Intra-Family and Other Business Transfer Techniques and Qualified Interest Trusts

Question 1

Installment sale

Answer 1

• pIgs (property owner needs income)
• Sale of property at FMV in exchange for payments
• spreads out taxable gain from sale (advantage, removes appreciating asset)
• if seller dies within installment period, PV of remaining payments is included in estate (disadvantage)
• property is secured
• gain is capital gain (dont use if subject to recapture, 1245 depreciation)
• if note is forgiven, estate reports all remaining gain
• if not is cancelled, gain recognized to extent FMV exceeds basis
• if sold within 2 years, deemed to paid in full
• if recapture of depreciation used, all income recognized in year of sale

Question 2

Self-cancelling installment note (SCIN)

Answer 2

• variation of installment sale
• any payments due at sellers death are cancelled
• no value included in estate
• gain is capital gain
• assets can be depreciated
• interest can be deducted
• higher payout than installment
• good when benefits from excluding exceed tax from buying cancellation feature

Question 3

Private annuity

Answer 3

• sale of property in exchange for periodic payments
• no value is included in estate
• property exchanged for promise
• taxation to seller - all taxed in year of sale
• no gift as long as value of transferred property equals discounted value of promised annuity
• all gain that would have been recognized over years taxed in current year
• only good if seller has little gain to report

Question 4

S corporation

Answer 4

gifting shares
- gift shares up to annual exclusion and shift income
- family member receives conduit income
- ineffective if child is under 24 y/o (kiddie tax)
- business entity must be capital sensitive
- not available if business is service related

Question 5

Family limited partnership (FLP)

Answer 5

• gift interests to limited partners to reduce estate
• qualifies for various valuation discounts allowing for lower gift tax
• general partner maintains control
• requirements
  1. income and tax benefits must be distributed according to owners percentage
  2. general partner may be paid salary
  3. capital must be a material income producing factor, cannot come from personal services

Question 6

Discounts in valuating the gifts

Answer 6

• lack of control and marketability

Question 7

Control

Answer 7

• donor retains control over business
• general partner retains managerial control, deciding when to make distributions or reinvest income
• some states general partner can hold 1% and still control the business

Question 8

Contribution of property

Answer 8

• disadvantage: gifting property loses step up basis at death
• interest given by parent retains parents income tax basis
• capital or ordinary tax on gain/loss by disposition of property for partnership is determined at partnership level

Question 9

Limited asset protection

Answer 9

• parent only partly liable to creditors of partnership
  -FLP provides limited degree of asset protection since FLP assets cant be attached to satisfy personal debt

Question 10

Ancillary probate

Answer 10

• partnership interest is considered personal property
• owner could avoid ancillary probate associated with out of state real property

Question 11

Gift-leaseback

Answer 11

• business owning parent wishes to establish a program of gifting but is held back by lack of available money or assets
• parent gives fully depreciated business assets outright or in trust to lower bracket family member and then leases asset back for use
• can continue using asset and claim deduction for lease payment

Question 12

Bargain sale

Answer 12

• combination of the gift and sale of specific property
• buyer (charity or family) pays less than the FMV for the property
• difference between FMV and price paid by buyer is gift

Question 13

Grantor retained annuity trusts (GRATs)

Answer 13

• irrevocable trust
• grantor transfers property and gets right to receive fixed annuity for certain number of years
• at end of term, balance goes tax free to beneficiaries
• if grantor dies before end of term, all property is brought back into the grantors estate
• gift of future interest, no exclusion

Question 14

Grantor retained unitrusts (GRUTs)

Answer 14

• trust that the grantor retains a qualified unitrust interest consisting of irrevocable right to receive fixed percentage each year of net FMV which is redetermined annually

Question 15

GRAT vs GRUT

Answer 15

• GRAT is more convenient
• GRAT pays fixed income (valued once)
• GRUT principal needs to be valued annually

Question 16

Grantor retained income trust (GRIT)

Answer 16

• transfer of property into irrevocable trust, retaining right to income for period of years
• less effective, right to income does not assure any will actually be distributed
  -value of property transferred to trust is reduced by retained interest
• gift of future interest
• could be good for non related party or QPRT

Question 17

Qualified personal residence trust (QPRT)

Answer 17

• irrevocable trust that grantor transfer personal residence retaining interest for personal occupancy for period of years
• after period it passes to beneficiaries or trust
• up to two can be transferred (one must be primary)
• make sense when
  1. residence is large (1M+)
  2. life expectancy is reasonable (10+)
  3. donor continues to live in residence
  4. estate is large (12,920,000+)