This document discusses estate planning considerations for unmarried couples. It covers non-tax issues like legal documentation of rights, as well as tax issues around income, gifts, and estate taxes. It describes various asset transfer techniques unmarried couples can use to minimize taxes and legally protect assets, such as terminable interest property trusts, lifetime gifts, and lifetime transfers of appreciating assets.

1. CPAs and Consultants

2. Estate planning for unmarried
couples
Brian Whitlock, Partner, CPA, JD, LLM
M 27, 2009
ay

3. Overview
• W im
hy portant to your practice
• Non-tax Issues
• Incom Gift, and Estate Tax Issues
e,
• Asset transfer techniques
3

4. IRS Circular 230
This written advice is not intended or written to be used,
and cannot be used by any taxpayer, for the purpose
of avoiding penalties that may be imposed under the
Internal Revenue Code.
4

5. Part 1: Importance of Unmarried
Couples in Your Practice
5

6. Dem ographics: Increasing % of
the Population
6

7. Part 2: Non-tax problems particular
to unmarried couples
7

8. Problems particular to unmarried
couples
• No automatic recognition of legal rights (as enjoyed by
married couples).
• Easier to exit relationship than a marriage (e.g. no
divorce or legal separation)
8

9. Federal Statutes
Defense of M arriage Act - Sam sex couples ineligible
e
for tax preferences and other rights enjoyed by
m arried couples under Federal Law s
• Internal Revenue Code (IRC)
• Em ployee Retirem Incom Security Act (ERISA)
ent e
• Consolidated Om nibus Budget Reconciliation Act
(COBRA)
• Fam Mily edical Leave Act
• Social Security Act (SSA)
•M edicare Act
9

10. Non-recognition of Spousal Rights
in M States for Unm
ost arried
Couples
•
Source: Hum Rights Cam
an paign RELATIONSHIP RECOGNITION IN THE US,
updated 01/11/2008
10

11. Lack of Spousal Rights:
Docum entation and
record keeping needed
Personal Issues
– Health Care Pow of Attorney for dealing w
ers ith
HIPAA
– Directive for the Disposition of Remains
– Custody of M inors
•Property Issues (co-ownership and transfer)
– Pre-Nuptial Agreem ents
– Co-Habitation Agreem ents
– Dom estic Partnership Agreements (Not Legally
recognized in som states)
e
– Business Partnership Agreem ents
– Trusts vs. W in creating a sustainable estate plan
ills
11

12. Death Considerations
•Will
– A public docum ent
–“ Speaks at death” Probate
via
– Nom inates Executor and/or Guardian over Minor
kids
– W override “
ills Lawof Intestate succession”
• Spouse/children (adopted children sam as natural)
e
• Parents/Siblings
• Grandparents/Cousins
– If W is challenged in Probate default is state statute
ill
• Gay and Lesbian persons are often estranged from families
• Incentive for Biological Fam to Challenge W
ily ill
• Adoption m be a stronger option than guardianship
ay
12

13. Death Considerations
•Revocable Trust
– A private document
– No Probate Court appointm or supervision required
ent
• Trustee is nam in docum not by court
ed ent
• Trustee is subject to fiduciary duty not routine supervision
• Stronger than Guardian for M inor Child
• Not subject to Probate (Johnson v. LaGrange State Bank)
•Irrevocable Trust
– A private docum ent
– Generally not subject to Probate
– Taxable w hen gift com pleted to Trust, if no retained interest
13

14. Asset Protection Strategies
•Lim Gift and Estate Tax Exposure
it
•Protect assets from Business Creditors
•Protect assets upon Term ination of
Relationship
– Pre-Nuptial and Partnership Agreem ents
– Loans secured by a m ortgage
– Term inable Interest Trusts
– Flexible Irrevocable Trusts (Trust Protectors)
– Split Interests (Chapter 14 Exem Transfers)
pt
– Lim ited Partnerships and Lim ited Liability
Com panies
14

15. Part 3: Tax problems particular to
unmarried couples
15

16. Tax Considerations involving
unequal wealth of unm arried couples
•Starting a Relationship - Gift Tax
•Operation and Dissolution - Incom Tax
e
•Death - Estate Tax
16

17. Starting a Relationship
•Question: Have you made a taxable gift
when..?
– Acquire Assets together
– Share Living Expenses
– Change the title on an asset
•No Spousal exclusion or ability to split gifts
17

18. Gift Tax Problems for
Unmarried Couples
• Planning required to avoid unintended taxable gifts
IRS does not need to prove donative intent (see
25.25 11-1(g)(1))
•A“ Gift” a transfer for less than full and adequate
is
consideration w ithout legal obligation to repay
•“ Love” and “ affection” not consideration under IRC
are
Treasury Regulation Section 25.25 12-8
• Transfer could be exem if it fulfills a local legal
pt
obligation, such as providing for a child or an
incapacitated adult [Hooke r, 10 TC 388 (1948) , aff‘d 37
AFTR 1530 (CA5, 1949); Re v. Rul. 54-343; Conv e rs e , 5
TC 1014 (1945) ]. Generally not so for a healthy adult.
18

19. Incom Tax Problem for
e s
Unm arried Couples
•Joint Returns not available under Federal law
– Tax Tables
– Dependency and Exclusions
•Gross Incom or Gift
e
– “ Incom from w
All e hatever source derived”
•Sharing or Allocating Tax Deductions
– General Rule: He (or she) w pays m deduct
ho ay
•M ortgage Interest - payer m be on title and m
ust ortgage (§163)
• Real estate taxes –payer m be on title (§164)
ust
• Charitable Contributions (§170)
19

20. The invisible elephant in
the house: unequal
shared living expenses
• Issue: disproportionate sharing of living expenses
• Questions: Incom Deduction, Gift
e,
• The m luxurious the lifestyle, the m exaggerated
ore ore
the issue
• View issue from tw perspectives
o
– On Title or Not on Title
– Paying expenses or not paying share of expenses
20

21. On Title and Paying Expense
- Options
Inc o me Tax Tre atme nt
• Interest Expenses and Real Estate Taxes
– Deductions generally allow to title holder
ed
•Maintenance and other Expense
– Household help not Incom Tax deductible
e
– Could be eligible for Child and dependent Care (limits)
Gift Tax Tre atme nt
• Absent as support obligation could be deem a gift
ed
• Suprem Court Dissent in Interest Free Loan Cases
e
21

22. Not on Title and Paying
Expense - Options
Tre atme nt as a Re ntal Arrang e me nts - Inc o me
• Could be Rental incom to Title Holder
e
– Definition of gross incom is expansive (IRC Section 6
e 1).
• Reim bursem of expenses for som
ent eone else has been
ruled to be included in gross incom (For exam
e ple, see
Old Colony Trus t Co. v. CIR, 279 US 716 (1929)).
22

23. Not on Title and Paying
Expense - Options
Treatm as a Rental Arrangem
ent ents -
Deductions
• Section 280A vacation hom rule lim
e itations
– Apply w hen ow lives in hom w tenant
ner e ith
– Lim deductions to rental incom
it e
–M ortgage interest and property taxes are subtracted first
• Belowmarket rental arrangements
– Risk treatm as Gift
ent
– Lack of profit motive –IRS Section 183 –denial of loss and
subject to 2% item ized deduction limitations
23

24. Not on Title and Not Paying
Expense - Options
Taking Care of Hom or Kids
e
• Title Holder need not report the rental incom in
e
exchange for service (Helvering v Independent Life Ins
Co., 54 S Ct 758).
• Deem incom to non-title holder under IRC Section 61
ed e
• Barter or Paym ents in-kind
• Household Em ployee taxable on incom e
• Con: Tax w ithholding could be required
• Pro: Em ployee Benefits possible
24

25. Som Incom Tax Potential
e e
Benefits
•Double the Section 179 im ediate expense
m
election for the couple.
•Wash sale rules not applicable (§ 1091)
– Sell Losers to Partner
– Sell Loser and Dom estic partner buys back within 30 days
25

26. Incom Tax Planning
e
Reduce disparity by sharing or shifting income
• Gift/Transfer incom producing assets to partner
e
• Em ployee in operating business
• Form a partnership or LLC
– Nam low incom partner as GP or m
e er e anaging m ber
em
– Grant m anager an incom interest (Sol Diam
e ond v.
Com .) in exchange for m
m anagem services –w
ent atch
RP 93-2 (defined and certain incom stream can be
7 e
valued)
• Create a Freeze Partnership w preferential return
ith
Chapter 14 does not apply
• Create a Personal Holding Com pany for portfolio
assets and em ploy dom estic partner to m anage
26

27. Strategies to Minim the Gift Tax
ize
•Annual exclusion $12,000 per year per donee
•Educational and m edical expenses –Section
2035(e)
•Interest free loans $10,000/$100,000 -
Section 7278
•Use $1 M illion lifetim applicable exclusion
e
27

28. Strategies to M inimize
the Gift Tax (continued)
•Joint Bank Account
– Gift is com plete when other party withdraw funds
s
– Docum deposits and w
ent ithdraw to avoid gift
als
•Real Estate
– Joint tenancy grants im ediate rights to partition
m
– Avoid Gift w a w
ith ritten agreement
• Partnership Agreem or LLC is safer option
ent
• Label as a business or investm arrangem
ent ent
• Agreem should cover Sharing of expenses
ent
28

29. Dealing w the Gift Tax
ith
Limitations
• Replace Cash Gifts w Secured Loans
ith
– Cash is Dangerous –Hard to get back
– Purchase of residence in Joint Tenancy risks loss of one-
half
– Child living w partner, rather than gift dow paym lend
ith n ent
the dow ns-paym and take subordinated m
ent ortgage debt
• Replace Cash Gifts w Restricted Property
ith
– Transfer value –keep control
• Place liquid/incom producing assets inside of an control entity
e
• Gift restricted interest in S Corporation, FLP or LLC
• Gift Term inable Interest
• Gift assets to trust rather than outright
– Part 4 –other transfer techniques
29

30. Incom Tax
e
Considerations
Eligibility for the Dependency Exemption
– M be Citizen, resident alien, or citizen of M
ust exico or
Canada(152(b)(3))
– M live w the taxpayer (152(d)(1)(A) and 2(h))
ust ith
– Gross Incom not over $3,400 in 200 $2,500 in 2008
e 7;
(152(d)(1)(B))
– Support > 50% (152(d)(1)(C)
– Relationship m not violate local law(152(f)(3))
ust
– If Dependant, m not file Joint w legal spouse (152(b)(2))
ay /
•Shared Filing Issues
– W claim eligibility for Head of Household?
ho s
– W claim dependency exem
ho s ption for Minors?
30

31. Practical Considerations for
em ployee benefits
•Medical Insurance
– Dom estic Partners not always covered
– Prem s for Partner’ coverage is taxable if not a
ium s
dependent
– No COBRA coverage, if job loss
– No M edicare coverage for Dom estic partner
– Custody of M inors
•Long Term Care Insurance
•Social Security Benefits
•Retirem benefits
ent
•Death Benefits
31

32. Planning Opportunities for
Em ployee Benefits
• General Partner or Managing m ber
em
– Generally Subject to Social Security
– Forty Quarters of W history w earn M
ork ill edicare Eligibility
• Employ Partner in operating business or PHC
• Employ Dom estic Partner in Schedule C or Household
– Medicare Eligibility
– Medical Insurance can be provided as a benefit
– Social Security Benefits
– Retirem benefits
ent
32

33. Beginnings and Endings
In Illinois, “
Cohabitation” can term inate of maintenance
paym ents in a divorce [750 ILCS 5/510(c)]. The courts
typically exam the follow factors:
ine ing
1. The length of the relationship.
2. The am ount of tim the couple spends together.
e
3. The nature of the activities engaged in.
4. The interrelation of their personal affairs.
5. Whether they vacation together, and
6. Whether they spend holidays together.
In Re Marriag e of S now , Appellate No. 3-00-0369, 3rd
District, filed June 14, 2001.
33

34. Part 4: Asset transfer techniques
for unmarried couples
34

35. Estate Tax Considerations
• Credit Shelter –$2M in 2008 ($3.5M in 2009)
M M
• No Marital Deduction for unmarried couples
OBSERVA TION: It is just as important as for m arried
clients to avoid w asting exem ption am ount and
potential double estate tax as unm arried clients
35

36. Estate Tax - Exclusions
• Incom Interests that expire at death
e
– Life Estate in Real Estate (I.e., a residence or vacation
hom e)
• Limited Pow of Appointm
ers ent
• Death Benefits paid to irrevocable beneficiary
– Estate of Schelberg v Com .
m
•“Term inable Interest Property” trusts
• Charitable Split Interest Trusts
36

37. Estate Tax – Inclusion Traps
• Retained Interests
– Section 2035 [certain transfer w ithin 3 years of death]
– Section 2036 [right to enjoy incom or benefit]
e
– Section 2038 [revocable transfers]
– Section 2039 [annuities]
• Incidents of Ownership over Life Insurance (Section
2042)
– Right to Borrowcash value
– Right to Change Beneficiary
• General Pow of Appointm (Section 204
ers ent 1)
37

38. Terminable Interest
Property Trusts
• Beneficiary of Trust has a right to enjoy the incom e
and principal of the trust, but that right w term
ill inate at
death or e nd of re lations hip
– No need for the trust to qualify for the marital deduction
– No need to include the value of the trust in the taxable
estate of the survivor
• If beneficiary has Limited Pow of Appointm
er ent, the
assets of the trust m be exem from the claim of
ay pt s
the beneficiary’ creditors
s
• Use Trust Protector to add a beneficiary or change
trust
38

39. Life Insurance
• Protect surviving partner and young children
– Replace incom stream
e
– Pay off Mortgage and debts
• Replace Wealth lost to Estate Tax payment
• Advantages:
– Death benefit is free of Incom Tax
e
– Death benefit is free of Estate Tax if beneficiary is owner
• Issues:
– Source of Annual Prem ium Dollars
– If paid indirectly by insured represents a gift
– M have an Insurable Interest
ust
39

40. Life Insurance Issues –
2 Year Contestability
• Insurable Interest
–M arriage presum an insurable interest in one’
es s
spouse
–Issue is only relevant at day of issue
–Create partnership for hom ow
e nership w buy
ith
sell funding
–Docum shared expenses and support for
ent
econom interest
ic
–Ow nership and beneficiary gift trap
40

41. Viatical Settlements
• Purpose to help terminally and/or chronically ill
– Section 101(g) adopted in 1996
– Allow insured ability to factor death benefit receivable to
s
cover health care and long term care costs
– Insured m be term
ust inally ill or chronically ill
•Market currently offers much broader applications
– Funds created to purchase w range of policies
ide
– Buyer (fund) w lose Section 10 incom exclusion
ill 1 e
• Rather than allow a policy lapse or rolling over
ing
policy yourself, consider selling the policy
41

42. Irrevocable Life Insurance Trusts
• Trust is funded w gifts
ith
– Annual Premium Dollars
– Incom Producing Property
e
• Real Estate
• FLP or LLC Interest
• S Corporation Stock
• Trustee of Irrevocable Trust ow policy
ns
– Insured has No Incidents of ownership
– Death benefit excluded from taxable estate
• Trust should be a Terminable Interest Trust
– Asset Protection
– Generation Skipping Provisions
• Trust Protector feature can provide flexibility
42

43. Transfer Scenario
Joe (age
Jan (age 30)
59) creates Jo e wis he s to
trust and le ave $ 5 MM to
keeps right Jan
to all
incom for
e
30 year
Joe’ estate =
s
$20M M
43

44. Gift or Transfer at Death
Joe (age
Jan (age 30)
59) creates Jo e wis he s to
trust and le ave $ 5 MM to
keeps right Jan
to all
incom for
e
30 year
Joe’ estate =
s
$20M M
Tax on $5,000,000 at 45% would be $2.25M before gift or estate
M
tax credit offset.
44

45. Life Insurance (The “Private ” Gift)
Joe (age
Jan (age 30)
59) gifts Jo e wis he s to
cash to le ave $ 5 MM to
purchase a Jan
20 year
level term
policy on his
Joe’ estate =
s life
$20M M
Tax on annual premium paym in excess of $12,000 annual
ent
exclusion once cumulative total exceeds $1M .
M
45

46. Utilizing leveraged
techniques to
m axim gifts
ize
– Gifts to Dynasty Trusts
– Grantor Retained Incom Trusts (GRITs)
e
– Qualified Personal Residence Trusts (QPRTs)
– Grantor Retained Annuity Trusts (GRA Ts)
– Split Purchase
– Voting and Non-voting Equity Interests
– Intentionally Defective Incom Only Trusts (IDIOTs)
e
– Charitable Rem ainder Trusts (CRA and CRUTs)
Ts
– Nonqualified GRITs or GRA Ts
46

47. Utilizing leverage
techniques to
m axim gifts
ize
(continued)
Estate freeze Rules of Chapter 14 – only apply to
“applicable fam ily m bers” spouses, lineal
em
fam m bers of ow
ily em ners or spouses, and
adopted children. Does not apply to dom estic
partners.
– Sec 270 and 2702 for zero value of retained interests
1
in corporations, partnerships and trusts for transfers
involving fam m bers
ily em
– Sec 2703 for zero value of certain rights and
restrictions disregarded for fam m bers
ily em
– Sec 2704 for zero value of certain lapsing rights and
restrictions
47

48. Chapter 14 – Definition of
“Applicable Family Members”
excludes domestic partners
SPOUSE HAS
Unm arried
SAME
friend or
LIMITATION
dom estic
ON SAME
partner MOM DAD
FAMILY
MEMBERS
YOU
BROTHER SISTER
NEPHEW
NIECE
SON DAUGHTER
48

49. Grantor Retained Incom Trust
e
Joe (age
Jan (age 30)
59) creates
trust and Jo e wis he s to
keeps right le ave $ 5 MM to
to all Jan
incom for
e
25 years
Joe’ estate =
s
$20M M
Joe transfers $5M to GRIT keeps right to receive incom for 24
M e
years. Regardless of the actual incom earned and paid by the trust
e
to Joe, the value of the gift is reduced by the present value of the
right to receive incom m
e easured at the current Section 7520 Rate
of 3.2% (44.68%) and the risk that Joe w die during the term
ill
selected (35.6%). The Present Value of this Future Interest gift is
$917,200.
49

50. Grantor Retained Incom Trust
e
Joe (age
Jan (age 30)
59) creates
trust and Jo e wis he s to
keeps right le ave $ 5 MM to
to all Jan
incom for
e
25 years
Joe’ estate =
s
$20M M
M 2006 –Section 7520 Rate 5.8%, the value of the gift is reduced
ay
by the present value of the right to receive incom w
e, hether or
not actually earned, at the current Section 7520 Rate
(62.366%) and the risk that Joe w die during the term selected
ill
(27.786%). Present Value of Future Interest Gift $492,400.
50

51. Grantor Retained Annuity Trust
Joe (age 59)
Jan (age 30)
creates trust
and keeps right Jo e wis he s to
to 5.802% per le ave $ 5 MM to
year (Quarterly) Jan
for 25 years
Joe’ estate =
s
$20M M
Section 7520 Rate 3.2%, the value of the gift is reduced by the
present value of the right to receive annuity (79.744%) and the risk
that Joe w die during the term selected (21.255%). Present Value
ill
of Future Interest Gift $2.72.
51

52. Grantor Retained Annuity Trust
Joe (age 59) Jan (age 30)
creates trust and Jo e wis he s to
keeps right to le ave $ 5 MM to
11.70373% per Jan
year (Quarterly) for
10 years
Joe’ estate =
s
$20M M
Section 7520 Rate 3.2%, the value of the gift is reduced by the
present value of the right to receive annuity (79.744%) and the risk
that Joe w die during the term selected (21.255%). Present Value
ill
of Future Interest Gift $1.67.
52

53. Charitable Lead Annuity Trust
Joe (age
Jan (age 30)
59) creates
trust – Jo e wis he s to
charities le ave $ 5 MM to
receive Jan
5.802% per
year 25
years
Joe’ estate =
s
$20M M
Section 7520 Rate 3.2%, the value of the gift is reduced by the
present value of the right to receive annuity (99.99%). Present
Value of Future Interest Gift $395.23.
53

54. Charitable Lead Annuity Trust
Joe (age
Jan (age 30)
59) creates
trust – Jo e wis he s to
charities le ave $ 5 MM to
receive Jan
11.70373%
per year 10
years
Joe’ estate =
s
$20M M
Section 7520 Rate 3.2%, the value of the gift is reduced by the
present value of the right to receive annuity (99.99%). Present
Value of Future Interest Gift $395.23.
54

55. Structuring Co-ownership
• Types
– Tenancy in Com onm
– Joint Tenancy w Rights of Survivorship
ith
– Tenancy by the Entirety (only available w Spouse)
ith
– Split Interest Purchase
– M arried couples are assum to contribute 50% each.
ed
(Regulation 20.2040-1)
• Unm arried owners need to prove survivor’ contribution
s
to exclude that portion from decedent’ estate. M
s arried
couples are assum to contribute 50% each (see
ed
regulation 20.2040-1).
55

56. Structuring Split Interests
• Split Interest Purchase
– Avoid retained interest by having each party com to the
e
purchase event w independent funds
ith
– Each party to purchase m have separate funds
ust
• Older generation purchases life estate or term interest
• Younger generation (or trust) purchases rem ainder
– Calculate the present value of the respective income
interest and the remainder interest
• Tw Variables Term of Years and AFR (Section 7520)
o
56

57. Discount vehicles
• Best assets m be the assets w the highest rates of
ay ith
return to the investor
• Low the value of w you gift, by howit can be used
er hat
– Restriction on Use
– Restricted stock
– Buy Sell Agreem ent
• Gifts of asset that lack marketability, constitute a minority
interest or represent a lack of voting pow er
– C Corporation (pays little or no dividend)
– S Corporation Stock
– Limited Partnership Interest
– Limited Liability Company
57

58. Gifts to Irrevocable Trusts
• Section 2503(b) –“Present Interest”
• Clifford Crum ey v. Com issioner
m m
– Gift to Trustee of Trust
– Donee beneficiary m have Pow to W
ust er ithdrawgift
– Notice generally required
– Lapse of W ithdraw Pow (5x5 pow
al er er)
– Hanging Pow ers
• Crum ey on Steroids
m
– Cristofani v. Com issioner (2 kids and 5 grandkids)
m
– Kohlsaat v. Com issioner (18 kids, grandkids and
m
spouses)
• Supercharged Trusts
– Intentionally Defective Incom Only Trusts (IDIOT)
e
– Section 6 through 6 (Grantor Type Trusts)
71 78
– Grantor (not the trustee) pays the incom taxes
e
58

59. Situation #2 - Before Tax Planning
Joe’ estate w
s ithout Joe’
s Jon’ estate w
s ithout
business = $600,000 Joe’ business =
s
$200,000
Original com on = $10M
m
Total gross estate =
$10.6M Joe’ business
s
value doubles from
Jo e re c e ive s $10M to $20M
all the c as h
divide nds .
59

60. Situation #2 –Step A: Shrink the
Value
Exchange old stock
for NewCom on
m
& Newpreferred
Joe’ estate w
s ithout Jon’ estate w
s ithout
Joe’ business =
s Joe’ business =
s
$600,000 $200,000
Newcom on = $0M
m
Preferred stock
Joe’ business
s
($10M Liquidation
value doubles from
value plus dividend)
$10M to $20M
Total gross estate =
$10.6M
60

61. Situation #2 –Step B Gift Com on
m
Keep Preferred
Com on Gift = $0
m
value because
Joe’ estate w
s ithout business is only w orth Jon’ estate w
s ithout
Joe’ business =
s $2M . Joe’ business =
s
$600,000 Put option is allocated $200,000
full am ount
Preferred stock Com on grow =
m s
(remains at $10M ) $10M all grow th
inures to the
Total gross estate = Com on
m
$10.6M
61

62. Situation #2 –“
Preferred Stock
Recap” Stock Freeze
–
Joe’ business value
s
now= $2,000,000
In 10 year on Joe’
s
Joe’ estate w
s ithout death = $20,000,000 Jon’ estate w
s ithout
Joe’ business =
s Joe’ business =
s
$600,000 $200,000
Preferred stock (up Com on = $10M
m
to $10M put option) Total gross estate =
= $10M $10.2M
Total gross estate =
$10.6M
W orks be s t w ith LLC or LP. Not e conomic to pay C Corporation
div ide nds .
62

63. Situation #3 Before Tax Planning
Joe’ estate w
s ithout Jon’ estate
s
Joe’ business =
s without Joe’
s
$600,000 business =
Joe’ business =
s $200,000
$1M
Total gross estate =
$1.6M
Joe receives all income
distributions and
appreciation
63

64. Situation #3 - Sale to an IDIOT
The Seed M oney
Joe creates
trust and Granto r Trus t
gifts $12K with Jo n as
on 12/31/x1 be ne fic iary
and $12k on
1/1 /x2
Joe’ estate
s Jon’ estate
s
without Joe’s without Joe’
s
business = business =
$600,000 $200,000
Joe’ business value = $1,000,000 in Year 1; In 10 year on Joe’
s s
death = $20,000,000. A 36.9% stake w ould be $369,000 m inus
discounts of perhaps 35%. Discounted value $239,850.
64

65. Situation #3 Sale to IDIOT –IDIOT
should be w orth 10% of Purchase
Transfer De fe c tive
note for Granto r
$215,850 Trus t with
+ the Jo n as
trust’
s be ne fic iary
$24k seed $24,000 Jon’ estate
s
m oney for seed without Joe’
s
30% Joe’ s money buys business =
business 36.9% of $200,000
Note: NOT a sale for stock
incom tax purposes
e
because the defective
grantor trust and Joe
are treated as the sam e
person for incom tax
e
return purposes
65

66. Situation #3 –Im ediately After
m
Note Exchange
De fe c tive
Granto r Trus t
with Jo n as
be ne fic iary
36.9% interest
Joe’ estate w
s ithout Jon’ estate w
s ithout
in business
Joe’ business =
s Joe’ business =
s
Note Payable
$600,000 $200,000
$215,850
63.1% interest in
business plus Note
Receivable $215,850
In 10 year on Joe’
s
Receive 100% of death = business is
Incom distributions
e w orth $20,000,000
until Note receivable
is fully paid.
66

67. Situation #3 –at Date of Joe’
s
Death
De fe c tive
Granto r Trus t
with Jo n as
be ne fic iary
Joe’ estate w
s ithout Interest in Jon’ estate w
s ithout
Joe’ business =
s business $10M Joe’ business =
s
$600,000 $200,000
63.1% interest in
Cash distributions
business split between Joe
and defective
grantor trust.
Joe and Jon’ business
s
value = $2,000,000
Versus Total In 10 year on Joe’
s
gross estate = death = $20,000,000
$20.6M
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68. Alternatives to Sale to a
Defective Grantor Trust
• Self-Canceling Installm Note –(SCIN)
ent
The installm note cancels at the date of the ow s
ent ner’
death. Trade off that interest rate needs to be higher
to com pensate for the additional risk. Could cause
capital gain at death on unpaid balance of note. Frane
• Private Annuity
The paym is structured like an annuity and
ent
disappears at death.
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69. Conclusion
• Personal Issues and Objectives of client
•M inim value
ize
• Transfer Value Keep Control
• Chapter 14 available to help domestic partners
69