Structuring Preferred Partnership Freezes in Estate...
Transcript of Structuring Preferred Partnership Freezes in Estate...
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Structuring Preferred Partnership Freezes
in Estate Planning: Navigating IRC
Chapter 14 Valuation Rules
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, MARCH 30, 2017
Presenting a live 90-minute webinar with interactive Q&A
David C. Jacobson, Counsel, Meltzer Lippe Goldstein & Breitstone, Mineola, N.Y.
Eric Fischer, Esq., Withers Bergman, New Haven, Conn.
Joshua Becker, Esq., Withers Bergman, New Haven, Conn.
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STRUCTURING PREFERRED PARTNERSHIP
FREEZES IN ESTATE PLANNING
NAVIGATING THE CHAPTER 14 VALUATION RULES
Presented by:
David C. Jacobson
Meltzer Lippe Goldstein & Breitstone
Eric Fischer
Withers Bergman LLP
Joshua Becker
Withers Bergman LLP
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Structuring Preferred Partnership
Freezes in Estate Planning
OVERVIEW
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Preferred Partnerships Generally
• Used in the estate planning context to shift value and appreciation between family
members or entities by dividing economics of partnership or LLC interests
• Preferred interests have priority rights as to income and liquidation proceeds, but
limited rights as to overall growth potential
• Non-preferred “common” interests have subordinate rights as to income and
liquidation proceeds, but receive the benefit of residual growth
• In other words, preferred interests benefit from current cash flow, while common
interests benefit from long-term growth and accumulation of value
Preferred
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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Preferred Partnership – Comparison to GRAT/IDGT
• Grantor Retained Annuity Trust (“GRAT”)
• Senior generation family member transfers property to trust and takes back a fixed
annuity interest
• Remainder beneficiaries benefit from GRAT appreciation in excess of annuity
payments
• Sale to Intentionally Defective Grantor Trust (“IDGT”)
• Senior generation family member makes “seed” gift to IDGT and sells additional
property to IDGT, taking back a promissory note
• Beneficiaries of the IDGT benefit from trust appreciation in excess of promissory
note payments
• Benefits of Preferred Partnership Planning
• Can accommodate multigenerational planning and accomplish basis step-up
• Consolidates management and control of family assets
• Greater flexibility – particularly important in light of changing legislative landscape
• Potential repeal of estate and GST taxes
• Legislative and regulatory attacks on GRAT and IDGT planning
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Structuring Preferred Partnership
Freezes in Estate Planning
UNDERSTANDING SECTION 2701
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Understanding Section 2701 – Historical Context
• Section 2701 provides special valuation rules that apply in the context of family-
controlled entities
• Intended to discourage the use of entity “design” to enhance wealth transfer
between generations
• Failure to account for rules can lead to unanticipated gift and estate tax
consequences, even when transactions have no wealth transfer motivation
• Pre-Section 2701 Preferred Partnerships – Perceived Abuse
• Senior generation family members would form preferred partnership and retain
discretionary rights that increased the transfer tax value of retained interests
• Put, call or conversion rights
• Liquidation rights
• Rights to non-cumulative payments
• Implied understanding that discretionary rights would not be exercised
• Would subsequently transfer common interests with depressed value
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Understanding Section 2701 – Subtraction Method
• Under traditional valuation principles, the transfer tax value of entity interests is
determined by the “subtraction method” of valuation:
Value of Transferred Interest = (Total Entity Value – Value of Retained Interest)
• In pre-Section 2701 preferred partnerships, discretionary rights retained by senior
generation enhanced the value of their retained interests
• Discretionary rights therefore decreased the value of common interests, which
would be transferred to junior generation family members
• Section 2701 attacks this perceived abuse by ignoring discretionary rights for
valuation purposes and assigning them a zero value
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Example of Pre-Section 2701 Preferred Partnership
Pre-2701
Preferred
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Non-Cumulative
Preferred Interest
Preferred Interest – Discretionary Rights
• Non-cumulative coupon, payable at the
discretion of G2 entity managers
• Put, call and/or conversation rights
• Liquidation preference
• Discretionary rights exercised (or not
exercised) to benefit common interests
Pre- Section 2701
Total Value $10M
Less: Preferred Interest $9.5M
(artificially high) _____
Value of Common $500k
Post- Section 2701
Total Value $10M
Less: Preferred Interest $500k
(zero-valuation rule) _____
Value of Common $9.5M
Gift of
Common Interests
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Structuring Preferred Partnership
Freezes in Estate Planning
SECTION 2701 TECHNICAL RULES
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Overview
• When does Section 2701 Apply?
• A deemed gift may occur whenever there is:
• a “Transfer” of an interest in a family controlled entity to a “Member of the Transferor’s Family”
• and after the transfer the transferor or an “Applicable Family Member” holds an “Applicable
Retained Interest”
• “Transfer”
• Broadly defined and includes traditional transfers (gifts, sales, etc.), capital contributions to
new or existing entities, redemptions, recapitalizations and certain other changes in an
entity’s capital structure
• “Member of the Transferor’s Family”
• Generally junior-generation family members – transferor’s spouse, descendant of the
transferor or his or her spouse, and the spouse of any such descendant
• “Applicable Family Member”
• Generally senior-generation family members – transferor, transferor’s spouse, ancestor of
transferor or transferor’s spouse, and the spouse of any such ancestor
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Attribution Rules
• Section 2701 sets up an extremely broad scheme for family attribution of interests
• Beware, as these rules could generate unexpected results in entity-to-entity transactions
• Basic Attribution – attributes indirect ownership to individuals from corporations,
partnerships, estates, trusts and other entities
• For trusts, a person is treated as holding interests held by the trust assuming the maximum
exercise of discretion in favor of the person and a grantor trust is attributed to the grantor
• Could result in 100% attribution to each beneficiary and grantor of a discretionary trust
• Tie-Breaker Rules – resolve instances of multiple attribution
• Apply differently depending on whether the equity interest in question is senior or
subordinate, and apply differently depending on the status of the individual
• Generally attribute Applicable Retained Interests to senior-generation family members
• Generally attribute subordinate equity interests to junior-generation family members
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Applicable Retained Interests
• Two types of Applicable Retained Interests that may be valued at zero under
Section 2701: “Distribution Rights” and “Extraordinary Payment Rights”
• “Distribution Rights”
• A right to receive distributions with respect to an equity interest in an entity unless the
interest has the same or subordinate distribution rights as the transferred interest
• Entity must be under family control:
• 50% of capital or profits interest in a partnership, or any interest in an LP “as a general partner”
• 50% of the total voting power or value of the equity interests of a corporation
• “Extraordinary Payment Rights”
• Put rights, call rights, rights to compel the liquidation of the entity, and other rights the
exercise or non-exercise of which affects the value of the transferred interest
• No control requirement
• As with other aspects of Chapter 14, there is a general presumption that entity
rights will be used to manipulate entity value for wealth transfer purposes
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Exceptions and Exclusions
• Same Class – retained interest is of the same economic class as (or proportional
to) the transferred interest (without regard to non-lapsing voting rights)
• Proportionality (“Vertical Slice”) – transfer proportionately reduces each class of
equity held by the transferor and all applicable family members
• Marketable Interests – market quotations available on an established securities
market for the value of the transferred interests
• Guaranteed Payments – payments made to a partner without regard to
partnership income
• Mandatory Payment Rights – the right to receive a payment required to be made
at a specific time and for a specific amount
• Liquidation Participation Rights – rights to participate in a liquidating distribution
• Even where a transferor retains Applicable Retained Interests, existence of Liquidation
Participation Rights will generally result in retained interests having some value
• Non-Lapsing Conversion Rights
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Qualified Payment Right Exception
• Qualified Payment Right is another exception to the zero value rule.
• A Qualified Payment is a:
• Cumulative payment,
• Payable periodically (but not less then annually), and
• At a fixed rate or a rate bearing a fixed relationship to a specified market rate
• Qualified Payment Rights are mandatory and involve no discretion, so the opportunity to
manipulate value does not exist, and zero value rule does not apply
• Qualified Payment Right Election
• Transferor or applicable family member may elect to treat a distribution right as a qualified
payment right
• Applies to specified amounts paid at specified times, and only to the extent not
inconsistent with the underlying instrument giving rise to the right
• Payment Grace Period
• Payments made up to 4 years following due date will be treated as if made timely
• Unpaid qualified payments accrue interest at the “appropriate discount rate”
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“Lower Of” and “Minimum Value” Rules
• “Lower Of” Rule applies in valuing a Qualified Payment Right (not subject to zero
value rule) held in conjunction with an Extraordinary Payment Right (subject to zero
value rule)
• Example
• Dad owns 100% of the stock in X Corp (valued at $1.5M). Dad transfers common stock
to Child and retains preferred stock with (i) Qualified Payment Right valued at $1M, and
(ii) right to put stock to X Corp for $900k (Extraordinary Payment Right).
• Under the “Lower Of” Rule, the value of Dad’s retained interest is $900k, even though he
retained a Qualified Payment Right (not subject to zero value rule) worth $1M.
• Why? Section 2701 assumes that Dad will exercise his Extraordinary Payment Right so
as to result in his retained stock having the lowest possible value
• Result: Dad made a gift of $600k = $1.5M (X Corp. value) - $900k (“Lower Of” Value)
• “Minimum Value” Rule – common growth interests must be valued at no less than
10% of (i) the value of all equity interests, plus (ii) total indebtedness of the entity to
the transferor or an applicable family member
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Structuring Preferred Partnership
Freezes in Estate Planning
STRUCTURING THE PREFERRED COUPON
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Valuing the Preferred Coupon
• Fair market value of the preferred coupon is determined taking into consideration
the facts and circumstances set out in Revenue Ruling 83-120
• Yield as compared to risk-adjusted market comparables
• Preferred return coverage
• Voting rights
• Dissolution protection
• Lack of marketability
• Underlying partnership assets
• Volatility
• Income Production
• Market conditions
• Valuation also impacted by 10% minimum value rule – common interests will be
deemed to have a minimum value equal to at least 10% of partnership equity,
regardless of actual holdings
Most important
factors
Coupon lower if
issuer cannot redeem
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“Forward” Preferred Partnership
• Advantages
• Junior generation benefits from growth in excess of preferred payments
• Negative capital (liabilities in excess of basis) – gain generally not triggered
• Technique approved by statute
• Potential for estate tax deferral under Section 6166
• Other Considerations
• Hurdle rate higher than IDGT/GRAT
• Possible pitfalls under Section 2701
Forward
Preferred
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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Comparison to Sale to IDGT
• Lifetime termination of grantor trust status means the grantor will be treated as
having transferred all assets and liabilities of the trust to the trust
• Gain triggered on negative capital assets (liabilities in excess of basis)
• Disagreement among commentators as to whether death of the grantor results in
similar treatment – no case, regulation or ruling on point
• Gain triggered on death? Immediately before death?
• Presumably gain recognized to the extent attributable to unpaid portion of promissory note
• Unlikely that trust assets would receive a parallel basis step-up due to gain recognition
• Basis step-up under Section 1014(a)?
• IRS no longer issues private letter rulings on this issue and has included it on the IRS priority
guidance plan
• Compare to Forward Preferred Partnership
• Full basis step-up for preferred interest at death
• No gain triggered with respect to negative capital
• 754 election – step-up for underlying assets of partnership
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Comparison to GRAT
• Advantages of GRAT
• Possible to “zero-out” so as to avoid making a taxable gift
• No valuation risk – GRAT structured to self-adjust
• Low hurdle rate – 7520 rate for March 2017 is 2.4%
• Considerations and Risks of GRAT
• Mortality risk – must survive GRAT term
• ETIP issue – not conducive to multigenerational planning
• No basis step-up at death
• No additional contributions during GRAT term
• Compare to Forward Preferred Partnership
• Full basis step-up for preferred interest at death
• No gain triggered with respect to negative capital
• 754 election – step-up for underlying assets of partnership
• No mortality risk
• Incorporating multigenerational trust can accommodate GST planning at outset
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“Reverse” Preferred Partnership
• High valuation due to coverage of coupon and liquidation payments
• Partnership agreement crafted taking into account factors in Rev. Rul. 83-120
• Unless very high investment returns, common interests will slowly be
“cannibalized,” resulting in wealth transfer to junior generation
• Since Applicable Retained Interests are passing to junior generation, preferred
interest can be structured more freely
Reverse
Preferred
Partnership
Senior
Generation
Junior
Generation
Preferred
Interest Common
Interest
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Considerations under Section 2036
• Preferred partnerships present similar risks as typical family limited partnerships
• Transferor should not retain control rights that might give rise to estate inclusion
• Amend partnership agreement
• Control distributions
• Dissolve the partnership
• Special issues with respect to the preferred coupon
• Fidelity-Philadelphia Trust Co. v. Smith
• In the context of debt obligations, three-part test to avoid Section 2036: (i) promise must be a
personal obligation of the transferee, (ii) obligation must not be specifically chargeable to
transferred property, and (iii) size of payments must not be determined by the income
generated by the transferred property
• Estate of Liljestrand v. Comm’r
• Decedent transferred almost all of his assets into a limited partnership, subsequently made gifts
of limited partnership interests to trusts for his children
• Among other bad facts, the preferred interest retained by the decedent was “engineered” such
that it equalled the partnership’s expected annual income
• All assets of the partnership were included in the decedent’s estate
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Partnership Formation Issues - Diversification
• Under Section 721, there is generally no gain or loss recognized on contribution of
property to a partnership
• Exception for transfers to partnerships that would qualify as “investment
companies”
• More than 80% of the value of partnership assets, including cash, held for investment and
assets consist of cash (including foreign currency), stock, bonds, options, forwards,
futures, RIC, REIT or PTP interests and precious metals
• Look-through rules for subsidiary entities
• Transfer must result in the diversification (e.g., no gain recognized where partners
contribute identical assets)
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Other Partnership Formation Issues
• Debt/Equity Characterization
• Important to ensure preferred interests are appropriately treated as equity, rather than
debt
• Multi-factor facts and circumstances test established by case law that tries to analyse the
intent of the parties
• Ways to buttress argument that preferred interest is equity:
• Condition preferred payments on partnership net profits
• Grant certain management and/or voting rights to preferred holders
• Consider “stapling” a non-preferred participation feature to the coupon
• Guaranteed Payments
• Payments to a partner for the use of capital and determined without regard to the income
of the partnership
• Generates a partnership-level deduction, and recipient must include the payment as
ordinary income
• Excluded from definition of “Distribution Right” under Section 2701, and are therefore not
Applicable Retained Interests
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• Partnership Capital Accounting
• Book Capital Account = the economic value of a partner’s interest in a
partnership.
• Example:
• A contributes BlackAcre, with a fair market value of $100, and tax basis of $10;
• B contributes cash of $100;
• Resulting Balance Sheet:
• Tax Capital Account = a partner’s share of inside basis (i.e. tax attributes)
• Tax capital accounts are credited based on the tax basis of contributed property, rather than the
fair market value of contributed property.
• Example (using hypothetical from above):
Assets Liabilities
BlackAcre 100 N/A/ 0
Cash 100
Capital Accounts
A 100
B 100
Tax Capital Accounts
A 10
B 100
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• Partnership Capital Accounting
• Section 704(c) Requires Tax Capital Accounting.
• Tax Capital Accounts track a partner’s share of inside basis because each partner
remains liable for the built-in gain of any property he/she has contributed to the
partnership.
• When a partner’s tax capital account is substantially less than his/her book capital
account (because the partner contributed highly appreciated property), the
partner’s tax capital account is more likely to go negative.
• If a partner transfers his/her interest in a partnership when his/her tax capital
account is negative, gain will result equal to the negative balance of the tax capital
account.
• As mentioned earlier, when grantor trust status terminates (upon the death of the
grantor) gain will be triggered to the extent of the grantor’s negative tax capital
account.
• Planning takeaway if planning with highly appreciated property/assets, it
may be advisable to use a preferred partnership structure, rather than a
grantor trust.
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• Partnership Liabilities
• Recourse Liabilities
• Recourse liabilities are those that any partner bears the economic risk of loss with respect to
the liability.
• This economic risk of loss is present only if any partner would be obligated to make a payment
to the creditor or a partnership contribution upon a constructive liquidation of the partnership
under certain hypothetical circumstances.
• Recourse liabilities can provide basis for distributions and can also generate basis for purposes
of the at-risk rules.
• Nonrecourse Liabilities
• Nonrecourse liabilities are those liabilities of the partnership for which no partner bears the
economic risk of loss.
• The creditor bears the economic risk of loss with respect to a nonrecourse liability.
• The most common type of nonrecourse liability is a loan for which property is pledged as
security for repayment and for which the lender's only remedy in the event of a default is to
foreclose on the property.
• Nonrecourse liabilities can provide basis for distributions, but generally do not provide basis for
purposes of the at-risk rules.
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The Disguised Sale Issue
• Section 707 - presumes a “disguised sale” exists any time a partner contributes
“built-in gain” property to a partnership and receives a distribution within two years
• Creates a deemed sale between partner and partnership (triggers gain recognition)
• Mismatch between this rule and the requirements of a Qualified Payment
• Solutions – exceptions to disguised sale:
• Payments not exceeding unreturned capital multiplied by 150% of highest AFR
• Highly unlikely in light of low interest rates
• Operating cash flow distributions
• “Reasonable” preferred returns where facts do not “clearly establish” that the distribution
is part of a sale
• Creates additional reporting obligations
• Reasonable guaranteed payments
• Reliance on Qualified Payment grace period for two-years
• Preferred payments will be cumulative and will compound at relevant discount rate
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Structuring Preferred Partnership
Freezes in Estate Planning
PLANNING WITH PREFERRED
PARTNERSHIPS
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Freeze Partnership for GST Efficiency
• Contains growth in less-efficient multigenerational planning vehicle
• Alternatively, consider utilizing reverse preferred partnership to “cannibalize” Non-Exempt Trust
• Section 2701 attribution rules need to be analyzed
• Possible to leverage GST exemption of G2 beneficiaries by making distributions from
Non-Exempt Trust and using them to fund GST Exempt Trusts
• G2 beneficiaries or Non-Exempt Trust could loan additional assets to GST Exempt
Trusts prior to partnership formation, improving coupon coverage
GST
Freeze
Partnership
Non-
Exempt
Trust
GST
Exempt
Trust
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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QTIP Freeze Partnership
• Advantages
• Provides steady cash-flow to surviving spouse
• Limits future growth of QTIP Trust
• Other Considerations
• Potential argument under Section 2519 that capital contribution is a taxable disposition of
income interest
• But see FSA 199920016
QTIP
Freeze
Partnership
QTIP
Trust
Trust for
Children
Common
Growth
Interest
Preferred
Cash-Flow
Interest
Surviving
Spouse
Income
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Intentionally Defective Preferred Partnership
• Preferred interest retained by Senior Generation not a Qualified Payment Right
• Triggers deemed gift, but offsetting adjustment to gross estate at death
• Useful for modest estates where access to assets remains important, or for
maximizing DSUE if a surviving spouse remarries
Defective
Preferred
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Non-QPR
Preferred
Interest
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Preferred Partnership/CRT
• Up-front charitable income tax deduction
• Provides reliable cash-flow from NIMCRUT
• Family trust receives the benefit of growth in excess of preferred coupon and
liquidation preference
Forward
Preferred
Partnership
Senior
Generation
Trust for
Children
Common
Growth
Interest
Preferred
Cash-Flow
Interest
Senior
Generation
NIMCRUT
Charity
Preferred
Interest
Lesser of Net
Income or Unitrust
Preferred
Interest
(at end of
CRT term)
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Capital Strip Preferred Partnership
Forward
Preferred
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Preferred
Cash-Flow
Interest
Assets
Real Estate (FMV) $10,000,000
Real Estate (Adj. Basis) $1,000,000
Liabilities – Mortgage ($8,000,000)
Net Equity $2,000,000
Preferred Return @ 6%
$1,800,000 x 6% = $108,000/year
Capital Accounts
Senior $1,800,000
Junior $200,000
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Capital Strip Preferred Partnership
Forward
Preferred
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Preferred
Cash-Flow
Interest
Assets
Real Estate (FMV) $10,000,000
Real Estate (Adj. Basis) $1,000,000
Liabilities
Mortgage ($8,000,000)
AFR Loan ($1,500,000)
Net Equity $500,000
Partnership takes $1.5M
AFR loan from related entity
and distributes proceeds
Senior Generation Return
Preferred $300,000 x 6% = $18,000/year
AFR Loan $1,500,000 x 2.05% = $30,750/year
$48,750/year
Versus Unleveraged Return - $108,000/year
Versus Installment Sale - $41,000/year
Basis Consequences at Senior’s Death
Basis in AFR Loan $1,500,000
Basis in Frozen Interest $9,800,000
Senior Equity - $300,000
Mortgage - $8,000,000
AFR Loan - $1,500,000
Basis in Cash Distributed $1,500,000
Capital Accounts
Senior $300,000
Junior $200,000
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Preferred Partnership with GRAT
• Addresses ETIP issue by moving growth in excess of Preferred coupon to GST-
Exempt Trust
• Addresses high hurdle rate of Preferred Interest
Forward
Preferred
Partnership
Senior
Generation
GST
Exempt
Trust
Common
Growth
Interest
Preferred
Cash-Flow
Interest
Gift of Common
Interests
(allocate GST
exemption) Long-Term
GRAT
Non-
Exempt
Trust
Contribution of
Preferred
Interests
Annuity
Payments
(funded by
Preferred
Coupon)
Preferred
Coupon less
Annuity
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Managing QDOT Tax Exposure
• Qualified Domestic Trust (QDOT) required to defer US estate tax on transfers to
non-citizen surviving spouse
• Trust “secures” US ability to impose estate tax on transfer to non-citizen spouse
• Principal distributions subject to US estate tax upon distribution, while income
distributions escape US estate tax
• Determination made pursuant to fiduciary accounting principles – cannot
include capital gains but unitrust election permitted
QDOT
Freeze
Partnership
QDOT Family
Trust
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Throwback Tax Planning – Yearly Distributions
• Throwback Tax triggered where distributions exceed distributable net income and
fiduciary accounting income (“FAI”)
• Most jurisdictions respect preferred interest coupon as FAI
• Yearly distribution of preferred coupon would “freeze” value of FNGT assets
UNI
Freeze
Partnership
FNGT with
UNI
US
Trust
Common
Growth
Interest
Preferred
Cash-Flow
Interest
Yearly FAI
Distributions
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Throwback Tax Planning – No Yearly Distributions
• Capital in FNGT with accumulated UNI difficult to access and put to productive use
for the benefit of US resident beneficiaries
• Economically, preferred partnership structure can allow FNGT capital to provide
coupon coverage, thereby enhancing US Trust return on investment, which would
not be subject to throwback tax
• DNI could also be distributed from FNGT on an as-needed basis using
outside assets
UNI Reverse
Freeze
Partnership
US
Trust
FNGT with
UNI
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Inbound Planning for Covered Expatriates
• Section 2801 imposes a tax at the highest estate and gift tax rate on certain gifts
from Covered Expatriates to US persons and incorporates the rules of Chapter 14
• Co-investment into a preferred partnership (and/or coordination with an existing US
Trust) provides an opportunity to shift growth to US family members without
triggering the Covered Expatriate tax
Covered Expatriate
Freeze
Partnership
Covered
Expatriate
US Family
Members
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Mark-to-Market Freeze
• Donald Trump campaign proposals included mark-to-market tax on appreciated
assets at death (subject to $10M exclusion)
• Preferred partnership caps the growth of appreciated assets otherwise subject to
mark-to-market tax at death
• Voting and management rights could be crafted to influence valuation at death
Mark-to-Market
Freeze
Partnership
Senior
Generation
Junior
Generation
Common
Growth
Interest
Preferred
Cash-Flow
Interest
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New York l New Haven l Greenwich l Los Angeles l Rancho Santa Fe l San Diego l San Francisco
London l Geneva l Zurich l Milan l Padua l Dubai l Hong Kong l Singapore l Tokyo l Sydney l British Virgin Islands
Thank You
David C. Jacobson Meltzer Lippe Goldstein & Breitstone
Eric Fischer Withers Bergman LLP
Joshua Becker Withers Bergman LLP
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