WHAT CORPORATE COUNSEL
NEEDS TO KNOW ABOUT
TRUSTS & ESTATES
ACC – Charlotte Chapter
Jessica Mering Hardin
Heidi E. Royal
Robinson Bradshaw & Hinson, P.A.
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
Basic Tools
• Financial Power of Attorney
• Health Care Power of Attorney and “Living Will”
• Will
• Revocable Trust
• Beneficiary Designations
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
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)
… 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
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)
How to Transfer
• Outright or in trust?
– Second marriage
– Ability of children to manage assets
– Protection from creditors
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
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
Tax-Efficient Transfers
• Irrevocable life insurance trust
• Intentionally defective grantor trust
• Grantor retained annuity trust
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)
“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)
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
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
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
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
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
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
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)
Jessica Mering Hardin
(704) 377-8110
jhardin@rbh.com
Heidi E. Royal
(704) 377-8144
hroyal@rbh.com