Family Business Planning with Chapter 14 Implications€¦ · Family Business Planning with Chapter...
Transcript of Family Business Planning with Chapter 14 Implications€¦ · Family Business Planning with Chapter...
/ / 1
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Family Business Planning with Chapter 14 Implications
RPTE Skills Training, July 2016
N. Todd Angkatavanich, Esq.Marissa Dungey, Esq.Withers Bergman LLP
4728130.1
/ / 2
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Overview of Chapter 14
Effective Oct 9, 1990 – replacing the repealed 2036(c) – criticized for being overly-vague, complex and unreasonable.
Special valuation rules set forth in Sections 2701, 2702, 2703 and 2704.
Attempts to prevent perceived transfer tax abuses in the context of business or other interests held within a family.
/ / 3
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Where Chapter 14 may come into your practice
• Preferred Partnerships/LLC
• Family Limited Partnerships
• Capital Contributions - Recapitalizations
• Buy-Sell and Shareholder Agreements
• Carried Interest Planning
• Profits Interests
• GRATs/ QPRTs / Sales of Remainder Interests
• Sales to Grantor Trusts
• Valuation Issues
• Joint Purchases
/ / 4
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Overview of Chapter 14
Underlying Assumption - Senior family members will structure ownership and transfer of family business (and other) interests so as to shift value to younger family members at a reduced transfer tax cost.
NOT ALWAYS THE CASE AT ALL!!!! But Presumptions built into provisions. PITFALLS FOR THE UNWITTING!!!
Important to Note – Very broad and can
unexpectedly apply!
/ / 5
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Overview of Chapter 14
"Deemed Gift Provisions”
• Section 2701
• Section 2702
• Section 2704(a)
"Disregard Provisions"
• Section 2703
• Section 2704(b)
/ / 6
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
IRC SECTION 2701
/ / 7
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
IRC Section 2701 – Overview
Deemed Gift Provision – even if no
gift/full and adequate consideration
under Chapter 12.
Perceived Abuse – Manipulation of
value between two classes of equity so
as to shift value to junior generation
while minimizing gift tax.
/ / 8
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Pitfalls and planning opportunities
• *Preferred entities
• *Profits interests
• *Capital contributions and recaps
• *Carried interest “vertical slice”
• Different classes of equity
• Pro-active planning:
• * Freeze partnerships to shift growth
• (GRATs, QTIPs, NON-Exempt Trusts)
/ / 9
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Historical BackgroundPre-October 9, 1990 Planning
Suspect Transaction - Parent
recapitalizes family company into
preferred and common interests.
Preferred had DISCRETIONARY
RIGHTS to Boost its value
Thus, minimal valuation of gift of common
(but with all upside potential).
/ / 10
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Pre-2701 Planning
Parent RetainedPreferred
Preferred (Discretionary Rights –
Inflated Value)
Common(Deflated
Value)
Common Gifted to Kids(at depressed value)
Partnership Agreement Provisions
Valuation Before Gift
Valued at $9.5M Valued at $500k
$10M total
/ / 11
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
CONGRESSIONAL RESPONSE – Concept of Applicable Retained Interest AND “Zero” Value Rule 2701 causes certain rights associated with Senior equity interests
(“Applicable Retained Interests”) retained by Senior Member to be valued at ZERO Rationale - If Discretionary Rights unlikely to be exercised by G-1,
why give “credit”? Section 2701 creates a Fiction
Resulting increase in value of the transferred interest to Junior Member
Subtraction method
/ / 12
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
“Transfers” -- Broader than you think
• Traditional Gift “Transfers”
• Capital Contributions
• Recapitalization
• Change in Capital Structure
/ / 13
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Terminology: “Junior” and “Senior” –• Family Members:
“Applicable Family Member” “Senior” Member and Spouse (T’s Spouse, Ancestor of T or T’s Spouse, and Spouse
of Ancestor)
“Member of the Family” “Junior” Member and Spouse (T’s Spouse, Lineal Descendants of T or Spouse, any
spouse of a Lineal Descendants )
• Equity Interests in a Controlled Entity “Senior” interest generally “Preferred” “Junior” interest generally “Common”
/ / 14
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2701 Zero Valuation Rule applies if:
1. “Transfer” to a Member of the Family AND AFTER
2. Transferor or “Applicable Family Member”RETAINS
3. “Applicable Retained Interest
/ / 15
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Applicable Retained Interest
Two Kinds of “Tainted” Rights cause Applicable
Retained Interest status: (Either)
1. Distribution Right (only if “CONTROL”)
Right to receive distributions with respect to
an Equity Interest
UNLESS has “Same or Subordinate”
distribution rights as the transferred interest
/ / 16
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Family “Control” pre-requisite for a Distribution Right:
Partnership – At least 50% of capital or profit interest; or any equity interest “as a general partner” of an LP (question “in a general partner”).
Corporation – At least 50% of the total voting power or total FMV of the equity interest of the corporation.
/ / 17
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Extraordinary Payment Right
Put, call, right to compel liquidation and
other rights:
• The exercise or non-exercise of which
affects the value of the transferred interest
• No “control” requirement – since held
individually (not in entity)
• Assumption older family member would not
exercise right
/ / 18
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
“Qualified Payment Right” (“QPR”)
MANDATORY AND QUANTIFIABLE (or otherwise subject to valuation)
QPR [[[QPR ELECTION]]]
• Cumulative payment
• Payable at least annually
• At a fixed rate
Lower Of – Senior Member’s equity
interest is given the lower value
/ / 19
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Rights That Are Not Extraordinary Payment Rights or Distribution Rights Under Section 2701
Mandatory Payment Rights
Liquidation Participation Rights
Right to Guaranteed Payment
Non-Lapsing Conversion Right
/ / 20
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Circumstances When Section 2701 Does Not Apply
Marketable Securities – Market quotations on
established securities market for either transferred
or retained interest
Same class exception – Same Class or
Proportional To.
• Non Lapsing differences in Voting OK (Ex. FLP)
“Vertical Slice” Proportionality Rule
/ / 21
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
What is the “Vertical Slice Rule” and why do we care?
The most elegant solution to a draconian deemed gift
tax rule under IRC Section 2701
The “rule” is really just one (of several) safe harbor
exceptions to Section 2701 – The “proportionality”
exception
Broadly requires a parent who wishes to transfer a
percentage of his GP carried interest to children (or
their trust) to also transfer a proportional interest of
fund LP interest (e.g., 25% carry + 25% LP interest)
Beware of “Bad Vertical Slices”
/ / 22
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Chief Counsel Advice 201442053 -Recapitalization
Mom contributed real estate to single class LLC and gifted interests to two sons and GCs; LLC had 20-year term.
LLC Recapitalized - sons allocated all profits and losses; ownership interests held by Mom and GCs were only capital interests with right to distributions based on capital account balances at recapitalization.
/ / 23
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Conclusion of CCA: recapitalization was “transfer” from Mom to Sons. Amount of transfer was determined pursuant to Treas. Reg. §25.2701-3(b)
•Both before and after recapitalization, Mom held Applicable Retained Interest (right to compel liquidation – turned out not to be the case- before transfer and Distribution Right that was not a QPR)•CCA valued Mom’s retained interest at Zero;
CCA did not ascribe any value to the retained capital interest (i.e. from “liquidation participation right”)
•In commentary, Richard Dees argues transfer more appropriately valued under Chapter 12 traditional gift tax principles•Settlement with IRS apparently ascribed value to capital interest retained by D
/ / 24
© 2016 N. Todd Angkatavanich. All Rights Reserved.
The 2701 Attribution Rules
• “Attribution to Estates, Trusts and other entities”
– assuming maximum exercise of discretion fbo
• “Grantor Trust Attribution Rules”
• “Multiple Attribution Rules” Treas. Reg. Section
25.2701-6(a)(5) – different tie-breaker ordering
rules apply: Cast a Wide 2701 Net.
As to applicable retained interests – Attribute
to Senior Member first (Grantor of GT first)
As to subordinated equity interests –
Attribute to Junior Member first
/ / 25
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Pro-Active Planning With Section 2701 Compliant Entities
Division of partnership or LLC interests
into Preferred “Frozen” and Common
“Growth” interests
Potential to “freeze” the growth and shift
growth (above Coupon and Liquidation
Preference) to common interests
/ / 26
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Pro-active planning
* Shifting growth –“pop” in valueQTIP
GRAT
GST Non-Exempt
/ / 27
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Preferred Partnership GRAT
GST Trust
Parent
Preferred Partnership
GRAT Contribution of Preferred
Interest
QPR*
Long Term GRAT
Annuity (Funded by Preferred Coupon)
Common
Capital ContributionCapital
Contribution
* Could also use mandatory payment right or guaranteed payment right
/ / 28
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Valuing The Preferred Interest
QPR avoids “Zero Valuation” rule
• Value of preferred interest should equal “par”
• Rev. Rul. 83-120 factors:
Yield as compared to risk-adjusted market comparables
Coverage of coupon
Dissolution protection
Voting rights
Lack of Marketability
De minimus Rule
/ / 29
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2701 Red flags• Different classes of equity in family vehicle (“control” broadly defined)
• Preferred entities
• Parent (alone) retained put, calls, liquidation rights
• Profits interests
• Recap – capital contribution
• Carried interest transfer planning
• Can still be done – but navigate issues
/ / 30
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
IRC SECTION 2704 (a) & (b)
/ / 31
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704 - Overview
• Section 2704(a) - a “Deemed Gift” and Estate
Tax provision that treats Disappearing, voting
or liquidation rights in a Family Controlled
Entity as transfers subject to estate or gift tax
• Section 2704(b) - a “disregarding” provision
that ignores “illusory” restrictions against
liquidation when valuing an interest in family
controlled entity
/ / 32
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704(a) – Overview (“Anti-Harrison” Rule)
• Harrison (TC 1987)
• * Dad owned 1% GP + 77.8% LP ($60MM pre-discount)
• * GP had right to liquidate partnership (but successor did not).
• * Estate successfully argued FET value is based upon discounted LP interest ($33MM) since right disappeared at death.
• * Tax Court allowed because no liquidation right.
/ / 33
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Lapse of Voting or Liquidation Right
• Family Controlled immediately Before and After lapse
• Lifetime Lapse – Gift
• Death Lapse – Transfer included in estate.
• “Restriction or Elimination” – Contrast a “Transfer”
resulting in a lapse of liquidation right is not subject to
2704(a) if the rights are not restricted or eliminated.
• Amount of Gift or Estate Inclusion – Difference between
value before lapse and after.
/ / 34
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704(a) - Definitions
• Liquidation Right – Right to Compel entity to
acquire holders equity interest – including by
aggregate voting power.(withdrawal right)
Contrast- Does Not need to be a right to
force liquidation of entity
• Members of Family – 2702 definition
• Control - 2701 meaning
/ / 35
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704(a) Lapse of Voting Rights• Estate of Rankin M. Smith
• Decedent owned super-concentrated (12x)
stock (Class A) in the Atlanta Falcons entity
• Converted to diluted Class B at death.
• Tax Court ruled that §2704(a) applied and the
value of the voting shares prior to those
voting rights lapsing ($30 M) would be
included in the estate after lapse ($22M
claimed value)
/ / 36
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Takeaways – 2704a
• Be careful when eliminating rights (voting or liquidation) – gift
pitfall
• Restructuring entities – switch vote to non-vote
• Disappearing rights at death – (ex. Vote converts to Non-
vote)
• Potential for mis-match. Contract value vs transfer tax value
/ / 37
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704(b) – Transfer Subject to Applicable Restrictions
Illusory restrictions on dissolution of a family controlled entity where either: (1) restrictions will eventually go away, or
(2) family can simply remove them.
Artificially reduces value of interests with no substantive effect on interests.
/ / 38
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704(b) – Summary of Rule
• If Transfer of an interest in Family “Controlled” Entity
• Any restrictions on ability to liquidate the entity that are more restrictive than state law (“APPLICABLE RESTRICTIONS”)
• Will be IGNORED for valuation purposes to the extent that:
• The restriction will LAPSE after; OR
• Transferor and Members of Family can REMOVE it IMMEDIATELY AFTER
/ / 39
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Elements of 2704(b)
• “Control” Prerequisite - 2704(b) applicable
ONLY IF Transferor and Members of Family “Control”
entity Immediately Before transfer (Contrast
2704a)
• Control – 2701 definition
• Member of Family – 2702 definition
/ / 40
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2704(b) – Example
• D owns a 76% interest and each of D's children, A and B, own a 12%
interest in general partnership X.
• The partnership agreement requires unanimous consent of all the
partners to liquidate the partnership. Under the state law that would apply
in the absence of the restriction in the partnership agreement, the consent of
partners owning 70% of the total partnership interest would be required to
liquidate X.
• On D's death, D's partnership interest passes to D's child, C. The
requirement that all the partners consent to liquidation is an Applicable
Restriction.
• Because A, B and C (all members of D's family), acting together afterthe transfer, can remove the restriction on liquidation, D's interest is valued
without regard to the restriction; i.e., as though D's interest is sufficient to
liquidate the partnership
/ / 41
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2704(b) and Kerr
Kerr: TP formed Texas limited partnership. Partnership
Agreement stated that LPs could not withdraw from
the partnership;
Texas law said that LP had right to withdraw from
Partnership at any time upon 6 months’ notice.
§2704(b) did not apply because the restriction
concerned withdrawal, not dissolution.
Fifth Circuit affirmed because a non-family member held
an interest. Restriction on withdrawal could not be
an “applicable restriction” because the family did
not alone have the ability to remove the restriction.
/ / 42
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Possible Expansion of § 2704(b)
Under § 2704(b)(4):• The Secretary may by the regulations provide that other restrictions
shall be disregarded in determining the value of the transfer of any interest in a corporation or partnership to a member of the Transferor’s family if such restriction has the effect of reducing the value of the transferred interest for purposes of this subtitle but does not ultimately reduce the value of such interest to the transferee.
Proposed Expansion:
• Proposals for the expansion Obama Administration’s Greenbook for fiscal years 2010-2013.
• Congress has not adopted - but Treasury Dept. previously indicated that it has working on draft proposed regulations that presumably are similar to those in the Greenbook. More recently indicated that the draft would not be based on the Greenbook, but rather upon the statute.
/ / 43
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
The Greenbook proposals expand 2704(b) by:
Create Additional Category of restrictions (known as “Disregarded Restrictions”) that would be
IGNORED:
(i) limitations on a holder’s right to liquidate that holder’s interest (i.e., restrictions on Withdrawal Right), that are more restrictive than Default standards set in the Regulations, and
(ii) limitations on a Transferee’s Ability to be Admitted as a full partner or to hold an equity interest in the entity.
/ / 44
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Disregarded Restrictions would include:
Enumerated default assumptions would replace the Disregarded Restrictions
(Contrast: currently Applicable Restrictions default to State Law)
/ / 45
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Default Assumptions (if Disregarded Restrictions are ignored):
• Greenbook proposals would also treat interests held by charities and non-family members of the Transferor as held by the Transferor’s family for purposes of determining if the restriction can be removed by Members of Family.
• Marital and Charitable Deduction Mismatch - The Greenbook proposals promise to make “conforming clarifications” with regard to the interaction with the transfer tax marital and charitable deductions.
/ / 46
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Safe Harbors
Greenbook proposals envision regulatory safe harborswhich will provide standards for allowable restrictions.
Other Predictions – Operating Business Exception
Some commentators have suggested that the proposed regulations may include a carve-out for active or “genuine” family-owned businesses.[1]
[1] Ronald D. Aucutt, ACTEC Capital Letter No. 38: Anticipated Valuation Discount Regulations(Jul. 20, 2015).
/ / 47
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Questions Regarding Validity
Richard Dees argues that, absent Congressional action, regulations based on the Greenbook proposal would be invalid.[3] Dees argues that:
(i) Legislative history under Chapter 14 intended to protect traditional valuation discounts and to prohibit family attribution in valuing business interests; and
(ii) Treasury’s authority under § 2704(b)(4) does not extend to the creation of new categories of disregarded restrictions, new regulatory defaults, or redefining “Members of a Family” to include charities and others.
[3] See Richard L. Dees, Possible New Regulations under Internal Revenue Code Section 2704(b), TAX NOTES (August 31, 2015).
/ / 48
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
IRC SECTION 2703
/ / 49
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Introduction: §2703 – why you should care
Presumption that any:
• Option, Agreement or Right to Acquire or Use
Property (at less than fair market value)
OR
• Restriction on the right to sell or use property
Is DISREGARDED for transfer tax purposes
Overcoming the presumption very difficult
/ / 50
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2703 Rule: For Estate, Gift and GST purposes, the value of any property determined without regard to:
Any option, agreement, or other right to acquire or use
property at less than fair market value.
Any restriction on the right to sell or use property.
These rights, agreements or restrictions may be contained in:
Partnership Agreement
LLC Operating Agreement
Articles of Incorporation
Corporate By-Laws
Shareholders’ Agreement
Any other agreement (e.g., Buy-sell agreement, Option)
/ / 51
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Why does 2703 matter – disruption of plan
• Unintended consequence from a transfer tax and funding standpoint
• Valuation mis-match (revalued for estate tax but not contract)
• If large enough numbers could cause first death estate tax – and loss of
marital deduction
• Cause first death estate tax or loss of valuable exemption
• Designed to attack “sweetheart Deals” in buy-sells and options. Broad – now
flps
/ / 52
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Effective date of §2703
Any right or restriction created after October 8,
1990
Any right or restriction substantially modified
after October 8, 1990
Substantially modified includes failure to
update a right or restriction created before
October 8, 1990
Common Misconception that a pre-1990
agreement is “safe”
/ / 53
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2703(b) Exception: Requirements for contractual price to be respected for estate/gift tax purposes
§2703(b)(1): bona fide business arrangement
§2703(b)(2): not a device to transfer property for
less than full and adequate consideration
§2703(b)(3): comparable to similar arm’s-length
arrangements
and
and
/ / 54
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
§2703(b)(1): Bona fide business arrangement
Reasons for entering into the right or restriction
will constitute “bona fide business arrangements”:
1) Maintenance of family ownership and control
2) Retention of family member as key employee
3) Create incentive for effective management
4) Ensure continued employment of shareholders and facilitate transition of ownership
5) Avoid expensive appraisals in determining the purchase price
6) Prevent transfer to an unrelated party
7) Provide market for equity interest
8) Plan for future liquidity needs
/ / 55
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
§2703(b)(2): Not a (Testamentary) Device
Factors indicate that a restrictive agreement served a testamentary
purpose:
1) Decedent’s poor health
2) No negotiation
3) Inconsistent enforcement of provisions.
4) Failure to seek professional advice
5) Failure to obtain or rely on appraisals
6) Exclusion of significant assets from price
7) No periodic review of price
8) Business arrangements fulfill testamentary intent
Deal must also reflect adequate consideration at time of agreement.
/ / 56
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
§2703(b)(3): Comparable to similar arrangements entered into by person in an arm’s length transaction
Smith court acknowledged difficulty of finding actual
agreements between unrelated persons similar to an FLP
agreement, yet rejected testimony of attorneys. Failed pre-
2703 law.
Blount court stated “the regulations… contemplate the
introduction of evidence of actual comparable transactions”-
Not merely isolated transactions. Also failed pre-2703 law.
Amlie was a taxpayer win on the comparable arrangements test.
Court held multiple comparables not necessary and credited
expert testimony about a single comparable arrangement.
/ / 57
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
§2703 safe-harbor
Does not apply if more than 50% by value of
the property is owned directly or indirectly by
non-members of the transferor’s family.
Note:
• “Family” - spouse, parents, grandparents,
descendants, siblings, nieces, nephews.
• Anyone who is a “natural object of the
transferor’s bounty.”
/ / 58
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2703 and FLPS
Old Argument: 2703 Disregard of Entire Partnership
2 IRS Arguments
• “Property” refers to the underlying assets
owned by the partnership
• “Restrictions” refers to the partnership entity
itself – “LOOK THROUGH”
• IRS Lost both:
• Church v. U.S.
• Strangi v. Comm’r
/ / 59
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2703 and FLPS Current Arguments: 2703 and Holman
GIFT TAX CASE
TP received a substantial amount of Dell
Computer Corp. stock options.
TP formed partnership for the following purposes,
and funded it with Dell stock:
• Long-term Growth
• Asset Preservation
• Asset Protection
• Education
/ / 60
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Held: Restrictive provisions (“ROFR”) ignored
under 2703
NOT Bona fide Business Purpose –
Personal Goals of TP.
Restriction was DEVICE - GP could re-acquire
partners’ interest at a discount attempted
transfer
Section 2703 and FLPS
Current Arguments: 2703 and Holman
/ / 61
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2703 on your radar
• Buys-sell agreements (pre and post 2703)
• Options
• FLP
• Mismatch consequences – unexpected disruption
• Remember pre-2703 law – “substantial modification”
/ / 62
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
IRC SECTION 2702
/ / 63
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2702 Overview
Deemed Gift provision
Generally regarded as statutory basis for
GRATs and QPRTs.
Exceptions to a zero value rule.
Transfers in trust (including “Deemed”) to a
Member of Family when Transferor OR
Applicable Family Member retains an interest
– Retained Interest equals Zero.
/ / 64
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Pre-2702 – The Perceived Abuse
Parent valued a retained “income
interest” for gift tax purposes based upon
an assumed income stream equal to the
prevailing interest rate.
Then investing trust to provide LESS actual
income to the parent
Under "Subtractive method" resulted in Larger
Retained Income Interest than actually received –
Depressed Gift .
/ / 65
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2702 Zero Valuation Rule addressed the Abuse.GRITs - Then and Now
GRIT - Then GRIT - Now
Pre-2702 (October 8, 1990)
- August 1989 long-term AFR of 8.32%
Under 2702 (Post October 8, 1990)
Transfer amount: $100,000
Retained “Income”
interest for 15 years: ($ 69,844)
Taxable gift: $ 30,156
Transfer amount: $ 100,000
Retained “Income”
interest* for 15 years: ( -0- )
Taxable gift: $ 100,000
*Parent gets credit of zero for retained “income” interest under Section 2702, even though Parent receives actual income payments.
/ / 66
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Post 1990 - Zero-Valuation Rule
• If 2702 applies, value of gift is determined by
subtracting value of interest retained by
Transferor or Applicable Family Member from
transferred property. “Subtraction Method” (like
2701)
• Retained interest is ZERO Unless a “Qualified
Interest”
• So the Gift equals the ENTIRE VALUE of
transferred property. (contrast 2701)
/ / 67
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Carve-OUTs to 2702 Zero value rule
Qualified Interests – Primarily GRATs
Zero Value rule N/A if retained interest is a “Qualified Interest”:
*Qualified Annuity Interest*Qualified Unitrust Interest, OR*Qualified Remainder Interest).
EXCEPTION TO 2702: Personal Residence Trust
For GRATs and QPRTs – Retained Interest is NOTvalued at Zero
/ / 68
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
GRATs and QPRTs - Rationale
Really are Exceptions to the Zero value rule.
Certainty that the parent will receive something
back that is mandatory and quantifiable in the
form of an annuity payment or a term interest in a
personal residence.
Thus, it is appropriate to give parent “credit” for
the retained interest in determining value of gift.
/ / 69
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Greenbook on GRAT
• President Obama’s “Greenbook” Proposals
• GRAT Proposals:
• 10-year Minimum GRAT term
• Maximum GRAT term of life expectancy of
the annuitant + 10 years
• Eliminate “zeroed-out” GRATs; minimum
remainder of 25% or $500,000 (Greater)
• Prohibit “swap” of GRAT assets by Grantor
/ / 70
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Estate Tax Inclusion Risk:
Treasury issued final regulations (effective for decedents dying after November 7, 2011).
Portion of GRAT includable in gross estate if Parent/Grantor doesn’t survive trust term is amount necessary to yield the annual payment using the Section 7520 rate as of the date of death. See Reg. Sec. 20.2036-1(c)(2)(iv), example 2.
Section 2036 includable amount = annual annuity/7520 rate (on date of death).
• Example:
Grantor dies before end of trust term when GRAT is worth $300,000 and 7520 rate is 6%; Section 2036 includable amount equals:
IRS previously took the position that 100% of GRAT included in estate.
Transfers $100,000
$12,000 annuity for 10 years
$12,000 Annuity---------------------
.06 (7520 rate)
= $200,000
Grantor 10 Year GRAT
/ / 71
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Generation Skipping Tax / ETIP Issue
ETIP inclusion under 2036
Cannot allocate GST exemption until end of
trust term (ETIP)
To maximize GST you want to allocate to
assets before assets appreciate
GST automatic allocation to indirect transfers
to deemed “GST Trusts”
Preferred Partnership GRAT idea
/ / 72
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Generation Skipping Tax / ETIP Issue (Cont’d)
Cannot allocate GST exemption until end of trust term (ETIP)
To maximize use of GST exemption, want to allocate to assets before
assets appreciate. GRATs are therefore less effective for GST planning
than other techniques (such as gift/sale transactions).
GST automatic allocation to indirect transfers to deemed “GST Trusts.”
Consider “election out” of GST automatic allocation rules at
end of trust term/ETIP
Example:
GRAT value at end of trust-formed ETIP - $10,000,000
Grantor’s remaining GST exemption = $2,000,000
If don’t elect out, results in GST inclusion ratio of .8 (80% subject
to GST tax)
/ / 73
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Preferred Partnership GRAT
GST Trust
Parent
Preferred Partnership
GRAT Contribution of Preferred
Interest
QPR*
Long Term GRAT
Annuity (Funded by Preferred Coupon)
Common
Capital ContributionCapital
Contribution
* Could also use mandatory payment right or guaranteed payment right
/ / 74
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
GRATs
Zeroed-out GRATs
Increasing Volatility and
Capturing the Upside (Rolling
GRATs; Series GRATS)
Estate tax inclusion risk
/ / 75
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
GRAT Technical Requirements
Fixed amount
Annuity amount may be increased up to 20% each year
GRAT adjusts for incorrect valuations
Cannot be payment of a debt obligation option
No additional contributions to GRAT permitted
No pre-payment
105 day rule
/ / 76
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2702 and Karmazin (and now Woebling)
IRS argued - sale of the LP interest by
the TP in exchange for note constituted
a “transfer in trust” under §2702
Under §2702, a retained interest has no
value unless it is a “qualified interest”
/ / 77
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
The sold LP interest should be recharacterized as a gift to the IDGT, in exchange for a retained interest valued at zero, resulting in a taxable gift of all LP interests sold
Woelbing - Tax Court scheduled trial for February 29, 2016. Ultimately settled.
Section 2702 and Karmazin (and now Woelbing)
/ / 78
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
2702(c) – Overview of Deemed Transfers in Trust with Term Interests
Zero valuation rule unless "Qualified
Interests”
Can apply to Joint Purchases or Sales of
Remainder Interests in which a family
member retains a term interest, or
potentially with respect to leasehold
interests
/ / 79
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Example: Section 2702(c) Joint Purchase (Ex. From Regs - without the numbers)
Remainder Interest
$ 2,541,600
20 YearTerm
Parent Child
Apartment
Parent treated as selling $10MM Apartment in exchange for $ 7,458,400 (Child’s contribution)
= Gift of $ 2,541,600 (Because Parent’s retained interest is NOT a Qualified Interest – so ZERO)
$ 10,000,000
$ 7,458,400
• Interests determined using June 2015 7520 Rate of 2.0%
• Assume parent 65 years old, child 30 years old
/ / 80
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Example: Section 2702(c) Joint Purchases (Cont’d)
A purchases a 20-year interest in an apartment building and
A's child purchases the remainder interest in the property.
A and A's child each provide the portion of the purchase price
equal to the value of their respective interests in the
property determined under § 7520.
For purposes of § 2702, A is treated as buying the entire
property and transferring the remainder interest to his
child in exchange for the portion of the purchase price provided
by A's child. A's retained interest is valued at zero because it
is not a qualified interest.
/ / 81
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
QPRT Joint Purchase – Section 2702(c) Exception
Personal Residence
G1 G2Life
Estate
$ Actuarial Value
Life Estate
Remainder
$Actuarial
Value Remainder
Section 2702(c) N/A if joint purchase structured to satisfy QPRT exception.
PLR 200112023
Does Section 2036(a)(1) apply to G1’s retained life estate? “Adequate consideration”?
Gradow vs. D’Ambrosio
/ / 82
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
QPRT Sale of Remainder Interest – Section 2702(c) Exception
Personal Residence
G1 G2
RetainLife
Estate
Sell Remainder for Actuarial Value
Section 2702(c) N/A if retained life estate satisfies QPRT exception?
PLR 200840038; 200919002
Does Section 2036(a)(1) apply?
/ / 83
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Section 2702(c) Exceptions
Leasehold Interest – If full and adequate consideration (good faith facts and circ.)
Property Interests which are NOT treated as term interests:
• Tenants-in-Common
• Tenants by the Entireties
• Tenants with Rights of Survivorship
/ / 84
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Qualified Personal Residence Trust
“Subtraction method” of valuation
is applied.
Retained use of the house is valued
based on the 7520 rate for the month
of the gift
/ / 85
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Example: QPRT
Parent gifts $2,000,000 house to QPRT with 10-year term
Parent’s age = 65
June 2015 7520 rate = 2.0%
Value of house: $2,000,000
Value of retained use of house: ($ 711,760)
Taxable gift: $1,288,240
Transfers $2,000,000
Parent 10 Year QPRT
Retains exclusive use
Kids receive at
end of term
/ / 86
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Continuing Trust After QPRT Terms:
Parent/Grantor may occupy
Must pay fair market rent to avoid
inclusion under Section 2036.
GST/ETIP issues must be considered if
continuation trust structured.
• Consider “electing out” of GST automatic
allocation
/ / 87
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
QPRT Technical Requirements:
Only one personal residence
Two QPRTs permitted at a time
“Personal residence” as defined in Section 121
Mortgage issue – additional gift
Sale by QPRT – QPRT must purchase replacement
residence within 2 years
Contribution of cash to purchase property through QPRT
permitted- must purchase within 3 months.
Prohibition against selling or transferring residence back
to the grantor or grantor’s spouse
/ / 88
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
QPRT Technical Requirements (cont’d):
Cash for improvements allowed if reasonably expected
Income distributed to term holder at least annually
May hold appurtenant structures and adjacent land
reasonably appropriate for residential purposes
Insurance proceeds can be held and reinvested in a new
personal residence within 2 years of receipt
No pre-payment permitted
More advantageous in high interest rate environments
/ / 89
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
N. Todd Angkatavanich is a partner at Withers Bergman, LLP, in the firm’s Greenwich, New Haven and New York offices. He serves as Regional Practice Group Co-Leader of the firm’s US Trust, Estate and Charities Practice Group. Todd is a Fellow of the American College of Trust and Estate Counsel and is a member of the Society of Trusts & Estates Practitioners. Todd has published articles in publications such as Trusts & Estates, ACTEC Law Journal, Estate Planning, BNA Tax Management, Probate & Property and other publications. He serves as Co-Chair of the Estate Planning & Taxation Committee of the Editorial Advisory Board of Trusts & Estates magazine, as well as a member of the Advisory Board for BNA/Tax Management Estates, Gifts and Trusts Journal. Todd is co-author of the pending BNA/Tax Management Portfolio No. 875, entitled “Wealth Planning with Hedge Fund and Private Equity Fund Interests.” A frequent speaker, Todd has given presentations for a number of organizations including the Heckerling Institute on Estate Planning, the Federal Tax Institute of New England, the Notre Dame Tax and Estate Planning Institute, the Washington State Bar Association Annual Estate Planning Seminar, the ABA Real Property, Trusts and Estates Section (Spring Symposia, Fall Joint Meetings and the joint ABA/New York Law School Skills Training Programs), BNA/Tax Management, as well as numerous estate planning councils, CPA societies and family office groups. Todd has been quoted in articles that have appeared in Barron's, Bloomberg Businessweek, The Boston Globe, The Philadelphia Inquirer, The Chicago Tribune, The Miami Herald, Forbes, MSN Money and other publications. Todd is Co-Chair of the ABA/RPTE Business Planning Group – Business Investment Entities, Partnerships, LLC’s and Corporations Committee and serves as a member of the ABA/RPTE Diversity Committee. He is a member of the Executive Committee of the Connecticut Bar Association, Estates and Probate Section, and on behalf of the Section also serves on the Planning Committee for the Federal Tax Institute of New England. He is the 2012 recipient of the award for “Private Client Lawyer of the Year” from Family Office Review. Todd has been included in The Best Lawyers in America® (for New York City, Greenwich and New Haven, Connecticut) and is also the recipient of the Best Lawyers® 2015 Trusts & Estates “Lawyer of the Year” award for New Haven, Connecticut. He has been rated AV Preeminent® by Martindale-Hubbell® Peer Review Ratings™ and has been listed in Who's Who Legal: Private Client. Todd received his B.A., in Economics, magna cum laude, from Fairleigh Dickinson University, his J.D., Tax Law Honors, from Rutgers University School of Law, Camden, his M.B.A. from Rutgers University Graduate School of Management, and his LL.M, in Taxation, from New York University School of Law.
Speaker BiographyN. Todd Angkatavanich, Esq., Withers Bergman LLP
/ / 90
© 2016 N. Todd Angkatavanich. All Rights Reserved.
London l Geneva l Zurich l Milan l Padua l New Haven l New York
Greenwich l San Francisco l Los Angeles l Rancho Santa Fe l San Diego
Singapore l Hong Kong l Tokyo l Sydney l British Virgin Islands
Marissa Dungey is an attorney at Withers Bergman, LLP, based in the firm’s Greenwich, Connecticut office. Her practice focuses on transfer tax planning, estate planning and trust structuring for wealthy individuals and their families. Marissa works with individuals and their advisors to develop and implement sophisticated planning strategies designed to minimize gift, estate and generation-skipping transfer taxes with trust planning optimized to achieve the individual's tax and non-tax goals, including creditor protection, charitable giving and income tax efficiency. Marissa regularly advises on planning with complex assets including interests in hedge funds, private equity funds and family businesses. She also advises on estate and trust administration matters, including adapting existing trusts to improve their tax efficiency and utility.Marissa frequently speaks to national audiences on a breadth of topics within wealth planning, including transfer taxes, income taxation of trusts, planning with fund interests and the gift and estate tax implications of Chapter 14 relevant to business interests.
Marissa earned her B.A. degree, cum laude, from New York University and her J.D. degree, magna cum laude, from Boston College Law School. Ms. Dungey is admitted to practice in Connecticut and New York. She is a member of the Connecticut Bar Association, Greenwich Bar Association, New York State Bar Association and American Bar Association. She serves on the Executive Committee of the Estates & Probate Section and the Pro Bono Committee of the Connecticut Bar Association and was named as a Trusts & Estates Fellow for the Real Property, Trust & Estate Law Section of the American Bar Association for 2014-2016 and an ACTEC Young Leader for 2016-2018.
Speaker BiographyMarissa Dungey, Esq., Withers Bergman LLP
4728130.1