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

2.  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.  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.  Purchase price adjustment ◦ King  Petter ◦ Defined value formula ◦ All property is transferred ◦ Non-taxable donee of excess  Charity  Marital Trust  GRAT

5.  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.  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.  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.  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.  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.  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.  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.  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.  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.  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.  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.  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 SM holds title to the property on behalf of the life tenants and the remainder beneficiary

17.  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.  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.  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.  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.  No substitute for running the numbers

22.  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.  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.  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?