1. WHAT CORPORATE COUNSEL NEEDS TO KNOW ABOUT TRUSTS & ESTATES ACC – Charlotte Chapter Jessica Mering Hardin Heidi E. Royal Robinson Bradshaw & Hinson, P.A.

2. Opportunities in Estate Planning Direct disposition of assets at death Provide for family members Ensure chosen friends, family members or advisors will make financial and medical decisions upon death or incapacity Implement business succession plans Minimize income tax liability Minimize transfer taxes (estate, gift and generation-skipping) Limit liability and protect assets

3. Basic Tools Financial Power of Attorney Health Care Power of Attorney and “Living Will” Will Revocable Trust Beneficiary Designations

4. Transfer Tax Considerations Federal estate, gift and generation-skipping transfer tax: 40% tax rate on amount in excess of lifetime exemption $5,430,000 lifetime exemption amount in 2015 (indexed for inflation in future years) Portability of estate tax exemption amount between spouses $14,000 annual exclusion from gift tax No state estate, gift or generation-skipping tax in North Carolina or South Carolina

5. Probate … Court-supervised procedure to inventory a decedent’s assets, pay debts and expenses and distribute property to beneficiaries Information is on the public record Limited ability to sell real property Court fees based on asset values (capped at $6,000 in NC; no cap in SC)

6. … and Ways to Avoid Probate Joint property with right of survivorship Assets passing by beneficiary designation (life insurance, retirement accounts, annuities) Transfer on death/pay on death account Funded revocable trust

7. When to Transfer Transfers taking effect at death –Will/revocable trust –Life insurance –Retirement benefits –Joint property with right of survivorship –Transfer on death accounts Lifetime transfers (sales and gifts)

8. How to Transfer Outright or in trust? –Second marriage –Ability of children to manage assets –Protection from creditors

9. What to Transfer Closely-held business interests –Interest in operating business Transfer restrictions Voting/non-voting shares Children’s disparate needs/abilities –Interest in family holding company Governing instruments Available discounts Cash/marketable securities Real estate

10. Transferring Corporate Interests Transfer restrictions –Governing instruments of closely-held entities (operating agreement, shareholders agreement) –Stock ownership and retention guidelines –Restrictions due to entity classification, such as S-corp Permissible or mandatory buy-back provisions Funding the buy-back Valuation

11. Tax-Efficient Transfers Irrevocable life insurance trust Intentionally defective grantor trust Grantor retained annuity trust

12. Irrevocable Life Insurance Trust Insured creates irrevocable trust for benefit of family members (spouse or other relative may serve as trustee) Trust purchases life insurance policy on life of insured or insured gives existing policy to trust Insured makes annual gifts to trust (beneficiaries have right to withdrawal) If not withdrawn by beneficiaries, trustee uses annual gifts to pay life insurance premiums At insured’s death, life insurance proceeds are paid to trust free of estate tax for distribution to beneficiaries (or to be held in further trust or used to purchase illiquid assets from estate to provide estate with liquidity)

13. “Defective” Grantor Trust Donor creates irrevocable trust for benefit of family members (best for non-relative to serve as trustee) Donor transfers cash/marketable securities/business interests to trust (valued for gift tax purposes at date of transfer) Trust income is taxable to donor but retained by the trust Donor’s payment of income tax is not an additional gift to trust Trustee may distribute trust property to beneficiaries Property not includible in donor’s estate at death – all appreciation escapes estate/gift tax Donor can sell assets to trust in return for a promissory note (no income tax consequences when payments are made)

14. Grantor Retained Annuity Trust Donor creates irrevocable trust for benefit of family members (donor may serve as trustee during early years) Donor transfers cash/marketable securities/business interests to trust (valued for gift tax purposes at date of transfer) and retains the right to receive an annuity Trust income is taxable to donor during annuity term Assets transferred to trust = present value of all annuity payments (nominal taxable gift at transfer) All appreciation in excess of annuity amounts at end of annuity term escapes estate tax if donor survives the stated annuity term Assets may continue in trust beyond annuity term

15. Structuring the Transfer Gifts of voting stock in corporation –Grantor cannot retain the right to vote the transferred shares –“Grantor trust” status must be structured to prevent any retained voting rights Solution: –Create two classes of stock – voting and non-voting –Include different provisions in trust to achieve grantor trust status

16. Structuring the Transfer Gifts of stock in S-corp –Is trust an eligible S-corp shareholder? Solution: –Create “grantor trust” for income tax purposes –Qualified Subchapter S Trust (QSST): One income beneficiary, all income must be distributed to income beneficiary, income taxed at beneficiary level –Electing Small Business Trust (ESBT): Multiple beneficiaries, income taxed at trust level

17. Trusts – Income Tax Considerations Who bears income tax liability for transferred assets? –Grantor trusts –Toggling grantor trust status Net investment income tax (“Medicare tax”) –Compressed income tax rates for trusts –Material participation by grantor, trustee or beneficiary

18. Reimbursement for Income Taxes Defective grantor trust: can trustee reimburse grantor for income taxes paid by grantor? –Yes, if trustee is not related or subordinate to grantor and there is no implied agreement –No, if trustee is related or subordinate to grantor

19. Trusts – Non-Tax Considerations Duration –Perpetual (“dynasty”) trusts permitted Fiduciary –Corporate vs. individual trustee –Power to remove and replace trustee Distribution standards –Distributions at ages/milestones –Equality among beneficiaries

20. Investment Opportunities – Private Securities Offering Trust as investor – accredited investor? –Consider value of trust assets ($5M+) –Consider trustee (bank) Closely-held family business as investor –Consider value of entity assets ($5M+) –Consider equity owners (individuals who qualify as accredited investors)

21. Jessica Mering Hardin (704) 377-8110 jhardin@rbh.com Heidi E. Royal (704) 377-8144 hroyal@rbh.com