Grantor Deemed Owned Trusts (GDOTs) Part 2 - Advanced Estate Planning

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Learn how Grantor Deemed Owned Trusts (GDOTs) are used in advanced estate planning cases.

Learn more at www.inknowvision.com

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Grantor Deemed Owned Trusts (GDOTs) Part 2 - Advanced Estate Planning

  1. 1. GDOTs Grantor Deemed Owned Trusts SCOTT HAMILTON, CEO INKNOWVISION, LLC WWW.INKNOWVISION.COM 630-596-5090 X80Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  2. 2. Grantor Deemed Owned Trusts Overview Benefits Issues Technical How they are usedCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  3. 3. Typical Scenario Goal: pass assets to heirs Client’s Estate Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  4. 4. Typical Scenario We add an intermediate entity to serve valid business purposes. Client’s Estate LLC or FLP Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  5. 5. Valid Business Purposes Protect your family’s future Saving gift taxes Asset protection Centralized management Flexible business planning Make family loans easier Maintain privacy Facilitate annual gifting Restrict non-partners from ownership Dead Hand Control Reduce estate taxesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  6. 6. Typical Scenario We add a GDOT Client’s Estate LLC or FLP GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  7. 7. Typical Scenario The Client funds the entity and receives membership interests in return Client’s Estate LLC or FLP GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  8. 8. Typical Scenario The Client sells membership interests to GDOT Client’s Estate LLC or FLP Units GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  9. 9. Typical Scenario The Client sells membership interests to GDOT for FMV consideration Client’s Estate LLC or FLP GDOT Cash/Notes/Other Assets of equal value Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  10. 10. Variation on a 2011 Theme The Client gifts membership interests to GDOT and uses exemption Client’s Estate LLC or FLP Outright Gift GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  11. 11. Typical Scenario The LLC makes distributions to the GDOT Client’s Estate LLC or FLP Income Distributions GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  12. 12. Typical Scenario The GDOT makes payments on the notes Client’s Estate LLC or FLP GDOT Promissory Note Payments Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  13. 13. Typical Scenario Net Equity/Appreciation Goes to beneficiaries Client’s Estate LLC or FLP Net Equity/Appreciation GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  14. 14. GDOT-BENEFITS Grantor pays taxes on income of GDOT Grantor pays taxes on income of GDOT Allows income tax free transactions between grantor & GDOT GDOT is a qualified S corporation shareholder/LLC Member Overcome Transfer-For-Value Rules - Old ILIT to New Appreciation out of estate Insurance Funding Application Distributions can fund beneficiary’s inheritance Distributions can fund charitable giving Asset ProtectionCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  15. 15. BENEFITS Grantor pays taxes on income of GDOT LLC or FLP Grantor Taxable Income K-1 to GDOT GDOT Taxable income attributed to Grantor Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  16. 16. BENEFITS Grantor pays taxes on income of GDOT Grantor LLC or FLP GDOT Tax Free Build Up Additional Gift Equal to Taxes Paid Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  17. 17. BENEFITS Allows income tax free transactions between grantor & GDOT Grantor LLC or FLP Low or High Basis Units GDOT No Gain or Loss Recognized • Sale of Units • Transfer of Units • Interest payments on notes Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  18. 18. BENEFITS GDOT is a qualified S corporation shareholder/LLC Member Grantor LLC /CORP S Election GDOT Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  19. 19. BENEFITS Overcome Transfer-For-Value Problem - Old ILIT to New Grantor LLC /CORP S Election Old ILIT Sale of policy Insured=Grantor GDOT Children Transfer for value exception Grandchildren “Transfer to the Insured” Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  20. 20. BENEFITS Appreciation of assets should be on the other side of the tax wall Grantor LLC or FLP T a Appreciation happens on x the other side of the tax wall W a GDOT l l Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  21. 21. ISSUE Caution: 2036 can create a hole in the wall! Grantor 2036 LLC or FLP T a x W a GDOT l l Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  22. 22. BENEFITS Insurance Funding Application Grantor LLC /CORP S Election GDOT Distributions from LLC Owns Life Insurance can fund premium payments Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  23. 23. BENEFITS Early Inheritance Grantor LLC /CORP S Election GDOT Distributions from LLC Owns Life Insurance can fund inheritance or make loans Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  24. 24. BENEFITS Charitable Giving Grantor LLC /CORP S Election Tax Deduction GDOT Distributions from LLC Owns Life Insurance can fund charitable giving Charities of ChoiceCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  25. 25. BENEFITS Asset Protection Grantor P LLC or FLP r o t e Grantor’s creditors should c not be able to pierce t GDOT protection wall i o n Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  26. 26. ISSUE Caution: Promissory Note May Not Be Protected Grantor P LLC or FLP r o Note t e Creditor’s may be able to c get note and payments t GDOT i o n Children Grandchildren Other Loved OnesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  27. 27. GDOT-ISSUES Phantom income drives grantor to the poor house Grantor gives away future upside Grantor loses free use of assets IrrevocableCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  28. 28. GDOT-ISSUESPhantom income drives grantor to the poor house Software valued at $1M Grantors cash on hand = $5M Grantors other (illiquid) assets = $20M Plan-transfer software to GDOT 5 years later software valued at $20M and sold Capital Gains taxes = $4M All taxed to grantor Cash on hand to pay taxes = $1MCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  29. 29. GDOT-ISSUESGrantor gives away future upside and use of asset Software valued at $1M Plan-transfer software to GDOT 5 years later software valued at $20M and sold All proceeds owned by GDOT Use of proceeds controlled by GDOTCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  30. 30. GDOT-ISSUESGDOT is an irrevocable trustCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  31. 31. GDOT-NEXT SESSION Solutions to issues Drill down on the formation issues  Creating “Grantor” trust status  Choice of trustees  Choice of beneficiaries  Trust Protector  Coverage  ReportingCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  32. 32. GDOT-NEXT SESSION Solutions to issues Drill down on the formation issues  Creating “Grantor” trust status  Choice of trustees  Choice of beneficiaries  Trust Protector  Coverage  ReportingCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  33. 33. Issues Phantom income drives grantor to the poor house  Revoke Grantor Status  Return asset to grantor  Prepay note  exchangeCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  34. 34. Issues Grantor gives away future upside  Keep part of asset  Sell/gift the other partCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  35. 35. Issues Grantor loses free use of assets  If free control-use entity planning  If needed for lifestyle-poor planningCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  36. 36. Issues Irrevocable  Trustees – of you can’t trust them, who can you trust?  Trust protectorCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  37. 37. Creating “Grantor” trust status IRC § 675(4)(C) Someone holds a non-fiduciary right to reacquire the trust corpus by substituting other property of equivalent valueCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  38. 38. Creating “Grantor” trust status IRC § 675(2) Any non-adverse party can enable the grantor to borrow trust corpus for income without adequate interest or without adequate security,Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  39. 39. Creating “Grantor” trust status IRC § 674 A non-adverse party has the power to add a beneficiary, other than after-born or after-adopted childrenCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  40. 40. Creating “Grantor” trust status IRC § 677(a) The income of the trust may be used to pay premiums on a policy of insurance on the grantors life or that of the grantors spouse.Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  41. 41. Choice of Trustees CPAs Attorneys Trust Companies Friends Relatives Beneficiaries Grantor’s spouseCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  42. 42. Choice of Beneficiaries Spouse Children Grandchildren Dynasty ProvisionsCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  43. 43. Trust Protector What is a trust protector Duties-usually none Powers  Simple  ComplexCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  44. 44. Coverage History Current thinking  Old and cold  10% or more GuarantiesCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  45. 45. Reporting Separate return vs Statement ReportingCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
  46. 46. Putting The Tools To Work GST Planning Family Bank Income Tax Neutral Divorce ProtectionIncentive Provisions Special Needs Planning Charitable Flexibility Funding Other Trusts Business Transfer Asset Protection Supercharge Life InsuranceCopyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011

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