Representative Transactions – Planning


We assisted a client in the creation of several trusts for the benefit of her children to which limited partnership interests and notes receivable from the family’s real estate development company were transferred by part gift and part sale for a long-term promissory note.  The limited partnership interest was determined to have an effective discount of almost 50%.  Moreover, given the real estate development company’s financial circumstances at the time of the transaction, an appraisal determined a discount of almost 30% on the notes receivable.  The transaction provided for a regular flow of income to the elderly client during her lifetime and consolidated ownership of related entities and could result in future estate tax savings of greater than $1,000,000.

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We have several clients who create charitable lead trusts at their death that benefit private foundations created by them.  The technique eliminates estate tax at death, but advance planning during lifetime for eventual ownership of assets by the charitable trust is important.  For example, to allow the family to retain assets that could not or should not be owned by a charitable trust (e.g., family business, homes and artwork) and avoid self-dealing issues, options were granted to family trusts to purchase the assets for a long-term promissory note.

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Through gifting and selling of a client’s minority interests in family-owned rental real estate companies to a trust which the client established for his wife, we were able to shift most of the client’s wealth to the trust and out of his estate.  Because the client owned a minority interest in the companies, we were able to use a discounted value (almost 20% less than full fair market value) for the sale and gift values, thereby transferring more for less.  The sale was in exchange for a private annuity payable to the client periodically during each year, which the client and his wife are using to meet their daily living expenses. Rental income from the companies transferred to the trust provides the trust with ample funds to make the annuity payments to the client, with excess funds available in the trust to meet any additional cash needs the client’s wife may have.  At the client’s death, the value of the real estate companies will not be includible in his estate for estate tax purposes, nor will the private annuity as it will cease being payable at his death.

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During a routine estate planning review, client, the sole owner of a retail product manufacturing company, mentioned that sales at the company were at an all-time high and were forecasted to continue because of the introduction of new product lines.  However, outlays incurred in recent years to expand the production capacity of the manufacturing facilities were insulating the increase in revenue from current income taxation and generating current losses for tax purposes.  In consultation with the client and company’s accountants, we restructured the company’s shareholdings between voting and nonvoting stock, so that the client could maintain sole control of the company (by keeping the voting stock).  Then, the client gifted nonvoting stock to a newly formed irrevocable non-grantor trust for the benefit of client’s family.  By using a trust which pays its own taxes, the grantor would not be burdened by the taxes on the likely increasing taxable income, but at the same time, the client wanted to ensure that the trust’s share of the tax losses associated with the expansion of the facilities would not be subject to the passive loss rules.  Therefore, a company executive (who is also a beneficiary) was named as trustee, with control over investments and administrative functions for the trust, which allowed the trust to be considered an active participant in the company.  Because the executive was also a beneficiary, control over distributions was vested with other unrelated individuals not actively involved in the business.  One year after the transfer, the current appraisal estimates the value of the company at more than triple the value when the stock was transferred to the trust.