“Taxpayers should exercise caution in implementing ING trusts, particularly in light of California’s new law, which is effective retroactively. While the ING trust remains a viable wealth preservation strategy in many states, it is unclear how long this will continue. Taxpayers who implement this strategy are well advised to craft an exit strategy as well.”
“Valuation appears to be trending within the Internal Revenue Service (“IRS”) these days: insurance policy valuations, CCAs regarding GRATs, charitable planning targeted, and now the Connelly case. The U.S. Court of Appeals for the Eight Circuit found that the value of life insurance proceeds funding a redemption buy-sell agreement should be included in the value of a closely-held business for estate tax purposes, changing conventional thinking. Business owners should consider a cadence of regularly reviewing their buy-sell agreements. These are living, breathing documents. If their buy-sell agreement happens to be a redemption agreement, the economics should be reviewed assuming the same treatment as the Connelly case. It may be that these buy-sell agreements are woefully underfunded, triggering an audit of their life insurance plans. And if the owner has an agreement in place, they should follow it to the letter, not set-it-and-forget-it.”
“At question was whether the life insurance proceeds received by a corporation and intended for redemption in the context of a stock-purchase agreement should be taken into account when determining the corporation’s value at the time of one of the stock-holder’s death. Buy-sell arrangements (“BSAs”) address how the business or other business owners can “buy-out” an owner’s interests after a specified triggering event, such as death. To be effective, the terms and structure of a BSA must be tailored to the unique needs of each business and business owner; there is no “one size fits all” form. BSAs also should take a comprehensive approach to buy-outs, addressing not just an owner’s death, but also disability, divorce, and bankruptcy, among other events. BSAs create a ready market for the purchase of a deceased or departing owner’s interests at a fair value, which makes them a key component of a business owner’s financial and legacy plan. To obtain optimum results, business owners should coordinate with their insurance advisors, attorneys, accountants, and other financial advisors from inception to ensure the BSA is properly customized to their business and appropriately funded. Owners and their advisors also should conduct regular reviews of their BSAs and any funding sources, especially after any changes in the business’s ownership, tax status, or value.”
“Abusive taxpayer transactions simply continue to raise the ire of the IRS. Commonly seen as a very conservative planning technique, the Internal Revenue Service (“IRS”) has recently taken extreme positions to challenge the use of grantor retained annuity trusts (“GRATs”). The IRS in a recent CCA takes the position that by undervaluing the assets transferred to a GRAT, the GRAT annuity interest is not a “qualified interest,” and therefore the entire transfer is a taxable gift. The IRS finds that the transferred interest can be undervalued to such an extent that it ceases to be a qualified interest under IRC § 2702. While the CCA is not precedent, it is a clear indication of how the IRS may deal with perceived abusive (valuation) transactions. A softer touch could have permitted use of the self-adjustment regulations to correct the transaction. Instead, the IRS uses a hammer to address, in our view, bad taxpayer behavior. To avoid costly disputes with the IRS, when funding a GRAT or any irrevocable trust with hard-to-value assets, obtain a qualified appraisal as of the date of the transfer.”
“As Congress and the Biden administration continue to consider the grantor trust rules, some practitioners have turned their attention to the little-used nongrantor irrevocable life insurance trust (“ILIT”) as a planning alternative. The ILIT, one of the most commonly used legacy management tools, is typically established as a grantor trust for income tax purposes for many reasons but the most important being the ability to use the trust income to pay life insurance premiums. The nongrantor ILIT is possible but not ideal. In most situations, the grantor ILIT will remain the preferred structure. However, it is possible to structure the ILIT as a grantor trust from the outset and allow for a future toggling-off of grantor trust status to manage possible changes in the law.”
Robert W. Finnegan has an excellent article in the current issue of Trusts & Estates (April, 2023) entitled, “The GRAT Enhancement Strategy.”
From the article:
Grantor retained annuity trusts (GRATs) have been a great wealth transfer success story…the shortcoming of successful GRATs is that their assets will be included in the children’s taxable estates.
With the GRAT enhancement strategy, the GRAT remainder makes a split dollar loan to a dynasty trust to purchase life insurance, moving appreciation of GRAT assets via the policy death benefit to the dynasty trust.
Finnegan provides a robust and detailed Case Study illustrating the benefits of this planning and concludes with “The GRAT enhancement strategy is a powerful wealth transfer tool in and of itself. It’s applicable to GRATs, staged distribution trusts and any trust in which the assets have been removed from the clients’ estates but will be taxed in the children’s estates. Clients may be more receptive to additional planning if they can minimize their involvement and expenses and use assets that have already been transferred.”
I highly recommend this article for your review and consideration.
“A rabbi trust is a vehicle that provides for such informal funding without running afoul of tax or ERISA compliance issues resulting from “funded” NQDC plan benefits. This article addresses key questions to consider when adopting a rabbi trust, including (i) whether the rabbi trust should be irrevocable; (ii) even if irrevocable, when can assets revert to the employer; (iii) should the rabbi trust include enhanced protections upon the employer’s change in control; (iv) what kind of investments should the rabbi trust hold and what kind of control over those investments should the employer retain; and (v) can the rabbi trust hold employer stock?”
“Rising interest rates, degrading asset valuations, and future legislative uncertainty coupled with high wealth transfer tax exemptions mean it’s a great time to revisit installment sales and similar transactions using grantor trusts.”
“Life insurance continues to play a vital role in legacy planning because of its unique value proposition – a source of income tax efficient liquidity, efficient wealth transfer on a multi-generational basis, a mortality hedge, a non-correlated asset class, and strong internal rates of return relative to the current stock market. Nonetheless, advisors should evaluate how higher rates and a volatile market may impact the performance of both new and existing life insurance funding approaches.”
“In legacy planning, the “clawback” refers to the additional estate taxes that could be triggered by lifetime gifts if the unified federal gift and estate tax exemption is less at the time of death than at the time of gift. If there is a lower exemption at death, without a special rule, the estate tax rules could recapture and tax the value of the gift that was originally sheltered from gift tax under a higher exemption. While final regulations issued in 2019 eliminated this clawback, the preamble to these final regulations acknowledged that the IRS needed to further consider whether gifts that they deem as not true inter vivos transfers should be excepted from this special rule.”