1. ILITs, IDGTs, GRATs and Other Four-Letter Words
Julius H. Giarmarco, Esq. , Giarmarco, Mullins & Horton, P.C.
May 1–3, 2016
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2. Wealth Transfer Strategies
Annually
Over Lifetime
Transfer of wealth excluded from any gift tax
Transfer of wealth through GST, estate, and gift tax exemptions
Transfer of wealth
utilizing discount
strategies
Transfer of wealth
utilizing freeze strategies (appreciation-only gifts)
Transfer of wealth through taxable gifts
$14,000 per individual ($28,000 gift splitting with spouse) per donee
Direct payments to educational institutions and health care providers1
Irrevocable life insurance trusts (ILIT)2
Gift tax exemption of up to $5.45M per individual3
GST and estate tax exemptions of $5.45M per individual3
Generation-skipping transfer trust (GST)
Family limited partnership (FLP)
Family limited liability company (FLLC)
Non-voting shares in family corporation (C or S corporation)
Grantor retained annuity trust (GRAT)
Intentionally defective grantor trust (IDGT)
Qualified personal residence trust (QPRT)
Intra-family loan
Statutory freeze partnership (FLP or FLLC)4
Pay gift tax now rather than paying estate tax later
Converting traditional IRA to Roth IRA5
Charitable planning:
CRTs and CLTs.
1 To qualify for exclusion, gifts of tuition and medical expenses must be made directly to the provider.
2 Often can be structured to use annual exclusion gifting.
3 Adjusted annually for inflation ($5.45M for 2016).
4 Can serve to both utilize discount and transfer wealth utilizing freeze strategies.
5 Paying the income tax in converting a traditional IRA to a Roth IRA is essentially a tax-free gift.
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3. Three General Strategies for Reducing Estate Taxes
The FET is only vulnerable to lifetime gifting.
Leveraging cash gifts through the purchase of life insurance in an ILIT.
Gifts that shift or reduce value.
Gifts to charity.
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4. Advanced Gifting Techniques
Irrevocable Life Insurance Trusts (ILITs).
Intentionally-Defective Grantor Trusts (IDGTs).
Grantor Retained Annuity Trusts (GRATs).
Spousal Lifetime Access Trusts (SLATs).
Beneficiary-Defective Inheritor’s Trusts (BDITs).
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5. Advanced Gifting Techniques
Family Limited Liability Companies (FLLCs).
Qualified Personal Residence Trusts (QPRTs).
Promissory Note Sale to Residence Trust (PNRTs).
Charitable Remainder Uni-Trusts (CRUTs).
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6. Irrevocable Life Insurance Trusts
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7. Children and More Remote Descendants
ILITs
Grantor/
Insured
Dynasty/
ILIT
Insurance Company
Children and More Remote Descendants
Crummey Gifts
Premium Payments
Allocate GST Exemption
Death Benefit
Net Proceeds
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8. ILITs Dynasty Trust Grantor Advantages Connectivity Think. Act. Lead.
Discretionary Distributions
to Children for Life
to Grandchildren for Life
to Great-Grandchildren
for Life
Future Generations
Grantor
Advantages
Creditor protection
Divorce protection
Estate tax protection
Assets remain in bloodline
Dispositive plan protection
Spendthrift protection
Consolidation of capital
Gift should take advantage of any remaining lifetime gift exclusion and lifetime GST exclusion
No transfer tax paid.
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9. ILITs Power of Compound Growth Economics Assumptions:
$1 million contributed to trust.
Trust lasts 120 years. Maximum term varies by state.
40% transfer tax imposed on non-dynastic trust assets every 30 years.
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10. Value of Dynasty Trust After 120 Years Value of Property if No Trust
ILITs
Power of Compound Growth Chart
$1 Million Example: Dynasty Trust vs 40% Estate Tax Every 30 Years
After-Tax Growth
Value of Dynasty Trust After 120 Years
Value of Property if No Trust
3.00%
$34,710,987
$4,498,544
4.00%
$110,662,561
$14,341,868
5.00%
$348,911,561
$45,218,993
6.00%
$1,088,187,748
$141,029,132
7.00%
$3,357,788,383
$434,169,374
8.00%
$10,252,992,943
$1,328,787,885
9.00%
$30,987,015,749
$4,015,917,241
10.00%
$92,709,068,818
$12,015,095,319
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11. ILITs How much is enough – with 4% inflation:
$1 Million Example: Dynasty Trust vs 40% Estate Tax Every 30 Years
After-Tax Growth
Real Value of Dynasty Trust after 120 Years
Real Value of Property if No Trust
4.00%
$1,000,000
$129,600
5.00%
$3,152,932
$408,620
6.00%
$9,833,386
$1,274,406
7.00%
$30,342,587
$3,932,399
8.00%
$92,650,964
$12,007,564
9.00%
$280,013,543
$36,289,755
10.00%
$837,763,631
$108,574,166
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12. ILITs How much is enough – with 4% inflation?
$1 Million Example: Dynasty Trust vs 40% Estate Tax Every 30 Years
After-Tax Growth
Real Value of Dynasty Trust after 120 Years
Real Value of Property if No Trust
Inheritors
4.00%
$62,500
$8,100 16
5.00%
$197,058
$25,538
6.00%
$614,586
$79,650
7.00%
$1,896,411
$245,774
8.00%
$5,790,685
$750,472
9.00%
$17,500,846
$2,268,109
10.00%
$52,360,226
$6,785,885
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13. Switching ILITs
Sale of policy from old ILIT to new ILIT for cash or promissory note.
If purchase price is at fair market value, then three-year rule of IRC Sec does not apply.
No transfer-for-value if new ILIT is grantor trust. Rev. Rul
No gain on sale if old ILIT is a grantor trust (or if no gain in policy).
Decanting.
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14. Intentionally-Defective Grantor Trusts (“IDGTs”)
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15. IDGTs
What is an IDGT?
An irrevocable trust that is defective for income tax purposes by triggering one of the grantor trust powers under IRC Sections
An irrevocable trust that is effective for estate tax purposes by not tripping over one of the estate tax inclusion provisions under IRC Sections 2036 – 2042.
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16. IDGTs Common grantor trust triggers:
The trust includes a power exercisable by the grantor (in a non fiduciary capacity) to reacquire [swap] trust assets by substituting assets of equivalent value. IRC Section 675(4)(C).
The trust includes a power held by a non-adverse party to add to the class of beneficiaries (other than the Grantor’s after-born or after-adopted children). IRC Section 674(a).
The trust includes a power to enable the trustee to loan money or assets to the grantor from the trust without adequate security. IRC Section 675(2).
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17. IDGTs Why an installment sale to an IDGT works:
No capital gains tax on sale. Rev. Rul
Freezes value of appreciation on assets sold at the AFR.
Interest payments not taxable to grantor.
Payment of IDGT’s income taxes by grantor leaves more assets in the IDGT – gift tax free. Rev. Rul
Back end-loading (i.e., interest only with a balloon payment).
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18. IDGTs Why an installment sale to an IDGT works (continued):
Valuation discounts increase effectiveness of technique.
Possible discount for value of note in seller’s estate.
IDGT is an eligible Subchapter S shareholder.
Lower interest rate than used in GRATs.
An IDGT can purchase an existing life insurance policy on the life of the grantor without subjecting the policy to taxation under the transfer-for-value rule. Rev. Rul
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19. Grantor Trust vs Non-Grantor Trust
Year
Beginning Balance
Taxable Income 7%
Less: Taxes at 40%
Ending Balance 1
$10,000,000
$700,000
$(280,000)
$10,420,000 $
$10,700,000 2
10,420,000
729,400
(291,760)
10,857,640
10,700,000
749,000 -
11,449,000 3
760,035
(304,014)
11,313,661
801,430
12,250,430 4
791,956
(316,783)
11,788,835
857,530
13,107,960 5
825,218
(330,087)
12,283,966
917,557
14,025,517 6
859,878
(343,951)
12,799,892
981,786
15,007,304 7
895,992
(358,397)
13,337,488
1,050,511
16,057,815 8
933,624
(373,450)
13,897,662
1,124,047
17,181,862 9
972,836
(389,135)
14,481,364
1,202,730
18,384,592 10
1,013,695
(405,478)
15,089,581
1,286,921
19,671,514
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20. IDGTs Funding the IDGT prior to sale. Amount of seed funds.
The “seed fund” reduces the risk that the sale will be treated as a transfer with a retained interest by the grantor under IRC Section 2036.
In PLR , the IRS ruled that IRC Sections 2701, 2702 and 2036(a) did not apply if the note retained by the grantor was bona fide debt.
In Sharon Karmazin, Tax Court Docket No , the IRS challenged an IDGT sale on the basis that IRC Code Sections 2701 and 2702 applied, but later dropped both arguments.
In Karmazin, the trust had 10% seed money. The case was settled out of court with the only adjustment being a reduction of the valuation discount from 42% to 37%.
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21. IDGTs Disadvantages to an IDGT sale: Requires 10% seed funding.
Note is taxable in grantor’s estate (unless SCIN is used).
Potential cash flow problems for grantor by paying IDGT’s income taxes.
Likely no step-up in basis at grantor’s death. This is on the IRS’s “no ruling” list.
Possible gift and estate tax exposure (under IRC Section 2036) if IDGT has insufficient equity.
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22. IDGTs GST considerations:
As long as the grantor allocates his or her generation-skipping tax (“GST”) exemption to the seed gift to the IDGT, the trust assets will be exempt from the GST tax.
The GST exemption does not need to be applied to the sale portion, but the sale should be reported on a Gift Tax Return (Form 709) to start the running of the three-year statute of limitations.
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23. IDGTs Grantor IDGT f/b/o Children Life Insurance Company Connectivity
1. Gifts $1M of Non-Voting Stock
2. Sells $9M of Non-Voting Stock (No Capital Gain Tax)
5. Excess Cash Flow / Premiums
6. Death Proceeds (Income and Estate Tax Free / Leverages GST Exemption)
3. $9M Note to Grantor Balloon Payment in 9 Years
4. $159,300 annual interest (Interest Rate 1.77%)
Advantages:
Value of assets sold frozen at 1.77% for nine years (assumed mid-term AFR).
Grantor’s estate further reduced by the income taxes paid on behalf of the trust.
The trust property escapes estate taxation for as long as permitted under state law.
IDGT can purchase a life insurance policy on Grantor’s life. Upon Grantor’s death, the death proceeds can be used to purchase Grantor’s voting shares and the balance of Grantor’s non-voting shares.
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24. Grantor Retained Annuity Trusts (“GRATs”)
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25. GRATs How does a GRAT work? Gift of property into trust.
Annuity payment is returned to Grantor (annually at IRC Section 7520 rate) for a set term.
It is possible to combine a trust term with a high annual annuity to reduce the gift tax value to zero or close to zero.
Appreciation in excess of the IRC Section 7520 rate is passed to the remaindermen free of transfer taxes.
If the assets do not appreciate faster than the Section 7520 rate, they are returned in kind to the Grantor.
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26. GRATs Interest Rate Sensitivity.
When interest rates are low, as they are now, a GRAT is more likely to succeed.
This is because the GRAT assets are more likely to appreciate at a rate greater than the IRC Section 7520 rate (sometimes called the “hurdle” rate).
When the GRAT term ends, the remainder beneficiaries will receive the difference between the actual appreciation and the IRC Section 7520 rate, transfer tax free.
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27. GRATs
Ideal assets.
Assets that will appreciate faster than the IRC Section 7520 rate.
Stocks and marketable securities.
LLC interests, partnership interests and S corporation stock (i.e., pass-through entities).
Assets qualify for valuation discounts, because they enhance the effectiveness of the GRAT.
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28. GRATs
Drawbacks.
Grantor must survive the GRAT term to achieve the estate tax savings. GRATs are a “bet-to-live” strategy.
(You can “hedge” this problem with life insurance.)
Grantor must pay income tax on assets in Trust.
(But this is essentially a tax-free gift to the remaindermen.)
The GRAT is an irrevocable trust – there may be no commutation.
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29. GRATs Typical GRAT Design.
The GRAT must be established for a term of years (2 years is minimum).
Multiple GRATs with varying terms can be used to minimize mortality risk.
Multiple GRATs with different assets (e.g., energy, technology, manufacturing, etc.) can be used to hedge against one of the GRATs failing.
Annuity payments may be re-GRATed, creating a “rolling” series of GRATs.
The annuity may be “back-end loaded” such that the annuity starts low and increases by as much as 20% each year.
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30. GRATs Income Tax Treatment.
The grantor is considered the “owner” for income tax purposes.
The grantor is not taxed on the annuity payments, because transactions between a grantor and a grantor trust are disregarded for income tax purposes. See Rev. Rul
The grantor’s payment of the GRAT’s income taxes is essentially a tax-free gift to the beneficiaries of the GRAT.
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31. GRATs Income Tax Treatment.
The grantor is considered the “owner” for income tax purposes.
The grantor is not taxed on the annuity payments, because transactions between a grantor and a grantor trust are disregarded for income tax purposes. See Rev. Rul
The grantor’s payment of the GRAT’s income taxes is essentially a tax-free gift to the beneficiaries of the GRAT.
In most cases, a GRAT will qualify as a grantor trust under IRC Section 677 (regarding the grantor’s retained right to income).
Since it is theoretically possible, however, that the income from the trust assets could exceed the annuity payments, consider adding another grantor trust trigger (such as the power to substitute assets under IRC Section 675(4)(C)) to ensure grantor trust treatment.
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32. GRATs Power to Substitute Assets.
If the GRAT assets “over-perform,” and the grantor would prefer to freeze the appreciation he or she passes on to his or her children, the power to swap assets can be very useful.
The swap power can also be used to get appreciated assets back in the grantor’s estate so that they receive a stepped-up basis upon the grantor’s death.
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33. GRATs Bullet-Proofing a GRAT.
Grantor can make gifts to an ILIT (for the benefit of the children receiving the GRAT remainder) to provide the funds needed to pay estate taxes (on the assetbequeathed to the children) should the Grantor die before the end of the GRAT term.
Alternatively, the children can purchase life insurance on the Grantor’s life to provide the funds necessary to purchase closely-held stock (pursuant to a buy-sell agreement) if the Grantor dies before the end of the GRAT term.
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34. GRATs Not Ideal for GST Planning.
Under the estate tax inclusion period (“ETIP”) rules, it is not possible to allocate GST tax exemption to a GRAT until after the term expires (or the grantor dies, if earlier). See IRC Section 2642(f) and Treas. Reg. Section (c).
Accordingly, it is not possible to “leverage” the initial gift (which could be very low or even zero) to exempt the ultimate remainder interest (which could be much more valuable than the assumed remainder interest at initial funding) from GST tax.
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35. GRATs
Grantor (age 65): Gift of $6.5M of stock (after 35% discount)
Gift = $4.17
GRAT Value: $10 million
Children or ILIT*
Remainder transferred to Children (or trust for Children’s benefit): Assumptions: 10% income/4% growth: $23.4M 10% income/8% growth: $36.6M
Gift = $ Section 7520 Rate = 2.2%
Contribution of Non-Voting Stock
Annual Annuity Payment of $731, (11.25%)
Remainder after 10 years
*Or split-dollar with an ILIT, because of ETIP rules.
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36. IDGT vs GRAT With IDGT: No mortality risk.
Can allocate GST exemption to seed gift.
Mid-term AFR is less than Section 7520 rate.
Back-loading (i.e., interest only with balloon payment vs. level annuity payment).
Not a statutory technique.
Possibility of unintended gift tax, which may be mitigated by using a “defined value” clause.
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37. Spousal Lifetime Access Trusts (“SLATs”)
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38. Life Insurance Company
SLATs
Grantor
SLAT
Assets
Spouse and children
Beneficiary – spouse is trustee or co-trustee; and spouse and children have access to income and principal; spouse is primary beneficiary
Descendants’ Trust
At spouse’s death; estate tax free
Life Insurance Company
Income
Grantor – spouse has “indirect” access to trust income and principal via the beneficiary – spouse (until beneficiary – spouse’s death or if divorced).
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39. Reciprocal SLATs Gift splitting is generally unavailable with SLATs.
So, in order to use both spouses’ exemptions, each spouse must set up a SLAT for his / her spouse.
However, if the two SLATs are similar, they may be “uncrossed” and treated for estate tax purposes as if each spouse had created a trust for himself / herself. United States v Grace, 395 US
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40. Avoiding the Reciprocal Trust Doctrine
Use different distribution standards (i.e., an ascertainable standard in one SLAT, and a fully-discretionary trust in the other SLAT).
In one SLAT, allow “sprinkling” of income and principal to descendants during spouse’s lifetime, but not in the other.
Use different trustees. For example, wife can be sole trustee and beneficiary of one SLAT; and husband can be a co-trustee (with an independent third party) and beneficiary of other SLAT.
Give one spouse a 5% / $5,000 power, but not the other.
Give one spouse a limited power of appointment, but not the other.
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41. Avoiding the Reciprocal Trust Doctrine
Give one spouse the broadest possible limited power of appointment, and the other spouse a power of appointment limited to the grantor’s descendants.
Give one spouse a 5% / $5,000 power, but not the other.
Give one spouse a limited power of appointment to “rewrite” the trust, but not the other.
Fund one SLAT with liquid assets and the other with illiquid assets (i.e., closely-held business interests).
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42. Avoiding the Reciprocal Trust Doctrine
Create the SLATs at different times.
If the richer spouse transfers assets to the poorer spouse so that the poorer spouse can establish a SLAT, this might trigger the step-transaction doctrine.
In Holman, 130 T.C. No. 12 and Gross, T.C. Memo , gifts of partnership interests 6 days and 11 days, respectively, after the formation of the partnership were ruled not to be step transactions.
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43. Beneficiary-Defective Inheritor’s Trusts (“BDITs”)
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44. BDITs
A grantor cannot establish a trust for his/her benefit and protect the trust assets from creditors or estate taxes (except in the “DAPT” states).
But, a third party (i.e., parent) can establish a trust for a child / grandchild’s benefit and protect the trust assets from the beneficiary’s creditors and estate taxes – provided the beneficiary does not make gifts to the trust.
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45. BDITs Parent/Grantor BDIT fbo Child
Beneficiary has a Crummey withdrawal power which makes the beneficiary the owner of the Trust for income tax purposes. IRC Sec. 678(a).
Grantor can have no grantor trust powers.
Grantor allocates his/her GST exemption to the gift.
Parent/Grantor
BDIT fbo Child
Funds BDIT with $5,000
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46. BDITs Parent/Grantor BDIT fbo Child
Beneficiary is co-trustee with a third party and has the right to remove and replace trustees with someone who is not related or subordinate. IRC Section 672(c).
Trustees can use trust income and principal for the beneficiary’s health, education, maintenance and support. Independent trustee can make distributions for “best interests”.
Beneficiary has a testamentary limited power of appointment (except over any life insurance on the beneficiary’s life) to “re-write” the trust.
Parent/Grantor
BDIT fbo Child
Funds BDIT with $5,000
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47. Interest Payments (at mid-term AFR) / Balloon (in 9 years)
BDITs
Parent/Grantor
BDIT fbo Child
Funds BDIT with $5,000
Beneficiary sells non-voting interests of a start-up business to BDIT. Beneficiary continues to control the business entity. Possible valuation discounts.
No gain on the sale. Rev. Rul
Beneficiary’s payment of BDIT’s income taxes is a tax-free gift to the BDIT. Rev. Rul
Beneficiary
IRS
Installment Sale
Interest Payments (at mid-term AFR) / Balloon (in 9 years)
Pays Income Taxes
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48. Interest Payments (at mid-term AFR) / Balloon (in 9 years)
BDITs
Parent/Grantor
BDIT fbo Child
Funds BDIT with $5,000
Since beneficiary cannot make a gift to the Trust, a third party must guarantee 10% of the loan. Guarantee fee should be determined by an independent appraiser.
The guarantee is the “seed” money so that the sale is not treated as a disguised gift. IRC Secs and 2702.
If beneficiary’s spouse is guarantor, fee is not taxable.
Beneficiary
IRS
Installment Sale
Interest Payments (at mid-term AFR) / Balloon (in 9 years)
Pays Income Taxes
Third Party
Guarantee Fee
Partial Guarantee
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49. Interest Payments (at mid-term AFR) / Balloon (in 9 years)
BDITs
Parent/Grantor
BDIT fbo Child
Funds BDIT with $5,000
Trust funds in excess of the interest payment and guarantee fee can be used to fund the balloon payment.
Excess funds may also be used to purchase life insurance so as to “leverage” the GST exemption.
All incidents of ownership must rest with the independent co-trustee.
Beneficiary
IRS
Installment Sale
Interest Payments (at mid-term AFR) / Balloon (in 9 years)
Pays Income Taxes
Third Party
Guarantee Fee
Partial Guarantee
Pays Premiums
Death Benefit
Life Insurance
Company
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50. Interest Payments (at mid-term AFR) / Balloon (in 9 years)
BDITs
Parent/Grantor
BDIT fbo Child
Funds BDIT with $5,000
BDITs are relatively untested and based upon PLRs , , and
Use defined value gift to avoid unintended gift tax.
Possible step-transaction challenge by the IRS.
Beneficiary
IRS
Installment Sale
Interest Payments (at mid-term AFR) / Balloon (in 9 years)
Pays Income Taxes
Third Party
Guarantee Fee
Partial Guarantee
Pays Premiums
Death Benefit
Life Insurance
Company
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51. Family Limited Liability Companies (“FLLCs”)
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52. FLLCs
FLLCs:
An FLLC is a partnership between family members, which exists for a business purpose.
The FLLC consists of voting and non-voting membership interests; and one or more manager(s) who control the daily operation of the entity and make all distribution decisions.
Although operating as a business, the FLLC also serves as an important estate planning and business continuation device.
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53. FLLCs Use of an FLLC is appropriate when there is a:
Wish to transfer the business to the next generation without relinquishing immediate control.
Desire to shift income to other family members who may be in lower income tax brackets.
Desire to shift future appreciation to the next generation.
Desire to reduce the value of the owners’ business interest for estate and gift tax purposes by way of valuation discounts (for lack of control and marketability).
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54. FLLCs Use of an FLLC is appropriate when there is a (cont.):
Desire to protect assets transferred to children from going to an ex-spouse as a result of a divorce settlement.
Need to make it difficult for creditors to seize assets.
Charging order sole remedy of creditors in most states.
The creditor may be KO’d by the K-1.
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55. FLLCs FLLC Parents Children GRAT IDGT ILIT Connectivity and/or
1. Transfer Business
2. Voting and non-voting membership interests
3. Gift / sell non-voting membership interests
Children
GRAT
IDGT
ILIT
and/or
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56. Qualified Personal Residence Trusts (“QPRTs”)
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57. QPRTs Grantor QPRT Children or ILIT Connectivity Think. Act. Lead.
Residence
Rent-Free Right of Use of Residence for 15 Years
Children or ILIT
After Expiration of Selected Term of Years
Grantor’s Age 70
FMV of Residence $1,000,000
FMV in 15 years
at 5% growth $2,079,000 Term of QPRT 15 Years
Initial Gift $332,520
FET Savings (35%) $698,563
§7520 Rate 2.2%
ASSUMPTIONS:
RESULTS:
Pays
Rent
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58. Promissory Note Sale to Residence Trust (“PNRT”)
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59. PNRT Grantor Connectivity Initial gift from Grantor: $500,000 PNRT
Promissory note sale of real estate to trust
Up to 9 x $500,000 funding amount (or $4.5M)
Interest only balloon note payment at the end of 9-year term
Interest is mid-term AFR
No gain on sale; PNRT takes grantor’s basis
Interest on the note over 9 years paid to Grantor
Interest for 9 years: not taxed to Grantor; typically covers FMV rent paid to trust
At end of 9-year term, note can be refinanced
Initial gift and growth remain in a defective grantor dynasty trust
PNRT
$500,000 initial gift
Growth on initial $500,000 gift
Growth on residence (rent and appreciation) in excess of mid-term AFR
Can use excess cash flow to purchase life insurance on Grantor’s life to leverage GST exemption
Allocates $500,000 of gift and GST tax exemptions
Pays fair market value (FMV) rent
Trust is an IDGT
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60. QPRT vs. PNRT Section 7520 rate and AFR:
QPRTs are less tax efficient when Section 7520 rates are low, resulting in higher gift tax values.
Conversely, PNRTs are more tax efficient in times of lower interest rates.
The mid-term AFR (used with PNRTs) is less than the Section 7520 rate (used with QPRTs).
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61. QPRT vs. PNRT Grantor’s age and health:
There is a mortality risk with QPRTs (that can be “hedged” with an ILIT).
In contrast, with a PNRT only the unpaid balance of the note is included in the grantor’s estate (unless a SCIN is used).
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62. QPRT vs. PNRT Valuation issues:
With a QPRT, an upward adjustment of value (upon a gift tax audit) increases the value of the gift.
However, with a PNRT, it may be possible to avoid an unintended gift tax by using a defined value formula clause. Wandry v Comm’r, T.C. Memo ).
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63. QPRT vs. PNRT Basis issues:
With a QPRT, the remainder beneficiaries take the grantor’s basis in the residence. And the grantor cannot reacquire the residence (to obtain a stepped-up basis).
In contrast, with a PNRT, the grantor can reacquire the residence by substituting other high-basis property of equivalent value. The power of substitution (IRC Section 675(4)) is the most commonly-used grantor trust trigger.
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64. QPRT vs. PNRT GST planning:
Because of the so-called “ETIP” rules, GST exemption cannot be allocated upon QPRT funding.
In contrast, with a PNRT, GST exemption can be allocated to the seed gift.
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65. QPRT vs. PNRT Other issues:
QPRTs are statutory techniques; whereas, PNRTs are based on case law and rulings.
A single taxpayer may have two QPRTs; and a married couple may have three QPRTs. But, with PNRTs , there is no limit on the number of sales and leasebacks.
A PNRT could result in higher property taxes at the onset (depending on state law); whereas, with a QPRT, such increased taxes will not occur until the end of the term.
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66. QPRT vs. PNRT Wealth transfer opportunities:
A PNRT will generally use less gift tax exemption.
With a PNRT, rent payments in excess of the AFR remain in trust.
With a PNRT, interest payments (which are tax free to the grantor) offset the lease payments.
At end of the QPRT term, the grantor can rent the residence at FMV. If the QPRT is designed as a grantor trust, the rent payments are tax-free gifts to the beneficiaries.
Similarities:
Creditor protection.
Valuation discounts available if fractional interests in the residence are gifted / sold.
Capital gain exclusion available for primary residence.
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67. Charitable Remainder Uni-Trusts (“CRUTs”)
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68. CRUTs Donor Charity Family Members
Charitable Remainder Uni-Trust
Asset Sale Reinvestment Management
Charity
Wealth Replacement Trust (ILIT)
Trust-Owned Life Insurance Policy
Family Members
Step 1: Creation of Trusts
Step 1: Set up two trusts: A CRUT and an ILIT.
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69. CRUTs Donor Charity Family Members Step 2: Donated Assets
Charitable Remainder Uni-Trust
Asset Sale Reinvestment Management
Charity
Wealth Replacement Trust (ILIT)
Trust-Owned Life Insurance Policy
Family Members
Step 2: Donated Assets
Step 2: Donor transfers appreciated asset which is sold by the CRUT without capital gains tax; and receives a charitable income tax deduction equal to projected remainder interest value (of not less than 10% of FMV of asset).
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70. CRUTs Donor Charity Family Members Step 3: Income
Charitable Remainder Uni-Trust
Asset Sale Reinvestment Management
Charity
Wealth Replacement Trust (ILIT)
Trust-Owned Life Insurance Policy
Family Members
Step 3: Income
Step 3: CRUT trustee pays a fixed percentage of the trust assets (valued annually) to the donor and the donor’s spouse for their joint lifetime.
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71. CRUTs Donor Charity Family Members Step 4: Premiums
Charitable Remainder Uni-Trust
Asset Sale Reinvestment Management
Charity
Wealth Replacement Trust (ILIT)
Trust-Owned Life Insurance Policy
Family Members
Step 4: Donor uses increased cash flow (from both charitable deduction and annual payments) to make gifts to an ILIT.
The ILIT purchases insurance on the life of the donor and the donor’s spouse, typically in an amount equal to the value of the donated asset.
Step 4: Premiums
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72. CRUTs Donor Charity Family Members
Charitable Remainder Uni-Trust
Asset Sale Reinvestment Management
Charity
Wealth Replacement Trust (ILIT)
Trust-Owned Life Insurance Policy
Family Members
Step 5: Charity Receives Remainder
Step 5: At the death of both spouses, the remaining assets (remainder interest) in the CRUT pass to charity.
The life insurance death benefit proceeds are paid to the ILIT, and the ILIT makes distributions (free of income and estate taxes) to the donor’s heirs.
Family members receive life insurance proceeds free of income and estate taxes
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73. CRUTs Connectivity Think. Act. Lead. Section 7520 Rate: FMV of Trust:
Growth Rate:
Income Rate:
Percentage Payout:
Payment Period:
Two Lives Ages:
Donor’s Deduction:
2.20%
$1,000,000 5% 2%
Annual
70, 65
$372,560
Year
Beginning Principal
Principal Growth
Income Rec’d/Accr’d
Distribution
Remainder 1
$1,000,000.00
$50,000.00
$20,500.95
$1,020,500.95 5
$1,084,560.19
$54,228.01
$22,234.52
$1,106,794.71 10
$1,200,385.48
$60,019.27
$24,609.05
$1,224,994.53 15
$1,328,580.31
$66,429.02
$27,237.17
$1,355,817.48 20
$1,470,465.68
$73,523.28
$30,145.95
$1,500,611.63
Summary
$1,220,947.11
$500,611.63
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74. CRUTs Connectivity Think. Act. Lead. Section 7520 Rate: FMV of Trust:
Growth Rate:
Income Rate:
Percentage Payout:
Payment Period:
Two Lives Ages:
Donor’s Deduction:
2.20%
$1,000,000 5% 2%
12.498%
Annual
70, 65
$100,020
Year
Beginning Principal
Principal Growth
Income Rec’d/Accr’d
Distribution
Remainder 1
$1,000,000.00
$50,000.00
$20,500.95
$124,980.00
$945,520.95 5
$799,253.65
$39,962.68
$16,385.46
$99,890.72
$755,711.07 10
$604,004.84
$30,200.24
$12,382.68
$75,488.52
$571,099.24 15
$456,453.15
$22,822.66
$9,357.73
$57,047.51
$431,586.03 20
$344,946.71
$17,247.34
$7,071.74
$43,111.44
$326,154.35
Summary
$618,444.79
$253,574.19
$1,545,864.63
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75. THE END THANK YOU Julius H. Giarmarco, J.D., LL.M.
Giarmarco, Mullins & Horton, P.C.
101 W. Big Beaver Road, 10th Floor
Troy, Michigan 48084
(248)
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