust risk ©2010 Richard A. Oshins and Robert G. Alexander 40

41 Funded ILIT BDIT Spousal Irrevocable Trust variation ©2010 Richard A. Oshins and Robert G. Alexander 41

42 So What Is A BDIT? A dynasty trust set up for my descendants which avoids their –Transfer taxes –Creditors, including divorcing spouses A beneficiary “controlled” trust Allows gifts and sales to a trust that is income tax defective as to the beneficiary –Crummey power of withdrawal – § 678 Wealth transfer leveraging with discounted entities 42 ©2010 Richard A. Oshins and Robert G. Alexander

43 BDIT Design Established and initially funded by a third party Fully discretionary distribution standards Controlled trusteeship –Family trustee –Independent trustee The “use” concept Broad SPA – a “re-write” power Perpetual Beneficiary has the functional equivalence of outright ownership of the trust assets 43 ©2010 Richard A. Oshins and Robert G. Alexander

44 “Seeding” the Trust Must come from the donor’s funds Economic validity –Debt-equity ratio –Rule of thumb – 10% or 9:1 ©2010 Richard A. Oshins and Robert G. Alexander 44

45 Guarantees Guarantees as “seed” money –Must be legitimate –Better than trust assets –Often made by beneficiaries –Need not be for the full amount of the note ©2010 Richard A. Oshins and Robert G. Alexander 45

46 Is a Gratuitous Guarantee a Gift? Unsettled –Cases seem to say no We pay for the guarantee –Get an appraisal –Avoids risk of gift to the trust by the guarantor –Income tax-free if the guarantor is the spouse or an income tax defective trust ©2010 Richard A. Oshins and Robert G. Alexander 46

47 Seeding the Trusts Gifts to Trust 47 $1,666 FBO Client and Katie FBO Client and Bob FBO Client and Sue Trust A Trust B Trust C $1,667 Client – Power of Withdrawal $5,000 ©2010 Richard A. Oshins and Robert G. Alexander

48 Transfer Tax Creditor rights Transfer Tax Creditor rights Owner for Income Tax Purposes - IRC § 678(a) 48 Caveat: Client has a Power of Withdrawal over all gifts to BDIT Caveat: Client never makes a gratuitous transfer to BDIT Who is the Grantor? ©2010 Richard A. Oshins and Robert G. Alexander

49 Tax-Free Sale to BDIT Assets Installment Notes Tax-Free Sale to BDIT Assets Installment Notes Wealthy client sells discountable income producing assets for an Installment Note 49 Trust A Trust B Trust C BDITs ©2010 Richard A. Oshins and Robert G. Alexander

50 Note Sale to a BDIT with a Guarantee 50 Parent “mom” BDIT W H Fee 1.Family Trustee 2.Beneficiary 3.I/T Grantor 4.Seller Gift Subject to Power of Withdrawal GuaranteeNote Sale ©2010 Richard A. Oshins and Robert G. Alexander

51 BDIT Tax Results Estate freeze –Installment notes in the estate –Post-transfer appreciation shifted Estate squeeze –Discounted assets removed from the transfer tax system Income “tax burn” – the beneficiary pays the tax on the income generate by the trust IRC §678 IRC §678 Crummey power of withdrawal 51 ©2010 Richard A. Oshins and Robert G. Alexander

52 BDIT Non-tax Results The client/beneficiary is in control of the BDIT Assets are creditor protected for the client/beneficiary and his/her family Assets are creditor protected for the client/beneficiary and his/her family Assets are available after the “tax burn” Client/beneficiary has a “re-write” power with a SPA –Protects against potential family conflicts –Protects against inadvertent gifts to the trust 52 ©2010 Richard A. Oshins and Robert G. Alexander

53 Safe Transaction – Valuation Disparity Gift Tax/Chapter 14 –SPA protects against an inadvertent gift –The gift is incomplete Reg. § (b) EstateTax/GSTT –Report the sale ©2010 Richard A. Oshins and Robert G. Alexander 53

54 IRS Reporting of Sale to Trust Timely file from 709 gift tax return –Non-completed gift –Treas. Reg. § (c) - 1(f)(4) If IRS does not challenge the valuation ©2010 Richard A. Oshins and Robert G. Alexander 54

55 IRS Reporting of Sale to Trust - cont. - If the IRS successfully challenges the valuation –It is an incomplete gift Treas. Reg. § (b) –Allocation pro-rata between exempt and non-exempt trusts for GSTT purposes The BDIT is safer than alternative strategies ©2010 Richard A. Oshins and Robert G. Alexander 55

56 BDIT Non-tax Results -Cont. Opportunity shifting –Business and investment opportunities –Giving free advice or managing trust assets Quintessential life insurance trust –Life insurance on a beneficiary who is also a trustee –Decision must be made by an independent trustee –Beneficiary cannot have a SPA over life insurance 56 ©2010 Richard A. Oshins and Robert G. Alexander

57 Benefits of This Strategy The entity/assets are moved out of the client’s estate on a discounted basis The transaction results in a leveraged estate freeze There is no income tax on the sales or the guarantee All of the assets in the BDIT are still available to and controlled by the Inheritor/beneficiary 57 ©2010 Richard A. Oshins and Robert G. Alexander

58 Benefits - Continued The Inheritor/beneficiary has a SPOA – a rewrite power The taxable estate of the inheritor is depleted by valuation discounts as well as payment of incomes taxes on the trust income – the “tax burn” The Inheritor and his/her family have creditor and divorce protection in perpetuity 58 ©2010 Richard A. Oshins and Robert G. Alexander

59 Benefits - Continued The Inheritor and his/her family have GSTT and estate exemption in perpetuity The SPOA prevents a gift tax on transactions with the trust Otherwise resistant clients will move forward with planning 59 ©2010 Richard A. Oshins and Robert G. Alexander

60 Why Wouldn’t Everyone Do A BDIT? Misconception – The BDIT is only for the ultra wealthy –Planning alternatives involve giving to someone else –BDIT includes the virtues of alternative estate planning techniques –BDIT benefits – substantial and forever ©2010 Richard A. Oshins and Robert G. Alexander 60

61 Planning For The Mid-range Client The client with a: –$5 million business –$1 million home –$2 million other assets The dilemma: –Tax and creditor exposure –Cannot afford to give the wealth away! ©2010 Richard A. Oshins and Robert G. Alexander 61

62 Planning For The Mid-range Client GRAT and IDIT –Prohibition against transfers with retained rights BDIT –“Fair and adequate consideration” exception Really the “only option” ©2010 Richard A. Oshins and Robert G. Alexander 62

63 THE BDIT vs. OTHER STRATEGIES

64 The BDIT vs. Note Sales to IDITs Wealth shifting benefits –Retained interest often creates continued Sec exposure –No need to retain anything Control No economic risk –Management –Use and enjoyment –Rewrite power –Tax burn ©2010 Richard A. Oshins and Robert G. Alexander 64

65 The BDIT vs. Note Sales to IDITS Safety –Gift tax –Step transaction –Pierre vs. Comm’r ©2010 Richard A. Oshins and Robert G. Alexander 65

66 The BDIT vs. APTs Greater creditor protection –Not a self-settled trust –Transfer tax savings –Control –Use and enjoyment determined by the client –APTs continuing costs ©2010 Richard A. Oshins and Robert G. Alexander 66

67 BDIT vs. FLPs Historical purpose of FLPs –Control –Valuation discounts IRS Sec exposure –There is no IRS Sec Substantial non-tax purpose ©2010 Richard A. Oshins and Robert G. Alexander 67

68 BDIT vs. ILITs Built-in funded ILIT No Crummey complexities and limitations Living benefits of life insurance –Access to “inside build-up” ©2010 Richard A. Oshins and Robert G. Alexander 68

69 The BDIT and Other Estate Planning Vehicles Revocable trusts – avoid probate Gifting Charitable planning Business succession planning ©2010 Richard A. Oshins and Robert G. Alexander 69

70 The BDIT and Other Estate Planning Vehicles - Cont. - Pre-marital agreements Unmarried, co-habiting partners –Traditional –Non-traditional Planning for physicians Planning for athletes and entertainers Combined with charitable planning ©2010 Richard A. Oshins and Robert G. Alexander 70

71 TOPICS Advantages of trusts Designing trusts from the viewpoint of the competent inheritor Opportunity shifting Hypothetical fact pattern The BDIT solution – freeze, squeeze, and burn BDIT/life insurance compatibility ©2010 Richard A. Oshins and Robert G. Alexander 71

72 ADVANTAGES OF TRUSTS ©2010 Richard A. Oshins and Robert G. Alexander 72

73 Key Concept Trusts Enhance Gifts and Bequests Assets received and retained in trust are much more valuable to the inheritor/donee than assets received outright The foundational concept of modern wealth planning: “Own everything in trust forever…” ©2010 Richard A. Oshins and Robert G. Alexander 73

74 A Trust “Shelters” Inherited Assets From the Beneficiaries’… Taxes –Transfer taxes –Income taxes Potential claimants –Creditors –Divorcing spouses –Government/agencies –Others ©2010 Richard A. Oshins and Robert G. Alexander 74

75 Transfer Taxes “ In fact, we haven’t got an estate tax, what we have, you pay an estate tax if you want to; if you don’t want to, you don’t have to.” Statement of Prof. A. James Casner “Estate and Gift Taxes: Hearings Before the House Ways and Means Comm.,” 94 th Cong., 2d Sess., pt. 2, 1335 (March 15-23, 1976) 2d Sess., pt. 2, 1335 (March 15-23, 1976) ©2010 Richard A. Oshins and Robert G. Alexander 75

76 Transfer Taxes – Cont. “The perpetual generation-skipping trust may have been the ultimate estate-planning scheme for those who had the foresight to establish one.” “…it appears possible to create … a perpetual trust, permanently eliminating future transfer taxes.” “For an intervening generation now the beneficiary of a generation-skipping trust, estate planning is no problem, because the trust is already the best possible built-in estate plan.” George Cooper “A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance,” The Brookings Institution, Washington D.C. (1979), P 57,58 ©2010 Richard A. Oshins and Robert G. Alexander 76

77 Power of Compound Growth Assumptions $1 million contributed to trust Trust lasts 120 years 45% transfer tax imposed on non-dynastic trust assets every 30 years ©2010 Richard A. Oshins and Robert G. Alexander 77

78 Power of Compound Growth Chart ____________________________________________________ ____________________________________________________ Value Value Value Value of Trust of Property Annual After if no of Trust of Property Annual After if no Growth 120 Years Trust _____________________________________________________ 4%$ 110,662,561 $ 10,126,316 5% 348,911,986 31,927,627 6% 1,088,187,748 99,575,980 7% 3,357,788, ,258,623 8% 10,252,992, ,212,935 ©2010 Richard A. Oshins and Robert G. Alexander 78

79 Observations Chart only illustrates estate tax depletion Ignores impact of DivorceLawsuits Reduced propensity to spend trust assets State income tax savings ©2010 Richard A. Oshins and Robert G. Alexander 79

80 INCOME TAXES Reduced planning importance due to Compressed rates Reduced exemption Kiddie tax Defective trust accelerates growth during “owners” lifetime ©2010 Richard A. Oshins and Robert G. Alexander 80

81 The Ultimate Creditor and Creditor Protection Vehicle A discretionary trust with “... the distribution discretion held by an independent trustee... is the ultimate in creditor and divorce claims protection – even in a state that restricts so called ‘spendthrift’ trusts – since the beneficiary himself has no enforceable rights against the trust.” (Emphasis supplied) Frederick R. Keydel “Trustee Selection, Succession, and Removal: Ways to Blend Expertise with Family Control,” 23 U.Miami Inst. On Est. Plan., Ch 4 (1989) at § ©2010 Richard A. Oshins and Robert G. Alexander

82 Creditor and Divorce Protection Asset Protection Maxim Divorces – Trust better than pre-nuptial agreement Use even if taxes were not a consideration ©2010 Richard A. Oshins and Robert G. Alexander 82

83 Overlooked Benefit – Particularly In Today’s Volatile Economic World Enables beneficiary to borrow for business or investment purposes without exposing trust owned assets to risk Lending institution typically requires personal guarantees of business owners and their spouses ©2010 Richard A. Oshins and Robert G. Alexander 83

84 Why We Use Dynastic Trusts Even If There Is No Estate Tax Predator protection State Income Tax Income shifting There will be a gift tax Enables younger beneficiaries to participate in family wealth earlier Compare to a GRAT ©2010 Richard A. Oshins and Robert G. Alexander 84

85 Receiving Assets in Trust Enhances the Gift or Inheritance Transfers from someone other than beneficiary If beneficiary makes the transfer it is a self- settled trust – Taxes – Creditors Conclusion - Transfers in trust are more valuable to recipients ©2010 Richard A. Oshins and Robert G. Alexander 85

86 Beneficiary Controlled Trusts Beneficiaries will like “in trust” inheritances only if: They are placed in control of the trust They understand benefits of receiving property in trust They understand the BCT concept ©2010 Richard A. Oshins and Robert G. Alexander 86

87 Our Goals Maximizing “in trust” benefits Maximize control and rights similar to outright ownership while preserving “in trust” benefits ©2010 Richard A. Oshins and Robert G. Alexander 87

88 Client’s Goals Transfer tax avoidance Creditor Protection Control Use and enjoyment of the property Determine who inherits Safe transaction ©2010 Richard A. Oshins and Robert G. Alexander 88

89 Design of Trusts ©2010 Richard A. Oshins and Robert G. Alexander 89

90 Traditional Trusts Typical Characteristics Pays out income Principal may be invaded for “HEMS” – “support trust” Distributes assets at specified ages Beneficiary not in control ©2010 Richard A. Oshins and Robert G. Alexander 90

91 Modern Trust Design Fully Discretionary Perpetual “Use” Concept Broad SPA’s – “Re-write power” Controlled Trusteeship at Proper Time Family Trustee Independent Trustee ©2010 Richard A. Oshins and Robert G. Alexander 91

92 Trusts Protect Assets From Creditors and Predators Trust must be set up by someone other than the beneficiary him/herself Trust must be set up by someone other than the beneficiary him/herself Third party settled trust Third party settled trust Makes sense even if there was no transfer tax Makes sense even if there was no transfer tax Modern theory of comprehensive wealth planning: Modern theory of comprehensive wealth planning: “Own everything in trust forever…” “Own everything in trust forever…” 92 ©2010 Richard A. Oshins and Robert G. Alexander

93 Beneficiary Controlled Trust “BCT” Goal – To maximize the benefits that an “in trust” inheritance can provide Family Trustee Controls Investments Controls Identity of the Independent Trustee ©2010 Richard A. Oshins and Robert G. Alexander 93

94 Beneficiary Controlled Trust “BCT” Independent Trustee Controls all non-tax sensitive decisions Individual or institution who meets the criteria of IRC § 672(c) “Independence” does not require a confrontational relationship ©2010 Richard A. Oshins and Robert G. Alexander 94

95 OpportunityShifting ©2010 Richard A. Oshins and Robert G. Alexander 95

96 Opportunity Shifting Referrals of favorable business or investment opportunities Giving free advice or managing assets Inheritor’s Trust as recipient BDIT often preferable ©2010 Richard A. Oshins and Robert G. Alexander 96

97 Basic Inheritor’s Trust Opportunity Shifting Income Tax Options Traditional Trust IDGTBDITSITCombination Tax Burn IDGTSITBDIT ©2010 Richard A. Oshins and Robert G. Alexander 97

98 Putting the BDIT on Steroids Hypothetical Fact Pattern Client owns 1/3 of a pass-through entity Value of entity $50 million Valuation discounts assume 40% ©2010 Richard A. Oshins and Robert G. Alexander 98

99 The BDIT Strategy Client’s parent sets up BDIT funding it with $5,000 Client is given power of withdrawal Client sells his 1/3 interest in the entity to the trust for a $10 million note ©2010 Richard A. Oshins and Robert G. Alexander 99

100 Variation – Spousal Irrevocable Trust Client’s spouse is the Settlor IRC §677(a) IRC §1041(a) ©2010 Richard A. Oshins and Robert G. Alexander 100

101 Parent is Settlor Client’s parent sets up BDIT funding it with $5,000 Parent uses independent funds Parent is Settlor for transfer tax and creditor right purposes Sale by the beneficiary is for “full and adequate consideration” ©2010 Richard A. Oshins and Robert G. Alexander 101

102 Beneficiary Defective Trust Trust is defective to the client/inheritor for income tax purposes Trust is defective to the client/inheritor for income tax purposes Power of withdrawal IRC § 678(a) Power of withdrawal IRC § 678(a) Transactions between client and trust ignored. Rev. Rul Transactions between client and trust ignored. Rev. Rul ©2010 Richard A. Oshins and Robert G. Alexander 102

103 Seeding the Trusts Gifts to Trust 103 $1,666 FBO Client and Katie FBO Client and Bob FBO Client and Sue Trust A Trust B Trust C $1,667 Client – Power of Withdrawal $5,000 ©2010 Richard A. Oshins and Robert G. Alexander

104 Transfer Tax Creditor rights Transfer Tax Creditor rights Owner for Income Tax Purposes - IRC § 678(a) 104 Caveat: Client has a Power of Withdrawal over all gifts to BDIT Caveat: Client never makes a gratuitous transfer to BDIT Who is the Grantor? ©2010 Richard A. Oshins and Robert G. Alexander

105 Tax-Free Sale to BDIT Assets Installment Notes Tax-Free Sale to BDIT Assets Installment Notes Wealthy client sells discountable income producing assets for an Installment Note 105 Trust A Trust B Trust C BDITs ©2010 Richard A. Oshins and Robert G. Alexander

106 Note Sale to a BDIT with a Guarantee 106 Parent “mom” BDIT W H Fee 1.Family Trustee 2.Beneficiary 3.I/T Grantor 4.Seller Gift Subject to Power of Withdrawal GuaranteeNote Sale ©2010 Richard A. Oshins and Robert G. Alexander

107 Results - Tax Freeze, Squeeze and Burn Estate Freeze Installment Notes in the beneficiary’s estate Post-transfer appreciated shifted Estate Thaw Discounted assets are removed from the transfer tax system forever Tax Burn – client beneficiary pays the income tax on trust income ©2010 Richard A. Oshins and Robert G. Alexander 107

108 Results – Non-Tax Client/inheritor is in control of the BCT Hot assets are creditor protected for client and family Assets available after “tax burn” Re-write power Protects against potential family conflicts Protects against inadvertent gift tax ©2010 Richard A. Oshins and Robert G. Alexander 108

109 “Seeding” the Trust Must come from donor’s funds Economic Validity Debt-Equity Ratio Rule of thumb 10% or 9:1 ©2010 Richard A. Oshins and Robert G. Alexander 109

110 Guarantees Guarantees as “seed” money Must be legitimate Better than trust assets Often made by beneficiaries Need not be for full amount of the note ©2010 Richard A. Oshins and Robert G. Alexander 110

111 Is a “Gratuitous” Guarantee a Gift? Unsettled Cases seem to say “no” We pay for the guarantee Get appraisal Avoids risk of gift to trust by guarantor Income tax-free - if spouse or defective trust ©2010 Richard A. Oshins and Robert G. Alexander 111

112 Ancillary Considerations Economic Risk – Estate Depletion Exposure Toggling Reimbursement Clauses Forum shopping to avoid self-settled trust BDIT resolves dilemma SIT exposure Basis Monitoring ©2010 Richard A. Oshins and Robert G. Alexander 112

113 ©2010 Richard A. Oshins and Robert G. Alexander 113 ENHANCED PLANNING OPPORTUNITIES WITH BDITs Significant Life Insurance Sales Potential

114 Life Insurance - ILIT BDIT is also a funded ILIT So is the SIT variation Insurance on the life of a beneficiary who is also a trustee Decisions made by independent trustee No power of appointment ©2010 Richard A. Oshins and Robert G. Alexander 114

115 Life Insurance Correlation with a BDIT Life insurance has two component parts Death benefit Inside buildup Asset class QRP and NIMCRUT alternative ©2010 Richard A. Oshins and Robert G. Alexander 115

116 Life Insurance Correlation with BDIT – Cont. Early Death Negligible Tax Burn Win on the Mortality Bet Later Death Greater estate tax depletion Tax-free build-up more dramatic ©2010 Richard A. Oshins and Robert G. Alexander 116

117 Increasing: income tax deferred cash value – available for use and outside the estate Decreasing: need for estate tax liquidity during “burn” (& net amount at risk outside estate) Decreasing Net Amount at Risk Increasing Cash Value Now Future Estate accessible Estate tax free “Tax burn” Insurance + A FIXED component of an investment portfolio outside the estate Derived from “Life Insurance as an Asset Class” by Richard M. Weber, MBA, CLU and Christopher Hause, FSA, MAAA © 2009 Ethical Edge Insurance Solutions, LLC. For further information contact EXHIBIT F ©2010 Richard A. Oshins and Robert G. Alexander 117

118 Goal – tax exempt or tax deferred wealth accumulation Vehicles Qualified Retirement Plans (“QRPs”) NIMCRUTs Cash Value Life Insurance (“CVLI”) Primary Retirement Planning Alternatives ©2010 Richard A. Oshins and Robert G. Alexander 118

119 Tax deferral – not exemption Tax at ordinary income rates Often converts capital gain into ordinary income IRD Non-alienation prohibits transfers to escape the estate tax QRP’s ©2010 Richard A. Oshins and Robert G. Alexander 119

120 Too Soon-Too Late – Too Much-Too Little Contributions Distributions Administrative and Legal Costs Government Regulations IRS Department of Labor Legislative Changes Non-discriminatory QRP’s - Cont. ©2010 Richard A. Oshins and Robert G. Alexander 120

121 Tax-deferral-not exemption Four-tier Rule – worst first 10% Rule Eliminates younger clients Reduces potential accumulation period Goes to charity at death Early death risk Administrative and legal costs Fully discriminatory NIMCRUTs ©2010 Richard A. Oshins and Robert G. Alexander 121

122 Tax exempt access to the investment fund Can access fund on a temporary basis and pay back E.g. - college Survivorship feature Early death – win on mortality bet No administrative and legal costs Fully discriminatory Cash Value Life Insurance - CVLI ©2010 Richard A. Oshins and Robert G. Alexander 122

123 Deferral v. Tax exempt access to income Access to funds on a temporary basis Survivorship Feature Risk of early death for QRPs and NIMCRUTs Decedent's Receipt QRP-IRD NIMCRUT – none CVLI in trust – tax-free Comparisons Major Comparisons ©2010 Richard A. Oshins and Robert G. Alexander 123

124 Adjustments – beneficiary controlled  Special Trustee  Not subject to power of appointment Accessing Inside Build-up  Two-step process Wrap Trust™ - there may be serious tax problems Life Insurance in a Beneficiary Defective Trust Life Insurance in a Beneficiary Defective Inheritor’s Trust 124 ©2010 Richard A. Oshins and Robert G. Alexander

125 Accessing Policy Cash Values Loan money to the beneficiary –No income tax consequence Purchase other assets from the beneficiary –Non-recognition of gain Distributions to the beneficiary –Worst alternative Assets no longer protected ©2010 Richard A. Oshins and Robert G. Alexander 125

126 Accessing Policy Cash Values – Cont. MEC –Income tax issues –Estate tax inclusion issues Back-end loaded policies Other planning issues ©2010 Richard A. Oshins and Robert G. Alexander 126

127 Other Planning Opportunities With a BDIT Tax and asset protected forever Advanced “wealth shifting” opportunities –Family income tax planning –Valuation/discount planning –Structured gifts and loans –New businesses – seed money –Investment opportunities 127 ©2010 Richard A. Oshins and Robert G. Alexander

128 Planning Opportunities – Cont. Grantor trust income tax planning Sales of “hot” assets – IRC§ 751 Structuring buy-sell arrangements State income tax planning Multi-jurisdictional asset protection planning Private retirement plan 128 ©2010 Richard A. Oshins and Robert G. Alexander

129 Planning Opportunities – Cont. Advanced Life Insurance Planning –Access to cash values –No transfer for value problems –Super-charge the insurance funding –Super-charge life insurance partnership planning –Premium financing techniques –Split dollar arrangements ©2010 Richard A. Oshins and Robert G. Alexander 129

130 Physicians/Equipment Leasing The doctors purchase $3 million worth of equipment in an LLC Each doctor sell his/her 1/3 interest in the LLC to a BDIT for a note –Rev. Rul –Discount ©2010 Richard A. Oshins and Robert G. Alexander 130

131 Physicians/Equipment Leasing - cont. - Equipment is leased to the medical practice Cash flow from the equipment leasing business –Pays the note –Buys CVLI For retirement-pension substitute As an asset class For family protection For buy-sell purposes ©2010 Richard A. Oshins and Robert G. Alexander 131

132 Buy-sell Planning Newco is owned 50/50 by A and B A’s parent set up A’s BDIT which buys A’s entity interest from A interest from A B’s parent sets up B’s BDIT which buys B’s entity interest from B ©2010 Richard A. Oshins and Robert G. Alexander 132

133 Buy-sell Planning cont’d Owns B’s interest Buys Life Insurance on A’s Life Owns A’s interest Buys Life Insurance on B’s Life A’s BDITB’s BDIT ©2010 Richard A. Oshins and Robert G. Alexander 133

134 Estate Planning for Professional Athletes and Entertainers Split between shiftable and non-assignable –A BDIT is wonderful for income opportunities which can be assigned Athlete/entertainer pays the income tax on all income ©2010 Richard A. Oshins and Robert G. Alexander 134

135 Estate Planning for Professional Athletes and Entertainers – cont. Income tax and current expenditures deplete non- assignable wealth BDIT grows income tax-free –Divorce and creditor protected Better than a marital property agreement –Cash value life insurance as a pension substitute or in addition to those provided by the sport –Death benefit protects the family ©2010 Richard A. Oshins and Robert G. Alexander 135

136 Premium Financing Strategies Premium Financing strategies to Consider –Private loan arrangements –Bank loan arrangements –Private split-dollar arrangements Special thanks to Northwestern Mutual Life insurance Company in the preparation of slides Used by permission, with modifications ©2010 Richard A. Oshins and Robert G. Alexander 136

137 Background Large life insurance need –Large premiums Often a 6 or 7 figure premium Often a 6 or 7 figure premium Insufficient gift tax capacity Insufficient gift tax capacity –However - No gifts allowed with the BDIT! ©2010 Richard A. Oshins and Robert G. Alexander 137

138 Background Client has cash flow or other assets available but must deal with gift tax limits –However - No gifts allowed with the BDIT! or Client wants flexibility or Client does not have sufficient cash flow or other assets available and wants to avoid selling assets ©2010 Richard A. Oshins and Robert G. Alexander 138

139 Critical Planning Points With the BDIT! Private premium financing arrangements –The arrangement must accrue interest at the AFR and pay the accrued interest with the principal at the end of the term so that there is no deemed gift to the BDIT Private split-dollar arrangements –The arrangement must be a contributory arrangement –The BDIT, from its own funds, must contribute the economic benefit portion of the premium Therefore, initially the BDIT must be independently funded with sufficient assets to make these payments ©2010 Richard A. Oshins and Robert G. Alexander 139

140 Premium Financing Overview Personal (“private”) loans Regular bank loans  pay interest in cash  accrue interest Current trends: interest rates, estate taxes Planning flexibility  lend, don’t give Non-equity split dollar Exit strategies ©2010 Richard A. Oshins and Robert G. Alexander 140

141 Private Financing: How It Works Life Insurance Policy Premiums Ins. Co. Client(s) Loans Interest Gifts (= interest) TRUST

142 Private Financing: Why Do It? Low gifts – interest < premium Generally lower interest rate than bank loan Gift tax efficient—gifts other than cash can be made –However: No gifts allowed with the BDIT! Flexibility ©2010 Richard A. Oshins and Robert G. Alexander 142

143 Private Financing: Risks & Drawbacks Does it make financial sense over the long term? Interest rates vary unless a lump sum is loaned The cost of an increasing death benefit vs. the cost of a static death benefit ©2010 Richard A. Oshins and Robert G. Alexander 143

144 Bank Financing: How It Works Lender Life Insurance Policy Premiums Ins. Co. Client(s) Interest Gifts (= interest) Loans TRUST

145 Bank Financing: Why Do It? Lower out of pocket cost  interest < premium Gift tax efficient –However – No gifts allowed with the BDIT! Other people’s money Minimize the need to sell performing assets ©2010 Richard A. Oshins and Robert G. Alexander 145

146 Bank Financing: Risks & Drawbacks Does it make financial sense? Interest rate uncertainty Lender uncertainty Additional time and expenses Collateral requirements in addition to policy Is grantor’s personal guarantee a gift? ©2010 Richard A. Oshins and Robert G. Alexander 146

147 Life Insurance Policy Premiums Ins. Co. Non-Equity Split Dollar: How It Works Client(s) Prem. Payments Term cost Gifts (= term cost) TRUST

148 Non-Equity Split Dollar: Why Do It? Term cost < premium Term cost < premium Term cost < interest Term cost < interest Gift tax efficient Gift tax efficient –However – No gifts allowed with a BDIT! ©2010 Richard A. Oshins and Robert G. Alexander 148

149 Non Equity Split Dollar Risks & Drawbacks Failure to terminate plan before: – CV significantly > premiums – Term cost gets too big (leverage is lost) Works best for younger insureds ©2010 Richard A. Oshins and Robert G. Alexander 149

150 Contact Information Robert G. Alexander, Esq Alexander & Klemmer, S.C. 933 N. Mayfair Road, Suite 301 Milwaukee, Wisconsin Tel: ©2010 Richard A. Oshins and Robert G. Alexander


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