Diana S.C. Zeydel, National Chair
Trusts and Estates
Greenberg Traurig, P.A.
305-579-0575
zeydeld@gtlaw.com
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General principles
◦ Application of 2701 or 2702?
◦ Estate tax inclusion if Note is outstanding?
 PLR 9535026
 Petter
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Debt versus equity issue?
◦ Miller
◦ Rosen
◦ Lockett
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Promissory note
Interest charged
Security or collateral
Fixed maturity date
Demand for payment
Actual repayment
Transferee had capacity to repay
Records of parties consistent with a loan
Federal tax reporting consistent with a loan
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Purchase price adjustment
◦ King
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Petter
◦ Defined value formula
◦ All property is transferred
◦ Non-taxable donee of excess
 Charity
 Marital Trust
 GRAT
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Why?
◦ Client wants access to the Note and the upside
◦ BONUS
Incomplete gift defense
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Problems
◦ Spouse dies first and grantor trust status shuts off
 Realization Event?
 Why? Because the transaction between the seller and the
trust is treated as a gift under Section 1041 when the debt
is issued; therefore, the trust has no basis in the note
 Possible Solution
 Nonrecourse debt
 Guarantees
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What’s the Deal?
◦ It’s a numbers game
 Included property of a GRAT is a function of dividing
the amount of the annuity by the 7520 rate
 The higher the rate, the lower the inclusion
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So the bet is that interest rates will go up
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Contribute $1 million to a 99-year GRAT
when the 7520 rate is 1.2%
◦ Annuity is $17,315.87 to zero out
◦ If 7520 rate goes to 6%
 More than 70% escapes tax
 $17,315.87/.06=$288,597.83
◦ If 7520 rate only goes to 4%
 More than 55% escapes tax
 $17,315.87/.04=$432,896.75
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Purpose
◦ More valuation protection than with a traditional
installment sale
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Method
◦ Perform the sale with an entity that is owned by the
seller or a wholly grantor trust owned by the seller
for income tax purposes that is an incomplete gift
trust
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Form LLC and fund
◦ Rule of Thumb is 10%
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Form FLP and fund
Perform an installment sale using the LP
interest in the FLP with the LLC
Contribute the leveraged LLC to a GRAT
 The LLC will hold FLP interest and Note obligation
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Valuation protection from the GRAT
◦ Annuity will self-adjust if the value of the LLC is
challenged
◦ Annuity payment will be relatively small
◦ Superior to funding a GRAT directly with the FLP
interest
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Negative
◦ GST planning is difficult
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Objectives
◦ Leverage the use of GST exemption
◦ Permit the CST for the benefit of the surviving
spouse to be a grantor trust as to the surviving
spouse
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Why does 678 not work?
◦ It does not appear that withdrawal for HEMS is
sufficient to make a credit shelter trust a grantor
trust with respect to the surviving spouse
◦ A greater power of withdrawal would make the trust
estate tax includible under Section 2041
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What is the solution?
◦ Start with a QTIP trust created for the benefit of the
less wealthy spouse
◦ Make a reverse QTIP election so that GST exemption
can be allocated
◦ Upon the death of the donee spouse the trust splits
into a credit shelter trust and a marital deduction
trust
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What about estate tax inclusion for the donor
spouse?
◦ Protected from inclusion under the QTIP regs with
respect to Sections 2036 and 2038
 Example 11, Treas. Reg. 25.2523(f)-1(f)
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Need to avoid creditor’s rights
◦ How do you do that?
 Use a self-settled asset protection trust jurisdiction
 Or use a jurisdiction such as FL that specifically says a
marital deduction trust is not available to the creditors
of the settlor
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The leverage of GST exemption is powerful
Grantor trust status creates additional
leverage
◦ ADDED BONUS
 Spouses can retain an income interest in the trusts
 Yes, you must navigate the reciprocal trust doctrine
 BUT maybe not as scary because the trusts are already
estate tax includible
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Use of the QPRT rules to acquire residential
property
Benefits
◦ Retain life use
◦ Avoid estate tax inclusion
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Caveats
◦ May work best with a new acquisition to avoid the
adverse application of 2702
◦ The Split Purchase TrustSM holds title to the
property on behalf of the life tenants and the
remainder beneficiary
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Idea is to substantially reduce the estate tax
cost of transferring an interest in a family
business at death
Client must also have an interest in
benefitting charity
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Following a path under the private foundation
regulations that permit a sale of the business
post death without violating the self-dealing
rules
◦ Section 53-4941(d)-1(b)(3)
 Indirect self-dealing shall not include a transaction
with respect to a private foundation’s interest or
expectancy in property held by an estate (or revocable
trust) IF:
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Executor possesses a power of sale or
Is required to sell the property under the
terms of an option
Transaction is approved by the probate court
Transaction occurs before the estate is
considered terminated for income tax
purposes
Estate received amount equal to the FMV
PF receives assets at least as liquid
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Series of PLRs have approved the transaction
◦ BUT no further rulings are being issued
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PLR 201129049 held it works even when the sale
was for a promissory note
◦ Retention of disqualified person’s note and receipt of
payments were not acts of self-dealing
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Key to success is that the business sold has
sufficient cash flow to amortize the note by the
end of the CLAT term
◦ Low interest rate environment will make CLAT annuity
payments relatively lower, and perhaps “shark fin” CLAT
and a note with a balloon payment can work
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No substitute for running the numbers
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Decedent established a partnership
Decedent made gifts of FLP interests during
his lifetime
Leaves remaining units in an optimal marital
deduction estate plan
IRS argues 2036 and includes the underlying
partnership assets in the decedent’s gross
estate
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Two Problems
◦ Marital deduction valuation problem
 Spousal trust receives partnership units, but included
assets are the underlying assets
◦ No marital deduction for the lifetime transfers
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Possible solutions to avoid the application of
2036
◦ Have one spouse form the FLP and the other spouse
fund the FLP
◦ Transfer the FLP units during lifetime
 Note there is no 2036 counterpart in the gift tax
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If all else fails
◦ Can you qualify the underlying assets for a marital
deduction?