cummings & lockwood llc and the family office association present protecting … · 2018. 7....

Cummings & Lockwood LLC and the Family Office Association Present

Protecting and Transitioning Your WealthA Comprehensive View of Trust and Estate Planning for Family Offices

Cummings & Lockwood LLC and Family Office Association present a comprehensive white paper for ensuring that your family office addresses the essential elements of planning - from life planning and administration to trust selection and asset protection.

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LIFEPLANNING...............................................................................................................................................1

IFAFAMILYMEMBERMOVESTOANEWSTATETHATHASLOWERINCOMEANDESTATETAXES,WHATSHOULDTHEFAMILY

MEMBERDOTOESTABLISHTHEIR“RESIDENCE”FORINCOMETAXPURPOSESANDTHEIR“DOMICILE”FORESTATETAXPURPOSES?...............................................................................................................................................1

INYOURSTATEOFDESIREDDOMICILE...................................................................................................................2INYOURFORMERSTATEOFDOMICILE..................................................................................................................3INADDITION,YOUSHOULD................................................................................................................................3IFAFAMILYMEMBERPLANSTOGETMARRIED,WHATSTEPSSHOULDHEORSHEBETAKINGTOPROTECTHISORHERASSETS

ORACCESSTOTHEFAMILYASSETS?.................................................................................................................4IFAFAMILYMEMBERISGETTINGDIVORCED,HOWSHOULDHEORSHECHANGETHEIRESTATEPLAN?....................................4HOWSHOULDAFAMILYMEMBERSTRUCTURETHEIRESTATEPLANINTHESECONDMARRIAGEORBLENDEDFAMILY

SITUATION?...............................................................................................................................................5WITHTHERISEOFALZHEIMER’SANDOTHERCOGNITIVEMENTALHEALTHISSUES,HOWDOYOUPLANFORALONGPERIOD

OFINCAPACITY?.........................................................................................................................................5WHATSHOULDFAMILYMEMBERSDOTOPRESERVE,PROTECTANDPASSONVALUABLETANGIBLEPERSONALPROPERTY

(I.E.,ARTWORK,CARS,JEWELRY)?..................................................................................................................6

DIGITALASSETS..............................................................................................................................................8

WHATARE“DIGITALASSETS”?...........................................................................................................................8WHATARETHECHALLENGESFACINGDIGITALASSETSTHATAREDIFFERENTTHANTRADITIONALASSETS?...............................8UPONANINDIVIDUAL’SDEATH,ISAFIDUCIARY(E.G.,EXECUTOR,PERSONALREPRESENTATIVE,TRUSTEE,AGENT,

ATTORNEY-IN-FACT,ORGUARDIAN)PERMITTEDTOACCESSTHEDECEDENT’SDIGITALASSETS?.......................................8WHATAREEXAMPLESOF“OUTSIDETHEENVELOPE”NON-CONTENTINFORMATION?.......................................................9WHATAREEXAMPLESOFISPSTHATPROVIDEANONLINETOOLFORPOST-DEATHACCESS?................................................9WHATSTEPSSHOULDAFIDUCIARYTAKEWITHRESPECTTODIGITALASSETS?..................................................................9

ADMINISTRATIONOFREVOCABLETRUSTS...................................................................................................10

WHATISAREVOCABLETRUST?........................................................................................................................10HOWISTHEREVOCABLETRUSTFUNDED?...........................................................................................................10WHOPAYSTHEINCOMETAXFORTHEREVOCABLETRUST?......................................................................................10WHATHAPPENSUPONTHEDEATHOFTHEGRANTOR?...........................................................................................11

TRUSTEESELECTION.....................................................................................................................................12

WHATISTHEPURPOSEOFTHETRUST?...............................................................................................................12WHATISTHENATUREANDVALUEOFTHEASSETS?................................................................................................12WHATARETHEFAMILYDYNAMICS?...................................................................................................................12WHATSKILLSSHOULDBECONSIDEREDINSELECTINGATRUSTEE?..............................................................................13

MANAGEMENTOFFAMILYLIMITEDLIABILITYCOMPANIESANDLIMITEDPARTNERSHIPS&GIFTINGFORHIGHNETWORTHINDIVIDUALS&BUSINESSSUCCESSIONPLANNING..........................................................14

WHATISTHEPRIMARY“TRAPFORTHEUNWARY”RELATEDTOTHEMANAGEMENTOFAFAMILYLIMITEDLIABILITYCOMPANYORLIMITEDPARTNERSHIP?............................................................................................................14

WHATARETHEINVESTMENTCOMPANYRULESANDHOWCANAFAMILYCOMPANYAVOIDTHEIRAPPLICATION?...................15WHATISDEFECTIVEABOUTANINTENTIONALLYDEFECTIVEGRANTORTRUST?...............................................................15WHATISAFAMILYBANK?...............................................................................................................................15ARETHEREANYGIFTINGOPPORTUNITIESTHATAREUNDEREXPLOITEDBYWEALTHYFAMILIES?.........................................16WHATFACTORSSHOULDTRIGGERADISCUSSIONABOUTADYNASTYTRUST?...............................................................16WHYWOULDADONOREVERELECTTOPAYGIFTTAXES?.........................................................................................17

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ISTHEREASIMPLEWAYTOPROVIDEABENEFITFORCHILDRENWITHOUTMAKINGATAXABLEGIFT?..................................17WHATISTHEBIGGESTOBSTACLETOBUSINESSSUCCESSIONPLANNING?......................................................................18WHATARETHECALLINGCARDSFORUSINGAPRIVATEANNUITYTOSELLANINTERESTINABUSINESS?................................18WHATUNIQUECONSIDERATIONSAPPLYTOATRUSTTHATWILLHOLDANINTERESTINAFAMILYCOMPANY?........................19WHATSTEPSWILLAFAMILYBUSINESSORDINARILYTAKEINORDERTOINSULATEITSELFFROMTHEPROSPECTOFNON-

FAMILYOWNERS?.....................................................................................................................................19WHATSHOULDABUSINESSOWNERCONSIDERINGAGIFTOFANINTERESTINAFAMILYCOMPANYTOCHARITYKEEPIN

MIND?...................................................................................................................................................20

RETIREMENTPLANSANDEMPLOYEEBENEFITS............................................................................................21

HOWDORETIREMENTPLANSANDEMPLOYEEBENEFITSFITINTOANESTATEPLAN?.......................................................21BENEFICIARYDESIGNATIONSFORRETIREMENTPLANSCANIMPACTNOTONLYTHERECIPIENTOFTHEPLANBENEFITBUTALSO

THETAXCONSEQUENCESASSOCIATEDWITHTHEBENEFIT.WHATARETHEBENEFICIARYOPTIONSANDTAX

CONSEQUENCES?......................................................................................................................................21WHATBENEFICIARYOPTIONSAREAVAILABLE?.....................................................................................................22WHATMINIMUMREQUIREDDISTRIBUTIONRULESAPPLYAFTERAPLANPARTICIPANT’SDEATH?........................................22WHATISAROTHACCOUNT?...........................................................................................................................25WHATARESOMEOTHERCONSIDERATIONSFOREXECUTIVEBENEFITS?........................................................................25

PRIVATEPLACEMENTLIFEINSURANCE(PPLI)...............................................................................................27

WHATISPRIVATEPLACEMENTLIFEINSURANCE?..................................................................................................27WHATARETHEREQUIREMENTSOFPPLITOENSUREEARNINGSANDPROCEEDSWILLNOTBEINCOMETAXABLE?...................27WHATARESOMEESTATEPLANNINGSPECIFICARRANGEMENTSWHEREPPLIISCOMMONLYUTILIZED?...............................28

GRANTORRETAINEDANNUITYTRUSTS........................................................................................................30

WHATISAGRAT?.......................................................................................................................................30HOWDOESTHEGRATWORK?.........................................................................................................................30CANYOUGIVEMEANEXAMPLEOFAGRAT?......................................................................................................30WHATARETHETERMSANDCONDITIONSTOBECONSIDEREDINAGRATTRUSTAGREEMENT?.................31WHATARETHETAXIMPLICATIONSOFTHEGRAT?....................................................................................31CANYOUGIVEMEANEXAMPLEOFTHEGRATTAXCALCULATIONS?..........................................................................32WHATIFTHEGRAT’SINVESTMENTPERFORMANCEISEQUALTOORLESSTHANTHEIRSINTERESTRATE?............................32IFTHEREISINSUFFICIENTINCOMETOPAYTHEANNUITYINONEYEAR,CANTHEDEFICIENCYBEPAIDINANOTHERYEAR,

RATHERTHANUSINGPRINCIPAL?..................................................................................................................33CANANINTERESTINACLOSELYHELDBUSINESSBETRANSFERREDTOAGRAT?............................................................33WHATARETHECOSTSOFMANAGINGAGRAT?...................................................................................................33

SALESTOGRANTORTRUSTS.........................................................................................................................34

WHATISAGRANTORTRUST?...........................................................................................................................34WHATARETHEADVANTAGESOFGRANTORTRUSTS?..............................................................................................34WHATGIVESATRUSTGRANTORTRUSTSTATUS?...................................................................................................34WHATISANINSTALLMENTSALE?......................................................................................................................34WHATARETHEBASICSOFANINSTALLMENTSALETOAGRANTORTRUST?....................................................................34WHATARETHEADVANTAGESOFANINSTALLMENTSALE?........................................................................................35WHATARETHEDISADVANTAGESOFATRADITIONALINSTALLMENTSALE?....................................................................36ARETHEREINCOMETAXCONSEQUENCESOFUSINGATRADITIONALINSTALLMENTSALE?.................................................37

QUALIFIEDPERSONALRESIDENCETRUSTS....................................................................................................37

WHATISAQPRT?........................................................................................................................................37

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HOWDOESTHEQPRTWORK?.........................................................................................................................38HOWISTHEQPRTCALCULATED?.....................................................................................................................38WHATARETHETERMSOFTHEQPRTTRUSTAGREEMENT?.....................................................................................38WHATARETHEESTATEANDINCOMETAXIMPLICATIONSOFTHEQPRT......................................................................39HOWLONGSHOULDTHEQPRTLAST?...............................................................................................................39CANYOUSTILLUSETHERESIDENCEAFTERTHEQPRTENDSANDTHECHILDRENBECOMETHELEGALOWNERS?.....................40CANYOUGIVEMEANEXAMPLEOFTHEQPRTTAXCALCULATIONS?..........................................................................40IFTHEPROPERTYTOBEPLACEDINTHEQPRTISLOCATEDINASTATEWITHAGIFTTAX,ARETHEREANYADDITIONALTAX

CONSIDERATIONS?....................................................................................................................................40CANIUSEAVACATIONHOMEORCONDOMINIUMFORMYQPRT?............................................................................41MAYIUSEMYSPOUSE’SUNIFIEDCREDITTOSHELTERMYQPRTGIFTIFTHEVALUEOFMYGIFTEXCEEDSMYOWNUNIFIED

CREDITEXEMPTION?.................................................................................................................................41WHATHAPPENSIFIWISHTOSTOPUSINGTHEPROPERTYINTHEQPRTASAPERSONALRESIDENCE?.................................41WHATARETHECOSTSOFMANAGINGAQPRT?...................................................................................................41WHATIFIHAVEAMORTGAGEAGAINSTTHERESIDENCEORWISHTOBORROWAGAINSTTHERESIDENCEINTHEFUTURE?........41CANICONTINUETOPAYFORIMPROVEMENTSTOTHERESIDENCEAFTERTHERESIDENCEISTRANSFERREDTOTHEQPRT?.......42CANMYSPOUSEHAVETHERIGHTTOLIVEINOURHOMEAFTERMYTERMEXPIRES?.......................................................42HOWDOTHEIRSINTERESTRATESEFFECTTHEVALUEOFTHETRANSFEROFPROPERTYTOAQPRT?..................................42SHOULDYOUONLYTRANSFERPROPERTYTOAQPRTWHENTHEIRSINTERESTRATESARERELATIVELYHIGH?......................42

SELF-CANCELLINGINSTALLMENTNOTE.........................................................................................................43

WHATISASELF-CANCELLINGINSTALLMENTNOTE?..............................................................................................43WHYWOULDASCINBEOFINTERESTTOME?......................................................................................................43HOWDOESTHETRANSACTIONWORK?...............................................................................................................43WHATARETHEADVANTAGESTOUSINGASCIN?..................................................................................................44WHATARETHEDISADVANTAGESTOUSINGASCIN?..............................................................................................44ARETHEREINCOMETAXCONSEQUENCESTOUSINGASCIN?....................................................................................45

PLANNINGWITHRESIDENTIALREALESTATE.................................................................................................46

WHATARETHETAXASPECTSOFRETAININGARESIDENCEUNTILIDIE?........................................................................46DOMYHEIRSHAVETOPROBATETHEHOUSE?......................................................................................................46WHATESTATEPLANNINGTECHNIQUESCANIUTILIZEWITHMYRESIDENCE?.................................................................46WHATAPPROACHESCANITAKEFORMANAGINGTHEFAMILYVACATIONHOME?..........................................................46WHATARETHEBENEFITSOFMAKINGAGIFTOFARESIDENCEINTRUSTVERSUSOUTRIGHT?..........................................47

PRIVATEANNUITIES.....................................................................................................................................49

WHATISAPRIVATEANNUITY?.........................................................................................................................49WHATARETHEBASICSOFAPRIVATEANNUITY?....................................................................................................49WHENSHOULDIUSEAPRIVATEANNUITY?..........................................................................................................49HOWISAPRIVATEANNUITYCALCULATED?..........................................................................................................49WHATARETHEADVANTAGESTOUSINGAPRIVATEANNUITY?..................................................................................50WHATARETHEDISADVANTAGESTOUSINGAPRIVATEANNUITY?..............................................................................50ARETHEREINCOMETAXCONSEQUENCESTOUSINGAPRIVATEANNUITY?....................................................................51

ADMINISTRATIONOFGRATS,QPRTS,IRREVOCABLEGIFTTRUSTS,IRREVOCABLEINSURANCETRUSTS.........52

WHATARETHEUNIQUEASPECTSOFADMINISTERINGGRATS?.................................................................................52WHATARETHEUNIQUEASPECTSOFADMINISTERINGQPRTS?.................................................................................52WHATARETHEUNIQUEASPECTSOFADMINISTERINGIRREVOCABLEGIFTTRUSTSANDIRREVOCABLEINSURANCETRUSTS?.....52

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ASSETPROTECTIONPLANNING.....................................................................................................................54

WHATISTHEPURPOSEOFASSETPROTECTIONPLANNING?......................................................................................54WHENSHOULDICONSIDERASSETPROTECTIONPLANNING?.....................................................................................54WHATISAFUTUREUNFORESEEABLECREDITOR?...................................................................................................54WHATASSETSAREEXEMPTFROMCREDITORS’CLAIMS?..........................................................................................55ARETHEASSETSHELDBYAREVOCABLETRUSTEXEMPTFROMCREDITORS’CLAIMS?......................................................55DOESALIMITEDLIABILITYCOMPANYPROTECTASSETSFROMCREDITORS?...................................................................55ARESOMELIMITEDLIABILITYCOMPANIESBETTERTHANOTHERS?..............................................................................56WHATISTHEDIFFERENCEBETWEENA“MEMBERMANAGED”LLCANDA“MANAGERMANAGED”LLC?.............................56

ASSETPROTECTIONTRUSTS.........................................................................................................................57

WHATISANASSETPROTECTIONTRUST(APT)?...................................................................................................57WHATADVANTAGESDOESANASSETPROTECTIONTRUSTOFFEROVEROTHERENTITIESTHATPROTECTASSETS,SUCHASA

LIMITEDLIABILITYCOMPANY(LLC)ORLIMITEDPARTNERSHIP(LP)?......................................................................57WHATJURISDICTIONSCANANASSETPROTECTIONTRUSTBECREATED?.....................................................................57WHATISTHEDIFFERENCEBETWEENADOMESTICANDAFOREIGNASSETPROTECTIONTRUST?.........................................57WHOCONTROLSANASSETPROTECTIONTRUST?..................................................................................................58HOWMUCHCANONETRANSFERTOANASSETPROTECTIONTRUST?.........................................................................58WHATTYPEOFASSETSMAYBETRANSFERREDTOANASSETPROTECTIONTRUST?.........................................................58

FAMILYTRUSTCOMPANIES..........................................................................................................................59

WHATISAFAMILYTRUSTCOMPANY?...............................................................................................................59WHATARESOMEREASONSTOHAVEAFAMILYTRUSTCOMPANY?............................................................................59WHOCANFORMANDOWNAFAMILYTRUSTCOMPANY?.......................................................................................59WHOMMAYAFAMILYTRUSTCOMPANYSERVE?.................................................................................................59

CROSS-BORDERTAXISSUES..........................................................................................................................60

DOESAU.S.CITIZEN’SU.S.ESTATEPLANDOCUMENTSGOVERNTHEDISPOSITIONOFTHEIRFOREIGNASSETS?.....................60ARETHEREANYTAXISSUESIFANON-U.S.CITIZENRESIDINGINTHEU.S.DECIDESTOMOVEOUTOFTHEU.S.?...................60INLIGHTOFTHEINCREASEDCOOPERATIONBETWEENGOVERNMENTSINSHARINGFINANCIALINFORMATIONOFTHEIR

CITIZENS,ARETHEREANYPROGRAMSINPLACETOHELPINDIVIDUALSBECOMECOMPLIANTBEFORETHEGOVERNMENTPENALIZESTHEM?.....................................................................................................................................61

ARETHEREANYPROBLEMSWITHAU.S.CITIZENORU.S.RESIDENTHOLDINGINVESTMENTSINFOREIGNBUSINESSES?...........61CANANON-U.S.CITIZENRESIDINGINTHEU.S.BESUBJECTTOU.S.INCOMETAXONWORLDWIDEINCOMEBUTNOTU.S.

ESTATEORGIFTTAXONWORLDWIDEASSETS?..................................................................................................62ISTHEREANYTAXPLANNINGTHATANON-U.S.CITIZENSHOULDDOBEFOREBECOMINGAU.S.RESIDENTORDOMICILIARY.....63ARETHEREANYPROBLEMSWITHAU.S.CITIZENLIVINGOVERSEASMOVINGU.S.ASSETSTOAU.S.REVOCABLETRUST?.......64ARETHEREANYISSUESWITHANON-RESIDENTALIENTRANSFERRINGASSETSTOAU.S.CITIZENORU.S.RESIDENT?..............64HOWSHOULDANON-RESIDENTALIENPURCHASEU.S.REALPROPERTY?....................................................................64

PLANNINGFORNON-U.S.CITIZENSPOUSES.................................................................................................66

DOESTHEU.S.ESTATETAXMARITALDEDUCTIONAPPLYTOTRANSFERTOANON-U.S.CITIZENSPOUSEFROMAU.S.CITIZENSPOUSE?......................................................................................................................................66

ARETHEREANYEXCEPTIONSTOTHEGENERALRULETHATTHEU.S.ESTATETAXMARITALDEDUCTIONISNOTAVAILABLEWHERETHESURVIVINGSPOUSEISANON-U.S.CITIZEN?YES,THEREARETHREEEXCEPTIONS:.....................................66

DOESTHEU.S.ESTATETAXMARITALDEDUCTIONAPPLYTOTRANSFERSTOAU.S.CITIZENSPOUSEFROMANON-U.S.CITIZENSPOUSE?......................................................................................................................................67

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DOESTHEU.S.GIFTTAXMARITALDEDUCTIONAPPLYTOTRANSFERSTOANON-U.S.CITIZENSPOUSEFROMAU.S.CITIZENSPOUSE?.................................................................................................................................................67

ARETHEREANYEXCEPTIONSTOTHEGENERALRULETHATTHEU.S.GIFTTAXMARITALDEDUCTIONISNOTAVAILABLEWHERETHEDONEESPOUSEINANON-U.S.CITIZEN?..........................................................................................67

DOESTHEU.S.GIFTTAXMARITALDEDUCTIONAPPLYTOTRANSFERSTOAU.S.CITIZENSPOUSEFROMANON-U.S.CITIZENSPOUSE?.................................................................................................................................................68

CANANON-U.S.CITIZENSPOUSEANDU.S.CITIZENSPOUSESPLITAGIFT?..................................................................68CANANON-U.S.CITIZENSPOUSEMAKEANNUALEXCLUSIONGIFTS?..........................................................................68DOESPORTABILITYOFDECEASEDSPOUSE’SUNUSEDLIFETIMEEXEMPTIONAPPLYTOANON-U.S.CITIZENSPOUSE?...............68ARETHEREANYISSUESIFAU.S.CITIZENSPOUSEANDNON-U.S.CITIZENSPOUSEHOLDANASSETASJOINTOWNERS(E.G.,

TENANCYBYTHEENTIRETIESORJOINTWITHRIGHTSORSURVIVORSHIP)?................................................................68ARETHEREANYISSUESIFANON-U.S.CITIZENSPOUSETRANSFERSASSETSTOADESCENDANT?........................................69ISTHESALEOFASSETSFROMAU.S.CITIZENSPOUSETOANON-U.S.CITIZENSPOUSECONSIDEREDATAXABLEEVENT?..........69ARETHERETAXISSUESIFANON-U.S.CITIZENSPOUSEWHOWASAU.S.RESIDENTDECIDESTOMOVEBACKTOHISORHER

COUNTRYOFORIGIN?................................................................................................................................70ARETHEREANYISSUESINNAMINGANON-U.S.CITIZENSPOUSEASAFIDUCIARY?........................................................70

ISSUESWITHNAMINGFOREIGNBENEFICIARIES...........................................................................................71

WHATAREU.S.SITUSASSETSFORESTATETAXPURPOSES?.....................................................................................71WHYSHOULDAFOREIGNBENEFICIARYAVOIDTAKINGTITLETOU.S.SITUSASSETS?.......................................................71WHATISU.S.SOURCEINCOME?......................................................................................................................72HOWCANADOUBLETAXOCCURONADISTRIBUTIONFROMATRUSTTOAFOREIGNBENEFICIARY?....................................72ISTHEREAWAYTOAVOIDTHEDOUBLETAXATIONTRAP?........................................................................................72IFAFOREIGNBENEFICIARYRECEIVESADISTRIBUTIONFROMAU.S.CITIZENORU.S.TRUST/ESTATE,DOESTHEU.S.

PERSONORFIDUCIARYHAVEAREPORTINGREQUIREMENTTOTHEFOREIGNBENEFICIARYORFOREIGNBENEFICIARY’SCOUNTRYOFRESIDENCE?............................................................................................................................73

THEWORLDOFCHARITABLEGIVINGOPPORTUNITIES..................................................................................74

WHATISACHARITABLELEADTRUST?................................................................................................................74WHYWOULDACLATBEOFINTERESTTOME?.....................................................................................................74ISTHEREANINCOMETAXBENEFITTOCREATINGACLAT?.......................................................................................75WHATARETHEBASICSOFCHARITABLELEADANNUITYTRUSTADMINISTRATION?.........................................................76DOTHEASSETSUSEDFORFUNDINGAFFECTTHEINCOMETAXCONSEQUENCESTOYOUANDTHEADMINISTRATIONOFTHE

CLAT?...................................................................................................................................................76MUSTTHETRUSTEESBESENSITIVETOCERTAINREQUIREMENTS?..............................................................................77WHATISACHARITABLEREMAINDERUNITRUST?..................................................................................................78ISTHEREANINCOMETAXDEDUCTIONAVAILABLEFORIMPLEMENTINGACRUT?..........................................................79WHATPROVISIONSMAYBEINCLUDEDINTHECRUT?............................................................................................79WHATARETHETAXIMPLICATIONSOFCREATINGTHECRUT?..................................................................................80WHATABOUTTHETAXATIONOFTHECRUTITSELF?..............................................................................................80WHOCANBETHEBENEFICIARYOFTHECRUT?.....................................................................................................81HOWLONGCANTHECRUTLAST?....................................................................................................................81CANYOUGIVEMEANEXAMPLEOFTHECRUTTAXCALCULATIONS?..........................................................................81CANICHANGETHECHARITABLEREMAINDERBENEFICIARYAFTERIFUNDTHECRUT?.....................................................82CANMYPRIVATEFOUNDATIONBETHECHARITABLEREMAINDERBENEFICIARY?............................................................82DOESACRUTHAVETOPAYMEAUNITRUSTAMOUNT?WHATOTHERPAYMENTOPTIONSARETHERE?.............................82CANIMAKEADDITIONALCONTRIBUTIONSTOTHECRUT?......................................................................................83ISTHEREAWAYFORMETOUSEACRUTTODIVERSIFYMYLOWBASISASSETSINATAX-EFFICIENTMANNERWITHOUT

“DISINHERITING”MYFAMILY?.....................................................................................................................83

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WHATARETHECOSTSOFADMINISTERINGACRUT?.............................................................................................83WHATPROPERTYSHOULDIUSETOFUNDACRUTDURINGLIFE?WHATPROPERTYSHOULDIUSETOFUNDACRUTAT

DEATH?WHATPROPERTYSHOULDINOTUSE?................................................................................................83WHATARETHEGENERALADMINISTRATIONCONCERNSINVOLVEDWITHADMINISTERINGACHARITABLEREMAINDER

UNITRUST?.............................................................................................................................................84WHATTYPEOFASSETSSHOULDBEUSEDTOFUNDTHECRUT?.................................................................................84HOWDOESTHECRUTQUALIFYASTAX-EXEMPT?.................................................................................................84WHATARETHELIMITATIONSONTHECHARITABLEINCOMETAXDEDUCTION?...............................................................85MUSTTHETRUSTEESBESENSITIVETOCERTAINREQUIREMENTS?..............................................................................86TAX-FREEIRADISTRIBUTIONSTOCHARITY..........................................................................................................88WHATISAPRIVATEFOUNDATION?...................................................................................................................88HOWDOICREATEAFOUNDATION?...................................................................................................................88WHOMAYMANAGETHEFOUNDATION?.............................................................................................................89CANIRESTRICTTHEACTIVITIESOFFUTUREFOUNDATIONMANAGERS?.......................................................................89ARETHEREANYTAXESPAYABLEBYAFOUNDATION?..............................................................................................90MUSTAFOUNDATIONMAKEDISTRIBUTIONS?......................................................................................................90ARETHEREOTHERRESTRICTIONSONHOWAFOUNDATIONISOPERATED?...................................................................91SELF-DEALING..............................................................................................................................................91EXCESSBUSINESSHOLDINGS............................................................................................................................91INVESTMENTSWHICHJEOPARDIZECHARITABLEPURPOSE.......................................................................................92TAXABLEEXPENDITURES.................................................................................................................................92WHATARETHEALTERNATIVESTOAFOUNDATION?...............................................................................................92

CUMMINGS&LOCKWOODCONTRIBUTORS.................................................................................................95

ABOUTCUMMINGS&LOCKWOODLLC.........................................................................................................98

OVERVIEW..................................................................................................................................................98PRIVATECLIENTSPRACTICE.............................................................................................................................98COMMERCIALPRACTICE..................................................................................................................................98

ABOUTTHEFAMILYOFFICEASSOCIATION..................................................................................................100

CUMMINGS& LOCKWOODLLC FAMILY OFFICE ASSOCIATION

WHITEPAPERPROJECT

LIFEPLANNING

IFAFAMILYMEMBERMOVESTOANEWSTATETHATHASLOWERINCOMEANDESTATETAXES,WHATSHOULDTHEFAMILYMEMBERDOTO

ESTABLISHTHEIR“RESIDENCE”FORINCOMETAXPURPOSESANDTHEIR“DOMICILE”FORESTATETAXPURPOSES?

Theconceptof“residence”and“domicile”aresimilarandareeasilyconfused.Whilefrequentlythestateofone’sdomicileisalsothestateofone’sresidence,thisdoesnotholdtrueforeveryone.Whileapersonmayhaveanumberofdifferentresidencesorbearesidentofanumberofdifferentstates,heorshemayonlyhaveonedomicileatanygiventime.Residencedetermineswhereonepaysincometax.Domiciledetermineswhereone’sestatewillpayestatetaxonassetsotherthanrealestate.

Theconceptof“residence”isbaseduponobjectivefactors.Likedomicile,aperson’sresidenceisdependentuponafindingofphysicalpresencewithintheparticularstate.Whetherapersonisaresidentofastatemaybedetermined,forexample,basedonthenumberofdaysspentwithinthestateortheownershipofpropertywithinthestate.Referencemustbemadetoeachstate’slawstodeterminethetaxandlegalconsequencesofbeingaresidentofthatstate.However,nofindingofintentisrequiredforapersontobedeemedaresidentofaparticularstate.Thus,dependinguponthelawsoftheparticularjurisdiction,apersonmaybedeemedaresidentofmorethanonestateandadomiciliaryofyetanother.

Thechoiceofresidencecarrieswithitdifferentlegalconsequences.Formoststates,astrictdayspresenttestwilldeterminewhetherornotyouareanincometaxresidentinthatstateevenifyouaredomiciledinadifferentstates.Somestateshaveharshrulesthattreatevenapartialdayphysicallypresentinthatstateasadaypresentinthatstateespeciallyifyoumaintainrealestateinthejurisdiction.Aswithestatetaxes,itisimportanttoavoidincometaxationintwodifferentstates.

Aperson’s“domicile”ishisorherpermanenthome,towhichheorshealwaysintendstoreturn.“Domicile”isoftendefinedas(i)actualresidencewithinaparticularstate,combinedwith(ii)theintentionofmakingthatstateone’spermanenthome.Actualresidenceinastatewithouttheintentiontoliveinthatstatepermanentlydoesnotsuffice.Sincedomicileisaquestionofintent,

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courtsoftenlooktoaperson’soverallmanneroflivingtodeterminewhethertherehasbeenachangeofdomicile.

Thechoiceofdomicilecarrieswithitvariouslegalconsequences.Itoftendetermines(i)jurisdictiontoassessstateincomeanddeathtaxes;(ii)primaryjurisdictiontoprobatewillsandadministerestates;and(iii)judicialjurisdictionoveranindividual.Domicilealsodetermineswhetherandwhereapersonmayexercisevariouslegalrightsandprivileges,suchasvoting.

Generally,youwillbesubjecttodeathtaxesonlyinyourstateofdomicile.However,ifyoudieowningrealpropertyinanotherstate,thatstatemayimposeitsowndeathtaxesonthevalueoftherealpropertylocatedinthatnon-domiciliarystate.

Federalcourtshaveallowedtwoormorestateseachtomakeanindependentdeterminationofdomicileandeachtoassessitsownestateandinheritancetaxesonthatbasis.TheUnitedStatesSupremeCourthasheldthatsuchdoubletaxationisconstitutional.Inoneinfamouscase,NewJerseyandPennsylvaniabothclaimedanheirtotheCampbellSoupfortuneasadomiciliaryandeachstatecollected$17millioninstateinheritancetaxesfromtheestate.Sinceadeterminationthatyouaredomiciledinmorethanonestatecouldhaveextremelyadverseandcostlyconsequences,itisimperativetotakeallthestepsnecessarynotonlytoestablishyournewdomicile,butalsotorevokeyourpriordomicile.

Ifyouwishtochangeyourdomiciletoanotherstatebutretainahomeinyouroriginalstate,youshouldtakestepsconsistentwiththischangeofdomicilethatmanifestyourintentiontoabandonyouroriginaldomicile.

Courtcasesdecidingtheissueofdomicileindicatethatnoonefactorconclusivelyestablishesdomicile.Asmentionedabove,thedeterminationofone’sdomicileisamatterofone’sintent,therefore,courtsoftenlooktoavarietyoffactorsindeterminingwhethertherehasbeenachangeofdomicile.Aperson’sdeclarationsastowhatheconsiderstobehishome,residenceordomicilemaybeusedasevidenceofintent.Suchdeclarationsoftenarefoundinformallegaldocumentsaswellasinotherwritteninstruments,suchasletters,hotelregistrationsandthelike.Tomakeyourchoiceofdomicileclear,youshouldtakeasmanyofthefollowingstepsasarepossibleinviewofyourparticularcircumstances:

INYOURSTATEOFDESIREDDOMICILE

• ExecuteanewWilloraCodicilwhichrecitesyournewdomicileandwhichcomplieswithallthelegalrequirementsofyournewstateofdomicile.

• ExecutenewDurablePowersofAttorney,LivingWillsandHealthCareProxieswhichreciteyournewdomicileandwhichcomplywiththelegalrequirementsofyournewstateofdomicile.

• FileaDeclarationofDomicile,ifavailable.• Purchaseandfurnishahometobeusedasyourprimaryresidence.• Registerasavoterandvote.


• FileyourfederalincometaxreturnwiththeappropriateIRSregionalservicecenterandshowyourstateofdesireddomicileasyourresidenceaddress.

• Paystateandlocaltaxesasaresident.• Obtainadriver’slicense.• Registeryourautomobile.• Fileforanyapplicabletaxexemptionsonresidentialproperty.• Bephysicallypresentwithinthestateaslargeapartofeachyearasispracticable,

especiallyduringtheinitialyear.Someindividualsmaywishtokeepadiaryoftripsoutofstateandofnightsspentinandoutofstate.

• Maintainamajorportionofyourbankaccountsandbrokerageaccounts.• Openasafedepositboxforyourjewelryandothervaluableproperty.• Payhealthinsurancepremiums.• Conductyourbusinessorprofessioninstatetotheextentpossible.• Joinclubs,religiousandsocialorganizations.

INYOURFORMERSTATEOFDOMICILE

• IfyouhavefiledaDeclarationofDomicileinanotherstate,mailacopytothetaxauthoritiesofthenon-domiciliarystate.

• Haveyournameremovedfromthevotingrolls.• Surrenderyourdriver’slicense.• Payanytaxesdueasanonresident.Markyourlastreturnasaresident“FINAL,”using

yournewaddress.• Spendaslittletimeaspracticableinthestate.• Closebrokerageandbankaccountsinthestate.• Changeclub,religiousandsocialmembershipsto“nonresident”status.

INADDITION,YOUSHOULD

• Describeyourselfasaresidentofyourdomiciliarystateinalllegaldocumentsthatrequirearecitalofresidence,suchaspassports,realestatedeeds,contracts,leasesandcreditapplications.

• Whentraveling,useyournewaddressasyourresidencewhenregisteringathotels,motels,etc.

• Sendachangeofaddresstoallbusinessentitieswithwhichyoudeal,includingthosethatpresentlyoweyoumoneyorthatmayoweyoumoneyinthefuture,e.g.,creditcardcompanies,insurancecompaniesorformeremployersthatprovidepensionplansordeathbenefits.

• Considertransferringtitletoanyresidentialrealestatesituatedinyourstateofformerresidencetootherfamilymembers,ortotrustsfortheirbenefit,butonlyafterconsideringtheestateplanningconsequencesofsuchatransfer.

• Aboveall,pursueaconsistentcourseofconductindicatinganintentiontoabandonyourformerdomicileandestablishahomeinthenewstate.


IFAFAMILYMEMBERPLANSTOGETMARRIED,WHATSTEPSSHOULDHEORSHEBETAKINGTOPROTECTHISORHERASSETSORACCESSTOTHE

FAMILYASSETS?

Wealthyindividualscontemplatingmarriageshouldconsiderenteringintoapremaritalagreement.Asitsnamesuggests,apremaritalagreementisanagreementinwritingenteredintobythefuturespousespriortomarriagewhichcontainsprovisionsregardingownershipofproperty.TheAgreementmaycontainprovisionsregardingdispositionofpropertyuponmaritaldissolution,death,ortheoccurrenceofanyotherevent;modificationoreliminationofspousalsupport;ownershiprightsindeathbenefitsfromlifeinsurancepolicies;andrightstoretirementplans.ThepartiesmayalsoagreetoexecuteaWillortrustthatreflectstheseprovisions.

Eachstate’slawdiffersontheenforceabilityofpremaritalagreements.Generally,apremaritalagreementmaybedeemedunenforceableitnotproperlypreparedorexecuted.Asageneralrule,torenderapremaritalagreementunenforceable,onemustprovethat:(1)heorshedidnotexecutetheagreementvoluntarily;(2)theagreementwasunconscionablewhenitwasexecutedorwhenenforcementissought;(3)heorshewasnotprovidedfairandreasonabledisclosureoftheamount,characterandvalueofproperty,financialobligationsandincomeoftheotherpartybeforeexecutionoftheagreement;or(4)heorshewasnotaffordedareasonableopportunitytoconsultwithindependentcounsel.Absenttheexistenceofanysuchfacts,apremaritalagreementmaybeamendedorrevokedonlybyawrittenagreementsignedbybothparties.Generally,courtswilltypicallyenforceapremaritalagreementunlessthetermsareunconscionableeitheratthetimeitwasexecutedoratthetimeoftheseparation.

Itisimportantthatanestateplanaccuratelyreflectsuchperson’sobligationsunderthepremaritalagreement.TheactofmarriagewillentitlethespousetopotentiallycontesttheWill,electagainstthewillandtakean“electiveshare”oftheestate.Moststatesprovidesomesortof“electiveshare”foraspousewhowaswrittenoutofherspouse’swill.Eachstatediffersastowhatisincludedandwhatisnotincludedincalculatingtheelectiveshare.Forexample,NewYorkincludesassetsheldinaRevocableTrustatthetimeofdeathwhileConnecticut,currently,doesnot.

IFAFAMILYMEMBERISGETTINGDIVORCED,HOWSHOULDHEORSHECHANGETHEIRESTATEPLAN?

Itisimportantforapersonwhohasrecentlydivorcedtore-evaluatehisorherestateplan,specificallythedispositionofassets.Inaddition,appointmentsofexecutorsandtrusteesmayneedtoberevisited,especiallyiftheformerspousewasnamedineithercapacity.Whilelocalstatelaw,mayrevokeanybequestsorappointmentsinfavorofthespouseautomaticallyupontheenteringofadivorcedecree,itmaynotrevokebequestsorappointmentsforthespouse’sotherfamilymembers.


Divorcecounselshouldbeconsultedpriortochanginganyestateplanningdocuments.Manystatesissueprotectiveordersassoonasadivorceisfiledthatpreventthepartiesfromchangingtheirestateplansuntilthedivorceisfinalized.

Inmanystates,RevocableTrustsarenotautomaticallyrevokedbydivorce.Instead,RevocableTrustsaregovernedbythetermsofthedocument.Thus,thecreatorofthetrustgenerallywillwishtoamendtheprovisionsofthetrusttoremovetheformerspouseasabeneficiary.

Irrevocabletrustsgenerallyalsoarenotrevokedbydivorce.Unlikerevocabletrusts,irrevocabletrustscannotbemodifiedorterminated.However,irrevocabletrustsareoftendraftedtoprovidecontingenciesintheeventofasubsequentdivorce.

HOWSHOULDAFAMILYMEMBERSTRUCTURETHEIRESTATEPLANINTHESECONDMARRIAGEORBLENDEDFAMILYSITUATION?

Athoroughestateplanshouldtakeintoaccountthepossibilitythatone’ssurvivingspouse,childrenorgrandchildrenmaybemarried,andalsopotentiallydivorced,duringtheirlifetimes.Theimpactofmarriageanddivorcelawthusisquiterelevantwhenstructuringgiftsorbequeststoaspouse,childrenandgrandchildren.

Manyclientsrightfullyworrythatgiftsmadenowtoaspouse,childrenorgrandchildrenmayeventuallyinuretotherelative’sspouse.Asageneralrule,propertyonespousereceivesbygiftorinheritanceshouldbeaccordedasomewhatdifferentstatusthanpropertyresultingfromearningsduringthemarriage,dependinguponhowlongthepropertywasheldduringthemarriage,whetherithasappreciatedinvalue,whethertheappreciationwastheresultofonespouse’seffortsandwhetherthereisotherpropertyavailablefordivision.Nevertheless,asdiscussedabove,alloranypartoftheestateofonespousemaybeawardedtotheotherspouseinadivorceandtherecanbenocertaintyastohowajudgewilltreatpropertyreceivedbygiftorinheritance.

Toreducetheriskthataspouse’s,child’sorgrandchild’sgiftorinheritancecouldbelostintheeventofdivorce,manyclientschosetoestablish“spendthrift”trustsfortheirspouse,childrenorgrandchildrenratherthanmakingoutrightgiftsorbequests.Childrenofspousesorspousesofchildrenandgrandchildrengenerallydonotacquireanyrightsinproperly-draftedspendthrifttrustscreatedforthebenefitofsuchperson.Inadivorceorremarriage,thecourtmaystillconsiderthevalueasonefactorwhenmakinganequitabledistributionofproperty.Nevertheless,thetrustpropertyshouldstillenjoygreaterprotectionthanitwouldifsuchpersonownedsuchpropertyoutright.

WITHTHERISEOFALZHEIMER’SANDOTHERCOGNITIVEMENTALHEALTHISSUES,HOWDOYOUPLANFORALONGPERIODOFINCAPACITY?

Everyestateplanshouldprovideforthemanagementofassetsintheeventofincapacity.Dependingonthejurisdiction,eachfamilymembershouldhaveadurablepowerofattorney,livingwillandhealthcareproxy(orAdvancedMedicalDirector)andaDesignationof


ConservatororGuardian.Insomestates,thesedocumentsmaybecombinedoreachaseparatedocument.

Adurablepowerofattorneyallowsthenamedpersontomanageassetsintheeventtheprincipalisnolongercapableofdoingso.ThisshouldbeeffectivetoavoidtheexpenseandcomplicationsinvolvedinhavingtopetitionaCourttoappointaConservatororGuardianforthatpurpose.Insomestates,aCourtwillhavecontinuingjurisdictionovertheConservatororGuardianwhichmayrequirecostlyannualaccountings.

ALivingWillandHealthCareProxyorAdvancedMedicalDirectiondocumentcontainstwomainparts.The“LivingWill”expresseswishesregardingtheremovalorwithholdingofextraordinarylifesupportmeasuresintheeventyouareinaterminalmedicalconditionorapermanentcoma.The“AppointmentofaHealthCareRepresentative”appointsanindividualtomakemedicaldecisionsonthepersona’sbehalfintheeventheorsheisincapacitatedandauthorizesthatindividualtocommunicatewishesrelatingtothewithdrawaloflifesupportundercircumstanceswhicharenotexpresslycoveredbytheLivingWill.Itisimportantthatthisdocumentcontainanauthorizationtogivetheagentaccesstoprotectedhealthinformationsoastomakeimportantdecisionsconcerningcare.

Finally,moststatesallowapersontoexecuteaseparatedocumentorincorporateintoadurablepowerofattorneyorlivingwilltheappointmentofaguardianorconservatorincaseoneisneeded.Ifthehospitalornursinghomehasconcernsaboutrelyingonadurablepowerofattorney,aguardianshiporconservatorshipproceedingmayberequired.Ifthepersonhasnamedaconservatororguardianintheirdocuments,itisextremelydifficultforaCourttonamesomeoneotherthanthenamedguardianorconservator.

WehavefoundthataRevocableTrustthathasbeenfundedpriortoincapacityasthebestvehicletomanageincapacity.Withoutthepracticalcomplicationsofadurablepowerofattorney,theTrusteesofaRevocableTrustcanmanagethefamilymember’sfundsforalongperiodofincapacity.

WHATSHOULDFAMILYMEMBERSDOTOPRESERVE,PROTECTANDPASSONVALUABLETANGIBLEPERSONALPROPERTY(I.E.,ARTWORK,CARS,

JEWELRY)?

Tangiblepersonalpropertyinalegalsensemeansanypropertythatismovable,thatyoucantouchandfeel,butisnotrealpropertylikeahouseorrealestateandisnotintangiblepropertysuchascashandmarketablesecurities.

Inordertopreserveandprotectfamilyheirlooms,itisimportanttotakeanInventoryfromtimetotimetodocumentwhateachpersonhasintheirpossession.TheInventorycanbeusefulinmakesuretheitemsarealladequatelyinsuredagainstfire,theftorothercasualtylosses.Appraisalshouldbeupdatedfromtimetotimeasthemarketforcollectiblesisvolatileanddoesnotcorrelatetothefinancialmarkets.Inaddition,documentsprovingtheauthenticityofitemsshouldbemaintainedinsafeplace.


Indevelopinganexitstrategyfortangibles,itisimportanttoaskifthenextgenerationwouldevenwantsuchitems.Whiletheseniorgenerationmayhavegreataffinityforanitem,thenextgenerationmayhavelittletonointerestinretainingtheitem.

Ifthenextgenerationisinterestedinreceivingtheproperty,agiftstrategydescribedinthispapercanbeusedtogiftthepropertytothechildren.Keepinmindthattherecipientswillmostlikelyhavethesameincometaxbasisinthepropertyasthedonor.

Ifitisdecidedtogiftitemstocharity,adonorshouldenterintoanagreementwiththecharitythatdictatesthetermofthedonation.

Ifthedonorwishestokeepacollectionofitemsinoneplace,thedonorshouldconsidersettingupacharityorfoundationtohousetheitems.Cautionwillberequiredtoavoidtheprohibitionsonself-dealingwithrespecttocharities.

Iftheownerwishtosellthepropertyandthepropertyisacollectible,keepinmindthatthereisaspecialcapitalgainsrateof28%forthesaleofcollectibles.

Finally,iftheownerwishestoretainthepropertyuntilhisorherdeath,theowner’sestateplanshouldaddressthedispositionoftangibles.Largevalueitemsoremotionallyvaluableitemsshouldbespecificallyaddressedintheestateplan.Manystatesnowallowapersontocreateaseparatememorandumwithrespecttothedispositionoftangiblepersonpropertythatislegalbinding.OtherstatesstillrequirethatadispositionmustbeinaWillorRevocableTrustinorderforthebequesttobelegallybinding.


DIGITALASSETS

WHATARE“DIGITALASSETS”?

Digitalassetsincludephotosandvideostomusic,whetherondevicesorinthecloud,aswellasemailaccounts,socialnetworkingaccounts,internetdomainnames,blogs,onlinegamingitems,andclientlistsandotherelectronicfiles.Accordingtoa2011surveyfromMcAfee,Intel’ssecurity-technologyunit,Americanconsumersvaluedtheirdigitalassets,onaverage,atalmost$55,000.

WHATARETHECHALLENGESFACINGDIGITALASSETSTHATAREDIFFERENTTHANTRADITIONALASSETS?

Therearemillionsofinternet-basedaccountsthatbelongtodecedents.Someinternetserviceproviders(ISPs)haveexplicitpoliciesonwhatwillhappenwhenanindividualdies,whereasothersdonot.EvenwhereISPsincludetheirpoliciesinthetermsofserviceagreements,mostconsumersonlyclickthroughtheseagreementswithoutathought.Historically,fewlawsexistontherightsoffiduciariesoverdigitalassets.Federallaw,enactedmorethanthreedecadesago,imposescriminalpenaltiesandpossiblycivilliabilityfortheunauthorizedaccessofcomputerhardware,devicesandstoreddata.

UPONANINDIVIDUAL’SDEATH,ISAFIDUCIARY(E.G.,EXECUTOR,PERSONALREPRESENTATIVE,TRUSTEE,AGENT,ATTORNEY-IN-FACT,ORGUARDIAN)

PERMITTEDTOACCESSTHEDECEDENT’SDIGITALASSETS?

InJuly2015,theNationalConferenceofCommissionersonUniformStateLawsestablishedamodellawtohelpstatesenactlegislation.Althoughsomestateshaveenactedtheirownlegislation,otherstatesareenactingthisuniformlegislationthatallowsafiduciaryto“stepintotheshoes”ofthedecedent.Whatafiduciarymayaccessdependsuponthetypeofinformationsoughtandwhatthedecedentauthorizedduringlife.Pursuanttotheuniformlegislation,afiduciarymayaccessacatalogof“non-content”information(i.e.,theoutsideoftheenvelope)withouttheexpresspriorconsentofthedecedent.However,tograntaccess“content”informationupondeath(e.g.,theletterinsidetheenvelope),theuser/decedenthasoptions:

• First,theusermayusetheISP’sonlinetooltoprovidedirectiontothefiduciary,whichwillsupersedeawill,trustorpowerofattorney.

• Second,intheabsenceoftheonlinetool,theusermayprovideawrittendirectioninawill,trustorpowerofattorney.

• Finally,ifthereisnowrittendirection,theISP’stermsofserviceagreementcontrols.


WHATAREEXAMPLESOF“OUTSIDETHEENVELOPE”NON-CONTENTINFORMATION?

• Logsofemailcommunications,includingemailaddressesofsendersandrecipientsanddate/timesentorreceived.

• Catalogsofphotoormusictitles.

WHATAREEXAMPLESOFISPSTHATPROVIDEANONLINETOOLFORPOST-DEATHACCESS?

• Facebook’sLegacyContact.Facebookpermitsthelegacycontacttowriteapinnedpostforthedecedent’sprofile,respondtonewfriendrequests,updatetheprofilepicture,anddownloadanarchivedcopyofwhatthedecedentpostedonFacebook.Toaccessmore,suchasmessages,thedecedentwouldneedtohavespecifiedinawillortrust.

• Google’sInactiveAccountManager.GooglepermitsausertonameanindividualtohaveaccesstohisorherGoogleaccountinformation,withtheoptiontoclosetheaccountand/orobtaindatafromtheaccount(includingGmail,GooglePhotos,YouTube,Google+,GoogleDrive,etc.)withacourtorder.

WHATSTEPSSHOULDAFIDUCIARYTAKEWITHRESPECTTODIGITALASSETS?

• Identifydigitalassets,accountsandinformation.• Locatethem(e.g.,computersandotherdevices,backupandflashdrives,andonline

storageandaccounts).• Accessthemaspermittedbylaw.• Valuethemforinventory,taxanddistributionpurposes.• Protectandpreservethem.Forexample,iftheownershipofadomainnameisnot

maintainedandexpires,thedomainissuspendedfortwomonths,thenputupforauction.

• Retainknowledgeable,technicalhelp.• Transferthemtotheintendedbeneficiaries.


AdministrationofRevocableTrusts

WHATISAREVOCABLETRUST?

ARevocableTrustisadocumentcreatedduringanindividual’slifetimetomanagehisorherassetsanddistributetheremainingassetsaftertheindividual’sdeath.The“Grantor”or“Settlor”istheindividualwhocreatedtheTrustandthe“Trustee”isthepersonresponsibleforadministeringtheTrust.TheGrantorcanserveasTrustee,ormayappointanotherperson,bankortrustcompanytoserveastheTrustee.Thetrustis“revocable”sincetheGrantormayamendorrevokethetrustduringhisorherlifetime.

TheTrusteemanagestheassetsofthetrustbymakinginvestmentdecisions,maintainingbrokerageandotherfinancialaccounts,loaningorborrowingfunds,retaining,acquiring,orsellingrealorpersonalproperty,hiringattorneys,accountants,investmentcounselorotheragents,andinanyothermannerasprovidedunderthetrustagreementorstatelaw.Generally,theTrusteedoesnothavetokeepallofthebeneficiariesinformedofthetrust,onlytheGrantor(iftheGrantorisnottheTrusteeorco-Trustee).

HOWISTHEREVOCABLETRUSTFUNDED?

TofundtheRevocableTrust,assetsmustbeformallytransferredtothetrust.FailuretoformallytransfertheassetsintotheRevocableTrustcouldresultintheassetsbeingsubjecttoprobate.Toaccomplishthis,theGrantormusttransfertheassetstothelegalnameoftheRevocableTrust,whichisgenerallyreferredtoasfollows:

“John.M.Smith,TrusteeoftheJohnM.SmithRevocableTrustdatedNovember1,2016”

Theexactmethodofthetransferwillvarydependingonthenatureoftheassets.AccountswithfinancialinstitutionswillrequirenewdocumentstobesignedbytheGrantorandtheTrusteetoopenanewaccountorre-titleanaccountinthenameoftheRevocableTrust.Transfersofrealestatewillrequirethepreparationofanewdeed,whichwillneedtoberecorded,but,itisimportanttoconsidertheimpactsuchatransfermayhaveonhomeowners’insurance,titleinsurance,andanymortgageontheproperty.OwnershipinterestsincloselyheldbusinessinterestsmustbeformallyassignedtotheRevocableTrust,takingcaretofollowtherequirementsfoundwithinanoperatingagreementorsimilardocument.

WHOPAYSTHEINCOMETAXFORTHEREVOCABLETRUST?

DuringtheGrantor’slifetime,theRevocableTrustisnotaseparatetaxpayer,andtheGrantormustincludeallitemsofincomeearnedbythetrustandallcorrespondingdeductionsonhisorherpersonalincometaxreturn.WhentheGrantorisalsoaTrusteeorco-TrusteeoftheRevocableTrust,theGrantor’ssocialsecuritynumberservesasthetaxpayeridentification


numberofthetrust.WhentheGrantorisnotaTrustee,theRevocableTrustmustapplyforaseparatetaxpayeridentificationnumberandthetrustwillberequiredtofileaseparateincometaxreturn(unlessthereisnoincomeforthattaxyear),althoughtheGrantorisstillresponsibleforthepaymentofincometaxesduringhisorherlifetime.

WHATHAPPENSUPONTHEDEATHOFTHEGRANTOR?

UponthedeathoftheGrantor,thetrustbecomesirrevocable.IftheGrantorwastheTrustee,thepersonappointedtobethesuccessorTrusteemustformallyaccepttheposition.TheTrusteewillgenerallyworkcloselywiththeExecutororPersonalRepresentativeoftheGrantor’sestateduringtheestateadministrationprocess.TheTrusteeisresponsibleforpayingclaimsandtaxesoftheGrantor’sestate,andthendistributingtheassetstothebeneficiariesasdescribedinthetrustagreement.TheTrusteewillgenerallyhaveadutytoinformanddisclosecertaininformationregardingthetrusttoallofthequalifiedbeneficiaries,exceptasotherwiseprovidedforinthetrustagreementorstatelaw.


TRUSTEESELECTION

ChoosingaTrusteecanbeachallengingdecision,especiallysinceGrantorscommonlywantafamilymembertobetheTrustee.ForaRevocableTrust,theGrantorwilltypicallyserveasaTrusteeduringhisorherlifetime,eitheraloneortogetherwiththeGrantor’sspouse,anotherfamilymember,oranIndependentTrustee.AftertheGrantor’sdeath,theGrantor’ssurvivingspouse,ifany,oroneormorechildrenoftheGrantorareacommonappointment.ItisimportantthatthatthesuccessorTrusteenamedtoactupontheGrantor’sdeathisabletoworkwiththeExecutoroftheGrantor’sestate,asthosetwopersonswillhavetoworkcloselytogetherduringtheestateadministration.Afterthedivisionofthetrustassetsforthebeneficiaries,ifthereareongoingtrusts,manymorefactorsenterintotheequation.ForanIrrevocableInsuranceTrust,theGrantorcannotserveasTrustee,andanIndependentTrusteemaybethebestoption.

WHATISTHEPURPOSEOFTHETRUST?

ThepurposeofatrustcanhelptonarrowdownwhoshouldserveasTrustee.Ifthetrustisaspendthrifttrust,thebeneficiaryshouldnotbeaTrustee,butaskingafamilymemberofthebeneficiarytobeaTrustee,especiallyasibling,maycauseadditionalproblems.Ifthetrustisprimarilyforassetprotection,thebeneficiarymayserveasTrustee,butinsomeinstances,formaximumprotection,itispreferableforanIndependentpersonorCorporateTrusteetoserveasaTrusteeorco-Trusteewiththebeneficiary.

WHATISTHENATUREANDVALUEOFTHEASSETS?

ThenatureandvalueoftheassetsalsohasanimpactontheselectionofaTrustee.Ifatrustconsistsofaresidenceandcash,thebeneficiarymaybeabletomanagetheassetswithoutanyassistance.Ifthetrustconsistsofacloselyheldbusiness,oneormorefamilymemberswhohavebeeninvolvedinrunningthebusinessformultipleyearsmaybethebestchoicetoserveasTrustee,eitheraloneortogetherwiththebeneficiary.Ifthetrustconsistsofmanycomplicatedinvestments,realpropertyheldinlimitedliabilitycompanies,andrequiressophisticatedtaxdecisions,thebeneficiarymayprefertonotbeaTrusteeatall,andaprofessionalTrustee,suchasabank,trustcompany,orattorney,isthebestchoicetoserveasTrustee.

WHATARETHEFAMILYDYNAMICS?

ChoosingafamilymemberorafriendtoserveasTrusteemayputadditionalstrainontherelationshipbetweenthebeneficiaryandtheTrustee.ThebeneficiaryandtheTrusteewillhavetoworktogetherandbeabletogetalongwitheachother,soifthereareanyquestionsabouttheabilitytodothat,itmaybebettertoappointanunrelatedpersonastheTrustee.


WHATSKILLSSHOULDBECONSIDEREDINSELECTINGATRUSTEE?

ATrusteewillneedanattentiontodetail,timeandorganizationalskills,interpersonalskillstocommunicatewellwiththebeneficiaries,honestyandintegritytosafeguardthetrustassets,expertisetoinvestandmanagethetrustassets,andtheknowledgeonhowtohandletaxissues,or,theTrusteewillneedtobeabletorecognizetheneedfortheseskillsandseekouthelpfromprofessionals.TheTrusteedoesnothavetobeanexpertineveryarea,buttheTrusteeshouldhaveasufficientenoughgraspoftheissuestorecognizewhenhelpisneededandtobeabletohiretheappropriateprofessionals.


MANAGEMENTOFFAMILYLIMITEDLIABILITYCOMPANIESANDLIMITEDPARTNERSHIPS&GIFTINGFORHIGHNETWORTH

INDIVIDUALS&BUSINESSSUCCESSIONPLANNING

WHATISTHEPRIMARY“TRAPFORTHEUNWARY”RELATEDTOTHEMANAGEMENTOFAFAMILYLIMITEDLIABILITYCOMPANYORLIMITED

PARTNERSHIP?

Familylimitedliabilitycompaniesandlimitedpartnerships(referredtohereinas“familycompanies”)areordinarilyformedinordertotakeadvantageofanumberoftaxandassetprotectionopportunities.However,thoseopportunitiesarejeopardizedifthefamilycompanyfailstoadheretoanumberoflegalformalities.Insum,theseformalitiesrevolvearoundasingleconcept,whichistheimportanceofrespectingthefamilycompanyasanoperatingbusiness.Onceafamilycompanyisinplace,itiscriticallyimportanttoconveytothefamilymembersthatthefailuretorespecttheformalitiesassociatedwiththeoperationsofthecompanyasabusinessimperiltheveryobjectivesthatledtothefamilycompany’sformation.

Familymembersmustunderstandattheoutsetthatthefamilycompanycannotoperateasa“piggybank”formembersofthefamily.Assetswhichwillbeneededinordertosatisfyfamilyexpensesunrelatedtothebusinessofthefamilycompanyshouldnotbecontributedtothecompany.Oncethecompanyisinplace,theownersmustcontinuetoadheretothisprincipalandavoidthetemptationtocomminglepersonalfundswiththefamilycompanyoraddassetsunrelatedtothebusinesstothefamilycompany.Mostimportantly,familycompanyfundsshouldonlybeusedtopaycompanyexpenses;companyfundsmustnotbeusedtopaypersonalexpensesoffamilymembers,orbetiedtoapatternofdistributionswhichcorrelateswiththeexpensesofindividualfamilymembers.Distributionstoownersshouldbemadefollowingapatternconsistentwithotherfor-profitbusinesses.

Thefamilybusinessmustbeidentifiedasabusinesswheninteractingwiththepublic.Accountsforthebusinessmustusethetaxidentificationnumberandnameofthefamilycompany,andnotthenameorSocialSecuritynumberofanindividualfamilymember.Correspondencerelatedtothebusinessofthefamilycompanyshouldappearoncompanyletterhead,toclearlydistinguishthebusinessofthecompanyfromthebusinessofindividualfamilymembers.

Afamilycompanyshouldkeepscrupulousrecordsofitsactivities.Inadditiontoformationdocuments,thecompanyshouldretaincopiesofbankstatementsandregularexpenseandincomeactivity,includingreceipts.Experiencedprofessionaladvisorsshouldbeinplacetoensurethatthisrecordkeepingfunctionissatisfied.Anexperiencedaccountantshouldpreparetaxreturns,issueScheduleK-1stotheownersonatimelybasis,trackcapitalaccountchangesandmaintainbooksandrecords.Anattorneyshouldsupervisetheretitlingofassetsinthenameofthefamilycompany,reviewthecorporaterecordstoconfirmthattheyareingoodorder,attendtoannualstatefilingsandprepareannualwrittenconsentstomemorializedecisionsmadeinperiodicmeetings.


WHATARETHEINVESTMENTCOMPANYRULESANDHOWCANAFAMILYCOMPANYAVOIDTHEIRAPPLICATION?

Priortotheformationofafamilycompanywhichwillbefundedwith80%ormoreofassetscomposedofcash,stocksorsecurities,itisimportanttoreviewwhetherornotthatfundingwilltriggerincomerecognitionundertheinvestmentcompanyrules.Theinvestmentcompanyrulescompeltherecognitionofunrealizedappreciationifthepartnersofthefamilycompanyhavediversifiedtheirinvestmentsinconnectionwiththeformationofthefamilycompany.Therearetwosafeharborsthatpartnerscantakeadvantageofinordertoavoidtheapplicationoftheinvestmentcompanyrules.First,partnerswhoarecontributingidenticalportfoliostothefamilycompanyarenotengagingindiversificationandsodonottriggertheinvestmentcompanyrules.Second,anadequatelydiversifiedportfolioofstocksandsecuritieswillnottriggertheapplicationoftheinvestmentcompanyrules.Afamilycompany’sportfolioisconsideredtobeadequatelydiversifiedifitsatisfiesthe25%testandthe50%test,meaningthatnomorethan25%ofitsvalueisinvestedinoneissuerandnomorethan50%ofitsvalueisinvestedinfiveorfewerissuers.Theproposedinvestmentportfolioforafamilycompanyshouldbereviewedinadvancebythefamilyattorneyand/oraccountantinordertoensurethattheinvestmentcompanyruleswillnotforceunexpectedincometaxbillsforanyofthepartners.

WHATISDEFECTIVEABOUTANINTENTIONALLYDEFECTIVEGRANTORTRUST?

Anintentionallydefectivegrantortrust,frequentlyreferredtoassimplya“grantortrust,”isatrustwhichrequiresthegrantortoreporttheincomegeneratedbythetrustassetsonthegrantor’sindividualincometaxreturn.Manygiftingvehiclesareintentionallydesignedasgrantortrustssothatthegrantorcancontinuetobeartheincometaxburdenassociatedwithassetsthathavebeenremovedfromthegrantor’sestatethroughacompletedgift.Inshort,thegiftbythegrantoriscompleteforgifttaxpurposesbutnotforincometaxpurposes.Thisallowsthetrustpropertytogrowinsideofthegrantortrustwithoutthedragofanincometaxburden.Somegrantorsresistthesuggestionthattheycontinuetopayincometaxesforfundsthathavebeengiftedtoatrustoffoftheirbalancesheettowhichtheynolongerhaveaccess.However,manygrantorsrecognizethattheannualincometaxpaymentsmadeinconnectionwithtrustincome“feel”likeanadditionalgifttothetrusteachyear,eventhoughtheIRSdoesnottreatthosepaymentsasgifts.Thus,grantortruststatusisapowerfultoolthatafamilycanusetoallowpreviouslygiftedtrustassetstogrowwithoutmakingadditionalgifts.Therearemanyadministrative“defects”thatcanbeusedtointentionallytriggergrantortruststatus,butamongthemostpopulararetheabilityofthegrantorto“swap”assetswiththetrust,theabilityofthetrusttomakepremiumpaymentsforalifeinsurancepolicyonthelifeofthegrantorandtheappointmentofaTrustProtectorwhohastherighttoaddbeneficiariestothetrust.

WHATISAFAMILYBANK?

Mostwealthyindividualswhoarereceivingtaxadvicearefullyutilizingtheir$15,000annualexclusionsfromthegifttaxinordertomakegiftstotheirchildrenandanygrandchildren.For


thefamilymemberwhowouldliketoprovideforsiblings,niecesornephewsormoreremotefamilymembers,alogicalnextstepistousetheannualexclusionsavailablewithrespecttothatgroupofindividualsinordertoestablishanEstateReductionTrustfortheirbenefit,sometimesreferredtoasa“familybank.”Thepurposeofthefamilybankistoremoveassetsfromtheestateofthedonorbyplacingtheminatrustforthebenefitofspecifiedfamilymembers.Thattrust,whichisordinarilystructuredasanintentionallydefectivegrantortrustforincometaxpurposes,isfrequentlyusedtoprovidefortheneedsofnon-linealfamilymembers,includingweddings,educationalexpenses,downpaymentsforhomes,etc.TheTrusteescanhavecompletediscretionoverthecircumstancesunderwhichdistributionsfromthefamilybankwillbemade,and,itisimportanttonote,thistechniqueisnotlimitedtobenefitingonlyfamilymembers.Somewealthyfamilieshavemorethanonefamilybank,includingseparatefamilybanksfordifferentbranchesoftheirfamilyand/orafamilybankfornon-relativeswhoareclosefriendsofthefamily.

ARETHEREANYGIFTINGOPPORTUNITIESTHATAREUNDEREXPLOITEDBYWEALTHYFAMILIES?

Manywealthyfamiliesandtheiradvisorsaresofocusedontheuseoftheir$15,000annualexclusionsfromthegifttaxthattheyoverlooktheexclusionforpaymentsofmedicalandeducationalexpenses.Thisexclusionprovidesthatpaymentsfortuitionexpenses(i.e.,not“roomandboard”)andmedicalexpensesmadedirectlytotheschoolormedicalproviderdonotcountastaxablegifts.Inotherwords,adonorcangiveaparticulardonee$15,000inayear,andalsopayallofthedonee’stuitionexpensesfortheyear(forexample,thisfigurewouldbeapproximately$50,000atsomeprivatecolleges)withoutmakingataxablegift.Thisabilitytopaytuitions,whichisnotlimitedtofamilymembers,canbecomeaverypowerfultoolenablingdonorstopaythetuitionsofmultiplegrandchildren,niecesandnephews.Ifafamilymemberiscomfortablysituatedinaschool,adonorcanevenfurtherenhancethistechniquebypre-payingtuitionsfortherestofthestudent’scareerattheschool.Inonenotablecase,agrandmotherpre-paidthetuitionsforanumberofgrandchildreninprivateschools,removinghundredsofthousandsofdollarsfromherestate.

WHATFACTORSSHOULDTRIGGERADISCUSSIONABOUTADYNASTYTRUST?

AwealthyfamilywillordinarilybegintoconsideraDynastyTrustwhentheyhavereachedthepointatwhichtheybelievethattheirassetsarelikelytolastbeyondthelivesoftheirchildren.ThedynasticaspectofaDynastyTrustordinarilytakesadvantageoftwoconcepts:(i)thestatutesofoneofthemorethantwodozenstates(amongthemorepopularjurisdictionsareAlaska,Delaware,Florida,NevadaandSouthDakota)thatallowtruststolastfor360yearsormore,and(ii)theapplicationofexemptionfromthegeneration-skippingtransfertaxtopropertyheldintheDynastyTrust.ByappointingaTrusteeinoneofthefavorablejurisdictionsinorderfortheDynastyTrusttohaveanexusinthatjurisdiction,andthenallocatingexemptionfromthegeneration-skippingtransfertaxtotrustproperty,trustassetscanbemadeavailabletomultiplegenerationswithoutbeingexposedtotheestatetaxorgeneration-skippingtransfertax.


ADynastyTrustcanbefundedatthedonor’sdeathbythedonor’sWillandRevocableTrust.However,ifthedonor’scircumstancesallow,apowerfulplanningopportunityistofundtheDynastyTrustduringthedonor’slife,therebyallowingthegiftedpropertytoappreciateinvalueoutsideofthedonor’staxableestate.Moreover,theDynastyTrustcanbestructuredasa“grantortrust”forincometaxpurposes,sothatthedonorcancontinuetobeartheincometaxburdenfortheDynastyTrustpropertyduringthedonor’slife.Finally,fundingtheDynastyTrustduringthedonor’slifeenablesthedonortoleveragetheuseofthedonor’sexemptionfromthegeneration-skippingtransfertax.ThedonorcanfundtheDynastyTrustwithassetsthathaveunusualpotentialtoappreciateorhavesubjectivevalue(forexample,aninterestinrealestate,artorabusiness)thataformalwrittenappraisalmightnotcapture.Infact,thebestcandidateforaDynastyTrustisthedonorwhonotonlycanaffordtogivevaluableassetstoaDynastyTrust,butonewhoisholdinganassetwithsubstantialpotentialtoappreciate.

WHYWOULDADONOREVERELECTTOPAYGIFTTAXES?

Theaveragedonorhassuchanaversiontovoluntarilypayingtaxesofanykindthatitisfrequentlymuchmoreeffectivetoillustratethetax-efficiencyofintentionallypayinggifttaxesusingsimplenumbersbeforedescribingtheunderlyingconcept.Assumethefollowingfactpattern:Aclientwith$7millionofcash,whohasusedupallofherlifetimeexemptionfromtheFederalgifttax,decidesthatshewouldliketomakeagiftof$5milliontoherchildrenduringherlife.Shemakesthegift,resultinginagifttaxpaymentof$2million.Supposethesameclientinsteaddecidedtoretainallofthesame$7millionuntilherdeath,providinginherWillthatitwillpasstoherchildren.Theinclusionofthe$7millioninherestatewouldgenerateanestatetaxof$2.8millionsothatthechildrenwouldreceive$4.2million.Thismeansthatthechildrenwouldreceive$800,000lessasaresultoftheclient’sdecisiontoretainthesefundsinherestateratherthangivingthemtothechildrenduringherlife.

The$800,000swing/lostbenefitinthisexampleresultsfromthedifferentmannerinwhichestateandgifttaxesarecalculated.Estatetaxcalculationsaretaxinclusive,meaningthattheestateisalsopayingtaxesonthedollarsthatareusedtopaythetax.Gifttaxcalculationsaretaxexclusive,meaningthatthedonorisnotpayingtaxonthedollarsthatareusedtopaythetax.TheIRSisfullyawareofthisplanningopportunity,whichiswhytaxpaymentsmadewithin3yearsofdeathareincludedinadecedent’sestate.However,forthedonorwhoisinclinedtomakeagiftandlikelytosurvivethatgiftby3years,electingtopaygifttaxescanresultinameaningfulbenefitforthedonor’sbeneficiaries.

ISTHEREASIMPLEWAYTOPROVIDEABENEFITFORCHILDRENWITHOUTMAKINGATAXABLEGIFT?

Someindividualswishtoprovideabenefittotheirchildrenwithoutmakingataxablegift,particularlyiftheyhaveusedupalloftheirlifetimeexemptionfromtheFederalgifttax.Forwealthyfamilies,thiswishfrequentlyresultsfromadesiretoseechildrenenjoythefruitsoftheirparents’financialsuccessduringthelivesoftheparents.Loanstothechildrenmemorializedwithpromissorynotesareanattractiveoptioninthissituation,particularlyina


lowinterestrateenvironment.Aloanenablesaparenttomoveasubstantialamounttoachild,andmayrequirethatthechildonlypayinterestontheprincipalbalanceduringthetermoftheloanwithaballoonpaymentofprincipalattheendoftheterm.Itisimportantforfamiliestoadheretothetermsofthepromissorynoteinordertosupporttheexpectationthattheloanwillberepaid.Thismeansthatthechildwillhaveunlimitedaccesstoandcontrolovertheloanedamount,sothatitisfrequentlyperceivedasan“advance”onaninheritance.Thepromissorynotecanberefinancediftheparentsurvivesthetermoftheloan,andtheloanmaybedistributedtothechildasaportionofthechild’sinheritanceatthedeathoftheparent.Fromataxefficiencystandpoint,theloanoperatesasapartialfreezeofthevalueoftheparent’sestate,becausetheloanedfundsarelikelytoappreciateatahigherratethantheinterestrateoftheloan,buttherealvalueofthissimpletechniqueistheparent’senjoymentinseeingthechildren’suseoftheloanedfunds.

WHATISTHEBIGGESTOBSTACLETOBUSINESSSUCCESSIONPLANNING?

Mostsuccessfulbusinessownersareverycapableatmanagingvariablesandmakingdecisionstorespondtothosevariables.Nevertheless,manyownersstumbleovertheapplicationofthatskill-settobusinesssuccessionplanning,presumablybecauseitforcesbusinessownerstofocusnotonlyonthefuturedirectionofthebusiness,butalsotheirownmortalityandfamilyissuesrelatedtothebusiness.Inordertostructureaneffectivebusinesssuccessionplan,experienceadvisorsneedtoknowwhowillbeinchargeofthebusinessinthefuture,economicexpectationsofbothcurrentandfuturebusinessleadersandtheformthatanyfuturefamilyinvolvementwilltake.Thesearenoteasyissuestoaddress,andmanybusinessownersstrugglewithoneormoreofthem,whichresultsinplacingbusinesssuccessionplanningonthebackburner.Itisimportantforabusinessownertorecognizethateffortsdirectedataddressingthesedifficultquestionswithateamofexperiencedprofessionaladvisorsarerewardedthroughboththepreservationoftheowner’slegacyinthebusinessandtheattendantfinancialwell-beingoftheowner’sfamily.

WHATARETHECALLINGCARDSFORUSINGAPRIVATEANNUITYTOSELLANINTERESTINABUSINESS?

Privateannuitiesarelesscommonthaninstallmentsalestointentionallydefectivegrantortrustsand,notcoincidentally,fliponeofthemostcommonassumptionsassociatedwithaninstallmentsaleonitshead.Likeaninstallmentsale,asaleinwhichaprivateannuityisusedtopurchaseabusinessmovesallofthefutureappreciationofthebusinessfromthebalancesheetofthesellertothebuyer.Unlikeastandardinstallmentsale,aprivateannuitydoesnotoperateundertheassumptionthatthesellerdoesnothaveshort-termliquidityneeds.Infact,thebestcandidateforaninstallmentsaleisasellerwhoislookingtousetheliquidityresultingfromannuitypaymentsfromthebuyertofundherretirement,ormeetotherknownliquidityneeds.Itisimportanttonotethatthestreamofannuitypaymentstothesellerisbasedonacombinationofthefairmarketvalueofthecompanyandtheseller’slifeexpectancy(thesellercannotbeterminallyill).Therefore,therisktothebuyerofabusinesswhousesaprivateannuitytocompletethepurchaseisthatthesellerwillfaroutliveherlifeexpectancy,resulting


insignificantadditionalannuitypaymentsbythebuyer.Therefore,thehealthandfamilyhistoryofthesellerisanimportantfactorforthebuyertoweighpriortothesale.

WHATUNIQUECONSIDERATIONSAPPLYTOATRUSTTHATWILLHOLDANINTERESTINAFAMILYCOMPANY?

TheprimaryconcernofmostbusinessownersgiftinganinterestinafamilycompanyintoatrustistheidentityoftheTrusteewhowillexercisevotingcontroloverthesharesownedbythetrust.Obviously,theownercanappointtheTrusteewhowillexercisecontroloverallofthetrustactivity,butitissometimesdifficulttofindoneindividualwhoistherightpersontoexercisevotingpowerwithrespecttothefamilycompany,manageothertrustinvestments,communicatewithfamilymembersconcerningdistributiondecisionsandensurethatthetrustfilesincometaxreturnsandkeepsclearrecords.OneoptionthatappealstomanybusinessownersistodividetheTrusteeroleintothreedistinctcategoriestoaddressthedifferentskill-setsrequiredtohandlethesedifferentresponsibilities.AnInvestmentTrusteecanberesponsibleformanagingthetrustassets,whichwouldincludeexercisingvotingpowerassociatedwiththefamilycompany.ADistributionTrusteewilltrackthecircumstancesofthetrustbeneficiariesandexercisediscretionconcerningdistributions.Finally,anAdministrativeTrusteewillretaintrustrecords,ensurethatthetrustfilesincometaxreturnsandattendtootherministerialfunctions.

ThisdivisionoflaborbetweendifferentTrusteerolescorrespondswithanotherobjectiveofmanybusinessownerswhotransferaninterestinafamilycompanyintoatrust:assetprotectionplanning.ThecompletediscretionoftheTrusteeofatrustoverdistributionstotrustbeneficiariesmakesatruststructuredinthatmanneranunattractivetargetforaclaimbyadivorcingspouseorothercreditor.Thislayerofprotectioncanbefurtherenhancedbyestablishingthetrustinajurisdictionwhichhasafavorablestatutoryframeworkforassetprotectionplanning.AppointinganAdministrativeTrusteebasedinajurisdictionwithadesirableassetprotectionregimeisacommonmannerinwhichtogainaccesstoadditionalprotectionfromclaimsagainstfamilymembers.

WHATSTEPSWILLAFAMILYBUSINESSORDINARILYTAKEINORDERTOINSULATEITSELFFROMTHEPROSPECTOFNON-FAMILYOWNERS?

Mostownersoffamilycompaniesfearthepossibilityofanon-familymemberbecominganownerofaninterestinthefamilycompany.Evenifthatownerismerelyanassigneewithnovotingpower,shewillhavetherighttoinspectcompanyrecords.Toprotectagainstthisprospect,theagreementthatgovernsafamilycompanyshouldgivetheexistingownersarightoffirstrefusalwhichistriggeredintheeventofaproposedtransfertoanindividualwhoisnotamemberofthefamily.Intheeventofaproposedtransfer,thisprovisionwouldpermittheexistingownerstopurchasetheinterestatissueundersimilartermsorforitsfairmarketvalue.Theagreementwouldordinarilyprovidethattherightoffirstrefusal,ifexercised,wouldresultinasaletotheexistingownersunderfavorabletermstotheotherowners.Forexample,manyoftheseprovisionsprovidethatthesalewilloccurinconjunctionwithaballoonpromissory


noteusinga15yeartermwiththelowestpermissibleinterestrate.Thiskindofaprovisionservesthedualpurposeofdiscouragingsalesofinterestsinthefamilycompanyand,shouldsuchapotentialsalearise,makingthepurchaseundertherightoffirstrefusalapalatablefinancialoptionfortheexistingowners.

WHATSHOULDABUSINESSOWNERCONSIDERINGAGIFTOFANINTERESTINAFAMILYCOMPANYTOCHARITYKEEPINMIND?

Transferringaninterestinafamilycompanytoapubliccharityisanattractivepropositionbecausethebusinessownerreceivesadeductionforthefairmarketvalueofthegiftedinterestandavoidspayingcapitalgains,sothatthecharityreceivesalargercontributionthanitmighthavehadthebusinessownerfirstsoldtheinterestinthebusinessandcontributedtheproceedsremainingafterpayingcapitalgainstaxtocharity.However,itisimportanttonotethatnotallcharitiesaretreatedequally.Anownerisentitledtoadeductionof30%ofheradjustedgrossincome(“AGI”)foragiftofabusinessinteresttoapubliccharityordonoradvisedfund.Thesameownerwouldonlybeentitledtoadeductionof20%ofherAGIforagiftofabusinessinteresttoaprivatefoundation,andtheavailabilityofthatdeductionislimitedtothevalueoftheowner’scostbasisinthegiftedfamilycompany,whichisfrequentlyverylow.Moreover,privatefoundationsaresubjecttorestrictionsconcerningself-dealingandexcessbusinessholdings,andthoserestrictionsareenforcedbyexposuretopunitiveexcisetaxes.Therefore,thebusinessownerwhoisconsideringagiftofaninterestinafamilybusinesstocharityneedstobefullyfamiliarwiththeserulesandshouldconsultwithhertaxadvisorinadvance.


RETIREMENTPLANSANDEMPLOYEEBENEFITS

HOWDORETIREMENTPLANSANDEMPLOYEEBENEFITSFITINTOANESTATEPLAN?

Themostimportantaspectofretirementplansandemployeebenefitsfromanestateplanningperspectiveisensuringthattheyareaccountedforandincludedintheestateplan.Manysuchplansandbenefitspasspursuanttobeneficiarydesignations.Eachbeneficiarydesignationshouldbecarefullycompletedtocoordinatetheassetspassingpursuanttosuchdesignationwiththeremainderoftheclient’sestateplan.Doingsowillhelptoavoidhavingassetspasstounintendedbeneficiaries,incurringunexpectedorunintendedestatetaxes,orboth.Inaddition,manyplansmay,pursuanttofederallaw,requiretheplanorplanbenefittopasstoadecedent’ssurvivingspouseabsentawaiver.Advisorsshouldbesuretoreviewthetermsofallapplicableplanstodeterminewhatrights,optionsandrestrictionsarepresentwithrespecttoeachparticularbenefit.Torevieweachretirementplanoremployeebenefitwouldbebeyondthescopeofthispaper.Insteadwewillfocusonthemorecommonplansandbenefits.

BENEFICIARYDESIGNATIONSFORRETIREMENTPLANSCANIMPACTNOTONLYTHERECIPIENTOFTHEPLANBENEFITBUTALSOTHETAXCONSEQUENCESASSOCIATEDWITHTHEBENEFIT.WHATARETHE

BENEFICIARYOPTIONSANDTAXCONSEQUENCES?

In general.

Beforediggingintoodeepintothebeneficiaryrules,someintroductionandoverviewregardingretirementplansisappropriate.Therearequalifiedretirementplans,acommonexampleofwhichwouldbea401(k),andnonqualifiedretirementplans,suchasindividualretirementaccounts(IRAs).Althoughtherearemanysimilaritiesbetweenthetwo,therearesomeimportantdifferences.Thatsaid,mostofthetaxrulesapplytoboth.Onedifferenceisthatqualifiedretirementplanshaverequirementsforincludingasurvivingspouseasthebeneficiaryoftheplanbenefitsuponthedeathoftheparticipant.

Income tax deferral.

Earningsinsidea401(k)orIRAaccountaretaxdeferred,meaningnocurrentincometaxispayable.Ingeneral,distributionsfroma401(k)orIRAaresubjecttoincometaxatordinaryincometaxrates,totheextentconsistingofdeductiblecontributionsandearnings.(Contributionsthatarenondeductiblearedistributedfreeofincometax.)Extendingthedeferralofthepaymentofincometaxforaslongaspossible,ifconsistentwiththeparticipant’sotherplanninggoals,istypicallyaprimaryconsiderationwhendeterminingthebeneficiariestobenamed.Anaccountwithabeneficiarydesignationthatisdesignedtotakeadvantageofextendeddeferralofincometaxisoftenreferredtoasa“stretch”IRAor401(k).


Lifetime distributions.

Thereexistsavoluminoussetofregulationswhichgovernrequiredminimumdistributionsfromretirementplansduringtheplanparticipant’slifetime.Wewillnotreviewthemhere.However,thefailureofaparticipanttowithdrawhisorherfullminimumrequireddistributionduringataxableyearresultsinafiftypercent(50%)penaltytaxontheundistributedportion.Accordingly,attentiontocomplianceisimportant.

Lifetime contributions to charity.

Anindividualage70½oroldercanmakedirectcharitablegiftsfromanIRA,includingrequiredminimumdistributions,ofupto$100,000topubliccharities(otherthandonoradvisedfundsandsupportingorganizations)andnothavetoreporttheIRAdistributionsastaxableincomeonhisorherfederalincometaxreturn.Mostprivatefoundationsareineligibledonees,butprivate-operatingandpass-through(conduit)foundationsareeligibledonees.ThereisnocharitabledeductionfortheIRAdistributions.However,notpayingtaxonotherwisetaxableincomeistheequivalentofacharitablededuction.Tax-freedistributionsareforoutright(direct)giftsonly—notlife-incomegifts.

Onlydistributionsfromtraditional(andRoth)IRAsaretaxfree.Distributionsfromemployer-sponsoredretirementplans,includingSIMPLEIRAsandsimplifiedemployeepensions(SEPs)aren’tqualifiedcharitabledistributions;noraredistributionsfromKeoghs,403(b)plans,401(k)plans,profitsharingandotherplans.

WHATBENEFICIARYOPTIONSAREAVAILABLE?

Theparticipant’schoiceofbeneficiaryorbeneficiariesforhisorherretirementplanswilldependuponacombinationoftheparticipant’sestateplanninggoals,incometaxconsequencesandestatetaxconsequences.Theuniverseofpotentialbeneficiarieswouldincludetheparticipant’sspouse,atrustfortheparticipant’sspouse,oneormoreoftheparticipant’schildrenormoreremotedescendants,oneormoretrustsforoneormoresuchindividuals,oneormorecharitablebeneficiaries,ortheestateoftheparticipant.Inalmostallcases,however,namingtheestateoftheparticipantasthebeneficiaryofaretirementaccountshouldbeavoidedifthereisanydesiretostretchthedeferralofincometaxesontheassetsintheplanaccount.

WHATMINIMUMREQUIREDDISTRIBUTIONRULESAPPLYAFTERAPLANPARTICIPANT’SDEATH?

Therearequitelengthyandoftentimesconfusingrulesthatgovernthedeterminationofminimumrequireddistributionsfromaretirementplanafteraparticipant’sdeath.Anunderstandingoftheserulesisnecessaryinordertoproperlystructurethebeneficiarydesignationtomeettheclient’sgoals.Thefollowingwillserveonlyasanoverviewofthegenerallyapplicablerules.


Designated beneficiary.

Therearetwoprimaryfactorsthatdeterminethecalculationofminimumrequireddistributionsforthebeneficiaryorbeneficiariesofaretirementplanaftertheparticipant’sdeath.First,didtheparticipantnamea“designatedbeneficiary”asbeneficiaryoftheretirementplan.Second,didtheparticipantdiebeforeoraftertheparticipant’srequiredbeginningdate.Theterm“designatedbeneficiary”isdefinedasanindividual.Anestate,charitableorothertax-exemptorganization,oranyotherentitydoesnotqualifyasadesignatedbeneficiary.Iftherearemultipledesignatedbeneficiaries,theoldestdesignatedbeneficiarywillbethedesignatedbeneficiaryfortheplan.However,ifanyoneofthemultiplebeneficiariesisnotanindividualthenthereisnodesignatedbeneficiary(unlessitispossibletoeliminatethenon-individualbeneficiarybySeptember30oftheyearaftertheyearoftheParticipant’sdeath).

See-through trusts.

Theoneexceptiontotherulethatabeneficiarymustbeanindividualinordertoqualifyasadesignatedbeneficiaryisforcertaintruststhatqualifyas“see-throughtrusts.”Ifatrustqualifiesasasee-throughtrustthentheruleslookthroughthetrusttoitsbeneficiaries.Ifallofthebeneficiariesofthetrustareindividualsthentheoldesttrustbeneficiarywillbetreatedasthedesignatedbeneficiary.Inorderforatrusttoqualifyasa“seethroughtrust”allofthefollowingmustapply:(i)thetrustmustbevalidunderstatelaw,(ii)thetrustmustbeirrevocableorbecomeirrevocableupontheparticipant’sdeath,(iii)allofthetrustbeneficiariesmustbeidentifiable,and(iv)certaintrustinformationanddocumentsmustbeprovidedtotheplanadministratorbyacertaindate.

Distributions after participant’s death.

Intheyearoftheparticipant’sdeath,thebeneficiarymusttakethebalance,ifany,oftheparticipant’sremaininglifetimeminimumrequireddistributionfortheyearoftheparticipant’sdeath.Thebeneficiary(unlesssuchbeneficiaryistheparticipant’ssurvivingspouse)muststarttakingminimumrequireddistributionsbeginningtheyearaftertheyearoftheparticipant’sdeath.Ifthebeneficiaryisadesignatedbeneficiary,theminimumrequireddistributionisbasedonthelifeexpectancyofthedesignatedbeneficiaryusingtheIRSSingleLifeExpectancyTable.

Surviving spouse as beneficiary.

Therearespecialrulesthatapplywhentheparticipant’ssurvivingspouseistheonlybeneficiary.Thesurvivingspousemaytakedistributionsunderthegeneralrulesfordesignatedbeneficiariesdescribedinthepriorparagraph.Alternatively,thesurvivingspousemayrolltheplanbenefitsintohisorherownIRAorothereligibleplanandtakeadvantageofthemorefavorablelifetimedistributionrulesforplanparticipants,includingdeferralofdistributionsuntilthesurvivingspousereachesage70-1/2.Thesurvivingspousemayalsonamehisorherownbeneficiariesoftherolledoverplanbenefit.


Required beginning date.

Asmentionedearlier,theotherimportantfactoriswhethertheparticipantdiesbeforeorafterhisorherrequiredbeginningdate.TherequiredbeginningdateisApril1oftheyearaftertheparticipantturnsage70-1/2.Iftheparticipantdiesbeforehisorherrequiredbeginningdate,andhasnotnamedadesignatedbeneficiary,theaccountmustbepaidoutinfullnolaterthantheendoftheyearthatincludesthefifthanniversaryoftheparticipant’sdeath.Thisisoftenreferredtoasthe“fiveyearrule.”Iftheparticipantdiesafterhisorherrequiredbeginningdateanddidnotnameadesignatedbeneficiary,theaccountmustbepaidoutnoslowerthanovertheparticipant’sremaininglifeexpectancyapplyingtheSingleLifeTable.

Naming a marital trust as beneficiary.

Therearemanycircumstanceswherenamingatrustasbeneficiaryisnecessary,desirableorpreferred.Therearealsosomecircumstanceswhendoingsowouldbediscouraged.Oneoptionforamarriedparticipantistonameatrustforhisorherspouse(oftenreferredtoasamaritaltrustoraQTIPTrust)asbeneficiary.DoingsowouldprohibitthesurvivingspousefromrollingovertheaccountintohisorherownIRA.However,especiallyintheeventofasecondmarriageorinlightofotherpotentialconcerns,theprotectionandcertaintyofamaritaltrustwilloutweighthedesireforaspousalrollover.Ifqualificationforthemaritaldeductionfromestatetaxisdesired,therearedetailedrulesthatmustbeadheredtoandthegoverninginstrumentmustcontainspecific,technicallanguage.Ineffect,boththeretirementplanandthetrustmustqualifyforthemaritaldeduction.Ifuseofthesurvivingspouse’slifeexpectancyisdesiredfordeterminingminimumrequireddistributions,thetrustmustalsoqualifyasasee-throughtrust.

Naming a credit shelter trust as beneficiary.

Therearescenariosinwhichitcouldmakesenseforacreditsheltertrustorestatetaxshelteredtrusttobenamedasabeneficiaryofaretirementplan.Doingsowouldtypicallyonlybeaconsiderationiftheparticipantdidnothavesufficientotherassetstofullyutilizehisorherremainingfederalestatetaxexemption.Ofcourse,withportabilityofthefederalestatetaxexemptionasanoption,namingacreditsheltertrustasbeneficiaryofaretirementplanislessappealing.Ifnamingthecreditsheltertrustasbeneficiary,theclientwillneedtodecidewhetherthetrustshouldbedesignedasasee-throughtrustsothatthereisadesignatedbeneficiaryforlifeexpectancypurposes.

Naming a trust for creditor protection and tax benefits.

Clientsmayalsowishtoconsidernamingatrustasabeneficiaryofaretirementplaninordertotakeadvantageoftheprotectivebenefitsoftrusts.ArecentU.S.SupremeCourtcaseheldthataninheritedIRAisnotanexemptassetunderfederalbankruptcylaws.Accordingly,designatinganindividualbeneficiaryofanIRAmaysubjecttheinheritedaccounttotheclaimsofthebeneficiary’screditors.Atrustcanbedesignedtobeprotectivefromcreditorsanddivorcingspouses,acommonconcernformanyclients.Whenleavingassets,includingretirementaccounts,tochildrenandgrandchildren,atrustisoftenutilizedtotakeadvantageoftheseprotectivebenefits.Similarly,atrustcouldbeusedtotakeadvantageoftheclient’sgeneration-


skippingtaxexemption.Infact,atrustforagrandchildthatqualifiesasasee-throughtrustwouldmaximizethestretchbenefitsoftheplan.

WHATISAROTHACCOUNT?

Roth accounts in general.

RothIRAandRoth401(k)accountsdifferfromtraditionalaccountsinseveralimportantways.Unlikecontributionstotraditionalaccounts,contributionstoaRothaccountaretaxable.DistributionsfromRothaccounts,withcertainlimitedexceptions,arenottaxable.TheparticipantinaRothaccountisnotrequiredtotakeminimumrequireddistributionsduringtheparticipant’slifetime.However,thesamerequiredminimumdistributions,subjecttothesamerulesdiscussedearlier,arerequiredforbeneficiariesofinheritedRothaccountsasarerequiredforbeneficiariesoftraditionalaccounts.

Roth conversions.

ParticipantsmayconvertatraditionalIRAaccountintoaRothIRAregardlessoftheparticipant’staxableincomefortheyear.Ofcourse,thevalueoftheconversionwillbeincludedintheparticipant’staxableincomefortheyear.Anon-spousebeneficiaryofaninheritedIRAmaymakeaqualifiedrollovertoaninheritedRothIRAifsucharolloverispermittedbytheplan.Again,theamountoftherolloverwillbeincludedinthetaxableincomeofthebeneficiary.

AnIRAparticipantshouldconsideraRothconversioniftheparticipant(i)hassufficientotherliquidassetstopaythetaxcostwithoutwithdrawingassetsfromtheIRA,(ii)intendstotransfertheIRAtooneormorebeneficiarieswhowillqualifyasdesignatedbeneficiariesandstretchtherequiredminimumdistributionsovertheirlifeexpectancies,(iii)willnotdrawdownontheIRAafterconversion,and(iv)expectshisorhereffectiveincometaxratetostaythesameorincreaseinretirementyears.

WHATARESOMEOTHERCONSIDERATIONSFOREXECUTIVEBENEFITS?

Inadditiontoatraditional401(k)and/orprofitsharingplan,thereisawiderangeofemployeebenefitsthatcouldbeincorporatedintothecompensationarrangementsforacorporateexecutive.Acommonbenefitislifeinsurance.Anothercommoncomponentofexecutivecompensationisequityintheemployer.Therearemanytypesofequityarrangements,includingstockgrants,stockoptions,restrictedstock,restrictedunits,phantomequityprofitsorcarriedinterests,andothers.

Ataminimum,itisimportantfortheexecutivetobeawareofhowthebenefitspassatdeathsothattheycanbeincorporatedintotheoverallestateplan,eitherbybeneficiarydesignationortestamentaryplan.Itisalsoimportantfortheexecutivetoknowwhetheranysuchbenefitsaretransferableduringtheexecutive’slifetime.Thiscouldbeespeciallyimportantwhenplanningforlifeinsuranceandequityawards.Certainequityawards,suchasstockoptionsandphantomequity,cancauseestatetaxproblemsatdeath.Allassetsownedbyadecedentmustbevalued


asofthedecedent’sdateofdeath.Astockoptioncouldbeunderwaterasoftheexecutive’sdateofdeath.Evenso,itwillhaveavaluegreaterthanzeroandmayincuranestatetaxasaresult.Ultimately,theoptioncouldexpireunexercised.Notonlywilltheassetthenbeworthlessbuttheestatewillhavepaidestatetaxonthatworthlessasset.Thesamecouldbetrueforaphantomequityawardwherethepayoutisbasedoncompanyearnings(orsomeothermeasurement)overatermofyears.Thephantomequitywillneedtobevaluedasoftheexecutive’sdateofdeathbasedonestimatesoffutureearnings.Actualperformancemayexceedprojectionsorfallshort.Ifexpectationsfallshort,thereisalikelihoodthatthephantomequitywillproducelesswealththanthedateofdeathvaluationanticipated.Ifunderperformanceissignificant,theestatetaxespaidcouldexceedthevalueoftheequity.Inordertoavoidsuchresults,executivesmaywishtoexploreoneormoreofthecharitablealternatives(eitherduringlifetimeoratdeath)thatarediscussedinothersectionsofthispaper.Inaddition,ifsuchcompensationawardsaretransferableduringlifetime,theexecutivewouldbeprudenttoconsidersomeofthelifetimetransferalternatives(likegrantorretainedannuitytrusts)discussedinothersectionsofthispaper.Inanyevent,theexecutiveshouldbecertaintounderstandthenatureofthebenefitandthepotentialimpactitmayhaveonhisorherestateforestatetaxpurposes.


PRIVATEPLACEMENTLIFEINSURANCE(PPLI)

WHATISPRIVATEPLACEMENTLIFEINSURANCE?

Privateplacementlifeinsurance(PPLI)isalifeinsurancepolicywrappedaroundaninvestment.Itissimilartoavariableuniversallifeinsurancepolicybuttheinvestmentsownedbythepolicyareprivatelyofferedandmeetveryspecifictaxcoderequirements.Theinvestmentsofmanyhighnetworthclientscanbeverytaxinefficient(particularlyhedgefundsandsimilarinvestments).PPLIpresentsanopportunitytoinvestorsforotherwisetax-inefficientinvestmentstobeownedinsideaninsurancepolicywhereinvestmentearningsarenotsubjecttoincometaxasearnedorasrealized,andaresimilarlynotsubjecttoincometaxuponthedeathoftheinsuredwhentheproceedsofthepolicyarepaidouttothebeneficiaryofthepolicy.

WHATARETHEREQUIREMENTSOFPPLITOENSUREEARNINGSANDPROCEEDSWILLNOTBEINCOMETAXABLE?

Severalrequirementsmustbesatisfiedinordertoensurethetax-freetreatmentofPPLI.First,theinvestmentsmustbeheldinaseparateaccountwhichmustbesegregatedfromthegeneralaccountoftheinsurancecarrier.Thisisbeneficialfortheinvestorbecausetheassetsinthesegregatedaccountarenotsubjecttotheclaimsofcreditorsoftheinsurancecarrier.Second,thereareseveralinvestmentrestrictionsthatapply.Specifically,purchasersofPPLI,whetheranindividualoratrust,mustgenerallyqualifyasbothan“accreditedinvestor”undersection501(a)ofRegulationDoftheSecuritiesActof1933anda“qualifiedpurchaser”undersection2(a)(51)oftheInvestmentCompanyActof1951.TherearelimitsontheamountofcontrolthattheownerofthePPLIpolicymayexercise.Theownermaynotengageinconductthatwouldqualifyasinvestorcontrol.Investorcontrolmayoccurwhenthecontractownerdirectsinvestmentstrategyormakesinvestmentdecisionsforthesegregatedaccount,including(i)determiningthespecificallocationoftheassetsofthesegregatedaccount,(ii)requiringthemanageroftheaccounttoacquireordisposeofanyparticularasset,or(iii)requiringtheaccountmanagertoincurorpayanyparticularliabilityoftheaccount.Toavoidinvestorcontrol,theremustnotbeanyprearrangedplanoragreementbetweentheseparateaccountmanagerandtheownerofthepolicytoinvestanyamountinanyparticularassetorsubjecttoanyparticulararrangement.Withregardtothemanagementoftheaccountassets,themanagermaynotconsultwithorrelyontheadviceofanypersonwhothemanagerknowsisapolicyowner,policybeneficiary,beneficialownerofanyentitythatisapolicyowner,orafiduciaryorbeneficiaryofatrust,thetrusteeofwhichisapolicyowner.Finally,therearediversificationrequirementsthatmustbemetintheseparateaccount.Nomorethan55%ofthevalueofthetotalassetsoftheaccountmayberepresentedbyanyoneinvestment,nomorethan70%byanytwoinvestments,nomorethan80%byanythreeinvestments,andnomorethan90%byanyfourinvestments.Investmentinaninvestmentcompany,partnershiportrust(suchasamutualfundorhedgefund)willnotviolatethediversificationrequirementaslongasthefundmeetstherequirementofaninsurancededicatedfund.Inordertobeaninsurancededicatedfund,(i)allofthebeneficialinterestsinthefundmustbeheldbyinsurancecompanyseparateaccounts,and


(ii)publicaccesstothefundmustbeavailableexclusivelythroughthepurchaseofavariableinsurancecontract.

WHATARESOMEESTATEPLANNINGSPECIFICARRANGEMENTSWHEREPPLIISCOMMONLYUTILIZED?

ItisimportanttokeepinmindthatthereisnoreasonwhyPPLImustbeusedinanytransactionstrategy.WhetherornotPPLIisutilizedinaparticularstrategywillbewhollydependentontheclient’swisheswiththerespecttotheinvestmentsinsidethepolicy.Withthatpreface,thefollowingaretwostrategieswherePPLIiscommonlypromoted.

Charitable Lead Annuity Trust.

Asdiscussedingreaterdetailinadifferentsectionofthispaper,acharitableleadannuitytrust(CLAT)isacommoncharitableplanningtechniqueusedtobenefitbothcharitablebeneficiariesandfamily.ACLATmaybedesignedasagrantortrustinwhichcasetheclientwillreceiveacurrentcharitableincometaxdeduction,subjecttoAGIlimitations.Thealternativewouldbeanon-grantortrustwhichwouldnotprovidetheclientwithacurrentcharitableincometaxdeduction.Inadditiontotheup-frontcharitableincometaxdeduction,agrantorCLATisattractivefromanestateplanningperspectivebecausetheassetsintheCLATgrowundiminishedbyincometaxesduetothefactthattheclientissaddledwiththeincometaxliability.Forsomeclients,however,theincometaxliabilitymaybesosignificantthattheclientwillrejectthestrategyasaresult.Tothoseclients,thegrantorCLATwouldlikelybemorepalatableiftheassetsinsidetheCLATgeneratedlittleornotaxableincomethatwouldhavetobereportedbytheclient.PPLImaybejustsuchanalternativeasPPLIwillnotgenerateanytaxableincomeorgainonitsinvestmentsinsidethepolicy.Accordingly,thereshouldbenotaxableincometotheclient.Ofcourse,anyinsurancepolicywouldreceivesimilartreatment,aswellasotherinvestmentsthatyieldlittleornotaxableincome.

Multi-generational split dollar.

AnotherstrategywherePPLIiscommonlypromotediscalledmulti-generationalsplitdollar.Untilthemiddleof2016,multi-generationsplitdollartransactionsweregenerallyconsideredtobeaggressivearrangementsandmanyconservativepractitionersandclientsshiedawayfromthem.Afterapairoftaxpayerfavorabletaxcourtdecisions(Morrissettev.CommissionerandEstateofMarionLevine),severaluncertaintieswereeliminated.Evenstill,thesearrangementsbearasignificantamountofuncertaintyandclientsshouldbefullyawareoftherisksbeforeproceeding.

Asimplifiedexampleofagenerational-splitdollararrangementmaybesummarizedasfollows:Theclient,thechildrenoftheclient,andgrandchildrenandmoreremotedescendantsofclientareallparticipantsinand/orbeneficiariesofthearrangements.ThecliententersintoaprivatesplitdollararrangementwithaDynastyTrustestablishedbytheclientandtheDynastyTrustwillpurchaseaPPLIpolicyonthelifeorlivesofoneormoreoftheclient’schildren.Asaresultoftheprivatesplitdollararrangement,theclientwillownareceivablefromtheDynastyTrust


equaltothegreaterof(i)thecumulativepremiumsadvancedor(ii)thepolicycashvalue.Thereceivablemaynotberepaiduntilthedeathoftheinsuredchildunderthepolicyandtheclienthasnoaccesstothecashvalueofthepolicywhiletheinsuredchildisliving.TheclientwillfilegifttaxreturnseachyearandreporttheannualgiftstotheDynastyTrustusingtheeconomicbenefitorloanregimeforaccountingforsplitdollararrangements.

Theclientmayonafuturedatethentransfertheprivatesplitdollarreceivableduringtheclient’slifetimebygiftorsale.Agiftorsalecouldinvolveoneormorechildrenorgrandchildrenofthegrantororoneormoretrustsfortheirbenefit.Alternatively,thereceivablemayberetainedbytheclientuntilhisorherdeath.Ineitherscenario,thevalueofthereceivableshouldbesubjecttoasignificantdiscountbasedonthetimedeferralofthepaymentofthereceivableuntilthedeathoftheinsuredchild.

Althoughanypermanentinsurancepolicycouldbeused,PPLIiscommonlysuggestedforagenerationalsplitdollararrangementgiventheinvestmentoptionsofPPLIpolicies.


GRANTORRETAINEDANNUITYTRUSTS

WHATISAGRAT?

AGrantorRetainedAnnuityTrust,or“GRAT”,isan“estatefreezeapproach”thatallowsaDonortogiveawaytheappreciationofanassetgifttaxfree.TheDonortransfershighincome-producingassetsorassetswithsubstantialgrowthpotential(orcashtobeinvestedinsuchassets)toatrustfromwhichtheDonorwillreceiveafixedamountannually(an“annuity”)foradesignatedperiodofyears(“GRATTerm”).AttheendoftheGRATTerm,iftheDonorisliving,thebeneficiariesnamedinthetrustinstrument(individualsoracontinuingtrust)willreceivetheassetsremainingintheGRATafterpaymentofthefinalannuityfreeofgiftandestatetax.DependingontheGRAT’scashflowand/ortheappreciationoftheGRAT’sassets(the“totalinvestmentreturn”),substantialestateandgifttaxsavingsmaybeachieved.

HOWDOESTHEGRATWORK?

ThetaxadvantageofthistechniqueresultsfromthewaythetaxablevalueofthegifttotheGRATiscalculated.ThevalueoftheDonor’staxablegiftisnotthevalueoftheassetstransferredtotheGRAT,butthecurrentvalueofthebeneficiaries’righttoreceivetheassetsremainingintheGRATupontheendoftheGRATTermafterpaymenttotheDonoroftherequiredannuitypayments.ThedurationoftheGRATandtheamountoftheannuitypaymentsarefixedtoreducethetaxablegifttozerooranominalamount.ThisformofGRATiscommonlycalleda“zeroed-out”GRAT.

IfthetotalinvestmentreturnofaGRATexceedstheanticipatedreturnbasedontherateprescribedbytheIRSforthemonththeGRATisestablished(the“7520rate”),this“excess”investmentreturnwillpassgiftandestatetax-freetotheDonor’sbeneficiariesattheendoftheGRAT.Ifthetotalinvestmentreturnislessthanthe7520rate,noassetswillremaintobetransferredtotheDonor’sbeneficiariesupontheexpirationoftheGRAT,butaslongasthetaxablegiftuponfundingtheGRATiszero,nothingwillbelostotherthantheexpenseofestablishingandadministeringtheGRAT.

CANYOUGIVEMEANEXAMPLEOFAGRAT?

JaneJonestransfers$1,000,000worthofstocktoa2-yearGRAT.Janebelievesthatthestockisundervaluedandexpectsittoincreaseby25%peryearforthenexttwoyears.AssuminganIRS7520interestrateof4.4%,Janemustreceiveanannuityof$533,248forthetwoyearsoftheGRATtoreducethetaxablegifttoanominalamount.Ifthestockappreciatesinvalueatthe25%annualratethatJaneexpects,$362,693ofstockwillpasstax-freetoherchildrenattheendofthetwoyearterm.


WHATARETHETERMSANDCONDITIONSTOBECONSIDEREDINAGRATTRUSTAGREEMENT?

• TheDonorcanbeaTrusteeortheonlyTrustee.• AspecifiedannualannuitypaymentwillbemadetotheDonorforatermofyears.Ifthe

Donordiesduringthetermofyears,theannuitypaymentswouldcontinuetobepaidtotheDonor’sestate.

• Thedeterminationoftheamountoftheannuitypaymentneededtoreducethetaxablegifttoanominalamountinvolvesafairlycomplextaxcalculationwhichtakesintoaccountthefollowingfactors:

(1) thecurrentvalueoftheproperty;(2) thetermoftheGRAT;and(3) the7520rateforthemonthoftransfer.

• AfterthetermoftheGRATexpires,thetrustprincipalwillbedistributedtothebeneficiariesspecifiedinthetrustagreement.Thebeneficiariescanreceivetheprincipaloutrightortheprincipalcanbeheldinfurthertrusts.

• OnceassetshavebeengiftedtotheGRAT,noadditionalcontributionsmaybemadetotheGRAT.

WHATARETHETAXIMPLICATIONSOFTHEGRAT?

Gift tax.

ThegoaloftheGRATistotransferwealthtothedesignatedbeneficiarieswithouttheimpositionofgiftorestatetax.Itissimilartoanoutrightgiftinthatitavoidsestateandgifttaxonthefutureincomeandappreciationonthegiftedproperty.Unlikeanoutrightgiftthatusesuplifetimegifttaxexemptionequaltothevalueofthegiftedpropertyonthedateofthegift,a“zeroedoutGRAT”willuseuponlyanominalamountofgifttaxexemption.Also,unlikeanoutrightgift,aGRATgiftwillresultineithera“win”ora“tie”,butnevera“loss”.Anoutrightgiftontheotherhandcanhaveanegativeresultifthepropertydeclinesinvalueafterthegiftismade.

Income tax.

DuringthetermoftheGRAT,theGRATistreatedasagrantortrustforincometaxpurposes.ThismeanstheDonorwillbetaxedonalloftheincomeandcapitalgainsearnedbythetrust,withoutregardtotheamountoftheannuitypaidtotheDonor.

AttheendoftheGRATterm,thebeneficiaries’taxbasisinthetrustpropertywillbeequaltotheDonor’staxbasisatthetimetheassetsweretransferredtotheGRAT.Therefore,ifappreciatedpropertyisgiftedtotheGRATandthebeneficiariessellthepropertyaftertheGRATterminates,anycapitalgainstaxonthedifferencebetweenthesalespriceandtheDonor’staxbasiswillreducethenetvalueofthepropertytransferred.IfthepropertyinsteadwereincludedintheDonor’sestateatdeath,thebeneficiarieswouldreceivea“step-up”intheproperty’staxbasistothefairmarketvalueofthepropertyattheDonor’sdeath.Aslongasthefederalcapitalgains


taxrateislessthanthecombinedfederalandstateestatetaxrate(upto40%)whichotherwisewouldhavebeenduehadthepropertytransferredtothebeneficiariesbytheGRATbeenretaineduntildeath,aGRATwillresultinlowertaxexposurefortransferredassets.

However,itisimportanttonotethat,if,aftertheterminationofaGRAT,theappreciatedpropertyissoldwhileitcontinuestobeheldinatrustthatistreatedasagrantortrustforincomepurposes,thegrantorwillpaythecapitalgainstax.

Estate tax.

IftheDonordiesbeforetheGRATannuitypaymentscease,thetrustassetswillbetaxableintheDonor’sestate.Consequently,itisimportanttoconsidertheDonor’slifeexpectancyinselectingtheGRATTerm.Also,iftheDonorismarried,carefulconsiderationshouldbegivenastowhetherandhowtoqualifytheGRATfortheestatetaxmaritaldeductioniftheDonordoesnotsurvivetheGRATterminordertoavoidpayingestatetaxatthedeathoftheDonorthatcouldotherwisebepostponeduntilthesurvivingspouse’sdeath.

CANYOUGIVEMEANEXAMPLEOFTHEGRATTAXCALCULATIONS?

Exampleof$1,000,000GRATestablishedwhenIRSinterestrateis4.4%,assumingtotalannualinvestmentreturnof10%.NOTE:Forthepastyears,theIRSinterest“hurdle”ratehasbeensignificantlylower(inthe1%to2%range).

TermofGRAT(inyears)

AnnualAnnuityPayment

MadetoDonor(Assuming4.4%IRS

Rate)

“TaxFree”GifttoBeneficiariesatEndofTerm

(Assuming10%TotalReturn)

2 $533,248 $90,180

3 $363,082 $129,200

5 $227,159 $223,682

10 $125,758 $589,490

15 $92,474 $1,239,107

20 $76,211 $2,362,498

WHATIFTHEGRAT’SINVESTMENTPERFORMANCEISEQUALTOORLESSTHANTHEIRSINTERESTRATE?

IftheGRAT’sannualcompoundedinvestmentreturnequalstheIRSinterestrate,thentheGrantor’sannuityinterestwillbefullypaid,buttherewillbeonlyasmallremainderintheGRATtopassontotheDonor’schildren.IftheGRAT’sannualcompoundedinvestmentreturnisless


thantheIRSinterestrate,thenthetrustprincipalwillbeexhaustedbeforetheendoftheGRATterm.Therewillbenotaxsavings,butnothingwillbelostexceptthetimeandexpenseassociatedwithestablishingandmaintainingtheGRAT.

IFTHEREISINSUFFICIENTINCOMETOPAYTHEANNUITYINONEYEAR,CANTHEDEFICIENCYBEPAIDINANOTHERYEAR,RATHERTHANUSING

PRINCIPAL?

No.TheIRSregulationsprovidethatanannuityinterestisonlyvalidifitispaidnolaterthantheduedateforthetrusttaxreturntowhichitrelates.Therefore,deficienciesmustbemadeupfromprincipal.Undercurrentlaw,trustassetscanbedistributedinkindtopaytheannuitywithoutcausingcapitalgainstaxestobepaidonthedistributedproperty.

IRSregulationsalsoprohibittheDonorfromloaningtheGRATfundswithwhichtomaketheannuitypayment.

CANANINTERESTINACLOSELYHELDBUSINESSBETRANSFERREDTOAGRAT?

Yes.TheGRATcanbeaneffectivemethodof“freezing”thevalueofthebusiness.ItcanalsominimizeanyriskfromavaluationofthebusinessinteresttransferredtotheGRATthatischallengedbytheIRS.Forexample,ifa55year-oldbusinessowner’sinterestinhisbusinessisvaluedattheamountoftheowner’sremaininggifttaxexemption(assume$5,000,000),thebusinessownermaybeabletomakeanoutrightgiftoftheinteresttohischildrenandavoidgifttaxbyusinghislifetimeexemption.Butifthevalueoftheinterestisdoubled($10,000,000)uponauditofthebusinessowner’sgifttaxreturn,gifttaxwillbedueequaltothegifttaxratemultipliedbytheamountofthegifttaxexemption($2,000,000).Iftheinterestisinsteadtransferredtoa“zeroed-out”GRATtopayhimfor20yearsanannuityequalto7.6211%oftheinitialvalueofthepropertycontributedtothetrust($762,113),thenassuminganIRSinterestrateof4.4%,thevalueofthetaxablegiftwillbe$10.48.IfthevalueofthebusinessinterestisincreaseduponauditbytheIRS,theannuitypaymentsrequiredtobepaidtotheDonorwouldincrease,buttherewouldbenoappreciableincreasetothetaxablegift.

WHATARETHECOSTSOFMANAGINGAGRAT?

ThecostsoftheGRATincludeattorneys’feesforpreparingthetrustagreementandthegifttaxreturn,andsomecostifprofessionalassistanceisrequiredinmakingcertaintheannuitypaymentsaremadecorrectly.


SALESTOGRANTORTRUSTS

WHATISAGRANTORTRUST?

Agrantortrust,alsoknownasan“intentionallydefective”grantortrust,isatrustwhichrequiresthegrantortoreporttheincomegeneratedbythetrustassetsonthegrantor’sindividualincometaxreturn.

WHATARETHEADVANTAGESOFGRANTORTRUSTS?

Manygiftingvehiclesareintentionallydesignedasgrantortrustssothatthegrantorcancontinuetobeartheincometaxburdenassociatedwithassetsthathavebeenremovedfromthegrantor’sestatethroughacompletedgift.Inshort,thegiftbythegrantoriscompleteforgifttaxpurposesbutnotforincometaxpurposes.Thisallowsthetrustpropertytogrowinsideofthegrantortrustwithoutthedragofanincometaxburden.Thus,grantortruststatusisapowerfultoolthatafamilycanusetoallowpreviouslygiftedtrustassetstogrowundiminishedbytaxes.Undercurrentlaw,thepaymentoftaxesbythegrantorisnotconsideredagift.

WHATGIVESATRUSTGRANTORTRUSTSTATUS?

Therearemanyadministrative“defects”thatcanbeusedtointentionallytriggergrantortruststatus,butamongthemostpopulararetheabilityforthegrantorto“swap”assetswiththetrust,theabilityofthetrusttomakepremiumpaymentsforalifeinsurancepolicyonthelifeofagrantor,andtheappointmentofaTrustProtectorwhohastherighttoaddbeneficiariestothetrust.

WHATISANINSTALLMENTSALE?

AninstallmentsaleintheestateplanningcontextisusuallystructuredasasaleforaNotewhichprovidesforpaymentsofinterestonlyforatermofyearswithaballoonprincipalpaymentattheendoftheterm.Thistechniqueisusefultotransferinvestmentsorbusinessintereststothenextgenerationwhilesimultaneouslyprovidingincometotheseller.Thisisalsousefulifthebuyer,usuallyadescendantoftheseller,doesnothavethefinancialresourcestopurchasetheinterestwithcash,orifthebuyer/descendantcannotorwillnotobtainoutsidefinancing.

WHATARETHEBASICSOFANINSTALLMENTSALETOAGRANTORTRUST?

ThegrantorsellsassetstotheTrusteeofanirrevocabletrust.TheTrusteewillpayfortheinterestbyissuingapromissorynoteforthepurchaseprice.TheTrusteeoftendoesnotmakeanydownpaymentforthesale.Priortothesale,thetrustshouldeitherhaveitsownassetsorbe“seeded”toprovideenoughtrustassetstoequalatleast10%ofthepropertybeingpurchased.Iftheassetsinthetrustarenotsufficientforthetransactiontobeconsideredan


arm’s-lengthsale,theInternalRevenueService(“IRS”)couldarguethatthesaleisreallyacontributiontothetrustwitharetainedincomeinterest,whichcouldcausetheentirevalueofthetrustassetstobeincludibleintheseller’sestateforestatetaxpurposes.Inexchangefortheinterests,theTrusteewouldgivetheseller/grantorapromissorynoteforthevalueoftheinterestsitreceives.

WHATARETHEADVANTAGESOFANINSTALLMENTSALE?

Theinstallmentsaleoffersseveralbenefits:

The grantor pays income taxes on behalf of the grantor trust.

Ifthetrustisdesignedtobeagrantortrust,thegrantorpaysthetaxliabilityontheannualincomegeneratedbytheinterestsheldbythetrust,aswellasthetrust’scapitalgainsintheeventthattheinterestweretobesoldinsideofthetrust.Thisresultsinanestatetaxbenefitbecausethegrantorpaystheincometaxesonearningsthataccruetothebenefitofdescendants,butthepaymentofthoseincometaxesisnottreatedasataxablegiftundercurrentlaw.Havingsaidthat,however,thegrantormustbewillingandabletoabsorbthedemandsonhisorherpersonalassetstopaythesetaxes.

No gift tax on the sale.

Asdiscussedabove,thetransferoftheintereststothetrustwouldbestructuredintheformofanarm’s-lengthsale,i.e.,anexchangeofaninterestforaninstallmentnotebearingatleastanIRS“safeharbor”rateofinterest(forexample,themidtermratefornotes3-9yearsinFebruary2018is2.31%).Asaresult,thistransfershouldberespectedasasaleforfairmarketvalue,inwhichcasethereshouldbenogifttaxconsequences,providedthatthefairmarketvalueoftheassetsoldisinfactthesameasthefaceamountofthepromissorynote.

Removal of appreciation from the taxable estate.

Byexchangingapotentialgrowthassetforanon-growthasset(thepromissorynote),thegrantorwouldbe“freezing”thevalueofpropertyremaininginthetaxableestateforestatetaxpurposes.Iftheinterestssoldtothetrustoutperformtheinterestrateonthepromissorynote,thetransactionenablesthegrantortopassthatexcessamountofvaluetothetrustfreeofgiftandestatetaxes.Further,limitingtheannualpaymentstointerest,atleastinitially,itiseasiertoshiftvaluetoyoungergenerationsbydeferringthepaymentoftheprincipaltothemaximumextentpossible.

Generation-Skipping Transfer (“GST”) planning.

PropertyheldinatrustmaybesubjecttoaGSTtaxuponthedeathofthegrantor’schildrenandfuturegenerationsofdescendants.In2018,theGSTexemptionis$11,180,000(lessanyusedforpriorlifetimegifts),whichmeansthatthegrantorcanprovideforupto$11,180,000(lessanyusedforpriorlifetimegifts)tobeheldintrustsforthegrantor’sdescendants,withoutanyGST


taxbeingimposeduponthedeathofeachdescendant.Ifstructuredasaninstallmentsale,thegrantormayimmediatelyallocateherGSTexemptiontothetrustuponitscreation(i.e.,theinitial“seedmoney”).ByallocatingGSTexemptiontoanytransfermadetothetrustuponitscreation,anyassetspurchasedbythetrust(includingthetransferredinterests)wouldbeGST-exempt.ThisprovidesabetterabilitytoleveragetheuseofGSTexemptiontomaximizeGSTtaxavoidanceforsuccessivegenerations.

WHATARETHEDISADVANTAGESOFATRADITIONALINSTALLMENTSALE?

Aninstallmentsalehasthefollowingprimarydisadvantages:

The sold assets will not receive stepped-up basis in the event of your death.

Ifyouweretoholdyourinterestintheassetuntilyourdeath,suchinterestwillbeincludedinyourtaxableestateandwillreceiveastep-upincostbasisatthattimetoitsthenfairmarketvalue.Inthatcase,asaleoftheinterestshortlyafteryourdeathwouldnotgeneratecapitalgain.However,bysellingyourinterestintheassettoagrantortrust(andtherebyremovingtheinterestfromyourestate),thepropertywillnotobtainthestep-upincostbasisuponsaleoratyourdeath.Thus,asubsequentsaleoftheinterestbytheTrusteewouldgenerateacapitalgainstaxevenifthesaleoccursimmediatelyafteryourdeath.Despitethisconcern,ifthemaximumfederalestatetaxrateismuchhigherthanthecapitalgainstaxrate,theadvantagesoutlinedabove(i.e.,theavoidanceofgifttaxonthetransferandonthefutureincometaxliabilitypaidbyyou,theavoidanceofestatetaxonfutureappreciation,andtheleverageofyourGSTExemption)mayoutweighthisdisadvantage.

Promissory note included in your taxable estate.

Ifyoudiebeforethepromissorynoteissatisfiedinfull,itwouldbeanassetheldbyyouandincludedinyourtaxableestate.

Reversal of traditional IRS income tax position.

Evenifyousoldyourinterestintheassettoagrantortrust,theIRSmayclaimthatthesaleresultsincapitalgaintoyouatthetimeofthetransaction.IftheIRSsuccessfullytookthisposition,youwouldrecognizeacapitalgainonthesaleoftheinterestatthetimeoftransfertothetrust.

Estate may recognize capital gain.

Ifyoudieholdingthepromissorynote,yourestatemayrecognizecapitalgainonanyunpaidprincipal.

IRS may treat the entire transaction as a gift.

TheIRSmayassertthatthetransactionwasreallyagiftandnotasale.Toavoidthisrisk,itisimportantthatthereisnopre-arrangementtoforgiveanyinterestorprincipaldueunderthe


promissorynote.Thetransactionshouldbestructuredlikeacommercialor“arm’slength”transaction.

IRS may treat a portion of the transactions as a gift.

EveniftheIRSisunsuccessfulinattackingtheentiretransactionasagiftasdescribedabove,theIRScouldattackthetransactionsonanotherfrontbyassertingthatthefairmarketvalueofthetransferredinterestsisgreaterthanthefairmarketvalueofthepromissorynotegivenbacktoyou.TheIRScouldarguethat(1)thepromissorynotewasnotworthitsfacevaluebecausethetrustwasnotacreditworthyborroweror(2)theappraisedvalueoftheinterestintheassetwassimplytoolow.

Sold interests may under-perform the IRS interest rate.

Inthiscase,youwillhaveactuallyincreasedthesizeofyourestateanddecreasedthevaluesoldtothetrustbecausetheinterestandprincipalpaymentsonthepromissorynotewillexceedthevalueoftheinterestssoldtothetrust.Ofcourse,thisisalwaysariskthatneedstobetakenintoaccount,andisdifficulttopredictorplanfor.

Absence of express statutory sanction.

Theinstallmentsaletoagrantortrustisatechniquethatdoesnothaveanexpressstatutorysanction.

ARETHEREINCOMETAXCONSEQUENCESOFUSINGATRADITIONALINSTALLMENTSALE?

Ofteninthistypeofplanning,thesaleisstructuredtobemadetoatrustthatisdesignedasa“grantortrust”(thatis,atrusttheassetsofwhicharetreatedasbeingwholly-ownedbythegrantorforincometaxpurposes).Ifthetrustisagrantortrust,thesaleoftheinterestswouldbetreatedasifyouweresellingtheinteresttoyourself.Asaresult,youcouldtakeareportingpositionthatnocapitalgainisrecognizedwhenthetrustbuystheinterests.Forthesamereason,thetrust’sinterestpaymentsunderthepromissorynoteshouldnotbetreatedasincometoyou.

Ifthetrustistreatedasaseparate“person”forincometaxpurposes(referredtoasa“nongrantortrust”),thesalewouldbeataxableeventforincometaxpurposesandincomereportedundertheinstallmentmethod.Further,thetrustwouldbeliableforanyincomeorcapitalgainsearnedbyit,which,generally,aretaxedatthehighestratesthatapplytoindividualsbecausethetaxbracketsthatapplytotrustsareverycompressed.

QUALIFIEDPERSONALRESIDENCETRUSTS

WHATISAQPRT?


TheQualifiedPersonalResidenceTrust(“QPRT”)canbeaneffectivemeansoftransferringone’sresidencetoone’schildrenorotherbeneficiariesatareducedtransfertaxcost:theownerofapersonalresidencetransfersittoatrust,butretainstherighttoliveintheresidenceforaspecifiedperiodofyears.Attheendofthatperiodofyears,thechildren(orotherdesignatedbeneficiaries)becometheownersoftheresidence.Thereafter,theresidencewillnolongerbeapartoftheformerowner’staxableestate.

HOWDOESTHEQPRTWORK?

ThetaxadvantageoftheQPRTtechniquecomesprimarilyfromthewayinwhichthevalueofthegifttothetrustiscalculatedforgifttaxpurposes.Thevalueofthegiftisnotthefullvalueoftheresidenceonthedateofthegift.Instead,thetaxablegiftisonlythevalueofthechildren’srighttotakepossessionoftheresidenceattheendofthespecifiedperiodofyears,whichcanbefarlessthanthecurrentvalueoftheproperty.Forexample,a$1,000,000homecanbegiftedtoaQPRT,removing$1,000,000fromthedonor’staxableestate,butthetaxablegiftmaybeaslittleas10or20percentofthevalueoftheresidence.BykeepingthegifttaxvalueoftheQPRTtransferbelowthedonor’sremaininglifetimefederalgifttaxexemptionamount,thedonorcanavoidpayingfederalgifttaxonthegift.

HOWISTHEQPRTCALCULATED?

WhiletheconceptofaQPRTissimple,thedecisiontocreateoneshouldnotbemadewithoutafairlycomplextaxcalculationtodeterminethevalueofthetaxablegiftwhichwillresult.Thisvalueisafunctionof(i)theageofthedonor;(ii)thenumberofyearsduringwhichthedonorwillretaintherighttooccupytheproperty;(iii)thecurrentappraisedvalueoftheproperty;and(iv)thecurrentIRSactuarialtablesandinterestratesusedtocalculatefuturevalues.

WHATARETHETERMSOFTHEQPRTTRUSTAGREEMENT?

• Thetrustwouldcontinueforaspecifiednumberofyears,afterwhichthepropertywouldbetransferredeitheroutrighttochildren(orotherbeneficiaries)orinfurthertrustfortheirbenefit.SelectionoftheQPRTtermofyearsrequirescarefulthoughtsincethetaxbenefitsarelostifthedonordiesbeforetheQPRTends.Alongertrusttermincreasesthetaxadvantages,butalsoincreasestheriskthatprematuredeathwillerasethoseadvantages.

• DuringthetermoftheQPRT,thedonorisentitledtoallrightsofoccupancy,andwillberesponsibleforallcostsofmaintenance.

• IftheresidenceissoldduringthetermoftheQPRT,anotherhomecanbepurchased.Ifareplacementhomeofequalvalueisnotpurchased,theunusedcashproceedsmusteitherbedistributedbacktothedonor(thusforfeitingthetaxbenefit),orthecashmustbeinvestedandthedonorwillbepaidanannuityforthebalanceoftheQPRTterm(thusreducing,thoughnotnecessarilyentirelyeliminating,thetaxbenefit).


• DuringtheQPRTtermthedonorcanbethesoleTrusteeoraco-TrusteeoftheQPRT,andmakeallmanagementdecisions.

WHATARETHEESTATEANDINCOMETAXIMPLICATIONSOFTHEQPRT

Estate taxes.

TheobjectiveoftheQPRTistoreduceestatetaxesbyremovingtheresidencefromthedonor’sestate.Ifthedonor’sdeathoccursaftertheQPRThasended,thedonor’staxableestateforfederalestatetaxpurposeswillincludeonlythevalueoftheoriginalgift(thechildren’sfutureinterestintheresidencewhenthetrustwascreated),andallappreciationinvalueafterthedateofthegiftwillhavebeenremovedfromthedonor’sestate.IfthedonordiesbeforethecompletionofthetermofyearsspecifiedintheQPRT,thetrustwillendandthepropertywillbedistributedtothedonor’sestatetobedisposedofbythedonor’sWill.Thetaxadvantageswillbelost,buttherewillbenotaxdetriments—taxeswillbecalculatedasthoughtheQPRThadneverbeencreated.

Capital gains.

Onthedownside,ifthedonorhassurvivedtheQPRTterm,theresidencewillnotreceivea“step-up”initsincometaxcostbasistoestatetaxvaluebecausetheresidencewillnothavebeentaxedinthedonor’sestate.Forthisreason,theQPRTisbestsuitedforahomelikelytostayinthefamilyuntilthechildren’sdeaths,whentheresidencewillgetthedesiredstep-upinbasis.However,evenifthepropertyislatersoldbythechildrenorothertrustbeneficiaries,thecapitalgainstax(atleastundercurrenttaxlaw)willbefarlessthantheinheritancetaxthatwouldhavebeenduehadtheQPRTnotbeencreated.

Income taxes.

DuringtheQPRTterm,thedonorwillbetreatedforincometaxpurposesasifheorshewerestilltheowneroftheproperty;e.g.,thedonorcandeductrealestatetaxesonhisorherpersonalincometaxreturn.IfthepropertyissoldbytheQPRT,acapitalgainstaxwillbedueinthesameamountasifthedonorstillownedtheproperty.Thedonormustpayanysuchcapitalgainstaxoutofhisorherownfunds,whichcanproduceagoodestatetaxresultbecausepaymentofthetaxfurtherreducesthedonor’staxableestateiftheproceedsofthesalearereinvestedbytheTrusteeinanotherpersonalresidence.

HOWLONGSHOULDTHEQPRTLAST?

Generally,theQPRTshouldbedesignedtolastaslongaspossiblesoastomakethevalueofthetaxablegifttothechildrenassmallaspossible-butnotsolongthatthedonordiesbeforetheQPRTends,whichwouldresultinalossofthetaxbenefitbecausethepropertywouldbeincludedinthedonor’staxableestate.


CANYOUSTILLUSETHERESIDENCEAFTERTHEQPRTENDSANDTHECHILDRENBECOMETHELEGALOWNERS?

Thatisentirelyuptothefamily.Ifthedonordesirestocontinuetousethepropertyasthedonor’sresidence,heorshewillhavetorentit.

CANYOUGIVEMEANEXAMPLEOFTHEQPRTTAXCALCULATIONS?

Lookingatthetablebelowandassuminganestatetaxataflat50%rate,ifa60-year-olddonorestablishesa20-yearQPRTtoholdaresidenceworth$1,000,000,thetaxablegiftis$251,220(usinganIRS4%interestrate,whichratechangeseachmonth).Ifthedonordiesatage85andthepropertyisthenworth$2,000,000,thedonor’staxableestatewillincludetheoriginaltaxablegiftof$251,220,and,ata50percenttaxrate,theestatetaxattributabletothatpropertywillbe$125,610.HadtheQPRTnotbeencreated,thedonor’sestatewouldhavepaidtaxon$2,000,000ata50percenttaxrate,or$1,000,000.TheuseoftheQPRTresultsina$874,390taxsavings.Thistaxsavingsmaybereduced,however,bytheincometaxcostofanyadditionalcapitalgainstaxesifthehouseissoldwithoutthebenefitofthestep-upinbasistotheestatetaxvalueofthehouseatthetimeofthedonor’sdeath.

Taxablegiftifa$1,000,000residenceistransferredtoaQPRT

AGEOFOWNER IflengthofQPRTis10YEARS

IflengthofQPRTis20YEARS50 $625,590 $352,560

55 $599,170 $307,70060 $563,570 $251,22065 $513,550 $182,34070 $445,760 $109,02075 $355,050 $47,430

IFTHEPROPERTYTOBEPLACEDINTHEQPRTISLOCATEDINASTATEWITHAGIFTTAX,ARETHEREANYADDITIONALTAXCONSIDERATIONS?

Yes,thetransferofthedonor’sresidenceinaQPRTwouldresultinataxablegift,anditwouldcausethedonor’scumulativelifetimegiftstaxwouldbedueasaresultofthetransfer,or,theQPRTwilluseaportionofthestategifttaxexemption.

EveninthecaseinwhichthestategifttaxincreasestheinitialcostofestablishingaQPRT,establishingtheQPRTmaynonethelessstillbevaluableforthosewhocanaffordtopaythegifttaxduewhentheQPRTiscreated.Thisonlyimpactsgiftsofrealestateinstatesthatimposeagifttax(currentlyonlyConnecticut).


CANIUSEAVACATIONHOMEORCONDOMINIUMFORMYQPRT?

Yes.AQPRTcanholdeitheraprimaryresidenceoroneotherresidencethatthedonoroccupies.

MAYIUSEMYSPOUSE’SUNIFIEDCREDITTOSHELTERMYQPRTGIFTIFTHEVALUEOFMYGIFTEXCEEDSMYOWNUNIFIEDCREDITEXEMPTION?

Itisrisky(andgenerallyunwise)todosobecause,ifyoudiebeforetheQPRTends,yourspouse’sexemptionwillhavebeenwasted.Thisunfavorableresultcanbeavoidedbygivingyourspouseaone-halfinterestintheresidencefirst,andthencreatingtwoQPRTs,oneforeachofyou.

WHATHAPPENSIFIWISHTOSTOPUSINGTHEPROPERTYINTHEQPRTASAPERSONALRESIDENCE?

Therearetwochoices.Thetrustagreementcanprovidethatthetrustwillendandthepropertyoritssalesproceedsbegivenbacktoyou.Fromataxperspective,thisisunattractivebecausethecashproceedsaredistributedtoyou,andthereforeallofthetaxadvantagesarelost.Alternatively,thetrustagreementcanprovidethatthepropertybesoldandeither(a)anewresidencepurchasedforyou,or(b)thecashbeinvestedandthetrustmustpayyouacashannuityfortheremainderoftheterm.

WHATARETHECOSTSOFMANAGINGAQPRT?

Littleornone.IfthedonororafamilymemberorfriendisthesoleTrustee,whichcommonlyisthecase,therearenoTrustee’sfees.Usuallynocourtcostsorcourtsupervisionisinvolved.IfthedonorisalsoaTrustee,thetrustisnotrequiredtofiletaxreturns.Therearecostsinvolvedinestablishingthetrust,however,suchasattorney’sfeesforpreparingthetrustagreementanddeedsoftransferandaccountant’sfeesforpreparingthegifttaxreturn.

WHATIFIHAVEAMORTGAGEAGAINSTTHERESIDENCEORWISHTOBORROWAGAINSTTHERESIDENCEINTHEFUTURE?

IfthepropertycontributedtotheQPRTissubjecttoanexistingmortgage,youwillmakeadditionalgiftseachtimeyoupayamortgagepaymentaftertheQPRTisfunded.Onepossiblewaytoavoidthisproblemisto“indemnify”theQPRTfromanyobligationtopayoffthemortgage,retainingtheobligationtopaythemortgageyourself.Inadditiontothegifttaxissue,ifamortgageexistsatthetimeofthetransferoftitleontheresidencetotheQPRT,thetransfermayresultinabreachofmortgagewhichcouldcausethedebttobepayableinfullatthetimeofthetransfer.Therefore,ifthereismortgageindebtednessonyourresidence,youshoulddiscussthisissuewithyourtaxadvisorbeforeestablishingyourQPRT.


YoushouldassumethattheresidencetransferredtotheQPRTisnolongerapotentialsourceofborrowing.So,forexample,ifyouindemnifytheQPRTfromanyobligationunderanexistingmortgage,youshouldnotusetheresidenceascollateralto“refinance”theoldmortgageandyoushouldnotplanonbeingabletofurtherborrowagainsttheequityofthehouseinanymanner.

CANICONTINUETOPAYFORIMPROVEMENTSTOTHERESIDENCEAFTERTHERESIDENCEISTRANSFERREDTOTHEQPRT?

Principalimprovementstotheresidence,suchasanadditionoranewroof,constituteadditionaltaxablegiftstotheQPRT,ifpaidforbyyou.Wesuggestthatyouspeakwithyourtaxadvisorbeforemakingsuchimprovements.

CANMYSPOUSEHAVETHERIGHTTOLIVEINOURHOMEAFTERMYTERMEXPIRES?

Yes.Taxesarenotaffected.

HOWDOTHEIRSINTERESTRATESEFFECTTHEVALUEOFTHETRANSFEROFPROPERTYTOAQPRT?

HigherinterestratesmaketheQPRTmoresuccessfulbecausehigherinterestratescausethetaxablegiftyouaredeemedtomakewhencreatingyourQPRTtobereduced.Mathematically,thehighertheinterestrate,themorevalueyouaredeemedtoretainduringtheQPRTtermandthereforethelessisbeingdistributedtoyourfamilyattheendoftheQPRTterm.

SHOULDYOUONLYTRANSFERPROPERTYTOAQPRTWHENTHEIRSINTERESTRATESARERELATIVELYHIGH?

HigherinterestratesdomaketheQPRTamoreattractivetool.However,theinterestrateisnottheonly,oreventhemoreimportant,factorinaQPRT’ssuccess.TheQPRTtechniqueishighlysensitivetothevalueoftherealestatebeingtransferred.Ifapropertyis“undervalued”inthesenseyouthinkitwilllikelyappreciateconsiderablyduringtheQPRTterm,youshouldconsideraQPRTevenifinterestratesarerelativelylow.Also,thelongerthetermoftheQPRT,thegreaterthediscount.Accordingly,theQRPTcanmakesenseinalowinterestrateenvironmentifitisforalongertermwithundervaluedrealestate.Often,agiftofavacationhomewillfitthisprofile.


SELF-CANCELLINGINSTALLMENTNOTE

WHATISASELF-CANCELLINGINSTALLMENTNOTE?

Aself-cancellinginstallmentnote(SCIN)isadebtinstrumentthatcontainsaprovisionwhichcallsforthecancellationoftheliabilityuponthedeathoftheholderduringthetermofthepromissorynote.Ifyou,astheholderoftheSCIN,diepriortotheexpirationofthetermoftheSCIN,theautomaticcancellationfeaturemayoperatetoremoveasignificantamountofassetsfromwhatwouldotherwisebeincludibleinyourestate.

WHYWOULDASCINBEOFINTERESTTOME?

Thistechniqueisbeneficialifyoubelievethatyouwillnotsurviveyouractuariallydeterminedlifeexpectancy.UsingtheSCINtransactionyouwillexemptanyportionofthesalespriceforyourinterest(s)thatisnotpaidbeforeyourdeath,togetherwithanypost-saleappreciation,fromestatetaxatyourdeath.Althoughyourestatemaybesubjecttoincometaxatyourdeath(basedupontheunpaidsalesprice)theapplicablefederalratewillbethecapitalgainstaxrate(currently20%),ratherthanthefederalestatetaxrate(currently40%);furthermore,yourestatewillbeinthepositiontoarguethatthiscapitalgainstaxshouldbedeductibleforestatetaxpurposes.

IfyoubelieveyouwillsurvivetoorbeyondyouractuariallifeexpectancyaSCINmaynotbetheidealsolution,asyoumayendupwithmorevalueinyourestate(tobesubjectedtoestatetax)thanifyoudidnotengageinthetransactionatall.Inthatcase,atraditionalinstallmentsalewouldbepreferable.

HOWDOESTHETRANSACTIONWORK?

Thekeyelementsofthetransactioncloselyresemblethetraditionalinstallmentsale,discussedabove,withsomekeydifferences:

• ThetermoftheSCINwouldbeaperiodofyearslessthanyourlifeexpectancy,otherwiseitmightbedeemedaprivateannuity.

• ThetermsoftheNotemusttakeintoaccountthepossibilityofyourdeathbeforetheNoteispaidoffbyincludinganincreasedinterestrateoranincreasedprincipalamount.Thisisknownasa“riskpremium.”Thesalespricewouldbedeterminedbasedupon(a)thefairmarketvalueoftheinterestsbeingsold(b)plusthe“riskpremium”forthepossibilitythatyoumaydiebeforereceivingallofthepayments(i.e.,thefullpurchaseprice).Ifthesalespriceincludesthesetwovalues,thennogifttaxconsequenceswillresultfromthetransfer.Theriskpremiumisincorporatedbyeitherutilizingahigherinterestrate(i.e.,an“interestratepremium”)orbyincreasingthepurchaseprice(i.e.,a“principalpremium”).Whatconstitutesanadequateriskpremiumisafact-specificquestion.Sinceyourlifeexpectancyisacriticalcomponentoftheriskpremium,itmust


beconsidered.Ifthesellerhasa“terminalillness,”suchactuarialtablesmaynotbeused.Aterminalillnessmeansthatthesellerhas“anincurableillnessorotherdeterioratingphysicalcondition”whichresultsinatleasta50%probabilitythattheindividualwilldiewithinoneyear.

• TheSCINcanbearrangedtobeself-amortizing,interest-onlywitha“balloon”paymentofprincipalattheendoftheterm,ortorequirelevelprincipalpayments,orsomethinginthemiddlelikethetraditionalinstallmentnote.Generally,aninterest-onlySCIN(whetherusinganinterestratepremiumorprincipalpremium)willlikelyresultinthemostestatetaxsavings.

WHATARETHEADVANTAGESTOUSINGASCIN?

Inadditiontothebenefitsoutlinedunderthetraditionalinstallmentsalediscussion,theSCINoffersthefollowingadditionalbenefits:

Potentially greater estate tax savings.

Unlikeatraditionalinstallmentsale,withaSCIN,theremainingprincipalbalancewouldnotbeincludedinyourestateatyourdeathbecause,bythetermsofthepromissorynote,itcancelsatyourdeath.Theestatetaxsavingscanbesubstantialifthesellerdiesmateriallypriortoherlifeexpectancy.Theprivateannuity,discussedbelow,alsosharesthisbenefit.

Lower interest rate.

Althoughtheissueisnotsettled,mostestateplannersagreethattheapplicablebaseinterestrate(excludingariskpremiumcomponent)touseforthepromissorynoteistheAFRineffectforthemonthofsale.However,aconservativeapproachwouldbetousethehighersection7520rate,whichis120%ofthemid-termAFRforthemonthinwhichthesaleoccurs.

Backloading of payments.

Ifyouuseaninterest-onlySCINthatdefersthepaymentofprincipal,atleastinitially,thepurchasingtrustwouldhaveagreateropportunitytoconvertitsilliquidinterestintoliquidassets(i.e.,cashormarketablesecurities),whichwouldleveragetheproceeds,allowingyoutomoreeasilyshiftvaluetoyoungergenerations.Moreimportantly,aSCINoffersamajoradvantageifyouweretodiepriortotheendofthetermbecauseofthepossibilityforasizeableprincipalbalancepaymentneverbeingmadebacktoyouoryourestate.Aspreviouslyexplained,theestatetaxsavingscouldbesubstantial.

WHATARETHEDISADVANTAGESTOUSINGASCIN?

Inadditiontothedisadvantagesoutlinedunderthetraditionalinstallmentsalediscussion,theSCINhasthefollowingdisadvantages:


Substantially greater seed funding.

Iftheprincipalpremiumapproachistaken,theinitialseedfundingofthetrustwouldaccordinglyincrease,i.e.,tomaintain10%oftheprincipalobligation,ataminimum.

Risk of lengthy life.

Ifyououtliveyourlifeexpectancy,theassetsincludedinyourestatewillbesubstantiallygreaterhadthepropertybeensoldinatraditionalinstallmentsale.Becauseoftheriskpremium,theSCINpaymentswillbesignificantlyhigher.Asimilarrisk,althoughlesssubstantial,existswithaprivateannuity.

Uncertainty of calculations.

ThecalculationofpaymentsunderaSCINcanbeuncertain,includingthedeterminationoftheriskpremiumandyourlifeexpectancy.Bycomparison,privateannuitycalculationsarerelativelystraightforward.

ARETHEREINCOMETAXCONSEQUENCESTOUSINGASCIN?

TherearedifferentincometaxconsequencesofaSCINinvolvingagrantortrustversusanongrantortrust.Ifyourinterestissoldtoagrantortrust,thesaleoftheinterestandtheinterest“income”youreceivefromthegrantortrustshouldbeanontaxableeventforincometaxpurposes.IftheSCINispaidoffwhileyouarealive,theproceedswillbeincludedinyourestateandyouwillrecognizegain,unlessthepurchaserisagrantortrust.

Withrespecttoanongrantortrust,iftheSCINiscancelleduponyourdeath,anydeferredgainwillberecognizedatthattime.However,althoughtheissueisnotclear,suchdeferredgainarguablyshouldnotberecognizedifthepurchaserwasagrantortrust.Withrespecttoanongrantortrust,iftheprincipalpremiumapproachistaken(i.e.,increasedpurchaseprice),itwillresultinhighercapitalgainsandlowerinterestincomebeingreportedbyyou.Accordingly,thetrustwouldreceiveahigherbasisintheinterestandlowerinterestdeductions.Conversely,iftheinterestpremiumapproachistaken,itwillresultinlesscapitalgainsandhigherinterestincomebeingreportedbyyou,withacorrespondinglowerbasisandhigherinterestdeductions.


PLANNINGWITHRESIDENTIALREALESTATE

WHATARETHETAXASPECTSOFRETAININGARESIDENCEUNTILIDIE?

Ifyouownaresidenceatthetimeofyourdeath,itwillbeincludedinyourestateforestatetaxpurposes.Aswithotherassets,yourestatewillgeta“step-up”incostbasisasofthedateofdeathsothattherewouldbenogainonsaleifitwassoldatthedateofdeathvaluationprice.Formanypeoplewhopurchasedahomelongago,itbemightbeadvantageoustoholdontothehouseuntiltheydieinordertowipeoutthepotentialcapitalgains.

DOMYHEIRSHAVETOPROBATETHEHOUSE?

Yourexecutorhastoopenaprobateinanystateinwhichyouownrealestateatthetimeofyourdeath.Inordertoavoidthis,manypeopletransfertheirhomesintothenameoftheirrevocabletrust.Thiswillnotavoidestatetaxesbutitwillavoidhavingtogothroughanancillaryprobate.However,itisimportantbeforemakinganytransfertoconfirmitwouldnotadverselyaffectanypossiblehomesteadexemptionsinstatessuchasFlorida.

AnotherapproachtoavoidprobatewouldbetoplacethehouseinthenameofanLLCsothatthemembershipinterestiswhatisownedinsteadoftherealestateitself.Thismayalsoavoidestatetaxesinsomestates,butthisareaisstillevolving.

WHATESTATEPLANNINGTECHNIQUESCANIUTILIZEWITHMYRESIDENCE?

Thereareseveralapproachesthatcouldbeutilizedwhenmakinggiftsofrealestatebut,aswithanygift,therecipientwillreceiveacarryovercostbasisinrealestate.Accordingly,itisimportanttoevaluatewhetherandhowmuchcapitalgainsmightbepassedontotherecipientandwhetherthetaxeffectswilloutweighanypotentialestatetaxbenefits.Theapproachesmostcommonlyusedare:

• QPRT(seeseparatewhitepapertopic)• SaletoGrantorTrust(seeseparatewhitepapertopic)• LLC(seebelow)• Outrightgiftorintrust(seebelow)

WHATAPPROACHESCANITAKEFORMANAGINGTHEFAMILYVACATIONHOME?

Thethresholdquestionwithanyofthisplanningisdothechildrenwantthehomeatall?Differentbeneficiariesmayhavedifferenteconomicsituationsorliveindifferentplacesacrossthecountryorworldandmaynotmakethesameuseoftheproperty.Itisimportanttohaveopenconversationsanddiscussionstoensurethatovertimetheproperty(andexpectations)


canbemanagedproperly.Therealsoshouldbesomediscussionofhowmuchmoneyisneededtosustainthepropertyandwhetheritcanberentedtounrelatedpeople.

Atrustcanbeusedinwhichatrusteecontrolstherealestate,butthatmayplacethetrusteeinthepositionofhavingtobalancedifferentbeneficiaries’interestsanduseoftheproperty.

Alimitedliabilitycompanyisoftenagoodwayformanagingasecondorvacationhome.ThefamilyortrustsfortheirbenefitwillownthepropertyasmembersoftheLLCandtheLLCOperatingAgreementwillsetouttherulesformanagingtheproperty.Themanagerswillmanagetheproperty,andtheOperatingAgreementwillsetouthowmanagerswillbesucceededandelected.

Anexitplanformembersshouldbethoroughlydiscussed:willtherebeprovisionsforbuyingoutamemberand,ifso,howwillthatbedone?Overtimeorimmediately?Atwhatprice?Willtherebeanytransferrestrictionsonamember’sdeath,divorceorcreditorproblems?Howwillthepropertybemanagedasgenerationscontinue?Howwillusagebescheduled?Howwillexpensesbemanaged?Throughanendowmentorcontributions?Ifthereisadisputehowwillitberesolved?

Thereareno“correct”waystoanswerthesequestionsorevenbestpracticesapproachesotherthantohaveopenandhonestdiscussionsregardingtheproperty.Propertyheldatthe“siblings”levelcanoftenbemanagedfairlywell,butoncethepropertydescendstothe“cousins”levelandpeople’spersonalandeconomicsituationsbegintodiverge,andthenumberofpeoplewithinterestsbeginstomultiply,itisdifficulttobalanceinterestsunlessthepropertyisendowedwithsubstantialfunds.

WHATARETHEBENEFITSOFMAKINGAGIFTOFARESIDENCEINTRUSTVERSUSOUTRIGHT?

Thebenefitsofmakingagiftintrustisifthedonorismarried,heorshecanretainindirectuseoftherealestate,becausethespouse,asbeneficiaryofthetrust,wouldbeentitledtousethepropertyrent-free.Normally,ifadonormakesagiftofaresidence,theonlywayheorshecanstillusethepropertyisifheorshepaysfairmarketrent.Otherwise,theIRSwouldlikelyarguethatthedonorretaineduseofthepropertyandseektoincludethepropertyinthedonor’sestateundertheretainedlifeestateprovisionsofInternalRevenueCodesection2036.

However,ifthespousediesortheybecomedivorcedandthegrantordesirestocontinuetousetheproperty,or,ifthedonordoesnothaveaspouse,heorshewouldneedtorentfromthetrust.Thiscanactuallybeapositiveplanningtechnique,sinceifthetrustisstructuredasa“grantortrust,”thepaymentofrentwillnotbeconsideredincomeforthetrustandthepaymentofrentbecomes,inessence,anadditionalgifttaxfreegifttothetrust.

Makingagiftoftherealestateintrustversusoutrightisalsoawaytoprotectandpreservetherealestatefortheintendedbeneficiaries.Ifagiftismadeoutrighttoabeneficiaryandthebeneficiarydies,getsdivorcedorhascreditorproblems,therealestatewouldbedisposedofinaccordancewiththebeneficiary’sestateplanormaybesubjecttodivorceorbankruptcy


proceedings.Retainingtherealestateinaproperlydraftedcreditorprotectiontrustcankeepthepropertyprotectedfromthoseclaims.

Thegrantorcanalsosetoutinthetrustagreementexactlyhowtherealestatewillbemanaged.Useofatrustwilleffectivelyrestrictthetransferoftherealestateandkeepitsusewithinaclassofbeneficiaries.Thetrusteecontrolshowandwhenthepropertyisused.Animportantpartofputtingtherealestateintrustistoprovideforhowtherealestateexpenseswillbemade.Willitbeexpectedthatthebeneficiariescontributeorpayrent?Whatifsomeofthebeneficiariesusethepropertyandsomedon’t?Itmaymakesensetoendowthetrustwithasumofmoneytocovercapitalexpensesandrepairs.Evenso,itcanbedifficultforatrusteetomanagethedivergentinterestofthebeneficiaries.


PRIVATEANNUITIES

WHATISAPRIVATEANNUITY?

Aprivateannuityisanarrangementwhereinexchangeforpropertysold,theseller/annuitantreceivesannualannuitypaymentsfortheremainderofhisorherlifetime.Anannuityisprivateifthepurchaserisnotinthebusinessofmakingannuities.Aprivateannuityisusedwheretheseller’sactuallifeexpectancyislikelytobelessthanhisorheractuariallifeexpectancy.

WHATARETHEBASICSOFAPRIVATEANNUITY?

Theclientsellsanassetorpaysmoneytoabuyerinexchangeforsuchanagreementtopayanannuitytothesellerforsuchseller’slifetime(orthejointlifetimesofsuchsellerandhisorherspouse).Thesellerremovesappreciatingstockfromtheseller’sestateandretainsthevalueoftheannuitypayments.Thisisaparticularlyusefulstrategytoprovideincometotheseller(andperhapstheseller’sspouse)forlifewhiletransferringinterestinclosely-heldbusinesstothenextgeneration.

WHENSHOULDIUSEAPRIVATEANNUITY?

Thistechniqueisabitofagambleasthetaxbenefitsofthetechniquearemaximizedifthetransfereediesbeforelifeexpectancy.Ifthetransferorsurvivesbeyondhisorherlifeexpectancy,thetransfereemayrepayanamountinexcessofthevalueoftheassettransferred,andpotentiallyincreasethevalueofthetransferor’sestatemorethanifthetransferhadneveroccurred.Thisriskisminimizedwheretheassetgrowssubstantiallyinvaluewhileinthehandsofthetransferee.Privateannuitiesworkbestforthosewhoareailing,butnotsomeonewhoisterminallyill.

HOWISAPRIVATEANNUITYCALCULATED?

Aproperlystructuredprivateannuityagreementmustmeetthefollowingcriteria:

• Thevalueoftheannuitypaymentsshouldequalthevalueofthepropertytransferred,becausetheannuitytransactionisnottreatedasagiftaslongastheactuarialvalueoftheannuityequalsthevalueofthestockthatistransferred.Unlesstheseller/annuitanthasaterminalillness,theannuitypaymentsaredeterminedbyusingthesection7520rateandtheIRS-approvedactuarialtablesforthemonthinwhichthesaleoccurs.Anessentialelementtothisplanningrequiresthatyougetamedicalopinionthatyouhaveatleasta50%likelihoodofsurvivingforone(1)yearasofthedateofthesale.Actuarialtablescannotbeusedtovaluetheseller’slifeexpectancyifthereisa50%ormorechancethatthesellerwilldiewithinone(1)yearafterthetransactionduetocurrenthealthproblems.Ifthereisa50%ormorechangethatthesellerwilldiewithinayear,theseller’sactuallifeexpectancymustbeused.However,iftheselleractuallylivesfor


eighteen(18)monthsafterthetransfer,thenthesellerispresumedtonothavebeenterminallyill.

• Theannuitypaymentscannotbetiedtotheincomegeneratedbythetransferredinterest,eitherdirectlyorcircumstantially.DoingsowouldgivetheIRSgroundstoassertthatyouretainedtherighttoenjoytheincomeforyourlifetime,whichwouldcausetheentirevalueofthetransferredinteresttobeincludibleinyourestateforestatetaxpurposes.

WHATARETHEADVANTAGESTOUSINGAPRIVATEANNUITY?

Theprivateannuityoffersthefollowingbenefits:

Estate tax savings upon premature death.

Theremainingprincipalbalancewouldnotbeincludedintheseller’sestateattheirdeathbecause,bythetermsoftheprivateannuitycontract,itcancelsattheseller’sdeath.Theestatetaxsavingscanbesubstantialifthesellerdiesmateriallypriortohisorherlifeexpectancy.Ifthepurchaserisanongrantortrust,theseller’sestatewouldbefurtherreducedbythecapitalgainstaxespaidonthesale.

Backloading of payments.

Theprivateannuitycanbedesignedsothateachannuitypaymentincreasesupto120%morethanthepriorannuitypayment.Suchbackloadingofferstheadvantageofnecessitatingsmallpaymentsinthebeginningtoleveragethereturnontheinterestthatwassold.Comparethiswithatraditionalinstallmentsale,wherebackloadingisavailableintheformofinterest-onlypaymentswithaballoonpaymentofprincipalattheendoftheterm.

Lesser Risk of Survivorship.

Survivorshipbeyondtheseller’sactuariallifeexpectancyislikelytoresultinahigherestatetaxliabilitythanifthesellerweretoimplementatraditionalinstallmentsale.However,thisriskislessseverewithaprivateannuitythanaSelf-CancellingInstallmentNote(“SCIN”),whichincludesariskpremiumandprovidesforaballoonpaymentofprincipalattheendofatermthatisshorterthantheseller’slifeexpectancy.

Fewer calculation uncertainties.

SincethefactorsonwhichaprivateannuityarebasedaregivenbytheIRS,thecalculationofpaymentsunderaprivateannuityarerelativelystraightforward.ASCINdoesnotcomewithsuchassurances.

WHATARETHEDISADVANTAGESTOUSINGAPRIVATEANNUITY?

Aprivateannuityhasthefollowingdisadvantages:


Immediate recognition of capital gain if sale to nongrantor trust.

Ifthesellersellshisorherinteresttoanongrantortrust,thesellerwouldimmediatelyrecognizecapitalgain.

No stepped-up basis in sold assets.

Sincethesellerwillnotholdtheseller’sinterestathisorherdeath,suchinterestwillnotobtainthestep-upincostbasisattheseller’sdeath,andasubsequentsaleoftheinterestbytheTrusteewouldgenerateacapitalgainstaxevenifthesaleoccursimmediatelyaftertheseller’sdeath.However,ifthesaleismadetoanongrantortrustthebuyerswouldhaveabasisequaltothepurchaseprice(withanyappreciationaccruingafterthesalebeingsubjecttofuturecapitalgainstax).Ifthemaximumfederalestatetaxrateishigherthanthecapitalgainstaxrate,theadvantagesoutlinedabovemayoutweighthisdisadvantage.

Larger payments back to seller.

Theannualpaymentsbacktothesellerwillbehigherthanthepaymentsunderatraditionalinstallmentsaleforatermequalingyourlifeexpectancy.Thisisbecausetheprivateannuitypaymentsmustaccountforthepossibilitythatthesellermaydieprematurely.Additionally,theannuitypaymentsarebasedonthehigher7520rateasopposedtotheAFR.

ARETHEREINCOMETAXCONSEQUENCESTOUSINGAPRIVATEANNUITY?

Iftheseller’sinterestissoldtoagrantortrust,thesaleofsuchinterestshouldbeanontaxableeventforincometaxpurposes.Althoughgrantortruststatusceasesupontheseller’sdeath,becausetheannuitypaymentsceaseatdeath,anydeferredgainshouldnotberecognized.

Ifthepurchaserisanongrantortrust,asaleofpropertyinexchangeforaprivateannuityisataxableeventforincometaxpurposes.DuetoarecentchangeinpositionbytheIRS,suchsaletoanongrantortrustinexchangeforaprivateannuitywillcauseanimmediaterecognitionofcapitalgainbecausethesalewillnotqualifyforinstallmentsaletreatment.


ADMINISTRATIONOFGRATS,QPRTS,IRREVOCABLEGIFTTRUSTS,IRREVOCABLEINSURANCETRUSTS

AsopposedtoRevocableTrusts,GRATs,QPRTs,IrrevocableGiftTrusts,andIrrevocableInsuranceTrustsareallirrevocabletrusts,meaningthattheycannotbechangedbytheGrantororanyotherperson,andeachtypeoftrusthasuniqueitemsofadministrationonwhichtheTrusteemustfocus.Typically,theseIrrevocableTrustsaredraftedtobe“GrantorTrusts”forincometaxpurposes,duringtheGrantor’slifetime,sothattheincometaxesarepaidbytheGrantor.

WHATARETHEUNIQUEASPECTSOFADMINISTERINGGRATS?

TheadministrationofaGRAThasafewdifferencesfromtheadministrationofaRevocableTrust.TheTrustee,inadditiontomakinginvestmentdecisionsandmanagingtheassets,willberequiredtomakeannualannuitydistributionstotheGrantor.Generally,theTrusteewillmakeeachannuitypaymentbydistributingcash,totheextentthereiscashavailable;however,sincethegoalisahighrateofreturn(tomaximizethevaluereceivedbytheultimatebeneficiaries),oftentherewillnotbesufficientcashavailabletomakealloftheannuitypayments,sotheTrusteewillhavetomakedistributionswithotherassets.Tomakeinkinddistributions,theTrusteewillberequiredtogetavaluationoftheassetsbeingdistributedasofthedateoftheannuitypayment.

WHATARETHEUNIQUEASPECTSOFADMINISTERINGQPRTS?

SinceaQPRTcannotholdanyotherassetsotherthananinterestinoneresidenceandcertainrelatedassets,theadministrationofaQPRTisfairlystraightforward,exceptforcertainsituations.Generally,theTrusteeismanagingtheresidenceandmaybepayingcertainexpensesrelatedtotheresidence.TheGrantormaycontributecashtotheQPRTfortrustexpensesthatareexpectedtobepaidwithinsixmonths,suchasimprovements,and,iftheTrusteehasenteredintoacontractforpurchaseoftheinitialorreplacementresidence.IftheQPRTisholdingadditionalcash,theTrusteemustdeterminequarterly,theamountsofcashthatareinexcessofthepermissibleamount,and,ifany,suchcashmustbeimmediatelydistributedtothetermholder.Additionally,proceedsfromthesaleoftheresidenceoraninsuranceclaimprovideuniqueadministrationaspects.TheTrusteemustusetheproceedsfromthesaleorinsurancetopurchaseanewresidenceorconverttheQPRTintoaGRAT.

WHATARETHEUNIQUEASPECTSOFADMINISTERINGIRREVOCABLEGIFTTRUSTSANDIRREVOCABLEINSURANCETRUSTS?

OneofthemainadministrationaspectsofIrrevocableGiftTrustsandIrrevocableInsuranceTrustsisinsuringthecontributionstothetrustqualifyforthegifttaxannualexclusion.Toqualify,theTrusteemustmakesurethatthetrustnotifiesthebeneficiariesthatacontributionhasbeenmadeandthatthebeneficiarieshavearighttowithdrawallorpartofthecontribution.


Thenotificationisdonethroughwhatiscommonlyreferredtoasa“Crummeyletter.”BeyondinsuringtheCrummeylettersaresenttothebeneficiaries,theTrusteewillneedtomakeinvestmentdecisionsandmanagetheassetsofthetrust,inthesamemannerasanyothertrust.ForanIrrevocableInsuranceTrust,theTrusteewillalsoneedtomakesuretheinsurancepremiumsarepaidoutofthetrustassets.


ASSETPROTECTIONPLANNING

WHATISTHEPURPOSEOFASSETPROTECTIONPLANNING?

Ourjudicialsystemisasfairasitcanbe,butitisinherentlyunfairinasignificantway:itisoftenexpensivetodefendagainstunwarrantedclaims.Itisnosecretthatsocietyhasbecomehighlylitigiousandthistrendisunlikelytochange.Thisisinlargepartduetolitigationservicesbasedonacontingencyfee.Inanidealworld,thecontingencyfeemodelwouldweanoutfrivolousclaimsbecauseanunsuccessfulattorneywouldnotbereimbursedforcostsandbillabletime.However,the“success”oftheplaintiff’sattorneyisoftenachievedwithasettlementbeforeanexpensivetrial.Ofcourse,thesuccesscomesattheexpenseofthedefendant,whochoosestopayaknownamountthanriskthepossibilityofpayingamuchhigheramount,potentiallyacatastrophicamount.Thereinliesthepurposeofassetprotectionplanning:toobtainnegotiatingleverageagainstafutureunforeseeablecreditorbyusinglocalstatelawtoprotectexemptassetsandusingotherlaws,whetherdomesticorforeigntoprotectnonexemptassets.

WHENSHOULDICONSIDERASSETPROTECTIONPLANNING?

Thisquestionshouldberephrasedasfollows:“WhencanInotengageinassetprotectionplanning?”Answer:Youusuallycannotengageinassetprotectionplanningwhenaclaimisbroughtagainstyouoryouareaware(orshouldbeaware)thataclaimcouldbebroughtagainstyou,especiallyifthevalueofthatclaimintheleastfavorablelight(i.e.,theworst-casescenario)exceedsthevalueofyourassetsthatareavailabletosatisfythecreditor’sclaim.Thus,ifyouhaveassetsthatyoudonotwishtobeexposedtocreditors’claims(whetherajudgmentoranegotiatedsettlement),youshouldconsiderassetprotectionplanningwhileyouonlyhavefutureunforeseeablecreditors.

WHATISAFUTUREUNFORESEEABLECREDITOR?

Fromanassetprotectionperspective,therearethreetypesofcreditors:1)apresentcreditor,2)afutureforeseeablecreditor,and3)afutureunforeseeablecreditor.Thefirsttwotypesofcreditorsareprotectedbyso-calledfraudulenttransfer,fraudulentconversionandvoidabletransactionlaws,whichprotectthepropertyrightsofcreditors(i.e.,theabilitytocollectonajudgment).Afutureunforeseeablecreditorisonewhocouldnotbeknownoridentifiedattherelevanttime.

Itwouldseemthatfuturecreditorsarealwaysforeseeableforthosewhoworkinhighliabilityprofessions.However,moststatesdonotdefine“foreseeability”inthishypotheticalmanner.Forexample,onewouldthinkthatanOBGYNcouldneverengageinassetprotectionplanningbecauseofthesheerpossibilityofcommittingmalpracticeduringhisorhercareer.Rather,tobeforeseeable,theOBGYNwouldneedtobeawareofaspecificpatientwhocouldbringaspecificclaimformalpractice.


WHATASSETSAREEXEMPTFROMCREDITORS’CLAIMS?

Statelawusuallydetermineswhatassetsareexemptfromcreditors’claims.Becauselawsdifferfromstatetostate,oneshouldcarefullyreviewthecurrentexemptionsgrantedunderhisorherstatelaw.Thefollowingareclassesofassetsthatmaybeexemptunderstatelaw:

• Retirementplanassets,including,butnotlimitedto,IndividualRetirementAccounts(IRAs),RothIRAs,SimplifiedEmployeePensionplans(SEPs),and403(b)annuities.401(k)assetsareexemptunderERISA(EmployeeRetirementIncomeSecurityAct),afederallaw.

• Lifeinsuranceonone’slife,whetherthecashsurrendervalue,proceedsupondeath,orboth.

• 529Plans.• Annuities.• Homesteadproperty(thatis,one’sprimaryresidence).Ahandfulofstatesfullyprotect

homesteadproperty.Forexample,ingeneral,FloridalawprotectsFloridahomesteadpropertyfromforcedsaleaslongasitiswithinthesizelimitations,whichareupto160acresofcontiguouslandiflocatedoutsideamunicipalityoruptoa1/2acreiflocatedwithinamunicipality.

• Asbetweenspouses,tenancybytheentiretiespropertyisexemptfromacreditorofasinglespouse.Tenancybytheentiretiespropertyismorecommonlypermittedinrealestatebutseveralstatespermititinpersonalproperty,suchasvehicles,andintangiblepersonalproperty(e.g.,financialaccountsandinterestsinentitieslikecorporations,partnershipsandlimitedliabilitycompanies).

ARETHEASSETSHELDBYAREVOCABLETRUSTEXEMPTFROMCREDITORS’CLAIMS?

No,becausethegrantorofthetrust(thatis,thepersonwhotransferspropertytotheRevocableTrust)hasretainedthepowertorevokethetrust.Thelawpermitsthegrantor’screditorstoreachtheassetsofatrusttothemaximumextentagrantorhasthepowertocontroltheassets.Sincethegrantorcanrevokethetrust,allofthetrustassetscanbenefitthegrantoratanytime.

DOESALIMITEDLIABILITYCOMPANYPROTECTASSETSFROMCREDITORS?

Theprotectionofferedbyalimitedliabilitycompany(LLC)underastandardstateLLCActofferstwotypesofprotections,“inside”protectionand“outside”protection.Theinsideprotectionissimilartothatofanyothercorporateentity.TheadvantageofdoingbusinessthroughanentitysuchasanLLCisthatinthenormalcourseofbusinesstheonlyassetssubjecttotheclaimsofthosedealingwiththeLLCaretheassetsheldbytheLLC.ThispermitstheownersoftheLLCtolimittheexposureoftheirpersonalassetsiftheLLCissubjecttocreditors’claims.

TheoutsideprotectiondealswithanLLC’sownerbeingsubjecttocreditors’claims.IftheLLCownerispersonallyliabletoajudgmentcreditor,oftenunrelatedtotheLLC,theapplicablestate


LLCActgenerallyprovidesthatthesoleandexclusiveremedyofjudgmentcreditoristoobtaina“chargingorder”againsttheowner’smembershipinterestintheLLC.TheeffectofachargingorderisthatanyLLCdistributionthatwouldbemadetothedebtor/ownermustinsteadbepaidtothejudgmentcreditoruntilthejudgmentissatisfied.ThiscreatesanadvantagebecausethejudgmentcreditorcannottaketheLLCmembershipinterestfromthedebtor/owner.Ofcourse,thedebtor/ownercannotbenefitfromLLCdistributionsduringthisperiod.Still,theownerisinabetternegotiatingpositionthanwithouttheoutsideprotectionbecauseLLCdistributionscouldbewithhelduntilasettlementisreached.

ARESOMELIMITEDLIABILITYCOMPANIESBETTERTHANOTHERS?

Thisquestioncannotbeansweredeasily,butthereisakeyconcernofwhichtobeaware.Alimitedliabilitycompanywithonlyonemember(commonlyreferredtoasa“singlememberLLC”)mayofferlessoutsideprotectionthanalimitedliabilitycompanywithtwoormoremembers(commonlyreferredtoasa“multimemberLLC”).Inmanyjurisdictions,achargingorderisthesoleandexclusiveremedybywhichajudgmentcreditorofamembermaysatisfyajudgment.ThismeansthatthejudgmentcreditorcannotattachtheassetoftheLLCbutinsteadislimitedtoreceivingdistributionsmadebytheLLConbehalfofthedebtormember.SomestatesprovideonlylimitedoutsideprotectiontotheownerofasinglememberLLC.Forexample,underFlorida’sRevisedLimitedLiabilityCompanyAct,ifthejudgmentcreditorcanprovetothecourtthatthejudgmentwillnotbesatisfiedinareasonabletime,achargingorderisnotthesoleremedyandthecourtmayorderthesaleoftheLLCinteresttosatisfythejudgment.Otherstates,suchasDelaware,NevadaandSouthDakota,providethatachargingorderisthesoleandexclusiveremedy,includingforanLLCwithasingleowner.ArelatedconcerniswhetherastatelikeFloridacanapplyitschargingorderlawtoLLCsformedinanotherstate.Thelawisnotclear.

WHATISTHEDIFFERENCEBETWEENA“MEMBERMANAGED”LLCANDA“MANAGERMANAGED”LLC?

Thesetermsareoftenconfused.Ingeneral,thechiefoperatingofficerofanLLCisthemanager.AmembermanagedLLCisonethatrequiresthemanagertoalsobeamemberoftheLLC,whereasthemanagerofamanagermanagedLLCcanbeanyone,includinganotherLLC.Forthegreatestflexibility,amanagermanagedLLCisusuallypreferable.


ASSETPROTECTIONTRUSTS

WHATISANASSETPROTECTIONTRUST(APT)?

Atrustdesignedtoprotecttheassetsthegrantorhastransferredtoit.Thistypeoftrustistechnicallyreferredtoasa“self-settledirrevocablespendthrifttrust.”Thetrustisself-settledbecausethegrantorisalsoabeneficiaryofthetrust.Thetrustcannotberevokedbythegrantor.Finally,thetrustcontainsspendthriftprotection,meaningthatthecreditorsofabeneficiarycannotattachtheassetsofthetrust.

WHATADVANTAGESDOESANASSETPROTECTIONTRUSTOFFEROVEROTHERENTITIESTHATPROTECTASSETS,SUCHASALIMITEDLIABILITY

COMPANY(LLC)ORLIMITEDPARTNERSHIP(LP)?

APTshavethedistinctadvantageofpermittingtheTrusteetomakedistributionstoorforthebenefitofanyoneormoreofthetrustbeneficiaries.Consequently,ifabeneficiaryhadcreditorconcerns,includingthegrantor,theTrusteecaneconomicallybenefitthebeneficiarywithoutthebeneficiaryreceivingtrustassets(forexample,makingamortgagepaymentorpayinglitigationfees).AnLLCorLPmustmakeitsdistributionsdirectlytoitsowners,insteadoffortheirbenefit,whichallowscreditorstocollectsuchdistributions.

WHATJURISDICTIONSCANANASSETPROTECTIONTRUSTBECREATED?

Domestically,thetrendhasbeenonestateperyearhasaddedAPTlegislation.Unlessyouliveinastatethathassuchlegislation,thegeneralsentimentisthattherearefourtoptierstates,whichare(inalphabeticalorder)Alaska,Delaware,NevadaandSouthDakota.In1996,AlaskawasthefirststatetoauthorizeAPTs.However,foreignjurisdictionshavepermittedAPTsevenearlier.TwoofthemostcommonforeignjurisdictionsusedareNevisandtheCookIslands,althoughtherearemanyothers.

WHATISTHEDIFFERENCEBETWEENADOMESTICANDAFOREIGNASSETPROTECTIONTRUST?

Otherthantheirgeographiclocationandspecificlegislation,theprimarydifferenceisthattheTrusteeofaforeignAPTisnotsubjecttothelawsofanystateintheUnitedStatesofAmerica.ThereisaconcernthattheUnitedStatesConstitutionmayrequireanassetprotectionstatetohonorjudgmentsfromhersisterstates.Thewidely-heldviewisthatthiswillnotbethecase.However,asof2017,nocasehasexaminedthisissue.EstablishinganAPToutsidetheUnitedStatesshouldeliminatethispossiblerisk.


WHOCONTROLSANASSETPROTECTIONTRUST?

Ideally,theGrantorshouldnothaveanycontrolovertheAPT.AlthoughtheTrusteeisthelegalownerofthetrustassets,oftena“TrustProtector”or“TrustAdvisor”isthepersonwhohastheauthoritytocontroltrustactivities.Typically,theTrustProtectorofadomesticAPThasthepowertodirecttheTrusteehowtoinvesttrustassetsandtomakedistributionstobeneficiaries.WithrespecttoaforeignAPT,usuallytheTrustProtectormustconsenttoTrusteedecisionsbeforetheyareauthorized.Finally,theTrustProtectorwillusuallyhavethepowertoremoveandreplacetheTrustee.Giventhiscentralrole,theselectionoftheTrustProtectorissignificant.

InsteadofaTrustProtectorcontrollingdistributionorinvestmentdecisions,analternativeistoincorporateDistributionorInvestmentCommittees.

HOWMUCHCANONETRANSFERTOANASSETPROTECTIONTRUST?

Mosttrustcompanieswilllimitthefundingtobenomorethan50%oftheGrantor’sliquidassets.Exceptionsmaybemadeonacasebycasebasis.TheconcernisthatoverfundingmayresultintheGrantor’sinabilitytosatisfyhisorherdebtsintheastheycomedueormayrendertheGrantorinsolvent.Ineithersituation,thelegallyresultmaybethattheGrantormayhaveviolatedthefraudulenttransferorvoidabletransactionlaws,whichwouldexposetheassetstocreditors’claims.

WHATTYPEOFASSETSMAYBETRANSFERREDTOANASSETPROTECTIONTRUST?

AlmostanyassetcanbetransferredtoanAPTifitisacceptabletotheTrustee.Transferringcashandmarketablesecuritiesisthesimplest.Lessliquidassets,suchasrealestateorclosely-heldcompanies,mustbehandledwithmorecareandexamination.Qualifiedretirementaccounts,suchasIndividualRetirementAccounts(IRAs)and401(k)s,cannotbetransferredtoanAPTunlesstheaccountassetsaredistributedtotheowner,whichmayresultintaxableincome.


FAMILYTRUSTCOMPANIES

WHATISAFAMILYTRUSTCOMPANY?

Ingeneral,aFamilyTrustCompanyisanentitywhichprovidestrustservicessimilartothosethatcanbeprovidedbyanindividualorfinancialinstitution(i.e.,abankorpublictrustcompany).ThisincludesservingasTrusteesoftrustsheldforthebenefitofthefamilymembers,aswellasprovidingotherfiduciary,investmentadvisory,wealthmanagement,andadministrativeservicestothefamily.

WHATARESOMEREASONSTOHAVEAFAMILYTRUSTCOMPANY?

• Thefamilyneedsanindependenttrusteeandthetraditionaltrusteeoptionsdonotsuitthefamily’scircumstances(e.g.,operatingasignificantfamily-ownedbusiness).

• AFamilyTrustCompanyfocusedonthefamily’scircumstancesmaybebettersuitedtohandlespecializedassets,suchasagriculturalproperties,family-ownedbusinesses,oralternativeinvestments,includingprivateequityandventurecapitalinvestments.

• AFamilyTrustCompanycanprovideheightenedresponsivenessandflexibilityforafamily,includingallowingthefamilytoselectseparateinvestmentmanagersforspecificassetclasses.

• AFamilyTrustCompanyfostersconsolidationofinvestmentsandfamilyofficermatters.• AFamilyTrustCompanycanpromotenon-familyfinancialobjectives,includingfamily

successionplanningandwealtheducationforyoungergenerations.• AFamilyTrustCompanycanprovideentrepreneurialmindsettothemanagementofthe

family’sinvestments.• ThefamilymaydesiretoavoidbeingsubjectedtosupervisionbytheFederalSecurities

andExchangeCommission(SEC),byinsteadsubjectingtheFamilyTrustCompanytothesupervisionoftherelevantstateregulator.

WHOCANFORMANDOWNAFAMILYTRUSTCOMPANY?

Generally,aFamilyTrustCompanymustbeownedexclusivelybyfamilymembers.

WHOMMAYAFAMILYTRUSTCOMPANYSERVE?

AFamilyTrustCompanymayprovidefiduciaryservicesonlytotheparticipatingfamilymembers(nottothegeneralpublic).


CROSS-BORDERTAXISSUES

Duetonumerousinternationalfinancialandassetdisclosureagreements,thecountriesaroundtheworldaresharinganindividual’sassetandincomehistoryandforcingtaxcompliance.Asaresult,individualswholiveinlesssecurecountriesarebeginningtofearforthesafetyoftheirfamiliesandturningtocountriesliketheUnitedStatesforresidence.Thefollowingisadiscussionofthevarioustrapsonemayencounterindealingwithacross-bordertransaction.

DOESAU.S.CITIZEN’SU.S.ESTATEPLANDOCUMENTSGOVERNTHEDISPOSITIONOFTHEIRFOREIGNASSETS?

WhenaU.S.citizenorU.S.residentownsforeignassets,theindividualneedstomakesurethatthetaxandestateplanningissuesconcerningtheforeignjurisdictionhavebeenconsidered.Inmostcases,theuseofaU.S.Willtocontrolthedispositionofforeignassetswillbesufficient.Ifthepropertyislocatedinajurisdictionwherethesuccessionlaws(e.g.,forcedheirship)ofthatcountrywillproducearesultthatiscontrarytotheU.S.estateplan,thenitmustbedeterminedwhetherthesuccessionlawsoftheapplicablestatewithintheU.S.canbeusedintheforeignjurisdiction.Forexample,mostcountriesoftheEuropeanUnionpermitaU.S.WillofaU.S.citizendomiciledintheU.S.toexpresslyoptoutofthesuccessionlawsoftheapplicableEuropeancountryandapplytheU.S.successionlaws.AnotherexampleisSwitzerlandhaslegislationthatallowsonetooptoutoftheirsuccessionlaws.

Afteronehasanalyzedtheapplicablesuccessionlaws,theimpactofusingatrusttoholdforeignassetsmustbeanalyzed.Mostcountrieshavedifficultyinunderstandingtrustlawanditsimpactundertheirrespectivetaxcodes.Carefulconsiderationneedstobemadeonusingatrusttoholdanyforeignassets.Therecanbesignificantincome,giftandinheritancetaxconsequences.Ifthetrustisnotaviableoption,thentheuseofaLimitedLiabilityCompany(ownedbyatrust)mayprovidetheestateplanningbenefitsfortheindividual.OtheroptionscanbeusingforeignstructurestoholdtitleoftheforeignassetsthatcouldthenbeownedbytheU.S.citizenorU.S.entity.However,youmustanalyzewhethertheforeignentitywillcauseanadverseU.S.incometax.

ARETHEREANYTAXISSUESIFANON-U.S.CITIZENRESIDINGINTHEU.S.DECIDESTOMOVEOUTOFTHEU.S.?

Yes,itisdependentonthelengthofstayintheU.S.Unlessmodifiedbyataxtreaty,anon-U.S.citizenwhohasbeenalawfulpermanentresident(e.g.,holdsagreencard)oftheU.S.foreightofthefifteenyearsendingwiththeyearduringwhichtheindividualleavestheU.S.isconsideredaLong-TermResident.IfaLong-TermResidentmovesfromtheU.S.resultinginthecessationoftheirstatusasaU.S.resident,thentheLong-TermResidentwillbedeemedtohaveexpatriatedfromtheU.S.Ataxtreatymayprovideaplanningopportunitybyhavingtheindividualclaimaresidencetie-breakerwithaforeigncountrypriortobecomingaLong-TermResident.However,ataxtreatycanalsocauseanaccidentalexpatriation.IfanindividualisconsideredaLong-Term


Residentanddecidestoexercisearightunderthetreatytochangetheirtaxresidencetoanon-U.S.country,thentheindividualwillhavedeemedtohaveexpatriated.IfaLong-TermResidentisdeemedtohaveexpatriatedfromtheU.S.bybecominganon-U.S.resident,thentheindividualwillbeknownasacoveredexpatriateandwillbesubjecttoanexittax.

Acoveredexpatriateistreatedashavingsoldtheindividual’sworldwideassetsuponexpatriatingandmustreportthebuilt-ingainasincomeandpaytaxesonitaccordingly.Thewashsalerulesandprovisionsthatavoidtherecognitionofgain(e.g.,saleofresidence)donotapply.Thefirst$713,000ofgainisexemptfromtax.Thus,ifexpatriationisplanned,anindividualcanleveragetheexemptionbyrecognizinglong-termgainpriortoexpatriationandallocatingtheexemptiononshort-termgain.Inaddition,theindividualcouldengageinthewashsaletransactionspriortoexpatriation.Theremayalsobeanopportunitytodeferthedeemedrecognitionofbuilt-ingainuntiltheassetsareactuallysold.

Afteranindividualisconsideredacoveredexpatriate,anyattemptedtransfertoorforthebenefitofaU.S.residentorU.S.citizenwillbetreatedasacoveredgiftorbequestandsubjecttoU.S.estateorgifttax.

INLIGHTOFTHEINCREASEDCOOPERATIONBETWEENGOVERNMENTSINSHARINGFINANCIALINFORMATIONOFTHEIRCITIZENS,ARETHEREANYPROGRAMSINPLACETOHELPINDIVIDUALSBECOMECOMPLIANTBEFORE

THEGOVERNMENTPENALIZESTHEM?

Therearevariousvoluntarydisclosureprogramsthatallowanindividualtobecometaxcompliant.Thevoluntarydisclosureprogramsareknownaseitherageneralvoluntarydisclosureprogramoraspecialvoluntarydisclosureprogram.Thegeneralprogramsareprogramswithnospecifiedenddate.Thespecialprogramsareprogramswithaspecificdatethattheprogramends.SomeexamplesofgeneralprogramsareChile,Colombia,Mexica,RussiaandTaiwan.Someexamplesofspecialprograms(theexpirationdatesareinparenthesis)areArgentina(March31,2017),Brazil(October31,2016),India(September30,2016),Indonesia(March31,2017),Malaysia(December15,2016),SouthAfrica(stillindraftformbutsoontobeopened),Turkey(December31,2016)andtheUnitedStates(scheduledtobecloseduponadatetobereleasedsoon).Ifanindividualoptsnottobecometaxcompliantunderavoluntarydisclosureprogram,thentheindividualrunstheriskofhavingpenaltiesleviedagainstthem,forfeitureofassetsandincome,andcriminalprosecution.Inaddition,thefailuretobecometaxcompliantcouldalsojeopardizetheindividual’srelationshipwithbanksandotherfinancialinstitutions.

ARETHEREANYPROBLEMSWITHAU.S.CITIZENORU.S.RESIDENTHOLDINGINVESTMENTSINFOREIGNBUSINESSES?

ItisacommontrapforaU.S.citizenorU.S.resident(“U.S.Person”)totakeownershipofaninterestinanon-U.S.entity.Itcouldbeasituationwhereanon-U.S.citizenspouseorrelativetransfersaninterestinanon-U.S.entitytoaU.S.Person.Anothercommonwaytofallintothe


trapisforanon-U.S.citizenthatmovestotheU.S.whileowninganon-U.S.entity.ThetwocommontrapsarehavingtheforeignentityclassifiedasaControlledForeignCorporations(CFC)andPassiveForeignInvestmentCompanies(PFIC).

AU.S.shareholderofaforeigncorporationthatistreatedasaCFCfor30ormoreconsecutivedaysduringataxyearmustincludeintheshareholder’sgrossincomeforU.S.incometaxpurposestheshareholder’spro-ratashareoftheCFC’s(i)earningsinvested,orconsideredtobeinvested,inU.S.propertyand(ii)SubpartFincome.Itdoesnotmatterwhethertheincomeisactuallydistributed.HoldingthesharesinanentityorTrustwillnothelptheindividualbecausetheIRSwilllook-throughtothebeneficiaryorowner.AforeigncorporationistreatedasaCFConlyiftheU.S.shareholderscollectivelyownmorethan50percentofthetotalcombinedvotingpowerortotalvalueofthecorporation’sstock.

APFICisaforeigncorporationthatsatisfiesonofthefollowing:(i)75%ormoreofitsgrossincomeforthetaxyearconsistsofpassiveincomeunderSubpartFoftheCode,or(ii)50%ormoreofitsassets,onaverage,consistsofassetsthatproduce,orareheldfortheproductionof,passiveincome.Intheabsenceofanycorrectiveelections(e.g.,QEFelection),aU.S.shareholderissubjecttoU.S.taxandaspecialinterestchargeiftheshareholderreceivesanexcessdistributionfromthePFICordisposesofthestock.ThePFICstatusofaforeignentityshouldbereviewedtodetermineacorrectivemeasurecanbetaken,forexample,restructuringtheentity,distributingtaintedassets,convertingtoaflow-throughentity,makingaQEFormark-to-marketelection.

CANANON-U.S.CITIZENRESIDINGINTHEU.S.BESUBJECTTOU.S.INCOMETAXONWORLDWIDEINCOMEBUTNOTU.S.ESTATEORGIFTTAXON

WORLDWIDEASSETS?

Yes.TheU.S.taxrulessubjectinganon-U.S.citizentoincometaxaredifferentthantherulesforestateandgifttax.InordertobesubjecttoU.S.incometaxonworldwideincomeanon-U.S.citizenmustmeetoneofthefollowingtests:(i)a“lawfulpermanentresident”oftheU.S.atanytimeduringthecalendaryear(e.g.,holdsagreencard);(ii)satisfiesthe“substantialpresencetest”intheU.S.;or(iii)makesaspecialelectiontobetreatedasaU.S.taxresident.The“substantialpresencetest”issatisfiedifanindividualispresentintheU.S.for(i)183daysormoreduringthatcalendaryear,or(ii)atleast31daysduringthatcalendaryearandsatisfiesaphysicalpresencetest(183daysormoreoveraweightedthree-yearlook-back).Thephysicalpresenttestisthesumofthe(i)thenumberofdaysofphysicalpresenceintheU.S.inthecurrentcalendaryear,(ii)one-thirdthenumberofdaysofphysicalpresenceintheU.S.inthefirstprecedingcalendaryear,and(iii)one-sixththenumberofdaysofphysicalpresenceintheU.S.inthesecondprecedingcalendaryear.Ifanindividualdoesnotaveragemorethan121daysperyearthecurrentyearandtwoprioryears,thenthephysicalpresencetestwillnotbesatisfied.

Eventhoughtheindividualmaysatisfythe“substantialpresencetest”,theindividualmaybeclassifiedasanexemptindividualundertheInternalRevenueCode(e.g.,governmentofficial,full-timestudent,teacher,medicalconditions,andprofessionalathlete).Inaddition,the


“substantialpresencetest”isnotsatisfiedunderthecloserconnectiontestwhichmeanstheindividualispresentintheU.S.forfewerthan183daysintheapplicablecalendaryearandestablishesthattheindividualhasataxhomeinaforeigncountryandhasacloserconnectiontosuchforeigncountrythantotheU.S.Underthecloserconnectiontest,theindividualcannotbeintheprocessofapplyingforagreencardorapplyingforadjustmentofstatus.ThecloserconnectiontestmustbemadebyanelectiononForm8840whichisattachedtoForm1040NR.Finally,theindividualshouldverifythatanincometaxtreatyisnotineffectthatmayalterthestandardsforresidencyorprovideatie-breaker.

IftheindividualisaU.S.taxresident,thentheindividualissubjecttoU.S.incometaxonworldwideincome.Iftheindividualisanon-U.S.taxresident(andnon-U.S.citizen),thentheindividualissubjecttoU.S.incometaxonU.S.sourcefixedordeterminableannualorperiodicalincome(FDAPincome)(e.g.,interest,dividends,rent,salary)andincomethatiseffectivelyconnectedwiththeconductofatradeorbusinesswithintheU.S.(ECI).ECIistaxedattheregulargraduatedincometaxrates(0to39.6%).FDAPincomeistaxedataflatrateof30%.Anincometaxtreatymayalterthetaxrateand/ortypeofincomesubjecttotax.Ifataxtreatyisapplicable,thenaFormW-8BENorW-8ECImustbeprovidedtothewithholdingagent.

EventhoughoneisU.S.residentforincometaxpurposes,theindividualmaynotbeconsideredaU.S.domiciliarysubjecttoU.S.estate,giftandgenerationskippingtransfertaxes.InordertobedomiciledintheU.S.,theindividualmust(i)intendtopermanentlyliveintheU.S.,(ii)bephysicallypresentintheU.S.,and(iii)becapableofmakinganinformed,intelligentdecisionaboutlivingpermanentlyintheU.S.ThefactsandcircumstanceswillshowwhetheranindividualhadtheintenttolivepermanentlyintheU.S.oraforeigncountry.IfthepersonisnotdomiciledintheU.S.,thentheindividualwillbesubjecttoU.S.estate,giftandgenerationskippingtransfertaxesonU.S.situsassets.Thelifetimeexemptionamountagainstestatetaxesis$60,000.IftheindividualisdomiciledintheU.S.,thentheindividualwillbesubjecttoU.S.estate,giftandgenerationskippingtransfertaxesonworldwideassets.AsaU.S.domiciliary,theindividualwillhavethesamelifetimeexemptionamountsasaU.S.citizen.

ISTHEREANYTAXPLANNINGTHATANON-U.S.CITIZENSHOULDDOBEFOREBECOMINGAU.S.RESIDENTORDOMICILIARY.

Yes.Anon-U.S.citizen(whoisalsonotconsideredacoveredexpatriate-seeabove)shouldtakeadvantageofthefavorableU.S.taxrulesfornon-U.S.citizens.Theindividualwillneedtotakeintoconsiderationforeigntaximplicationsandapplicabletaxtreaties.Someplanningoptionsinclude(i)avoidingtaxresidencybyrelyingontheexceptionsforexemptindividuals,treatytie-breakerprovisionsorthecloserconnectionexception,(ii)acceleratingtherecognitionofnon-U.S.sourceincome,(iii)recognizegainonappreciatednon-U.S.situsassets,(iv)transfernon-U.S.situsassetstoaforeigntrust,(v)reorganizeforeignentitiestoavoidU.S.anti-deferralprovisions(e.g.,ControlledForeignCorporations,PassiveForeignInvestmentCompanies),and(vi)transferringassetstoaU.S.Trust.Eachmethodwillneedtobeanalyzedtodeterminewhetheritisappropriate.


ARETHEREANYPROBLEMSWITHAU.S.CITIZENLIVINGOVERSEASMOVINGU.S.ASSETSTOAU.S.REVOCABLETRUST?

Therecanbepotentialproblems.TheuseofatrustismostlyanAmericanestateplanningvehicle.Somecountrieshavedifficultyinunderstandingthepurposeofatrustandthetaxationofcontributionsto,anddistributionsfrom,atrust.Forexample,ifaU.S.citizenisresidingintheUnitedKingdomandisconsideredadomiciliaryoftheUnitedKingdom,thenatransferofU.S.situsassetstoaU.S.revocabletrustwouldbetreatedasataxabledispositionbytheclient.TheUnitedKingdomwouldimposea20%taxonthetransfer,whichcouldeventuallyincreaseto40%.Priortofundingatrust,itisimportantfortheindividualtoanalyzethetaximplicationsofthefundingofthetrustanddistributionstobeneficiaries.

ARETHEREANYISSUESWITHANON-RESIDENTALIENTRANSFERRINGASSETSTOAU.S.CITIZENORU.S.RESIDENT?

Beforeanon-residentalientransfersassetstoaU.S.citizenorU.S.resident,itshouldbedeterminedthatthenon-residentalienisnotacoveredexpatriate(discussedabove).Assumingtheindividualisnotacoveredexpatriate,anon-residentaliencantransfernon-U.S.situsassetstoaU.S.residentorU.S.citizenwithnoU.S.giftorgenerationskippingtransfertaxissues.Anassetisconsiderednon-U.S.situsifitisnotU.S.situs.U.S.situsassetsinclude(i)U.S.realestate,(ii)tangiblepersonalpropertylocatedintheU.S.,and(iii)currencylocatedintheU.S.,(iv)cashdepositsinaU.S.bank.IntangibleassetssuchasstockinaU.S.corporationandU.S.treasuryobligationsarenon-U.S.situsassetsforgifttaxpurposesbutU.S.situsassetsforU.S.estatetaxpurposes.

Anon-residentalienwhomakesagiftofU.S.situspropertysubjecttoU.S.gifttaxisentitledtotheannualgifttaxexclusionandalimitedcharitablegifttaxdeduction.However,thenon-residentalienisnotentitledtotheunifiedcredit(currently$11,180,000foraU.S.residentorU.S.citizen)andgiftsplittingwithaspouse.Thus,thenon-residentalienshouldlimitthegiftsofU.S.situsassetssubjecttoU.S.gifttax.

Thenon-residentalienshouldconsidergiftingnon-U.S.situsassetsforU.S.gifttaxtoaU.S.citizenorU.S.residentoratrustforthebenefitofsuchperson.IfthegiftismadedirectlytotheU.S.citizenorU.S.resident,thensuchindividual’sestatesubjecttoU.S.estatetaxwillbeincreased.However,ifthegiftismadedirectlytoaanirrevocableU.S.trustforthebenefitoftheU.S.citizenorU.S.resident,thentheassetscouldavoidU.S.estatetax.Inaddition,thetrustcouldbestructuredasadynastytrustandtheassetswouldavoidU.S.estatetaxformultiplegenerations.

HOWSHOULDANON-RESIDENTALIENPURCHASEU.S.REALPROPERTY?

Ifanon-residentalienisplanningonpurchasingaresidenceittheU.S.withnointentionsofbecomingaU.S.domiciliary,thentheforeignnationalmustbeverycarefulnottocreateanestatesubjecttoU.S.estatetaxes.RealpropertylocatedintheU.S.isconsideredU.S.situs


propertyforU.S.estateandgifttaxpurposessubjectingtheassettoa40%estatetax.Inaddition,ifthepropertyisgoingtobesubjecttoamortgage,thenitisimportanttounderstandthedifferencebetweenarecourseandnon-recourseloan.Anon-recourseloanprovidesthattheborrowerisnotpersonalliableforthedebt.Arecourseloanprovidesthattheborrowerispersonallyliableforthedebt.Ifanon-U.S.citizen,non-U.S.residentdiesowningaresidenceintheU.S.subjecttoanon-resourceloan,thenonlythenetequityvalueisincludedintheestate.However,ifthepropertywassubjecttoarecourseloan,thenthefullfairmarketvalueoftheresidenceisincludedintheestatewithonlyaportionoftheloanbeingdeductibleonlyiftheworldwideassetsaredisclosed.

Sincethenon-residentalienshouldnotdirectlyholdU.S.realpropertytoavoidtheU.S.estatetaxonrealproperty,thepreferredstructureishavetheU.S.realpropertyownedbyaU.S.entity(e.g.,LimitedLiabilityCompany)andthentheU.S.entitywouldbeownedbyaforeignentity.Thenon-residentalienwouldthenownaninterestinaforeignentitywhichwillremovetheU.S.realpropertyfromU.S.estatetax.


PLANNINGFORNON-U.S.CITIZENSPOUSES

Inordertounderstandthetaximplicationfortransferringassetstoanon-U.S.citizenspouse,itisimportanttounderstandtheU.S.estateandgifttaximplicationsforaU.S.citizenspouse.Ingeneral,anunlimitedmaritaldeductionfromU.S.estateandgifttaxisavailable,sothatU.S.citizenspousesmaytransferassetstooneanotherwithouttheimpositionofanyU.S.estateandgifttax.

DOESTHEU.S.ESTATETAXMARITALDEDUCTIONAPPLYTOTRANSFERTOANON-U.S.CITIZENSPOUSEFROMAU.S.CITIZENSPOUSE?

Unfortunately,theestatetaxmaritaldeductionisnotavailablewherethesurvivingspouseisnotaU.S.citizen.ThisistrueevenifthesurvivingspouseholdsaU.S.greencard.However,thelifetimeexemptionamount(currently$11,180,000)isavailabletooffsetestatetaxontransferstothenon-U.S.citizenspouseoratrustforthebenefitofanon-U.S.citizenspouse.

ARETHEREANYEXCEPTIONSTOTHEGENERALRULETHATTHEU.S.ESTATETAXMARITALDEDUCTIONISNOTAVAILABLEWHERETHESURVIVINGSPOUSEISANON-U.S.CITIZEN?YES,THEREARETHREE

EXCEPTIONS:

• Adecedentmaytransferassetstothesurvivingnon-U.S.citizenspousewithoutincurringestatetaxiftheassetspasstoaQualifiedDomesticTrust(“QDOT”)forthebenefitofthesurvivingspouse.Theestatetaxwillbedeferreduntilprincipalisdistributedtothesurvivingspouseduringthesurvivingspouse’slifetime(estatetaxisincurredwitheachdistribution).Uponthedeathofthesurvivingspouse,thebalanceofthetrustwillalsobesubjecttoestatetax.TheQDOTmaybecreatedbythedecedent,thedecedent’sexecutororthesurvivingspouse.IftheQDOTiscreatedbythesurvivingspouse,andthesurvivingspouseisnotaU.S.incometaxresident,thentheQDOTcanbestructuredasagrantortrusttothesurvivingspouse.ThiswillallowtheQDOTtoavoidanypotentialthrowbacktaxesandaccumulationdistributionswhichwillbeverybeneficialtotheremainderbeneficiariesifoneormoreofthemareU.S.citizensorresidents.Finally,beforetheQDOTischosenastheplanningvehicle,youmustconsultwithcounselfromthejurisdictionofthesurvivingspousetodeterminewhethertheuseofaQDOTwillresultinanadverseincometax.

• Themaritaldeductionwillapplytoassetsbeingtransferredtothesurvivingnon-U.S.citizenspouseifthesurvivingspousebecomesaU.S.citizenbeforethefilingoftheestatetaxreturnandwasdomiciledintheU.S.atalltimesbetweenthedeathofthedecedentandthedatethesurvivingspousebecameaU.S.citizen.

• AnestatetaxtreatybetweentheU.S.andthecountryoforiginforthedeceasedspousemayprovideforamaritaldeductionequaltoaproratedunifiedcreditamount.Ifthemaritaldeductionunderthetreatyisdesired,thenanelectionmustbemadebythedecedent’sexecutor.Ifthetreatybenefitiselected,thenaQDOTcannotbeused.


Accordingly,thetreatyelectionmaynotbethedesiredchoiceiftheassetspassingtothesurvivingnon-U.S.citizenspouseexceedtheproratedunifiedcreditamountdeterminedunderthetreaty.

DOESTHEU.S.ESTATETAXMARITALDEDUCTIONAPPLYTOTRANSFERSTOAU.S.CITIZENSPOUSEFROMANON-U.S.CITIZENSPOUSE?

Ifthenon-U.S.citizenspouseisaresidentoftheU.S.,thentransferstotheU.S.citizenspousewillbeentitledtotheunlimitedmaritaldeduction.Asaresident,thelifetimeexemptionamount(currently$11,180,000)isavailabletothenon-U.S.citizenspouse.Ifthenon-U.S.citizenisnotaresidentoftheU.S.,thentransfersofU.S.situsassetstotheU.S.citizenspouseareentitledtotheunlimitedmaritaldeductionandtransfersofnon-U.S.situsassetswillnotbesubjecttoU.S.estatetax.U.S.situsassetsincludeU.S.realestateandtangiblepersonalpropertylocatedintheU.S.SharesofstockinU.S.corporations,debtobligationsofU.S.personsandcertainintangiblepropertyrightsissuebyorenforceableagainstU.S.personsareusuallysubjecttoU.S.situsassetsforestatetaxpurposes.However,anestatetaxtreatymayexemptsomeitemsfromU.S.tax.Althoughthetransferofnon-U.S.situsassetstotheU.S.citizenspousewillnotbesubjecttoestatetax,thoseassetswillbecomepartofthesurvivingU.S.citizenspouse’sestatesubjecttoU.S.estatetax.Inordertoavoidtheinclusionofthoseassetsinthesurvivingspouse’sestate,thenon-U.S.citizen(whoisalsoanon-U.S.resident)spouseshouldconsidertransferringthenon-U.S.situsassetstoatrustforthebenefitoftheU.S.citizenspouse.Thetrustcanbestructuredtoavoidestatetaxuponthedeathofthesurvivingspouse.

DOESTHEU.S.GIFTTAXMARITALDEDUCTIONAPPLYTOTRANSFERSTOANON-U.S.CITIZENSPOUSEFROMAU.S.CITIZENSPOUSE?

No.Themaritaldeductiondoesnotapplyfortransferstoanon-U.S.citizenspouse.Inaddition,theuseofaQDOTisnotavailabletobypassthisexception.Finally,thetransfermayalsobesubjecttotaxationifthecouplewereresidinginanon-U.S.jurisdiction.

ARETHEREANYEXCEPTIONSTOTHEGENERALRULETHATTHEU.S.GIFTTAXMARITALDEDUCTIONISNOTAVAILABLEWHERETHEDONEESPOUSE

INANON-U.S.CITIZEN?

Yes,therearethreeexceptions:

• Ifthereisanobligationtosupporteachother(e.g.,noprenuptialagreementthatprovidesotherwise),thenpaymentstosupportthespousesandtheirfamilyshouldnotbeconsideredgiftsbetweenthespouses.

• TheU.S.citizenspousehasanannualgifttaxexclusionamountfortransferstoanon-U.S.citizenspouse.Theamountfor2018is$152,000.Inordertoqualifyfortheannualexclusion,thegiftmustotherwisequalifyforthemaritaldeduction(ifmadetoaU.S.citizenspouse)andbeapresentinterest.


• Paymentsmadedirectlytomedicalcareprovidersoreducationalinstitutesonbehalfofthenon-U.S.citizenspousearenottreatedasgifts.

DOESTHEU.S.GIFTTAXMARITALDEDUCTIONAPPLYTOTRANSFERSTOAU.S.CITIZENSPOUSEFROMANON-U.S.CITIZENSPOUSE?

Yes.TheunlimitedU.S.gifttaxmaritaldeductionappliestotransferstoaU.S.citizenspousebecausethecitizenshipordomicileofthedonorisirrelevant.

CANANON-U.S.CITIZENSPOUSEANDU.S.CITIZENSPOUSESPLITAGIFT?

Yes,onlyifthenon-U.S.citizenspouseisdomiciledintheU.S.

CANANON-U.S.CITIZENSPOUSEMAKEANNUALEXCLUSIONGIFTS?

Yes.Ifthenon-U.S.citizenspouseisdomiciledoutsidetheU.S.,thenthenon-U.S.citizenspouseisnotsubjecttoU.S.gifttaxontransfersofnon-U.S.situsassets.Thus,theannualexclusionisonlyapplicableontransfersofU.S.situsassets.

DOESPORTABILITYOFDECEASEDSPOUSE’SUNUSEDLIFETIMEEXEMPTIONAPPLYTOANON-U.S.CITIZENSPOUSE?

Ifthenon-U.S.citizenspouseisnotdomiciledintheU.S.,thenthedeceasedU.S.spouse’sunusedlifetimeexemptionisnotportabletothenon-U.S.citizenspouse.Ifthenon-U.S.citizenspouseisdomiciledintheU.S.,thenthedeceasedU.S.spouse’sunusedlifetimeexemptionisportabletothenon-U.S.citizenspouse.Accordingly,ifthenon-U.S.citizenspouseisnotdomiciledintheU.S.,thentheU.S.citizenspousemustutilizethelifetimeexemptionamount.

ARETHEREANYISSUESIFAU.S.CITIZENSPOUSEANDNON-U.S.CITIZENSPOUSEHOLDANASSETASJOINTOWNERS(E.G.,TENANCYBYTHE

ENTIRETIESORJOINTWITHRIGHTSORSURVIVORSHIP)?

WhenbothspousesareU.S.citizens,theunlimitedmaritaldeductionmeansthatspousemayholdpropertyjointly,withnoregardtotheamountscontributedbyeitherspouse,withoutincurringanytaxliability.However,thelackofanunlimitedmaritaldeductionwithrespecttogiftsorbequeststonon-U.S.citizenspousesmeansthatunintendedestateorgifttaxconsequencescanresultwhereaU.S.citizenspouseownspropertyjointlywithanon-U.S.citizenspouse.Theestateandgifttaximplicationsareasfollows:

• EstateTax:Ifthesurvivingspouseisnon-U.S.citizen,theamountincludableinthedeceasedspouse’sestateistheportionofthevalueoftheassetattributabletothecontributionmadebythedecedentspouse.Wherethesurvivingspouseisanon-U.S.


citizen,theentirevalueofthejointlyheldpropertyisincludedinthedecedentspouse’sestateunlessthedecedent’sexecutorsubmitsfactssufficienttoshowthatthepropertywasnotentirelyacquiredwithconsiderationfurnishedbythedecedentorwasjointacquiredbygiftorinheritance.TheportionofthevalueincludibleintheestateofthedecedentspousewouldneedtobeplacedintoaQDOTinorderforsuchvaluetoescapetheimpositionofestatetaxatdeath.Ifthepropertywasaresidenceandconsideredhomesteadproperty,thentheQDOTmaynotbeavailable.

• GiftTax:ThecreationofajointtenancyinrealpropertyafterJuly13,1988willnotbetreatedasataxablegifttoanon-U.S.citizenspouseregardlessofwhichspouseprovidedtheconsideration.However,upontheterminationofthejointtenancyotherthanbydeath(e.g.,sale),therewillbeataxablegifttotheextentthatthenon-U.S.citizenspousereceivesagreatershareoftheproceedsthanthesharerepresentingthespouse’scontribution.Regardingpersonalproperty,thegeneralruleisthatthecreationofajointtenancyafterDecember31,1953istreatedasataxablegiftmadebythecontributingU.S.citizenspousetothenon-contributingnon-U.S.citizenspouseuponthecreationofthejointtenancyofone-halfofthevalueoftheproperty.However,thisgeneralruleusuallydoesnotapplytothecreationofajointbrokerageaccountorjointbankaccountbecausemostjurisdictionstreatthetransferasrevocableandanincompletegift.Ifthecontributingspousecannotunilaterallywithdrawthefundsorthestatetreatsthecreationoftheaccountasacompletedgift(e.g.,NewYork),thenagiftmayoccuruponthecreationoftheaccount.Unfortunately,theIRShasnotbeenconsistentinitstreatmentofsuchaccounts.Ifthecreationoftheaccountisconsiderednon-taxable,thenthewithdrawaloffundsfromtheaccountmaybeataxablegift.

ARETHEREANYISSUESIFANON-U.S.CITIZENSPOUSETRANSFERSASSETSTOADESCENDANT?

Ifthenon-U.S.citizenspouseisdomiciledintheU.S.,thenthespousewillhaveaccesstothefulllifetimeexemptionamountavailabletoU.S.citizens.However,ifthenon-U.S.citizenspouseisnotdomiciledintheU.S.,thenthespousewillonlybesubjecttoU.S.gifttaxorestatetaxontheU.S.situsassetstransferredtoadescendant.Sincethenon-U.S.citizenspousewillonlyhaveaccesstoanominalexemption(annualexclusionamountforgiftsanda$60,000lifetimeexemptionamountforestatetax),theownershipandtransferofU.S.situsassetsmustbecarefullyplanned.

ISTHESALEOFASSETSFROMAU.S.CITIZENSPOUSETOANON-U.S.CITIZENSPOUSECONSIDEREDATAXABLEEVENT?

Ingeneral,asaleofassetsbetweenspousesisanon-taxableevent.Thisisalsotrueifthepurchasingspouseisanon-U.S.citizenaslongasthespouseisaU.S.taxresident.However,ifaU.S.citizenspouseissellinganassettoanon-U.S.citizenspousewhoisnotaU.S.taxresident,thenthesalewillbeataxableeventtothesellingspouse.


ARETHERETAXISSUESIFANON-U.S.CITIZENSPOUSEWHOWASAU.S.RESIDENTDECIDESTOMOVEBACKTOHISORHERCOUNTRYOFORIGIN?

Yes.Anon-U.S.citizenwhohasbeenaresidentoftheU.S.foratleasteightoutoffifteentaxableyearsisconsideredaLong-TermResident(thelengthmaybedifferentunderanincometaxtreatybetweentheUnitedStatesandthespouse’scountryofcitizenship).IfaLong-TermResidentmovesfromtheU.S.resultinginthecessationoftheirstatusasaU.S.resident,thentheLong-TermResidentwillbedeemedtohaveexpatriatedfromtheU.S.Thismayresultinanexittaxonthebuilt-ingainofthespouse’sworldwideassets.Inaddition,ifthespousesubsequentlytransfersanyassetstoaU.S.residentorU.S.citizen,thenthetransferwillbesubjecttoa40%transfertax.Anothertrapisthatanon-U.S.citizenspousemaycauseanaccidentalexpatriationifthespousemakesanelectionunderataxtreatythatresultsintheshiftofresidencyfromtheU.S.

ARETHEREANYISSUESINNAMINGANON-U.S.CITIZENSPOUSEASAFIDUCIARY?

Yes.Thenamingofanon-U.S.citizenspousewhoisnotresidentintheU.S.asaTrusteeofaTrustandgivingthespousesubstantialdecisionsundertheTrustcanresultintheTrustbeingclassifiedasaForeignTrust.Inaddition,namingthespouseasaTrusteemaypulltheTrustintothespouse’scountryofresidence(orcitizenship)andsubjecttheTrusttotaxinthatcountry.Finally,statelawmayprohibitthenamingofanon-U.S.citizenspousewhoisnotresidentintheU.S.asafiduciary.


ISSUESWITHNAMINGFOREIGNBENEFICIARIES

TheU.S.andnon-U.S.taximplicationsmustbeconsideredbeforeanon-U.S.citizenwhoisneitherresidingordomiciledintheU.S.isnamedasabeneficiary(“foreignbeneficiary”)ofanestateplan.

Therearethreecardinalrulesfortransferringassetstoaforeignbeneficiary:

• Minimizeaforeignbeneficiary’sU.S.situsassetstoavoidU.S.estatetax.• Minimizeaforeignbeneficiary’staxableU.S.sourceincometoavoidU.S.incometax.• Minimizetheimpositionofdoubletaxationondistributionsfromtruststoaforeign

beneficiary.

WHATAREU.S.SITUSASSETSFORESTATETAXPURPOSES?

ThefollowingassetsareconsideredU.S.situsassetsforestatetaxpurposes:(i)realestatelocatedintheU.S.;(ii)tangiblepersonalpropertylocatedintheU.S.;(iii)sharesofstockofU.S.corporations(including,sharesofco-ops);(iv)moneymarketaccountswithU.S.mutualfunds;(v)cashdepositswithU.S.brokers;(vi)cashinU.S.safetydepositboxes;(vi)debtsofU.S.obligors(however,publiclytradedbondsissuedafterJuly18,1984areconsiderednon-U.S.situs);(vii)interestsinpartnershipsthattransactbusinessintheU.S.orownassetsintheU.S.;and(viii)cashsurrendervalueofU.S.lifeinsuranceownedbyaforeignbeneficiaryonthelifeofanotherperson.AnestatetaxtreatycouldalterthedefinitionofU.S.situsassets.Accordingly,youwillneedtoverifywhetheratreatyisapplicable.

WHYSHOULDAFOREIGNBENEFICIARYAVOIDTAKINGTITLETOU.S.SITUSASSETS?

Anon-U.S.citizenwhoisnotdomiciledintheU.S.(“non-residentalien”)issubjecttoU.S.estatetaxonU.S.situsassets.TheestatetaxrateisthesameasforU.S.citizens.However,theexemptionamountisonly$60,000(unlessincreasedunderatreaty).Finally,debtsandadministrationexpensesmaybedeductedinproportionthattheU.S.situsassetsbearstotheworldwideassets.

IftheforeignbeneficiaryreceivesU.S.situsassetsfromanindividualoranestateortrust,thentheforeignbeneficiarywillbecreatinganestatesubjecttoU.S.estatetax.InsteadofreceivingtheU.S.situsassets,youshouldconsiderwhethertheU.S.situsassetscanbesoldandconvertedtonon-U.S.situsassets(anyassetsthatarenotlistedasU.S.situsassets).AnotheroptionisthattheforeignbeneficiaryshouldholdU.S.situsassetsthroughforeigncorporationsorforeigntrusts.TheuseofaforeigncorporationorforeigntrusttoholdU.S.situsassetswillnotcuretheU.S.incometaxationofU.S.sourceincomeearnedfromtheU.S.situsassets.ThetransferofU.S.realestatetoaforeigncorporationsorforeigntrustsmayresultinanincometaxconsequence.


WHATISU.S.SOURCEINCOME?

Anon-residentalienistaxedonU.S.sourceincome.Thetaxisgenerallya30%withholdingrate.However,anincometaxtreatymaybeineffectthatreducesthewithholdingrate.U.S.sourceincomeisasfollows:(i)dividendsfromU.S.corporations(gainfromthesaleofU.S.securitiesisnottaxable);(ii)rentfromU.S.realproperty;(iii)gainfromthesaleofU.S.realproperty;(iv)interestondebtsofU.S.obligors(however,interestonpubliclytradedbondsissuedafterJuly18,1984arenon-U.S.situs);(v)salariespaidbyU.S.entitiesandnon-U.S.entitiesforservicesperformedintheU.S.;and(vi)U.S.royalties.IncomeearnedinconnectionwiththeconductofatradeorbusinessissubjecttoincometaxatthesamegraduatedratesasaU.S.residentorU.S.citizen.

SincepubliclytradedbondincomeisexemptfromU.S.incometax,theforeignbeneficiarymaybenefitfromreplacingU.S.rentalincomeanddividendsfromU.S.stockswithbondincome.

HOWCANADOUBLETAXOCCURONADISTRIBUTIONFROMATRUSTTOAFOREIGNBENEFICIARY?

Mostcountriesdonothavelawsthatdealwithtrusts.Inthosecountries,thetaxauthoritiesandcourtshavehaddifficultyintryingtoclassifyadistributionfromatrusttoabeneficiarythatisresidinginthatcountry.Somecountrieswillclassifythetrustasacorporationandtaxthedistributionstothebeneficiaryasordinaryincome.Somecountrieswilltaxnotonlytheincomedistributionsbutalsotaxprincipaldistributionsasordinaryincomeorataxablegift.Thenon-U.S.taxationofthedistributionstoaforeignbeneficiarymustbeconsidered.Iftheforeignbeneficiaryistaxedonthetrustdistribution,thenadoubletaxcanoccuriftheincomebeingdistributedtotheforeignbeneficiarywasalsotaxedintheU.S.IfthetaxpayerintheU.S.isnottheforeignbeneficiary,thenthedoubletaxationreliefunderanincometaxtreatyandforeigntaxcreditsundertheInternalRevenueCodewillnotbeofhelpsincetherearetwodifferenttaxpayers.Anotherissuetobewearyofisthatsomecountrieswilltreatallofthetrustincomeastaxabletotheforeignbeneficiaryeventhoughitisnotdistributed.

AnexampleofthedoubletaxationcanbefoundwithaU.S.grantortrust.WithrespecttoaU.S.grantortrust,thetrustincomeistaxabletothegrantorratherthantothetrustorbeneficiaries.Ifthereisaforeignbeneficiaryofthetrustandincomeorprincipalisdistributedtotheforeignbeneficiary,thenthecountrywheretheforeignbeneficiaryresidesismorelikelythannottotaxtheforeignbeneficiaryonthedistributions.SincethegrantorpaidtheU.S.incometaxesandtheforeignbeneficiaryispayingforeignincometaxes(orgifttaxes)onthereceiptoftheincome,adoubletaxwilloccur.aTreatyorthecodewillnotprovideanyreliefsincethetaxpayersaredifferent.

ISTHEREAWAYTOAVOIDTHEDOUBLETAXATIONTRAP?

Inordertoavoidthedoubletaxation,itwouldbenecessarytoavoidtheuseofagrantortrust.Ifthetrustisanon-grantortrust,thenthetrustwouldpaytheincometaxonthetrustincome.


However,ifthetrustdistributestheincometothebeneficiaries,thenthetrustcandeductthatincomefromitstaxableincome,totheextentthatsuchincomeentersintothetrust’sdistributablenetincome(“DNI”)fortheyear.TheDNIdeductionallowsthetrusttoallocateitstaxableincometothebeneficiariesthatreceivetheincome.TheDNIdeductionappliestodistributionstoU.S.beneficiariesandforeignbeneficiaries.Aplanningtechniqueisthatiftheincomeisconsiderednon-U.S.situsincome,thentheforeignbeneficiarydoesnothavetopayU.S.incometaxonit.ThisistrueeventhoughthetrustavoidedincometaxontheincomebyclaimingaDNIdeduction.YouwillneedtochecktoseeifanincometaxtreatyaltersthedefinitionofU.S.sourceincomeandtheapplicabletaxrates.

Ifthebeneficiaryisaforeignbeneficiary,thentheforeignbeneficiarywouldreceiveatrustdistributionofincomethatmayormaynotbesubjecttoU.S.incometaxdependingonwhetheritisU.S.sourceincome.Theforeignbeneficiarymostlikelywouldowetaxtothebeneficiary’scountryofresidence.IftherewastaxpaidinboththeU.S.andtheforeigncountry,thenaforeigntaxcreditmaybeallowedtooffsetthedoubletax.

IFAFOREIGNBENEFICIARYRECEIVESADISTRIBUTIONFROMAU.S.CITIZENORU.S.TRUST/ESTATE,DOESTHEU.S.PERSONORFIDUCIARYHAVEAREPORTINGREQUIREMENTTOTHEFOREIGNBENEFICIARYOR

FOREIGNBENEFICIARY’SCOUNTRYOFRESIDENCE?

Ingeneral,distributionstoaforeignbeneficiaryrequirethewithholdingoftax.AdistributionofincometoaforeignbeneficiarywillrequiretheU.S.persontofileaForm1042,AnnualWithholdingTaxReturnforU.S.sourceIncomeofForeignPersons.InadditiontoForm1042,theU.S.personmustalsofileForm1042-S,ForeignPerson’sU.S.SourceIncomeSubjecttoWithholding,andForm1042-T,AnnualSummaryandTransmittalofForms1042-S.Iftheforeignbeneficiarywantstoclaimthattheincomeisnotsubjecttotaxorsubjecttoalowerwithholdingrate,thenthebeneficiarymustprovidetheU.S.personwithFormW-8BEN,CertificateofForeignStatusofBeneficialOwnerforUnitedStatesTaxWithholding,orFormW-8ECI,CertificateofForeignPerson’sClaimthatIncomeisEffectivelyConnectedwiththeConductofaTradeorBusinessintheUnitedStates.IftheforeignbeneficiaryfeelsthattheU.S.taxliabilitywasnotfullysatisfiedbythewithholding,thentheforeignbeneficiarymustfileaForm1040NR,U.S.NonresidentAlienIncomeTaxReturn.Finally,theU.S.personresponsibleforwithholdingtaxesonthedistributiontotheforeignbeneficiaryshouldrequesttheforeignbeneficiarytoobtainanindividualtaxpayeridentificationnumber(ITIN)byfilingFormW-7,ApplicationforIRSIndividualTaxpayerIdentificationNumber.TheFormW-7canbecomplicatedforaforeignbeneficiaryduetothedocumentationrequiredbytheIRS.Inaddition,itcantakefourtosixweekstoobtaintheITIN.TheITINisrequirediftheforeignbeneficiarywantstoclaimatreatybenefitunderFormW-8BENorFormW-8ECI.

InadditiontothevariousfilingsintheU.S.,theforeignbeneficiarymayalsohavereportingrequirementstothebeneficiary’scountryofresidence.TheU.S.personwhoisactingasanexecutorofanestateorTrusteeofatrustshouldalsoconfirmthattheU.S.personisnotrequiredtoalsofileanannualstatementwiththeforeignbeneficiary’scountryofresidence.


THEWORLDOFCHARITABLEGIVINGOPPORTUNITIES

Theopportunityforphilanthropicgivingisvastandrangesfromsimplywritingachecktoyourfavoritecharitytoimplementingacomprehensiveandthroughcharitablegivingplantolastforgenerationsaspartofyourfamilylegacy.Herewereviewsomeofthetechniquesthatmayofinteresttoyou.

WHATISACHARITABLELEADTRUST?

Acharitableleadtrustisatrustthatmakesannualormorefrequentpaymentstooneormorecharitiesforthecharitableterm.Thecharitabletermcanbeafixednumberofyearsoritcanbebasedonthelifetimeofthedonororcertainrelatedindividuals.Attheendofthecharitableterm,anypropertyremainingintheleadtrustisdistributedorheldinfurthertrustforindividualbeneficiaries(typicallythedonor’schildrenorgrandchildren).Theamountpaidtocharityeachyearmaybeanannuity(astateddollaramount)oraunitrustinterest(astatedpercentageofthevalueofthetrustassets,ascalculatedannually).Thereisnominimumormaximumpercentagethatmustbepaidtocharity.Thepercentageoramounttobepaidtocharitycanremainthesameeachyearorcanbedesignedtoincreaseoverthecharitableterm.

WHYWOULDACLATBEOFINTERESTTOME?

Acharitableleadtrustcanbeusedtomakeafuturegifttoindividualswhilesatisfyingthedonor’scharitablegoals.

Whenthedonorfundsaleadtrust,heorshemakesonegifttocharitythatisdeductibleforgiftorestatetaxpurposesandasecond,taxable,gifttotheindividualswhowillreceivethetrustpropertywhenthecharitabletermends.Thevalueofthecharitablegiftisthepresentvalueofthestreamofpaymentstobemadetocharityoverthecharitableterm,determinedbyusingthelowestapplicablefederaldiscountrateineffectatthetimethetrustisfunded.Thevalueofthetaxablegifttotheindividualbeneficiariesoftheleadtrustisthedifferencebetweenthevalueofthepropertyusedtofundthetrustandthevalueofthecharitablegift.

Theapplicablefederaldiscountrateusedtovaluethedonor’staxablegifttotheleadtrustisthegovernment’sassumptionastotheexpectedrateofreturnforthetrust’sinvestmentsatthetimeoffunding.Thepotentialforthetrust’sactualinvestmentperformancetoexceedthegovernment’sassumptionpresentsanopportunityforthedonortomakeatax-advantagedgifttoindividualsbyusingacharitableleadtrusttomakethedonor’scharitablegifts.Iftheannualrateofreturnonacharitableleadannuitytrust’sinvestmentsexceedsthefederaldiscountrateusedtovaluethecharitablegifttothetrust,alloftheexcessinvestmentreturnwillaccrueforthebenefitoftheindividualbeneficiariesatnofurthergiftorestatetaxcost.Withacharitableleadunitrust,thecharityandtheindividualbeneficiariessharethebenefitoftheexcessinvestmentreturnbasedontheirrelativeinterestsinthetrust.


Thebenefitsofusinganannuitytrusttotransferpropertytoindividualsmustbeweighedagainstthegeneration-skippingtransfertaxadvantagesofusingaunitrustwhengrandchildrenormoreremotedescendantsarethebeneficiaries.

Acharitableleadannuitytrustcanbestructuredto“zeroout”thetaxablegiftsothatnoportionofthedonor’slifetimeexemptionfromgifttaxisusedandnogiftorestatetaxliabilityisincurredinconnectionwiththeleadtrust.Tozerooutthetaxablegift,thedonorselectsacharitabletermandpaymentamountthat,usingtheapplicablefederaldiscountrate,createsacharitablegiftthatisequalinvaluetothevalueoftheentirepropertyusedtofundtheleadtrust.Ifthetrust’sinvestmentsearnanannualrateofreturnthatexceedsthefederaldiscountrate,assetswillbedistributedtotheindividualbeneficiariesattheendofthecharitabletermatnogiftorestatetaxcost.Acharitableleadunitrustcanalsobestructuredtoreduce,butnotto“zeroout,”thetaxablegift.

ISTHEREANINCOMETAXBENEFITTOCREATINGACLAT?

Generally,whenacharitableleadtrustiscreatedforgiftorestatetaxplanningpurposes,itisnotstructuredtoqualifyforafederalincometaxcharitablededuction.

Aleadtrustgiftthatdoesnotqualifyforanincometaxcharitabledeductioncanstillbeusefultothedonorforincometaxpurposes.Althoughthedonorreceivesnoincometaxcharitabledeductionforfundingthetrust,thetrust’sincomewillnotbeincludibleonthedonor’staxreturn.Foradonorwhosecharitabledeductionsalreadyexceedtheamountheorshecanusetooffsettaxableincome,thistypeofleadtrustcangenerateanindirecttaxdeductionforthedonorbecausethetrust’sincomewillbetaxedtothetrust,insteadofthedonor.Althoughtheleadtrustwillreportandpaytaxonitsownincome,itisallowedanunlimiteddeductionforincomeitdistributestocharity.Generally,iftheleadtrust’staxableincomeeachyeardoesnotexceedtheamountitpaystocharityfortheyear,thetrustwillnotpayanyincometax.

Ifthedonorwishestoreceiveanincometaxdeductionforfundingacharitableleadtrust,thedonormustcreateaspecialkindoftrustthatistreatedasifitwereownedbythedonorforincometaxpurposes.Thismeansthatinordertoclaimanincometaxdeductionforfundingaleadtrust,thedonormustbewillingtoreportallofthetrust’sannualincomeandgainsonhisorherindividualtaxreturn.Thedonor’sonlyincometaxdeductionwillbeforfundingthetrust.Thedonorwillnotbeabletoclaimanyadditionaldeductionswhenthetrustmakesitspaymentstocharityeachyear.Ifthedonordiesduringthecharitableterm,aportionofthetaxdeductionbenefitthedonorreceivedfromfundingtheleadtrustwillbeincludedasincomeonthedonor’sfinalincometaxreturn.

Thistypeofleadtrustcanbeusefulwhenthedonorisinanexceptionallyhighincometaxbracketintheyearthedonorfundsthetrustandexpectstobeinalowerincometaxbracketinsubsequentyearswhenthetrust’sincomewillbetaxedtothedonor.Thedonor’sdeductionforfundingthetrustisequaltothevalueofthecharitablegift,subjecttocertainlimitationsthatarebasedonthetypeofpropertyusedtofundthetrust,thestatusofthecharityasapubliccharity


oraprivatefoundation,andtheruleslimitinghowmuchincomethedonorcanoffsetwithacharitabledeductioninanyyear(themaximumamountis30%ofadjustedgrossincome).

Inappropriateplanningsituations,a“supercharitableleadtrust”canbecreatedtocombinetheincome,giftandestatetaxadvantagesofthetwotypesofcharitableleadtrusts.Thestructureofasuperleadtrustismorecomplicatedbecausethedonormustcreateatrustthatwillbetreatedasifitwereownedbythedonorforincometaxpurposes,butdosoinamannerthatdoesnotcausethetrusttofailtoachieveitsintendedgiftandestate-taxadvantages.Thedonormustalsobeinsuchafinancialpositionthatthedonor’sobligationtopaytaxontheleadtrust’sincomeandgainsforanumberofyears(e.g.,10to25years)wouldbeviewedasatax-planningopportunityratherthanaburden.

Pleasenotethatthefederaldiscountrateisrecalculatedeachmonth.Thelowertherate,theeasieritistostructureacharitableleadannuitytrustthatwill“zeroout”thetaxablegift.Donorshavesomeplanningflexibilitybecausetheycanusethediscountrateineffectinthemonththeyfundaleadtrustortheratethatwasineffectineitherofthetwoprecedingmonths.

WHATARETHEBASICSOFCHARITABLELEADANNUITYTRUSTADMINISTRATION?

AdministrationofaCharitableLeadAnnuityTrust(the“CLAT”or“trust”)involvesinvestingthetrust’sassets,makingtimelyannuitypaymentstotheCharitableBeneficiary,preparingandfilingreturnsinatimelymanner,andaccountingforthetrust’sadministration.

DOTHEASSETSUSEDFORFUNDINGAFFECTTHEINCOMETAXCONSEQUENCESTOYOUANDTHEADMINISTRATIONOFTHECLAT?

Ifadonorwishestotransferassetsotherthancash,cashequivalentsandunrestrictedpubliclytradedsecuritiestoaCLAT,thedonorshouldreviewthefundingplanwithhisorheraccountantandlegalcounseltoconfirmtheincometaxconsequencesoftheproposedgifttothedonor,aswellasthetaxandadministrationconsequencestothetrustandthetrusteesofacceptingandholdingtheproposedgift.

FundingtheCLATwithappreciatedassetswillnotcausethedonortorecognizecapitalgain,andtheunrealizedappreciationwillnotbeapreferenceitemforAMTpurposesonthedonor’sincometaxreturn.However,iftheCLATmustpayalargecapitalgainstaxinordertoreinvestlowbasisassetscontributedtothetrust,itwillbeharderfortheCLATtomakealltherequiredannuitypaymentsandbuilduppropertytobedistributedtotheremainderbeneficiarieswhenthecharitabletermends.

CareshouldbetakentoensurethatthefundingoftheCLATisnotdeemedtobean“assignmentofincome”bythedonor.IfaCLATisfundedwithappreciatedpropertythatissubjecttoabindingsalescontractoranyagreementorunderstandingunderwhichthetrusteesareobligatedtosellthepropertytoathirdparty,thedonorwillrecognizegainonhisorherpersonalincometaxreturnwhenthetrustsellstheproperty.Cautionshouldalsobeexercisedif


thedonortransfersstockinacloselyheldcorporationduringanongoingtenderofferandpendingmergerthatthedonorhasparticipatedinnegotiatingandplanning.Insuchacase,thedonorcouldbedeemedtohavealreadyconvertedthestockintoafixedrighttoreceivecashatthetimethestockiscontributedtotheCLAT.

TheCLATdoesnotqualifyasashareholderofScorporationstock.

IftheCLATwillholdmorethan2%oftheownershipinterestsinanybusinessenterprise(corporation,partnership,otherentity),thetrusteesshouldconsultlegalcounselwithrespecttotheapplicationoftheexcessbusinessholdingsrules.

Holdingormakinginvestmentsinentitiesthataredisqualifiedpersons,aswellasco-investingwithorholdinginvestmentsincommonwithdisqualifiedpersonscancreateavarietyofself-dealingproblems.Thetrusteesshouldreviewtheprivatefoundationself-dealingrulestoconfirmthattheCLAT’sinvestmentplanwillnotgiverisetoanypotentialself-dealingissues.

CareshouldbetakenbeforefundingaCLATwithorinvestingitinstockofadonor-controlledcorporation,stocksubjecttoavotingtrust,orpoliciesofinsuranceonthelifeofthedonorand/orthedonor’sspouse,andbeforefundingaCLATwithpropertyencumberedbyamortgageorothersimilarlien.Whiletherearecertainexceptionsthatmaybeapplicableinagivensituation,generallyadonorrisksthatagiftofmortgagedpropertytoaCLATwillgeneratereliefofindebtednessincomeandbetaxedasabargainsale,beaprohibitedactofself-dealingatthetimethegiftismadeandwhentheCLATmakespaymentsonthedebt,andgiverisetodebt-financedincomeastowhichonlyaportion(notmorethan50%)canbeshelteredfromincometaxbytheannuityamountspaidtocharity.

MUSTTHETRUSTEESBESENSITIVETOCERTAINREQUIREMENTS?

TominimizetheincometaxesthataCLATmustpay,trusteesshouldconsideravoidingborrowinganddebt-financedinvestments(mortgagedproperty,marginedsecuritiesaccounts,partnershipswithdebt-financedinvestments)aswellasinterestsinapartnershiporotherpass-throughentitythatoperatesanactivetradeorbusinessorholdsdebt-financedproperty.Suchinvestmentsproduceunrelatedbusinesstaxableincomeordebt-financedincome,andannuitypaymentsmadetocharitywillshelteronlyaportion(upto50%)ofsuchincomefromtax.

TheCLATisataxabletrust.Itwillbesubjecttoincometaxtotheextentthatitsgrossincomeexceedsitsdeductions.Itisnotsubjecttoalternativeminimumtax.Thetrusteesmustfileafederalfiduciaryincometaxreturn(Form1041)andsplit-interesttrustinformationreturn(Form5227)withtheInternalRevenueServiceeachyear.Thetrust’sForm5227(otherthanScheduleA)willbeopentopublicinspection.Thetrusteesmayalsoneedtofileastatefiduciaryincometaxreturndependingonthesitusofthetrust.

TheCLATwillbeentitledtoacharitabledeductioneachyearforthegrossincomeofthetrustthatisdistributedtotheCharitableBeneficiarywhentheannuitypaymentismade.


Thetrusteesmayneedtoregisterthetrustandfileannualreportsdependingonthesitusofthetrust.Forexample,thetrusteesofaNewYorkCLATarerequiredtoregisterthetrustwithinsixmonthsofitsfundingandtofileannualreports(FormCHAR004)withinsixmonthsfollowingtheendofeachtaxableyearofthetrustwiththeCharitiesBureauoftheNewYorkAttorneyGeneral'sOffice.

Annuitypaymentsmustbemadeeachyearinatimelymannerandinaccordancewiththeprovisionsinthetrustdocumentregardingfrequencyofpayments.Failuretomakethepaymentsinatimelymannercangiverisetoprivatefoundationexcise(penalty)taxes.

CLATsaresubjecttotheprivatefoundationexcisetaxrulesunderCodesection4945thatprohibitthetrusteesfrommakingtaxableexpenditures.Ifthecharitiesarenamedinthetrustandtheirsharesarefixedbythetermsofthetrust,thetrusteesmaysimplydistributetheannuityamounttothenamedcharitiesinthesharesstatedinthetrust.

If,however,thetrusteeshavediscretiontoselectthecharitiestoreceivetheannuityamountortodeterminetheirrespectivesharesoftheannuityamount,thenthetrusteesmustfollowspecialprocedureswhenmakingannuitypaymentsinordertoavoidincurringapenaltytaxandhavingtotrytorecoverthepaymentsmade.Ifthetrusteesdocumentthatthecharitiesare501(c)(3)tax-exemptorganizationsthathavebeenclassifiedbytheIRSas“otherthan”privatefoundationsbecausetheyaredescribedinInternalRevenueCodesection509(a)(1)or(2)(“501(c)(3)publiclysupportedcharities”),thetrusteesmaysimplypaytheannuityamounttothosecharities.If,however,thetrusteesdeterminethatacharityisnota501(c)(3)publiclysupportedcharity(forexample,a501(c)(3)charitythatisclassifiedasaprivatefoundation,aprivateoperatingfoundation,ora509(a)(3)supportingorganization),thenthetrusteesmustobtaincertainadditionaldocumentationrequiredbytheIRSand/oruseagrantagreementandrequireannualgrantreportsfromthecharityinconnectionwithanyannuitypaymentsmadetothatcharity.

Thetrusteesmaywishtoprepareinformalaccountingsandrequestthatthebeneficiariesreleasethemfrompersonalliabilityinconnectionwiththetrust’sadministration.Thetrustdocumentdescribestheinformationtobeprovidedinaninformalaccount.Or,thetrusteesmayfileperiodiccourtaccountings,withnoticetothespecificstate’sAttorneyGeneral’soffice(whichwouldrepresentallcharitablebeneficiaries)inordertoensurethatthetrusteesareeffectivelyreleasedfrompersonalliabilityinconnectionwiththeiradministrationofthetrust.

WHATISACHARITABLEREMAINDERUNITRUST?

TheCharitableRemainderUnitrust(“CRUT”)canbeaneffectivemeansfordiversifyinghighlyappreciatedassetswhileavoidingorpostponingcapitalgainstax,increasingcashflowduringyourlifetime,obtainingacurrentincometaxdeductionandprovidingforyourfavoritecharitiesuponyourdeath.Theconceptisextremelysimple:youtransferahighlyappreciatedassettoatrust,retainingtherighttoreceivepaymentsfromthetrustforyourlife.Onyourdeath,thecharitiesyouwishtobenefitreceivetheassetsremaininginthetrust.Thetrustisincludedinyourtaxableestate,butqualifiesfortheestatetaxcharitablededuction.


ThetaxadvantagesoftheCRUTcomeprimarilyfromitstax-exemptstatus,whichallowsthetrusttosellappreciatedassetswithoutpayinganycapitalgainstax,andfromtheincometaxdeductiongeneratedwhenyoufundthetrust.

ISTHEREANINCOMETAXDEDUCTIONAVAILABLEFORIMPLEMENTINGACRUT?

YourincometaxdeductionforfundingaCRUTislimitedtothepresentvalueofthecharity’srighttoreceivetheassetsremaininginthetrustatyourdeath.IfyoufundtheCRUTwithassetsthat,ifsoldbyyou,wouldgeneratealong-termcapitalgain,yourincometaxdeductiongenerallywillbecalculatedusingthefairmarketvalueoftheappreciatedassets.Nevertheless,youwillnotberequiredtorecognizeanygainwhenyoufundthetrust,eitherforregularincometaxorforAMTpurposes.IfyourCRUTwillbenefitaprivatefoundation,thenyourdeductionwillbecalculatedusingyourbasisintheassetscontributedtotheCRUTunlessyoufundtheCRUTwith“qualifiedappreciatedstock”(basically,unrestrictedpubliclytradedsecurities).Thereare“percentagelimitation”rulesthatlimithowmuchofyouradjustedgrossincomecanbeshelteredfromincometaxinanyyearwithacharitablededuction.Excessdeductionscanbecarriedforwardforuptofiveyears.ItisimportanttoworkwithyouraccountanttoconfirmtheactualtaxbenefitsthatcanbeachievedbyfundingaCRUTwithaparticularasset.

ThevalueofthecharitableremainderinterestintheCRUTmustbeatleast10%ofthevalueoftheassetscontributedtothetrust.Thevalueofthecharitableinterestisafunctionof(i)thelengthoftimethatpaymentswillbemadetoyou;(ii)thepercentageofthetrustassetsthatwillbedistributedtoyoueachyear,andthefrequencywithwhichpaymentswillbemadeduringtheyear(monthly,quarterly,semi-annually,orannually);(iii)thefairmarketvalueofthepropertybeingcontributedtothetrustatthetimeofthecontribution;and(iv)thecurrentIRSactuarialtablesandinterestratesusedtocalculatefuturevalues.

WHATPROVISIONSMAYBEINCLUDEDINTHECRUT?

TheCRUTtrustdocumentmayallowforthefollowing:

• Thetrustwouldmakedistributionstoyouforlife,anduponyourdeath,theremainingtrustpropertywouldbetransferredorheldinfurthertrustforoneormoreU.S.charities.

• DuringthetermoftheCRUT,youwouldreceiveasetpercentage(atleast5%,butnotmorethan50%)ofthefairmarketvalueofthetrust’sassets,asredeterminedeachyear(the“unitrustamount”).Theunitrustamountmustbepaidinaccordancewiththetermsofthetrust,thatis,inmonthly,quarterlyorsemi-annualinstallments,orannually.TheCRUTmaynotmakeanyotherdistributionstoyou.

• Whenyoureceivetheunitrustamount,itwillbetaxabletoyouundertheFourTiersystemapplicabletoCRUTs,whichtreatstheunitrustamountaspaidfirstfromthetrust’sordinarytaxableincome(fromthecurrentyearandanyundistributedordinarytaxableincomefromprioryears),nextfromthetrust’snetcapitalgains(currentand


prioryears),andthenfromthetrust’stax-exemptincome.Iftheamountdistributedtoyouexceedsallthetrust’scurrentandpreviouslyundistributedincomeandgains,theexcesswillbeatax-freereturnofprincipal.

• YoucanbethesoleTrusteeofyourCRUT.IfyourCRUTholdsassetsthataredifficulttovalue(restrictedstock,closely-heldstock,realestate,partnershipinterests),youmusteitherappointanIndependentco-Trusteetovaluethoseassetseachyearorobtainaqualifiedappraisalofthehard-to-valueassetseachyear.

WHATARETHETAXIMPLICATIONSOFCREATINGTHECRUT?

Ifyouand/oryourspousearethebeneficiariesoftheCRUT,theobjectiveistodiversifyhighlyappreciatedassetsinatax-efficientmannerandtosecureanincometaxdeductionforfundingthetrust.Yourretainedinterestinthetrustisnotataxablegift.Ifyourspousehasaninterestinthetrust,thengiftandestatetaxdeductionswillbeallowedforyourspouse’sinterestaslongasyourspouse,oryouandyourspouse,aretheonlynon-charitablebeneficiariesandyourspouseisaU.S.citizen.Giftandestatetaxdeductionsalsowillbeallowedforthecharitableremainderinterestinthetrust.

IfsomeoneotherthanyouoryourspouseisthebeneficiaryoftheCRUT,theobjectivewillbetobenefitthatindividualwithastreamofpaymentsovertheindividual’slife.ThecharitableremainderinterestinthetrustwillreduceyourtaxablegifttothebeneficiaryoftheCRUT,butyouwillusegifttaxcreditand/orwillpaygifttaxonthatgift.BecausetheCRUTisatax-exempttrust,thenormaladverseconsequencesofusinglowbasisassetstomakeagifttosomeonearemitigatedtosomeextent,andyourincometaxdeductionforfundingtheCRUT(andavoidanceofrecognitionofgainwhenfundingtheCRUTwithlowbasisassets)mayhelptooffsetsomeofthegifttaxcostoffundingtheCRUT.WhenyouuseaCRUTtomakeataxablegift,itisimportanttostructurethetrustinamannerthatwillavoidhavingitincludedinyourtaxableestateshouldyoupredeceasethebeneficiary.

WHATABOUTTHETAXATIONOFTHECRUTITSELF?

TheCRUTisatax-exempttrust.However,itisextremelyimportantforaCRUTtoavoidholdingdebt-financedpropertyorotherinvestmentsthatproduceunrelatedbusinesstaxableincome(“UBTI”).UBTIissubjecttoa100%excisetax.TheCRUTshouldbeabletoavoidUBTI,andtheconfiscatoryexcisetaxonUBTI,byinvestinginanunleverageddiversifiedportfolioofmarketablesecurities.CRUTsshouldavoidanyborrowingandshouldbeverycautiouswithrespecttoacceptinggiftsofand/orinvestinginmortgagedproperty,marginaccounts,andpartnershipsandotherpass-throughentitiesthatmayproduceUBTIforthetrust.

TheCRUT’sincomeandgainswillbetaxedtothebeneficiaryreceivingtheunitrustamountwhenandtotheextentthattheunitrustamountistreatedaspaidfromthetrust’sincomeandgain.TheCRUTwillkeeparecordofitsundistributedincomeandgains.Ifthecurrentyear’sordinarytaxableincomeislessthantheunitrustamount,someoralloftheprioryears’ordinarytaxableincomethathasnotpreviouslybeendistributedtothebeneficiarywillbetreatedaspart


ofthedistributionandwillbetaxedtothebeneficiary.Iftheordinarytaxableincome(currentandprioryears’)islessthantheunitrustamount,theCRUT’scurrentandprioryears’undistributedcapitalgainswillbetreatedaspartofthedistributionandwillbetaxedtothebeneficiary.TotheextentthattheCRUTproducesordinarytaxableincome,thecapitalgainrealizedbythetrustfromthesaleofappreciatedassetsremainsuntaxedinthetrust.Inthisway,thetaxonthecapitalgainfromthesaleofappreciatedassetsyoucontributetothetrustisdeferredandpossiblyavoidedentirely.

WHOCANBETHEBENEFICIARYOFTHECRUT?

AnyindividualcanbealifetimebeneficiaryofaCRUT,aslongasthevalueofthecharitableremainderinterestintheCRUTisatleast10%ofthevalueoftheassetstransferredtothetrust.

Anyindividual,classofindividuals(whetherornotthenliving)oranyentity(trust,corporation)canbethebeneficiaryofaCRUTforatermofupto20years.

CRUTsthatarefundedduringthedonor’slifegenerallybenefitthedonorand/orthedonor’sspouse.

CRUTsthatarefundeduponthedonor’sdeathoftenbenefitthedonor’sspouseorchildren.

Iftherearemultiplebeneficiaries,theirinterestsintheCRUTmaybesuccessiveinterestsorjointinterests.

IfaCRUTbenefitsboththespouseandotherfamilymembers,thespouse’sinterestwillnotqualifyforthemaritaldeductionforgiftorestatetaxpurposes.Insuchcases,itmaybepreferabletocreateamaritaltrustforthespouse,followedbyaCRUTforthechildren,securingamaritaldeductionforfundingthemaritaltrust,anddelayingandreducingthetransfertaxtobepaidatthespouse’sdeathforthechildren’sinterestintheCRUT.

HOWLONGCANTHECRUTLAST?

ACRUTcanlastforthelifetimeofabeneficiaryorthelifetimesofmultiplebeneficiaries,orforatermofyears(nottoexceed20),aslongasthevalueofthecharitableremainderinterestintheCRUTisatleast10%ofthevalueoftheassetstransferredtothetrust.

CANYOUGIVEMEANEXAMPLEOFTHECRUTTAXCALCULATIONS?

Ifa60yearolddonorestablishesaCRUTtopaya5%unitrustamounttohimselfforhislife,andfundstheCRUTwithappreciatedmarketablesecuritieswithabasisof$500,000andafairmarketvalueof$1,000,000,thevalueofthedonor’sdeductiblegiftis$383,410.Ifthedonorisage75atthetimeofthetransfer,thevalueofthedeductiblegiftis$603,470.Thedonor’sretainedinterestintheCRUTisnotagiftforgifttaxpurposes.Thegiftofthecharitableremainderinterestisdeductibleforbothgiftandincometaxpurposes.Inadditiontothebenefitoftheincometaxdeduction,thedonordefersand/oravoidspayingtaxonthe$500,000of


capitalgainthattheCRUTrecognizes(butisnottaxedon)whenitsellstheappreciatedsecurities.TheCRUTwillbeincludedinthedonor’staxableestateathisdeathwithafullyoffsettingestatetaxdeduction.

CANICHANGETHECHARITABLEREMAINDERBENEFICIARYAFTERIFUNDTHECRUT?

IfyouarethebeneficiaryoftheCRUT,youmayretaintherighttochangethecharitableremainderbeneficiariesbyaddingandremovingcharities,restrictinghowtheywillusethepropertytobedistributedtothem,andchangingtheirrelativesharesintheremainderinterest.IfyouarenotthebeneficiaryoftheCRUTandyoudonotwanttoriskhavingtheCRUTincludedinyourtaxableestate,youshouldnotretaintherighttochangethecharities,butyoumaygivethatrighttothebeneficiaryoftheCRUT.

CANMYPRIVATEFOUNDATIONBETHECHARITABLEREMAINDERBENEFICIARY?

IfyouareabeneficiaryoftheCRUT,youcannameyourfoundationasthecharitableremainderbeneficiarywithoutadversetransfertaxconsequences.However,doingsomayreducethebenefitofyourincometaxdeductionforfundingtheCRUT.Thepercentagelimitationrulesthatdeterminehowmuchofyouradjustedgrossincomecanbeoffsetwithacharitabledeductioninanyyeararelessfavorableforgiftstoprivatefoundations,andunlessyourappreciatedpropertygiftstotheCRUTarelimitedto“qualifiedappreciatedstock,”yourincometaxdeductionforthosegiftswillbedeterminedusingyourbasisinthepropertyratherthanitsfairmarketvalue.

IfyouarenotabeneficiaryoftheCRUTandwanttoavoidhavingtheCRUTincludedinyourtaxableestate,youshouldbecautiousaboutnamingyourfoundationasaremainderbeneficiaryunlessyoudonotserveasatrustee,officerordirectorofyourfoundationoryourfoundationhasadoptedproceduresthatprohibityoufromparticipatingindecisionsregardingthefoundation’suseoffundsreceivedfromtheCRUT.

DOESACRUTHAVETOPAYMEAUNITRUSTAMOUNT?WHATOTHERPAYMENTOPTIONSARETHERE?

ACRUTdistributestothebeneficiaryasetpercentageofthefairmarketvalueofthetrust’sassets,asrevaluedeachyear(a“unitrustamount”).

Acharitableremainderannuitytrust(“CRAT”)paysafixedamount(astateddollaramountorapercentageoftheinitialvalueoftheCRAT)tothebeneficiaryeachyear.

ACRUTalsomaypaythebeneficiarythelesserofthetrust’sincomeandtheunitrustamount(an“incomeCRUT”).SinceaCRUTmustmakeeachpaymenttothebeneficiaryinatimelymanner,anincomeCRUTcanbeusefulwhenthepropertythatwillbeusedtofundtheCRUTisilliquidanddoesnotproducesufficientincometopaytheunitrustamountasitcomesdue.Anincome


CRUTalsomayconverttoaregularCRUTuponthehappeningofastatedevent,suchasthesaleoftheilliquidasset,thereafterpayingthebeneficiaryafixedpercentageofthevalueofthetrust’sassets,withoutregardtotheamountofincomeproducedbythetrust.

CANIMAKEADDITIONALCONTRIBUTIONSTOTHECRUT?

YoumaymakeadditionalcontributionstoaCRUT.Youwillbeentitledtoanincometaxdeductionforthevalueofthecharitableremainderinterestintheadditionalassetscontributed,andtoanincreasedunitrustpaymentbasedontheamountadded.BeforefundingtheCRUTormakinganyadditionalcontribution,youneedtoconfirmthatthevalueofthecharitableremainderinterestwillbeatleast10%ofthevalueoftheassetsbeingcontributedtothetrust.

YoumaynotmakeadditionalcontributionstoaCRAT.

ISTHEREAWAYFORMETOUSEACRUTTODIVERSIFYMYLOWBASISASSETSINATAX-EFFICIENTMANNERWITHOUT“DISINHERITING”MY

FAMILY?

Ifyouand/oryourspouseareinsurable,youcancreateanirrevocabletrusttopurchaseandownapolicyofinsuranceonyourlifeoronthejointlivesofyouandyourspouse.YouwoulduseaportionoftheCRUTdistributionstofundthepremiumpaymentsforthetrust.Onyourdeathoronthedeathofthesurvivorofyouandyourspouse,theassetsremainingintheCRUTwouldpasstocharityandtheinsurancewouldbepaidtothetrustforthebenefitofyourdescendants.Ifproperlystructured,theinsurancetrustandpolicywouldnotbeincludedinyourtaxableestate.

WHATARETHECOSTSOFADMINISTERINGACRUT?

Dependingonwhoservesastrusteeandhandlestheinvestmentofthetrust’sassets,theCRUTmighthavetopaytrusteefeesand/orinvestmentmanagementfees.Thetrusteemustfileaninformationreturnforthetrusteachyear,andmustprepareaScheduleK-1informingthebeneficiaryhowtoreporttheunitrustpaymentsforincometaxpurposes.Usuallynocourtcostsorcourtsupervisionareinvolvedduringthebeneficiary’slife.Somestates(forexample,NewYork)requireacourtaccountingtobefiledaftertheinterestsofthenon-charitablebeneficiariesexpire.Therealsoarecostsinvolvedinestablishingthetrust,suchasfeestopreparethetrustagreementandgifttaxreturn.

WHATPROPERTYSHOULDIUSETOFUNDACRUTDURINGLIFE?WHATPROPERTYSHOULDIUSETOFUNDACRUTATDEATH?WHATPROPERTY

SHOULDINOTUSE?

Generally,fundingaCRUTduringlifewithlowbasisassetsthatifsoldwouldproducealong-termcapitalgainwillproducethegreatestbenefitforthedonor.IftheCRUTwillbenefita


privatefoundation,itisgenerallypreferabletofundtheCRUTwithqualifiedappreciatedstock(unrestrictedpubliclytradedsecuritiesthatifsoldwouldproducealong-termcapitalgain).

WhenfundingaCRUTatdeath,itmaybeadvantageoustouseassetsthataresubjecttoincometax,suchasaretirementaccount.

YoushouldavoidfundingaCRUTwithmortgagedproperty,propertyinwhichyouwillcontinuetoownaninterest(propertythatyouwouldownwiththeCRUTastenantsincommon),interestsinpartnershipsthatholddebt-financedpropertyorthatoperateanactivetradeorbusiness,Scorporationstock,assetsthataresubjecttoabindingsalescontractoranyagreementorunderstandingunderwhichthetrusteesoftheCRUTwouldbeobligatedtosellthepropertytoathirdparty,andduringyourlife,retirementaccountsandotherassetsthatwouldcauseyoutorecognizeordinaryincomeifyoutransferredthemtothetrust.Illiquidassets,lifeinsurancepolicies,options,andtangiblepersonalpropertyalsomaypresentissues.

ItisadvisabletoworkwithyourattorneyandyouraccountanttoconfirmthatyourplansforfundingaCRUTwillproducethedesiredresultsbothwithrespecttotheincometaxconsequencesofyourgiftandwithrespecttotheadministrationofandtaxconsequencestotheCRUT.

WHATARETHEGENERALADMINISTRATIONCONCERNSINVOLVEDWITHADMINISTERINGACHARITABLEREMAINDERUNITRUST?

AdministrationofaCharitableRemainderUnitrust(the“CRUT”or“trust”)involvesinvestingthetrust’sassets,revaluingthemannually,makingtimelyunitrustpaymentstothebeneficiaries,preparingandfilingreturnsinatimelymanner,providingthebeneficiarieswithtaxinformationregardingtheirunitrustpayments,andaccountingforthetrust’sadministration.

WHATTYPEOFASSETSSHOULDBEUSEDTOFUNDTHECRUT?

FundingaCRUTwithappreciatedpropertygenerallyproducesthegreatestincometaxbenefitforthedonor.Adonordoesnotrecognizecapitalgain,forregularincometax,AMTornetinvestmentincometaxpurposes,whenheorshefundsaCRUTwithlong-termcapitalgainproperty(appreciatedpropertythat,ifsoldbythedonor,wouldhaveproducedalong-termcapitalgain).SincetheCRUTisatax-exempttrust,thetrusteecanselltheappreciatedpropertywithoutincurringanytaxliabilityandre-investtheentireproceeds.ThebeneficiaryoftheCRUTwillbetaxedonthecapitalgainfromthetrust’ssaleonlywhenandtotheextentthatsuchgainisreceivedbythebeneficiaryaspartofaunitrustpayment.Thisdeferral,andpossiblyavoidance,oftaxonthecapitalgainmakesitadvantageousforincometaxpurposestofundaCRUTwithhighlyappreciatedlong-termcapitalgainpropertyduringlife.

HOWDOESTHECRUTQUALIFYASTAX-EXEMPT?


Inorderforthetrusttoqualifyasatax-exemptCRUTandforcontributionstothetrusttoqualifyforincome,giftandestatetaxcharitabledeductions,thevalueofthecharitableremainderinterestintheassetstransferredtotheCRUTmustbeatleast10%ofthevalueofthoseassetsatthetimeoftransfer.Itisthecharitableremainderinterestthatgivesrisetoacharitabledeductionforincome,giftandestatetaxpurposes.

BeforefundingaCRUTandbeforemakinganyadditions,thedonor(andthetrustee)shouldconfirmthatthe10%minimumcharitableremainderinteresttestwillbesatisfied.TheIRSdiscountrateusedtovaluetheremainderinterest(the“AFR”)isadjustedeachmonth.Whendeterminingwhetherthe10%testhasbeensatisfied,thedonorshouldusetheAFRineffectinthemonththecontributiontothetrustismade(nottherateforeitherofthetwomonthsprecedingthegift).

WHATARETHELIMITATIONSONTHECHARITABLEINCOMETAXDEDUCTION?

Inorderforthetrusttoqualifyasatax-exemptCRUTtowhichtax-deductiblecontributionsmaybemade,thecharitableremainderorganizationmustbeadomesticcharity(oneformedintheU.S.).InordertosecurethemostfavorableincometaxdeductiontreatmentforlifetimegiftstotheCRUT,thetrust’sdescriptionoftheorganizationsqualifiedtoreceivetheremainderinterestmustexcludeprivatenon-operatingfoundations.

IftheCRUTprohibitsthedistributionoftheremainderinteresttoaprivatenon-operatingfoundation,thenthedeductionforcontributionsofcashorshort-termcapitalgainpropertytotheCRUTcanbeusedtooffsetacertainamountofthedonor’sAGI.Thedeductionforcontributionsoflong-termcapitalgainpropertycanbeusedtooffsetalesseramountofthedonor’sAGI.Thedeductionforlong-termcapitalgainpropertygiftsisdeterminedusingthefairmarketvalueofthepropertycontributed.Thedeductionforallotherpropertygiftsisbasedonthelesseroffairmarketvalueandthedonor’sbasis.Thedonormayalsoelecttohavethatcertainlimitationapplytogiftsoflong-termcapitalgainproperty,butonlyifthedonor’sdeductionforallsuchgiftsisdeterminedusingthedonor’sbasisinsteadoftheproperty’sfairmarketvalue.

Ifaprivatenon-operatingfoundationisnamedorcanbeaddedorsubstitutedasacharitableremainderbeneficiary,thentheabovelimitationsoncurrentdeductibilityofgiftstotheCRUTwillbereduced.Inaddition,thedeductionforallpropertygiftswillbebasedonthelesseroffairmarketvalueandthedonor’sbasisunlessthepropertycontributedisunrestrictedpubliclytradedstockwhich,ifsoldonthedateofthegift,wouldhaveproducedalong-termcapitalgain(“qualifiedappreciatedstock”).AfairmarketvaluedeductionwillbeallowedforcontributionsofqualifiedappreciatedstocktoaCRUTthatbenefitsormaybenefitaprivatenon-operatingfoundationuntilthecombinedqualifiedappreciatedstockgiftsofthedonorandthedonor’sfamilymembersinaparticularcorporationtotal10%ofthatcorporation’soutstandingstock.


Adonordoesnotneedtoobtaina“writtenacknowledgment”ofacontributiontoaCRUTinordertosubstantiatetheincometaxdeduction,butmustretainacopyofthecalculationofthevalueofthecharitableremainderinterestinthedonor’sgiftwithhisorherincometaxrecords.

IfthedonorcontributesassetsotherthancashtotheCRUT,thedonormustfileaForm8283withhisorherincometaxreturninordertoclaimanincometaxdeductionforthosegifts.GiftsofunrestrictedpubliclytradedsecuritiesarereportedinSectionAofForm8283;otherpropertygiftsmustbereportedinSectionB.A“qualifiedappraisal”froma“qualifiedappraiser”isrequiredinordertosubstantiatethedeductionforanypropertygiftsreportedinSectionB.Withoutanappraisal,nodeductionwillbeallowed.Thedateoftheappraisalcannotprecedethedateofthegiftbymorethan60days.Ifwithin3yearsofthedateofcontribution,thetrusteessellcontributedpropertythatwasreportedinSectionBofForm8283,thetrusteesmustreportthesaleonForm8282.

MUSTTHETRUSTEESBESENSITIVETOCERTAINREQUIREMENTS?

ACRUTisexemptfromfederalincometax.However,thetrusteesmustfileaninformationreturn,Form5227,withtheInternalRevenueServiceeachyear.Thisreturn(otherthanScheduleA)isopenforpublicinspection.ScheduleAreportsthecontributionsmadetotheCRUTduringtheyear,theincomeaccumulatedbytheCRUT,andthedistributionsmadetothebeneficiary.ThetrusteesofaCRUTmayberequiredtofilestateinformationreturnsorregisterthetrustdependingonthesitusoftheCRUT.

AlthoughaCRUTisexemptfromfederalincometax,ifithasany“unrelatedbusinesstaxableincome,”includingany“debt-financedincome,”thatincomeissubjecttoan“excisetax”ata100%taxrate.IftheCRUTconductsanactivetradeorbusinessorinvestsinorreceivesaninterestinanypartnershiporotherpass-throughentity(ajointventureoranLLCtaxedasapartnership)thatconductsanactivetradeorbusiness,theCRUTwillhaveunrelatedbusinessincome.IftheCRUTborrowsfunds(includinguseofamarginaccounttobuysecurities)orholdsmortgagedproperty,oriftheCRUThasaninterestinapartnershiporotherpass-throughentitythatborrowsfundsorholdsmortgagedproperty(suchasapartnershipthatownsleveragedrealestateinvestmentsordebt-financedgaspipelines),thenunlessanexceptionapplies,theCRUTwillhavedebt-financedincome.ACRUT’sunrelatedbusinesstaxableincome,includingitsdebt-financedincome,issubjecttoa100%excisetaxandmustbereportedonForm4720.ThetrusteesmustalsoincludetheCRUT’sunrelatedbusinesstaxableincomewhendeterminingthecharacterforincometaxpurposesoftheunitrustamountpaidtothebeneficiary.So,notwithstandingthattheCRUThasalreadypaidan“excise”taxinanamountequaltothisincome,totheextenttheunitrustpaymentisdeemedtoincludesomeorallofthisincome,itwillalsobesubjecttoincometaxinthehandsofthebeneficiary.

Unitrustpaymentsmustbemadeeachyearinatimelymannerandinaccordancewiththeprovisionsinthetrustdocumentregardingfrequencyofpayments.FailuretomakethepaymentsinatimelymannercandisqualifythetrustasaCRUTand/orgiverisetoexcise(penalty)taxes.PaymentoftheunitrustamountcanbedeferredonlyinthecaseofpaymentsattributabletopropertypassingtoaCRUTbyreasonofadonor’sdeath.Paymentoftheunitrust


amountattributabletosuchpropertymaybedeferreduntilallofthefundingattributabletothedonor’sdeathhasbeencompleted.

Thetrusteesmaywishtoprepareinformalaccountingsandrequestthattheunitrustbeneficiaryorthatallofthebeneficiariesreleasethemfrompersonalliabilityinconnectionwiththetrust’sadministration.Thetrustdocumentdescribestheinformationtobeprovidedinaninformalaccount.Sinceitisnotclearwhetheranamedcharity’sreleaseofthetrusteeswouldbeeffectivetoprotectthetrusteesfrompersonalliabilityifothercharitiesarelateraddedorsubstitutedforthereleasingcharity,thetrusteesmayprefertofileperiodiccourtaccountings,withnoticetotheAttorneyGeneral’soffice(whichwouldrepresentallcharitableremainderbeneficiaries)inordertoensurethatthetrusteesareeffectivelyreleasedfrompersonalliabilityinconnectionwiththeiradministrationofthetrust.

WheninvestingaCRUT,theTrustees(andinvestmentcounsel)shouldkeepinmind:(a)anyapplicablestateprudentinvestorlaw,(b)theprivatefoundationself-dealingrules,and(c)the100%excisetaxonunrelatedbusinesstaxableincomeanddebt-financedincome.

AtrustwillnotqualifyasaCRUTifitrestrictstheTrusteesfrominvestingthetrustassetsinamannerthatcouldresultintheannualrealizationofareasonableamountofincomeorgainfromthesaleordispositionoftrustassets--forexample,adirectioninthetrusttoretaindonatedsecuritiesortoinvestthetrustonlyinthesecuritiesofaparticularissuer,ortoinvestonlyinaparticularkindoffinancialinstrument,suchasdoubletax-exemptbonds.

WhetherornotCodesection4944(jeopardizinginvestments)isapplicabletoaCRUT,thetrust’sgoverningstatelawmayimposeitsownprudentinvestorstandardandrequirethatthetrusteesdiversifytheCRUT’sinvestments,includingthosecontributedtothetrustbygift.IfatrusteeinveststheCRUT’sassetsinabalanced,diversifiedportfoliodesignedtomeetboththeCRUT’scurrentandfutureneeds,neitherCodesection4944norstateprudentinvestorlawshouldbeaconcern.

Atrustwillnotqualifyasatax-exemptCRUTifitisa“grantortrust”forincometaxpurposes.ThetrusteesshouldreviewthegrantortrustrulesbeforeacceptingagiftoforinvestingtheCRUT’sassetsinstockofadonor-controlledcorporation,stocksubjecttoavotingtrust,policiesofinsuranceonthelifeofadonorand/oradonor’sspouse,orpropertysubjecttoamortgage.Agiftofmortgagedpropertymayalsobeaprohibitedactofself-dealing,andevenifitfallswithinaself-dealingexceptionpermittingitstransfertotheCRUT,maygiverisetodebt-financedincomeintheCRUTthatissubjecttoa100%excisetax.

ACRUTdoesnotqualifyasashareholderofScorporationstock.

IfpropertycontributedtoaCRUTistransferredsubjecttoabindingsalescontractoranyagreementorunderstandingunderwhichthetrusteesareobligatedtosellthepropertytoathirdparty,thedonorwillrecognizegainonhisorherpersonalincometaxreturnwhenthetrustsellstheproperty.Cautionshouldalsobeexercisedifadonortransfersstockinaclosely-heldcorporationduringanongoingtenderofferandpendingmergerifthedonortakespartinnegotiatingandplanningthetenderofferandmerger,asthedonorcouldbedeemedtohave


alreadyconvertedthestockintoafixedrighttoreceivecashatthetimethestockiscontributedtotheCRUT.

TAX-FREEIRADISTRIBUTIONSTOCHARITY

Forindividuals70½orolder,thereisyetanotherwaytomakecharitablecontributionsinataxefficientmanner.ThesedonorsmaymakedirectcharitablegiftsfromanIRA,includingrequiredminimumdistributions,ofupto$100,000annuallytopubliccharities.Thisdistributiontocharitywouldnotbereportedastaxableincomeonthedonor’sfederalincometaxreturn.Donoradvisedfunds,supportingorganizationsandmostprivatefoundationsareineligibledonees,butprivate-operatingandpassthrough(conduit)foundationsareallowed.WhilethereisnocharitabledeductionforIRAdistributions,thismethodavoidstaxonotherwisetaxableincome.Donorsmustbemindfulofseveralrulestoensuretheirdistributionisnottaxedasincome.WhilealldistributionsthataremadefromanIRAduringtheyearinwhichapersonturns70½canbeappliedtowardsatisfyingtheminimumdistributionrequirement,onlydistributionsmadeonorafterreachingage70½willavoidtaxationasincome,sodonorsshouldmakesuretowaituntiltheyhaveactuallyreached70½beforemakingthedistribution.Distributionsfrommostqualifyforthistax-freetreatment.Distributionsfromemployer-sponsoredretirementplans(likeSIMPLEIRAsandsimplifiedemployeepensions(SEPs)),profitsharingplans,403(b)plans,401(k)plansorKeoghsdonotqualifyforthistax-freetreatment.Inaddition,anycharitabledistributionfromanIRAmustbemadedirectlybytheIRA’sadministratorortrusteetoaqualifiedcharityandcannotbedistributedtothedonorfirst.

WHATISAPRIVATEFOUNDATION?

Aprivatefoundationisatypeofcharitableorganization.Bothtax-exemptprivatefoundationsandpubliccharitiesarebothknownas“501(c)(3)s”(becausetheyarebothexemptfromfederalincometaxundersection501(c)(3)oftheInternalRevenueCode),andbothqualifytoreceivecontributionsthataredeductibleforincome,giftandestatetaxpurposes.However,aprivatefoundationusuallyreceivesitsfundingfromoneorafewprivatesources,whilemostpubliccharitiesreceiveon-goingpublicsupportfortheirprogramsandactivities.Theprincipalactivityofaprivatefoundationtendstobemakinggrantstopubliccharitiesandawardingscholarshipstoindividuals.Itmay,however,operateadirectcharitableprogram,suchasamuseum,arboretum,homelessshelter,orMealsonWheelsprogram,inwhichcaseitmaybeappropriateforthefoundationtoseekrecognitionfromtheInternalRevenueServiceasa“privateoperatingfoundation.”

HOWDOICREATEAFOUNDATION?

Afoundationcanbecreatedasacorporationorasatrust.Generally,itiseasiertoformandadministeratrustthanacorporation.Ifyouestablishthefoundationasatrust,thencertainpowers(suchasterminationandamendmentpowers)shouldbeincludedinthetrust


agreementtomakethetrustasflexibleaspossible.Thetrusteesshouldalsobegiventhepowertoincorporatethefoundationincasethatlaterbecomesdesirable.

Normally,thecorporateformischosenwhenafoundationisexpectedtoengageinactivitiesthatexposeitsmanagerstoagreaterriskofliability,suchasprovidingservicesorgoodstoorholdingfacilitiesopentothepublic.Thetrustformisoftenusedwhenafoundationwillcarryoutitstax-exemptpurposesbymakinggrantstoothercharitableorganizations.However,thechoicebetweenatrustorcorporationmaydependonhowcomfortableyouarewithcorporategovernanceproceduresand,possibly,alsoonthenumberofindividualsyouwishtohaveparticipateingoverningthefoundation.

WHOMAYMANAGETHEFOUNDATION?

Therearefewrestrictionsonwhomayserveasatrustee,directororofficerofafoundation(a“foundationmanager”).

IfafoundationisincorporatedunderConnecticut,FloridaorNewYorklaw,itmusthaveatleastthreedirectors.Anindividualmayserveasbothadirectorandanofficerandmayholdmultipleoffices.However,NewYorklawrequires,anditisgenerallybetterpracticefor,differentindividualstoserveaspresidentandassecretary.

Ifafoundationisformedasacharitabletrust,anindividual,includingtheindividualwhoformedthetrust,mayserveasthesoletrusteeandcontrolallfunctionsofthefoundation,includingdistributions.

However,theremaybeadvantagestonamingseveraltrustees.Considerthefollowing:

• Wouldyouliketohaveyourchildrenorotherfamilymembersbecomeinvolvedintheprocessofphilanthropy?Thisisanopportunityforyoutoinvolvetheminthejoysofparticipatoryphilanthropywhileyouarestillaliveandabletoguidethem.

• Wouldtheprocessofselectingcharitablerecipientsoffoundationgrantsbenefitfromtheinvolvementofpersonswithdifferentbackgroundsandareasofexpertise?

• Doyourprofessionaladvisersshareyourinterestinthefoundation?Ifso,wouldtheirprofessionalexpertisecoupledwiththeirknowledgeofyourfamily’sgoalsandobjectivesbehelpfulinguidingthefoundation?

• Ifyouplantofocusthefoundation’sgrantsononeortwocharities,woulditbehelpfultohavemembersoftheirboardsserveastrusteesofyourfoundation?

CANIRESTRICTTHEACTIVITIESOFFUTUREFOUNDATIONMANAGERS?

Yes.Ifyouwanttolimittheabilityoffuturefoundationmanagerstochangeyourfoundation’sfocus,youcanrestrictthefoundation’scharitablepurposesinitsorganizationaldocumentsandrestrictthepoweroffuturefoundationmanagerstoamendthosepurposes.Youcanalsoimposelegallybindingrestrictionsonthefoundation’suseofyourcontributionsatthetimeyoumakeyourgifts.


Ifyouintendtobenefitaparticularpubliccharityorcharities,thenyoumightwanttoconsidercreatingasupportingorganizationinsteadofaprivatefoundation.Asupportingorganizationisorganizedandoperatedexclusivelytobenefitcertainidentifiedpubliccharities.Itisitselfclassifiedasapubliccharity(ratherthanasaprivatefoundation)becauseofitsrelationshipwithandresponsivenesstothepubliccharitiesitwascreatedtosupport.However,asupportingorganizationcannotbecontrolled,directlyorindirectly,bythepersonswhocreateandfunditortheirfamilymembers.Sinceasupportingorganizationisapubliccharity,contributionsyoumaketoitqualifyformorefavorabletreatmentundertheincometaxcharitabledeductionrules.Inaddition,mostoftheso-called“excisetax”rules(discussedbelow),whichareapplicabletoprivatefoundations,donotapplytosupportingorganizations.However,theorganizationalandoperationalrequirementsforasupportingorganizationcanbeasormorecumbersometodealwith,andcertainexcisetaxrulesapplicabletosupportingorganizationsareactuallymorerestrictive,thantheprivatefoundationexcisetaxrules.

ARETHEREANYTAXESPAYABLEBYAFOUNDATION?

Yes.Afoundation’sannualnetinvestmentincome(suchas,interest,dividendsandcapitalgains)issubjecttoa2%excisetaxthatis,ineffect,ataxonthefoundation’sincome.Eachyear(otherthanitsinitialtaxyear)inwhichafoundation’scharitabledistributionsequalorexceeditsaveragehistoricgivingratioplus1%ofitsnetinvestmentincomefortheyear,this2%taxonincomeisreducedto1%.

Ifafoundationhasunrelatedbusinesstaxableincome,itmustpaytaxonthatincomeatregulartrustorcorporateincometaxrates.Unrelatedbusinesstaxableincomeisincomefromtheconductofanactivetradeorbusinessthatisnotdirectlyandsubstantiallyrelatedtocarryingoutthefoundation’scharitablepurposes(otherthanbyproducingrevenueforthefoundation).Afoundationcanhaveunrelatedbusinesstaxableincomeifitholdsaninterestinapartnershiporlimitedliabilitycompanythatconductsorownsaninterestinotherpass-throughentitiesthatconductanactivetradeorbusiness.IfafoundationownsstockinanScorporation,allofitsshareoftheScorporation’sincomeandgains,andanygainthefoundationrecognizeswhenitdisposesoftheScorporationstock,willbesubjecttounrelatedbusinessincometax.Afoundation’sdebt-financedincomealsoissubjecttounrelatedbusinessincometax.Thetaxappliestothedebt-financedportionofthefoundation’sincomeandgainsfromholdingordisposingofthedebt-financedproperty,whetherthefoundationholdspropertydirectly(e.g.,amarginedsecuritiesaccountormortgagedrealproperty)orindirectly(throughapartnershiporlimitedliabilitycompanyinwhichthefoundationholdsaninterest).

Otherverysignificantexcise(penalty)taxesmaybeassessedifafoundationfailstomakecertainrequireddistributionsorengagesincertainprohibitedtransactions.

MUSTAFOUNDATIONMAKEDISTRIBUTIONS?

Yes.Federallawrequiresafoundationtodistributeanamountequaltoroughly5%oftheaveragefairmarketvalueofitsinvestmentassetstoothercharitableorganizationsortoexpend


thatamountdirectlyforcharitablepurposeseachyear.Thisrequirementissatisfiedaslongastheamountrequiredtobedistributedorexpendedforanyyearisdistributedorexpendedbytheendofthefollowingtaxyear.WithadvanceapprovalfromtheInternalRevenueService,thedistributionrequirementcanbesatisfiedbysettingasideanamountforafutureprojectforwhichimmediateexpenditureisnotfeasible(forexample,ifafoundationplanstobuildamuseumwithin5years).Therearesubstantialpenaltiesforfailuretomaketimelydistributions.

ARETHEREOTHERRESTRICTIONSONHOWAFOUNDATIONISOPERATED?

Yes.Afoundationmustbeoperatedasthecharitableorganizationthatitisandnotforprivatebenefit.Inaddition,certaintransactions,investmentsandexpenditurescangiverisetoexcise(penalty)taxliabilityforafoundation,the“disqualifiedpersons”involvedinthetransaction,andsometimesalsoforthefoundation’smanagers(itstrustees,directors,officersandcertainemployees).Afoundation’s“disqualifiedpersons”includeitssubstantialdonorsandtheirfamilymembers,itsmanagersandtheirfamilymembers,andcertaintrusts,partnershipsandcorporationsinwhichtheforegoingholdasignificantinterest.Thetransactionsthatcanresultintheimpositionofpenaltiesincludethefollowing:

SELF-DEALING

Thefollowingtransactionsandarrangementsbetweenafoundationandadisqualifiedpersonareprohibited:anysale,exchangeorleasingofproperty,anyloanorextensionofcredit,andanyfurnishingofgoods,servicesorfacilities.Afoundationisalsoprohibitedfrompayingcompensationtoadisqualifiedpersonorreimbursingadisqualifiedpersonforexpenses.Inaddition,anytransfertoorusebyadisqualifiedpersonofafoundation’sassetsorincomeisalsoprohibited.Suchtransactionsandarrangementsareprohibitedwithoutregardtowhethertheyarefairandbeneficialtothefoundation.

EXCESSBUSINESSHOLDINGS

Generally,afoundationanditsdisqualifiedpersonscannotco-ownabusiness.Theexcessbusinessholdingsrulesprohibitafoundationanditsdisqualifiedpersonsfromholding,intheaggregate,morethan20%ofthevotingstockofacorporationortheprofitsinterestsinapartnership(“permittedholdings”).Thepermittedholdingsareincreasedto35%ifoneormorepersonswhoarenotdisqualifiedpersonshaveeffectivecontrolofthebusiness.Underasafeharborrule,afoundationwillnotbetreatedashavingexcessbusinessholdings,regardlessofhowmuchofthebusinessisownedbydisqualifiedpersons,ifthefoundationownsnomorethan2%ofthevotingstockandnomorethan2%invalueofalloutstandingsharesofallclassesofstock(votingandnon-voting).Indeterminingwhetherafoundation’sinterestfallswithinthesafeharbor,thefoundationwillbetreatedasowninganyinterestinthebusinessthatisheldbyarelatedfoundation.


Theexcessbusinessholdingstaxdoesnotapplytoafoundation’sinterestinanentityifatleast95%oftheentity’sincomeisderivedfrompassivesources(forexample,afamily-ownedinvestmentfundholdingpubliclytradedsecurities).

Iftheexcessbusinessholdingsrulesapply,thenafoundationmustdisposeofitsexcessholdingsinatimelymannertoavoidincurringapenaltytax.Excessholdingsreceivedbygiftorbequestmustbedisposedofwithin5yearsoftheirreceipt.Excessholdingscreatedwhenadisqualifiedpersonpurchasesadditionalholdingsmustbedisposedofbythefoundationwithin90days.Thereisnograceperiodwhenafoundationpurchasesexcessbusinessholdings.

Whendisposingofexcessbusinessholdings,afoundationmustbecognizantoftheself-dealingrulesthatprohibitsalestodisqualifiedpersons.Anarrowexceptiontotheself-dealingrulespermitsabusinessentitythatisadisqualifiedpersontoredeemafoundation’sexcessbusinessholdingsaspartofageneralredemptionoffer,butthebusinessentitymaynotissueanotetothefoundationtopayforthesharesitredeems.

INVESTMENTSWHICHJEOPARDIZECHARITABLEPURPOSE

Afoundationisprohibitedfrominvestingitsassetsinamannerthatjeopardizesitsabilitytocarryoutitsexemptfunction.Thestatutedoesnotprohibitanyparticularinvestment.Rather,itimposesadutytouseordinarybusinesscareandprudencetoprovideforafoundation’slong-termandshort-termneeds.Diversificationisprudent;speculationmustbeavoided.

TAXABLEEXPENDITURES

Afoundationisprohibitedfromlobbyingorotherwiseattemptingtoinfluencelegislation,fromparticipatinginorinterveninginanypoliticalcampaignonbehalfoforinoppositiontoanycandidateforpublicoffice,andfrommakinganyexpenditurethatisnotforoneormoreofitsexemptpurposes.Unlesscertainrequirementsaresatisfied,afoundationisalsoprohibitedfromoperatingavoterregistrationdrive,makingscholarshiporsimilartypesofgrantstoindividualsormakinggrantstoentitiesotherthanU.S.publiclysupportedcharities.Althoughpubliccharitiesarepermittedtoengageinalimitedamountoflobbyingandprivatefoundationsareprohibitedfromengaginginanyamount,aprivatefoundationmaymakeageneralsupportgranttoapubliccharitythatengagesinlobbyingwithouthavingthepubliccharity’slobbyingattributedtoit.

WHATARETHEALTERNATIVESTOAFOUNDATION?

Wehavementionedabovesomecircumstancesthatindicatewhenaprivateoperatingfoundationorasupportingorganizationmightbeanappropriatealternativetoagrantmakingprivatefoundation.

Anotheralternativetoconsiderisestablishingadonor-advisedfund(a“DAF”)withanexistingpubliccharitythatsponsorsaDAFprogram.Sincethesponsoringcharityownstheassetsinits


DAFs,itisresponsibleforallinvestmentdecisions,administrativedutiesandreportingobligations.AsthegrantadviserfortheDAFyouestablish,youwouldhavetherighttorecommend,butnottodirect,grantstobemadefromyourDAF.Althoughthegrantadvisercanonlymakerecommendations,thecharitiesthatsponsorDAFprogramsgenerallygivefullandcarefulconsiderationtothegrantadviser’srecommendations.Asponsoringcharitywillnot,however,makegrantsthatareprohibitedbylaworoffensivetoitscharitablepurposeormission,anditmayhaveagrantmakingpolicythatpreventsitfromacceptingcertaingrantrecommendations.

Whenchoosingasponsoringcharity,youshouldreadthedescriptionofitsDAFprogramcarefullytodeterminewhethertheprogram’stermsandrestrictionsareacceptabletoyou.SomecharitiesalloweachthenservinggrantadvisertonamesuccessoradvisersfortheDAF,inperpetuity.Otherslimitthenumberofsuccessoradvisers.SomecharitiesoperatenationalDAFprograms,whileothers,suchascommunityfoundations,tendtofocustheirgrantmakingonaparticulargeographicarea.AsponsoringcharitymayalsorequirethatitsDAFsbeusedprimarilyorsolelytomakegrantsthatsupportitsownprogramsortheprogramsofitsaffiliates.

InadditiontosponsoringDAFprograms,manycommunityfoundationsoperate“donor-designatedfund”programsthatallowadonortocreateafundthatwillprovideapermanentsourceofsupportforaparticularcharityorcharitiesselectedbythedonorwhenestablishingthefund.Communityfoundationsmayalsooffertoestablisha“fieldofinterestfund”tobenefitorganizationsthatoperateprogramswithinadonor’sselectedfieldofinterest(suchas,artsandculture,oryouthandfamilies).Eachyear,thecommunityfoundationselectsthecharitiesthatwillreceivedistributionsfromitsfield-of-interestfunds.WhenyouestablishaDAF,youmayalsorequirethecommunityfoundationtodistributetheassetsremainingatyourdeathtoadesignatedfundorfield-of-interestfund.

ContributionsmadetoapubliccharitytoestablishaDAForotherrestrictedfundaretreatedmorefavorablyforpurposesoftheincometaxcharitabledeductionthanarecontributionsmadetoagrantmakingprivatefoundation.UsingaDAFcanalsobehelpfulforindividualswho“bunch”theircharitablecontributionstobeatthenewlyincreasedstandarddeductionamountandmaximizetheirtaxsavingsthroughitemization.Withthestandarddeductionat$12,000forindividualsand$24,000formarriedcouples,manytaxpayersmaynolongerseetaxsavingsfromtheirgiving.Onestrategyistopoolor“bunch”multipleyearsofcharitablecontributionsinoneyearanditemizedeductionsinthatyear.Adonormaynotwanttoactuallycontributemoreassetstoanycertaincharityinoneyear,sothatdonormaywishtocontributeseveralyearsofcharitablegiftstoaDAFatonetime.TheDAFcanthenbeusedtodistributegrantstovariouscharitiesovertimeasthedonordesires.

Evenifyoucreateyourownfoundation,yourlocalcommunityfoundationcanstillbeasourceofimportantinformationregardingorganizationsandprogramsinyourcommunitythatneedyourfoundation’ssupport.Byworkingwithyourlocalcommunityfoundation,youcanhelpensurethatyourprivatefoundation’seffortsandactivitiesareefficientlycoordinatedwiththephilanthropicactivitiesofotherorganizationsinyourcommunity.


_______________________________________________________________________________________________________________©Copyright2018Cummings&LockwoodLLC.Allrightsreserved.Thiswhitepaperisforgeneraleducationalpurposesandisnotintendedaslegaladvice.Ourobjectiveistoconveytoyoutheprincipalcharacteristicsinvolvedwithtrustsandestatesplanningastheyapplytocommonsituations.Forthisreason,wehavedeliberatelysimplifiedtechnicalaspectsofthelawintheinterestofclearcommunication.Cummings&Lockwood’sprivateclientsattorneyswouldbepleasedtoconsultwithclients,prospectiveclientsand/ortheirprofessionaladvisorswithregardtotheirspecificestateplanningneeds.InaccordancewithIRSCircular230,wearerequiredtodisclosethat:(i)thiswhitepaperwasnotintendedorwrittenbyCummings&Lockwoodtobeused,anditcannotbeusedbyanytaxpayer,forthepurposeofavoidingpenaltiesthatmaybeimposedonthetaxpayer;(ii)thiswhitepaperwaswrittentosupportthepromotionormarketingofthetransaction(s)ormatter(s)addressedbythewhitepaper;and(iii)eachtaxpayershouldseekadviceonhisorherparticularcircumstancesfromanindependenttaxadvisor.


CUMMINGS&LOCKWOODCONTRIBUTORS MARYBETHCRAWFORDMaryBethCrawfordisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheBonitaSprings,Florida,office.Shefocusesherpracticeonestateplanning,taxplanningandprobateandtrustadministration.MaryBethbringsacaringandcomprehensiveapproachtoestateplanningandprovidesherclientsandtheirfamilieswithboththetechnicalandpersonalguidancetheyneedindevelopingtheproperplan.

ShereceivedherLL.M.inTaxationandJ.D.,withhonors,fromtheUniversityofFlorida,LevinCollegeofLaw,andreceivedherB.A.fromtheUniversityofFlorida.

MaryBethcanbereachedat(239)390-8062orviaemailatmcrawford@cl-law.com.DANIELP.FITZGERALDDanielP.FitzgeraldisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheFirm’sGreenwich,Connecticut,office.Hispracticefocusesonestateplanning,estateadministration,taxation,partnerships,probatelitigationanddefendingtaxaudits.Dan'sextensiveestateadministrationexperienceallowshimtodevelopestateplansthataddressissuesandconcernsbeforetheybecomeproblematic.

Hehasworkedwithabroadrangeoffinance,accounting,hedgefundandprivateequityprofessionals,aswellasartistsandentrepreneurs.Danhasdevelopedcomprehensiveestateplanstoassistmembersofmanygenerationsintheirwealthplanning,protectionandprotection.DanistheprincipalinchargeoftheFirm’sContinuingLegalEducationProgramandthePrivateClientsGroupAssociateTrainingProgram.

DanreceivedhisB.A.fromLafayetteCollege,hisJ.D.fromSyracuseUniversityCollegeofLaw,andhisLL.M.inTaxationfromNewYorkUniversitySchoolofLaw.Dancanbereachedat(203)863-6511orviaemailatdfitzgerald@cl-law.com.JESSIEA.GILBERTJessieA.GilbertisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheFirm’sGreenwich,Connecticut,office.Jessieadviseshighnetworthindividualsonestateandtaxissues,helpingthemwithsuccession,generation-skippingandassetprotectionplanning.Shealsorepresentsexecutorsandtrusteeswithrespecttoprobate,estateandtrustadministrationmatters,aswellaswithestateandfiduciaryincometaxes.

Jessieisafrequentwriterandlectureronestateplanningandadministrationtopics,includingbusinesssuccessionplanning,fiduciaryincometax,andthePrincipalandIncomeAct.ShehasalsoservedasalawclerkwiththeUnitedStatesTaxCourtinWashington,D.C.

JessiereceivedherA.B.fromHamiltonCollege,herJ.D.fromCaseWesternReserveUniversitySchoolofLaw,andherLL.M.inTaxationfromNewYorkUniversitySchoolofLaw.Jessiecanbereachedat(203)[email protected].


DAVIDM.HALPENDavidM.HalpenisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedinthePalmBeachGardens,Florida,office.Davidhasover20yearsofbroad-basedlegalexperienceintrustsandestatesplanning,estatesettlement,trustadministration,businesssuccessionplanning,andU.S.andinternationaltaxplanningforavarietyofhighnetworthclients.PriortojoiningCummings&Lockwood,hewasashareholderwithDunwody,White&LandonintheirNaplesandPalmBeach,Florida,offices.

DavidreceivedhisLL.M.inTaxationfromtheUniversityofFlorida,LevinCollegeofLaw,hisCertificateinInternationalLawfromtheParisInstituteofInternationalLaw,hisCertificateinInternationalTaxLawfromLeidenUniversity,theNetherlands,hisJ.D.,withhonors,fromtheUniversityofFlorida,LevinCollegeofLaw,andhisB.A.fromtheUniversityofFlorida.

Davidcanbereachedat(561)214-8508orviaemailatdhalpen@cl-law.com.DANIELG.JOHNSONDanielG.JohnsonisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheStamford,Connecticut,office.DanisPrincipal-in-ChargeoftheStamfordofficewherehehaspracticedsincejoiningtheFirmin1997.Hepracticesprimarilyintheareasofestateplanning,familybusinesssuccessionplanning,estateadministrationandtrustadministration.Danfrequentlylecturesonestateandtaxplanningtopicsbeforebothlawyerandnon-lawyeraudiences.

DanreceivedhisA.B.,cumlaudefromGeorgetownUniversityandhisJ.D.fromUniversityofVirginiaSchoolofLaw.Dancanbereachedat(203)[email protected] RobertL.LancasterisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheNaples,Florida,office.Robfocuseshispracticeontheareasofestateplanningandbusinesssuccessionplanning.Healsohelpsclientswithwealthpreservationplanning,whichinvolvesmaximizingthebenefitsofferedunderFloridalaw,aswellasconsideringtheimplementationofsophisticatedforeignordomesticstructures.RobreceivedhisLL.M.inTaxationandJ.D.,withhonors,fromtheUniversityofFlorida,LevinCollegeofLaw,andhisB.S.inBusinessManagement,cumlaude,fromFloridaStateUniversity.Robcanbereachedat(239)[email protected]

RaniNewmanMathuraisthePrincipal-in-ChargeofthePalmBeachGardens,Florida,officeofCummings&Lockwoodwhereshefocusesherpracticeonestateplanning,estateandtrustadministration,charitableplanning.Ranialsorepresentsguardiansandconservators.Shefrequentlyspeaksonestateandtaxplanningtopicstoattorneyandcommunity


audiences.PriortojoiningtheFirm,Raniwastheprobatestaffattorneyforthe15thJudicialCircuitCourtinPalmBeach,Florida.InadditiontotheFirm'sFloridaoffices,RanihasbeenresidentintheFirm'sGreenwich,Connecticutoffice.RanireceivedherLL.M.inEstatePlanningfromtheUniversityofMiamiSchoolofLaw,herJ.D.fromNovaSoutheasternUniversityShepardBroadLawCenter,andherB.A.fromtheUniversityofMichigan.Ranicanbereachedat(561)214-8503orviaemailatmathura@cl-law.com.DOUGLASH.OLINDouglasH.OlinisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheGreenwich,Connecticut,officewhereheservesasPrincipal-in-Charge.DougjoinedCummings&Lockwoodin1999andbecameaPrincipalin2001.Hispracticefocusesonestateplanning,familybusinesssuccessionplanning,andestateandtrustadministration.Dougspeaksfrequentlyonestateandtaxplanningtopicsbeforebothlawyerandnon-lawyeraudiences.

DougreceivedhisB.A.,withhonorsfromEmoryUniversity,hisJ.D.fromNewYorkUniversitySchoolofLaw,andhisLL.M.inTaxationfromNewYorkUniversitySchoolofLaw.Dougcanbereachedat(203)863-6504orviaemailatdolin@cl-law.com.HEATHERJ.RHOADESHeatherJ.RhoadesisaPrincipalinCummings&Lockwood'sPrivateClientsGroupandisbasedintheWestHartford,Connecticut,office.HeatherjoinedtheFirmin1999andshepracticesintheareasofestateplanning,estatesettlement,trustadministrationandcharitableplanning.HeatherisamemberoftheFirm'sNationalCharitablePlanningGroup.

HeatherreceivedherJ.D.fromtheUniversityofConnecticutSchoolofLawandherB.A.fromtheUniversityofConnecticut.

Heathercanbereachedat(860)[email protected].


ABOUTCUMMINGS&LOCKWOODLLC

OVERVIEW

Foundedin1909,Cummings&Lockwoodprovidessophisticatedlegalcounseltobothprivateclientsandcommercialenterprises.Ourclientsincludeindividualsandfamilieswithinheritedandnewlycreatedwealth,aswellasemerging,middlemarketandFortune500companies.Withover100attorneysandfiduciaryaccountantslocatedinStamford,GreenwichandWestHartford,Connecticut,andinNaples,BonitaSpringsandPalmBeachGardens,Florida,wehavetheexperience,technologyandresourcestoprovideabroadrangeoftrustsandestates,corporateandfinance,litigationanddisputeresolution,andcommercialandresidentialrealestateservicestoourclients.

PRIVATECLIENTSPRACTICE

Cummings&LockwoodhasoneofthelargesttrustsandestatespracticesintheUnitedStates,withasignificantprivateclientbaseofhighnetworthindividualsandfamilies,familyoffices,closely-heldbusinesses,andnationalcharitiesandfoundationswithverycomplexandsophisticatedlegalneeds.Ourclientsresideinnearlyall50U.S.statesandinover25countriesaroundtheworld.Ourprivateclientsattorneys,manyofwhomhavebeenelectedtotheprestigiousAmericanCollegeofTrustandEstateCounsel(ACTEC),areexperiencedintheareasofestateplanningandadministration;estate,incomeandgifttax;trustformationandmanagement;executorandtrusteeservices;charitablegivingandfoundations;internationalestateandtaxplanning;estateplanningforhedgefundandprivateequityprincipals;specialneedsplanning;probatelaw;andresidentialrealestate.Whetherdealingwithrecentlyacquiredassetsorfamilyfortunesthatspangenerations,theFirmprovidesinnovativestrategiesandsolutionstopreserve,enhanceandtransitionourclients'wealthinthemosttax-efficientmannerpossible,aswellasmeettheirvariedlegalneedsandpersonalgoals.Cummings&Lockwood’sprivateclientattorneysregularlycollaboratewithotherprofessionaladvisors,includinginvestmentmanagers,accountants,insuranceagents,financialplannersandtrustofficersamongothers,toensurethatourclientsachievetheirestateplanningobjectives.

COMMERCIALPRACTICE

Cummings&Lockwoodhasanelitecommercialpracticewithnumerous,professionally-recognizedlawyerswhoareexperiencedintheareasoflitigationanddisputeresolution;realestateinvestmentanddevelopment;banking,lendingandcredittransactions;corporateacquisitionsanddivestitures;andpartnership,limitedliabilitycompanyandtaxmatters.


Ourclientsincludeentrepreneurs,closely-heldcompanies,regional,nationalandinternationalcorporations,hedgefunds,privateequityfirms,financialinstitutionsandnot-for-profitorganizations.Inaddition,Cummings&Lockwood'scommercialandprivateclientslawyersregularlyworktogethertoprovideentityplanning,businesssuccessionplanning,taxguidanceandlitigationtoprivately-ownedbusinessesofallsizesandindustries.ForadditionalinformationaboutourFirm,practiceareas,capabilitiesandattorneys,pleasevisitourwebsiteatwww.cl-law.com.


ABOUTTHEFAMILYOFFICEASSOCIATION

TheFamilyOfficeAssociationisaglobalmembershipcommunityofsuccessfulfamiliesandsinglefamilyoffices.Wearecommittedtocreatingvalueforeachfamily/SFOthatweserve;valuethatenhanceswealth,strengthenslegacy,andunitesmultiplegenerationsbyspeakingtosharedinterestsandpassions.TheFamilyOfficeAssociationprovidestheresourcestosolveyourmostdifficultchallengesandhelpyouachieveyourcollectivegoals:toinvestintelligently,givestrategically,andlearnexponentially.

TheFamilyOfficeAssociationisthecommunityleaderinservingallthekeyimperativesforsuccessfulfamilies,respectingyourprivacybutenablinganintimatecommunityofglobalfamilieslikeyours.Ourorganizationdeliverseducation,contentandprogrammingopportunities,proprietaryresearch,andaccesstosalientthoughtleadershipthatwillinterestallgenerationsofyourfamily.

Inadditiontothedeepestandmostuniquecontentinthecommunity,throughouttheyear,wehostavarietyofexclusiveeventsforthosequalifiedandacceptedintoourhighestlevelofmembershipincludingseasonalsummits,investmentforumsandfamilyretreats,allwithcarefullyselectedspeakersandpresenters.Intheseintimateface-to-facesettings,youwillbeabletotrulyengageexpertsandgetpersonaladviceandopinionsonthebestwaytocaptureopportunity.

Ourcontentandprogrammingledbytopprofessionalsandthoughtleadersacrossavarietyofkeyeconomic,familybusiness,philanthropicandsocialfields,arethebestinthecommunity.Thisrichanddiversecontentandprogrammingofferinginsightwiththoughtleadership,yieldstheoptimalcombinationforenhancingandnurturingsuccessfulfamilies.

cummings & lockwood llc and the family office association present protecting … · 2018. 7....

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