49th Heckerling Institute on Estate PlanningSummary and Overview

By: Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

The following are rough draft meeting notes prepared at the recent Heckerling Institute and published in Leimberg Information Services, Inc. (LISI). These notes were published within hours of the conclusion of the proceedings and could not have been reviewed in order to be completed so quickly. There are no doubt errors in these notes. LISI obtained special permission from the Heckerling Institute to publish these notes. These notes are being made available as a courtesy to you as an attendee at a presentation summarizing the proceedings. These notes should not be posted to any website, other than as a temporary means of distributing them to attendees at a program. They should not be distributed beyond that. Bear in mind that no notes appear below on more than 20 concurrent and other sessions. The final papers presented at this year’s Heckerling Institute can be obtained from Lexis Nexis. Recordings of all of the proceedings are available from Convention CDs, Inc. 800-747-6334 or email scott@conventioncds.com.

Contents

1. Fundamentals Program: Planning for Income Tax Basis.2. Recent Developments 2014.3. Trust Design.4. Portability and the Death of the Credit Shelter Trust.5. Reducing Both Income and Estate Tax for the Wealthiest .2%.6. Audit Issues on the IRS Radar.7. SCINs and Private Annuities.8. Curing Estate Plans that Don’t Make Sense Post-ATRA.9. Addressing Family Business Rivalries.10. Uniform Fiduciary Access to Digital Assets Act.11. Tax and Administrative Procedure Rules for Estate Planners.12. Crafting a 21st Century Gift and Estate Tax.13. Question and Answer Panel.14. Asset Protection Trusts Under Attack (I-D).15. Life Insurance as an Asset class (II-D).16. Powers of Appointment in the Current Planning Environment.17. Split-Interest Trusts Created by Entities.18. Trust Protectors.

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19. Ethical Considerations in Acting as Executor or Trustee.20. Trust Protectors for Trusts for Individuals with Special Needs (III-C).21. Trusts and Estates Holding Business Interests (IV-C).22. Planning for the Modern Family.23. The New Biology.24. What Really Matters in Estate Planning.

1. Fundamentals Program: Planning for Income Tax Basis .a. Changing planning paradigm.

1. Comment : Subsequent to this year’s institute, President Obama is proposing an elimination of the step up in basis at death (with exemptions and special rules for homes and tangible property). The President referred to basis step up as “the single largest capital gains tax loophole.” While it is unlikely that this will be enacted, that would completely revamp all planning, and eliminate many of the planning ideas discussed. He has also proposed raising capital gains tax rates which have declined over past decades, perhaps back to the 28% rate they had been. Hello CRTs. http://nyti.ms/1ClLZhw .

ii. $12M estate use to be viewed as a large estate, and it would have faced a substantial estate tax. Now, however, the estate tax will be negligible, but the potential income tax impact much more dramatic. This makes the need to plan for basis step-up far more important for most estates than to plan for the reduction of estate tax.

1. Comment : It will be interesting to see how much cost and complexity clients under the federal estate exemption amount will tolerate for basis adjustment planning. Client’s struggled to comprehend bypass trusts when they perceived a 50% estate tax cost. Now, they will have to understand different planning concepts, that for many will be more complex than the bypass trust, with a lower likely payoff.

iii. For wealthier clients basis step up must be maximized as well as estate tax reduction planned for.

b. While cost basis is commonly referred to for income tax purposes there are a myriad of definitions and nuances to consider. The impact of whether there is an exchange, or other type of transfer may affect

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which basis rules apply. As another example, in the year 2010 the odd rules for basis applied. IRC Sec. 1022.

c. What is basis?i. What the tax law defines as basis may not be identical to a

laypersons definition of the investment in a property. It is not what you invest since if you build a home your labor is not factored in as part of basis although it is clearly a valuable investment.

ii. Basis is used to determine gain and loss on disposition.iii. There are a myriad of technically defined terms with respect to

basis.iv. Basis can be adjusted up and down when you make additions

(e.g., subsequent contributions). 1. Interest and taxes on unproductive and unimproved real

property as carrying charges, which are normally viewed as deductions, IRC Sec. 266 permits an election to add these as part of income basis.

a. Statute: “No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable.”

2. Under Regulations refers to an original tax return. Therefore, this cannot be done retroactively on an amended return.

v. There can be deletions or reductions to basis from depreciation, amortization, etc.

1. Now use MACRS as the depreciation calculation (prior law was ACRS) depreciation standards. IRC Sec. 168.

d. Basis of property acquired by gift.i. The basis of property received as a gift is determined under IRC

Sec. 1015.ii. If acquired by gift after 1920 when rules enacted the basis of

the done is generally the same as the basis was in the hands of the donor (the last donor who did not receive the property by gift).

1. Statute: “If the property was acquired by gift after December 31, 1920, the basis shall be the same as it

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would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value…”

iii. Different basis used if it is a gift of appreciated (fair market value is greater than basis) or depreciated (fair market value less than basis) property. The character may be different than anticipated because of partnership or other adjustments.

iv. The above calculation as to whether the fair market value of the property is less than, or more than, the basis at the date of the gift requires a determination of the effective date of the gift. This is determined under IRC Sec. 2511 and is when the donor relinquishes dominion and control under the gift tax rules. Compare the donor’s tax basis to the fair market value on that date.

v. Three scenarios:1. Donee can sell for more than basis. Use the donor’s

adjusted basis for determining gain.2. Donee sells the asset at a price that is between the

donor’s adjusted basis and the fair market value of the date of the gift. No gain or loss is recognized in this instance when “in between.”

3. The donee sells the property for less than then the lower of: (i) fair market value at the date of gift, (ii) and the carry over basis amount. Loss can be recognized.

vi. Be certain on gift tax returns Form 709 that basis is disclosed. Often this is not done because clients do not have the data or simply do not provide the information.

1. Comment : With the higher exemption amounts it will be even more challenging to get moderate wealth clients to file gift tax returns which they will perceive as having no tax impact. For the 2011 tax year, there were 219,544 gift tax returns filed. What will that figure drop to with the now larger and increasing exemption? In 2013 the number of returns had actually increased to 369,063. Surprisingly, an increase? http://www.irs.gov/uac/SOI-

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Tax-Stats---Total-Gifts-of-Donor,-Total-Gifts,-Deductions,-Credits,-and-Net-Gift-Tax.

vii. Gift tax paid may affect basis.1. The donee’s tax basis in the gifted property is increased

for the gift tax paid on the gift transfer.2. This basis adjustment applies regardless of whether it is

the donor or donee who pays the gift tax.3. If you paid gift taxes on the net appreciation of the

property given 1015(d)(6) you must determine gift tax allocable to the net appreciation of the asset given away.

4. This basis adjustment appears to be added on as the gift tax is paid. However, if the gift property is sold by the donee before the donor actually pays the gift tax it appears that you can presume that the tax will be paid and so the basis should be increased.

a. Comment: “(6) Special rule for gifts made after December 31, 1976 (A) In general In the case of any gift made after December 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as— (i) the net appreciation in value of the gift, bears to (ii) the amount of the gift. (B) Net appreciation. For purposes of paragraph (1), the net appreciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor’s adjusted basis immediately before the gift.”

e. Inter-spousal Lifetime Gifts.i. IRC Sec. 1015 rules do not apply to inter-spousal gifts. Instead

of 1015 IRC Sec. 1041 applies. IRC 1041 generally treats inter-spousal transfers as gifts.

f. IRC Sec. 1014 Addresses Basis of Property Received from a Decedent.

i. 1014(a) Basis of property in hands of person acquiring the property from a decedent is either the fair market value on the date of death or if applicable on the alternate valuation date value (AVD).

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ii. 1014(b) what does it mean to be “acquired from a decedent?” There is a list of definitions/provision in 1014(b).

iii. If the property is included in the gross estate you will receive a basis adjustment but this is not the only standard. It has to be acquire from the decent. It does not have to be included in the gross estate to get a basis step up. This raises interesting issues in the grantor trust area.

iv. The property may have been transferred during life but still included in the donor’s estate, e.g. the regulations discuss as an example a gift in contemplation of death (old regulations) but under current law a more apt example would be the donor dying with a retained interest in the asset given. There would be a basis step-up.

v. If you make a transfer and the transferee takes depreciation deductions those reduce basis.

vi. Community property.1. Community property has grown in importance in recent

years. 2. If one spouse dies owning property characterized as

community property only ½ of the property is included in the gross estate, but all of the property receives a basis step-up.

3. When a client from a non-community property state has community property you may wish to segregate that property to retain the community property status since it may then benefit from this double basis step up afforded to community property. Generally, community property assets will remain “community property” unless that status is destroyed. Consider separating this property into a separate trust. If you instead the client has income from say a community property account deposited into one spouse’s separate bank account, that might taint the characterization of the entire property, not just the income so deposited, as non-community property.

vii. IRC Sec. 1014(e).1. This is a significant exception adopted in 1981 when the

unlimited marital deduction was enacted.a. Comment: (e) Appreciated property acquired by

decedent by gift within 1 year of death (1) In general In the case of a decedent dying after

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December 31, 1981, if— (A) appreciated property was acquired by the decedent by gift during the 1-year period ending on the date of the decedent’s death, and (B) such property is acquired from the decedent by (or passes from the decedent to) the donor of such property (or the spouse of such donor), the basis of such property in the hands of such donor (or spouse) shall be the adjusted basis of such property in the hands of the decedent immediately before the death of the decedent.

2. There was a concern with an unlimited marital deduction that if spouse was terminally ill the well spouse could transfer all asset to the ill spouse to get a basis step up on the ill spouse’s death.

3. If H receives property from W within one year of death and she leaves it back to H, that property should get a carryover basis, not a step-up.

4. This is not really an in “contemplation of death” concept, but rather based on a time frame -- within the one year time frame.

5. Maximizing basis step up is a substantial consideration. If you can transfer property by gifting to a terminally ill spouse why not try it? First be certain that there are no creditors of that spouse, and that the transferor spouse will really get the assets back (not some other party).

a. Comments : i. This may represent a significant new

planning step for many clients with substantial late-in-life gifts. Perhaps the “old” approach of dividing assets to fund a bypass trust will give way to shifting appreciated assets to the older/sicker spouse.

ii. Might practitioners complete lien and judgment searches on a donee spouse before such large transfers to endeavor to identify possible issues the client might not be aware of?

iii. Consider who the agent is of the donee spouse’s durable power of attorney. Even if the will provides for a bequest back from ill

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W to H what if W’s children from a prior marriage are her named agents? Might her agents use a broad gift provision to transfer H’s property to them before W’s will can transfer assets back to H (or wherever agreed)? Perhaps W’s children might just “help themselves” even without the authority of a broad gift provision in their favor under W’s POA.

iv. What if H dies unexpectedly before W those asset that H transferred may pass to W’s children instead if his.

v. If the client is amendable to this type of planning steps should be taken now. To facilitate this type of planning broad spousal gift provisions should be included, when appropriate and agreeable, in client durable powers and revocable trusts.

6. Planning concept – “triangulate” the planning. a. H gifts assets to W and W bequeaths assets with

basis step up to the children an there is no issue under 1014(e). Also be careful not to trigger an inadvertent estate tax. So this could be a useful planning tool up to the exemption amount.

i. Comment : 1. This is a clever planning idea that will

become more common in the appropriate circumstances. Use the triangulation approach with a bequest in the ill spouse’s will to a trust to which the transferor spouse can be added.

2. This mechanism is quite similar to the hybrid DAPT approach suggested by many to lessen the risk of using that technique. A similar mechanism could be added here. “…the trust agreement provides that the trust protector or independent trustee can add additional beneficiaries, including the settlor.”

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See Steve Oshins & the Hybrid Domestic Asset Protection Trust, LISI Asset Protection Planning Newsletter 200 (May 10, 2012).

3. Use the liquidation of assets following death, recommended below, to begin the tolling of the income tax statute of limitations.

b. The more difficult issue is what if the property is bequeathed to the trust in which the transferor spouse is a discretionary beneficiary? There are no regulations just legislative history and several PLRs. If it comes back to a trust of which the transferor/surviving spouse is a beneficiary, the basis step up should be disallowed to the extent of the transferor/spouse’s proportionate interest in the trust. So for example, if the transferor is a beneficiary pursuant to an ascertainable standard or income beneficiary that can be determined. If the H has an interest only as a discretionary beneficiary how can you evaluate this?

i. Comment : 1. What does POA provide for? How are

the finances of the clients structured? What steps might be useful to have prepared to be ready to trigger this planning? Might it pay to have pre-arranged transfer documents and other steps so that a transfer can be completed?

2. Perhaps use a technique like a hybrid trust, analogous to what has been discussed in the DAPT context, where the transferor spouse can be added in the future as a beneficiary.

c. The time period after which the transferor spouse might be added is after the statute of limitations. But waiting until after the running of the estate tax statute of limitations has run may not be sufficient. That might not be the relevant statute of limitations

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to be concerned about since it is an income tax issue, not an estate tax issue. If the trust sells off all assets shortly after funding (subject to wash sale rules which may limit losses and other considerations) and buys new investment assets the gain will be triggered and the income tax statute of limitations will also begin to toll.

1. Comment : Will the statute run? What about the 25% rule? Could the IRS argue prearrangement and fraud to prevent tolling statute of limitations?

ii. This should not be a trust protector who may well be in a fiduciary capacity but rather a person acting in a non-fiduciary capacity.

iii. Caution, if this is documented d. Use a bifurcated marital trust into two

components:i. I leave any assets given to me by my spouse

within one year of my death.ii. I leave any assets not given to me by my

spouse within one year of death.g. IRD.

i. No basis step-up under IRC Sec. 1014 for IRD. IRC Sec. 691.ii. There is no clear definition. The definition is cobbled together

from cases, Code and Regulations. Here is a simple framework to identify IRD in general terms: If you treat the decedent as an accrual basis taxpayer, determine what should have been taxed had they been accrual basis, that is what should be taxed as IRD. That is not a complete definition, but a workable start.

h. GST.i. IRC Sec. 2654(a)(1) and (2) basis adjust from GST.

1. Statute: “Except as provided in paragraph (2), if property is transferred in a generation-skipping transfer, the basis of such property shall be increased (but not above the fair market value of such property) by an amount equal to that portion of the tax imposed by section 2601 (computed without regard to section 2604) with respect to the transfer which is attributable to the excess of the fair market value of such property over its adjusted basis immediately before the transfer. The preceding shall be

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applied after any basis adjustment under section 1015 with respect to the transfer.”

ii. If as a result of death there is a termination of the interest and a GST tax is imposed you are to adjust the basis in same manner as you would under IRC Sec. 1014. You have a death, taxable termination and a GST tax is paid, you get a date of death step up.

iii. 2654(a)(1) in all other cases if there is an adjustment because of GST tax, treat it in same manner as under the gift tax rules.

i. Holding Period.i. Determines whether long versus short term gain will be

realized. You must hold the property for “more than one year” in order to have a long term capital gain. IRC Sec. 1222.

ii. The time period is really one year and one full day.iii. For depreciated property received by gift, there is a possibility

that for gain calculations you use basis of donor, but for calculation of a loss you would instead use the fair market value on the date of gift. If you use the donor’s basis and tack the holding period.

iv. For loss property the rule is different. You use fair market value. So there is no tacking in this instance since it is not based on a carryover basis. So the holding period starts on the date of the gift.

v. For a part gift/part sale the holding period is allocated to the proportions of asset.

vi. Inherited property if sold within one year of death you can use a long term holding period but the person selling the property has to be the person who received the property from the decedent. The person who sells must have inherited directly from the decedent. IRC Sec. 1015; 1222.

vii. IRC Sec. 1022 if you had a special election in 2010 use carry over basis and if you have transferred basis, then holding period tacks. If you do not have carry over basis no tacking.

j. Uniform basis rule for trusts and estates.i. Basis is apportioned among beneficiaries in proportion of their

interests. So if you have an income interest and remainder beneficiary you can apportion basis based on actuarial interests of the income and remainder beneficiaries. The apportionment is also affected by age and interest rates. Although the trust uniform basis may remain the same but the beneficiaries’ shares

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will vary over time. The regulations say to allocate basis based on relative interests. But if you have a HEMS right or a strictly discretionary interest how can you allocate basis? What value is attributable to these interests for purposes of determining apportionment?

ii. The uniform basis rule applies in two important situations. One is how depreciation deductions should be allocated. This can be different then state law rules.

iii. These rules are important when CRT interests are sold. There is a market in the sale of remainder trust interests and there are companies that make a business of acting as middlemen for these transactions. If a term interest is sold it is deemed to have a basis of zero unless it is part of a transaction in which all interests in the trust are being sold to a third party. If a unitrust interest holder sells his interest to a third party investor, no matter as to his age or interest or the uniform basis, the seller’s basis is zero for gain calculation purposes. The code does not address whether the remainder beneficiary would get the selling beneficiary’s interests. It should. This could be an issue if it is a term remainder non-charitable interest. If the parties agree to a commutation in which each is “cashed/asseted” out, then this rule applies. The term beneficiary gets no basis. The term beneficiary could have a gain and the remainder beneficiary could have a loss.

iv. Uniform basis rules are different for a life estate followed by a remainder free of trust. So the rules are different for the same asset whether in or out of trust.

k. Proving Basis.i. There is a myth that if you cannot prove the basis it is zero. If

you don’t have documentation the basis may still be something, it is not necessarily zero. The initial burden is on the taxpayer to provide the information.

ii. Burnett v. Houston 283 US 223 if the taxpayer provides some relevant information the IRS should agree to some basis.

iii. Cohan v. Commr. 39 F. 2nd 540, case provided that if sufficient information is provided the IRS cannot simply ignore it.

iv. IRC Sec. 7491, if you believe you will have to go to court and you can provide information but the IRS is not being reasonable, use this provision. Once you have done what this

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provision requires you may shift the tax burden of proof from the taxpayer to the IRS.

l. Portability.i. Tax reasons.

1. Why would a smaller client with minimal estate tax exposure not want the double basis step up?

2. The tax reason is to focus on the double step up.3. What about a client/couple with an estate between

$5,430,000 and $10,860,000 – if they won’t get beyond upper limit so that a federal estate tax is triggered, why not use portability.

ii. If there are non-tax reasons such as asset protection, second or later marriage, etc. then use trust planning.

1. Comment : Nuclear families may be a smaller proportion of our client bases then many realize. Consider: “In 1970, 40 percent of households were married couples with children. Such households made up just 19 percent of homes in 2013.” http://www.philly.com/philly/news/How_American_families_are_changing.html

iii. What if each spouse has $10M.1. H leaves all asset into a QTIP’able trust for W.2. Use a reverse QTIP for $5M to safeguard the GST

exemption.3. Surviving spouse gets $5M outright and now has $15M

(her original $10M plus the $5M that was inherited directly and not place din the trust).

4. W creates a $5M grantor trust shortly after H’s death using H’s DSUE. This is analogous to the bypass trust but is a grantor trust so more powerful.

m. Four ways to gain basis step up.i. Give independent trustee or trust protector right to distribute

assets out to surviving spouse so that they will be included in that spouse’s estate and be stepped-up on his/her death.

1. This is a relatively easy approach to use.2. Independent trustee merely distributes and included in

surviving spouse’s estate under IRC Sec. 2033.3. The difficult issue is who will do this? An institutional

trustee will not be comfortable doing this. Whether or not

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an individual trustee or protector is willing to do so will be dependent on the family circumstances.

4. You need to make sure that the trustee acts and does so before the death of the surviving spouse.

5. You have to verify that there are no creditor issues affecting the surviving spouse.

6. The trustee will have to obtain the information as to exemption remaining in order to do this analysis.

7. Accurate information as to the surviving spouse’s health is essential to making a decision and this may be quite difficult.

8. If surviving spouse transfers or bequeaths assets to unintended beneficiaries the trustee will be sued.

9. What if assets increase substantially in value and create an unintended estate tax.

a. Comment : The potential potholes with this type of approach are significant. If there is any family friction or concern would anyone act?

ii. Give an independent trust protector the right to create a general power of appointment in favor of the surviving spouse to create estate inclusion.

1. This is very complex to draft.2. You want to pick assets with lowest basis. But not

necessarily since some asset may not be sold for the foreseeable future. So you really want assets that will trigger the most gain in the nearest term. So merely selecting assets is quite complex.

3. Will the creation of the power work in the particular state?

4. Be cautious that there are no other clauses in the instrument that will prevent this from occurring properly.

5. This complex concept has to be explained to the client.6. The benefit of this is that it can function automatically. 7. The problems with this are legion, the drafting and asset

selection are both complex.a. Comment :

i. Might it be easier for a person in a non-fiduciary capacity to take this action? If trust protectors will often, perhaps generally, be deemed to be acting in a fiduciary capacity,

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perhaps someone else should be given this power.

ii. This can be nearly impossible to ascertain. The parent/client may be adamant that the heirs will vacation in the family cottage forever. The heirs hate going there and will sell as soon as the parent dies. The planners and the client may not know this.

8. Kurz v. Commr. 101 TC 44 case raises issues with this and the result may not be as intended. Kurz suggest that there must be a real economic effect to the power independent of its tax reasons.

a. Comment : What is the impact of this to a general power of appointment contained in a silent trust so that the power holder is never informed of it?

9. The clause may not give you enough general power but giving some general power, complimented by the actions of an independent trustee or protector acting, can be in combination the best approach.

iii. Include in the documents a contingent general power of appointment. To the extent of any unused exclusion at second spouse’s death that portion of assets will be subject to this contingent power of appointment.

1. This must be done on a timely basis which will be difficult.

2. You don’t want to over-include assets.3. This act will likely occur near death so the circumstances

will be difficult.iv. Delaware tax trap trigger where allowed to be triggered.

1. Create non-general powers of appointment to continue without violating the rule against perpetuities. IRC amended to prevent this.

2. If you try to create these special powers it may trigger estate inclusion.

3. This is complex to understand and it may not be easy to identify by just reading the document.

4. Some states have statutes that prevent you from violating the Delaware tax trap.

5. Governing instrument savings clauses may prevent this from being effective.

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6. The Delaware tax trap approach puts the burden on the client.

v. The chance of getting the exactly correct answer in any of these approaches is close to zero.

vi. State death tax issues may significantly change the above. 1. Comment : For a detailed discussion of planning in a

decoupled state, see “Estate Planning in a Decoupled State Post-ATRA for Married Clients Under the Federal Exclusion Amount,” By: Martin M. Shenkman, Esq., Richard H. Greenberg, Esq., Glenn A. Henkel, Esq., and Bruce D. Steiner, Esq., published in CCH’s CPA Client Advisor Library.

n. Part Gift-Part Sale.i. Charitable bargain sale more capital gains is paid on sale

component. This arises in bargain sales to charities and gift annuities.

ii. The adjusted basis of the property has to be apportioned based on fair value.

o. Basis in Partnership. i. General comments.

1. Subchapter K of the Code.2. Partnerships includes FLPs and LLCs, whatever is

deemed a partnership for tax purposes. It has more than two owners and elects to be taxed as a partnership or is taxed as a partnership.

3. Several theories underlying partnership taxation. Aggregate theory provides that the partner owns the partnership so that the partner and partnership are treated and taxed as one unit. The entity theory in contrast looks at FLP as a separate entity from its partners. Both theories apply. But for basis discussions the aggregate theory seems to predominate.

ii. Issues to consider.1. How basis is affected in the typical estate planning

transactions?2. Inside and outside basis and how each is determined.3. How is basis created on contributions to the partnership?4. How is basis adjusted while the partnership is in

operation? This affects outside basis.

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5. Effect of ordinary distributions and liquidating distributions and impact on inside and outside basis.

6. Negative basis.7. What happens to basis on gifts to a grantor trust, to heirs,

or a non-grantor trust?8. IRC Sec. 754 election mechanics.

iii. Inside versus outside basis.1. Outside basis is the basis of the partner in his partnership

interest.2. Inside basis what is the partnership’s basis in the asset

inside the entity. This could be the combination of what each contributing partner paid for the property contributed.

iv. Basis on contribution of assets.1. Generally no gain is recognized on contributions to

partnership. IRC Sec. 721.a. Comment : Watch out for the investment company

rules for security FLPs and LLCs. See Shenkman, “Avoiding the Investment Company Trap When Forming FLPs and LLCs,” Estate Planning December 1999.

2. Contribution of a partner’s note to the partnership. When note is repaid you get basis. Contrast this to a C corporation that if you transfer a note to a C corporation you get basis equal to the fair value of the note. But if a C corporation later elects S status it is unclear what should happen.

v. Basis by other than contribution.1. Purchase of partnership interest provides basis for the

partnership interest purchased -- outside basis. The inside basis, other than if there is a 754 election made, is not effected.

2. Basis commonly transferred by gift. Dad gifts LP interest to son then son will have same basis. IRC Sec. 1015.

3. No change on gift to grantor trust. Since this is a non-recognition event basis and holding period should not be affected. Rev. Rul. 85-13.

4. Inheritance – same general rules apply. Outside basis gets a step up and this is the most common use of a 754

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election to obtain as commensurate increase in inside basis.

a. Comment : Obtaining a 754 basis adjustment may be essential to realizing the desired inside basis increase. However, securing that is not merely a matter of the appropriate election being made but may also require consent of a general partner of a limited partnership or manager of an LLC. It may be worthwhile to advise clients to address this issue now by confirming that partnership and operating agreements mandate the election when appropriate, or if not, negotiating that change now, before it becomes necessary.

vi. Operations.1. Income increases basis, and losses reduce basis.2. There is no such thing as negative basis. There can be a

negative capital account. They are different concepts. Capital account is an accounting concept. A negative capital account results when the partner received distributions greater than what is contributed.

vii. Assets distributed out of partnership.1. Non-liquidating distributions.

a. No loss ever recognized.b. Basis is adjusted.c. If there is no gain or loss on the distribution then

basis should be unchanged.d. Cash distributions reduce basis.e. Property distributions result in a distribution of

basis. No step up in basis occurs. This can defer gain recognition until the distributee partner eventually sells.

f. What if receive $120,000 distribution and basis of $100,000? It will trigger gain of $20,000. IRC Sec. 731(a).

g. Be careful to evaluate distribution to be aware of possible gain.

2. Liquidating distributions.a. As a general rule the outside basis is used to

become the basis of the assets distributed. If

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outside basis is $100 the tax law tries to allocate the outside basis to those assets.

b. Cash is allocated first and consumes basis = fair market value, dollar for dollar. The remaining basis, after the allocation to cash, is then allocated.

viii. Transfers to grantor and non-Grantor Trusts.1. Rev. Rule. 85-13 it is as if no transaction has occurred on

transfer to grantor trust. See above.2. If there are basis adjustment limitations and suspended

losses, confirm in advance whether they may be eliminated. If the LP is a passive activity the passive activity losses on a gift will be deferred and wont’ be used until death or sale.

ix. Testamentary transfers.1. Consider whether there is IRD inside the partnership.2. When value partnership interest consider IRD items since

these get zero basis.3. Generally you get a step up in basis on outside basis. But

generally there is no adjustment inside the partnership.4. Partnership taxation tries to minimize double taxation

and that is the intent of the 754 adjustment – to eliminate disparity between inside and outside basis.

5. Generally you would want to make the election to avoid disparity. However, the election can be complex and create significant accounting burdens.

6. Must track basis for each type of assets. Create 754 account. If have multiple deaths each will have their own 754 account. You will also need a separate account to track for regular tax and AMT tax purposes. The administrative burdens can be significant.

7. 754 adjusts only the inside basis. Usually the outside basis was changed as a result of death or sale or exchange and was increased. So assets attributable solely to that partner are adjusted.

8. Any distribution of any interest in a partnership not otherwise treated as an exchange will be treated as an exchange. When an estate funds a trust as part of distributions to beneficiaries that creates a second basis adjustment (after death). IRC Sec. 761. It does not appear that anyone follows this. Funding a pecuniary bequest

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should logically result in a step-up but does this result in another 754 election on funding a non-pecuniary bequest?

p. Passive Activity Losses.i. If you die and the passive activity losses are less than

differential in basis you can use it all against passive income from the activity, or against other income.

q. Grantor Trust Basis Issues.i. Often not clear what the correct answer is, there are often

multiple rules.ii. Rothstein v. US, 735 F.2d 704 case 2nd Circuit.

1. Non-grantor trust.2. Grantor sold property for a note.3. Trust wanted to claim higher basis and grantor would

pick up gain on installment sale.4. Court said IRS is incorrect and taxpayer does not

continue to own the asset.5. IRS responded with Rev. Rul. 85-13 saying that grantor

owns assets after which are held by grantor trust so you cannot have a true sale and cannot have a basis increase.

6. If Rothstein is correct then note sale transactions would not work. But after several subsequent rulings to Rev. Ru. 85-13 that is now the law.

iii. On sale to grantor trust basis is an income tax issue and for income tax purposes the sale to a grantor trust is a non-event.

iv. If grantor trust status terminates while grantor is alive you should pick up gift tax on net appreciation. If you are dealing with an installment sale under exemption amount and there is no encumbrance it should be a non-event. If debt is in excess of basis this results in recognition of gain.

v. The real issue is what happens on death and grantor trust status terminates on death? There is not a good answer. There is not an answer on which everyone agrees. Look at 85-13. If property is encumbered by debt in excess of basis there is no gain recognized, basis gets stepped up and gain disappears. Basis created by a non-recognition event.

vi. Chief Counsel advisory CCA 200937028 provided that death is not a recognition event.

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vii. What about assets inside trust? What happens to their basis? Is it a receipt of property from a decedent under IRC Sec. 1014? Consider Rev. Rule 85-13 and IRC Sec. 1014.

viii. Careful reading of the Code and provisions is important. There is a gap. Consider that for a non-resident alien you can get a basis step up with no quid-pro-quo.

r. Private Annuities.i. These transactions could be more certain than SCINs.

ii. Basis issues are quite important and the rules are complex. The annuitant/seller – basis is important because what is paid is divided into three parts: return of capital (amortized over life expectancy on a straight line basis), capital gain, and the annuity component which is the rest of the payments (in a normal sale this would be interest but the payor cannot deduct it in a private annuity transaction so it is referred to as an annuity not interest payment).

iii. Regulations proposed in 2006 still have never been finalized. They are still on the priority guidance list. These provide all gain must be recognized in year of sale. When finalized the regulations will be effective retroactively to the 2006 proposal date. If the sale is to a grantor trust it is a non-recognition event.

iv. What is basis to obligor/buyer? This is important to calculate depreciation on the property purchased. What is basis if obligor/buyer re-sells property while seller/annuitant is alive? It is the sales price, the present value of future payments. If you sell at a loss then basis is only what you have paid so you cannot generate a loss in this instance.

v. At obligor’s death basis is adjusted down to the amount, if less, that has in fact been paid.

vi. Use a private annuity or SCIN only if you have a seller whose actual life expectancy is significantly shorter than actuarial tables predict. This means living longer than one year (really 18 months) but a lot less than they should have.

vii. In light of recent IRS statements you might prefer the private annuity to the SCIN.

1. Comment : See Akers outline and notes at Tuesday morning’s session.

viii. If death occurs early the buyer’s basis will be reduced.ix. If buyer was taking accelerated depreciation and then as a result

of death the amount is reduced buyer may have an amount less

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than what was paid. Since there can be no negative basis some commentators might view the differential as current gain to recognize. There is no real authority for this so presumably few practitioners if any would report this.

s. SCINs.i. Note that will disappear on death. An asset is sold but the note

received will disappear on death as a result of the cancellation feature.

ii. Actuarially it must be anticipated that you have to outlive the note. So if you outlive the note you will get back more than you gave up so as with the annuity above, you want to do SCINs for those that will die within their actuarially life expectancy.

iii. Create a SCIN when you believe what you will receive in return will be less.

iv. Estate of Moss v. Commr. 74 TC 1239 there is nothing to include in the estate value.

v. But you must receive a premium as either increased interest or an increased payment to compensate for the cancellation feature. A combination of the two can be used.

vi. GCM 35903 the buyer’s basis is the fair value of the assets exchanged.

vii. Example: Father (F) sells property to Son (S). Property in son’s hands is fair market value of property since anticipate that note will be paid. The issue is should that income really be recognized? The IRS position is that the amount not paid must be recognized to justify basis. The note you created only applies if you are alive. If you are dead there is no obligation so that there is no cancellation of the obligation. The argument that might be made is no more recognition of the income because there was no cancellation of the debt because the debt only existed while alive. Better reasoning under Estate of Frane v. Commr. 98 TC 341 is that there is no cancellation of indebtedness.

t. How can you manage basis?i. The JEST trust is an attempt made to get community property

like treatment in a non-community property state.ii. TAM 9308002.

1. Spouses serve as co-trustees. Could require that all of trust assets could be subject to debts and taxes of grantor. H delivers statement to W saying I want all joint assets.

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Under 2041 and Regs thereunder it is a general power of appointment so that if H dies first what H contributed is included in his estate. What W put in is also included in H’s estate because H has a general power of appointment over these assets.

2. IRS questioned whether there is really a general power of appointment but concluded that it was.

3. Several cases stand for proposition that a power of appointment over a trust someone else can revoke does not make this situation the equivalent to the requirement of having to have someone consent to the exercise of that power.

4. This is a transfer revocable up until the date of death. It is a gift the moment before death and qualifies for the estate tax marital deduction. However IRS said IRC Sec. 1014(e) is a problem. The IRS views the initial transfer as incomplete until the moment before death so the transfer is a no-basis increase.

5. This approach can be used to assure use of large unified credit and should work.

6. The problem is was the gift made effective at the moment before death or the moment after? If effective after death there is no marital deduction.

iii. JEST.1. The problem of 1014(e) was addressed with joint estate

step up trust, or “JEST.” This looks similar to tax basis revocable trust. The assets of the donor/surviving spouse that are included only because of general power of appointment.

2. The JEST can minimize the problems of 1014(e). It is a means to get a basis step up on the first death if that spouse has insufficient assets.

a. Comment : Joint Exempt Step-Up Trust (JEST), is discussed in Gassman, Ellwanger & Hohnadell: “It's Just a JEST, the Joint Exempt Step-Up Trust,” LISI Estate Planning Newsletter 2086 (April 3, 2013) at http://www.leimbergservices.com.

3. Alaska and Tennessee statutes differ from other community property states.

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a. Everything you acquire is separate property unless you agree that it is community property. All community property states allow you to opt in for separate property, but in Alaska and Tennessee you have to opt in for any property to be covered.

b. Both Alaska and Tennessee have provisions for a trust with situs in that state even though the grantors of the trust do not live in that state. The situs of property held by a trust is usually the situs of the trust. You must have a trustee in Alaska (Tennessee). The trustee must have certain functions like preparing tax returns and maintaining records and have possession of some of the assets. Some commentators would want trustee to be in charge of all trustee functions and have all asset held in the trust to minimize the risks of an argument with the IRS over conflict of laws. The statute requires mandatory statement advising the client about the consequences of this and that the client must seek competent counsel.

c. Does this technique work? There are no cases on point. But the general rules on situs support this. A key case is 1944 Supreme Court case Harmon.

iv. Alan Gassman’s summary of the above discussion.1. With portability, you are not as concerned with the

problem of the first spouse not having money. In fact, the best portability comes from an insolvent estate of the first spouse. They got no use of their exemption. The only problem is convincing them to file a federal estate tax return. This can be a little tricky. Somebody has to pay for preparing the return.

2. The problem of 1014(e) was addressed by Alan Gassman and a couple of other lawyers in a series of articles - where they created what they call "The Joint Estate Step-Up Trust" (or "JEST").

3. The concept looks a great deal like the tax basis revocable trust, with one very clever distinction, and that is that the assets of the donor surviving spouse that are includible only because of the General Power of Appointment (where the first spouse to die does not have

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enough assets to fully fund their exemption) to bring the estate up to the exemption amount, which are thus includible only because of 2041, and are attributable to the property that was owned by and contributed by the surviving spouse. These will go into a non-marital trust that the surviving spouse is not a beneficiary of, and the rest is for marital deduction funding. That absolutely ought to work in terms of 1014(e).

4. You still have the question of whether the spousal gift is the moment before or the moment after, and when you are explaining the technique to the client in writing, you need to point out this one little tiny item of uncertainty. You can state that you think it unlikely that this will be a problem - that all the private rulings take favorable positions. All of them. There are none taking an unfavorable position. That's something. We can cite them, but we can't rely on them, but it is still something…So they have some significance.

5. Once the client can get past that one little piece of risk, I think the JEST is a great technique for what it is seeking to do. It is a way to minimize the problems of 1014(e). I commented earlier that you can accomplish the same concept if you are dealing with an inter-spousal gift within one year of death, you say "fine, the access I was given within one year of death is a little different - non-marital trust. It is a great technique-- - the cases I mentioned about the - whether or not it is really a general power. I had a debate with Mitch Ganns, who said - the rulings don't really say that, and I went back and read them, and said, yes they do really say in my opinion they really do say that, and while Mitch is one of those people I usually defer to in judgment - I really disagree on this one.

6. So, the JEST actually is a workable technique to get the basis step-up on the estate of the spouse to die, when they don't have money or enough money. It is a way around 1014(e) - the tax basis revocable trust - not so much.

7. The JEST is a material improvement.8. Page 201 - I've got to say, that Alaska and now,

Tennessee, community property trust is probably the

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simple best basis play in estate planning, and no one seems to be using it, and I am a little - I think it is outrageous that it isn't being proposed more often, but there it is.

9. We mentioned that community property has a really swell rule that both sides get a basis step-up on the first spouse's death. (Howard continued to cover the Alaska and Tennessee Community Property Trust discussion, stating that it is the best technique available).

u. Basis in life insurance policies.i. It is not premiums paid, it is premiums paid less the portion of

the premium that went towards term coverage.1. Comment: See Larry Brody’s discussion and outline

from the Wednesday afternoon special session on Insurance as an Asset Class.

2. Recent Developments 2014. a. Practice has changed.

i. Tax law changes are not driving clients to practitioners. The future is different. Practitioners will have to be more proactive.

ii. Estate planning services will still be needed.iii. The top 2/10ths of 1% of the wealthiest taxpayers will require

extensive work. Consider the run-up in the stock market and the impact of that one change on wealthiest clients.

iv. The old days of focusing planning on moving assets via gift/transfer to irrevocable trusts to remove appreciation from an estate are no longer sufficient. Basis step-up is too important and must be considered in all gift planning.

v. For a zero basis asset it must appreciate more than 250% before the estate tax savings will offset the income tax result.

vi. Clients will often say that an asset won’t be sold. Some clients might even say they want to leave/create an income tax burden to make it harder for the client’s heirs to sell. If a client takes that perspective practitioners should confirm that decision it in writing. The reality is, contrary to what many/most clients say, most assets will be sold.

vii. Rule against perpetuities New York Times article illustrates how significant state law has become to practice.

b. Federal tax legislation.

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i. ATRA is like any other legislation, some items were permanent but many were temporary and subject to extenders.

ii. Important extender provisions, including qualified charitable contributions of IRAs, expanded contributions of qualified conservation real property, etc.

iii. There could be new legislation, maybe. 1. While the risk is not significant there is a more likely

chance then in the past to have estate tax repeal, etc.iv. HEET Trusts.

1. Health Education Exclusion Trust use the gift tax exclusion 2503(e) and the GST exclusion 2611(b)(1).

2. President Obama wishes to modify HEETs since he views them as abusive.

3. Currently distributions for the benefit of skip persons are not subject to GST tax if direct payments for tuition or medical. IRC says GST transfer does not include these types of payments excluded under IRC Sec. 2503(e).

4. Are these trusts worth funding? If you create a trust for only grandchildren the trust will be a skip person triggering GST tax. Merely adding children to the trust in addition to grandchildren, may not suffice to avoid this. IRS can take position the interests of older children in such a trust are nominal and the transfer to the trust would trigger a GST.

v. Crummey powers.1. Proposals may limit to $50,000.2. Can you gift daughter interest in LLC not transferable

and this may be OK under proposal.c. New York.

i. Estate Tax.1. Gifts within 3 years of death will increase estate by

amount of gifts.2. Significant trap.3. New Yorker is generally not taxable on real estate and

tangible property located outside New York but if the client gifts these within three years of death it will become subject to New York tax.

ii. Joan Rivers.1. Said resident in New York but domiciled in California to

save New York estate tax.

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2. According to Bruce Steiner, Esq. Joan Rivers’ Will was probated in New York, and the petition recited a New York domicile. So it looks like they conceded that issue.

a. Comment : Determining and planning for residency and domicile is becoming as more important component of planning for many clients in light of increasing mobility and the increasing importance of state taxation. Too many clients claim they are resident in a low/no tax state without the planning, and often without the facts, that they should have to support that position. Dick Nenno’s presentation at a prior Institute addressed many of these issues in considerable death.

iii. New York Income Tax.1. NY takes the position that all trust created by a NY

resident is forever a NY resident trust. It can escape NY taxation if it doesn’t have NY assets, no NY Trustee, etc. NY viewed this as a means of permitting avoiding NY tax.

2. Throw back tax was enacted in 2014. There is a tax on accumulated income. If a NY resident receives a distribution will have to pay tax in NY on that distribution.

3. This won’t stop the export of trusts outside NY because tax is deferred, if beneficiary leaves NY it will be avoided, and tax on accumulated income doesn’t pick up capital gains since they are not part of DNI and do not produce an accumulation distribution.

d. Portability.i. Rev. Proc. 2001-38 concerning a disregarded QTIP election.

1. The Rev. Proc. was intended to provide relief if an unnecessary QTIP election was made.

2. What happened was that an executor inadvertently made a QTIP election on a bypass trust. IRS said we would disregard it as a leniency to the taxpayer.

3. Now a QTIP trust is desirable to get a step up in basis. If left all in a bypass trust there is no step up but IRC Sec. 2044 requires step up and it is treated as property passing from the decedent under IRC Sec. 1014(b).

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4. An issue was raised by some practitioners that the QTIP election if there is no estate tax due (e.g., on a Form 706 filed solely to secure portability) the QTIP election was not necessary so IRS could ignore the QTIP election.

a. Comment : Some speculated that decoupled states that require conformity of state with federal filing would not respect a state QTIP election and state estate tax would be due. This was not the intent. Some practitioners has used a general power of appointment trust or granted the surviving spouse a general power if necessary to assure qualification for the state estate tax marital deduction. These precautions and the attendant complications may no longer be necessary.

5. There should be no issue of this with creating a trap for the unwary.

e. Completed gift and GRAT.i. Scrivener error.

ii. Reformation in local court. Reformation relates back to date of creation of the document.

iii. PA has UTC and under Sec. 415 you can establish by clear and convincing evidence that it was an error.

iv. Reformation should be contrasted with modification.v. UTC Sec. 415 modification does not require clear and

convincing evidence but modification is prospective only.f. General power of appointment.

i. PLRs 201444002-201444006.ii. Issue is that the grantor created a trust for grandchild and

permitted the grandchild to appoint to grantor’s issue which means the grandchild could exercise in favor of the grandchild. Since the grandchild is included in grantor’s issue was this a general power of appointment causing trust property to be included in the grandchild’s estate? The IRS held that since it was a testamentary power the grandchild could not appoint to himself/herself during lifetime or to his/her creditors so it was not a general power.

g. Business Opportunity.i. It is common to plan for goodwill in corporate transactions that

are not estate planning motivated. Sellers want to allocate some consideration to personal goodwill rather than corporate

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goodwill. This will create only one layer of tax, a capital gains tax, since the proceeds will be received directly by the shareholder not by the corporation. If in contrast it is the corporation’s goodwill being sold you have two layers of taxation. Allocation of goodwill as between personal and corporate goodwill has long been an issue.

ii. These issues can be relevant to the business succession and estate planning areas.

iii. Boss Trucking Inc. v. Commr. TC Memo 2014-17. 1. Dad had trucking company. Regulatory issues arose.

Three sons started their own business and used some of equipment used in Dad’s business and some of the same suppliers and customers. [Comment: was it Steve Douglas?] Dad was not involved in the new business started by the sons. IRS said the creation of the new business by the sons was a distribution of goodwill by Boss Trucking to Dad, and then followed by a gift of that goodwill by dad to the 3 son.

2. The Tax Court said that the IRS was not correct only because the goodwill belonged to the Dad as a shareholder, not the corporation. There was never an employment agreement or non-compete agreement that would have formalized this. Does this suggest not having those documents in place? Tax Court also held that there was no gift by Dad to sons (or sons’ business) because the new company had a different name, etc.

3. Planning ideas – if transition business to younger generation have them form their own business and build their relationships. As long as senior generation is not involved there may be no gift transfer. This might provide a gift tax free succession strategy.

a. Comment : These cases provide a framework to potentially circumvent transfer tax issues on the transfer of certain family business interests. However, for family business interests where the senior family member’s estate is below the exemption it would be preferable to retain the business in the estate for basis step up purposes since there will be no tax.

iv. Estate of Adell v. Commr. TC memo 2014-155.

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1. C Corporation was engaged in uplink broadcasting business.

2. The only customer was a charity formed by decedent and son. The decedent’s son who had created all the relationships and created goodwill. On decedent’s death what was the value of the stock if the goodwill belonged to the son and not to the company?

3. IRS appraised company and came up with a value that was ten times greater than the taxpayer.

4. Tax Court held that the value of the company should not reflect the son’s goodwill.

5. Note that on son’s death goodwill would die with him and not be included in the estate.

v. Cavallaro v. Comr. TC Memo 2014-1891. Case held the opposite as the Adell and Boss cases

finding that a merger transaction was a gift.vi. General planning ideas.

1. Have new ventures started in an irrevocable trust so outside the estates.

2. If the company would have a claim against the child for taking the corporate opportunity then it would be a taxable gift. So be careful with employment agreements and shareholders agreements not to provide for such a restriction.

i. Comment : Employment and other agreements may be useful to support compensation etc. but perhaps provide the opposite of a typical corporate opportunity clause by stating that there will be no such restrictions. Consider the impact on other siblings. This was discussed by another speaker in a different context at this year’s Institute who pointed out the intra-family issue of a child in the business secures an incredible investment opportunity and does not share it with other siblings. In that context a seemingly opposite recommendation was made. So caution is in order.

h. Valuation cases.

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i. Richmond v. Commr. TC Memo 2014-26.1. In one case the appraisal was not completed which

worked to the taxpayer’s detriment.2. Built in capital gain. Two circuits give dollar for dollar

deduction. IRS expert gave nominal expert. Judge used about ½ of net asset value with a discount for built in capital gain. Used time value of money and assumed gain would be realized over time.

ii. Gustina.1. 12-717-47 December 5, 2014.2. Appeal from Tax Court decision.3. 41% LP interest in timber.4. Taxpayer did not have ability to liquidate or remove GP.

Tax Court judge said there as a 25% chance LP could find another LP to join him and liquidate. 9th Circuit said that was contrary to evidence and hypothetical buyer would have to get GP approval, etc. Viewed it as clear error to assign the 25% probability.

5. This is analogous to Simplot case.iii. Elkins Case.

1. Elkins 2. When James Elkin died he owned fractional interests in

64 works of art comprising a $35M art collection. The value of the art was agreed to.

3. Issue was discount.4. IRS position was no discount should be permitted.5. Testimony of art appraiser testified no market for partial

interests in art. Estate argued for 70-80% discounts. Tax Court limited discount to 10% (better than 5% in Stone case). Tax Court reasoned that potential buyer would be able to convince other owners to buy the minority interest.

6. Tax Court agreed that there should be some discount and that IRS was wrong. Tax Court agreed with estate’s discounts.

7. Burden of proof is not always on the taxpayer. IRC 7491 provides that if the taxpayer can present credible evidence as to evidence the burden shifts to the IRS. In this case the Elkins estate produced three expert witnesses whose testimony supported the discounts. The

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IRS testimony was week. The Court felt that if the IRS position was correct that there was no market that would support discounts taxpayers wanted.

8. The cotenant agreement used may not provide a great benefit if used in future planning/cases. IRC Sec. 2703.

i. Alternate Valuation Date.i. PLR 201431017. AVD must be elected within one year window

(i.e., within one year of the return due date) to obtain Sec. 9100 relief.

ii. PLR 201441001. AVD could not be elected as the return was filed more than one year after the deadline.

j. Same Sex Marriages.i. Florida August 21, 2014 become the 35th state to recognize

same-sex marriages. Court held the ban against it was unconstitutional. Stay expired in January 2015.

ii. DeBoer v. Snyder 6th Circuit has overturned decisions in four states that allowed same-sex marriages. 6th Circuit says that it is determined by the states.

k. Premarital Agreement.i. PLR 201410011 spouse’s right to elect under a revocable trust

did not disqualify it for the marital deduction.ii. The Code gives preferential treatment to certain payments made

pursuant to divorce. If a premarital agreement requires alimony treatment for future post-divorce payments that may not be the result if only a premarital agreement requires this. Consider including a provision in the premarital agreement requiring parties to incorporate the provisions into a marital settlement agreement or divorce decree.

l. FATCA.i. Applies to foreign trust unless an exemption applies.

ii. Beginning in 2014 payments of dividends, etc. withholding will apply to gross proceeds. This withholding is independent of other withholding provisions under the Code.

iii. A foreign entity must comply with requirements that different depending on the entity’s status.

m. 2701 Gift.i. Donor/mother funded an LLC and gave gifts to two children.

Operating agreement provided for distributions of all profits to the children.

ii. CCA 201442053.

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iii. Happens only if senior family member has received an applicable retained interest. This includes a distribution right or an extraordinary payment right.

n. DINGs and NINGs.i. Delaware [Nevada] Incomplete Gift Trust (DING [NING]).

ii. Grantor retains a limited power of appointment so there is no completed gift into the trust so no gift tax exemption is used. If the estate is under the exemption then all assets in trust will be treated as in estate and obtain a basis step up.

iii. Do NINGs and DINGS work as a state income tax plan? PLRs 201410001-201410010 say yes in form and substance the trusts work from the IRS purposes.

iv. New York no longer permits this technique for a New York resident. NY will treat the trust as a grantor trust for NY income tax purposes even though it will continue to be treated as a non-grantor trust for federal purposes. Does not apply to trusts established and funded before client became a NY resident.

v. These rulings illustrate the trend of the increased importance of state income tax planning in the overall planning process.

o. Disclaimer.i. Taxpayer disclaimed within 9 months of attaining the age of

majority. PLR 201403005.p. QTIP Division/Disclaimer.

i. PLR 201426016.ii. Surviving spouse was beneficiary of single QTIP. Plan outlined

in ruling is QTIP to be divided into three trusts. Trust 1 same terms, Trust 2 unitrust of 3-5% in lieu of income payment and, Trust 3 same terms but it would be ended after division and distributed.

iii. Division was required because IRC Sec. 2519 provide if any portion of QTIP transferred during lifetime it is treated as a gift of entire interest.

iv. Must do a severance. See what state law provides for.q. Estate of Sanders v. Commr TC memo 2014-100.

i. Adequate disclosure case.ii. Decedent filed Forms 709 reporting gifts of closely held stock.

In 2012 IRS challenged valuations on Forms 709. IRS claim value was almost double the amounts on Forms 709.

iii. Taxpayer claimed gifts were disclosed and more than 3 years had passed. IRS said that returns did not meet adequate

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disclosure rules. The business involved had interests in a related entity none of which was disclosed.

iv. Tax Court said that since there was a material issue as to whether there was adequate disclosure so no summary judgment.

v. Detailed description, all financial data, etc. is all required.vi. There are two types of adequate disclosure. A gift that is

potentially within Chapter 14 has additional disclosure requirements.

r. Estate of Donald Woelbing and Marion Woelbing Estate.i. Note sale to grantor trust being challenged by IRS.

ii. Profitable company sells lip balm. Founder’s son sold $60M interest for a note to a grantor trust. Trust has assets in excess of 10% of the value of the note. There was also a guarantee. Parents elected to split gifts.

iii. Donald died in 2009 and the note was still outstanding and the gift tax audit was still outstanding.

iv. IRS held that the value of the shares transferred was $116M not $60M. Claimed it was not a sale but a transfer to a trust with a retained interest and that it did not qualify for a retained interest so it was deemed a transfer of the entire interest. The value definition clause should be disregarded. IRS asserted valuation penalties. The shares were also include in gross estate since if caught by 2702 should be caught by 2036. If IRS prevails on 2036 it will be a double tax.

v. Counsel for the estate indicated that the Chapter 14 issue is not likely to be an issue.

vi. What can be done with similar transactions? 1. You should inform clients that IRS may attack such

transactions. 2. You could use GRATs instead of note sales until the

issue is resolved but many commentators do not believe that is necessary and the loss of GST benefits by using GRATs rather than note sale to dynastic trusts, is significant. While GRATs are safer sales to a grantor trust can be more effective.

3. You could use a note sale but structure the payments to conform to GRAT annuity payments.

s. Perpetuities and GST Planning.

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i. Three recent articles have taken different sides on this issue. The first, was a law review article by Sitkoff and Horowitz highlighted an issue concerning state perpetuity laws. Blattmachr then wrote an article addressing this and noting that Alaska should not be subject to the issue. Steve Oshins wrote an article providing a rebuttal and defending Nevada law.

ii. A NY Times article picked up on Sitkoff’s article as the professor making the case that perpetual trusts are not constitutional.

1. Comment : Estate Planning Newsletter 2263, Jonathan Blattmachr, Mitchell Gans and Bill Lipkind provided their views of the NY Times article and claimed that the article’s position may be correct. Steve Oshins, Esq., in “The Rebuttal to Unconstitutional Perpetual Trusts” LISI Estate Planning Newsletter 2265 (December 22, 2014).

iii. 28 states and Wash. DC have abolished by statute the rule against perpetuities that states that a trust cannot last forever. In these states you can have perpetual trust or one that lasts for many centuries e.g. 360 in Nevada or a 1,000 years in other states. This is a clear growing trend.

iv. States with restrictions.v. 9 states have constitutional provision against perpetuities:

1. Montana, Oklahoma, Texas and Arkansas restrictions.2. Arizona, Nevada, North Carolina, Tennessee and

Wyoming. They have constitutional provisions prohibiting perpetuities but statutes permitting them. Are these viable or do they violate their state’s constitutions.

vi. In a state with a constitutional provision against perpetuities, but not statute for it, e.g. Texas, would it honor a Delaware trust? Under conflict of laws it may be that the Texas court could choose not to respect the perpetual aspect of that trust in Delaware.

vii. What do you do now?1. You can draft a savings clause to address this.2. “Sit tight” with existing trusts.3. Don’t form new trusts in those states, like Nevada,

Arizona, North Carolina, Tennessee and Wyoming, until the issue is resolved. Use instead Alaska and South

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Dakota. Alternatively, you can discuss the possibility of the risk involved with a client considering such a trust.

4. State courts will almost assuredly protect their laws and trust companies

a. Comment : The “feel” of comments seems to be that speakers seemed to believe that this matter will resolve favorably.

viii. Issue what if a beneficiary of a Nevada trust goes bankrupt. Will a federal court address this and hold the trust invalid so that the interest can be reached?

t. Summary of the above discussion provided by Steve Oshins, Esq.i. 28 states & DC have abolished RAP. You can have a perpetual

or near perpetual trust in those jurisdictions (e.g., Florida, 360 years). There has been a growing trend that states have been lining up to attract capital. In meantime, you have 9 states that constitutionally have in some form or another prohibited perpetuities. In 4 of those 9 states, MT, OK, TX, AK, they have a RAP. Article focuses on the other 5. AZ NV NC TN WY. Those 5 states have constitutional provisions saying no perpetuities, but statutes saying that it is permissible to form long term trusts.

ii. The constitution references "perpetuities" so applies to RAP, definition of perpetuities at time the constitution went in, discussed entails that is different than RAP which says interest in property can't vest for life plus 21 years that is a vesting prohibition, not an entail prohibition. Does perpetuities mean RAP and entail?

iii. Second issue, go to states that have a constitutional prohibition against perpetuities but not RAP, would TX recognize DE perpetual trust that was set up by Texan in DE? TX probably would not recognize that trust say authors. When law review article that questions constitutionality of state statutes in NV and other jurisdictions that promote perpetuity, creates conflict.

iv. Is this unconstitutional? Some commentators are saying this. v. A spendthrift trust in the Caribbean is recognized. Another

speaker disagreed with the commentators stating that this was that against public policy.

vi. NV and another state that are of most interest. Estate planning attorneys in NV have rushed to defend the NV statute. Steve Oshins who had a hand in drafting the statute published a

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rebuttal in Leimberg Services (LISI) on December 22, 2014 makes an argument that the meaning of perpetuities is undefined. Vesting is not prohibited. Up to courts or legislature to define what perpetuities means, and NV says it is 365 years by legislative action. A court could conclude that it only applies to real estate.

vii. In fact, NC has a constitutional provision much like NV, and has decided it much like this. Sitkoff disagrees.

viii. Second, could decide that prohibition against perpetuities could say just that. If 90 years is perfectly okay (life plus 21), then why not 360?

ix. If Cromwell wanted to establish a trust that is still valid today, why not? Several NV estate planning attorneys are looking to NV legislature to resolve this in favor of statute. Don't panic, let's see what they can accomplish.

x. If you are planning to use NV, include savings clause from Jonathan's Blattmachr’s article. Sitkoff's article is well reasoned and has merit, and I would not set up a trust in these five states until the issue is resolved.

xi. NV and WY have been attractive because of favorable law dealing with private trust companies. Some states require capital/employees. NV/WY are very favorable. Not often that RAP and law review article gets in NY Times. Donaldson. Those who have NV/WY trust, do you need to anything? No. Those who are considering NV/WY trust, would you do it? One of two things will happen. Voters will shut down constitutional change for this. Alternatively, state courts pushed to change this, will they do it? Probably yes assuming judge understands it. Or, alternatively, do nothing. Since when does an academic who writes an article mean anything? Be careful, because beneficiary of long term trust under NV law goes bankrupt, and bankruptcy court goes after it, can they get it? Donaldson. Courts might need to look at this quickly. Bring up to client potential risk which is minimal compared to positives, and let client know it as an item to consider but not a big item, we all agree.

1. Comment : a. If a trust is moved to a jurisdiction that does not

face such an issue will that still saddle the trust

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with a shorter perpetuities period based on the failed statute in the former jurisdiction?

b. Blattmachr in the article referred to above suggests a savings clause: “…if the trust has a perpetuities limitation (or savings) provision, it appears there is no adverse result except that the trust may not last for as long as the settlor initially hoped. If a long term duration would not be valid, then under the savings provision a traditional trust duration period (e.g., the standard lives in being plus 21 years term) should apply…”

u. Portability.i. Extension of time to file for portability. Rev. Proc. 2014-18.

PLR 201406004, 201410013, etc. Leniency was afforded for portability but do not expect that again in the future.

ii. If late, try for IRC Sec. 9100 relief if reasonable cause.iii. Portability election is easy and inexpensive and should be used.

v. McNeely v. US 2014 WL 2617418 case.i. Note on extension request expect to make an IRC Sec. 6166

election to defer estate tax.ii. $1M tax and 800,000 of that deferred. If you pay more than the

non-deferred portion you do not get a refund. The over payment is applied against the deferred portion.

iii. Instead, pay the tax that will be non-deferred and request an extension. The IRS is lenient in granting extensions to pay and file if done on a timely basis.

3. 3.8% Surtax.a. Passive loss rules had not had great impact on trusts until recently

since clients generally did not generate net losses inside a trust.b. Now we are concerned about passive income in a trust because of the

3.8% surcharge as this includes passive activity gross income. This is an activity in which the taxpayer does not materially participate.

c. This test is easy to understand on an individual level, but how can a trust materially participate. 1.469-5T(g) entitled “Material participation of trusts and estates” – “Reserved.” Since 1980 no guidance has been provided.

d. The IRS has taken a consistent position that a trust is only a material participant if trustee participates.

e. IRS says time spent as an officer, director or employee will not count as that person is not taking those actions wearing a fiduciary hat. That

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position is incorrect and inconsistent with the concepts as applied to say an S corporation employee/shareholder. A fiduciary cannot remove that “fiduciary hat” and act in a non-fiduciary capacity as an employee.

f. Frank Aragona Trust v. Commr., 142 TC No. 9 Case.i. Trust was sole owner of LLC a disregarded entity that operated

real estate so effectively the trust was conducting the real estate activity.

ii. The trust had six trustees. Three trustees were full time employees of the LLC owned by the trust.

iii. The trust took the position that since 3 trustees materially participated in the business that the trust was a material participant. IRS said you cannot count those hours done in employee capacity.

iv. Tax Court said IRS is wrong and activities of trustees who are employees and who materially participate in business interest owned by trust that is a materially participating activity and the Surtax should not apply.

v. Courts will have to give deference to Regulations when issued.vi. Issue that concerns IRS is ability to use trusts as a tax shelter.

vii. It may be several years before we see guidance in this area.g. Reg. Sec. 1.67-4 TD 9664 Regarding IRC Sec. 67(e) Regulations.

i. Regulations issued in response to Knight decision.ii. Expenses are protected if not have been incurred if the property

were not held in the trust or estate.iii. 67(e) was not read literally but was meant to exclude expense

for properties typically held by individuals, like investment advisory fees.

iv. Conclusion from Knight case is that investment fees are subject to the 2% floor under 67(e), but not all expenses are included.

v. If a flat fee is charged for bundled services, how do we allocate bundled fee as between good and bad expenses? The general rule is that an allocation must be made between 67(e) expense and all other expenses. First type of fee is a flat fee charged for other than number of hours working on the matter. An executor’s fee is based on a percentage and not hourly basis must be allocated as between investment and other.

vi. Any reasonable method may be used. You might consider what an investment adviser were charged if it were not a trustee.

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vii. Not only financial institutions, but attorneys and CPAs as well, must address these as well. Legal and accounting fees should generally be deductible on Form 706, but on a Form 1041 (where you will claim since estate may not pay an estate tax) transmission and estate expenses should not be subject to 2% floor. Work cleaning up LLC and other matters would be subject to 2% floor.

viii. Bigger issue is in trust administration. If lawyer sits in an investment review meeting, or reviews an agency agreement, that is clearly subject to 2% floor. You might consider flat fee billing then as long as it is not investment advise it should be all deductible.

ix. Not all Sec. 67(e) expense are subject to 2% haircut. The greater the 67(e) expenses that can reduce gross income by avoiding the limitation, make more likely to benefit from a deduction. Also, impacts trusts AMT.

x. Final regulations apply for all years beginning after May 9, 2014.

xi. Investment advisory fees incurred for an investment objective unique to a trust may be protected. Fiduciary costs, such as probate and accountings, are not commonly incurred by individuals.

xii. Regulations don’t address how ordinary estate transmission expenses should be treated for IRC Sec. 67(e) purposes. How do you handle costs of deeds and assignment documents? What about sales expenses if a sale is made to pay taxes that would not have to be paid if we were not dealing with an estate? There may be future guidance to address this.

h. SEC vs. Wyly.i. This was not a tax case but rather an SEC Disgorgement case.

ii. In 1990s two brothers created an Isle of Mann trust and intended the trusts to be non-grantor trusts. They took this position and did not report income on US tax returns. Advisers recommended not to make required SEC disclosures. They didn’t.

iii. The SEC eventually considered these provisions and won a civil enforcement action against the brothers.

iv. The problem the SEC faced was that there were no investment profits so how could they punish the brothers? The court decided if the brothers had filed as required with the SEC and

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the tax savings would not have occurred had they reported properly. So the amount of tax savings was determined to be the amount of profits to be reached as a result of the SEC violation, and the amount to be disgorged.

v. If similar facts came before the court in a tax case, as to whether a trust is a grantor trust or whether trust property should be included in the grantor’s estate, it could be problematic.

vi. The basis for concluding that the trust was a grantor trust was based on the degree of control the grantors exercised over the trust decisions even though they had no legal right to do so. The trustees were required to take direction from trust protectors (the brother’s attorney and 2 employees). The court viewed these protectors as agents and that there was defacto control and therefore it was a grantor trust under IRC Sec. 674. All investment decisions were made by the brothers. This rationale might yield the same result under IRC Sec. 2036 as to control.

vii. In past we did not have to worry about the grantor’s power in this type of instance based on the Byrum case. But the Wyly case casts doubt on this.

viii. Should be sure that clients are careful in how they make decisions.

ix. Sam Wyly has filed for bankruptcy. The broker followed brother’s directions directly instead of going through the trustee. More formality should be respected.

x. $200M debt to SEC how will they get the assets out of Isle of Mann?

i. Conservation Easements.i. Scheidelman v. Comr, 755 F.3d 148 and other cases.

ii. Must tie up/restrict use of property to qualify for income tax deduction.

iii. In 2006 this technique became more popular. Could deduct up to 30% of AGI and only a 5 year carryover. This made it difficult to get benefit. Pension Protection Act gave 15 year carryover and 50% of AGI limit and for farmers and ranchers the limit was increased to 100% in AGI.

iv. The IRS examines conservation easement deductions carefully. You have to be able to substantiate the numbers. If you ignore the formalities, or do not have adequate valuations, it will be a problem.

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v. Marco Zarlengo case must record deed for it to be effective. Since deed was not recorded the deduction in that year was disallowed.

vi. Seventeen Seventy Sherman St., LLC in Colorado. In exchange for a conservation easement on the Mosque the city of Denver gave them a zoning variance. This was not a charitable donation but rather a quid-pro-quo and no deduction could be allowed to the extent value was received in exchange for this.

vii. Mountanos case. Donated 882 acres of raw land that was used for recreational deer hunting. Conservation easement donated in perpetuity that can only be used for deer hunting. The taxpayer claimed for purposes of their valuation analysis that the highest and best use would be a winery. But there was no road access or water on the property. IRS pointed out that it was not feasible to grow wine so that could not set the value. A second expert provided that the property could be subdivided but CA state law prevents that scope of development so that appraisal was also not respected. The lesson is that highest and best use must be a reasonable best use.

j. Promissory Note to Private Foundation.i. PLR 201446024.

ii. Note has to be issued in transaction after death.iii. Put note in LLC and interests in the LLC were given to the

private foundation.iv. This avoided the promissory note issue.

k. Clark v. Rameker, 134 S. Ct 2242.i. Non-spouse holder of inherited IRA are not exempt from claims

of a bankruptcy trustee.ii. Ordinary meaning of retirement funds.

4. Trust Design .a. Assets in trust.

i. Merely drafting a trust is insufficient. Trusts are not generic. The document will control the assets for decades or centuries.

ii. Important that the trust be given significant thought. What are the rules of the road going forward?

b. Appointment of Trustee.i. These are the most important provisions in the entire

documents.

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ii. Distributions are a vitally important consideration.iii. If an individual is named and dies and successor loses touch

with family what happens? Whoever you put on the list -- it will change. Frequently clients call years later to change named successor trustees.

iv. You need default provisions to address the above. Who you empower to appoint successor trustees is important. Grantor’s spouse can appoint perhaps successors, and thereafter name beneficiaries with a power to appoint successors. You might give the power to those people to add to the list of who can appoint further successors.

v. Instead of viewing trustee appointments as only a fixed list, create mechanism to remove and replace and add new trustees. What about giving a named person power to restrict or create conditions upon a future trustee serving. Example: “No person shall be appointed trustee that does not have [name condition].” You can also provide for exclusions of who cannot be appointed as a trustee.

vi. You can create powers who can control which roles. You can have one person in charge of voting company stock and another in charge of distributions. States that have directed trust statutes permit this readily. Even in other states that don’t permit directed trusts the provisions of the trust should still control.

1. Comment: But without the authority of an underlying direction statute merely including direction language in the trust instrument will not absolve other trustees from liaility. A trust investment advisor/trustee provision might work contractually but what role/liability will the other fiduciaries have in a state without a direction statute? They will still have some degree of responsibility for monitoring the investment adviser.

vii. Consider requirements and qualifications which can be added.c. Removal Powers.

i. Removal provisions can be as tailored as the above comments concerning appointing trustees. Create a list of removal persons

ii. Rev. Rul. 95-53 grantor cannot remove and replace the trustee with a person who is not related or subordinate trustee. An employee is a subordinate.

d. Beneficiaries as co Trustees.

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i. If you limit the beneficiary’s right to distribute to a health education maintenance and support (HEMS) can have beneficiary as sole trustee.

ii. What if a best interest standard? Have a bifurcated standard so that the beneficiary can be a co-trustee. The beneficiary can distribute per HEMS and a discretionary standard can be given to the dis-interested co-trustee.

1. Comment : If the default is to draft trusts for generations or “forever” shouldn’t this broad approach/bifurcated standards be included as the default? Who will be beneficiaries and trustees in 100 years? Why exclude unknown future beneficiaries?

e. Administrative trustees.i. If the trust permits appointing trustees in limited roles you can

appoint an administrative trustee in the future.1. Commen t: Why not build in various trustee

roles/positions from inception as the default in all trusts unless there is a specific reason not to. It provides incredible flexibility if it is needed. If the flexibility is provided for from inception it may avoid the costs and problems of a future decanting. So perhaps draft to provide for an administrative trustee, an investment trustee, distribution trustee, and even if one fiduciary is appointed for all these roles initially the flexibly/structure will have been provided to address future changes.

ii. Individual trustees may not maintain records and handle all formal trustee functions. An administrative professional trustee, such as a bank or trust company, serving in this role will likely maintain the requisite records.

1. Comment : Individuals rarely maintain records or adhere to trust formalities. Having an institutional trustee will enhance the likelihood of the trust and entire plan succeeding and it also solves many of the trustee issues discussed above. Even for a moderate wealth client the cost of hiring an administrative trustee, especially in a trust friendly jurisdiction, seems quite modest compared to the state law benefits and the greater likelihood of formalities being observed.

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iii. Naming an administrative trustee, even a directed administrative trustee, can create sufficient nexus to apply a specific state law.

1. Comment : With the considerable advantages trust friendly jurisdictions can offer, this too should be the default approach. Following is a partial checklists of the advantages of Delaware as contrasted to more “traditional” jurisdiction like New Jersey:

a. Delaware has a directed trust statute, NJ does not. So in Delaware the trust document can name an adviser or committee to direct the trustee on investments. Delaware has had this for over 100 years. This can be critical to holding a closely held business or other unique asset in a trust and still securing a top tier trustee.

b. DAPTs or self-settled trusts which is a trust you set up and for which you are a beneficiary. Delaware has permitted DAPTs since 1997. About 1/3rd to ½ of new Delaware trusts are some type of asset protection trust.

c. Silent trusts are not sanctioned by statute in New Jersey (so if you’re a trustee in NJ have you been disclosing all to the beneficiaries?) In Delaware if the governing instrument says that trustee does not have to notify beneficiaries of interests in the trust the trustee can honor that. If the document is silent then Delaware trustees have to provide notice under the McNeil case which requires current beneficiaries to get notice.

d. Perpetual trusts are allowed in Delaware. NJ also allows perpetual trusts. Score one for the Garden State! But has your state jumped on the perpetuities bandwagon? NY hasn’t.

e. Pre-mortem validation of a trust is feasible in Delaware. NJ does not have a statute for this. In Delaware the trustee can send notice as to what the trust says to a beneficiary and then the beneficiary has 180 days to contest. If she does not do so that beneficiary is precluded from challenging it later. The more substantial the planning done in advance

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of the notice the better. So if the trust is not funded, e.g., trust only had $100, then after death $100M pours into it, the courts might not uphold it.

f. If you fund an irrevocable trust in Delaware during lifetime then your probate estate won’t pay the NJ estate tax.

g. Delaware offers more flexibility in drafting. Example, you can set up a trust that instructs a trustee not to diversify portfolio.

h. Delaware updates its trust laws more frequently.i. Income taxation of trusts is more favorable in

Delaware. If a NJ resident sets up irrevocable non-grantor Delaware trust (DING) it will avoid NJ capital gains tax. NY has restricted this technique.

j. NJ is one of only 3 states to tax charitable remainder trusts (CRTs) at the trust level. So if setting up a CRT set it up in Delaware not in NJ.

f. Investment Trustee.i. Third parties seem to understand the name “investment trustee”

better than “investment advisor.”ii. Managing investments is an administrative power but don’t

grant an investment power that will violate IRC Sec.2036(b) power to control closely held stock. Also exclude giving the grantor as an investment trustee the power to control insurance on grantor’s life. All other investments can be controlled by the grantor.

g. Trust protectors.i. Role to provide flexibility.

ii. Power to make administrative changes to facilitate administration of the trust without changing beneficial interests.

iii. Changes to address tax law changes.iv. Correct scrivener errors.v. Power to change the name of the trust.

1. Comment : Consider granting right to prohibit use of trust income to pay life insurance premiums should that be useful to turn off grantor trust status in the future.

h. Powers of appointment.i. Facilitate amending the trust in future.

ii. Can change distribution of assets among children.

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iii. Change terms of trusts for grandchildren.iv. Add charitable beneficiaries, example divert money via a power

of appointment from a bad child to a charity.v. This can be given to third parties.

1. Comment : The potential liability exposure of holding a power to change beneficiaries this creates for the power holder could be substantial. Many of these powers will not be accepted by an institution, only by an individual, some of whom perhaps do not appreciate the magnitude of the potential exposure. Many (perhaps most) trust protectors will be acting in a fiduciary capacity, e.g., a person holding the power to replace a trustee. Some of the powers, such as adding a beneficiary, should be given to a different person who perhaps holds no other powers and expressly does not have to act in a fiduciary capacity.

i. Powers of appointment.i. Build into the powers of appointment specifications as to how it

can be exercised, such as in trust or not, add powers of appointment, over after added property (property that pours into trust at a later future date).

ii. Is it revocable if it has not become effective?iii. Contingent general powers of appointment.

1. Consider:a. GST considerations.b. State estate tax.c. Basis step up.

2. You have to balance these sometimes competing tax objectives. You can get a basis step up if there is a taxable termination caused by the death of a beneficiary. So a trust for a child’s benefit and it passes to trusts for grandchildren, this is a taxable termination and the assets may get a basis step up.

3. Where the heir is domiciled will determine if there is a state estate tax as result of the general power of appointment.

a. Comment : The use of powers of appointments in various forms has grown, and will continue to increase, in an effort to secure basis step-up. This comment points out just one of the myriad of unexpected, and perhaps uncontrollable issues that

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may confound such planning. Where might mom live in five years? If an elderly parent is given a general power and falls ill, might she move from a non-tax state to a decoupled state with a harsh tax system to be near a child? How can the family members giving an elderly parent or other relative general powers be monitored? What if several siblings grant an elderly parent a general power? How many siblings actually would share personal financial and estate planning information to coordinate this?

4. A default may be to draft a general power and permit restrictions to be placed on it. But how can a trustee know when to take away a power? Perhaps only have this exercised by the trustee at the request of the beneficiary.

j. Divide trusts.i. “Share toys not money.”

ii. If there is a single trust for multiple beneficiaries different investment and lifestyle attitudes can be problematic. Let the children go separately in their own ways.

1. Comment : For families with very young children (and certainly when the wealth level is more moderate) having a single pot trust until perhaps the youngest child is 21, for example, can be useful. The trustee can assist from one pot to fund a home for the minor children, cover joint child care type expenses, etc.

iii. Include power to divide in the trust instrument. Give the trustee the power to terminate a trust early or distribute down to sub trust for children early.

k. Discretionary distributions.i. What constitutes “support?” What is “maintenance”? There has

been much litigation and there is a wide middle ground between any parameters. How large of a yacht fits within the definition of “support”? A 50’ yacht? 100’ yacht?

ii. Should the standard consider beneficiary resources?1. Comment : While it can be challenging to get

beneficiaries to divulge financial information necessary for evaluating distributions, but now this information will also be critical for income tax planning for sprinkle trusts to determine which beneficiaries are in which tax bracket

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in order to minimize overall trust/family income taxes, including avoiding the 3.8% Surtax. So regardless of what the trust instrument requires concerning consideration of beneficiary resources for distribution standards, surveying beneficiary tax status (income level, state of residence, etc.) will be a more common component of annual trust maintenance.

iii. Must it be equal as to various beneficiaries?iv. What about dental, dental insurance?v. For education what about books, supplies, etc.

vi. If don’t provide detail you might find arguments between fiduciaries and beneficiaries about what is, or is not, included in definition.

l. Advancement.i. Example two children are beneficiaries and are 30 and 10. Trust

ends and divides when youngest attains age 25.ii. If a distribution can count as an advancement it may provide

flexibility to help the older child.iii. Don’t make advancement mandatory but rather discretionary.

Permit the trustee to count distributions as an advancement.m. Withdrawal rights.

i. Crummey powers.ii. Define in the document when a withdrawal right gets trigged.

iii. Deemed additions to the trust may be problematic. Example grantor pays insurance premium directly, a sale for less than full consideration, etc.

iv. Include power to increase or decrease right of withdrawal. For example, a child is exercising the right to withdraw so remove them.

n. Incentive provisions and guidance.i. If you write a simple rule you can create a myriad of complex

exceptions. So if you require work what about as child who does volunteer work? What if incapacitated?

ii. Consider instead giving guidance. For example, if you use a HEMS and/or sole discretion standard, provide guidance. “To extent you can make this happen….” “When making distributions consider encouraging handling money intelligently, pursuing gainful employment,”

1. Comment : This type of information might be better handled das a side letter by the settlor to the trustee then

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by incorporating it into the document. With the trend towards very long term/perpetual trusts how relevant will any information incorporated into the governing instrument today be in 50, 100+ years?

o. Divorce Clauses.i. Take out not only ex-spouse but family fiduciaries of the ex-

spouse as well.1. Comment : Many trusts do not provide for this.

Matrimonial counsel need to involve trust counsel in the planning process. Many simply do not do this early enough or to a sufficient degree. The issues discussed elsewhere concerning grantor trust status for a trust post-divorce have proven rather shocking in a number of divorce cases.

ii. Similarly, if a child/heir divorces provide for the removal of their spouse and anyone related to that spouse.

iii. IRC 673(e) grantor is deemed holding power of person who was spouse when trust created. Removing ex-spouse on divorce, i.e., through a divorce clause, ends grantor trust status. If not then the trust will continue to be a grantor trust with your ex-spouse as beneficiary.

1. Comment : if the grantor or spouse retains a reversionary interest in trust income or principal that is valued at more than 5% they are treated as owner, grantor, of that portion of the trust. See Keebler fundamental’s lecture handout/lecture.

p. Children definitions.i. H gifts assets to W who sets up trust. H and W divorce. H’s

money goes to future children of now ex-spouse depending on definitions used.

ii. Adopted children. State law may cover but consider making it express. If client moves which law applies?

iii. Out of wedlock child? Should it be treated differently for male and female descendant?

q. Portability.i. Should you direct trustee of revocable trust to make the

election?ii. Should you direct them to pay for it?

r. Conduit trust provisions.

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i. Should you build this into every trust to permit naming trust as beneficiary of retirement plans and retain stretch?

s. Change of situs and governing law.i. Can give this to trustee.

1. Comment : If you name an institutional trustee, especially in a trust friendly jurisdiction, perhaps the power to change situs should be given to a trust protector independent of the institutional trustee to provide flexibility to the protector’s right to change trustees as well as situs.

ii. It cannot affect rule against perpetuities. You cannot lengthen term of trust by changing situs.

1. Comment : See the discussion above concerning the issues raised with the law in Nevada and certain other states. If the issue is not resolved favorably and trusts in those jurisdictions have to be moved to states whose laws do not have those issues, will this be an issue for those trusts? For example, without resolution would moving a trust from Nevada to Alaska subject that trust to a shorter rule against perpetuities?

iii. Lynn case in Illinois. Illinois said it will tax a trust if grantor was Illinois resident. In case a power of appointment was exercised and moved to Texas and no contacts with Illinois. If trust had continued to be governed by Illinois law result would have been different. Court held that Illinois could no longer tax the trust.

t. Include provisions to protect trust from inadvertently becoming a foreign trust.

i. US Persons have to make all “substantial decisions” as defined in Regulations under 7701.

ii. If non-US person can appoint a trustee that can make the trust a foreign trust.

u. Miscellaneous.i. Limitation on powers to acquire closely held businesses.

ii. Waive annual accounting requirement to save costs.iii. Limit trustee liability. If a friend is taking the job should you

protect them except for willful wrong doing or gross negligence?

1. Comment : Personally, I’d rather have a professional trustee do the job right than have Uncle Joe serve and get

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a lower standard of liability in case he does the job wrong. Clients often struggle with negative misconceptions about institutional trustees, but addressing those misconceptions might be a better service to the client then instead limiting liability for family trustees.

iv. Waive prudent person rule to a certain extent. There is still a remaining high standard.

1. Comment : A better approach might be to simply carve out an exception for a particular assets. See comments by several speakers elsewhere in this outline that in spite of clients being adamant that assets won’t be sold most often eventually are. Also, iven the long term nature of most trusts, diminishing the scope of the prudent investor standard could prove detrimental in the future.

v. Give trustee power to consider similar trusts as part of the overall portfolio. If can consider all trusts as a whole can invest better.

1. Comment : a. Asset location decisions may solve the

bypass/appreciation issue so giving a broader standard to consider not just trust assets but all family assets when making an investment allocation decision for the particular trust can be useful. For example, the bypass trust trustee may opt for an entirely bond portfolio (actively managed assets that are not likely to result in large unrealized appreciation, etc.) and leave appreciating assets classes in the surviving spouse’s estate to mitigate the loss of second basis step up. The Prudent Investor Act does permit consideration of tax consequences, but will that suffice?

b. A summary of the Prudent Investor Act provides: “The trustee has a list of factors which must be considered in making investment decisions, including "general economic conditions," "possible effect of inflation or deflation," "the expected total return from income and the appreciation of capital," and, "other resources of the

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beneficiaries." The trustee must take tax consequences of investment decisions into account. There is a positive obligation to diversify assets "unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.” http://www.uniformlaws.org/ActSummary.aspx?title=Prudent%20Investor%20Act. While a trustee might consider relying on the right to consider tax consequences, a more explicit authorization would certainly be preferable.

v. Incapacity and deemed resignation.i. If incapacitated deemed to resign.

1. Comment : This type of clause can often be too broadly drafted in that many such clauses ignore the temporary nature of an acute condition. An individual trustee may not be able to act for a month, perhaps more, but thereafter be perfectly capable of acting in a fiduciary capacity. Many chronic illnesses are typified by sporadic short term attacks or exacerbations. Removing a trustee that will be perfectly capable in a matter of weeks or months to continue serving is unlikely to be the intent of the client. Most provisions are simply too course to address this.

ii. What is incapacity? 1. Legal disability, such as a minor.2. Incarcerated.3. Whereabouts unknown for 90 days.

w. How trustees vote.i. If move to another state law may change.

ii. Single signatory clause. Unless otherwise agreed in writing any one trustee can sign documents on behalf of the trust. This does not mean unilateral action, it just permits one to sign on behalf of the trust, to simplify administration.

x. Transfer to other trusts.i. If there are similar trusts it facilitates management and

simplification.ii. Permit merger, transfer and built-in decanting to a substantially

similar trust.

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y. S corporation modification powers.i. QSST.

1. Comment : For purposes of planning for the 3.8% Surtax a QSST election will shift the touchstone for material participation from the trustee to the beneficiary.

ii. ESBT.1. Comment : ESBTs may be more useful in the past for

purposes of avoiding the 3.8% Surtax by naming an active trustee.

iii. Power to avoid undermining S corporation election.z. Conflict waiver clause.

i. Banks as trustees want to use some of their own services and products.

ii. This can address more. What if brother-in-law is trustee and a CPA the conflict waiver is necessary for him to do so.

aa. Disclaimer clauses.i. State what happens if a disclaimer occurs.

ii. One child disclaims and if the trust provides that it is for all children it may not be a qualified disclaimer.

1. Comment : See discussion elsewhere about the application of this concept when a beneficiary disclaims but the trust provides for the grantor’s heirs which includes the disclaimant.

bb.GST provisions.i. Power to divide.

ii. Permit trustee to pay from a trust with a lower/higher exclusion ratio as opposed to another rather than having to take equally from both trusts.

iii. Survivability. Use 90 day survival clause for predeceased parent exemption or use a 6 month clause.

cc. Right to information.i. If grantor creates trust for children can grantor still get

information about trust?ii. Include clause that anyone with power to appoint or remove

trustee, grantor and grantor’s spouse, should have power to receive reports.

1. Comment : The inclusion of a broader class of beneficiaries provides greater flexibility to pass income to lower bracket taxpayers. But it also puts all the people named in line to receive trust disclosures which may not

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be the client’s intent. The growing use of non-reciprocal SLATs (see Gideon Rothschild’s notes/comments in the asset protection presentation) has implications to this as well. SLATs can result in spouses transferring assets they view more as their retirement assets then then they view them as inheritances for their children. These clients might be incredibly uncomfortable having their children see trust statements. The issues as to what has to be disclosed under state law and the governing instrument is becoming more of a concern and will require more attention.

5. Portability and the Death of the Credit Shelter Trust .a. General.

1. Comment : Zeydel’s power points illustrating the analysis she completed with JP Morgan are quite incredible and reflect answers that in some instances might be the opposite of what a practitioner might have suspected. They are well worth obtaining and studying.

ii. Must consider various state laws and which state to site a trust in.

iii. Credit shelter trusts are not dead.iv. Portability has made planning much more complex.v. The exemption/DSUE is a descendable “asset” we can leave to

our surviving spouse if we wish.vi. Portability facilitates getting a basis step up and the use of the

shelter of the exemption of the first spouse to die. vii. But it is not really permanent.

viii. Portability doesn’t cover all taxes we have, such as GST and state estate taxes. Think of loss of GST if don’t capture first exemption.

ix. Portability is another step on the tax-continuum of treating spouses as a single economic unit, like gift splitting.

x. Portability is applicable when first spouse to die does not have adequate assets to use his/her exemption.

b. Filing.i. There will be a DSUE to leave to the surviving spouse if and

only if a return is filed.ii. Everyone wanted a Form 706EZ but it did not happen.

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iii. Can estimate assets to nearest $250,000 and if qualifies for marital/charitable don’t have to be as involved in appraisals.

iv. IRS needs return from you and detail to determine how much exemption you are porting.

v. Say something about filing the estate tax return and paying for in it prenuptial agreement and estate planning documents.

vi. What if you have a large estate and elect portability because all of estate goes to surviving spouse? What if everything goes to a QTIP trust (which is a planning technique with portability). Still must file to get portability.

vii. There is no box to check for portability. Must file a complete and proper return to elect portability. If you do not want portability you must explicitly elect out.

c. Portability.i. Was supposed to be simple but isn’t.

ii. Solution for IRD.iii. Physician with homestead and large IRA, portability lends itself

well for planning this type of estate.iv. If you create a bypass trust and the investment assets contained

in that trust do not perform well you lose exemption. So if you deploy your exemption “asset” on the wrong thing your clients will lose. But on average this should not be a concern with a balanced portfolio, but it could be.

1. Comment : a. This is an incredible point that seems to be left off

the table during many bypass trust discussions. The “Great Recession” certainly demonstrated this factor. For bypass trusts naming individual trustees in particular, which is certainly more common with lower wealth clients, what type of return on investments are they likely to realize? If they are not properly allocating investments, and panic when there is a turn of events, as so many individuals tend to do, this alone can make portability trump.

b. Perhaps if an individual trustee would be managing the investments portability should be relied upon rather than funding a bypass trust. Consider the following: “The average investor's 20 year annualized return is astounding simply

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because of how awful it was. According to an analysis by Dalbar, the average investor earned 2.1% over the twenty year period ended Dec. 31, 2011. How did this compare to other asset classes? To make it very simple, the S&P 500 returned 7.8%, while the Barclays Capital US Aggregate Bond Index returned 6.5% over the same time period. A 50/50 blend of these two asset classes would have yielded a nominal annualized return of 7.2%.” Michael Maye, “Average Investor 20 Year Return Astoundingly Awful,” http://www.thestreet.com/story/11621555/1/average-investor-20-year-return-astoundingly-awful.html, 07/18/12.

v. In a decoupled state the state shelter may be less than the federal shelter so you may use portability.

vi. Use a plan to form and fund grantor trust after first spouse’s death. If you inherit DSUE and transfer it to a grantor trust that is beneficial because it can compound. Rev. Rule 2004-64 paying the income tax on a grantor trust is not a gift and income tax rates are higher so the benefits of a grantor trust are an incredible wealth mover. The surviving spouse’s may lose benefit unless a DAPT is used. We have not had much favorable law, although many of the cases have been bad facts. This is concerning.

1. Comment : There was extensive discussion of this planning technique in the 2014 Heckerling session on planning for estates under $10 million. As to the DAPT, see the comments/materials from Gideon Rothschild’s Special Session on asset protection planning. It does not appear that DAPTs are dead, merely that care should be exercised.

d. Negatives of Portability.i. Loss of first spouse’s GST exemption. It is difficult to be

comfortable losing a tax benefit. Use QTIP trust with a reverse GST to capture this.

1. Comment : A real challenge is for a “moderate” wealth client to convince them of the prudence of this planning. Without the fear of the estate tax driving them, will they entertain the prudence of this? If the Form 706 used to

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secure portability is prepared by the lowest cost return preparer the client can find planning like this will assuredly be overlooked.

ii. If you don’t use QTIP are you protecting spouse from creditors and being taking advantage of.

iii. Potential loss of tax credits if just bequeath all to surviving spouse and don’t file return you could lose PTP.

iv. Risk of losing DSUE by remarriage. 2009 Census. What is the likelihood of being widowed twice? Men 70 and older 22.6% were widowed and 17.4% are currently widowed. Does this mean 78% remain single? Women 70+ 52% widowed and 48.3% currently widowed. 94% could remain single. 14 of 1,000 men 65+ remarried after being widowed.

v. Why are we so worried about stacking DSUEs when the wealthy client can do it by making an immediate gift? There is an inherent unfairness in that the wealthiest can afford to stack DSUEs but less wealthy cannot gift away the asset (or they have the cost and risks of a DAPT).

e. Options.i. Basis versus portability. Do we want to have to address all of

this now if client is not likely to die for 25 years? We want flexibility.

ii. Plan to delay decision using disclaimer planning but will the surviving spouse do it?

iii. Use a QTIP and disclaim back into a bypass trust. Start with a trust with greater benefits and disclaim into a trust with less benefits but get rid of power of appointment in bypass trust.

iv. Clayton QTIP. 1. A spouse’s qualified income interest for life continuing

and an executors election is a good QTIP. 2. D has will establishing trust and from the portion of the

trust executor elects to treat as QTIP and the portion the executor the executor does not elect to treat as QTIP passes to child. It is not a partial QTIP. The disposition shifts to another trust or beneficiary. That is OK and you have a QTIP as to the portion that you make the election for.

3. Caution, many commentators recommend that an independent fiduciary make this determination.

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v. The problem of using a QTIP and relying on portability is that the DSUE may be diverted. What if surviving spouse remarries and gifts splits with the surviving spouse? The DSUE may be lost and wont’ be available to shelter the QTIP that was intended for children of the first marriage. This is difficult to cover in a prenuptial agreement so it is difficult to do the ultimate protection.

vi. What about IRC Sec. 2519 as a possible solution to the loss of DSUE by the second spouse.

1. Gift income interest in QTIP and trigger 2519 but you don’t give up whole income interest away, just a slice to trigger 2519. This works to capture the DSUE.

2. You will have 2036 inclusion as you kept some income interest so it will all be included in the surviving spouse’s estate, but you will recapture the DSUE and will not have to worry about it be diverted elsewhere.

a. Comment : In last year’s Institute several presentations discussed using a IRC Sec. 2519 disclaimer of the entire income interest to trigger a gift of the entire QTIP thereby using the DSUE. Under that plan the surviving spouse would have lost her entire income interest but perhaps been willing to do so as she remained a discretionary principal beneficiary of the QTIP after the income disclaimer. This is an interesting spin on that planning idea that certain would resonate better with every surviving spouse as some of the income interest is retained. How much must be disclaimed to trigger 2519?

f. Supercharged Credit Shelter Trust.i. The key elements are in the Regulations.

ii. Goal – trying to have a credit shelter trust that is a grantor trust. Try to deploy tax benefits without the spouse losing access to assets. Get grantor trust status and get leverage.

iii. What are we doing with the strategy? We are creating inter-vivos QTIP.

iv. Navigate the reciprocal trust doctrine. Each QTIP is included in the client’s gross estate. These are not the reciprocal trusts like SLATs endeavoring to remove from the estate. Under IRC Sec. 2044 are included in the gross estate. This is not the same level

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of issue/risk as other trust plans. Do, however, make the trusts different.

v. At the end you will only have one credit shelter trust under one QTIP.

vi. The opportunity is that if H creates QTIP for W. Make a reverse QTIP election and currently allocate GST exemption. This will leak income interest but on a total return investment plan this is not that big a deal.

vii. When H dies the exemption is allocated to the QTIP trust and it comes back to W as a credit shelter trust. QTIP regulations provide that if you set up a QTIP for spouse there should be no issues under IRC Sec. 2036 or 2038.

viii. IRC Sec. 2041 is a potential issue – creditor rights. This may be viewed as a self-settled trust. Because it was included in my spouse’s gross estate. In Florida have specific legislation that provides if you have a QTIP for spouse and you become a beneficiary on spouse’s death it is not deemed a self-settled trust. So this planning must be done in a DAPT state or a state that has legislation similar to Florida’s. This can be argued to be estate planning not creditor avoidance. Arizona has a similar statute.

ix. What is the opportunity for this? Because the beneficiary/surviving spouse funded the trust it will be a grantor trust.

x. What is an issue with this strategy? The notion that this property was included in the spouse’s estate for estate tax purposes. Will this shift the grantor? The Regulations provide that unless there is a general power of appointment, and you exercise it, nothing has happened with the identity of the grantor. Gratuitous transfer. 1.671-2(e)(5) grantor of transferor trust is generally treated as grantor of transferee trust subject to the exercise of a general power of appointment. Do I have a GPOA over QTIP I created for my spouse? No.

g. Basis issue.i. What if you gift $5M zero basis asset using exemption? When

is this a good idea and bad idea?ii. If asset appreciates to $6M you have a $400,000 estate tax

savings but the income tax at 20% capital gain + 3.8% tax is more than $1M.

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iii. What if asset appreciates to $10M? Estate tax savings on $5M is $2M. Capital gain is $2,800,000 still more costly.

iv. If $5M appreciates 3 fold to $15M. Estate tax savings on $10M appreciation is $4M and capital gains is about $3.5M so you are finally ahead.

1. Comment : Eye popping the amount of appreciation that is necessary to make the transfer advantageous.

v. Using a low basis asset for lifetime planning may not be advantageous. If client does not have low basis asset it may be viable. Gifting a diversified portfolio.

vi. What if an event in the future will triple the value of the asset? Use grantor trust with substitution strategy even if you have to take on debt.

h. Look at wealth and spending levels.i. 3% spending level living 20 years a $10M couple has a 27%

chance of having an estate tax issue. But if spending 5% the likelihood of a tax is down to 3%.

1. Comment : Unless a client has had a professional adviser create a real financial plan few have a realistic measure of what they are spending as a percentage of their wealth. This is a great illustration of why estate planning cannot be done well without the active involvement of a wealth manager or financial planner.

ii. Pure portability, credit shelter trust, estate tax exclusion, grantor trust after first death, use exemption today, all can increase substantially the portion of assets that will be GST exempt by using lifetime planning.

6. Reducing Both Income and Estate Tax for the Wealthiest .2%. a. Grantor trusts.

i. Can you use estate and gift tax rate to subsidize income tax.ii. Flexibility to sell into a grantor trust Rev. Rul. 85-13 that a trust

is not capable of entering into a sales transaction if violate grantor trust rules.

iii. Confident that if a note is still receivable there are no income tax consequences even though sold a low basis asset.

iv. Flexibility (reverse grantor trust) is buying an asset back from that trust. To preserve estate planning perhaps you buy the asset

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back using a note with a higher interest rate. Asset is included in the estate for a basis step up.

1. Comment : While the default approach seems to be creating grantor trusts with swap powers for the above purpose too few clients seem to return to address the use of these powers and the post-implementation planning for them. Are the CPAs and wealth managers instead addressing the monitoring of swap powers or are clients just not heeding the advice they almost assuredly received when these trusts were done to monitor the appreciation in the trust for purposes of determining when to exercise a swap power?

v. There is no real authority for the situation when you buy an asset back from the trust using a note, what the trust tax basis is in the note. You will have step up in basis on asset included in the estate, but it is unclear if the trust itself has a capital gain transaction. It is not clear what the trust basis is in the note.

vi. How can you solve this problem?vii. Asset allocation. Some asset classes lend themselves to passive

equity investment which can be efficient. Some asset classes do not lend themselves to passive investments. Consider the effect of taxes on asset allocation.

viii. Equities, as compared to bonds. are taxed at a lower rate if sell when you can use long term capital gains rates. You can also choose with equity when you are taxed, i.e., you can control the turnover that triggers gains. Contrast this with bonds which have to report gain as income is received. You might choose not to be taxed at all by holding on until death or using highly appreciated asset to fund charitable gifts.

ix. Consider asset location versus allocation. With a 5% turnover need a rate of return of 12% to double money over 10 years considering taxes. In contrast hedge fund manager may need to earn 21+%. Hedge fund manager must outperform substantially if do no planning. But if put hedge fund in a grantor trust using estate and gift tax rate to subsidize the difference between the two is much less 7.06% in 5% turnover fund to double and hedge fund has to earn 7.94%.

x. Practitioners must get involved in the asset location decisions.1. Comment :

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a. In a much simpler context asset location can solve the portability/bypass trust/second basis step up issue in some cases, especially for moderate wealth clients funding a smaller bypass trust. Use asset location decisions to hold in the bypass trust the portion of the portfolio least likely to need a basis step up.

b. This also presents a potential trap for practitioners. Do most estate planners have the expertise to get involved to any depth with asset location (or allocation) decisions? While certainly at a mile high level practitioners can and should interact with the client’s wealth managers concerning these matters, how “deep” can we get? Perhaps heeding some of the comments made in Skip Fox’s presentation (you must read his materials) practitioners might consider excluding specific investment planning advise in their retainer agreements to avoid a misperception by clients as to what the scope of involvement is.

b. Low basis asset planning.i. Some asset client may never want to sell but kids will. If no one

will sell asset including heirs, then use a different strategy.1. Comment : One of the other speakers at this year’s

Institute suggested that so often when a client/parent is adamant that a particular asset will never be sold, the heirs cannot wait to sell it. He also suggested that it is rare for an asset really not be sold over the long term. Since holding period is so fundamental to planning decisions perhaps we should be encouraging clients to really discuss their conclusions on holding period with the intended heirs, and then document the final client decisions should the heirs later challenge the rationale of the planning decisions based on that assumption.

ii. Are there strategies to save exemption to preserve exemption for basis step-up?

1. Cascading sales to grantor trust.2. GRATs.3. Leveraged GRATs combines best of both worlds.4. Use of defined value clauses.

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a. Excess to charity.b. Excess to GRAT. Is this against public policy?

How can you not have a deemed contribution issue.

i. Comment : 1. A number of practitioners have and

continue to use this technique of having the excess value spill-over into a zeroed out GRAT. Another speaker at this year’s Institute commented on this in a manner suggested they too believed it a viable approach.

2. It appeared (see below), unless I misunderstood the comment, that Porter suggested otherwise, i.e.. that there should be no problem using a GRAT as a spill-over receptacle.

c. In lieu of a sale to a grantor trust, what about selling to a single member LLC that is a disregarded entity?

d. Have a client who owns both an LP interest, equity and cash, role it all up into a single member LLC.

e. Sells or loan other assets into the single member LLC with say 90% leverage. See IRC Sec. 385 about debt and equity. Borrow on the IRC 385 debt/equity concepts in forming and leveraging the single member LLC.

f. Take non-managing units after LLC is “old and cold” and transfer all non-managing units to a GRAT taking double discounts.

g. If it is inside a GRAT if there is a valuation disagreement the annuity amount paid by the GRAT back to the client/grantor is increased. No gift tax surprise.

h. Unlike a traditional GRAT this planning mechanism succeeds even without appreciation (i.e., without beating 7520 Rate) because of the significant discounts. Something undiscounted, cash, comes out to pay annuity amounts and there

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is no need for a re-valuation of the entity interests each year.

i. If you pay out an annuity payment with hard to value assets there is no protection on “coming out” of the GRAT.

i. Comment : Other speakers at this year’s Institute addressed this concept as well and suggested using a defined value mechanism to protect a GRAT’s payment of an annuity in-kind to the grantor.

j. Do you have a deemed contribution or commutation? Do you have to get it just right?

k. If the GRAT fails what is included in the client’s estate? [Annuity amount/7520 rate] is amount of GRAT principal included at death.

i. Comment : Carlyn McCaffrey gave a presentation at a prior Institute on the care and feeding of GRATs that has a very comprehensive discussion of the amount included in the estate. See: “The Care and Feeding of GRATs – Enhancing GRAT Performance Through Careful Structuring, Investing and Monitoring.” Although the focus generally tends to be on short term GRATs, for longer term GRATs that some use in the context of transferring family business interests, older GRATs that fail may face different rules. Also review the terms of the governing GRAT instrument to ascertain what is provided before endeavoring to determine tax consequences.

c. Consider the Client’s Parent.i. Most of very wealthy are self-made. Self-made people often

want to take care of a parent.1. Comment : The statistics corroborate the above

comment, and are surprisingly significant. 32% of those who have a parent age 65 and older have provided financial support to that parent. This data suggests many clients have an elderly relative (the statistic is only for

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parents) who they may support and thus who likely has a modest estate (or why else would they need support).If the client provides financial assistance to this elderly family member there is likely some level of trust to support this type of planning.

ii. Create a trust for parent, kids and grandchildren.iii. Make a gift to that trust and then sell low basis assets to this

trust. Give the parent a general power of appointment. If the parent has a very modest estate the inclusion in the parent’s estate for a step up in basis.

iv. If parent doesn’t exercise power of appointment pay off the note with now how basis asset. After parents death if the power wasn’t exercised the grantor trust status as to the child/settlor does not change. Now the child/settlor can depreciate the asset again.

v. 1014(e) should not apply since it was not a gift but a sale. If the client is not a beneficiary 1014)(e) should not apply at all.

1. Comment : a. President Obama is proposing an elimination of

the step up in basis at death (with exemptions and special rules for homes and tangible property). While it is unlikely that this will be enacted, that would completely revamp all planning, and eliminate many of the planning ideas discussed. He has also proposed raising capital gains tax rates which.

b. Other speakers addressed the use of a general power of appointment for basis step up purpose as well. Many practitioners are uncomfortable with the scope of a GPOA. As an alternative, grant the beneficiary a limited testamentary power of appointment over the trust assets (e.g., to the client’s children or only to the person’s creditors). Give a specified person the authority to convert the beneficiary’s limited power of appointment into a general power of appointment over the appreciated asset sub-trust. Another possible solution may be to make the parent/power-holder’s exercise of the power subject to the consent of a non-adverse person. The person holding the consent power

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cannot have a substantial interest adverse to the exercise of the power in favor of the decedent, his or her estate, his or her creditors or the creditors of his or her estate. Treas. Reg. Sec. 20.2041-3(c)(2). What if the trust is a silent trust in a jurisdiction permitting such trusts? Would that negate the power?

d. What if buy asset back for a note.i. If instead what if borrow the money and use cash to buy asset

back. Then grantor trust has high basis cash.ii. For client in their 50’s and 60’s they are worried about leverage

outstanding with a lender. Refinance it by going years later to trustee of the grantor trust and request a long term arrangement, perhaps not a secured note, etc. Trustee must determine fair terms to meet fiduciary duties. Loan back and pay back to third party lender. Still have a grantor trust so can service note with a low basis asset.

iii. What if before you borrow money from the grantor trust you convert the trust to a complex trust. Perhaps at that point in time the settlor is tired of the tax burn.

e. Post-mortem strategies.i. Get step up in basis but want to avoid estate tax.

ii. Use a testamentary charitable lead annuity trust (CLAT).1. Clients generally don’t like these because heirs have to

wait longer for money. 2. What if you have a 20 year balloon payment note,

interest only, higher than AFR so you can zero out the CLAT. This could be an advantageous approach to the note since never out of pocket principal since children are remainder beneficiaries of the CLAT. They are getting an estate tax charitable deduction for the interest.

3. The family may be better off after the charitable gifts than had nothing gone to charity at all.

f. Can you simulate a bypass trust?i. Step up in basis on first spouse’s death.

ii. Form an arrangement using a single member LLC.iii. Surviving spouse say lives 10 years.iv. Gifts non-managing units to something that looks like a credit

shelter trust. v. Then sell the remaining equity to the trust.

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vi. Avoid 2036 with Rev. Rul. 81-15 you have a contractual right or note coming back from the trust. This may give greater rights and creditor protections then the surviving spouse would have had as a beneficiary of the credit shelter trust.

vii. Power of grantor trust is critical. Math over any period 10 years or longer the grantor trust burn far exceeds benefits of an estate freeze or discount planning.

viii. Advantages of traditional credit shelter trust include GST exemption, surviving spouse creditor protection, etc.

g. Use instead Subchapter S planning which may provide advantages over a partnership.

i. Existing old trust with boilerplate to permit investing in a Subchapter S. This would be QSST language. If the older trust does not have these clauses it may be feasible to reform the trust to have this flexibility added.

ii. If a trust beneficiary makes a QSST election he or she is treated as a grantor trust just as if it were a grantor trust. IRC Sec. 1361(d)(1)(B) provides that for purposes of IRC Sec. 678(a) the beneficiary of a QSST will be treated as the owner of that portion of the trust which consists of stock in an S corporation for which the IRC Sec. 1361(d)(2) election is made.

iii. If sell into a grantor trust there is no capital gains consequences. It is unclear whether sell into the QSST you can you avoid capital gains consequences.

iv. What if form after death? Trustee of credit shelter trust forms QSST after death. No worry about IRC Sec. 2036 if sell non-voting stock. Rev. Rul. 81-15.

v. Simulating a credit shelter trust but you don’t have the problems with DSUE since the trust can be both a creditor protected trust, and a GST trust.

h. Saving income and Estate taxes using charitable planning techniques.i. Instead of individually creating CRUTs what if an entity was

used to implement a charitable planning strategy? Single member LLC creates 20 year CRUT. Income tax advantages, get discount for charitable interest.

ii. Instead of cash what if give a preferred partnership interest to charity and sell the growth interest to a family trust. 2701 doesn’t apply since nothing has been retained by the donor/transferor. If gift the preferred interest should get income

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tax deduction. Most of the value of the preferred is a present value analysis of the fixed income component.

iii. 704(b) not taxed on this.iv. What if put highly appreciated asset in and sell it? Under 704(c)

if highly appreciated asset owned by charity there should be no tax consequence. Under 704(c) gain should be allocated to the donee/charity.

v. If use preferred with highly appreciated assets get substantial benefit.

vi. What if IRS says aggregate theory not entity theory applies? This argument should not succeed.

vii. If put preferred into a CLAT may cure some of the issues.i. Complex trust creates two class LLC.

i. The trustee of a complex trust forms a single member LLC that is structured with both preferred and growth interests.

ii. The trustee distributes out preferred interest and retains the growth interests in the trust.

iii. Later get a step up in basis and make a 754 election. iv. Shift preferred interest to a companion trust that is a grantor

trust the client creates. Allocate income away from complex trust to a grantor trust.

j. Multi-owner exchange funds.i. Use partnership structure to defer income tax and achieve

economic goals.1. Exchange funds formed by many clients contributing low

basis marketable assets, and others contributing sufficient non-marketable assets to avoid triggering gain on formation. As a result all have created a diversified portfolio.

2. 7 year wait3. In early 1980s IRS lost many cases on this. IRS

petitioned Congress for rules. ii. Enhance the exchange fund strategy to maximize basis.

1. Perhaps you can use an income tax strategy before you pull out of the partnership. Assume structured with children as general partners.

2. Partnership borrows $595,000 and buys non-marketable real estate. More than 7 years old. Parent pulls out the real estate with 30% discount since it is a non-marketable interest. If parent had -0- basis in partnership

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(presumably as a result of initially contributing zero basis stock when the exchange fund was formed) the real property on distribution will also have a zero basis. When the parent later dies there is a basis step up in the real estate they hold.

3. Where did the basis go to? To the remaining assets in the partnership. $595,000 basis gets allocated to low basis stock. Kids sell stock and pay off debt. They are left with diversified portfolio that has some basis.

k. Marital planning to garner basis adjustments.i. JEST trusts.

ii. Elect community property.

7. Audit Issues on the IRS Radar .a. Hot issues.

i. Installment sales.ii. IRC 2036.

iii. Valuations.1. Comment : Valuations issues focus on discounts, etc. But

in the new tax paradigm for moderate wealth clients who will not be subject to the estate tax, valuing assets as high as possible, short of triggering an estate tax can lead to the opposite planning. Will Congress have to enact valuation overstatement penalties?

iv. Formula clauses.v. Promissory note valuation for gift and estate tax purposes.

vi. GRAT audits.b. Audit and appeals.

i. The time constraints that agents face from caseload, staff reduction, etc. seems to be resulting in many arguments being thrown into 30-day and 90-day letter that normally would not be made and leaving the arguments to be sorted out later.

ii. Exam is increasingly exercising right to have a conference with the appeals office. The taxpayer has the right to be present. This slows the process but has become more common.

iii. Changes at Appeals. They are not considering new issues. So if the matter was not raised in the 30-day letter, or the notice of deficiency, Appeals will not consider it. Similarly, if the taxpayer wants to present new evidence, such as a new

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appraisal, at Appeals your case will get shipped back to exam to review. Appeals will not perform investigative functions.

c. Instalment sales.i. Gift tax issues.

1. FMV of interest sold.a. Step transaction Pierre v. Commr. TC Memo

2010-106 issues.b. Made seed gift and sale on same day. Sold 9.5%

and gifted 40.5%. IRS argued transfers should be aggregated.

c. Taxpayer “won” since only modest reduction in discount.

d. What are the state law property rights transferred?e. If you use LLC or partnership interests put time

between the funding of the trust with the seed units and the later sale of additional units. 30 days is fine, next tax year is the best.

2. FMV of consideration received.a. Valuation of note.

i. Is it a balloon payment?ii. Look at Frazee case.

iii. What is the security for the note?b. 2702.

i. Woelbing case.ii. Estate tax issues.

1. 2036/2038 issues with respect to interests sold.2. IRS argues that decedent retained right to income from

partnership because distributions from the partnership were used to pay note payments. Have the paper trail from payments from the partnership/LLC not equal to the note payments with similar timing. Disjoint it. If you use distributions from the LLC make the distributions different inn terms of timing and amount from the note payments.

3. Pierre issue/adequate and full consideration.a. Is the sale of the LLC a bona fide sale for full and

adequate consideration?b. Pierre was a gift/sale which makes it appear

difficult to satisfy the adequate consideration issue.c. Consider making a seed gift with cash.

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4. Woelbing/Beyer cases.iii. IRC 2036 is the most litigated issue.

1. If IRS is successful all assets of the entity may be brought back into the estate.

2. Even if partnership interest transferred during lifetime (Harper, Korby).

3. 2036(a)(2) - Two part test.a. Adequate and full consideration

i. Interest proportion and value of contributed property credited to capita accounts.

b. Bona fide sale.i. Is there a significant and legitimate non-tax

reason for creating the entity? This is a smell test. Is there something other than tax attributes at work in the transaction.

ii. Centralized asset management (Stone).iii. Involvement of the next generation (Stone,

Mirowski).iv. Protection from creditors or failed marriages

(Kimbell, Black, Murphy)v. Preservation of investment philosophy

(Schutt, Murphy, Miller)vi. Avoid fractionalization of assets. Example,

putting the family ranch inside the entity. Mrs. Church did not want heirs to have right to partition.

vii. Avoiding imprudent expenditures by next generation family members. Partnerships and LLC can provide this.

4. 2036(a)(1) possession or enjoyment of the right to income from the property.

a. Non pro rat distributions (Harperb. Personal expenditures with partnership funds

(Strangi, Hurford Rector).c. Personal use asset in partnership (Strangi).d. Payment of estate tax and expenses when asset

transferred to partnership close to death (Miller, Strangi, Erikson).

e. Accurate books and records not kept (Harper).

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f. Insufficient assets outside of the partnership (Thomson, Miller, Strangi, Rector).

iv. Can the senior family member be a general partner of FLP or managing member of the LLC? “I believe so.”

1. In Strangi Turner and Cohen.2. Investment powers not subject to 2036(a).

a. Byrum case. i. Comments: See prior notes in the Recent

Developments concerning Wyly.3. 2036(a)(2) applied in Turner as he had sole right to make

distributions.4. Cohen 1982 Tax Court decision held 2036(a)(2) did not

apply to Mass. Business trust. Citing Byrum, if trust agreement gave discretion it would be a problem but if circumscribed by reasonable limits to exercise limits as to distribution decisions then Cohen court says 2036(a)(2) should not apply. So if the senior family member will be a GP of FLP, or manager of LLC, include a business judgment ascertainable standard. The entity can mandate that available cash should be distributed but entity can hold cash reserves determined by general partner though fiduciary obligation and their reasonable business judgment. If you don’t have unlimited or unreasonable discretion you should not have a 2036(a)(2) problem.

5. Having next generation family members involved helps.6. 2036(a)(2) refers to power alone or in conjunction with

another person. But if you satisfy the bona fide sale you don’t get to the (a)(2) analysis.

d. Preparation begins at the planning level, not when an audit notice is received.

i. IRS will issue broad request trying to get all information as to the creation of the entity from any attorney, accountant or firm involved in recommending the creation of the entity.

1. Comment : This so often seems to be a struggle with clients and a gap in many plans. Great attention is paid to the governing trust instrument and appraisal but the entity documents governing the entity interests transferred are too often not given enough attention. It certainly seems from the above comment that these formalities are on the IRS radar screen. Sometimes

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transactions are completed with the least entity documentation possible. Perhaps that is not the optimal approach in light of the above comment. Some of the issues/steps that might be worth considering might include:

a. Creating governing entity documents before and after a transfer (e.g., a signed operating agreement before the entity interests are gifted or sold, and again after with the new trust owner signing as a member).

b. Obtaining copies of underling documents for the entity, such as a deed for a real estate LLC to confirm it is held in the name of the entity.

c. Corroborating the compensation arrangement for family members (e.g.., to deflect a later challenge that under compensation constituted an impermissible transfer by the founder/GRAT settlor to the GRAT).

d. Obtaining certificates of good standing for entities whose interests are transferred to identify and correct issues.

e. Enhancing nexus to a trust friendly jurisdiction by taking steps in addition to just naming an institutional trustee in that jurisdiction.

f. Using arm’s length documents and security arrangements.

g. Having annual minutes or even meetings.ii. IRS asks for copies of emails.

iii. The attorney client privilege may or may not apply. What has the client done with a privileged communication after having received it from the attorney? Think if your potential audience.

iv. There is increased summons activity at the audit level.v. Best evidence is contemporaneous documents that address non-

tax aspects of the entity.vi. Lawyer can testify as to non-tax attributes of the entity.

e. What are discount ranges?i. “All over the board.”

f. Defined value mechanisms.i. “Service has not thrown in the towel on these issues.”

ii. Is the transaction reported consistently with the formula?

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1. Comment : The comments concerning consistent with the defined value mechanism have generally focused on gift tax reporting, but is more advisable even if not perhaps necessary? If LLC interests are sold to a trust subject to a defined value mechanism should anything be indicated on the Form K-1? Might the K-1 report the percentage interest with an asterisk and an indication that the percentage reported is subject to a defined value mechanism? Should the potential receptacle under the defined value mechanism (e.g., a GRAT or QTIP) indicate on its income tax filings that it has a possibility of an interest in an entity under that mechanism? What about on an QSST or ESBT election? Should there be an indication of the potential for shares being held by another entity?

iii. Petter/Wandry formula1. As finally determined for estate and gift tax purposes.2. Petter is similar to McCord but formula is based on final

determination for gift and estate tax. There was an initial allocation among the parties but the final allocation depended on audit results.

3. IRS argued that this was an impermissible Proctor approach, but Mrs. Petter got nothing as a result of the change in value. It was a reallocation between the trust and charity and public policy supports gifts to charity.

4. Wandry used a formula clause with no charity. a. Gift of $1M of LLC interests divided among

children and grandchildren based on values as family determined. They “got back” units since number of units was less if the value increased. IRS argued this was a reversion just like Proctor. Court said no that the taxpayer transferred the number of units equal to $1M. It did not provide for a reversion. The language in the Wandry case carried the day.

b. Tax Court Memo - Court said no import that no charity was involved.

c. IRS has non-acquiesced. So the question is what position will the IRS take down the road.

d. “I think the Wandry clause is just fine.”

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i. Comment : Under a Procter approach the IRS gets no benefit from an audit. Is there any advantage to using a mechanism that will trigger some current tax on audit? For example, under the other mechanism used have the first $X or Y% of interests remain with the donee/buying trust knowingly triggering some gift and GST tax and then having the remainder other interests resulting from the valuation increase on audit spill-over into a private foundation, GRAT, QTIP, etc.

iv. Defined value clauses.1. McCord. Donees had to agree amongst themselves how

to allocate.2. Clause did not allocate units on a percentage basis.

Looked to agreement between the donees.3. 5th Circuit said look to assignment agreement and if

charities made a bad deal with sons, so what. Subsequent determination by Tax Court was not relevant.

4. Hendrix.v. Consideration adjustment clause.

1. King.2. This is good law.

vi. Reversion clause.1. Commr. v. Procter 142 F.2d 824.2. Key is that if the clause is triggered it provides property

transferred gets returned to the transferor.3. Don’t use these.

vii. GRAT as a receptacle for the extra value.1. IRS has argued it is a reversion like Procter.2. “I see no policy reason…” why this should not work.

a. Comment : It appeared (see above), unless I misunderstood the comment, that Eastland might have suggested otherwise.

3. 2702 Regulations support position.4. Should have different trustee on the trust and the GRAT.

viii. Lifetime QTIP.1. This can be used as a receptacle for the excess value.

ix. Report properly.

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1. Report consistently with formula.2. Reflect formula in gift tax return schedule.

a. Comment : See comments above inquiring whether more might be advantageous?

3. Units initially allocate based on formula and appraisal.4. Attach formula transfer documents and appraisal.5. Satisfy adequate disclosure rules start limitations

running.6. Knight v. Commr. Issue on reporting.

g. Challenges of Promissory Notes.i. IRS has challenged value of the note as being less than face.

There is a presumption IRC Sec. 7872 interest rate is a safe harbor.

ii. Some agents are looking at this differently.iii. Reasonable expectation for repayment.iv. 9 Factors examined, including:

1. Note. 2. Interest.3. Repayment schedule.4. Security.5. Demand for payment.6. Records.7. Repayment.8. Solvency.

v. The key factor is whether there was a reasonable expectation of repayment when loan was made.

vi. Refinancing of loans as interest rates declined. Many AFR notes have been refinanced. IRS has argued that the refinancing of a note at a lower rate is a gift. There is an entire industry doing this it is not confined to estate planning so there should be on reason that this does not work.

1. Comment : a. Some commentators suggest shortening the term of

the renegotiated note or providing another modification that could constitute consideration for the change.

b. Consider the fiduciary obligations of the trustee in all these matters, especially if the note prohibited prepayment.

h. GRATs.

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i. Are all provisions required by the Regulations included in the trust agreement?

ii. Are the formalities of the GRAT being complied with? Is the GRAT being operated in accordance with its terms? Atkinson analysis based on CRT. Have annuity payments been properly and timely made.

iii. Valuation on initial transfer. Re-valuation provision may help.iv. Was there a disguised gift compared to what grantor received

on a substitution?v. Were in-kind distributions made? Were they properly valued?

vi. Consider using a Wandry formula with respect to exercise of power of substitution and paying an annuity in kind.

a. Comment : This point was mentioned by 3+ speakers at this year’s Institute. Perhaps this is a result of increasing audits of GRAT annuity payments and/or a desire to shift appreciated assets back into a client/settlor’s estate for basis step up purposes. In contrast in the past it may have been more desirable to use cash in the GRAT to make the annuity payment. At any rate, it seems that the use of valuation formulas in GRAT payments in-kind might become the new way to go.

i. Transferee liability.i. US v. Marshall case. 5th Circuit.

ii. Split in circuits on whether donee liability for gift tax is limited to value of gift receive (3rd and 8th Circuits), or include unlimited liability for interest (5th and 11th circuits).

iii. This is important concerning filing adequate disclosure for note sale transactions.

iv. Donee statute of limitations expires 1 year after donor’s statute of limitations.

8. SCINs and Private Annuities .a. General.

1. Comment : The notes below are in opposite order of the handout materials presented.

ii. Sell an asset for a note, the note would be included in the estate. In contrast, a SCIN cancels by it terms at death so nothing should be left included in the estate.

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iii. Estate of Moss v. Commr. 74 TC 1239 was seminal case acknowledging that the self-cancelling feature was a bargained for feature.

iv. How do you value SCIN?v. When the note is cancelled is there recognition of relief of

indebtedness income? Frane case said yes. There was a strong dissent in Frane but if the note sale using the SCIN is consummated with a grantor trust there is no immediate income recognition, and there may not even be income recognition at death.

b. CCA 20130033i. The 7520 table does not apply (average life mortality tables).

These only apply to value an annuity, remainder, etc. For notes we use instead a willing buyer and willing seller standard and look at the decedent’s actual medical history.

ii. If look at decedent’s actual medical history they may have longer life expectancies then government tables suggest.

c. Davidson v. Commr. Case.i. General.

1. Founder of Guardian Industries. Sold 100M of stock for SCINs.

2. At time he was 86 and IRS Tables said 5.8 year life expectancy. SCINs structured with 5 year balloon payment. If he died before year 5 all notes would be cancelled. A large premium, 88% principal premium, others built in interest premium of 13.4%.

3. He was diagnosed shortly after the sale with terminal illness and died in 2 months.

4. Notice of deficiency was over $2.9B.5. Key issue was a health issue.6. IRS medical expert, gleaned from Tax Court petition,

thought there was a 2.5 year life expectancy. 7. 4 medical experts testified. All thought there was greater

than a 50% chance of living more than one year. This satisfies the test.

ii. IRS argued that the debts were not bona fide debt.1. See Rosen v. Commr. TC Memo 2006-115.2. More assets were put as collateral to support the note.

iii. 2nd Issue IRS Argued 7520 does not apply to valuing installment notes.

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1. IRC 7520 should apply to valuing installment note. Publication 1457 has an example of valuing a temporary annuity for 10 years or the prior death of a person age 65. That is a self-cancelling installment note.

2. Dallas v. Commr. Involved a SCIN. It appears that the 7520 tables were used in valuing the SCIN.

iv. Conclusion.1. Tough. We know IRS position but no court case says

they are wrong and if this case settles, which is what seems to be anticipated, there still won’t be a reported case confirming the IRS is incorrect.

2. Use private annuities since we know we can use the mortality tables for those transactions.

d. Sale of Assets for a Private Annuity.i. Note that 2006 Regulations have still not been finalized.

ii. Variations.1. Sale of assets for annuity paid $X for life, etc.2. Can use deferred annuity where payments do not start for

X years.3. Could have a graduated annuity with the payments

increase X% each year.4. You can have a payment for a stated term combined with

an annuity called Private Annuity with Stated Term - “PAST”.

5. Cap (see below).iii. Who uses.

1. Someone not in great health.2. If in great health you could get more in your estate than

what you sold.iv. Why clients might wish to do a private annuity.

1. What if you run out of money on a note sale? With a private annuity the payments continue no matter how long you live. You can use a private annuity since they cannot run out of money. This may give the worried client comfort.

2. Use a private annuity as a bet to die to hedge another bet to live planning strategy.

v. Advantages.1. No gift tax if value of annuity equals value of what was

transferred.

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2. Nothing included in gross estate.3. Cash flow for life.4. Transaction can be done with an existing trust that has

had GST exemption allocated to it.5. For a client with a short life expectancy the tax results

can be dramatic.vi. Disadvantages.

1. What if individual outlives life expectancy?a. This is a reason to use a private annuity for a stated

term, a term of years, or until death so there is a cap.

2. Income tax issues. Old rule pre – 2006 recognize gain over annuity term. 2006 Proposed regulations require immediate recognition so now can only complete a private annuity to a grantor trust to avoid under Rev Rul 85-13 immediate recognition.

a. Old lawi. Recognized gain over individual’s life

expectancy. Using 72 mortality tables. ii. These old tables had longer life expectancies

than current tables because they were based on actual purchases of commercial annuities.

iii. After received payments for life expectancy excess payments are ordinary income tax treatment. This is not a favorable treatment.

b. After October 2006 new proposed regulations.i. All gain to be recognized immediately.

ii. Strategy of selling assets to a grantor trust for a private annuity and trust would then sell the assets but no gain recognition.

c. Buyer tax consequences.i. Income tax impact to buyer is not great.

ii. Buyer gets no interest deduction. The rationale is that all the payments made is that the payments go into buyer’s basis (cannot get interest deduction and basis). This results in phantom income.

iii. If assets is sold after annuitant/seller’s death thereafter the trust sells the asset. The basis when the asset is sold is the total of all

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payments made. It no longer has relevance what the fair value is.

d. Proposed regulations and Buyer.i. Since all income is recognized up front

buyer should have basis.3. No interest deduction on deferred element so family gets

disjointed result, but this is not a problem when the sale is to a grantor trust.

4. Section 2036 risk.a. If sale is to an individual with adequate assets no

issue.b. If sale is to a grantor trust with limited other assets

IRS could argue that the annuity payment was a right to retained enjoyment in the assets “sold” to the trust.

i. Comment : 1. This is a challenge of using private

annuities in light of the proposed 2006 Regulations. Can you fund a trust sufficiently to avoid the 2036 issue? Perhaps an older (e.g. 2012) grantor trust that has grown in value might work.

2. Guarantees which would not have been used in older sales to an individual (e..g, child) may not be feasible to shore up the economics of the buyer/trust to minimize the above retained enjoyment risk. But see Trombetta case below.

5. Annuity may be impractical for older individuals. As client ages the private annuity amount becomes impractically large.

6. Emotional impact to client.a. Both the client and family have to surmount the

fact that the strategy has a better tax effect if the senior family member does not live long.

b. Might be able to offset this by using other strategies that rely on longer life so that the private annuity is more of a hedge.

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vii. 4 Key hurdles.1. Valuation issue.

a. Mortality tables.b. IRS will update tables every 10 years. Treas. Reg.

Sec. 20.2031-7(d)(7).c. Data is still 10-20 years old.d. Estate of Kite v. Commr. case.

i. Life expectancy of 12.5 years.ii. No payments under terms for 10 years.

iii. She should not be able to use tables if would not live 10 years.

iv. Court said children thought she would live to life expectancy and quoted the regulations. Greater than 50% probability of living at least one year which the court found in this case, so that the annuity was fairly valued.

2. Terminal illness test to use government tables.a. Tables have to be used unless client is terminally

ill. This is a person who is known to have a terminal illness or other deteriorating physical condition.

b. A client with bad health habits does not fit that definition so the tables can be used.

c. If there is at least a 50% probability that the individual will die within the year you cannot use the tables.

d. A safe harbor is provided if the client survives at least 18 months.

i. Comment : Involve a physician from the inception of planning so that the medical letters that are typically obtained are sufficient and properly address the issues for the particular client.

3. 2036 Issue.a. Woelbing case.b. If little more in the trust than the property sold it

looks like a 2036 problem.

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c. If no ability to make payments, formalities not complied with, etc. transaction will not be respected.

d. If there are substantial assets in the trust you may meet many of the tests and avoid these issues.

e. Trombetta case and the Herford case. The court concluded that 2036 applied where a sale was made to a grantor trust in return for a private annuity. Both cases involved bad facts.

f. Guarantees were given. The taxpayer argued that guarantees should be relevant. Court did not give effect to the guarantees.

g. 2043 consideration offset apply to a 2036 argument? Have to subtract out consideration received. Is this determined at time of initial transfer or at time of death? A number of general 2043 cases in the context of life estates. A 2043 offset may mitigate much of a 2036 argument.

4. Exhaustion issue.a. IRC Sec. 7520. b. If annuity is paid from limited fund cannot use

standard tables to value unless there are enough assets that will satisfy the annuity if the individual lived to age 110. This is an important limitation. Commentators argue that this test is unreasonable.

c. Because of the income tax effects you will use a grantor trust to avoid immediate up front income recognition. So the trust may violate the exhaustion test.

d. Idea is that if you live long term you win on the bet so you need a lot of assets.

e. To satisfy the exhaustion test how much as to be in the trust to address it. It takes a substantial amount in the trust before the transaction can pass the exhaustion test.

f. If you fail the exhaustion test you calculate the gift. Gift can be significant.

g. Regulations may not be valid. The assumption of age 110 is not realistic. Can you ignore the

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exhaustion test? IRS logic is that there should be sufficient assets in trust to pay for stated term.

h. Use a sufficiently prefunded trust which might be a previously created grantor trust. Use guarantees to shore up trust. See Trombetta above.

i. Use a private annuity with a stated term that will change the calculation of the exhaustion test.

j. Use a term longer than life expectancy. See GCM. If longer than tables annuity tables have to be used.

k. IRC Sec. 1275 OID rules. There is an exception for annuities. Do we have to worry about this?

e. Deferred SCIN.i. Kite case.

ii. “Juices” the transaction.f. Sale of assets from QTIP.

i. 2519 issue.ii. If the QTIP directly sold assets in exchange for a private

annuity. This may present a planning possibility.g. Which is better instalment sale or private annuity.

i. Contingency on installment note payment. 1980 act changed this and defined instalment sale quite broadly.

ii. GCM 39503 addressed some of this.1. In particular dealt with a note with life based

contingencies. It concluded if payments based solely on individual’s life Sec. 72 apply.

2. If expect to get all payments over life time of individual installment sale rules apply.

3. If note is so long payments to be received after death and will tax under annuity rules.

4. 7520 enacted post-GCM.5. 1274-1275 enacted addressing income tax treatment of

debt.6. Not clear if GCM is still valid.

iii. Should we value it as a standard note or as an annuity?

9. Curing Estate Plans that Don’t Make Sense Post-ATRA .a. What do you do with Pre-ATRA plans that don’t make sense?

i. Rates and exemptions all unified at 40%.ii. GST, gift and estate same exemption.

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b. New planning paradigm.i. Laws are not stagnant and may change again.

ii. Obama administration has proposed reducing exemption and raise rates.

1. Comment : See comment above concerning the latest proposal on restricting/eliminating step-up in basis.

iii. Republicans might push for repeal.c. What do you do with old bypass trust?

i. When set up it was needed to avoid estate tax.ii. Now it is not needed.

1. Comment : If there is a broad class of beneficiaries it might be useful to shift income to lower bracket family members even if there is no estate tax benefit.

iii. Planning done years ago may no longer be appropriate.d. How to avoid or eliminate discounts.

i. Want to reduce discounts so basis step up is greater.ii. Redeem LLC or FLP interests to avoid entity discounts, but that

could expose assets to creditor claims. Liquidate the entity and have the family own the underlying assets so get full step up. There should be little or no income tax cost on the liquidation.

iii. If discounts not needed, have parent purchase GP interest from the kids or the trusts. This might eliminate discounts.

iv. Convert limited partnership to a general partnership in which each partner has power to liquidate. There should be no income tax.

v. Amend entity documents to eliminate discount features.a. Comment: This may also emasculate any asset

protection benefits the entity had afforded.vi. Merge fractional interests.

a. Timberland.b. Coins.

vii. Have co-owners enter into co-ownership agreement that doesn’t justify discounts such as a right to force sale of entire interest.

e. How to get assets in trust into a taxpayer’s hands to get a basis step up.

i. Pull into settlor’s estate.a. Irrevocable trusts with low basis assets that would

be more beneficial to be included in Settlor’s estate for basis step up.

b. Exercise swap power.

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i. Get appraisal.ii. Consider a defined value mechanism.

iii. Try to use cash if you can.iv. If no cash borrow from third party lender.v. If trust doesn’t have a swap power consider

trustee and settlor entering a purchase and sale agreement and if it is a grantor trust the transaction will be income tax free.

vi. If the trust is not a grantor trust perhaps it can be converted by decanting, judicial reformation, etc.

c. Look at 2036.i. Structure planning to trigger 2036.

ii. If client transfers property for less than full and adequate consideration or retains interests the property will be pulled back into the client’s estate.

iii. If sold asset did not want cash flow from entity to mirror payment on the note.

iv. A client’s cavalier dealing with assets could bring asset back into estate to qualify for a step up.

ii. Causing assets to be included in beneficiary’s estate.a. All irrevocable trusts are candidates for this

planning.b. Bypass trust can be brought into surviving

spouse’s estate.i. What do you do about funding a bypass trust

that is not needed?ii. Many states authorize family settlement

agreement.iii. What are consequences if distribute assets to

surviving spouse and not to bypass. If distribute all to spouse it may be a gift by the kids.

iv. How do you value that gift? Especially if mother has testamentary power of appointment?

v. Can you distribute part to children?

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vi. What does this do to portability? Because the assets did not pass to surviving spouse from first deceased spouse you may lose/waste part of the DSUE.

vii. You will lose part of GST exemption.viii. Failing to fund the bypass trust could be a

breach of fiduciary duty of the trustee.c. What about a GRAT or QPRT?

i. Comment: Having the settlor lease the use of the house for $1/year for life would seemingly violate 2036, cause estate inclusion and support a basis step up on death. This would certainly violate the trustee’s fiduciary duties.

d. Review existing trust agreement. What are distribution provisions? Can appreciated property be made to beneficiary? If discretionary that might suffice to distribute. Bear in mind trustee has fiduciary duty to all beneficiaries.

e. If IRS views distributions as exceeding standards in trust they will argue the asset should be back into the trust.

f. Change the trustee. If you can appoint beneficiary as trustee that might cause estate inclusion but many states have a savings clause that prevent this.

i. Comment: For a trust in a self-settled jurisdiction, moving the trust back to the settlor’s home state might suffice to subject a DAPT to estate inclusion.

g. Exercise of a non-general power of appointment to trip the Delaware tax trap.

iii. Causing asset to be included in a third party’s estate through a power of appointment.

a. Trust created f/b/o child and child exercises power to appoint in favor of elderly grandmother. On her death the property can pass to a GST trust for the child/beneficiary.

b. You garner a step up in basis but watch 1014(e) if done within one year no basis step up. But this is a transfer by power of appointment not by gift as

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required under 1014(e) so it arguably works in any event.

iv. Change ownership of spousal assets.a. If one client has a shortened life expectancy they

may get a step up on appreciated assets and a step down on depreciated assets.

b. Goal is to get appreciated assets into short life expectancy spouse.

c. In a common law jurisdiction spouses swapping assets should be income tax free under IRC Sec. 1041.

d. Which spouse will die first?e. Community property laws provide double step up

on death. If H and W own property at death all community assets get a step up in basis. Create an Alaska or Tennessee community property trust to take advantage of the community property laws in those states.

f. Life insurance and ILITs.i. What are income tax consequences of the various options?

ii. Consider fiduciary issues if held in trust.iii. Selling in secondary market may generate more.iv. Turn off grantor trust status.

1. Comment : See the notes below “Insurance as an Asset Class.”

10.Addressing Family Business Rivalries .a. General.

i. Cain and Able – the historic case of sibling rivalry.ii. The statistics on the transition of family business are appalling:

30% family businesses pass to second generation and only 12% to third generation.

iii. Sometimes family does not wish to transition the business.iv. Estate tax is rarely the reason.v. Lack of planning and not addressing family and other issues is

the cause.b. What causes rivalries?

i. Ones not working in business often want business sold so they do not have to depend on sibling/cousins for money.

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ii. Disparate income/wealth status for various family members creates conflict between those looking to plow profits into the business and others need cash flow.

iii. Distant relatives may not be employed in the business and have less concern for business continuity.

iv. In-laws.v. Non-active family members.

c. Other issues.i. Reluctance of founder not willing to give up control.

ii. Incentivize of key non-family members to keep the involved when children are able to take over.

iii. Divorce.iv. Cannot force business to pay a dividend so include provision in

shareholders’ agreement, partnership or operating agreement to assure some distributions based on tax payment.

1. Problems post-death could be significant.2. Could make provision only apply after death but should

be from inception.d. Business in trust f/b/o three children.

i. Surviving parent gets upset with a child and swaps out the business interest that had been transferred to the trust.

1. Comment: The abuse of the swap power to create family animosity has rarely been spoken about. This is potentially a major risk of a technique that has become ubiquitous in planning.

ii. What is value of promissory note mother swapped to trust for business? How does this affect fiduciary duties of trustee?

iii. What is value of business that was taken out?e. Partnership formed.

i. Son who was trustee created LP for tax reasons.ii. Son who was not trustee sued that LP was created to restrict

him.f. LLC Structure.

i. Consider having all family members be members of LLC that is GP and mandate that they elect an independent manager.

ii. Could agree to distribute on in-kind basis all assets or have them sold.

g. Mission statement.i. Draft one.

ii. If family cannot agree on core values business will not pass on.

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h. Policies with respect to business.i. Distribution to equity interests.

ii. Transferability of interests.iii. Employment of family members. Many require employment

outside the family business before coming into the family business.

iv. Compensation of family employees. Should it be based on what they would earn in unrelated enterprises? But don’t want to create unnecessary tension.

v. Develop policies while founder is still alive so he/she can use persuasion to get the rest of the family on board.

vi. Retirement of family members. This is especially problematic concerning the founding family member. If retirement does not occur capable family members and other non-related key employees may not stay. It may keep advancement down if there is no reasonable retirement policy.

vii. Redemption of equity interest. Generally, clients might think this is inappropriate. However, if there is a disgruntled family member there should be a put right. It might be at a discount from FMV and it may mandate payment terms over time.

viii. Sharing investments? Some family members in the business might be privy to a great business or investment opportunity should he or she have to share that opportunity?

1. Comment : Including a strong provision concerning business opportunity, broad enough to include even investment opportunities might provide a measure of protection against this. However, see discussions elsewhere in this Institute concerning Boss Trucking. It may be that having no restrictions is important to the treatment of shareholder versus corporate goodwill.

ix. Should the family members at same level share estate planning with each other?

11.Uniform Fiduciary Access to Digital Assets Act .a. Importance of Digital Assets.

i. 1 billion pounds was transacted electronically in UK each day.ii. 15,000 mobile banking applications each day in the UK.

iii. Only google has provided policies for this.

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iv. Only 9 states have enacted laws granting fiduciaries access assets. Only Delaware addresses all 4 types of fiduciaries.

v. Federal acts only Graham Leach mentions fiduciaries.vi. Federal privacy laws prohibit disclosure without lawful

consent. Uniform act tries to address that.vii. Digital assets have significant value. Domain names can be

quite valuable. “insurance.com” sold for $36M.viii. Bitcoin is an electronic currency.

b. Uniform process.i. 125 year old non-profit association that has provided non-

partisan proposals on various subjects. Each state appoints an attorney. People can sign up to be observers.

ii. Sections of ABA appoint advisers who are obligated to come to meetings.

iii. Observers include industry representatives from the likes of Microsoft, Google, Netchoice, etc.

iv. Work finished this summer.c. What are problems?

i. Most state probate codes have no provisions, no default rules and are of no help to fiduciaries facing these issues.

ii. Difficult to define.iii. Easy to violate federal, state or contractual provisions

unknowingly.iv. Password and encryption issues. If encrypted uniform act won’t

help.v. ULA = end user license agreements. It is the agreement that

governs the on line account or the privacy policy.vi. 4th Amendment to Constitution provides strong expectation of

privacy in home. No warrants shall issue but for probable cause, etc. The government cannot search our home without probable cause. When using a computer that is networked we have the same expectation of privacy but the network is not located in our home. The access then is not protected by the 4th amendment.

d. Stored Communication Act 1986; Access; Consent.i. Content of communication cannot be disclosed to government

or private individuals, such as fiduciaries, prohibited except under special circumstances. Non-law enforcement requests, if only to specific people, like an employer service, then not subject to privacy protections of the Stored Communications

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Act and cannot use the Act as a shield. That does not mean your request will be granted. It may be harder or impossible for a fiduciary to gain access to a private account.

ii. Can give lawful consent to contents of email. Doesn’t provide in act for fiduciaries so it is not clear from text from statute that a fiduciary can ask provider for access to account. Some evidence in Senate report by reference to “authorized agent” but providers don’t agree. The only way to get internet service providers assurance that a fiduciary can access it is by pointing to an underlying state law or obtaining a court order that the fiduciary has the account holders “lawful consent.”

iii. Perhaps the reference lines in an email or sender information may be helpful, e.g. to identify which financial institutions the account holder transacts business with. This is not as helpful as you think. Providers don’t think you need content or attachments.

iv. Social media accounts that are not accessible to public are not covered. Anyone can view a twitter account that is not protected.

v. Each state and Congress have enacted computer and data laws, e.g., anti-hacking laws. Criminalizes unauthorized access to a computer system.

e. Terms of Service Agreements.i. Even with account holder authorization you may be breaking

the law. You are almost always accessing an internet provider’s system.

ii. Terms of service agreements prohibit third party access. So when a fiduciary accesses account it is exceeding the scope of what is permitted.

iii. Terms of service agreements are easy to violate. The reality is few people reads these agreements. Almost every social network has a clause in the TOS agreement that lets them use your pictures for their marketing.

f. Personal representative authority.i. Availability by default unless prohibited by the client in a will,

by a court or in a TOS agreement recognized by the act.g. Sec. 6 agents under power of attorney.

i. Controversial.ii. Unless POA prohibits it the agent has access to digital assets

and records of electronic communications.

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iii. If the POA has to expressly grant access to content for this to be reached. This tracks lawful consent requirement. This means all old powers of attorney should be updated.

h. Trustee authority.i. If you are the initial account holder the act confirms your

authority over the assets.ii. This doesn’t mean trustee can access every digital asset. If

assets are added subsequently the bifurcated approach applies. iii. No provisions as to how you transfer digital assets into a trust.

Not clear how this should be done.iv. Underlying trust law will address allocation of responsibility

among trustees. When drafting an agreement address whether certain trustees should, or should not, have access.

i. Subsection 8.a.i. Why is copyright mentioned as federal law trumps state law?

ii. Content providers are very concerned with piracy and privacy. They don’t want to have copyrighted content laundered. So still subject to copyright and other rules and regulations that would otherwise apply.

iii. Fiduciary can only act to extent of powers under state law. While this is obvious many internet service providers do not understand fiduciary concepts.

iv. Fiduciary has same authority as account holder except where the account holder has expressly opted out of fiduciary access in the terms of service agreement.

j. What if state opts for no access?i. Choice of law provision solely to bar fiduciary access they

cannot do this.ii. Must be a knowing waiver and choice by the account holder.

k. Privacy.i. Industry complains that the act ignores privacy rights of third

parties.

12.Tax and Administrative Procedure Rules for Estate Planners .a. Return related issues.

i. How to file returns? How to mail them?ii. How can you abate penalties?

iii. Statute of limitations.iv. When are returns due?

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v. What is reasonable cause?vi. All these details come up in the compliance following the

completion of a transaction.vii. Tax procedure – there are developments almost every day.

b. Return must supply sufficient information to the government to determine the tax.

i. Tax protector returns that have insufficient information it is not a return.

ii. It is generally a low standard.iii. An all zero return (not the protestor style) if accurate is a

sufficient return.c. Gift tax adequate disclosure.

i. These rules provide that the statute of limitations will only apply if taxpayer has made adequate disclosure of all facts and circumstances on a filed return.

ii. The 1997 Taxpayer Relief Act provided for this.iii. In 1999 final regulations were issued.iv. These rules are a safe harbor. They are not the exclusive way to

satisfy the statute.v. What is needed for adequate disclosure:

1. Description of property given.2. Identity.3. Trust tax ID and a description or a copy of the trust

instrument.4. Detailed description of the valuation method of the

property subject of the gift or a “qualified appraisal.”5. Qualified appraisal has to have the same date as the date

of the gift.6. Must indicate if taking a position contrary to any

regulation or proposed regulation. Note that proposed regulations have no weight.

7. You can make adequate disclosure of non-gifts. Regs say if you disclose fact about those transaction the statute will run. You must meet 4 of the 5 requirements. The one item you don’t need to include is a valuation or detailed description of the valuation method.

8. There are exceptions for ordinary business transactions such as a payment of salary in family business. See further discussion below.

9. Brown Case.

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a. Was there adequate disclosure? No summary judgment because it is a question of fact.

b. The substantive disclosure and the gift are both issues to address.

10.How did these rules affect pre-1997 gifts? The statute runs but the adequate disclosure rules do not apply.

vi. If you want the statute of limitations to run you can still fall back on 6501(c)(9) without meeting the adequate disclosure rules.

vii. Clue rule. Must inform government.d. Return must be signed.

i. Many individuals e-file. There is a protocol for this. Sign e-file authorization.

ii. There are many more cases addressing filing issues in the context of paper returns.

iii. If return not signed statute of limitations can’t run.iv. Who signs and files return for decedent’s estate?v. Different rules for income, estate and gift.

1. Income tax returns file for person charged with property.2. Gift tax returns provide that it is the executor.3. IRC 2203 - The executor must file. Executor or

administrator of decedent, but if none appointed the person in actual or constructive receipt of the property. Unclear whether person has to be in US. Concept of constructive or actual receipt of property is a statutory executor. All the surviving joint tenants, revocable trust, the beneficiaries under beneficiary designations.

4. With multiple executors you can have multiple returns.5. Estate tax return must be signed by executor not an agent.

vi. Income tax return. Agent can sign for taxpayer if taxpayer absent from use for more than 60 days or incapacitated. Spouse can sign for other if other spouse is incapacitated.

vii. Gift tax Reg. permits agents to file gift tax returns for taxpayer because of illness, injury or absence of the taxpayer. The taxpayer must ratify the agent’s signature of the return within a reasonable time.

e. Estate Amended Return.i. There is no duty to file an amended return.

ii. In estate and gift tax area the taxes are cumulative so the application of the above is problematic. If filing current year

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gift tax return and you discover prior return wrong you don’t have a duty to amend the prior return but you nonetheless have to include the correct figure for prior gifts.

iii. There is no provision to amend an estate tax return. You can file a supplemental return. Reg. Sec. 20.6081-1(c). The IRS does not have to accept that.

f. Gift tax returns and adequate disclosure.i. Can amended Rev. Proc. 2000-34 you can file amended gift tax

return to start statute of limitations if the originally filed return did not meet the adequate disclosure rules.

g. What is effective date of a return?i. What if file return before due date and amend before due date?

Amended return is deemed the real return.ii. Return amended after due date the original return is still the

return for 10 year period for assessment etc. h. Due dates.

i. Individual returns April 15.1. 4868 automatic extensions.2. Nonresident get two months extra to file Can get addition

extension to December if file letter request. No form.ii. Fiduciary 15th of 4th month.

1. Get 5 month (not six) month automatic extension using Form 7004.

2. 15th day of 6th month following end of trust tax year for foreign trust.

iii. Gift tax return may be due on estate tax return date.1. Income tax return automatically extends gift tax return

due date. No box to check.2. If don’t extend income tax return file Form 8892 to get

gift tax return extension.3. Use 8892V to pay additional tax.

iv. Foreign grantor trust return due March 15.v. FINCEN 114 FBAR due June 30. This is not a tax form.

vi. Estate tax return.1. If abroad get extra amount of time for reasonable cause.

i. Extension of time to pay tax.i. 6166.

ii. 6161. 1. Discretionary extension of time by IRS.

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2. This applies to pay gift tax as well as estate tax. This might come up if gift just before death and hard to come up with funds.

3. Must show “undue hardship”.j. Other due dates.

i. 90 day letter you have 90 days from mailing of letter to file Tax Court petition.

ii. Claims for refunds.1. Must be filed the later of 3 years from the filling of the

return or 2 years form the payment of the tax. IRC Sec. 6511.

2. When does 3 year rule start to run? What if file return early? It starts on April 15 the due date for the return if you filed early.

3. If the client obtained an extension and files after due date but before extended due date the actual filing date is the date the time period begins to toll.

k. Refunds.i. Informal claims.

ii. Formal claims.iii. Amending refunds.iv. Issue of payment versus deposit.

1. Taxpayers under examination may make a deposit of tax to stop running of interest.

2. If taxpayer makes remittance and doesn’t’ designate it as a “deposit” is deemed a payment and the two year period for refund claim starts to run.

3. If the client designates the remittance as a deposit there is no payment and the statute of limitations does not start to run.

l. Statute of limitations on assessments.i. 3 years from date return is filed IRS can assess additional

income, gift, estate or GST tax.ii. 6501(c)(8) if client has any foreign related items in their

income, e.g. foreign financial assets, beneficiary of foreign trust, etc. if did not file the proper information (e.g., Form 3520 to report distribution from foreign trust) the statute of limitations never runs on the return. This applies to everything on the tax return, not just the items related to the form not filed.

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iii. No statute of limitations on penalties for not filing Form 5471, etc.

iv. FBAR, FINCEN etc. are six year statute of limitations, not three years.

v. Statute of limitations can be extend to six years1. Income tax if understatement of gross income by 25%

statute goes to six years.2. Income from specified foreign financial asset as defined

in IRC 6038(d) and more than $5,000 automatically a six year statute. This applies regardless of whether client filed disclosure forms.

3. Estate tax context omission of assets exceeded 25% of the gross estate extends to six years.

4. Gift tax if you had omission of more than 25% statute extends for six years.

5. Statue of limitations can be extended by agreement with IRS Form 872. These are typically a fixed duration. In some instances taxpayer and IRS will Form 872A for an open ended period.

m. Filing deadlines and e-Filing.i. 1040X must be filed manually.

ii. Tax Court petitions must almost always be e-filed.1. Exception for pro-se petitioners.

n. When is a return deemed filed?i. Date of delivery to IRS.

ii. Mailbox rule. If certain conditions are met if mailed before due date and delivered afterwards, will be deemed filed on date mailed.

1. Post mark on or before due date.2. IRS received returns.3. Taxpayer deposited return in US Mail, properly

addressed and proper postage paid.4. You can use private deliver services and there are

regulations that govern this. Only certain services listed by IRS can be used to take advantage of the mailbox rule.

5. Special rules govern what type of deliver service and what a Fed X “Postmark” means.

6. How does taxpayer prove put return in mail proper postage?

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a. Only way to prove this is through registered mail or certified mail or a qualified private delivery service.

b. Before these regulations were issued there was a split in Circuits on this.

c. If you paper file a return only use registered, certified or delivery service.

7. Cases on private postage meters, e.g., in a private office. The US postal services doesn’t mark a private metered item. If you can set date on private postage meter there is no control as you can change meter date. So rules were developed to address this. If there is both a meter and postal service mark the postal service mark governs. A postal meter mark will only be accepted if the IRS receives the return in the normal delivery date. If received outside of the normal delivery date taxpayer can prove that they mailed on time and the delay was due to the postal service.

o. Penalties.i. Substantial authority.

ii. Substantial estate and gift tax valuation understatement penalties.

p. Informational forms.i. If fail to file 3520 5471 etc. there is an automatic tax penalty of

40% ii. See above concerning extension of statute.

13.Crafting a 21 st Century Gift and Estate Tax .a. The current tax system is unreasonably complex, inefficient and does

not accomplish societal goals.b. Concentration of wealth is destructive to society.c. Proposal for new different approach to tax system.d. Billionaire estate tax.

14.Question and Answer Panel .a. Keeping current what to read.

i. Tax Notes.ii. Leimberg.

iii. Thomson Reuters daily newsstand.

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iv. Trusts & Estates magazine.v. ABA trusts & estates section and list serves.

vi. Trust prof. blog.b. QTIP Trust invests in an LP or LLC.

i. QTIP could distribute to old and cold LLC, or form a new LLC with family members involved. The trustee of the QTIP will not have right to withdraw or liquidate and will not be the managing member.

ii. Reduce with discounts.iii. Others can be members of the LP or LLC.iv. On death of surviving spouse you may be able to obtain

discounts of 20-40% depending on make-up of assets, structure of entity, and other factors.

v. Inquire whether the fiduciary can do this? Does the trust instrument or state statute give you broad trustee powers that permit this transaction? Never assume it can be done without a review of the governing instrument.

vi. Trustee should inquire why this is being done. A tax benefit is one objective but what other reasons? Does the trustee have duties to the beneficiaries of the QTIP trust and are any of those fiduciary duties being breached? If you are realistically reducing the value by turning securities into an illiquid LLC interest where you cannot withdraw and liquidate and there are meaningful restrictions, isn’t the trustee really destroying value? The trustee must be mindful of a potential breach of trust action against the trustee. Has there been a breach of fiduciary duty? There is no easy answer. Can you secure agreements from beneficiaries in advance of doing the action?

vii. Do not have everyone sign off indicating that they agree to the restrictions in the LLC/LP structure this could be problematic on an audit.

1. Comment: Have each beneficiary contribute a modest dollar amount and individually become a member of the LLC and to sign the operating agreement in that capacity. This way none of them can argue later that they were not aware and agreeable to the consequences.

viii. IRC Sec. 2519 may be an issue. If a small portion of the interest in the QTIP is given away it is deemed a gift of the entire value of the principal of the QTIP. What started or was anticipated to be a transfer to an LLC might this be a transfer/gift of some of

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the spouse’s income interest? It is believed that this should not be the case since the surviving spouse has access to LLC/LP income/distributions.

ix. You might mandate in the operating agreement distribution of cash to minimize this 2519 risk, but this will reduce the discounts.

x. Field Service Advice 199920016 indicates that there should not be a problem.

xi. What if QTIP funds 100% of the entity?xii. Kite Tax Court Memo 2013-43 QTIP Trust created FLP with

discount and transferred assets to the surviving spouse. IRS did not raise IRC 2519. See Steve Akers article on Bessemer website.

xiii. The transaction is more likely to be respected if there is a valid business purpose, such as the contribution of real estate to an LLC for asset protection.

xiv. If done with marketable securities there should be a valid business purpose that is documented.

c. QTIP owns LP interests and discounts are deemed negative from a basis planning perspective.

i. Rephrase the question above somewhat differently. What if you did this transaction several years ago? $5M of assets from QTIP put into FLP and received in return an LP interest that would be valued at $3M net of a 40% discount. Now we are concerned about discounts and the impact on basis step up. What can be done?

ii. Amend the partnership agreement giving the partners the right to liquidate so that there should be no discount.

1. Comment : Consider the impact of such a broad liquidation right on the asset protection benefits the LP/LLC had previously provided. Those benefits may be compromised.

iii. If you did a partial liquidation what is the value of the QTIPs remaining interest.

iv. Best approach is to amend the agreement and liquidate the QTIP interests so it owns underlying assets.

d. Portability.i. There is animosity. The executor refuses to file a Form 706 in

an estate that is not otherwise required to file. W-2 wants son from deceased H to file. What can be done?

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ii. Does the executor have a duty to the surviving spouse to file? There might be a premarital agreement that might r3equire the filing of a Form 706. A detailed prenup might indicate even who should pay for this.

iii. If there is a contractual obligation to file that should govern and Son will have to file and DSUE should carryover.

iv. If there is no prenuptial agreement and new W is a beneficiary of the estate there is a duty to that beneficiary. There is a duty of impartiality and in that case and now there is an audit risk because of lifetime assets deceased H made and if no Form 706 filed, it would not come into play, the executor might view the filing as exposing the estate and other beneficiaries to greater risk.

v. Can the surviving W sue to mandate that the executor file?vi. Is DSUE an entitlement of the surviving spouse

vii. Can surviving spouse herself file Form 706 as a person in possession of property file on her own? If there is an executor already appointed that may not be the case.

1. Comment : Some state laws permit appointment of special executor and she may file in that capacity. That will still not secure cooperation of the children from the deceased spouse’s prior marriage on providing data, but it will provide an independent (of the antagonistic executor) means of filing.

viii. Can she compel disclosure of information?ix. If none of the above work what can be done to obtain DSUE

amount? If not addressed in as prenuptial or post-nuptial agreement endeavor to negotiate a deal with the executor and perhaps W can agree to pay for the filing to get cooperation.

x. Should executor ask for indemnity agreement for W to cover incremental costs to the estate? Not clear that this will work?

xi. Might executor select most costly preparer?1. Comment : Inherit conflict. Kids inheriting want highest

valuations to lower future capital gains costs. The higher the valuations the lower the DSUE. It is not only about getting the Form 706 filed, valuation of non-marketable assets could be another battle.

e. Asset protection advice. Is it required that an estate planner provide it?i. Is it a custom where you practice for estate planners to give

asset protection advice?

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ii. Malpractice claim depends on custom in your area. It is not the custom to provide asset protection planning as part of estate planning in New York.

iii. If you practice in a jurisdiction which has self-settled trust language giving this advice might be required.

iv. It is important what your engagement letter provides. You could exclude this in the engagement letter. No matter what is the custom is in your area if your engagement letter clearly excludes providing asset protection advice then you should not be held responsible.

v. If the client faces unusual risks then practitioner might suggest bringing in co-counsel to address this.

vi. 20 years ago asset protection planning would never have been considered as part of estate planning.

f. Beneficiary controlled inheritor’s trust.i. Inheritance trusts can give beneficiary significant control and

asset protection, what size of trust warrants this type of planning in light of the compliance requirements, costs, etc.

ii. In matrimonial area if can remove trustee that makes distributions that may be deemed to give access to funds and it will be treated as such. So be careful what powers are provided.

iii. Assets in trust by trust created by another prevents separate property from inadvertently being transmuted into marital property, can provide protection from a right of election, and can provide state income tax savings. There will be a commensurate loss of basis step up.

iv. What are costs of maintaining a non-grantor trust? Survey by National Society of Accountants $497 is average cost to prepare a trust return, accounting would be extra but there is generally no need for this. Periodically have the beneficiaries sign a release approving trustee actions in lieu of trust accountings.

1. Comment : Make this a part of a period annual or bi-annual trust review meeting.

v. Even a small trust can make sense. The value of the trust may increase over time by private equity or other investments. The state income tax savings of say as NY beneficiary with such a trust in Delaware can be significant.

g. QSST.i. All distributions are considered income and taxable to the

beneficiary.

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ii. Trustee commissions paid ½ from income and ½ from principal under most state principal and income act.

iii. If distribution received it may be income under QSST but the ½ of fiduciary fee is owed.

iv. Have the income account pay it but set up a liability form the principal account to the income account.

v. Do you need to bear interest on this deficit?vi. If the S corporation is not sold or there is not a large

distribution that is characterized as income/principal how that will be paid?

vii. Use power to adjust income and declare it as principal. This could be used in certain circumstances.

viii. If the distributions exceed 5% of the value of the trust on an annual basis you could convert to a unitrust and characterize amount above 3% as principal.

ix. Suggestion – under Uniform Principal and Income Act (UPIA) a distribution from an entity including an S corporation, LLC or LP is not income if it not made in cash. So if entity takes cash and buys a marketable security the distribution of the market able security would not be a distribution of income it would be a distribution of principal. The act does say this.

h. Disclose note sale to IDIT on income tax return but not on gift tax return. Does this toll the statute of limitations?

i. Will this suffice for gift tax adequate disclosure purposes?ii. There is a critical difference between income and gift tax

returns.iii. The regulations under the gift tax rules require a filing of a gift

tax return to meet the adequate disclosure on Form 709 or a statement attached to the return.

iv. There are a few exceptions. -1(f)(4)v. Treasury says if there is a transfer to a family member in the

ordinary course of business it is adequately disclosed if reported for income tax return purpose. Example is a child in a family business who gets a year-end bonus and it is reported on the income tax purposes. That is deemed adequate disclosure for gift tax purpose (as to IRS characterizing the bonus as a gift) if it is reported for income tax purposes.

vi. “Any other transfer” may be included if you disclose all information you would have provided same info you would have provided on gift tax return. But this only applies to

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payment to family members, not trusts. See IRC 2032(A). A sale to a defective grantor trust is not a sale to a family member.

vii. See checklist of adequate disclosure by Stephanie Loomis-Price on ABA website. Two sets of checklists: IRC Sec. 6501(c) and second set deals with 1992 Chapter 14 rules. The latter says “adequately shown” and the former “adequately disclosed.” To be safe you should comply with both sets of rules.

viii. Cavalera Case. Audit of a company that sold all of its assets. It had merged with a company owned by 3 sons and company owned by parents. Income tax agent referred to gift tax auditors who audited the return and found a $27M gift. Practitioners should not assume these referrals to gift tax auditors don’t happen, they do. Consider filing gift tax returns in these issues.

i. Private Art Museums.i. If your client has a substantial art collection and she wants to

retain control, avoid estate tax and get an income tax deduction there is a technique that might work.

ii. Build a special building dedicated to charitable purposes. Form a private operating foundation whose objective is to make art available to the public. Several times a month this is opened to the public and periodically the art is permitted to travel to other museums. Taxpayer controls it.

iii. Taxpayer gets charitable deduction for gifts to the operating foundation.

iv. How often must the art be made available to the public to demonstrate a real charitable purpose? No clear answer.

v. There are self-dealing issues that will arise when the art collection is on the same property where the family maintains its residence.

vi. There are using assets of private foundation for their own purposes. Is rent a self-dealing problem? It would seem to compound the problem since you are not generally allowed to have self-dealing transactions with a private foundation. Parties in the art building would be a problematic. What if hold charitable fund raises in the building? Would that be permissible? That is likely OK as it is for a charitable purpose.

j. Elective share.i. Dad and Son have real estate partnership 50/50. Son has buyout

right at $50,000. FMV is $4M.

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ii. 2703 would apply and not recognize the value in the buyout if entered into after 1990 (or if pre-1990 modified thereafter). Has to be bona fide business arrangement and not a device to transfer.

iii. Estate tax value will not be $50,000.iv. But son does have $50,000 contractual right that may be

enforceable under state law.v. Surviving spouse files elective share entitling her to 50% of the

augmented estate. What amount is included in the augmented estate? $50,000 or $4M? The definitions under state law are important. State statutes don’t tie into federal estate tax law. State law might characterize this as a $50,000 value. State law might also consider this transaction to include a $3,950,000 testamentary gift that would be brought into the calculation.

vi. If dad could withdraw from partnership is there a discount? Yes a discount would be a fractional interest discount that is less than a lack of control discount. There could be a lack of marketability discount. Case law values 100% of an interest in a corporation or LLC where in some instances a minor lack of marketability discount has been applied.

k. Sale to IDIT, Note Renegotiation.i. Note issued at 12% with no prepayment penalty. Interest only

with balloon payment.ii. Can you renegotiate at AFR?

iii. Why does note have a 12% interest rate in any event? iv. Trustee has prepayment right and may even have a fiduciary

obligation to refinance. No gift tax problem since the new note will have same value as old note.

v. No income tax consequences since a grantor trust.vi. Have an agreement signed by settlor and trustee describing

terms of note, prepayment clause, and that trustee is ready to prepay but instead for convenience the settlor is willing to refinance.

vii. New note must comply with AFR.l. IRC Sec. 67(e) and 2% Floor.

i. Do you think that the methodology chosen by corporate trustees will be audited by IRS?

ii. Polled various trustees. One has formed a committee and is looking at the issue.

iii. Another trustee has made the following decision:

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1. For trusts 60% is allocable to investment and 40% not allocated to the 2% floor.

2. For estates 20% investment and 80% not subject to 2% floor.

iv. In the final regulations whether a third party advisers would have charged comparable fee for those services, and the amount of the fiduciary attention devoted to estate devoted to investment advice versus dealing with beneficiaries and other fiduciary decisions. A trustee may consider facts in determining if an allocation is reasonable. What attention is paid to various services, consider allocation of overhead, etc.

v. The investment adviser appears four times a year and the trust officer dealing with the beneficiaries may meet 12 times a year.

vi. What if the trustee hires an investment adviser for 20 basis points to identify an asset allocation then invest in mutual funds? Then only the 20 basis points would be a cost subject to 2% floor and nothing else would be.

vii. This rule only became effective January 1, 2015 so that it is new.

m. QTIP.i. H died in 2012 leaving $500,000 estate to bypass trust. From

2012 to 2015 assets in H’s trust doubled in value. W dies in 2015 with an estate below the exemption amount.

ii. Can H ‘s executor file a late 706 in 2015 QTIPing the Husband’s trust thereby including them in W’s gross estate to get a basis step up.

iii. This can only apply if bypass trust is QTIP’able.iv. Can you sit on QTIP’able bypass trust until surviving spouse

dies to decide what to do?v. Is it too good to be true? 20.2056(b)(7)(B)(4). If you did not file

a timely Form 706 it has to be reported on the first estate tax return filed after the due date.

vi. If the amount in the bypass trust had exploded in value and you wanted it to remain a bypass trust then taking no action would have perhaps been the correct approach.

vii. So strategy is to use a QTIP’able bypass and wait until death of second spouse.

n. QTIP Modification.i. Spouse died owning business as did children and grandchildren.

ii. Years later business sold for substantial money.

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iii. If on surviving spouse’s death estate tax will be on QTIP assets but they want it to go to charity.

iv. If there is no power of appointment and children under terms of trust will take it outright.

v. If children die before wife it goes to distant relatives.vi. What can be done?

vii. Children cannot disclaim because more than 9 months have passed.

viii. Children would agree to a modification. How would IRS view this?

ix. Reformation may be feasible in some instances but this is taking away from one group of beneficiaries to another and that type of modification or reformation would be a gift.

x. If the modification was allowed by a local court the IRS may not be able to challenge even in light of Bosch doctrine.

xi. The statute of limitations would have already expired by the time the surviving spouse died (if more than 3 years after the decree) so IRS would be bound on date of death to what the trust reads.

xii. What other approaches might be possible?xiii. What if children gift their remainder interest to the charities?

This is what might happen in a modification. The children might receive a charitable deduction now. Their partial interest rule should not apply since they did not create the interest as long as their gift is not made to a private foundation. 2044 inclusion in gross estate in spite of what children did will pass on death. If QTIP had spendthrift clause they could not do this but in many states courts will modify and eliminate spend thrift clause.

xiv. If trustee has power to invade the QTIP for the surviving spouse can appoint to another trust giving the spouse a testamentary power of appointment to charity. This gives more flexibility so if not appropriate on her later death to send to charity she doesn’t have to exercise power this way. But in this latter approach the children won’t get a charitable contribution deduction.

o. Liquidity Issues in Estate.i. Spouse dies.

ii. 16M in estate tax due to prior gifts.

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iii. $8M of estate in IRA. $3M available to apply to estate tax. $1.5M in ILIT.

iv. How do you get $1.5M to pay estate tax from ILIT?v. If ILIT is obligated to pay estate tax or debts it will be included

in the estate so most ILITs prohibit this. But most ILITs permit trustee to lend funds to the estate or to buy assets from the estate. Since no assets to buy here it would be a loan.

1. Comment : Structure as Graegin loan.vi. Whose approval would you need to make loan? ILIT may have

to distribute to children and let them make the loan.vii. How do you get money from IRAs to pay estate tax? You have

to see who the beneficiaries of the IRAs are and have them make loans to the estate.

viii. Would apportionment apply? You may have an insolvent residue because of the significant gifts made. This will depend on state law. Once residue is involvement apportionment may be triggered. Will there be an abatement of any earlier requests?

p. Late Portability Elections.i. Rev. Rule. 2014-18 permitting late election for 2011-2013 if

done by 12/31/13 and indicated on top “FILED PURSUANT TO…”.

ii. Rev. Proc. Indicated had to file by 12/31/14. What about filing after that date?

iii. Rev. Proc. Had a 12/31/14 date. This doesn’t mean you are entirely precluded. Even if an estate tax return is not otherwise required you have to have a timely filed Form 706. You can seek, IRC Sec. 9100 relief. There have been a dozen+ PLRs on 9100 relief. See Recent Developments discussions.

iv. 9100 relief is not automatic you have to show reasonable cause. You may have to show reasonable clause for not complying with Rev. Proc. As well.

q. Late Form 709.i. 2011 late 709 with gift splitting and W forget to report grantor

GST trust on Form 709.ii. Should have automatic allocation of GST exemption.

iii. H elected to split gift so he is a transferor and he lost part of his GST exemption.

iv. Can H elect out of split gift election?v. Once due date for return has passed you cannot revoke election

to split gifts.

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vi. This is an opportunity for 9100 relief since H’s GST allocation was lost for a transfer he did not know about.

r. HEET Trust.i. See Monday’s discussion.

ii. Do these trusts really make sense? iii. How do you fund trust without a direct skip? iv. Create a trust with children as beneficiaries but if they are too

old for school add power to distribute for medical expenses as well. This will postpone tax until last child dies.

v. If you want to protect the trust further permit trustee to borrow from trust assets and make distribution to trust from which no distributions can be made for five years. The receiving trust should be a non-skip trust. When last child dies there will be at taxable termination not eh value in the original trust but this shod be net value not counting amount distributed out. But the full amount should be included for basis increase purposes.

s. Pooled Income Fund.i. College wants to wrap up as not economic to continue.

ii. Maintained by public charity. Contribute appreciated securities. Donor makes contribution gets an income and gift tax charitable deduction based on actuarial value of expectancy and payout.

iii. Many colleges started these.iv. Want to collapse fund. Can gift retained income interest to

college and get an income tax deduction. That is permissible. Second option is for donor to receive cash on actuarial value in the fund. What are tax consequences? Should be capital gain. What is basis? There should be no basis.

t. In CRT area some suggested that non-chartable beneficiary could sell her income interest at the same time that the chary sold its interest there could be an offset of gain by basis in annuity interest. If transferred appreciated assets the trust would not have paid income tax on the gain but under uniform basis rules the private individual would have had basis equal to current fair market value. IRS issued a notice in 2008 saying that this is an issue of interest (special reporting), etc. You start out the non-charitable beneficiary is deemed to have a basis equal to the basis in the trust assets but reduced by her actuarial share of trust income. So the answer is that there would be a capital gain tax on the transaction between current value and this basis.

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15.Life Insurance As an Asset Class .a. Comment : Special thanks to Charles Ratner for his comments and

corrections on the notes following.b. Using life insurance as an asset class instead of as a death benefit.

i. Life insurance post-ATRA.ii. As an asset class.

iii. Tax considerations.1. Comment: Life insurance planning has become more not

less complex. With an aging population the investment and long-term care features can be more important than estate tax planning features for the $10M and under client. The incredible complexity and almost infinite variations of policy design decisions make much of this an area beyond what many non-insurance advisers can navigate. Larry Brody suggested how many times in this presentation that the Code provisions he was referring to would be incomprehensible to an attorney? Consider expressly excluding in your retainer letter/engagement agreement insurance design/selection decisions. See the comments made in other presentations about not being liable if asset protection is so excluded in the engagement letter. Also carefully consider the cautions made by Skip Fox in his discussion of ethical issues in his Thursday morning presentation.

c. How do you access a life insurance asset in the most tax advantageous manner?

i. What is a life insurance policy for income tax purposes?1. IRC Sec. 7702(b)(1) the cash value accumulation test

(CVAT).2. Guideline premium test (GPT) under IRC Sec. 7702(c)

(2).3. A financial instrument will be considered life insurance

for all income tax purposes if viable under applicable law and meets one of two actuarial tests when issued and throughout its existence.

4. These endeavor to measure relationship between policy cash value and death benefit to make sure that there is

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adequate death benefit to warrant the favorable insurance characterization for tax purposes.

5. Corridor test under IRC 77026. In early years must be more death benefit to cash value

then in later years. By age 95 cash value and death benefit can be the same yet it will still be considered life insurance.

ii. Separate rules exist for variable polices which must meet two additional tests. Must be adequately diversified under IRC Sec. 817(h) and for private placement policies an investor control test to be sure that the owner is not directing underlying investments has to also be met.

iii. Generally: 1. The CVAT is used with traditional whole life polices and

for survivorship policies; and 2. The GPT is used with other types of policies like

universal and variable policies.iv. Policy illustrations will confirm if the policy meets these tests.

You can rely on the policy illustration for this purpose.v. Client should not send in unscheduled premiums in early that

could trigger a violation of one of these tests. They carriers should reject such payments.

vi. IRC Sec. 7702A added in 1988 defines a new subset of life insurance policies for income tax purposes, a modified endowment contract (MEC). Although this provision was directed at investment –oriented single premium policies it- applies to all policies issued on or after June 21, 1988 that fail to meet the so-called “7-pay”. In many cases the test on an actuarial basis can be met in 5 years or less. They did not want the insurance industry selling 2 pay policies, etc. So the rule is that if payments are more than are needed to create policy going until life expectancy it will be a MEC. This is a complex calculation attorneys cannot make. Carrier should reject any check that creates a MEC unless the client expressly intended to create a MEC. Advisers should be able to rely on the carrier taking this precautionary action.

vii. A MEC nonetheless is still considered “life insurance” if it complies with Section 7702 so the death benefit will qualify for the income tax exclusion under 101(a)(1).

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viii. Lifetime distributions from MEC policies do not receive the same favorable income tax treatment as lifetime distributions from non-MEC life insurance policies, they are instead treated like distributions from annuities.

ix. Once a policy is characterized as a MEC it will remain a MEC forever. If you do a 1035 exchange for a new policy the MEC taint will carryover.

x. The increase in the cash value of the policy until accessed in a tax inefficient manner is not taxable income. This rule, as above, does not apply to MECs.

xi. The general rule of deferred taxation for cash value increases applies even to a life insurance policies that are a MEC assuming the policy continues to satisfy the definitional requirements above.

xii. Policy dividends are issued by insurance companies that issue participating polices, e.g. companies owned by policyholders. Dividends are returns of excess premiums and are generally not taxable, but they reduce your basis in the contract. Dividends only become taxable when your basis is reduced to zero. So when basis is exhausted through tax free dividends or other distributions, further dividends and distributions are taxable.

xiii. Policy loans IRC Sec. 73(e)(5) if a policy meets applicable definition of life insurance and is not classified as MEC, a loan made against the policy will not be included in the policyholder’s taxable income even if the amount of the loan exceeds basis (investment in the contract), subject to one exception.

xiv. If you have a policy and you borrowed in excess of policy basis, and you transfer it, even by gift, that transfer has two results. It will be treated as a partial sale so you will have gain on the sale. Unless the transfer or the transferee is exempt from the IRC Sec.101(a)(2) transfer for value rules, the transferee will not get the IRC Sec. 101(a) tax free receipt of death benefits. Be certain that the gift is made to a grantor trust so that these negative consequences can be avoided. There would be no gain on such a transfer.

xv. A policy loan is not a withdrawal rather it is a non-recourse loan form the insurance company, secured solely by the cash value of the policy. Loans are not taxable even if the loan exceeds investment.

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xvi. Universal life.1. Policy withdrawals. In addition to borrowing again the

policy an owner of universal life can also make a withdrawal from the policy accumulation account or make a partial surrender. It is not a loan. There is no interest. It reduces the value of the cash account.

2. A policy withdrawal is not taxable unless you exceed basis in the policy.

3. So withdraw up to basis is income tax free, and thereafter use the withdrawal treatment/consequences as above.

4. Be sure MEC rules are not applicable (not triggered).5. FOG if you make a withdrawal from a universal life

policy in first 15 years – forced out gain 7702(f)(7) if reduce death benefit creates an income tax problem.

xvii. A loan against a MEC or a withdrawal from a MEC.1. It is taxable income to extent cash value of policy

exceeds the investment in the policy. So to the extent it exceeds basis in the policy there is gain.

2. MEC policies do not follow the otherwise normal basis rule. MEC basis comes out last and income comes out first.

3. Special rule if you loan or pledge or assign a MEC policy. It is treated as a distribution. This is done to prevent an end-run around the loan or distribution rules above. IRC Sec. 72(e)(10).

4. Special loan or withdrawal rules for MECs under IRC Sec. 72(v) imposes a 10% penalty tax if occurs before taxpayer reaches age 59 ½ (similar to IRA rules). Note that the term is “taxpayer” not policy owner. If the policy is owned by a trust who is the taxpayer? There is no answer. The industry practice is that if it is a grantor trust look through the trust to the grantor for the age test to see if the special penalty tax applies.

xviii. Policy Surrender or Lapses.1. If a policy is surrendered or matures other than by reason

of the insureds death, any amounts receive by the policy holder are taxable to the extent that they surrender proceeds exceed the investment in the contract. This is a basis like concept under IRC Sec. 72(e).

2. Is the policy a capital asset? That should be clearly yes.

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3. Is there a sale or exchange? Not clear that this occurs if you surrender a policy. See IRC Sec. 1234A. This characterizes lapse of financial instruments (such as options) as capital transactions despite the lack of the usual required sale or exchange. Does that Section apply to the surrender of a life insurance policy? There are no reported cases but a Tax Court case that settled was settled on this basis.

4. If a loan is outstanding when the policy is surrendered or is allowed to lapse the borrowed amount is added to the amount realized and becomes taxable income to the extent of the total cash value and the loan proceeds exceed the policyholder’s investment in the contract. See Barr .v. CIR, TC Memo 2009-250.

5. If you surrender a policy you will get a Form 1099R from the carrier for all proceeds plus the loan amount.

6. What about a sale of the policy? There is now a stable life settlement market. If someone doesn’t want a policy it could be sold to an unrelated investor. This should be treated as a capital transaction since the policy is a capital asset and the life settlement sale would provide the required sale or exchange (which is missing in the surrender or lapse) note that gain up to the cash surrender value is likely ordinary income as a substitute for interest based on old Supreme Court cases.

7. Rev. Rule. 2009-13, 2007-1 CB 684 reaching both conclusions above and requiring the owners’ basis in the policy, as opposed to the investment in the contract. It has to be reduced by the cost of insurance (which is not defined) on the theory that a policy is made up of two parts: (1) a death benefit; and (2) cash value. The premiums pay for both of these components.

8. Does 2009-13 apply outside of sales to the life settlement market? Not clear.

d. Cash value insurance can play one or more roles in a personal financial plan.

i. Provides enduring coverage without enduring cost.1. After some point in time if sufficient funding client will

not have to continue payments, policy can “pay.”

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2. Clients are realizing they may want/need insurance for a longer time period then they anticipated in earlier plans (longer life expectancy).

ii. Provided flexibility on pension plan payouts (i.e., pension max).

1. If permanent life insurance is paid up by retirement if you have a policy in place this technique is a lot easier.

iii. Provide funds for long-term care.1. Many policies offer ability to take down cash value to

pay for long term care.a. Comment : If policies are owned by an ILIT

pulling out the long term care benefit and getting it to the insured who is the settlor of the trust becomes more complex. The benefit may have to be sought by the trustee then the cash loaned to the settlor.

2. If they don’t need the long term care portion they will use the death benefit.

iv. Be a vehicle for income tax deferral, conversion and diversification in the retirement/investment portfolio.

e. Case for insurance as an investment.i. Cash value life insurance offers significant income tax

advantages especially for those subject to the 3.8% Surtax on NII. Tax deferred growth of cash value, tax free access to cash value if the policy is not a MEC and tax free death benefit are all valuable.

1. Comment : See notation above that the average individual investor has earned a meager 2.2% per year on investments over the past 20 years. What is the right touchstone for evaluating the potential returns from an insurance policy as an investment?

ii. An individual who owns a policy might be able to redeploy or repurpose insurance for investment. Determine flexibility to increase premiums without underwriting. Reduce the death benefit for faster cash accumulation.

iii. Speaking of perspective, keep in mind that regardless of its purpose the insurance policy is an insurance policy! Some agents describe this to clients in a manner that almost suggests something else.

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iv. “If you are not happy with it you can 1035 it.” Some agents suggest that clients need not worry if issues arise, the policy can readily be changed tax free in a 1035 exchange. This is misleading. What about underwriting? It is never guaranteed that in the future you will qualify for a new policy. What about the hit from acquisition cost on the new policies? What if there are loans on the old policies? This is not nearly as simple as many people make it seem to be.

f. Products Generally.i. Various types of products.

1. Whole life/term blend.2. Current assumption universal life.3. Equity indexed universal life.4. Variable universal life.5. Private placement variable universal life.

g. All policies encompass common factors: mortality, interest and expenses, the rest is packaging. Differences in the way the mortality, interest and expenses are packaged can, however, be very meaningful for those who are depending on the policy for certain results, especially over longer time periods. One type of policy is not inherently better than another type. However, one type of policy may be much more appropriate than another type for a given client and particular circumstances. Products are constantly evolving with features that blur the traditional lines of demarcation with respect to product characteristics.

h. Not every client that considers insurance as an investment will buy it. They should not walk away because they don’t find a product. There are too many good choices from many good carriers. Reasons some clients won’t commit:

i. Some walk away because they don’t want to take a physical. ii. When shown illustrations, clients look at three columns:

premium, cash value and death benefit. But the estate liquidity buyer and the investment-oriented buyer look at those columns differently. The liquidity buyer says “why can’t the premium be lower? I wish the cash value were higher, but it really doesn’t matter because I won’t own it. When I die, will the beneficiary get the death benefit plus the cash value?” It is unusual for the liquidity buyer to make a decision quickly, partly because the policy will be in an ILIT, which also adds some complexity to the whole process.

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iii. The investment buyer looks at those same three columns and asks “Why does it take so long to get the money into the policy? What if I want to put more or less into the policy in the next few years? Why isn’t my early cash value higher? Why is the death benefit so high? I don’t want to pay for so much insurance.” This type of client/buyer also looks much more closely at how the policy works and its expense structure than the liquidity buyer. The investor is also more interested in the agent’s post-sale service than is the liquidity buyer.

i. Whole life/term blend. A $1 million policy might, for example, be comprised of $500,000 whole life and $500,000 of term. The whole life portion offers guarantees, the term offers low cost coverage based on current assumptions. Dividends from whole life portion buy paid up additions that displace term. Typically designed with paid up additions rider or other mechanism to accelerate growth of paid up additions. Product can appeal to policyholders who like to “invest” their money in the general account of an insurer they admire.

j. Current assumption universal life. Flexible premium product allows policy holder to set up premium to support the death benefit to maturity, or to set premiums just to support the death benefit to a given age at or upon given assumptions. Must monitor and adjust the premium as circumstances permit. Insurer guarantees minimum interest and maximum the cost of insurance. Product appeals to those want utmost flexibility.

k. Equity indexed universal life (EIUL) is essential akin to a CAUL with same concept of current versus guaranteed COIs. Insurer credits the cash value with the greater of a minimum guaranteed rate or a portion of the growth of an index such as the S&P 500. Crediting methodology typically involves such components as the return of the selected index, the measuring period of the return, the “cap”, etc. Product can appeal to those who want some participation in capital markets with limited downside from the guarantee.

l. Variable Universal Life (VUL). Flexible premium product like CAUL with same concept of current vs. guaranteed COIs. Can invest the cash value among accounts that are like mutual funds and locate and reallocate them Need asset allocation, investment policy statement (IPS), monitoring, etc. VUL buyers who want to emphasize cash value growth will reduce death benefit to minimum. Cash value is not part of the insurer’s general account nor is it subject to insurance company creditors. Product may appeal to those who want premium

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flexibility and ability to more fully participate in the capital markets. Note that some suggest that VUL (and other policies) have “underperformed”. Mr. Ratner suggests that it’s more likely that these policies were either “under-described” or under-managed.

m. Private placement variable universal Life (PPVUL). PPVUL is unregistered under federal and state securities laws. Available only to accredited investors under the 1933 Act or “qualified purchasers” under the 1940 Act. Compared to VUL, PPVUL is likely to have no surrender charges, offers the buyer the ability to invest the cash value in otherwise tax-inefficient hedge funds, and the ability to negotiate lower sales loads and broker compensation. The PPVUL buyer still has to deal with the investor control and diversification rules.

n. Life policy design for investment.i. Individual indicates how much he would like to pay annually or

in aggregate. Individuals often want to get the money into the policy as rapidly as possible. But his can be counter-productive in light of MEC rules so have to look at alternatives, like a three-pay plan.

ii. Individual selects the type of policy he would like to purchase:1. General account whole life, term blend, CAUL, or EIUL.2. Separate account (VUL or PPVUL).3. In larger cases the individual may diversify among two or

three types of products.iii. Policy comparison. For example, which policy can generate the

most income for X years start at age Y without requiring additional premiums to stay in force to age Z?

iv. Level the playing field.o. Life insurance as a trust investment. Many high net worth individuals

use life insurance as trust investment for pure wealth transfer. They believe that the IRR on the death benefit may be as good or better on a risk and attitude-adjusted basis as anything else they would use for this purpose. This may be worthwhile use of the $5.43 million exemption. Policy selection and design implications – individual or second to die policy is an important consideration for younger insureds, where there could be many years between deaths.

1. Comment : Retaining appreciating low basis asset in the estate and instead funding an ILIT with a permanent life insurance policy that presents no basis step-up considerations can solve planning issues and complexity.

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p. What about an insurance policy that is working but it is held in a trust that is not working/viable.

i. The insurance is viable but the trust owning it is problematic. What can be done? Solutions for a broken ILIT.

ii. When client or agent says the policy is working but client does not want to pay because no longer satisfied with the trust.

iii. If represent husband and wife and draft for insured spouse the definition of “spouse” can cause problems.

iv. What if there is a divorce? Some parties do not want that spouse to continue to be a beneficiary of the ILIT and not used a floating spouse clause.

v. So the changes in a client’s life and circumstances can make the ILIT problematic.

vi. What if the ILIT was prepared by another attorney and there are problems that might result in estate inclusion?

q. What can we do to get a good policy out of a bad trust? 4 alternatives:i. Sell it.

1. Advantage is you can sell the policy to anyone.2. Sales have drawbacks. You may wish to sell to another

trust with different beneficiaries, or an LLC, etc. Sale price may be significant and the desired buyer doesn’t have sufficient cash and may wish to use a note for the purchase. Now the old trust will hold the cash or the note. If insured dies the beneficiaries of the old trust have a promissory note and the buyer has the cash. These beneficiaries of the old trust may sue the trustee for having made the sale. There could be fiduciary issues.

3. What if the trustee sells for a note but does not take adequate security and the buyer stops paying?

4. How do you value policy? Forms 712 often have surprising values or multiple values. Trustee may need independent appraisal to support that it was real FMV for the sale price because of the fiduciary obligations.

5. If the policy is sold for too little it could be an impermissible distribution to some third party. If the trust sells the policy for too much the beneficiaries may be happy but the buyer may be viewed as having received a gift from the trust and that could raise yet other issues.

6. Consider using formula provisions for the sale to protect from gift tax audits.

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7. Consider filing a gift tax return and reporting this as a non-gift tax transfer, but trusts cannot make gifts so will this really work?

8. Watch transfer for value rules. It is not a transfer to the insured. Is it a transfer to a partner of the insured or a partnership in which the insured is a partner? If the insured is a GP or manger of the LLC you may have 2042 incidence of ownership issues. Transfer to a corporation in which the insured is a shareholder may be an exception. Can you cure this later on by a subsequent transfer that fits into the exception?

ii. Distribute it under terms of the policy.1. If you review trust agreement to distribute you are

limited to terms of the trust agreement. The trust might restrict distributions while the insured is alive. For example, only to the spouse the client does not want the policy to go to.

2. There may be young children and you cannot distribute to them at that time.

3. It can be difficult to distribute a policy out of the trust by having insurance carrier to issue three policies to replace one. Carriers may balk at this.

4. You might be able to use an entity to hold the policy.5. Trust provisions may not be conducive to the

distributions. 6. There may be a HEMS limitation.

iii. Decant it.1. Three options.

a. Statutory decanting if state law permits. More states are adopting statutes.

b. Decanting under the terms of the trust agreement if trust provisions permit distributing to another trust.

c. Common law decanting under state case law.2. Notification can be a problem. Most laws require

notification of all beneficiaries and many clients will not want this. Don’t have consent by anyone to decanting since that may be viewed as a gift. Notification may suffice to satisfy a trustee rather than a consent to the decanting.

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3. Consider withdrawal rights. Many ILITs include withdrawal rights for annual exclusion and more. Some of these are hanging powers. Decanting and distributions you are moving assets out of the old trust. If the beneficiaries have realistic withdrawal rights have you made those academic? That might create a problem.

iv. Use the powers to substitute assets and substitute other assets that are more appropriate for the beneficiaries in the trust.

1. This may be held by grantor.2. The insured grantor will get the policy back and it will be

included in his or her estate.3. They may transfer thereafter to a new trust and start 3

year rule again.4. IRS has held that power of substitution will not itself

cause inclusion. Rev. Rul. 2008-22 trust fund will not be included in grantor’s estate under IRC Sec. 2038 or 2036. Look at Jordhal case. The fact that the settlor can pull out policy if he or she has to put in equal value, should not impact beneficial interest of beneficiaries. In Jordhal it was putting back another insurance policy. In the two rulings the IRS said the trustee must make sure that there is equivalent value. Jordhal uses the phrase “equal value” which means equal cash value, equal death value and a similar form of policy. So substituting one insurance policy for another will be quite difficult.

16.Asset Protection Trusts Under Attack (I-D). a. General.

1. Comment : See comments above by other speakers as to why addressing asset protection planning should not be part of the standard of estate planning practice, and the comments by Fox.

ii. Judges look at the case situations after the bad things have happen. This makes it tougher for the client as it casts a negative air on the planning, so be sure the transaction was structured conservatively in the beginning.

iii. Having other planning motives for deploying strategy other than asset protection is important. Document non-asset protection motives.

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1. Comment : DAPT situs change and basis. Change the situs of a self-settled domestic asset protection trust (“DAPT”) to a non-DAPT jurisdiction as a means to create estate inclusion if the basis step-up is more important than the estate exclusion, assuming that the DAPT was a completed gift trust. Could this be a creative way to let a client have their asset protection cake and eat their basis step-up too. Example: Establish a DAPT for a physician client to protect assets while she is practicing. After she retires and the statute of limitations runs have the trustee divide the trust into two sub-trusts, 1 highly appreciated assets, one not. Change situs of the highly appreciated sub-trust to a non-DAPT jurisdiction.

b. Weitz v. Weitz No. 016811-08 case.i. Tortious conduct took place in NY so Cook Island trust was

subject to jurisdiction in NY.ii. Long arm statute. This was a “real stretch”.

iii. The wire transfer was effected out of a NY bank so that gave a NY court jurisdiction.

c. In re Mortenson (Battley v. Mortensen, Adv. D. Alaska, No. A09-90036)

i. First case dealing with DAPT.ii. The trust was created without counsel.

iii. 548(e) trustee can reach assets in self-settled trust within 10 years was cited by court as reason to do so.

iv. What if debtor had forced litigation into state court if the state judge would have been more sympathetic then the federal judge.

v. Taxpayer never got rid of the creditors that were creditors at time of trust. He had actual creditors when he made the transfers. This hurt him. Actual creditors is an easy analysis. He still owed them money at the time he filed bankruptcy.

vi. If he had not gone into bankruptcy the 4 year Alaska statute of limitations may have applied.

vii. Case shows the danger of being too aggressive in the planning.d. In re Huber, 201 BR 685 Case.

i. Washington lawyer, Washington debtor and Washington creditors.

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ii. The trust had its most significant relationship with Washington and Washington has a strong public policy against asset protection trusts.

iii. Had co-trustee in Washington. iv. Trust should have been structured with all parties outside of

jurisdiction. More control has to be given up.v. If you have too much control it will undermine the planning.

e. Rush University Medical Center v. Sessions 202 WL 4127261.i. Trust was established in a way that created greater exposure.

ii. Hybrid trust with Illinois co-trustee and assets.f. US v. Townley No. 04-35767.

i. Client admitted to transferring assets into a trust to avoid future creditors.

g. California and Washington laws are very creditor friendly. i. If you are dealing with real estate it is more difficult.

h. In re Reuter 499 BR 655.i. Bankruptcy court upheld spendthrift statute.

ii. Hook – court upheld MO spendthrift statute.iii. MO adopted UTC in 2005.

i. In re Yerushalmi 487 BR 98.i. Long term interest in QPRT.

ii. Wanted to attack QPRT as an “alter ego” arrangement.iii. Court rejected the claim and said there were legitimate reasons

to create a QPRT.iv. Court cited favorable facts. Debtor had significant other assets

when QRPT was created and no litigation threatened at that time and no inappropriate conduct was engaged in with debtor and the QPRT.

v. So a long term QPRT may provide important asset protection benefits if done in a correct manner.

vi. When might you use this technique? In states with a weak homestead protection such as California. Use if a valuable vacation home.

vii. Combine the QPRT with a Delaware asset protection trust as well as a QPRT. If debtor in CA gets in trouble the real estate is still in CA but if you have a DAPT you can sell the real estate and take proceeds to the venue and get rid of real estate problem.

viii. If Settlor has desire to live in house for 30 years. From IRS tables there is a value to this based on 7520 rates. Query

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whether the court might force a sale of the property and permit creditor to reach portion equal to value of settlor retained.

j. 548(e) Bankruptcy Code.i. Statute : (1) In addition to any transfer that the trustee may

otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if— (A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

ii. In re Porco 447 BR 5901. Only applies to express trusts not to express or

constructive trusts.iii. In re Castellano No. BR 11 B 46854

1. Property goes into spendthrift trust.2. Daughter had financial issues and notified trustee with

mother’s estate plan and share of estate went into a spendthrift trust.

3. It is not a self-settled trust but the daughter participated in the creation of the trust by advising the trustee that she had financial problems.

4. Court held that daughter indirectly caused the trust for her benefit so that it should be regarded as a similar device.

5. Court developed 4 part test to determine what constitutes a “similar device” you want benefits after transfer is made, you must have participated in process and it doesn’t have to be formally a trust.

6. An aggressive trustee in bankruptcy could go after FLP, FLLC, GRAT, CRT, etc.

7. Bear in mind most of these cases settle so the fact that there has not been a reported case doesn’t mean that this there have not been such cases.

k. Branch Banking & Trust Co.l. US v. Grant No. 00-8986.

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i. Does the settlor really have control?m. Uniform Voidable Transactions Act.

i. Word “fraudulent” has been removed since it was confusing with the term used to denote common law “fraud.”

ii. Section 4. The language we have always seen … a transfer made or obligation incurred is voidable as to a creditor whether the creditors claim arose before or after the transfer was made.” Ongoing argument as to future creditors, were they known, etc.

iii. The official comment that historically unknown future creditors are covered in all circumstances, and that is not factually correct.

iv. How do you define future creditors? Does a physician who knows statistically he will be sued have no ability to plan?

n. Judge Mahoney General Comments.i. Uniform Fraudulent Act.

ii. Bankruptcy Code Sec. 548(e).iii. Denial of discharge for Debtors.

o. Uniform Fraudulent Transfers Act and Uniform Fraudulent Conveyance Act.

i. These are the laws for voiding transfers into asset protection trusts by trustees or creditors.

ii. These are state law. Even though there are uniform laws each state has its own variations.

iii. UFCA is older than the UFTA. NY State still uses UFCA. UFTA final version just came out in October 2014.

iv. Conveyances made with actual intent to hinder, delay and defraud creditors are voidable.

v. Transfers for less than reasonably equivalent value are voidable.

vi. UFTA and Bankruptcy Code – good faith of transferee may be a defense.

vii. Under Bankruptcy Code a transferee may be able to get a lien for the money they paid for the property. So good faith of transferee matters but doesn’t mean transfer won’t be voided.

viii. Badges of Fraud.1. Whether transfer was to an insider.2. Did debtor retain possession or control of the property

after transfer.3. Had the debtor been sued before the transfer?4. Did the debtor transfer substantially all assets?

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5. Did debtor conceal?6. Was the value received equivalent.7. Did debtor become insolvent because of or shortly after

transfer?8. Were essential assets transferred?9. These are not an exhaustive or required list, but just

factors to consider in the analysis.ix. Bankruptcy code if you are a trustee and want to overturn a

transfer the bankruptcy trustee can use Bankruptcy provisions or use state law fraudulent transfer provisions to perhaps obtain a longer statute of limitation or more favorable case law. So there are many options available to a bankruptcy trustee.

x. What creditors can take action? When can a trustee step into the shoes of a creditor to void a transfer?

xi. A transfer is voidable as to a creditor whether the claim arose before or after transfer was made if the transfer was made with actual intent to hinder delay or defraud (similar if insufficient value received).

xii. The issue of “intent” to hinder, delay or defraud is important. Intent is determined at the time of the transfer. What creditors existed at that time? What creditors arose later that debtor intended to defraud.

xiii. Who is a creditor who can be harmed and who can get sued? Who can do something about it? Present creditors are easy. Who did the debtor owe money to when the transfer was made? The difficult issue is for creditors who claims arose after transfer was made who the debtor intended to defraud? Cases discuses “potential” and “foreseeable” creditors.

xiv. Example a physician who goes without malpractice protection. Does she have creditors because she is human and will make a mistake. Is it merely enough that there is a creditor in the future? The cases run across the board and there is no clear or final answer. Contrast this with a physician who hit a school bus and kills them. That was not a foreseeable creditor.

xv. Cases are very fact sensitive. Having non-asset protection motives helps. If the debtor did not hide anything from creditors it will help.

1. Comment : The high exemptions likely place most physicians below the estate tax threshold thereby

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eliminating a significant non-asset protection motive for planning.

p. Bankruptcy cases.i. Most published opinions go against debtors. But they are bad

cases.ii. Portnoy lied to creditors.

iii. Lawrence debtor put money in offshore trust when there was a big judgment and said you could not get money.

iv. None of these debtors “looked good.”q. 548(e) of Bankruptcy Code.r. Self-settled trusts or similar devices are subject to claw-back or being

voided.i. If more than 10 years they should be valid. Each addition is

viewed as a new transfer.ii. In bankruptcy court you will be “all right” if more than 10

years.iii. If physician funded a self-settled trust and 10 years pass before

a bankruptcy proceeding occurs that transfer should not be voidable even if the patient was viewed as a prospective future creditor.

iv. “Similar device” language bankruptcy judges should defer to state law to see what this phrase might mean.

v. The law says it should be “liberally construed.” This is not positive for asset protection planning.

s. Discharge in bankruptcy can be denied.i. Can still have assets distributed but creditors can continue to go

after you.ii. If a debtor transfers or conceals property within one year before

filing for bankruptcy the discharge will be denied.iii. Disclose, disclose and disclose.iv. If you seal a transfer that period of one year can go back as far

as you have concealed assets. You could be thus subject to a denial of discharge claim.

v. If your discharge is denied for concealment it is a “slam dunk” that you will be convicted of a bankruptcy crime since anyone concealing property is also in trouble. Can face 5 years of jail time. If the attorney is deemed an abettor to this concealment they can be subject to this as well.

t. General conclusions.

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i. Asset protection plans are “worth it.” Normally they settle. Getting ½ a loaf is pretty good if there is a problem.

ii. The law is very unclear and very discretionary with the judge. Domestic trusts look better than foreign trusts. Facts matter.

u. Cases define future creditors in sense of actual fraudulent transfers.i. Delineating what constitutes a future creditor is a key dilemma.

ii. If defendant is put on stand and asked what the purpose of settling the trust was, and there are no estate tax benefits associated with the plan, if the plan was only done to avoid future creditors, it sets the client up for a voidable situation.

iii. The more time between the funding of the trust and potential creditor of the claim the better.

iv. 9th Circuit defines future creditors very broadly.v. Defenses raised are constitutional issues, such as full faith and credit

challenges.i. Concept is simple. Judgment of one state must be

acknowledged by a sister state. ii. “Domestic asset protection trusts work, I’m pretty comfortable

about that….How do you define ‘work’.”iii. No one can be persuaded that there is no full faith and credit

issue, but it is “not necessarily a fatal problem.” A well-crafted DAPT will be a tough fight for a creditor.

iv. Example – businessman with real estate business creates DAPT in Delaware (15 jurisdictions have DAPT legislation). He has a liquidity event and has $100M. No threats or creditors. Puts 10% or $10M into a Delaware DAPT. Five years later he has an issue with a bank and only ‘asset’ left is the DAPT. Lawsuit may last several years, there may defenses to bank’s claims, lender liability issues, etc. Bank gets judgment after 2 years of litigation. Then there is a post-judgment proceeding. The DAPT may not be discovered until after the judgment has been entered. Now bank wants to go after the trust. They cannot do that without what amounts to a second proceeding to demonstrate a basis for going after this trust. There are three basic ways to attack a DAPT:

1. Fraudulent transfer.2. Show it was a sham transaction. Settlor directly or

indirectly controlled it. Is the trustee acting as a trustee? If there is a sham or alter ego theory it may crack the trust.

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3. Jurisdictional issues? Is the trustee doing business in CA? Can you get jurisdiction over the assets of the trust similar to the Rush case since the asset was ultimately Illinois real estate. This might permit in rem jurisdiction over trust assets. Might have jurisdiction over the settlor. Option of moving is there but you need to do it in advance.

4. What law governs? Look at conflict of laws. Is it Delaware or CA law?

v. The trust has now been in place for 6-7+ years and there was no fraudulent transfer. There is no sham argument as trust has been administered in a professional manner so no alter ego argument. The trustee has no connection to CA so there are jurisdiction issues. Asset are in Delaware. Having said all this the DAPT might still reach this even under such clean facts by saying the trust is void ab-initio as violating of CA public policy. This second lawsuit would then have to be taken to the Delaware trustee.

vi. The trustee in Delaware is not going to roll over and play dead and hand all the assets to the claimant. The Delaware trustee will go into Delaware court and ask for direction. So this is now lawsuit number 3.

vii. This might have to go into a federal court. This would be lawsuit number 4. This is after years of litigation and appeals which is a time consuming and costly process.

viii. All of the above is why most of these cases settle for less than 100 cents on the dollar.

w. How do you obtain maximum leverage?i. What if client is sued within a short time of creating the trust?

This will look bad as compared to having done more traditional estate planning.

ii. Can an attorney be sued if he/she doesn’t suggest a client engage in asset protection planning? No. But you cannot really address estate planning without addressing creditor issues to some extent. In the past we might have advised a client to divide a house into tenants in common to fund a bypass trust. This could have had asset protection issues, etc. Asset protection may be an integral part of the estate planning process.

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1. Comment : Changing a house from tenants by the entirety into tenants in common facilitated funding a bypass trust but destroyed any asset protection benefits tenants by the entirety provided. Now with portability the calculus advice has to be quite different. Even if the client lives in a decoupled state, e.g., New Jersey with only a $675,000 exemption, the potential state estate tax savings of this step might no longer outweigh the loss of potential tax benefits. In the past the opposite conclusion may have been reached. Should we be contacting clients that may have undertaken this type of planning in the past and advising them that they should re-deed their homes back into tenants by the entirety to obtain the asset protection benefits if the estate tax benefits are no longer as significant?

iii. What if you first do estate planning before addressing asset protection planning? So instead of doing a DAPT what if your first did a SLAT if you don’t live in one of the 15 self-settled trust states? What about a SLAT and you give the spouse a power of appointment in favor of the surviving spouse/donor spouse? That might be viewed as a self-settled trust, but in some jurisdictions it may not be. This might be viewed as a “similar device.” What if spouse is added after a 10 year period? So first do whatever other planning that can be done in the context of estate planning before doing a DAPT.

1. Comment : An important consideration is the quality of the administration of the plan. A client that opts for what they view as a less aggressive plan but does nothing to properly administer it, ignores trust formalities, etc. likely has a far more aggressive and less supportable plan than a properly planned DAPT. This often seems to be the biggest struggle – getting the client to return for annual review meetings so proper administration of whatever plan was consummated can be addressed. When a physician client opts to prepare her own trust tax returns to save an accounting fee, does it really matter what type of trust planning was implemented?

iv. GRATs to remove future appreciation, SCINs, private annuity transactions, etc. All of these might appear less aggressive then a self-settled trust.

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x. Case Study 1 The Kramers.i. 20M net worth.

ii. NY couple.iii. Issues always exist even in estate planning.iv. $13M brokerage in joint name perhaps have a post-nuptial

agreement ½ are in each spouse’s name. A marital property agreement is an effective and inexpensive means of achieving asset protection.

v. What if make gift to use up exemption? There are ample estate tax planning objectives. If a creditor reaches it the exemption would be wasted?

vi. What if transferred assets to wife? Is that a fraudulent transfer? Under NY law that would be viewed as a fraudulent transfer.

vii. Wills should bequeath all assets in trust.viii. Creditors can put you into an involuntary bankruptcy. If they

are really concerned about a fraudulent transfer.ix. You don’t have to solve every situation with other options

using other estate planning objectives.y. Case Study 2 The Andersons.

i. All jointly and severally liable on loans secured by accounts receivable.

ii. Does that mean because the loans are secured by more collateral can we feel comfortable doing asset protection planning?

iii. The receivables may or may not be worth this amount. You cannot be sure what the situation will be when/if the guarantee is called.

z. Pennell’s comment last year about DAPTs not working.i. If you live in one of the 15 states they do work if no fraudulent

transfer.ii. In other states, see above discussion.

1. Comment : The number of states adapting legislation permitting DAPTs has grown since the first state enacted such legislation. There have been a paucity of cases that all appear to be poorly planned and orchestrated, the classic “bad fact” situations. The continuum over which a DAPT plan can be implemented is tremendous. Certainly with cautious and careful planning, transferring a modest percentage of assets, corroborating to the extent feasible that there are no liens, judgments, claims, etc. Using an

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institutional trustee in the jurisdiction where the trust is created, endeavoring to respect the trust and adhere to trust formalities, adding a second tier of protection to the trust planning with entity structures, and so on, can certainly provide a measure of protection. All of the speakers at this session confirmed that. Moving to the opposite end of the spectrum, clients can poorly implement an overly aggressive plan, no different than the many bad-fact FLP cases that we have all seen Yet those cases did not deter most practitioners from using FLPs, they merely refocused most on being more cautious, creating better documentation, encouraging clients to work with their advisers to better monitor and administer the plans (the Achilles heel of so many plans).

17.Powers of Appointment in the Current Planning Environment .a. General.

i. A power of appointment (POA) is a non-fiduciary power to dispose of property.

ii. A general power of appointment (GPOA) is a non-fiduciary power to dispose of property to a class that includes yourself, your estate, creditors of your estate (see discussion below as to what the latter phrase means).

iii. IRC Sec. 2041 excludes three situations from being a GPOA:1. HEMS – limited by an ascertainable standard.2. Donor/creator’s consent to exercise.3. Can only exercise POA with a person holding an adverse

interest.b. Inadvertent General Power.

i. Mother’s instrument gives power to appoint assets among her descendants and power holder is one of the descendants. Mom gave Son a general power without intending it to be a GPOA.

ii. Get a state court reformation of the trust.iii. Uniform act tries to fix this problem. Unless you specifically

say it is a general power there will not be one in that circumstance.

c. Wills/Revocable Trusts.

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i. Traditional rule is POA is exercised in a will by specific reference to the power. But many people now use revocable trusts.

ii. Uniform Act addresses exercise of POA provided under a revocable trust.

d. Substantial compliance.i. Goal is to avoid inadvertent non-exercise.

ii. Mom creates POA the exercise of which requires the power holder to make specific reference to the power.

iii. Many cases occur each year where the power holder gets close but not quite, e.g., they mention the wrong trust.

iv. At common law there was no notion of substantial compliance. So if Mom’s will provides son can appoint property in his will by giving specific reference to that power then for sure he could not exercise by including a provision exercising it in his revocable trust. Nor could he do so without referencing to the power and specifically noting that it was created under the mother’s will dated [date].

v. The Uniform Act changes this. So if done under a revocable trust and referred to a power created by Mom that should suffice for substantial compliance.

vi. An exception to the above is if there was a material purpose mother had in mind by the express or detail in the provision creating the POA.

vii. A residuary clause won’t overcome the substantial compliance requirement.

viii. A consequence of this is that it is harder to avoid exercising a power. Consider including in all wills a provision stating that powers are not being exercised to avoid an ambiguity, and then if there is an intent to do so provide for it.

e. General Powers to provide for basis.i. Give power but don’t really want it exercised. So the narrowest

GPOA is the power to appoint to the creditors of the power holder’s estate. This should be the narrowest power.

ii. Who are the creditors of your estate? What is really the consequence of this?

1. What are the practical consequences to this?2. What if mom makes an irrevocable charitable pledge?3. What if Mom borrows money and spends it.4. What if Mom borrows money and buys sibling a car?

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5. How can you exercise this power?f. Fraud on the Power.

i. Examples are contractual items. You cannot contract to exercise a power of appointment unless it is currently exercisable. For example if you have a testamentary GPOA you cannot contract while alive to exercise it. The intent was you had the right to change your mind until your death so you cannot fix it now by agreement.

ii. This has been a policy for more than a century.iii. Suppose that you exercise the power to give $1M to Fred on the

condition that he agrees to give $1M to the opera. Suppose Fred has sufficient assets and makes a pledge to the opera today and says in the pledge that if on my father’s death I come into money I will give you a $1M. Then the GPOA is exercised. Is that viable or is it a fraud on the power?

iv. There are very few cases dealing with this issue.v. Traditionally the grants of these powers had been more limited

than in recent times.vi. Law appears to turn on original donor’s intent. If intent was to

limit the class then the drafters of the Restatement believe the courts will not permit someone to circumvent this as in the above opera example.

g. Creditors.i. What about a GPOA created by a third party, e.g., grandmother

dies in 1981 and created a trust for mom. Many years later that trust is decanted and mom ends up with GPOA. Is there a risk of exposing trust assets to mom’s creditors?

ii. Risk is mom could divert assts.iii. What about mom’s creditors reaching the trust now that the

trust has been decanted so that mom has a GPOA? iv. Does the GPOA give mom’s creditors the right to reach trust

assets? If mom could exercise the GPOA why not, the creditors might maintain, require her to exercise it in their favor?

v. Old common law rule was if you held a GPOA at death your creditors could not get the assets unless you exercised the power. This goes back to an 1879 Massachusetts case.

1. Some states were more aggressive. KY 1939 case says even if you exercised GPOA your creditors cannot get the assets, but that is a minority position.

2. Michigan and New York have changed the general rule.

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3. The Uniform Act has gone the other way. If you have a GPOA and your estate is not sufficient to pay off assets then your creditors can get to the assets.

vi. What about mom’s liability for health care costs?vii. What about mom’s liability from driving – a bad car accident?

What is the potential costs of such liability?viii. States that have DAPT legislation will have a different result.

h. Crummey.i. Traditional common law this is tantamount to ownership since

beneficiary can withdraw it.ii. Trying to exempt out Crummey withdrawal rights from general

common law rules so that Crummey power holder does not become the defacto owner of the trust.

iii. There may still be a gift tax implication.i. Entity holding POA.

i. Duties on persons in fiduciary positions.ii. If create a trust but include a board of directors in an LLC and

give the LLC a power of appointment?iii. Board in LLC can be given power to amend trust.iv. This shifts decision making.v. Might this reduce or eliminate fiduciary duties through a POA?

18.Split-Interest Trusts Created by Entities .a. Entities creating trusts.

i. Significant advantages when an entity creates a split-interest trust, like a CRT.

ii. Historically when corporations liquidated they would form a master grantor trust (pre-LLC/LP days). Now might use LP structure with the corporation as the GP.

iii. IRC Sec. 170(a) provides a deduction for charitable donation by an individual with various percentage limitations based on the nature of the property and the done charity, etc.

iv. Special rule under 642(c) you get a deduction from gross income paid by estate or trust (for an estate, for income set aside) for charitable purposes pursuant to the governing instrument. An estate has a less restrictive requirement to qualify as it only has to pay for a “charitable purpose.”

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v. C Corporations get a deduction under IRC Sec. 170. The rules are quite different than those that apply for individuals but are not applicable to S corporations.

vi. Rules for S corporations and partnerships differ. The charitable deduction an S corporation takes is passed to its shareholders (other than an ESBT). For partnerships contributions are passed through to the partners under IRC Sec. 702(a)(4).

vii. Rev. Rul. 2004-5 IRS held that if a partnership makes a charitable contribution and there is a trust that is a partner the trust gets the deduction even though it doesn’t meet the IRC 642(c) requirements as a result of the governing instrument not permitting contributions. The deduction is allowed. IRS issued this ruling after losing a number of cases.

viii. For the above to occur, a trust/partner to obtain a contribution deduction for a partnership donation, the partnership must have paid the donation from gross income. FSA 200140080.

ix. The above test can be met by the donation of property. However, the asset donated must have been acquired by the partnership using its gross income. Gross income remains gross income.

x. IRC Sec. 681 shall apply. This provides that if trust makes distribution with unrelated business income (UBI) then it gets no deduction under IRC Sec. 642(c). Regulations under 681 – trust does not get 642(c) deduction but gets deduction individual would get under IRC Sec. 170.

xi. Revocable trust must make 645 election to avoid application of IRC 681.

xii. If partnership funds with something other than unrelated business income it may work.

xiii. You cannot specify the source of payment to a charity from a trust or estate unless it has significant economic effect for IRC 642(c).

xiv. May be able to avoid IRC 681 limitation which throws you to limitation on individuals. HO 8-10.

b. Individual limitations.i. Individuals are limited to no more than 50% of AGI if a non-

appreciated asset, 30% if a private foundation or long term capital gain property, etc.

ii. An individual’s contribution is limited to 30% when made “for the use of” the charity in contrast to a donation “to” the charity.

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iii. Contributions to a CLT are limited to 30% or 20%. c. Partnership limitations.

i. If you can have a partnership make the contribution and the partner were a trust there may be no 50% or 30% limitation. The only limitation is when it is paid with unrelated business income.

ii. How can we have a partner involved? Regulation provides that a corporation or partnership can create a charitable trust, or any kind of trust, but it won’t be treated as created by the partnership or corporation unless it is for a business purpose of the entity.

iii. Partnerships and corporations make charitable contributions all the time. How do we know a contribution by a partnership to a CRT/CLT will be for business purpose? If entity decides each year which charity to benefit will that control suffice? What if the donations are limited to matters related to the industry the partnership or corporation is in? Example if the partnership publishes books what if it makes donations for educational charitable purposes? That would seem to suffice.

iv. Google.org was set up as a foundation more than 20 years ago. 501(c)(3) limitations. Google wanted to carry out important philanthropic goals without restrictions. Google.org gives grants to for profit companies to get them to develop a cleaner car that won’t pollute, as an example. It is not a non-profit corporation but the purposes are philanthropic.

v. Consider including in the business purpose section of the certificate filed to form the entity an additional business purpose of carrying out activities for human-kind.

vi. In this way if the entity creates a charitable trust that will be consistent with the certificate forming the entity.

d. Entity can create a charitable trust.i. A number of PLRs have permitted entities to form CRTs.

1. PLR 9419021 partnership (LLC) could create CRT.2. PLR 9205031 corporation can create CRT.

ii. A number of PLRs have permitted entities to form CLTs.1. PLR 9512002 S corporation could create CLT.2. PLR 8145101 C corporation can create CLT.

iii. If an entity creates a charitable trust:

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1. The entity will be treated as a grantor of the trust if the transfer was for a business purpose (see recommendations on this point below).

2. If the entity makes a transfer to a charitable trust for the personal purpose of the entity owners it will be treated as a constructive dividend to those owners. Reg. Sec. 1.671-2(e)(4).

3. What is unique about an entity created charitable trust is that unlike an individual the entity does not die so that grantor trust status does not have to cease.

e. CLTs.i. With a CLUT or CLAT the charitable payments end at the

conclusion of the trust term and the remaining trust corpus passes to the non-charitable beneficiary.

ii. You can create CLT as either a grantor trust or non-grantor trust.

1. Non-grantor CLT.a. Most are non-grantor trusts. b. If it is structured as a non-grantor trust the

client/donor does not receive a contribution deduction for the interest committed to the charitable remainder beneficiary.

c. The trust will be entitled to a 642(c) deduction without limitation (unless unrelated business income) for transfers to charity.

2. Grantor CLT.a. The grantor gets an upfront deduction equal to the

interest committed to charity but then the grantor will have to include in income in future years all income earned during each year of the charitable term, but he or she will not receive any further contribution deduction.

b. This is a trade of the upfront deduction for future income recognition.

i. There may be a way to get up front deduction and avoid back end income.

ii. Recapture – if client create a grantor CLT client will recapture upfront deduction if grantor trust status terminates too early.

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iii. The Code rule is harsh. You have to recapture the deduction to the extent that the present value of all income included is less than the deduction. What should really be considered for recapture is the payments the charity received during the term it was a grantor trust and the deduction. Reg. Sec. 1.170A-6(c).

iii. Can you obtain the upfront contribution deduction but avoid income recognition in later years using a grantor CLT?

1. Rev. Rul. 2007-45 IRS published sample CLT forms. a. These included instructions on how to make a CLT

a grantor trust. b. Don’t give to grantor or a disqualified person.

675(4)(C) power of substitution. c. But if grantor trust status terminates before

charitable term is over you will have recapture under Code provisions (not under Regulations).

2. How can you avoid the above?3. Instead of an individual transferor creating the grantor

CLT, what if instead a partnership creates the CLT? a. A partnership can create a CLT and will be treated

as the grantor as noted above. Reg. Sec. 1.671-2(e)(4).

b. What if partner dies? Should not have an impact on CLT, but the IRS would argue for recapture because the partner died.

c. But what if a trust is the partner? Trusts don’t have to die and instead can last for a long time or perpetually.

d. So a trust is a partner in a partnership that creates a CLT. The trust/partner cannot die but rather the trust/partner continues so that the recapture event should never be triggered.

f. What asset might you fund such a CLT with?i. Municipal bonds.

1. What if fund trust with municipal bonds? But the return now is too low. Presently it is lower than the 7520 rate and CLT will only succeed if income/growth is greater than 7520 rate.

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ii. IRA.1. What about using a Roth IRA? Fund CLT with Roth

IRA, get upfront deduction for grantor trust. Take money out tax free. But can you transfer a Roth IRA to a CLT? Rev. Rul. 85-13 and the Regulations under 1001 anything owned by grantor trust is treated for federal tax purpsoes as owned by grantor. So if grantor contributes Roth IRA to a CLT grantor trust she is still treated as the owner.

2. Problem this is not permissible you cannot transfer any IRA to a grantor trust or you will lose its status as an IRA or Roth IRA.

iii. Life Insurance.1. Use life insurance and borrow from policy.

a. Borrowing on MEC insurance contract is income.i. Comment: See detailed discussion of MEC

rules in the session “Insurance as an Asset Class” in this outline.

b. Few people would be willing to put insurance policy into a CLT.

c. If you put in a new policy it will be a MEC and when you borrow to make the required CLAT annuity payment you will get taxable income and this structure cannot work.

2. What if the CLAT was structured as a Shark-fin CLAT?a. Make small payments until insured dies.b. If you do, the CLT pays the charity a small amount

each initial year, say $1,000/year. When the grantor/donor/insured dies, on death pay whatever is necessary to make the CLT remainder as small as possible. Presumably the life insurance proceeds will suffice to fund this payment.

c. You cannot zero out CLT based on a lifetime but you can make it small, say 5%.

d. You would get a deduction for 95% of what is contributed.

e. If pay less than 7520 rate (which $1,000 is) you must have amount paid on death that increase as the grantor ages for the CLT to qualify.

3. Recapture is an issue but there is a solution relating to the Atkinson v. Commr. 115 TC 26 case. If you create CRT

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and fail to make payments on time you have a bad CRT. IRS decided to apply this concept to GRATs.

4. Having payments vest when grantor dies makes the payments are simultaneous with death.

5. Fund with cash and policy that is not paid up so that the CLT finishes payments on the insurance policy. This approach can facilitate avoiding the MEC taint on the policy that later borrowing will not trigger an income tax cost that MEC characterization would.

6. But IRC Sec. 170(f)(10) addresses charitable reverse split-dollar. If a charity pays any premium on policy of insurance and any benefit can go to a non-charity then there are three adverse effects: no income tax deduction, there is no gift tax deduction, and a 100% excise tax. This is the Trifecta of tax horrors and must be avoided.

7. Use a grantor CLT, fund with cash and grantor buys a non-MEC policy for four to five years. Then the grantor can exercise power of substitution and swap in the now non-MEC life insurance policy and get cash back from the CLT.

8. The may be challenges to the above suggestion. The IRS might argue that the various transactions are one under a step-transaction doctrine. The IRS might assert this as an act of self-dealing.

g. Impossible Dream.i. Achieved through a strange form of life insurance under IRC

Sec. 7702(g) frozen cash value policy.ii. The annual increase in the net cash surrender value will be

included in gross income of the owner of the policy. So use frozen cash value policy so the net cash surrender value does not increase so you avoid taxable income and it is not subject to MEC rules.

iii. If you do this type of policy you can borrow up to extent of original premium without taxable income but you will have pay out more during term.

iv. You can pay out enough with a multi-life policy. When payments come out of 7702(g) policy.

v. You can structure a CLT like a GRAT with 20% increasing payments.

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19.Trust Protectors .a. Protectors are third party decision makers in trusts.

i. This is one of the most significant developments in America trust law.

ii. Concept taken from foreign trusts.iii. Is “trust adviser” more descriptive then “trust protector?”

1. South Dakota statute used phrase “adviser” and that person is a fiduciary.

2. When speaking of other powers use term “Trust Protector.”

iv. Trust advisers have generally been found to be fiduciaries.v. Litigation counsel to trust protector on the stand: “And what

steps did you take to protect the trust?”b. Should you use a protector?

i. A trust protector should not be used in every trust. It should be used when appropriate. If it is not a role that is needed do not use it.

ii. Ask whether there is a function that will be better served with a protector.

iii. Will settlor’s intent be better carried out with a protector?c. Threshold question is the protector a fiduciary?

i. That is not the correct way to phrase the question.ii. One protector may be different then another because of the

different powers they hold.d. Powers of Protector to Advisers

i. UTC 808 suggests powers may be greater or broader, perhaps they are just different.

ii. Dilemma if you name a protector do not assume anyone knows what they are to do. If you, in contrast, name a trustee there are centuries of case law defining this. For trust protectors there is “virtually no law.” So we must define what they do.

iii. Wide variety of powers that can be given but they must be in the instrument.

e. State Statutes.i. Early statutes, Delaware was the first, dealt with trust

“advisers.”ii. When added protectors, statutes indicated same as advisers but

they are not.iii. Statutes did not focus on what protector is supposed to do.

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iv. Several categories of statutes1. UTC 808 which states that this is a person other than a

beneficiary who holds a power to direct (don’t say who they direct), is presumptively a fiduciary, must act in good faith with respect to the purposes of the trust and the interests of the beneficiaries.

2. The above UTC deals with trust advisers.3. Deals with investment and distribution duties. This does

not define protector duties. The comment adds somewhat more, but not much.

4. UTC comments state that the intent of 808 is to ratify the use of trust protectors. It did not say to create the use of them.

5. 808 is a default provision.v. 11 states have no statutes on trust protectors. 26 states (UTC

plus 11) have no statutes.vi. Many statutes don’t correlate UTC 808 on advisers and the

statute the state has on protectors.vii. Some states provide a list of powers but they generally state

that the powers are non-exclusive so they are not powers granted.

viii. Most statutes state that the protector only has the powers granted in the trust instrument so if the instrument is silent the trust protector has no powers.

ix. Some statutes state that the protector is a fiduciary. Some statutes provide the opposite, that the protector is not a fiduciary, but that status can be varied in the instrument.

x. Idaho – if a trust adviser with trustee functions then the protector is a fiduciary.

f. Case law.i. 3 cases.

ii. Oldest is McLean Case from MO.1. Discussion focuses on bad acts of trust protector. These

were allegations in a petition.2. The case went to court of Appeals on a motion for

summary judgment.3. Issue was whether plaintiff could prove allegations in the

petition and only evidence before court was petition, answer and trust instrument.

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4. Court said the plaintiff shall have an opportunity to prove up the case.

5. Court said trust protector had no duty to monitor performance of the trust.

6. Only had powers in instrument.7. Instrument gave power to remove and replace the trustee.8. After 3 day trial the court granted a directed verdict. This

meant that the plaintiff did not prove the allegations in the petition. Court of Appeals determined that there was no liability for the protector since there was nothing that happened after the protector received a request by the beneficiary to replace the trustee. Nothing adverse happened between the notice and the protector’s resignation.

iii. Schwartz v. Wellin 2014 WL 1572767.1. Protector was going to turn off grantor trust powers.2. When stock sold there would be a huge gain and Settlor

did not want that gain on his personal return.3. The children did not want the gain so they wanted to

terminate the trust before the sale.4. The trust protector amended the trust to give him the

right to bring an action to stop the termination of the trust.

5. The issue was whether the protector had that power.6. The court looked at the trust instrument which permitted

the protector to amend the trust to contract the powers of the protector but not to expand the powers of the protector. The action of the protector was an expansion of powers and the protector did not have that right. Court held protector had no standing to do this.

7. Children thereafter removed protector. Protector appointed a trustee and this become the second part of the decision.

8. Children claimed that protector could not appoint a trustee since the protector was removed. Court read language in the trust which said that there must always be a protector and removing the protector without naming a successor was not valid.

iv. Florida Case.1. Florida has UTC 808 provision.

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2. Court looked at trust instrument and found that the protector acted within the scope of powers and validly exercised the powers.

3. In the case the protector amended the trust to prevent the children from bringing an action against the trustee who was a second spouse.

g. Who to appoint.i. Should not be a related or subordinate person.

h. Powers to give protector.i. Powers given define role of protector.

ii. Three types of powers.1. Trust Adviser.

a. Powers normally subsumed by trustee.b. Investment powers.c. Power to direct sales.d. Power to veto purchases.e. These powers assure that the trust adviser will be a

fiduciary. You cannot have a trustee directed to follow the direction of an adviser and exonerate the adviser (by making the adviser a non-fiduciary).

f. If the advisers is not a fiduciary the trustee should be permitted to reject the advice given by the adviser.

2. Powers that the Settlor beneficiary or trustee would not otherwise have.

a. Approve trustee compensation.b. Change governing law and situs.c. Approve trustee accounting.

3. Powers that ore otherwise lodged with a court and for tax or other reasons cannot be given to a beneficiary.

a. Modify the trust instrument.b. Interpret terms of the trust.c. Veto exercise of beneficiary right including the

right to an accounting.d. Terminate a trust.e. These are in a non-fiduciary capacity.

i. How to draft trust protector provisions.i. First issue to address is the trust protector necessary or

desirable for the particular trust. If not don’t use it.

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ii. Because of the status of state law don’t rely on it and instead spell out which powers are given to the protector.

iii. If the trust protector is given powers other than those of a trustee be in a state to permit trust protector act as a non-fiduciary.

iv. Be specific as to what terms are, what is intended for protector.v. Expressly state whether or not the protector is a fiduciary.

vi. You cannot have both the trustee and trust protector both exonerated.

vii. Absent bad faith the protector is not liable.viii. Is this a standby job or do you really intend the protector to

monitor the trustee. This was the case in McLean. Then you should put in an express provision that there is no duty to be informed.

ix. If the trust protector is to monitor the trustee they should get all relevant information to do that.

x. Address compensation of the trust protector. If it is a standby position perhaps compensation be nominal or a reasonable hourly. If the trust protector is to monitor the trust they should be compensated for the liability they spend.

xi. Be careful of the words used. If interpretation is needed incorporate that into the body of the trust.

xii. Use appropriate name. If the protector is given trustee powers call them an adviser. If you are giving them non-typical trustee powers call them a trust protector.

xiii. Set out duty of care. If you intend that the protector not be liable absent willful misconduct, include this. The standard of care, e.g., absent bad faith, will protect the

xiv. Who will pay the attorney for the trust protector if the protector is sued? Settlor can enter into an indemnification agreement with the trust protector.

j. What does protector and trustee need to do?i. A protector must read the instrument without reviewing the

trust instrument.1. Comment : How many protectors understand their

responsibility and have reviewed the trust with counsel, taken reasonable steps to ascertain the status of the trust and the trustee’s performance on a periodic basis?

ii. Does the protector have insurance?iii. If a lawyer does malpractice cover?

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iv. What about the trustee? Does the protector have to receive information on a regular basis? Should the protector receive statements on a regular basis? If the protector is to act in only a standby fashion should they receive regular statements? Providing statements could expand on the liability of the protector.

1. Comment : Some institutional trustees will insist on sending the protector statements and other information.

v. Just because someone has been appointed a protector does not mean that they can direct investments or distributions so the trustee must understand the scope of the protector’s powers.

20.Ethical Considerations in Acting as Executor or Trustee .a. Challenges confronting lawyers and other professionals in serving as

an executor or trustee, or representing one, are legion.b. How do you handle representation and what are your ethical

challenges acting as executor or trustee, or representing them.c. When acting as fiduciary must consider 5 areas of the ethical rules.

i. Competent to handle representation.ii. Conflicts of interests.

1. Relationships between beneficiaries2. Relationships between other family members who may

not be fiduciaries or who may not be beneficiaries.iii. Manage communications between parties. Failure can result in

discipline.iv. What type of compensation should be charged and will it be

reasonable. This can result in the denial of compensation to the attorney.

v. Gifts. If named in a fiduciary capacity the attorney may become friendly with the client and might receive gifts.

d. Failure to adhere to rules can create significant problems.i. Lawyer discipline.

ii. The number of disciplinary complaints against estate planners is substantial. 1,200,000 lawyers have active licenses. This is down substantially over the past 7-8 years.

iii. The number of complaints received is almost 44,000. That is almost 1 in 20.

iv. Sanctions imposed such as private, public sanction or disbarment is about 6,000 attorneys in a year.

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v. Possibility of being sanctioned is not that great.vi. The mere fact that a complaint is brought against an attorney

can create tremendous burdens and have a devastating impact.vii. Failure to follow the rules relating to conflicts and other rules

can result in the lawyer from being removed from existing representation.

e. Rule 1.1. Competence.i. This is important because estate planning practices on planning

or administration often involve many areas of administration, trust and estate law, real estate law, and so much more.

ii. Lewis v. State Bar of Calif. 23 Cal. 3d 683.1. Lawyer had no experience.

iii. Layton v. State Bar of Calif. 50 Cal. 3d 889.1. Lawyer failed to maintain insurance on the house.2. Failed to close the estate.3. Failed to perform the legal services he was providing to

the estate competently.f. Conflicts.

i. Lawyer representing a fiduciary has to make sure that he or she knows what the relationships are between the lawyer and the other parties.

ii. The representation that we undertake is often ambiguous. iii. New laws like the UTC may provide flexibility to make certain

changes without formal court supervision.iv. Lawyer may be concerned that if he indicates who he does or

does not represent he may lose business.v. Bringing other lawyers into the conversation may slow the

process of the administration or the sale of assets.vi. The ethical requirements expressly address trusts and estates

lawyers about issues that might arise. Model rule 1.7 comment 27. Conflicts questions may arise in estate planning and estate administration. A lawyer may be called upon to prepare wills for several family members such as husband and wife, and, depending upon circumstances, a conflict of interest may be present…In order to comply with conflict of interest rules, the lawyer should make clear the lawyer’s relationship to the parties involved.

vii. Does the existence of the relationship be adverse to other heirs or affect the representation of the executor? If multiple heirs this can be quite complex.

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viii. Must define who you are representing and who you are not representing. Potter v. Moran, 49 Cal. Rptr. 229. Trustee was exposed to continuing claims concerning improper management of the trust because the settlement of accounts were not binding on the beneficiaries because of conflicts of interest.

g. Joint Representation.i. Each client must give consent confirmed in writing.

ii. Must be able to provide competent and diligent representation of each client.

iii. Joint representation of co-fiduciaries. 1. Can you represent as attorney to co-trustees?2. If you are the attorney and executor can you represent the

estate?3. Multiple trustees must stay informed and participate and

must jointly make decisions unless pursuant to the terms of the governing instrument one has delegated to the other.

4. Generally joint representation of co-fiduciaries will not represent a conflict of interests. But if a conflict of interests does arise the attorney may not be able to represent anyone of the co-fiduciaries.

5. What duty do I owe the beneficiaries?iv. Fiduciary and lawyer owe few duties to the beneficiaries other

than lawyer owes to third parties generally.1. The nature and extent of lawyer’s duties to beneficiaries

will vary according to the circumstances.2. Some duties may be owed.

v. Can you represent both a fiduciary and beneficiary? Can you be a trustee and also represent the beneficiary?

1. A client who is adequately informed may waive some conflicts concerning the same or a related matter.

2. Example surviving spouse is executrix may give informed consent to permit the lawyer who represents her and to represent the child beneficiary. Must still meet requirements of Model Rule 1.7.

3. What if represent a fiduciary who is also a beneficiary? The answer is yes but you must understand the representation and you understand the possible adversity.

4. If you represent the fiduciary in that capacity and as a beneficiary you must obtain consent to act in both

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capacities. You must indicate that the beneficiaries can obtain independent representation at their own expense. You must maintain separate records. You must charge the fiduciary separately for work done as a fiduciary and as a beneficiary.

vi. Baker Manock & Jenson v. Superior Court 96 Cal. Rptr. 3d 785.

1. Court concluded that attorney for executor does not have a conflict of interest for representing a beneficiary of a will with another unless there is a conflict.

h. What if the attorney who drafts a document and named himself or herself as fiduciary?

i. Lawyer can do so as long as client exercised his or her judgment to do so.

ii. ABA Ethics Opinion 02-426. Lawyer must provide reasonably adequate information, the desired skills, the kinds of individual entities that can serve effectively, and the costs.

iii. Lawyer can disclose his or her ability to serve as a fiduciary.iv. Must disclose pros/cons of using lawyer versus someone else.

Should document why this was done.v. Model Rule 1.7 addresses this issue.

vi. While the appointment of a named fiduciary is desirable, the designation of a particular lawyer to serve as counsel is not necessary. There is no reason that the fiduciary cannot decide at the time it is necessary who counsel is that he or she wants to hire.

vii. An attorney because he drafts a will has no preferential position to probate that will. Merely putting this in the document creates suspicions.

i. Communications.i. Lawyer acting as fiduciary or representing fiduciary. Dealing

with third parties as lawyer. ii. Model Rule 4.3 if lawyer knows or should know that the person

misunderstands lawyer’s role should clarify. Should not give unrepresented person advice other than recommendation to secure his or her own counsel.

iii. Consequences can be severe. If fails to follow rules actions by lawyer may not be binding. This could expose the fiduciary to ongoing risk for actions taken.

iv. Courts tend to be very protective of unrepresented persons.

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j. Confidentiality.i. If you have joint clients anything you tell one you must tell the

other.ii. If representing co-executors or co-trustees is this a separate

representation of each of them or is it a joint representation.k. Compensation.

i. See Model Rule 1.5.ii. Fees must be reasonable.

iii. Novelty, skill required, hours, fees customarily charged for similar legal services, etc. can be considered. Take into account all factors.

iv. This unfortunately gives no help in determining whether a particular charge is or is not reasonable.

v. Estate of Hughes 90 P.3d 1000. Contingent fee for 1/3rd of assets to be increased to 40% if certain contingencies met. Court upheld trial court’s refusal to uphold fees. Failed to differentiate representing fees representing the person as a fiduciary from representing her as a beneficiary.

vi. Courts are rejecting flat or percentage fees. Matter of Paitner’s Estate 567 P.2d 820.

vii. Trend appears towards hourly basis fees which will be evaluated as to whether they are reasonable in terms of hourly rate and work done.

l. Gifts by clients to attorneys.i. Doesn’t say you cannot receive a gift.

ii. It says you cannot solicit a gift.

21.Trust Protectors and SNITs .a. Facts.

i. 1 of 80 children diagnosed with Autism.ii. Accidents, head trauma and more will survive remaining

diminished capacity.iii. How many trust beneficiaries with dementia and cannot

advocate on their own behalf1. Comment : It is estimated that by 2050 as many as 16

million Americans will be living with Alzheimer’s disease. The need for this type of planning should dramatically alter estate planning in coming years. Revocable trusts with protectors to deal with these issues

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should become common, and perhaps the default drafting approach for aging clients and those facing incapacitating health challenges.

b. Trust protectors.i. NY has no statute so if use a protector the terms of the

document control.c. If beneficiary cannot take action a protector may be far more

important.i. If the beneficiary is incapacitated may not have ability to

enforce trustee carrying out mandates of the trust. ii. If beneficiary cannot do so who will?

1. Comment : There has been increasing attention to the requirements to give notice to beneficiaries. Many institutional trustees have internal policies favoring notice. But if the trust instrument does not include a provision, such as the Designated Representative concept which is being proposed in Delaware legislation, who will receive notice? See Section 2. Adding a new § 3339 to Chapter 33 of Title 12 of the Delaware Code “§ 3339 Designated representatives of trusts.” Perhaps this should be included more frequently as a default provision to be triggered for any incapacitated beneficiary. Unless someone receives notices how will anyone look after an incapacitated beneficiary?

d. What is a special needs trust and beneficiary with special needs?i. Two different types of documents. Distinction is based on who

puts money into the trust.1. “Self-settled” or “first party” or “(d)(4)(A) trusts”. The

incapacitated individual puts the funds into the trust.a. Could be plaintiff in personal injury suit.b. Could be divorce and child support payments

could be directed into such a trust.c. Other.d. The trustee in a pooled trust is someone the non-

profit selections not who a client selects.e. Examples in this presentation don’t cover first

party trusts because the Medicaid agency might claim that there is too much control.

f. Individual with special needs cannot set this up a parent or guardian must set up the trust. NAELA

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and others are backing law “Special Needs Trust Fairness Act” which would permit someone with sufficient capacity to set up their own first party trust. He or she could set up a pooled trust but not a first party trust under current law.

2. Third party trust.a. Example a parent who has child with autism and

wants to set up a trust without negatively impacting government benefits. Many benefits are means tested so must qualify, submit an application and demonstrated limited income and assets.

b. Federal law 42 U.S.C. Section 1380 et seq. permits a first party trust. The statute does not address third party trusts although some states do have these statutes.

c. If your state has such a statute you should model a trust you draft after the local statute so that a case worker will recognize the language.

d. Third party trusts are generally wholly discretionary. The intent is that the distribution will not replace or supplement governmental benefits but rather to supplement, and make better, what the government is providing for.

e. Trust fund to better the special needs beneficiaries’ life is the goal.

ii. First party trust you have to agree that on death of beneficiary funds in the account will be paid back to Medicaid. There is no obligation to for money to remain in the account by the death of the beneficiary, but if there are assets remaining they must be left to Medicaid. Contrast, in a third party trust, there is no need for a payback and in fact erroneously including such a payback provision is a significant mistake.

iii. Dealing with an unnecessary payback provision may be dealt with by a trust protector and this may be a basis to include a protector provision in the trust.

1. Comment : Would this be a correction of a scrivener’s error or a change in beneficiaries which might require a different type of provision.

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iv. Who should be the protector and trustee? In many cases, clients simply choose to name family members. Many don’t have significant sums in the trust so that often they cannot find a trust company or bank willing to serve. If the assets are insufficient they cannot earn enough and they will not accept the trustee position. Special Needs trusts are not like ordinary trusts, the trustee has the added responsibility to make certain that the distributions will not taint the beneficiary’s qualification as a special needs beneficiary.

v. Line of cases are imposing duty of trustee to act, beyond duty of a regular trustee, because the beneficiary of a SNT is different.

1. NY case. a. Bank appointed as trustee of SNT and beneficiary

was in group home in upstate NY. The trustee had never visited the individual and had not spent money on his or her care.

b. During an annual accounting proceeding Judge called trustee in.

c. Judge inquired as to how many times they visited beneficiary and how many distributions made? None.

d. Judge wrote a scathing opinion and made it clear that they had to perform properly.

e. This case brought a “chill” to the SNT trustee market.

2. In another case.a. Bank hired someone to take care of the

beneficiary.b. Judge asked why they did not apply for Medicaid

to see if they could retain funds to supplement Medicaid which was the intent of the trust.

c. Bank was surcharged.d. This case has inhibited this particular bank from

taking these cases.vi. For all the above reasons having a protector in place to protect

the beneficiary could be helpful, if not vital. Also, laws are changing at a fast pace: local laws, federal laws, local practice, etc. Having a protector that can modify the trust to address

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changes in law could be another important point of having a protector.

e. Power corrupts and absolute power corrupts absolutely. So having a protector to monitor the trust and trustee may be an important mechanism to protect the beneficiary.

f. Even if the beneficiary is not on Medicaid, so you don’t have the special needs/Medicaid issues, anytime there is a less capable or infirm beneficiary, having a protector to help protect that beneficiary’s interests could be important.

g. Case studies.i. Powers given to protectors to be assumed in the governing

instruments in each case study below (except for the pooled fund example).

1. Remove and replace trustee.2. Change situs.3. Make modifications or corrections to the trust.4. Power to amend the trust in light of law changes.5. Right to be compensated.6. Some might want to add power to veto distributions.7. Some might want to add power to add beneficiaries.

h. Case Study No. 1A: If you decide to have a protector who should you name?

i. Facts.1. Daughter 35 with Downs’s syndrome. Life expectancy

can be fairly long. She works in a sheltered workshop and lives in a group home.

a. Comment : Life expectancy for individuals with Down syndrome has increased dramatically in recent years, with the average life expectancy approaching that of peers without Down syndrome. http://www.ndss.org/Down-Syndrome/Myths-Truths/

2. Entire $1.2M estate left in SNT for daughter. On her death to children of sibling.

3. Named bank as trustee.4. Second cousin who lives locally and is a CPA may be a

candidate to serve as trust protector.ii. Discussion.

1. Trust might be a purely discretionary trust.

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2. Amount of funds in trust, medical issues and degree of incapacity of the daughter will all effect terms that should be included in the trust.

3. In selecting trust protector consider geographic location. If brother lives in London will he have the ability to monitor his sister? Will he be able to obtain and direct information to the Trustee? Is it preferable to name the 2nd cousin who is local? Consider the conflict of interest for the brother in that his children inherit whatever is left and not spent on his special needs sister.

4. Note that many group homes will only accept a resident who is on SSI. The trust has to be written to prohibit the trustee from making distributions that would disqualify the daughter for government aid because, among other matters, it might disqualify her from being in the group home.

5. Who should be named the protector is also effected by what powers are given to the trustee and to the protector. What is the role?

6. Who will monitor the daughter’s lifestyle? The trustee. Perhaps require the trustee to present an annual quality of life review by the beneficiary each year. This would give the protector the ability to review care. Consider having a local social worker and have him or her report on the status. The bank might not be able/willing to undertake this so hiring a care manager or social worker might suffice.

a. Comment : Consider mandating in the trust document that the institutional trustee will hire an independent care manager at least once per year (or more frequently if appropriate) and issue a report to the trustee and directly to the trust protector. This can provide the trust protector independent corroboration of the care being given to the beneficiary and her status.

7. Will protector be paid? Cousin might wish to be paid but brother may not. The trust should in all events provide reasonable reimbursement of costs.

8. Consider successor as either cousin or brother age.

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9. Address expenses of the brother from London visiting. Should travel be reimbursed?

10.Should the trustee be given the flexibility to pay what might exceed what is permissible?

11.What will future rules be for SSI? Will SSI even exist in a form we would recognize today? This is another reason to give some flexibility to let protector amend the trust.

i. Case Study 1B.i. Facts.

1. Middle child has mental illness and bi-polar disorder. As a result of care and medication he is living independently and works as a clerk in a retail store. He is not on SSI.

2. Estate is $4.5M which they will leave outright to three children, 1/3rd each but special son’s share to be in SNT. 50% of the remainder of the SNT will go to a charity that has supported/helped the child, and 25% to each of the other siblings.

3. Should they name attorney or their uncle as protectors? Should sisters be named as trustees?

ii. Discussion.1. Equal is not necessarily fair, and fair is not equal.

Perhaps more should be left for special child? Perhaps less should be left for special child as a result of SSI?

2. No lawyer would be willing to accept the responsibility involved in this case. How much can appropriately be paid and at what rate?

3. Naming sisters is a conflict of interests. Consider a corporate trustee if one will serve.

4. Is $1.5M enough for trust company? Are you content to use only income distributions perhaps naming sisters it is not as much an issue to name the sisters? Perhaps have accumulated income go to the charity.

5. Is child able to obtain employment other than with his uncle? Will that job be secure for any duration? Replaceable if not?

6. How much intervention do parents provide in special child’s care now? Are they policing his funds?

7. Perhaps in contrast to prior case study an attorney might serve as trustee in this case as the role is more clearly defined then the trust protector role was in the preceding

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example. If that were done and the daughters could be named protectors.

8. Often the parents seek to bind/involve the other children into the life of the special child. That should be factored into the planning. The children to be involved should understand in advance the scope and duration of this responsibility, especially in an instance like this with mental illness.

j. Case Study No. 2 Do you always need a trust protector?i. Grandchild age 2 has developmental disabilities

ii. Should a protector be appointed to effectuate changes for benefit of special grandchild? Why not name the parent as protector?

iii. Need a series of successive protectors to continue this for the young grandchild’s life.

iv. A protector would be useful because of the significant unknowns as to the grandchild’s disability. It is not clear in the fact pattern how severe it is at present and it may take years to know the real impact.

v. Who are the remainder beneficiaries of the SNT? vi. Divorce rate is very high among parents with a special needs

child. So naming a protector could be particularly valuable and protective in such a situation. This also may affect who you would name as protector.

vii. It might be beneficial at some point to dissolve the trust. Might wish to permit distributions sufficient to do this but in a manner that does not destroy qualification for special needs. Might therefore include decanting powers as well.

k. Case Study No. 3. Should protector be obligated to act or only permitted to react?

i. Facts.1. Beneficiary age 40 severely autistic. Lives in group home

operated by a charity.2. Siblings live 1,000 miles away.

ii. Analysis.1. Must protector investigate unusually high earnings

generated by the trust?2. Does she have to wait until she has actual knowledge of

the siblings violating their fiduciary responsibilities before acting?

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3. Note that this case study is not a SNT so no concern about maintaining government benefits. It may therefore be feasible to convert to a unitrust to minimize some of the issues of investments being made to maximize income at the expense of the remainder beneficiaries.

4. The beneficiary actually does not need all of the income. It is not clear that the foundation won’t make up the difference. Therefore, there may not be an incentive to maximize income. In fact, it might be the opposite incentive to maximize growth not income.

5. The trust protector’s scope of responsibility depends on the trust instrument, circumstances, and state law.

6. There should be a different standard for a protector depending on whether the protector had information disclosures or not. If the trust instrument does not give the protector authority over the investments of the trust that doesn’t create a responsibility and an obligation to investigate the asset allocation, etc.

a. Comment : The fact pattern appeared to give the protector the right to replace the trustees. Not sure I would agree with the conclusion above if the protector holds that power. If the trust protector can change the trustees, and the trustees are not performing properly, might not some obligation be inferred to monitor to some level trustee performance to make the decision as to whether or not to replace? What is the minimum level of “review” (if that is the appropriate descriptive term) that a protector should undertake if he or she holds the power to replace a trustee to minimize or avoid liability for holding that power? Is it really safe to “wait” for actual knowledge?

7. If you have the power to remove the trustee you have the obligation to intervene. If you have the right to remove the trustee logically you should take some steps to evaluate whether you should terminate the trustee.

8. What is in the best interests of the child/beneficiary? In this case a charity seems to have the primary responsibility for his care.

l. Case Study No. 5 - Pooled Trust.

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i. Leaving money to pooled trust for special daughter. ii. It is tantamount of turning over funds to a charity with special

knowledge. Do you need a protector to check up on the pooled trust?

iii. Pooled trusts are useful where there is a small sum of money or no family member as you can get professional management and should not have to worry about bad faith because it is under the auspices of a charity and is run by officers of that charity.

iv. Compare to first party trust where only 50% of funds left on the beneficiary’s death (at least in the state in the example) has to revert to the state.

v. If you join a pooled trust you sign a joinder agreement to become party to a master trust. The trust sets up a pooled investment account for investment purposes but they have a separate account for each participant.

vi. When you are deceased who watches the pooled trust? They are likely to need less “watching” then other arrangements. But you might set up a third party trust and hire a care manager to monitor what the care level is for the beneficiary/child. This becomes akin to a “watchdog” trust. You will not be able to appoint a trust protector since this is not a trust the client and attorney are preparing. The joinder agreement is basically handed to the client to sign, not to re-draft.

22.Trust and Estates Owning Business Interests a. Business interests in trust introduction.

i. Importance is significant given the statistics on the size and value of closely held business interests.

ii. Prudent investor rule may be violated by holding the equity.iii. Conflict of shareholder and fiduciary duties can present unique

and complex issues.iv. IRC Sec. 469 and 1411 and impact of material participation

rules on trust owned businesses, contrasting Aragona versus IRS views.

v. Election issues – QSST and ESBT generally and with respect to material participation.

b. Hypothetical case study for this session - Billings Family.i. Bobby Billings long term client. Billy died and Bobby is

executor. Two adult children. Majority owner 80% Billings

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Timber Co. an S corporation. Value approximately $30M. This a slow growing steady paying company. Timber may be harvested over 30-40 years. Earn 5% a year. It is a classic estate challenge in that it is a high value asset with limited cash flow. The land is worth far more than the cash return on the timber.

ii. Each child owns 10% of the company.iii. Will provides:

1. Preservation of asset.2. Into trust.3. Distributions to children and spouse. 4. Fiduciary can retain timber company and does not have

to diversify.iv. Facts.

1. Payroll tax issues.2. Cash payments have historically been made to various

contractors.3. Conservative timber management plan versus the need

for liquidity.4. No strip cutting.

v. Estate tax issues.1. Estate tax deferral 6166.2. Need to aggressively cut timber to pay estate tax which is

contrary to terms of will. 3. Kids are against an aggressive cutting plan and want to

preserve timber.4. Wife wants cash flow to preserve her lifetime.5. Substantial mineral rights are owned. There is a potential

for oil discovery.6. Billy had a mistress and provided her with a house and an

allowance. She wants to have the same allowance or to be paid off.

vi. Tax issues.1. Does the Federal priority statute apply?

a. 31 USC Sec. 3713.b. This could result in personal liability to the

fiduciary. c. This statute puts the US government in a priority

position. Can be violated if executor distributes all assets rendering the estate insolvent and unable to pay federal debts.

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d. There is a case law engrafted rule that the executor had to have notice of the federal claim to be liable.

e. Knowledge -- how far does the duty of inquiry extend? This is broad knowledge. While there is a lack of clarity as to what this might require the IRS has taken a harsher approach. It requires due diligence by the executor, according to the IRS position.

f. There are defenses to these claims:i. A fact question – prove you did not have

knowledge. It is possible to win this suit but it will be difficult. See O’Sullivan v. Commr. TC Memo 1994-17 case.

ii. Reliance on counsel. Little v. Commr. 113 TC 474 case.

iii. Court orders. Go to probate court and make full disclosure and get an order of distribution. This is not a defense, although many practitioners might believe that it is. IRS is not bound by court order. IRS does not have to even enter an appearance. King case. Even if IRS shows up they are not bound by order of distribution if there is a federal priority statute that applies.

iv. For probate cases may allow administrative expenses of probate estate to be paid in advance of IRS. State law will govern which expenses may be so allowed. Again if distributions made beyond what is permitted personal representative will be liable.

g. Who is affected? Anyone who has control over the assets. So the applicability is to more than just a personal representative.

h. Transferee liability is an issue. Beneficiaries do not want to receive assets and then have to disgorge.

i. In the case study these issues are present in both the company operations (cash payments and payroll taxes) and personal payments (payments to the girlfriend).

2. Business taxes.

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a. Current taxes.b. Past taxes.c. Federal priority statute.d. If past taxes are a debt and executor distributes

personal liability may follow.3. Steps to take.

a. Provide IRS notice of fiduciary status. i. Comment: Form 56.

b. Amended returns. While not required, if you find an error, it may be worthwhile.

c. File request for discharge of income, estate and gift taxes. This begins 9 month period for IRS.

i. Request for discharge of estate taxes. IRC Sec. 2204.

ii. Request for Assessment IRC Sec. 6501.iii. Request for Discharge. IRC Sec. 6905.

d. Obtain copies of all prior gift tax returns.e. In this hypothetical, the estate does not face all

these issues, but the payroll taxes, cash payments and other issues must be addressed.

4. What if potential SEC violations while decedent was alive? Retain securities lawyer to ascertain what liability this may have created.

c. Prudent investor rule and direction to hold the business.i. Will did not mandate, in absolute terms, holding the business in

the case study.ii. The issue – retaining the stock in the close held business versus

diversification of assets. Uniform Prudent Investor Act requires diversification unless the trustee reasonable determines that there are special circumstances. This creates problems for trustee holding a close business.

iii. Arguments can be made pro/con to whether a will should mandate holding a business interest.

iv. Terms of the trust can they waive the duty to diversify.v. Options for the protection of the trustee.

1. Liability insurance.2. Consent of beneficiaries to retain the asset (i.e., not to

diversify).3. Court order confirming the right to hold the business

interest.

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4. Move the trust to a more favorable jurisdiction.vi. Sibling/family rivalries can exacerbate all of this. Heirs in the

business and heirs not in the business may have very different views.

vii. Can the executor demonstrate special circumstances? How can the executor corroborate the special relationship that the business has to the trust under UPIA standards?

viii. In practice, case law provides that to deviate from the duty to diversity should be authorized by the testator. The trustee could be mandated to hold the investment which is not what is in the current will in the case study. The business has been owned by the decedent for a long time and has special relationship to the sons.

ix. Most clients want to give some flexibility to operate the family business so long as it makes financial sense, but most do not want to mandate that the business be retained in all circumstances. Mandatory retention provisions are problematic if the asset should have to be sold. You would then need a court order, or perhaps beneficiary consent, to sell. It can be useful to have an “escape valve” to permit sale if necessary.

x. This will does not have any provision that dispenses with the requirement to act prudently. So even if there is some protection from not diversifying, that does not excuse a lack of prudent action. This will/hypothetical has some useful language.

xi. It would be preferable if the will waived duty of prudence, and other provisions to support the executor/trustees holding the timber company.

xii. Another option to protect the executor might be to obtain beneficiary consent to hold the business interest. This consent should be obtained in writing. This is particularly reasonable in the instant case since the children each own equity in the business as shareholders. However, there are minor grandchildren. It is not clear that the children as parents of the grandchildren could represent the grandchildren. Commentary to the Uniform Principal and Income Act (UPIA) if the beneficiaries consent the trustee will generally not be held as liable.

1. Comment : This may not be simple. Will a virtual representation clause permit the parent to sign on behalf

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of the minor? What about a disabled beneficiary? The surviving widow in the hypothetical may not have any involvement or knowledge of the business. Will she have the knowledge to understand the implications? If she is advised to hire her own counsel she may and that could lead to further complications.

xiii. Could the trust be moved to a state that has a direction statute to permit this?

1. Comment : Whoever effectuates the decanting could seemingly be in the same position vis-à-vis a disgruntled beneficiary if that decanting then permitted the continued non-diversification. If the current trustee decants to a state that has more favorable statutes, or into a trust with provisions permitting non-diversification, the beneficiary could argue that fiduciary was responsible for effectuating the change and should not be relieved of liability because of provision that trustee facilitated.

d. Conflicts of Interest.i. Trustee versus beneficiaries.

1. Terms of trust regarding spouse.2. Terms of trust regarding retention of stock.3. Liquidation issues versus conservative timber cutting

plan.4. Personal liability versus disclosure to the IRS.5. What the trustee does may conflict as between income

and remainder beneficiaries.ii. Trustee versus company interests.

1. Aggressive versus conservative management plan.2. Trustee as a shareholder.

a. Use of trusts to hold interests in evolving area of shareholder rights. Trustee may have traditional duties to beneficiaries and simultaneously also have duties due to participants in the enterprise that have nothing to do with the trust. So for example widow wants income, cash flow is needed to pay estate tax, but trustee has duties to the other owners of the corporation. The trustee may have to make decisions at the entity level that might conflict with his responsibilities as a trustee.

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i. Comment : If there is no identify of owners as between the trust and business enterprise non-trust equity owners, the trustee as an officer/director/shareholder may have to take an action in the company’s best interests that is not assuredly in the trust beneficiaries best interests.

b. What if corporation wishes to expand?c. Dissent could trigger statutory buy out. If meet

criteria under the statute it may trigger a buyout based on “fair value,” as defined in the statute, which can be quite different then fair market value (e.g., the statute may not permit discounts). This could be attractive in some instances but not all. In this instance the children want to preserve the business. There are many conflicting issues in this fact pattern.

d. Application to members/partners of LLC/LP will depend on applicable state law and it may be quite different than how a corporation may be affected.

iii. Minority shareholder oppression potential.1. If trustee is, in contrast to this case study, in a minority

position, the consequences and concerns are quite different.

2. Minority shareholder had no market and corporation has perpetual existence.

3. Shareholders may have right for derivative action but that is unusual. There have developed direct causes of action.

4. Donahue v. Rodd Electrotype Co. 328 NE.2d 505 case. Court used partnership analogy and found rights. Legislatures have gotten involved with an oppression approach. Many closely held entity statutes create obligations among shareholders. This is all intended to provide remedies to minority owners when there is abuse of control, with something that frustrates the minorities “reasonable expectations.” Delaware applies a “fairness” doctrine.

5. Other examples of oppression include stealing corporate opportunity, firing a minority shareholder, refusing to pay dividends, wasting assets, not permitting

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participation in decision making, doing other improper transactions.

6. Client may be part of what some statutes call “in control” and a minority shareholder can sue even other minority shareholders.

7. How should a buyout be structured? Cross purchase or redemption?

8. Be cautious of self-dealing.9. In a minority situation the trustee must be on the lookout

for oppression to identify a way to negotiate out of it, ask for a provisional director, etc. If proceed in this manner some beneficiaries may want out, so the trustee can be pulled in many directions.

e. Material participation.i. Regulations under IRC Sec. 469.

ii. TAMs have taken a narrow view in contrast to the case law.iii. How would the Net Investment Income Tax (NIIT) apply to the

case study?iv. While Billy (decedent in case study) was alive what was NIIT

impact on his 80% interest in the controlled corporation? Sec. 1411 treats passive income from a business as if it were NII. So if distributions from the timber S corporation were passive it would be so subjected to NIIT. But during his lifetime Billy was actively involved in the business. There are extensive regulations to determine whether an individual materially participates. Since Billy likely worked more than 500 hours/year he should not have been subject to the NIIT.

v. What if Billy could not work 500 hours in his last few years of life? Could he still maintain that he was active? There are seven tests that apply to individuals, one of which includes a 5 out of 10 year rule. This might have sufficed to avoid NIIT in later years. There is a less well known rule that there are special rules in IRC Sec. 469 that got dragged into IRC Sec. 1411. One of these is recharacterization of income. If you spend more than 100 hours the income will be deemed non-passive so active income would escape IRC Sec. 1411 tax.

vi. What about the application of the NIIT to Bobby, the son, running the business. He clearly spends 500+ hours managing. So the income on his 10% equity will be active, but what about

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the 80% of the income that goes to the estate and the trust. Assume the surviving Wife was not active.

vii. The test under 469 evaluates whether Bobby’s (son/trustee’s) participation characterize the trust as active? Bobby is clearly in control now. Bobby cannot exercise the power however he wants. He is subjected to trustee and corporate fiduciary constraints. Regs under 469 provide no guidance. There is a Senate report that says little other than the trust material participates if the trustee participates. That is not much guidance but it does seem to mean a trustee acting under fiduciary duties should be the litmus test.

viii. Can we count Bobby’s actions as a director, President, etc.? The answer is yes you can count it because when he does these acts he must take into account his fiduciary duties to the beneficiaries of the trust. The trustee cannot take off his “fiduciary hat” when working as an officer or director of the corporation. In Aragona it said two of the brothers active in the business also owned equity directly.

ix. In many cases you might have separate trusts for each child. Does it matter that you divide the business up into different trusts?

x. In Arogona had to show that the trust was also a real estate professional. The court did not define how to count fiduciary hours. Court did say hours that are personal services hours that are subject to fiduciary duties.

xi. What if the trust was moved to a state where a trust investment advisor had investment control over the trustee’s holding and acted in a fiduciary capacity the material participation test should be based on his involvement.

1. Comment : How can a protector or adviser charged with investment decisions for the trust not be acting in a fiduciary capacity?

xii. You cannot aggregate the hours of various family members. So if you have multiple trustees and only one trustees is a material participant is that sufficient? It would seem so.

f. S corporation considerations.i. Stock may remain in estate for some time especially if 6166.

Estate can hold S corporation stock for as long as estate can remain open. There are 2 years after funding testamentary trust to make election. If beneficiaries are active in business a QSST

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election makes sense since the beneficiary is treated as the grantor of the trust. In many trusts it provides that if the trustee believes it is advantageous they can convert the trust into a trust that qualifies as a QSST. In a QSST the S corporation stock portion would be treated as a grantor trust as to the beneficiary but no matter how you get to grantor trust status you look to beneficiary.

ii. For an ESBT you look to participating at the trust level to the trustee as to the material participation since the trust pays the tax.

1. Comment: Perhaps if the trust were a QTIP/marital trust under the will (it would seem that it would have to be to defer tax on the substantial estate) a QSST or ESBT election could be made for the QTIP. An ESBT might be advantageous if income will be characterized by the activities of the trustee. With an ESBT election the NIIT may be avoided. If instead a QSST elections is made it would be the wife’s involvement that would be the litmus test. Although the ESBT requires taxation at the maximum rate, if both the surviving spouse and QTIP would be in the maximum rate in all events, the ESBT could provide a net savings on the 3.8% tax.

iii. What if a bank is named as trustee? If had an arrangement by which Bobby was a fiduciary making decisions then he would still be the litmus test. The focus should be on who is making decisions, not just the titles. What if they moved the business to a private trust company? Would you count the actions of the employees of the private trust company?

iv. Mineral interest are passive royalties they are per se passive so the material participation analysis will not apply.

23.Planning for the Modern Family .a. General.

i. Personal planning vital especially for clients $10M and under.ii. Do definitions in documents address current environment?

b. Who is a spouse?i. What do the definitions provide for in the documents?

ii. This is not only about same-sex couples.iii. Don’t rely on state law defaults.

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iv. Yager v. Gregory Cattle Co. 638 So. 2d 1266 – court found indicia of marriage existed but fact was parties were not legally married.

v. Crescionne v. Louisiana State Police - officer killed in line of duty had 3 spouses. Third spouse was legally separated at his death but they were not divorced so court held they were married.

vi. Who is a spouse? Do you want to include a domestic partnership or civil union or only legal marriages? What if you are in a state that doesn’t recognize same-sex marriages? Should you provide a couple that is married in any state where marriage was legal regardless of law in state where domiciled, etc.

c. Same Sex Marriages.i. Inconsistencies remain.

ii. Windsor.iii. Status is still changing. But even if “landscape” becomes

consistent what happens if travel outside the company.iv. Recognition of spouse for federal tax purposes does not extend

to partners in civil unions. Now that same sex marriage has been recognized on the federal level and in many states the leniency given to civil unions is waning.

v. Power of appointment.1. If move to a state where marriage is not recognized what

impact on power of appointment?d. When is a person no longer a spouse?

i. Should it be at the time there is a legal separation?ii. Should it be at the time file for divorce? What if file but die

before divorce is consummated?iii. At what point in time should a spouse cease to be a spouse.

e. What is a descendant and who is a child?i. Reproductive technology issues.

ii. Can an adopted child inherit from a parents relatives? This is surprisingly not settled in many states and particularly if the documents are quite old.

1. Restatement 3rd – treated as adopted only if adopted before age 18 and adoptive parent functioned as adoptive parent, etc. This leaves lots of “wiggle room.”

2. Florida permits adult adoptions.

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3. Dennis v. Kline, 120 So. 3d 11. Document amended to include legally adopted persons. Adopted god-daughter. Sister filed suit to prevent step-daughter from being considered a beneficiary. Court found that document expressly provided that an adopted person is treated as a child.

4. Texas found differently. Will in this case said lineal biological children.

5. Estate of Furia v. Cameron, 126 Cal. Rptr. 2d 384. Discussed “equitable adoption.” Had close relationship with step father and a grandmother/grandchild relationship but did not hold in her favor.

6. A legally adopted child may not be the only one who can inherit depending on the document.

7. Carey v. Jaynes 265 S.W. 3d 801 – be cautious not to rely on antiquated terms especially in long term trusts. Grantor defined relationship using “lawful and blood” a child born out of wedlock was excluded.

f. Assisted Reproductive Technology.i. Few cases, but potential problems are legion as a result of

reproductive technology.ii. NY case of posthumously conceived child long after expected

period of time following death.iii. Restatement 3rd doesn’t give a time line.iv. Petitioned court to harvest post-death husband’s genetic

material. Courts permitted this.v. Texas case. Mother filed case to harvest murdered son’s sperm

after his death. She wanted grandchildren using a surrogate. Court granted the motion.

g. Later Marriage Issues.i. Rules of restrictions.

ii. You can do almost whatever you want, except you cannot overly restrict marriage and you cannot induce divorce.

iii. Case – father left daughter on condition of her marrying in a certain faith. At death there were only five eligible bachelors in that group. Court struck provision.

iv. Divorce issue has many cases. You need an intent provision to make clear that you are not trying to induce divorce but merely trying to provide additional financial support if the child divorces.

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v. How is invalidity of restrictions in document dealt with?1. If this clause is invalid here is what I would like to occur

[elaborate].h. Other relationships.

i. What rights to parties have without an agreement? May be able to enforce equitable rights but it won’t compare to a marital situation.

ii. Domestic relationship agreement.1. Can structure as an LLC, as a partnership or using trusts.2. Need consideration.

a. Sexual services cannot be consideration.b. Household work or mutual financial support can

constitute consideration.c. If the parties have a business together that might

suffice.3. Define rights and expectations in agreement.4. Consider gift and estate tax consequences because they

are not married there will be no deductibility of payments and gain may be triggered on property transfers.

5. Must document expectation of the parties to the relationship.

6. Jointly owned property can be problematic and can create issues as to when a gift might be complete.

7. Include a provision that a property is being held in joint tenancy for ease of administration on death but if we separate partner ‘A’ gets it back. Perhaps this might reduce risk of gift issue.

iii. Twilight relationships. 1. Adults over 50 are largest growing segment of the

population.2. Address care giving.3. If owner of home goes into a nursing home can partner

stay in the home?

24.The New Biology .a. General.

i. Complexity has grown.ii. How much control does one really have?

iii. Huge gap between law and science.

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iv. Lord Coke in 1644 – no property rights in the body. This law evolved because no one wanted someone moving taking a deceased relatives body with them. The body belongs to no one.

v. US has limited right to body to place it once, burial, etc. This has had impact on funeral homes. Cannot hold body for payment. Gives right to sue funeral homes for mishandling corpses. These were tort claims.

vi. What about lifetime interests in the body?1. Medical malpractice claims. Patient sued for lost eye, no

commercial value.2. Criminal cases has similar concept. Balloons in stool

with drugs. No right to stool.3. Tax/IRS cases have similar results. Early 1970s earned

$80,000/year for not reporting money for selling her blood. Taxpayer claimed she sold property so tax at capital gains rate. IRS said no property interests in the body, she was paid for a service.

4. Intellectual property cases have similar results. Leukemia – removed spleen and found genetically unique T cells. Hospital developed it into a billion dollar business. Patient had no claim since no property right.

vii. So unless state addresses these issues by statute you have no right to dictate how you can be buried, etc. Look at state inheritance statutes. If spouse is first intestate taker she decides, etc. These are not in the probate statutes these rules are all in public health laws.

viii. How do you make anatomical gifts? States have had to enact statutes to permit/facilitate this. This is done at state level and governs right to gift a body part at death (not during life). You cannot be paid for it. There is a federal law that governs this. This addresses what happens during life as well. One goal of NODA is to restrict organ’s harvested during lifetime. NODA does not ban sale of blood, sperm or eggs. You are not selling those but rather you are providing a service.

ix. Issue of this is when is someone dead? Uniform Determination of Death Act, no brain stem function (even if reflexive body is working).

x. Statutes don’t work because families don’t consent. If mom signed organ donor card but the family remaining refuses and threatens suit it will not happen.

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b. Posthumous reproduction.i. Egg has been fertilized with a sperm that had frozen for 20+

years.ii. Pre-embryo – 4-8 cell zygote.

iii. Embryos cell differentiated has started and you cannot presently freeze it.

iv. Sperm harvesting is illegal in UK and Canada but is done all the time in the US.

v. Egg harvesting. Parents had dying daughter’s eggs harvested and tried to “regrow” their lost daughter.

vi. Eggs can sell for $2,500 to $100,000 an egg.vii. States are trying to regulate artificial reproduction clinic. Must

have contract about what happens to genetic material. viii. Cases initially were matrimonial cases and have held that when

a couple fights over frozen genetic material embryos and pre-embryos are not persons or property and are material ruled by agreement with the cryogenic lab. If they don’t agree whoever does not want to procreate wins.

ix. You cannot bequeath genetic material under will. You can include it but it is not binding. The disposition of the material is governed by the contract with the cryogenic lab.

c. Inheritance rights if posthumously conceived.i. When can a posthumously conceived child have a right?

ii. No common law.iii. First statue was uniform parentage act. It was considering

adoption. If adopt that child goes into adoptive parents family line and lives his/her prior family line. This was contemplating lifetime conception.

iv. California was the first state to address this and there can be inheritance rights but there must be implantation within two years of death and some indication or consent to use.

v. Uniform status of assisted conception act. No inheritance rights unless you indicate in will or other document that you want a posthumously conceived child to inherit. This act did not however include a time line. Louisiana adopted this act but provided must be within three years. Great inconsistency.

vi. Uniform probate code requires implantation within three years. This does not require consent, but most states require consent.

vii. NY 2 years for implantation birth within 33 months and must designate someone to regulate the process.

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d. Rule against perpetuities.i. What is life in being?

e. Legitimacy.i. What if will requires that child be legitimate.

ii. If at time of conception father dead and mother was not married the child is illegitimate.

iii. The interaction of reproductive biology with many other laws is complex and can have unexpected results.

25.What Really Matters in Estate Planning .a. Sources of happiness.b. No incremental happiness with incremental wealth once above certain

base economic level.c. Relative nature of wealth/happiness – how you fare compared to

those around you not how you fare in absolute terms.d. People invest irrationally.e. More involvement and choice give people the feeling of control.f. Most wealthy people become wealthy by exerting control (e.g., to

build a business) but lessening control is often key to estate planning success.

g. Control is an essential factor in determining client satisfaction with financial planning.

h. Clients may remain dissatisfied with estate planning unless family mission statement/goals are achieved. Stated tax saving goals often mask actual goals.

CITE AS: 

LISI Estate Planning Newsletter #2277 (January 23, 2015) at http://www.leimbergservices.co m    Copyright 2015 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission. 

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