This document discusses several advanced estate planning strategies, including: 1) Wealth transfer strategies using grantor trusts like spousal lifetime access trusts (SLATs) and installment sales/loans to intentionally defective grantor trusts (ISIGTs/IFLs). 2) Using family limited partnerships/family limited liability companies (FLPs/FLLCs) to leverage gift and estate tax exemptions through valuation discounts. 3) Employing grantor retained annuity trusts (GRATs) and charitable lead annuity trusts (CLATs) to transfer wealth at a reduced transfer tax cost. 4) Unwinding prior estate planning using split purchase trusts as an alternative to qualified

1. Melinda Merk, SunTrust Bank Private Wealth Management, Vienna, VA
Hunter Payne, Harbour Capital Advisors, LLC, McLean, VA
Sarah Butters, Holland & Knight LLP, Tallahassee, FL
ABA Tax Section Fiduciary Income Tax Committee
January 26, 2013
Orlando, FL

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 Beyond basic estate planning, there are several
sophisticated wealth transfer strategies that can be used
to help your estate plan go the extra mile, including:
◦ Wealth transfer strategies that provide extra benefits to the
grantor and/or the grantor’s spouse
◦ Additional wealth transfer strategies to utilize when gift tax
exemption is exhausted
◦ Creative planning such as GRATs, CLATs and sales to IDGTs
and other advanced planning strategies
◦ Techniques to preserve basis adjustments upon the grantor’s
death

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 Brief Summary of ATRA
◦ $5 million dollar exemption for federal estate, gift and GST tax
now “permanent”
◦ Exemption now indexed for inflation, which means the 2013
exemption amount is $5,250,000
◦ Portability retained, so surviving spouse can use deceased
spouse’s unused exemption amount, provided:
 An estate tax return is filed for the deceased spouse; and
 The portability election is made
◦ Maximum transfer tax rate of 40%, which is higher than the 2012
rate (35%), but still much lower than the pre-2010 rates that
ranged from 45-55%

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 What ATRA did not do:
◦ ATRA did not curtail many previously targeted transfer techniques
that benefit from a low interest rate environment (0.87% for mid-
term loans made in January 2013), such as:
 Short term GRATs
 Sales to grantor trusts
 Intra-family loans
◦ ATRA also did not curtail:
 Grantor trust rules
 Valuation discounts on transactions between related parties
 Valuation discounts on non-marketable minority interests
 Long-term dynasty trusts

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 What ATRA means to practitioners?
◦ We all worked our butts off for nothing?
◦ No harm/no foul for gifts that didn’t get closed in 2012
◦ Many who missed the boat are given a second chance
◦ Many who caught the boat may now want to put the boat
in reverse

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 As the lifetime exemption grows, SLATs are
becoming an attractive option for lifetime gifting
 Ideal for the person who wants to use up
exemption while ensuring some access to the
assets (through their spouse)
 Not ideal for all marriages

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 Trust is held for the benefit of the spouse (and possible
other persons) for the spouse’s lifetime
 At beneficiary-spouse’s death, assets pass to the
remainder beneficiaries
 Beneficiary spouse can be the trustee
 During a spouse’s lifetime, there must be a prohibition
on distributions that would satisfy his or her obligation to
support the other spouse

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 Pros:
◦ Trust provides some creditor protection
◦ Allows the grantor to give it away while retaining the ability to
indirectly access it (through the beneficiary-spouse)
◦ SLATs are grantor trusts for income tax purposes
 Cons:
◦ Grantor-spouse’s indirect access to the trust assets ends upon
the death of the beneficiary-spouse
◦ Beneficiary-spouse’s interest in the trust is irrevocable, and
therefore unaffected in the event of a divorce
◦ Generally, cannot make gift-splitting election unless spouse’s
beneficial interest in the trust is “ascertainable”

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 If the Reciprocal Trust Doctrine is to be avoided, the
trusts must be crafted so that either:
◦ The grantors are not left in approximately the same
economic position; or
◦ The trusts are not interrelated – namely that they do
not share substantially the same terms. See, US v.
Grace, 395 U.S. 316 (1969).
 Depending on the context, other courts have mentioned
additional factors such as the fact that the trusts share the
same trustee or that they are funded with the same
assets

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 Thus, it is not impossible to do multiple SLATs as
between spouses, but:
◦ Avoid identical terms
◦ Contribute different assets to each trust
◦ Where possible, space out the creation/funding of
multiple SLATs
◦ Vary the trustees, beneficiaries, distribution terms, and
powers of appointment

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 Sample transaction:
◦ Wife’s trust for Husband
 Discretionary income for life, possibly with a 5&5 power
 H has a lifetime POA to his then heirs-at-law (that could possibly
include the wife)
 Remainder beneficiaries are their children
 Corporate trustee
◦ Husband’s trust for Wife
 Mandatory income for life, deferred for first 5 years
 Discretionary distributions to children are permitted
 W has a testamentary SPOA
 Remainder beneficiaries are their children and a small share for a
charity
 Individual trustee

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 Transfers underlying assets while allowing donor to retain control as GP/Manager
 Leverages gift and estate tax exemption due to valuation discounts applicable to gifted
interests for lack of marketability and lack of control
 Provides asset protection from donee’s creditors (e.g., in case of divorce)
 Facilitates more efficient gifting of partial interests in the underlying assets (such as real
estate)
 Provides centralized management and consolidation of family assets, which can reduce
management expenses and provide additional investment opportunities
 Provides vehicle for preserving and protecting family legacy asset and to maintain “buy
and hold” philosophy
 Offers educational opportunities to involve next generation in investment management
 Flexible – operating agreement can be modified
 Donor can retain income stream from the transferred assets via (reasonable) management
fee payable to GP/Manager
 Helps to avoid expense/burden of probate of underlying assets
 May be used in conjunction with other wealth transfer techniques (e.g., installment sale to
grantor trust, GRAT)

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Children
(or Irrevocable Trust)
Children
(or Irrevocable Trust)
Future Gifts of
LP Interests
Family Limited PartnershipFamily Limited Partnership
1% General Partner
(Control Interest)
1% General Partner
(Control Interest)
Assets
DonorDonorS Corp owned
by Donor
S Corp owned
by Donor
99% Limited Partner99% Limited Partner
DonorDonor

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Children
(or Irrevocable Trust)
Children
(or Irrevocable Trust)
Future Gifts of Non-Managing/
Non-Voting Membership Interests
Family LLCFamily LLC
Assets
DonorDonor
100% Member/
Manager
100% Member/
Manager
DonorDonor

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 Administrative costs of establishing and maintaining partnership are not insignificant
◦ Separate federal and state income tax returns must be filed
◦ Other formalities of the entity must be respected
 Separate books, capital accounts, pro rata distributions, etc.
 Valuation risk if FLP/FLLC interest is revalued by IRS
◦ Professional appraisal and adequate disclosure on timely-filed gift tax return highly
recommended
◦ Form in jurisdiction with favorable default state law (such as DE) to avoid disregard of
applicable restrictions under IRC Section 2704(b)
◦ Valuation risk may be mitigated by use of Wandry formula [discussed later]
 IRS may try to deny availability of annual gift tax exclusion [Hackl]
◦ Consider including right of first refusal in operating agreement, with reasonable payment
terms
◦ Requiring mandatory distributions or including put option may also help, but could adversely
affect valuation discount
 IRS may argue step transaction/gift of underlying assets
◦ Allow significant time period/delay between funding of FLP/FLLC and gift of interest so that
there is “real economic risk of a change in value”
◦ Adjust capital accounts upon any additional non-pro rata contributions

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 IRS may argue full inclusion of FLP/FLLC assets in donor’s estate
under Section 2036
◦ Must have legitimate and significant non-tax reasons for forming entity
◦ Proportionate interests should be received upon contribution and capital accounts
should be properly maintained
 Consider initial capital contribution by children or family trust for pooling of assets
◦ Avoid bad facts such as:
 Deathbed formation/contributions
 Contributing all of client’s assets to entity
 Contributing personal use assets to entity (and commingling of personal assets)
 Non pro rata distributions and disregard of other entity formalities
 Use of FLP/LLC assets to pay estate taxes at decedent’s death
◦ Affirm GP/manager’s fiduciary duty in operating agreement
◦ Require unanimous consent of all partners/members for dissolution or amendment
of operating agreement
◦ Encourage client to give up control as GP/manager prior to death (preferably more
than 3 years to avoid Section 2035), or involve independent party in distribution
and dissolution decisions

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 Provide detailed letter/checklist to client regarding
ongoing administration of the entity
 Schedule annual meeting/review with client to
confirm that formalities of entity are being followed

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 Summary of Wandry case [T.C. Memo 2012-88 (March 26, 2012)]:
◦ Joanne and Dean Wandry established a family LLC with marketable
securities
◦ In 2004, the Wandrys hired an appraiser to value the LLC and did their
best to calculate the percentage gift so that no gift tax would be due
◦ As a safety net, the gift document transferring their LLC interests to
family members included a “defined value,” stating that if the value of the
gifts was later determined to be higher than stated, the number of units in
the LLC would be reduced
◦ In 2012, the U.S. Tax Court ruled for the Wandrys, and the IRS declined
to appeal the decision. Nonetheless, the IRS has not acquiesced

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 Not exactly
◦ Although the IRS lost, they have not conceded the issue
either
◦ But we do know that other types of formula gifts work,
like marital funding formulas and formula disclaimers are
settled
◦ So, why not couple the Wandry formula gift with a
formula disclaimer?

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 Sample transaction:
◦ Assignment of interest to trust, using either:
 The client’s unused GST, as finally determined for federal
tax purposes; or
 For clients who have more GST than lifetime exemption
remaining, the client’s unused exemption amount; or
 For split gifts, twice the unused exemption amount for the
spouse with the lesser remaining exemption.
◦ Trustee’s execute a timely disclaimer of the gift to the
extent it exceeds the applicable exemption amount

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 Planning Considerations:
◦ Does the trustee have the power to disclaim under the
trust agreement?
◦ Would a disclaimer breach a fiduciary duty under the
trust agreement or state law?
◦ State law regarding disclaimers:
 Who gets the disclaimed interest?
 Grantor?
 If someone other than the grantor, has the grantor still made a
taxable gift?

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 Illustration (IFL)
Grantor Irrevocable Grantor Trust
Beneficiaries
Step 1. Gift
Step 2. Loan
Step 3. Interest-bearing Note
Step 4. Distributions

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 Illustration (ISIGT)
Grantor Irrevocable Grantor Trust
Beneficiaries
Step 1. Gift
Step 2. Sale of Assets
Step 3. Interest-bearing Note
Step 4. Distributions

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 Lending /installment sale arrangement:
◦ AFR often lower rate than GRAT and CLAT
◦ Accruing interest?
◦ Balloon principal?
◦ Proper term (short, mid, long)?
◦ Prepayment option
◦ IFL in lieu of third-party mortgage?
◦ Private annuity in lieu of loan or installment sale
obligation?
◦ Forgiveness of a loan or installment sale obligation

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 Assets to be purchased by trust
◦ Defined value formula clauses?
◦ Purchasing discounted, growth, or cash flow-
generating assets from estate?
◦ Buying life insurance from grantor to avoid 3-year rule
(and transfer-for-value issues)?
◦ Illiquid asset problems on the way out minimized due
to ability to back-end load
◦ Purchase of grantor’s right to the retained annuity in a
GRAT?

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 Trust structuring issues:
◦ Grantor trust or not?
◦ Proposed legislative attacks intended to coordinate
certain income and transfer tax rules applicable to
grantor trusts
◦ Using an existing grantor trust?
◦ Grantor tax reimbursement clauses?
◦ Toggling?
◦ Using SLATs or DAPTs?
◦ Crummey powers?

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 Seed gift issues:
◦ Equal to $5.25MM exemption amount?
◦ Allocate GST exemption thereto?
◦ In cash or hard assets? Discountable asset? Asset
to be sold?
◦ Guarantees in lieu of seed gifts?

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 Other important notes when comparing to other
key wealth transfer strategies
◦ "Uncodified" strategy (compared to GRAT and CLAT)
◦ No mortality risk as seen with GRAT, but if the grantor
dies while the note is still outstanding, will the Service
argue that such causes gain realization to the extent
that the note is unpaid?

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 Illustration (GRAT)
Grantor GRAT
Beneficiaries
Step 1. Transfer Assets
Step 2. Annuity Payments
Step 3. Remainder

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 Illustration (CLAT)
Grantor CLAT
Beneficiaries
Step 1. Transfer Assets
Step 2. Annuity Payments
Step 3. Remainder
Charity

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 Annuity structuring issues:
◦ Often higher rate than IFL and ISIGT.
◦ Back-end loading
 The maximum rate of annual increase is 20% for a
GRAT
 Shark-fin opportunity for CLAT.
◦ Prohibition on making annuity payments with a note

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 Assets to be transferred to trust
◦ Defined value formula clauses?
◦ Transferring discounted, growth, or cash flow-
generating assets from estate
◦ Separately buying life insurance from grantor to avoid
3-year rule (and transfer-for-value issues)?
◦ Illiquid asset problems on the way out
 Magnified in the case of a GRAT due to limited back-end
loading
 Minimized in the case of a CLAT due to ability to back-
end load

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 Trust structuring issues:
◦ Grantor trust or not?
 GRATs are grantor trusts, but what about a private
annuity in conjunction with a non-grantor trust?
 CLATs can be grantor or non-grantor trusts
◦ Proposed legislative attacks intended to coordinate
certain income and transfer tax rules applicable to
grantor trusts
◦ Grantor tax reimbursement clauses
◦ Toggling?
◦ Rolling or series?

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 Valuation of remainder interest
◦ Zeroing out?
◦ GST exemption allocation:
 Can’t allocate GST exemption until end of ETIP in context
of GRAT
 In general, it is impossible to allocate GST tax
exemption to a CLAT with exact precision because
the Code provides an adjustment to any allocation
that is made to the trust
◦ Sales and gifts of remainder interests?

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 Other important notes when comparing to other
key wealth transfer strategies
◦ "Codified" strategies (compared to ISIGT).
◦ Mortality risk issues
 Inclusion of GRAT assets in estate to the extent grantor
fails to outlive term
 Grantor need not outlive the CLAT term
◦ Proposed legislation risks
 Requiring a minimum term in the context of a GRAT.
 No word yet on proposed legislation which would require
a minimum term with a CLAT

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 Split Purchase Trust (vs. QPRT)
 Private Annuity Sale to Grantor Trust
 Sale of Remainder Interest in GRAT to Dynasty
Trust

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 Most clients who’ve done QPRTs want to know how to unwind
◦ FMV of property has depreciated
◦ Mortality risk if grantor dies during the QPRT term
◦ Don’t want to pay rent after QPRT term (to avoid inclusion under §2036)
 With split purchase, parent contributes funds for life interest and child (or
dynasty trust) contributes funds for remainder interest (based on §7520
actuarial values, provided death not imminent)
◦ Must be implemented at time of purchase from unrelated party
◦ Property is purchased and owned by irrevocable trust designed as a QPRT
 Allows transaction to qualify for personal residence exception to §2702
◦ If funds used to purchase remainder interest are acquired from the parent, must be
acquired in an unrelated transaction
◦ Avoids §2036 inclusion in parent’s estate because full and adequate consideration
was paid for remainder and interest was acquired from unrelated party (vs.
parent/term holder)
◦ Because ETIP period should not apply, GST exemption can be allocated to trust
that purchases the remainder interest
◦ Ideal for clients with shorter than expected life expectancy

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 Grantor gifts “seed money” (or uses personal guarantees) to irrevocable grantor trust
equal to approximately 10% of FMV of assets to be sold to trust
 Grantor transfers property to trust in exchange for lifetime annuity equal to fair market
value of the property sold (using §7520 present value calculation, provided parent’s
death is not imminent)
 Annuity can be paid in cash or “in kind” by trust
◦ Best to pay with cash to the extent available to avoid “leaky” freeze
 No taxable gift, so long as the present value of the annuity received is equal to the
fair market value of the property sold
 No §2036 inclusion at grantor’s death
 No income tax consequences on initial transfer or upon receipt of annuity
◦ Trust takes carry-over basis in property
 No valuation risk - annuity can be designed to adjust if assets transferred are
revalued upon audit (similar to GRAT)
 Can be used for GST planning
 Ideal for clients with shorter than expected life expectancy

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 GRAT remainder beneficiary (e.g., remainder trust for grantor’s children) sells
remainder interest in GRAT to Dynasty Trust (also created by the grantor,
ideally “old and cold”)
◦ Spendthrift clause in GRAT must permit this
 Purchase price for remainder is based on §7520 actuarial value
◦ Nominal value if remainder interest is sold shortly after the GRAT is formed and
GRAT is nearly zeroed out
 Arguably, no gift from remainder trust to Dynasty Trust because FMV has
been paid for remainder interest [See D’Ambrosio; Wheeler]
 Because remainder trust and Dynasty Trust are both grantor trusts as to the
settlor, no income tax consequences should result from sale
 Allows remainder interest to pass to Dynasty Trust at end of GRAT term, free
of GST tax
◦ But see PLR 200107015 (grantor is still transferor for GST purposes to the extent
FMV of trust assets exceed amount paid for remainder interest)

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 Questions?