1. the beneficiary defective inheritor’s trust (“bdit”) “a powerful new wealth planning...

THE BENEFICIARY DEFECTIVE THE BENEFICIARY DEFECTIVE INHERITOR’S TRUST INHERITOR’S TRUST

(“BDIT”)(“BDIT”)

“A Powerful New Wealth Planning Strategy”“A Powerful New Wealth Planning Strategy”

Michael W. Halloran, AEPMichael W. Halloran, AEP®®, CLU, CLU®®, CFP, CFP®®, ChFC, ChFC®®

22©2010 Richard A. Oshins and Robert ©2010 Richard A. Oshins and Robert

G. AlexanderG. Alexander

A Special AcknowledgementA Special Acknowledgement

The Beneficiary Defective Trust, the original version of The Beneficiary Defective Trust, the original version of the BDIT, was created by attorney Richard A. Oshins in the BDIT, was created by attorney Richard A. Oshins in the 1970’s. In the ensuring years, under his tutelage, the 1970’s. In the ensuring years, under his tutelage, the concept has gained prominence in estate and asset the concept has gained prominence in estate and asset protection planning among top attorneys around the protection planning among top attorneys around the nation dealing with high-net-worth individuals and nation dealing with high-net-worth individuals and families. Grateful acknowledgement is given to his families. Grateful acknowledgement is given to his origination and further development of the BDIT and origination and further development of the BDIT and related strategies. related strategies.

©2010 Richard A. Oshins and Robert ©2010 Richard A. Oshins and Robert G. AlexanderG. Alexander 33

TopicsTopics

Primary high-end wealth shifting strategiesPrimary high-end wealth shifting strategies

The BDIT ConceptThe BDIT Concept– BenefitsBenefits

TaxTax

Creditor protectionCreditor protection

Client does not give up controlClient does not give up control

Modern wealth designModern wealth design– Enhancing the value of gifts and bequestsEnhancing the value of gifts and bequests


Topics – cont.Topics – cont.

The squeeze, freeze and burnThe squeeze, freeze and burn

Enhanced IDITs for estate tax depletion planningEnhanced IDITs for estate tax depletion planning

Funded ILIT – the BDIT can buy life insurance onFunded ILIT – the BDIT can buy life insurance on– The client/beneficiaryThe client/beneficiary– Others with an insurable interestOthers with an insurable interest

Life insurance correlation with the BDITLife insurance correlation with the BDIT



Providing funds for retirementProviding funds for retirement– QRPsQRPs– NIMCRUTsNIMCRUTs– BDIT with CVLIBDIT with CVLI

Life insurance as an asset classLife insurance as an asset class



Clients with business or investment opportunitiesClients with business or investment opportunities

Planning with pass-through entitiesPlanning with pass-through entities

Doctors and business owners with equipment leasingDoctors and business owners with equipment leasing

Buy-sell strategiesBuy-sell strategies



Advanced asset protection strategiesAdvanced asset protection strategies– Self-settled trustsSelf-settled trusts

Income tax strategiesIncome tax strategies

Estate planning for professional athletes and Estate planning for professional athletes and entertainersentertainers

Other planning opportunitiesOther planning opportunities


Primary Planning Choices forPrimary Planning Choices for High-End Wealth Shifting High-End Wealth Shifting

GRAT – IRC §2702GRAT – IRC §2702– Gift to trust in exchange for an annuity substantially Gift to trust in exchange for an annuity substantially

equal in value to the transferred propertyequal in value to the transferred property

IDIT – Note SaleIDIT – Note Sale– Non-controlling interest sold to an income tax Non-controlling interest sold to an income tax

defective trust in exchange for an installment notedefective trust in exchange for an installment note– Generally interest only with a balloon paymentGenerally interest only with a balloon payment

ILITILIT


Primary Planning Choices for Primary Planning Choices for High-End Wealth ShiftingHigh-End Wealth Shifting

These techniques involve moving wealth to trusts These techniques involve moving wealth to trusts created for created for someone else:someone else:– Wealth depletion concerns – no direct accessWealth depletion concerns – no direct access– Control concernsControl concerns

Loss of controlLoss of control

IRS exposure with too much retained controlIRS exposure with too much retained control

A better alternative – the BDITA better alternative – the BDIT– ““The Beneficiary Defective Inheritor’s Trust”The Beneficiary Defective Inheritor’s Trust”


Major Causes of Wealth ErosionMajor Causes of Wealth Erosion in the U.S. in the U.S.

Bad Investments/managementBad Investments/management TaxesTaxes DivorcesDivorces LawsuitsLawsuits Beneficiary/family problemsBeneficiary/family problems Bad economyBad economy Changes in the lawChanges in the law



The Client’s “Wish” ListThe Client’s “Wish” List

Save taxesSave taxes

Creditor and divorce protectionCreditor and divorce protection

Control over the plan - assets and incomeControl over the plan - assets and income

Full use and enjoyment of the plan assetsFull use and enjoyment of the plan assets

The right to decide who else uses or gets the propertyThe right to decide who else uses or gets the property– And when and how they get the propertyAnd when and how they get the property

Multi-generation/perpetuityMulti-generation/perpetuity

The ability to re-write the plan as neededThe ability to re-write the plan as needed


Fundamental Facts of Wealth PlanningFundamental Facts of Wealth Planning

Trusts enhance gifts and bequestsTrusts enhance gifts and bequests

Inheriting in trust is better than inheriting outrightInheriting in trust is better than inheriting outright– Trusts offer many significant advantages that cannot Trusts offer many significant advantages that cannot

exists for assets owned outrightexists for assets owned outright– Assets received and retained in trust are more Assets received and retained in trust are more

valuable to the inheritor than assets received outrightvaluable to the inheritor than assets received outright


Fundamental Facts of Wealth PlanningFundamental Facts of Wealth Planning- cont. -- cont. -

A trust shelters inherited assets from the beneficiary’sA trust shelters inherited assets from the beneficiary’s– TaxesTaxes

Transfer taxesTransfer taxes

Income taxesIncome taxes– Would be claimants Would be claimants

CreditorsCreditors

Divorcing spousesDivorcing spouses


The Ultimate Creditor and CreditorThe Ultimate Creditor and Creditor Protection Vehicle Protection Vehicle

A A discretionarydiscretionary trust with “. . . the distribution trust with “. . . the distribution discretion held by an discretion held by an independent trusteeindependent trustee . . . is the . . . is the ultimate in ultimate in creditorcreditor and and divorce claims protectiondivorce claims protection – – even in a state that restricts so called ‘spendthrift’ even in a state that restricts so called ‘spendthrift’ trusts – since the beneficiary himself has no trusts – since the beneficiary himself has no enforceable rights against the trust.” enforceable rights against the trust.” (Emphasis (Emphasis supplied)supplied)

Frederick R. KeydelFrederick R. Keydel““Trustee Selection, Succession, and Removal: Ways to Trustee Selection, Succession, and Removal: Ways to

Blend Expertise with Family Control,” 23 U.Miami Inst. Blend Expertise with Family Control,” 23 U.Miami Inst. On Est. Plan., Ch 4 (1989) at On Est. Plan., Ch 4 (1989) at §409.1§409.1



Overlooked Benefit – Particularly in Overlooked Benefit – Particularly in Today’s Volatile Economic WorldToday’s Volatile Economic World

Trusts enable the beneficiary to borrow for business or Trusts enable the beneficiary to borrow for business or investment purposes without exposing trust-owned investment purposes without exposing trust-owned assets to riskassets to risk

Lending institutions typically require personal guarantees Lending institutions typically require personal guarantees of business owners and their spousesof business owners and their spouses


Critical QuestionCritical Question

Can a wealthy client set up and fund a trust for Can a wealthy client set up and fund a trust for him/herself and protect his/her assets from his/her taxes him/herself and protect his/her assets from his/her taxes and creditors?and creditors?


The Tax and Creditor RightsThe Tax and Creditor Rights Impediments Impediments

Income Tax – grantor trustIncome Tax – grantor trust

Estate Tax – grantor trustEstate Tax – grantor trust

Creditor rights – self-settled trustCreditor rights – self-settled trust– Estate tax inclusionEstate tax inclusion

Creditor rights can create serious income and wealth Creditor rights can create serious income and wealth transfer tax issues!transfer tax issues!– Also, watch distribution standards and who is (are) Also, watch distribution standards and who is (are)

the trusteesthe trustees


The BDIT SolutionThe BDIT Solution

Anyone other than the client him/herself can set up and Anyone other than the client him/herself can set up and fund the trustfund the trust

Key Concept:Key Concept:– The trust must be set up and funded by someone elseThe trust must be set up and funded by someone else– The beneficiary cannot make “gifts” to the trustThe beneficiary cannot make “gifts” to the trust


Test Your KnowledgeTest Your Knowledge

Combining the planning opportunities of:Combining the planning opportunities of:– Chapter 13Chapter 13– IRC §678IRC §678– Rev. Rul. 2004-64Rev. Rul. 2004-64– Rev. Rul. 85-13Rev. Rul. 85-13– Rev. Rul. 93-12Rev. Rul. 93-12


Question #1Question #1

Can I set up a trust for my descendants which will avoid Can I set up a trust for my descendants which will avoid their:their:– Transfer taxes, andTransfer taxes, and– Creditors, including divorcing spousesCreditors, including divorcing spouses– In perpetuityIn perpetuity

Chapter 13 GSTT rulesChapter 13 GSTT rules


The Typical Inheritor’s TrustThe Typical Inheritor’s Trust

A trust set up and funded by someone elseA trust set up and funded by someone else– Generally as an accommodationGenerally as an accommodation


Transfer Tax ConsequencesTransfer Tax Consequences

Measured by the amount of the contributionMeasured by the amount of the contribution

Subsequent growth of the assets is irrelevantSubsequent growth of the assets is irrelevant

GSTT exempt foreverGSTT exempt forever


Key ConceptsKey Concepts

A trust created by someone elseA trust created by someone else

No No gratuitousgratuitous transfers by the transfers by the beneficiariesbeneficiaries– Sales for FMV are OKSales for FMV are OK



What are the income tax consequences of a gift subject What are the income tax consequences of a gift subject to a Crummey power of withdrawal?to a Crummey power of withdrawal?

IRC §§ 678 and 671IRC §§ 678 and 671– Beneficiary income tax statusBeneficiary income tax status– Trust income is taxes to the beneficiaryTrust income is taxes to the beneficiary

Remember – the income tax provisions and the Remember – the income tax provisions and the estate/gift tax provisions of the IRC are estate/gift tax provisions of the IRC are notnot interpreted interpreted

in paria materiain paria materia!!


Tax Consequences of an Income taxTax Consequences of an Income tax Defective Trust Including a BDIT Defective Trust Including a BDIT

Rev. Rul. 85-13Rev. Rul. 85-13– Non-recognition of gain of salesNon-recognition of gain of sales

The “tax burn”The “tax burn”


The “Tax Burn” ConceptThe “Tax Burn” Concept

Estate depletion as a result of paying income tax on trust Estate depletion as a result of paying income tax on trust assetsassets– Less assets exposed to estate taxesLess assets exposed to estate taxes– Less assets exposed to creditorsLess assets exposed to creditors

Trust assets grow income tax-free during the “Grantor” Trust assets grow income tax-free during the “Grantor” trust statustrust status

Over time the wealth compounding is more powerful Over time the wealth compounding is more powerful than discountingthan discounting


The Tax Burn - IllustrationThe Tax Burn - Illustration



What are the gift tax implications if I pay income tax as a What are the gift tax implications if I pay income tax as a result of the grantor trust rules?result of the grantor trust rules?

Rev. Rule. 2004-64Rev. Rule. 2004-64– No additional gift on payment of income taxNo additional gift on payment of income tax



If I make a sale to a trust that is income tax defective to If I make a sale to a trust that is income tax defective to me, do I recognize taxable gain or loss?me, do I recognize taxable gain or loss?

Rev. Rul. 85-13Rev. Rul. 85-13– Non-recognition of gain/loss on sales/exchanges with Non-recognition of gain/loss on sales/exchanges with

an IDITan IDIT



If I own 100% of an entity and I make a gift of a 20% If I own 100% of an entity and I make a gift of a 20% interest to each of my five (5) children, are the gifts of interest to each of my five (5) children, are the gifts of each 20% interest valued as a non-controlling interest?each 20% interest valued as a non-controlling interest?

Rev. Rul. 93-12Rev. Rul. 93-12– No family attribution rules for purposes of discountingNo family attribution rules for purposes of discounting


So What Makes A BDIT Work? So What Makes A BDIT Work?

Combines the planning opportunities of:Combines the planning opportunities of:

#1 - Chapter 13 – GSTT rules#1 - Chapter 13 – GSTT rules

#2 - IRC § 678– beneficiary income tax status#2 - IRC § 678– beneficiary income tax status

#3 - Rev. Rul. 2004-64 – no additional gift on #3 - Rev. Rul. 2004-64 – no additional gift on payment of income tax payment of income tax

#4 - Rev. Rul. 85-13 – non-recognition of sales to #4 - Rev. Rul. 85-13 – non-recognition of sales to IDITs IDITs

#5 - Rev. Rul. 93-12 – no family attribution rules for #5 - Rev. Rul. 93-12 – no family attribution rules for

purposes of discountingpurposes of discounting



The Ultimate TrustThe Ultimate Trust A Beneficiary Defective Inheritor’s A Beneficiary Defective Inheritor’s

TrustTrust

Combining:Combining:

– A third-party settled trust withA third-party settled trust with

– Grantor trust income tax status for the beneficiaryGrantor trust income tax status for the beneficiary

Finessing the “pipe dream”Finessing the “pipe dream”



BDIT Fact PatternBDIT Fact Pattern

Mom sets up the trust for the benefit of her son and his Mom sets up the trust for the benefit of her son and his childrenchildren– Transfer tax protection for the beneficiariesTransfer tax protection for the beneficiaries– Creditor protection for the beneficiariesCreditor protection for the beneficiaries– In perpetuityIn perpetuity

Wealthy client (the son) is the grantor for income tax Wealthy client (the son) is the grantor for income tax purposespurposes– Income tax planning for the sonIncome tax planning for the son


BDIT Fact Pattern – cont.BDIT Fact Pattern – cont.

Client’s parent sets up the BDIT funding it with a gift of Client’s parent sets up the BDIT funding it with a gift of $5,000$5,000– Parent uses independent fundsParent uses independent funds– Parent is the settlor of the trust for transfer tax Parent is the settlor of the trust for transfer tax

purposes and for creditor rights purposespurposes and for creditor rights purposes

Client (and only the client) is given a Crummey Client (and only the client) is given a Crummey withdrawal power over the entire giftwithdrawal power over the entire gift– The withdrawal right is allowed to lapseThe withdrawal right is allowed to lapse


BDIT Fact Pattern – cont.BDIT Fact Pattern – cont.

Son owns one-third (1/3) of a pass-through entitySon owns one-third (1/3) of a pass-through entity

Value of 100% of the entity - $50 millionValue of 100% of the entity - $50 million

Value of son’s one-third (1/3) interest after discountingValue of son’s one-third (1/3) interest after discounting– $10 million$10 million

Son sells discountable interests in the entity to the trusts Son sells discountable interests in the entity to the trusts for installment notesfor installment notes

Son’s sale to the trust is for “full and adequate Son’s sale to the trust is for “full and adequate consideration”consideration”


A Beneficiary DefectiveA Beneficiary Defective Inheritor’s Trust Inheritor’s Trust

The trust is defective to the client for income tax The trust is defective to the client for income tax purposespurposes– Power of withdrawal – IRC §678(a)Power of withdrawal – IRC §678(a)– Transactions between the client and the trust are Transactions between the client and the trust are

ignored for income tax purposesignored for income tax purposes

Rev. Rul. 85-13Rev. Rul. 85-13


VariationVariation Spousal Irrevocable Trust (“SIT”) Spousal Irrevocable Trust (“SIT”)

Set up and seeded by the client’s spouseSet up and seeded by the client’s spouse

Combines Combines – IRC §677(a) – income tax grantor trust rulesIRC §677(a) – income tax grantor trust rules– IRC §1041(a) – no tax on transfers between spousesIRC §1041(a) – no tax on transfers between spouses– Rev. Rul. 85-13 Rev. Rul. 85-13


Spousal Inheritor’s Trust – Cont.Spousal Inheritor’s Trust – Cont.

Caveats Caveats – Settler spouse is the “owner” of the trust incomeSettler spouse is the “owner” of the trust income– Subsequent divorce will not terminate grantor trust Subsequent divorce will not terminate grantor trust

statusstatus

IRC §672(e)(2)IRC §672(e)(2)

The settler spouse cannot be a beneficiaryThe settler spouse cannot be a beneficiary– Solution – give the beneficiary spouse a SPASolution – give the beneficiary spouse a SPA– Support trust riskSupport trust risk


Funded ILITFunded ILIT

BDITBDIT

Spousal Irrevocable Trust variationSpousal Irrevocable Trust variation


So What Is A BDIT?So What Is A BDIT?

A dynasty trust set up for A dynasty trust set up for mymy descendants which avoids descendants which avoids theirtheir– Transfer taxes Transfer taxes – Creditors, including divorcing spousesCreditors, including divorcing spouses

A beneficiary “controlled” trustA beneficiary “controlled” trust

Allows gifts and sales to a trust that is income tax Allows gifts and sales to a trust that is income tax defective as to the beneficiarydefective as to the beneficiary– Crummey power of withdrawal – § 678Crummey power of withdrawal – § 678

Wealth transfer leveraging with discounted entitiesWealth transfer leveraging with discounted entities



BDIT DesignBDIT Design

Established and initially funded by a third partyEstablished and initially funded by a third partyFully discretionary distribution standardsFully discretionary distribution standardsControlled trusteeshipControlled trusteeship– Family trusteeFamily trustee– Independent trusteeIndependent trustee

The “use” conceptThe “use” conceptBroad SPA – a “re-write” powerBroad SPA – a “re-write” powerPerpetualPerpetualBeneficiary has the functional equivalence of outright Beneficiary has the functional equivalence of outright ownership of the trust assetsownership of the trust assets

4343

©2010 Richard A. Oshins and Robert ©2010 Richard A. Oshins and Robert G. AlexanderG. Alexander

““Seeding” the TrustSeeding” the Trust

Must come from the donor’s fundsMust come from the donor’s funds

Economic validityEconomic validity– Debt-equity ratioDebt-equity ratio– Rule of thumb – 10% or 9:1Rule of thumb – 10% or 9:1


GuaranteesGuarantees

Guarantees as “seed” moneyGuarantees as “seed” money– Must be legitimateMust be legitimate– Better than trust assetsBetter than trust assets– Often made by beneficiariesOften made by beneficiaries– Need not be for the full amount of the noteNeed not be for the full amount of the note


Is a Gratuitous Guarantee a Gift?Is a Gratuitous Guarantee a Gift?

Unsettled Unsettled – Cases seem to say noCases seem to say no

We pay for the guaranteeWe pay for the guarantee– Get an appraisalGet an appraisal– Avoids risk of gift to the trust by the guarantorAvoids risk of gift to the trust by the guarantor– Income tax-free if the guarantor is the spouse or an Income tax-free if the guarantor is the spouse or an

income tax defective trustincome tax defective trust


Seeding the TrustsSeeding the Trusts

Gifts to Trust Gifts to Trust

4747

$1,666

FBOClient

and Katie

FBOClient

and Bob

FBO Client

and Sue

Trust A Trust B Trust C

$1,667 $1,667

Client – Power of Withdrawal $5,000


Transfer TaxTransfer Tax Creditor rights Creditor rights

Owner for Income Tax Owner for Income Tax Purposes - IRC § 678(a)Purposes - IRC § 678(a)

4848

Caveat: Client has a Power of Withdrawal over all gifts to BDITCaveat: Client never makes a gratuitous transfer to BDIT

Who is the Grantor?


Tax-Free Sale to BDITTax-Free Sale to BDIT

AssetsAssets

Installment NotesInstallment Notes

WealthyWealthy client sells discountable income client sells discountable income producing assets for an Installment Note producing assets for an Installment Note

4949


BDITsBDITs


Note Sale to a BDIT with a Note Sale to a BDIT with a GuaranteeGuarantee

5050

Parent“mom”

BDIT WHFee

1. Family Trustee2. Beneficiary3. I/T Grantor4. Seller

Gift Subject to Power of Withdrawal

GuaranteeNote Sale


BDIT Tax ResultsBDIT Tax Results

Estate freezeEstate freeze– Installment notes in the estateInstallment notes in the estate– Post-transfer appreciation shiftedPost-transfer appreciation shifted

Estate squeezeEstate squeeze– Discounted assets removed from the transfer tax Discounted assets removed from the transfer tax

systemsystem

Income “tax burn” Income “tax burn” – the beneficiary pays the tax on the – the beneficiary pays the tax on the income generate by the trustincome generate by the trust

IRC §678IRC §678

Crummey power of withdrawalCrummey power of withdrawal



BDIT Non-tax ResultsBDIT Non-tax Results

The client/beneficiary is in control of the BDITThe client/beneficiary is in control of the BDIT

Assets are creditor protected for the client/beneficiary Assets are creditor protected for the client/beneficiary

and his/her familyand his/her family

Assets are available after the “tax burn”Assets are available after the “tax burn”

Client/beneficiary has a “re-write” power with a SPAClient/beneficiary has a “re-write” power with a SPA

– Protects against potential family conflictsProtects against potential family conflicts

– Protects against inadvertent gifts to the trustProtects against inadvertent gifts to the trust



Safe Transaction – Valuation DisparitySafe Transaction – Valuation Disparity

Gift Tax/Chapter 14Gift Tax/Chapter 14– SPA protects against an inadvertent giftSPA protects against an inadvertent gift– The gift is incompleteThe gift is incomplete

Reg. §25.2511-2(b)Reg. §25.2511-2(b)

EstateTax/GSTTEstateTax/GSTT– Report the saleReport the sale


IRS Reporting of Sale to TrustIRS Reporting of Sale to Trust

Timely file from 709 gift tax returnTimely file from 709 gift tax return– Non-completed giftNon-completed gift– Treas. Reg. §301-6501(c) - 1(f)(4)Treas. Reg. §301-6501(c) - 1(f)(4)

If IRS does not challenge the valuationIf IRS does not challenge the valuation


IRS Reporting of Sale to TrustIRS Reporting of Sale to Trust- cont. -- cont. -

If the IRS successfully challenges the valuationIf the IRS successfully challenges the valuation– It is an incomplete giftIt is an incomplete gift

Treas. Reg. §25-2511-2(b)Treas. Reg. §25-2511-2(b)– Allocation pro-rata between exempt and non-exempt Allocation pro-rata between exempt and non-exempt

trusts for GSTT purposestrusts for GSTT purposes

The BDIT is safer than alternative strategies The BDIT is safer than alternative strategies


BDIT Non-tax Results -Cont.BDIT Non-tax Results -Cont.

Opportunity shiftingOpportunity shifting

– Business and investment opportunitiesBusiness and investment opportunities

– Giving free advice or managing trust assetsGiving free advice or managing trust assets

Quintessential Quintessential life insurance trustlife insurance trust

– Life insurance on a beneficiary who is also a trusteeLife insurance on a beneficiary who is also a trustee

– Decision must be made by an independent trusteeDecision must be made by an independent trustee

– Beneficiary cannot have a SPA over life insuranceBeneficiary cannot have a SPA over life insurance



Benefits of This StrategyBenefits of This Strategy

The entity/assets are moved out of the client’s estate on The entity/assets are moved out of the client’s estate on a discounted basisa discounted basis

The transaction results in a leveraged estate freezeThe transaction results in a leveraged estate freeze

There is no income tax on the sales or the guaranteeThere is no income tax on the sales or the guarantee

All of the assets in the BDIT are still available to and All of the assets in the BDIT are still available to and controlled by the Inheritor/beneficiary controlled by the Inheritor/beneficiary



Benefits - ContinuedBenefits - Continued

The Inheritor/beneficiary has a SPOA – a rewrite powerThe Inheritor/beneficiary has a SPOA – a rewrite power

The taxable estate of the inheritor is depleted by The taxable estate of the inheritor is depleted by valuation discounts as well as payment of incomes taxes valuation discounts as well as payment of incomes taxes on the trust income – the “tax burn”on the trust income – the “tax burn”

The Inheritor and his/her family have creditor and The Inheritor and his/her family have creditor and divorce protection in perpetuitydivorce protection in perpetuity



Benefits - ContinuedBenefits - Continued

The Inheritor and his/her family have GSTT and estate The Inheritor and his/her family have GSTT and estate exemption in perpetuityexemption in perpetuity

The SPOA prevents a gift tax on transactions with the The SPOA prevents a gift tax on transactions with the trusttrust

Otherwise resistant clients will move forward with Otherwise resistant clients will move forward with planningplanning



Why Wouldn’t Everyone Do A BDIT?Why Wouldn’t Everyone Do A BDIT?

Misconception – The BDIT is only for the ultra wealthyMisconception – The BDIT is only for the ultra wealthy– Planning alternatives involve giving to someone elsePlanning alternatives involve giving to someone else– BDIT includes the virtues of alternative estate BDIT includes the virtues of alternative estate

planning techniquesplanning techniques– BDIT benefits – substantial and foreverBDIT benefits – substantial and forever


Planning For The Mid-range ClientPlanning For The Mid-range Client

The client with a:The client with a:– $5 million business$5 million business– $1 million home$1 million home– $2 million other assets$2 million other assets

The dilemma:The dilemma:– Tax and creditor exposureTax and creditor exposure– Cannot afford to give the wealth away!Cannot afford to give the wealth away!


Planning For The Mid-range ClientPlanning For The Mid-range Client

GRAT and IDITGRAT and IDIT– Prohibition against transfers with retained rightsProhibition against transfers with retained rights

BDITBDIT– ““Fair and adequate consideration” exceptionFair and adequate consideration” exception

Really the “only option”Really the “only option”


THE BDIT vs. OTHER THE BDIT vs. OTHER STRATEGIESSTRATEGIES

The BDIT vs. Note Sales to IDITsThe BDIT vs. Note Sales to IDITs

Wealth shifting benefitsWealth shifting benefits– Retained interest often creates continued Sec. 2036 Retained interest often creates continued Sec. 2036

exposureexposure– No need to retain anythingNo need to retain anything

ControlControl

No economic riskNo economic risk– ManagementManagement– Use and enjoymentUse and enjoyment– Rewrite powerRewrite power– Tax burnTax burn


The BDIT vs. Note Sales to IDITSThe BDIT vs. Note Sales to IDITS

SafetySafety– Gift taxGift tax– Step transactionStep transaction– Pierre vs. Comm’rPierre vs. Comm’r


The BDIT vs. APTsThe BDIT vs. APTs

Greater creditor protectionGreater creditor protection– Not a self-settled trustNot a self-settled trust– Transfer tax savingsTransfer tax savings– ControlControl– Use and enjoyment determined by the clientUse and enjoyment determined by the client– APTs continuing costsAPTs continuing costs


BDIT vs. FLPsBDIT vs. FLPs

Historical purpose of FLPsHistorical purpose of FLPs– ControlControl– Valuation discountsValuation discounts

IRS Sec. 2036 exposureIRS Sec. 2036 exposure– There is no IRS Sec. 2536There is no IRS Sec. 2536

Substantial non-tax purposeSubstantial non-tax purpose


BDIT vs. ILITsBDIT vs. ILITs

Built-in funded ILITBuilt-in funded ILIT

No Crummey complexities and limitationsNo Crummey complexities and limitations

Living benefits of life insuranceLiving benefits of life insurance– Access to “inside build-up”Access to “inside build-up”


The BDIT and Other The BDIT and Other Estate Planning VehiclesEstate Planning Vehicles

Revocable trusts – avoid probateRevocable trusts – avoid probate

GiftingGifting

Charitable planningCharitable planning

Business succession planningBusiness succession planning


The BDIT and Other Estate Planning The BDIT and Other Estate Planning VehiclesVehicles- Cont. -- Cont. -

Pre-marital agreementsPre-marital agreements

Unmarried, co-habiting partnersUnmarried, co-habiting partners– TraditionalTraditional– Non-traditionalNon-traditional

Planning for physiciansPlanning for physicians

Planning for athletes and entertainersPlanning for athletes and entertainers

Combined with charitable planningCombined with charitable planning


TOPICSTOPICS

Advantages of trustsAdvantages of trusts

Designing trusts from the viewpoint of the competent Designing trusts from the viewpoint of the competent inheritorinheritor

Opportunity shiftingOpportunity shifting

Hypothetical fact patternHypothetical fact pattern

The BDIT solution – freeze, squeeze, and burnThe BDIT solution – freeze, squeeze, and burn

BDIT/life insurance compatibilityBDIT/life insurance compatibility


ADVANTAGES OF TRUSTSADVANTAGES OF TRUSTS


Key ConceptKey ConceptTrusts Enhance Gifts and BequestsTrusts Enhance Gifts and Bequests

Assets received and retained in trust are much more Assets received and retained in trust are much more valuable to the inheritor/donee than assets received valuable to the inheritor/donee than assets received outrightoutright

The foundational concept of modern wealth planning:The foundational concept of modern wealth planning:

““Own everything in trust forever…”Own everything in trust forever…”


A Trust “Shelters” Inherited AssetsA Trust “Shelters” Inherited Assets From the Beneficiaries’… From the Beneficiaries’…

Taxes Taxes – Transfer taxesTransfer taxes– Income taxesIncome taxes

Potential claimantsPotential claimants– CreditorsCreditors– Divorcing spousesDivorcing spouses– Government/agenciesGovernment/agencies– OthersOthers


Transfer TaxesTransfer Taxes

““In fact, we haven’t got an estate tax, what we In fact, we haven’t got an estate tax, what we

have, you pay an estate tax if you want to; if you don’t have, you pay an estate tax if you want to; if you don’t want to, you don’t have to.”want to, you don’t have to.”

Statement of Prof. A. James CasnerStatement of Prof. A. James Casner““Estate and Gift Taxes: Hearings Before the Estate and Gift Taxes: Hearings Before the House Ways and Means Comm.,” 94House Ways and Means Comm.,” 94thth Cong., Cong.,

2d Sess., pt. 2, 1335 (March 15-23, 1976) 2d Sess., pt. 2, 1335 (March 15-23, 1976)


Transfer Taxes – Cont.Transfer Taxes – Cont.

““The perpetual generation-skipping trust may have The perpetual generation-skipping trust may have been the ultimate estate-planning scheme for those been the ultimate estate-planning scheme for those who had the foresight to establish one.”who had the foresight to establish one.”

“…“…it appears possible to create … a perpetual trust, it appears possible to create … a perpetual trust, permanently eliminating future transfer taxes.”permanently eliminating future transfer taxes.”

““For an intervening generation now the beneficiary For an intervening generation now the beneficiary of a generation-skipping trust, estate planning is no of a generation-skipping trust, estate planning is no problem, because the trust is already the best problem, because the trust is already the best possible built-in estate plan.”possible built-in estate plan.”

George CooperGeorge Cooper““A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance,” A Voluntary Tax? New Perspectives on Sophisticated Estate Tax Avoidance,”

The Brookings Institution, Washington D.C. (1979), P 57,58The Brookings Institution, Washington D.C. (1979), P 57,58


Power of Compound Growth Power of Compound Growth

AssumptionsAssumptions

$1 million contributed to trust$1 million contributed to trust

Trust lasts 120 yearsTrust lasts 120 years

45% transfer tax imposed on non-dynastic trust 45% transfer tax imposed on non-dynastic trust

assets every 30 yearsassets every 30 years


Power of Compound Growth Power of Compound Growth ChartChart

________________________________________________________________________________________________________ ValueValue Value Value

of Trustof Trust of Property of Property Annual Annual After After if noif noGrowthGrowth 120 Years 120 Years Trust Trust

__________________________________________________________________________________________________________

4%4% $ 110,662,561$ 110,662,561 $ 10,126,316 $ 10,126,3165%5% 348,911,986 348,911,986 31,927,627 31,927,6276%6% 1,088,187,748 1,088,187,748 99,575,980 99,575,9807%7% 3,357,788,383 3,357,788,383 307,258,623 307,258,6238%8% 10,252,992,943 10,252,992,943 938,212,935 938,212,935


ObservationsObservations

Chart only illustrates estate tax depletionChart only illustrates estate tax depletion

Ignores impact ofIgnores impact of

DivorceDivorce

LawsuitsLawsuits

Reduced propensity to spend trust assetsReduced propensity to spend trust assets

State income tax savingsState income tax savings


INCOME TAXESINCOME TAXES

Reduced planning importance due toReduced planning importance due toCompressed ratesCompressed ratesReduced exemption Reduced exemption Kiddie taxKiddie tax

Defective trust accelerates growth during “owners” Defective trust accelerates growth during “owners” lifetime lifetime


The Ultimate Creditor and CreditorThe Ultimate Creditor and Creditor Protection Vehicle Protection Vehicle

A A discretionarydiscretionary trust with “. . . the distribution trust with “. . . the distribution discretion held by an discretion held by an independent trusteeindependent trustee . . . is the . . . is the ultimate in ultimate in creditorcreditor and and divorce claims protectiondivorce claims protection – – even in a state that restricts so called ‘spendthrift’ even in a state that restricts so called ‘spendthrift’ trusts – since the beneficiary himself has no trusts – since the beneficiary himself has no enforceable rights against the trust.” enforceable rights against the trust.” (Emphasis (Emphasis supplied)supplied)

Frederick R. KeydelFrederick R. Keydel““Trustee Selection, Succession, and Removal: Ways to Trustee Selection, Succession, and Removal: Ways to

Blend Expertise with Family Control,” 23 U.Miami Inst. Blend Expertise with Family Control,” 23 U.Miami Inst. On Est. Plan., Ch 4 (1989) at On Est. Plan., Ch 4 (1989) at §409.1§409.1



Creditor and Divorce ProtectionCreditor and Divorce Protection

Asset Protection MaximAsset Protection Maxim

Divorces – Trust better than pre-nuptial Divorces – Trust better than pre-nuptial agreementagreement

Use even if taxes were not a Use even if taxes were not a considerationconsideration


Overlooked Benefit – Particularly Overlooked Benefit – Particularly In Today’s Volatile Economic WorldIn Today’s Volatile Economic World

Enables beneficiary to borrow for business or investment Enables beneficiary to borrow for business or investment purposes without exposing trust owned assets to riskpurposes without exposing trust owned assets to risk

Lending institution typically requires personal guarantees Lending institution typically requires personal guarantees of business owners and their spousesof business owners and their spouses


Why We Use Dynastic Trusts Why We Use Dynastic Trusts Even If There Is No Estate Tax Even If There Is No Estate Tax

Predator protectionPredator protection

State Income TaxState Income Tax

Income shiftingIncome shifting

There will be a gift taxThere will be a gift tax

Enables younger beneficiaries to participate in Enables younger beneficiaries to participate in family wealth earlierfamily wealth earlier

Compare to a GRATCompare to a GRAT


Receiving Assets in Trust Receiving Assets in Trust Enhances the Gift or InheritanceEnhances the Gift or Inheritance

Transfers from someone other than Transfers from someone other than beneficiarybeneficiary

If beneficiary makes the transfer it is a If beneficiary makes the transfer it is a self-settled trustself-settled trust

– TaxesTaxes– CreditorsCreditors

Conclusion - Transfers in trust are more Conclusion - Transfers in trust are more valuable to recipientsvaluable to recipients


Beneficiary Controlled TrustsBeneficiary Controlled Trusts

Beneficiaries will like “in trust” inheritances Beneficiaries will like “in trust” inheritances only if:only if:

They are placed in control of the trustThey are placed in control of the trust

They understand benefits of receiving They understand benefits of receiving property in trustproperty in trust

They understand the BCT conceptThey understand the BCT concept


Our GoalsOur Goals

Maximizing “in trust” benefitsMaximizing “in trust” benefits

Maximize control and rights similar to outright ownership Maximize control and rights similar to outright ownership while preserving “in trust” benefitswhile preserving “in trust” benefits


Client’s GoalsClient’s Goals

Transfer tax avoidance Transfer tax avoidance

Creditor ProtectionCreditor Protection

ControlControl

Use and enjoyment of the propertyUse and enjoyment of the property

Determine who inheritsDetermine who inherits

Safe transactionSafe transaction©2010 Richard A. Oshins and Robert ©2010 Richard A. Oshins and Robert

G. AlexanderG. Alexander 8888

Design of TrustsDesign of Trusts


Traditional TrustsTraditional TrustsTypical CharacteristicsTypical Characteristics

Pays out incomePays out income

Principal may be invaded for Principal may be invaded for “HEMS” – “support trust”“HEMS” – “support trust”

Distributes assets at Distributes assets at specified agesspecified ages

Beneficiary not in controlBeneficiary not in control


Modern Trust DesignModern Trust Design

Fully DiscretionaryFully Discretionary

PerpetualPerpetual

““Use” ConceptUse” Concept

Broad SPA’s – “Re-write power”Broad SPA’s – “Re-write power”

Controlled Trusteeship at Proper TimeControlled Trusteeship at Proper TimeFamily TrusteeFamily TrusteeIndependent TrusteeIndependent Trustee


Trusts Protect Assets Trusts Protect Assets From Creditors and Predators From Creditors and Predators

Trust must be set up by someone other than the Trust must be set up by someone other than the beneficiary him/herselfbeneficiary him/herself

Third party settled trustThird party settled trust

Makes sense even if there was no transfer taxMakes sense even if there was no transfer tax

Modern theory of comprehensive wealth Modern theory of comprehensive wealth planning:planning:

““Own everything in trust forever…”Own everything in trust forever…”



Beneficiary Controlled Trust “BCT”Beneficiary Controlled Trust “BCT”

Goal – To maximize the benefits that an “in trust” Goal – To maximize the benefits that an “in trust” inheritance can provideinheritance can provide

Family Trustee Family Trustee Controls InvestmentsControls InvestmentsControls Identity of the Independent TrusteeControls Identity of the Independent Trustee


Beneficiary Controlled Trust “BCT”Beneficiary Controlled Trust “BCT”

Independent TrusteeIndependent TrusteeControls all non-tax sensitive decisionsControls all non-tax sensitive decisionsIndividual or institution who meets the criteria of Individual or institution who meets the criteria of IRC § 672(c)IRC § 672(c)

““Independence” does not require a confrontational Independence” does not require a confrontational relationshiprelationship


OpportunityOpportunity

ShiftingShifting


Opportunity ShiftingOpportunity Shifting

Referrals of favorable business or Referrals of favorable business or investment opportunitiesinvestment opportunities

Giving free advice or managing assetsGiving free advice or managing assets

Inheritor’s Trust as recipientInheritor’s Trust as recipient

BDIT often preferableBDIT often preferable


Basic Inheritor’s TrustBasic Inheritor’s TrustOpportunity ShiftingOpportunity Shifting

Income Tax OptionsIncome Tax OptionsTraditional TrustTraditional TrustIDGTIDGTBDITBDITSITSITCombinationCombination

Tax BurnTax BurnIDGTIDGTSITSITBDITBDIT


Putting the BDIT on SteroidsPutting the BDIT on SteroidsHypothetical Fact PatternHypothetical Fact Pattern

Client owns 1/3 of a pass-through entityClient owns 1/3 of a pass-through entity

Value of entity $50 millionValue of entity $50 million

Valuation discounts assume 40%Valuation discounts assume 40%


The BDIT StrategyThe BDIT Strategy

Client’s parent sets up BDIT funding it Client’s parent sets up BDIT funding it with $5,000 with $5,000

Client is given power of withdrawal Client is given power of withdrawal

Client sells his 1/3 interest in the Client sells his 1/3 interest in the entity to the trust for a $10 million entity to the trust for a $10 million note note


Variation – Spousal Variation – Spousal Irrevocable TrustIrrevocable Trust

Client’s spouse is the SettlorClient’s spouse is the Settlor

IRC §677(a)IRC §677(a)

IRC §1041(a)IRC §1041(a)


Parent is SettlorParent is Settlor

Client’s parent sets up BDIT funding it with Client’s parent sets up BDIT funding it with $5,000$5,000

Parent uses independent fundsParent uses independent funds

Parent is Settlor for transfer tax and Parent is Settlor for transfer tax and creditor right purposescreditor right purposes

Sale by the beneficiary is for “full and Sale by the beneficiary is for “full and adequate consideration”adequate consideration”


Beneficiary Defective TrustBeneficiary Defective Trust

Trust is defective to the client/inheritor for Trust is defective to the client/inheritor for income tax purposesincome tax purposes

Power of withdrawal IRC § 678(a)Power of withdrawal IRC § 678(a)

Transactions between client and trust Transactions between client and trust ignored. Rev. Rul. 85-13ignored. Rev. Rul. 85-13


Seeding the TrustsSeeding the Trusts

Gifts to Trust Gifts to Trust

103103

$1,666

FBOClient

and Katie

FBOClient

and Bob

FBO Client

and Sue


$1,667 $1,667

Client – Power of Withdrawal $5,000


Transfer TaxTransfer Tax Creditor rights Creditor rights

Owner for Income Tax Owner for Income Tax Purposes - IRC § 678(a)Purposes - IRC § 678(a)

104104

Caveat: Client has a Power of Withdrawal over all gifts to BDITCaveat: Client never makes a gratuitous transfer to BDIT

Who is the Grantor?


Tax-Free Sale to BDITTax-Free Sale to BDIT

AssetsAssets

Installment NotesInstallment Notes

WealthyWealthy client sells discountable income client sells discountable income producing assets for an Installment Note producing assets for an Installment Note

105105


BDITsBDITs


Note Sale to a BDIT with a Note Sale to a BDIT with a GuaranteeGuarantee

106106

Parent“mom”

BDIT WHFee

1. Family Trustee2. Beneficiary3. I/T Grantor4. Seller

Gift Subject to Power of Withdrawal

GuaranteeNote Sale


Results - TaxResults - Tax

Freeze, Squeeze and BurnFreeze, Squeeze and Burn

Estate FreezeEstate FreezeInstallment Notes in the beneficiary’s Installment Notes in the beneficiary’s estateestatePost-transfer appreciated shiftedPost-transfer appreciated shifted

Estate ThawEstate ThawDiscounted assets are removed from Discounted assets are removed from the transfer tax system foreverthe transfer tax system foreverTax Burn – client beneficiary pays the Tax Burn – client beneficiary pays the income tax on trust incomeincome tax on trust income


Results – Non-Tax

Client/inheritor is in control of the BCTHot assets are creditor protected for client and familyAssets available after “tax burn”Re-write power

Protects against potential family conflictsProtects against inadvertent gift tax


“Seeding” the Trust

Must come from donor’s funds

Economic Validity

Debt-Equity Ratio

Rule of thumb 10% or 9:1


Guarantees

Guarantees as “seed” money

Must be legitimate

Better than trust assets

Often made by beneficiaries

Need not be for full amount of the note


Is a “Gratuitous” Guarantee a Gift?

Unsettled

Cases seem to say “no”

We pay for the guarantee

Get appraisal

Avoids risk of gift to trust by guarantor

Income tax-free - if spouse or defective trust


Ancillary Considerations

Economic Risk – Estate DepletionExposure

TogglingReimbursement ClausesForum shopping to avoid self-settled trustBDIT resolves dilemmaSIT exposure

Basis Monitoring



ENHANCED PLANNING ENHANCED PLANNING OPPORTUNITIES OPPORTUNITIES

WITH BDITsWITH BDITs

Significant Life Insurance Sales PotentialSignificant Life Insurance Sales Potential

Life Insurance - ILIT

BDIT is also a funded ILIT

So is the SIT variation

Insurance on the life of a beneficiary who is also a trustee

Decisions made by independent trustee

No power of appointment


Life Insurance Correlation with a BDIT

Life insurance has two component parts

Death benefit

Inside buildup

Asset class

QRP and NIMCRUT alternative


Life Insurance Correlation with BDIT – Cont.

Early DeathNegligible Tax BurnWin on the Mortality Bet

Later DeathGreater estate tax depletionTax-free build-up more dramatic


Increasing: income tax

deferred cash value –

available for use and

outside the estate

Decreasing: need for estate tax liquidity during “burn” (& net amount at risk outside estate)

Dec

reas

ing

Net

Am

ount

at

Ris

k

Increasing Cash V

alue

Now FutureEstate accessible

Estate tax free“Tax burn”Insurance

+A FIXED component

of an investmentportfolio outside the

estate

Derived from “Life Insurance as an Asset Class” by Richard M. Weber, MBA, CLU and Christopher Hause, FSA, MAAA © 2009 Ethical Edge Insurance Solutions, LLC. For further information contact [email protected]

EXHIBIT F


Goal – tax exempt or tax deferred wealth accumulation

Vehicles

Qualified Retirement Plans (“QRPs”)

NIMCRUTs

Cash Value Life Insurance (“CVLI”)

Primary Retirement Planning Alternatives


Tax deferral – not exemption

Tax at ordinary income rates

Often converts capital gain into ordinary income

IRD

Non-alienation prohibits transfers to escape the estate tax

QRP’s


Too Soon-Too Late – Too Much-Too Little

Contributions

Distributions

Administrative and Legal Costs

Government Regulations

IRS

Department of Labor

Legislative Changes

Non-discriminatory

QRP’s - Cont.QRP’s - Cont.


Tax-deferral-not exemption

Four-tier Rule – worst first

10% Rule

Eliminates younger clients

Reduces potential accumulation period

Goes to charity at death

Early death risk

Administrative and legal costs

Fully discriminatory

NIMCRUTs


Tax exempt access to the investment fund

Can access fund on a temporary basis and pay back

E.g. - college

Survivorship feature

Early death – win on mortality bet

No administrative and legal costs

Fully discriminatory

Cash Value Life Insurance - CVLICash Value Life Insurance - CVLI


Deferral v. Tax exempt access to income

Access to funds on a temporary basis

Survivorship Feature

Risk of early death for QRPs and NIMCRUTs

Decedent's Receipt

QRP-IRD

NIMCRUT – none

CVLI in trust – tax-free

Major Comparisons Comparisons


Adjustments – beneficiary controlled

Special Trustee

Not subject to power of appointment

Accessing Inside Build-up

Two-step process

Wrap Trust™ - there may be serious tax problems

Life Insurance in a Life Insurance in a Beneficiary Defective Beneficiary Defective

Inheritor’s Trust Trust

124124©2010 Richard A. Oshins and Robert

G. Alexander

Accessing Policy Cash ValuesAccessing Policy Cash Values

Loan money to the beneficiaryLoan money to the beneficiary– No income tax consequence No income tax consequence

Purchase other assets from the beneficiaryPurchase other assets from the beneficiary– Non-recognition of gainNon-recognition of gain

Distributions to the beneficiaryDistributions to the beneficiary– Worst alternativeWorst alternative

Assets no longer protectedAssets no longer protected


Accessing Policy Cash Values – Cont.Accessing Policy Cash Values – Cont.

MECMEC– Income tax issuesIncome tax issues– Estate tax inclusion issuesEstate tax inclusion issues

Back-end loaded policiesBack-end loaded policies

Other planning issuesOther planning issues


Other Planning OpportunitiesOther Planning Opportunities With a BDIT With a BDIT

Tax and asset protected foreverTax and asset protected forever

Advanced “wealth shifting” opportunitiesAdvanced “wealth shifting” opportunities– Family income tax planningFamily income tax planning– Valuation/discount planningValuation/discount planning– Structured gifts and loansStructured gifts and loans– New businesses – seed moneyNew businesses – seed money– Investment opportunitiesInvestment opportunities



Planning Opportunities – Cont.Planning Opportunities – Cont.

Grantor trust income tax planningGrantor trust income tax planning

Sales of “hot” assets – IRC§ 751 Sales of “hot” assets – IRC§ 751

Structuring buy-sell arrangementsStructuring buy-sell arrangements

State income tax planningState income tax planning

Multi-jurisdictional asset protection planningMulti-jurisdictional asset protection planning

Private retirement planPrivate retirement plan



Planning Opportunities – Cont.Planning Opportunities – Cont.

Advanced Life Insurance PlanningAdvanced Life Insurance Planning– Access to cash valuesAccess to cash values– No transfer for value problemsNo transfer for value problems– Super-charge the insurance fundingSuper-charge the insurance funding– Super-charge life insurance partnership planningSuper-charge life insurance partnership planning– Premium financing techniquesPremium financing techniques– Split dollar arrangementsSplit dollar arrangements


Physicians/Equipment LeasingPhysicians/Equipment Leasing

The doctors purchase $3 million worth of equipment in The doctors purchase $3 million worth of equipment in an LLCan LLC

Each doctor sell his/her 1/3 interest in the LLC to a BDIT Each doctor sell his/her 1/3 interest in the LLC to a BDIT for a notefor a note– Rev. Rul. 85-13Rev. Rul. 85-13– DiscountDiscount


Physicians/Equipment LeasingPhysicians/Equipment Leasing- cont. -- cont. -

Equipment is leased to the medical practiceEquipment is leased to the medical practice

Cash flow from the equipment leasing businessCash flow from the equipment leasing business– Pays the notePays the note– Buys CVLIBuys CVLI

For retirement-pension substituteFor retirement-pension substitute

As an asset classAs an asset class

For family protectionFor family protection

For buy-sell purposesFor buy-sell purposes


Buy-sell PlanningBuy-sell Planning

Newco is owned 50/50 by A and BNewco is owned 50/50 by A and B

A’s parent set up A’s BDIT which buys A’s entityA’s parent set up A’s BDIT which buys A’s entity

interest from Ainterest from A

B’s parent sets up B’s BDIT which buys B’s entity B’s parent sets up B’s BDIT which buys B’s entity interest from Binterest from B


Buy-sell Planning Buy-sell Planning cont’dcont’d

Owns B’s interest Owns B’s interest

Buys Life Insurance on Buys Life Insurance on A’s LifeA’s Life

Owns A’s interest Owns A’s interest

Buys Life Insurance on Buys Life Insurance on B’s LifeB’s Life

A’s BDIT B’s BDIT


Estate Planning for ProfessionalEstate Planning for Professional Athletes and Entertainers Athletes and Entertainers

Split between shiftable and non-assignableSplit between shiftable and non-assignable– A BDIT is wonderful for income opportunities which A BDIT is wonderful for income opportunities which

can be assignedcan be assigned

Athlete/entertainer pays the income tax on all incomeAthlete/entertainer pays the income tax on all income


Estate Planning for ProfessionalEstate Planning for ProfessionalAthletes and Entertainers – cont.Athletes and Entertainers – cont.

Income tax and current expenditures deplete non-Income tax and current expenditures deplete non-assignable wealthassignable wealth

BDIT grows income tax-freeBDIT grows income tax-free– Divorce and creditor protectedDivorce and creditor protected

Better than a marital property agreementBetter than a marital property agreement– Cash value life insurance as a pension substitute or in Cash value life insurance as a pension substitute or in

addition to those provided by the sportaddition to those provided by the sport– Death benefit protects the familyDeath benefit protects the family


Premium Financing StrategiesPremium Financing Strategies

Premium Financing strategies to ConsiderPremium Financing strategies to Consider– Private loan arrangementsPrivate loan arrangements– Bank loan arrangementsBank loan arrangements– Private split-dollar arrangementsPrivate split-dollar arrangements

Special thanks to Northwestern Mutual Life insurance Special thanks to Northwestern Mutual Life insurance Company in the preparation of slides 124-136. Used by Company in the preparation of slides 124-136. Used by permission, with modificationspermission, with modifications


BackgroundBackground

Large life insurance needLarge life insurance need– Large premiumsLarge premiums

Often a 6 or 7 figure premiumOften a 6 or 7 figure premium

Insufficient gift tax capacityInsufficient gift tax capacity– However - No gifts allowed with the BDIT!However - No gifts allowed with the BDIT!


BackgroundBackground

Client has cash flow or other assets available but must Client has cash flow or other assets available but must deal with gift tax limitsdeal with gift tax limits– However - No gifts allowed with the BDIT!However - No gifts allowed with the BDIT!

oror

Client wants flexibilityClient wants flexibility

oror

Client does not have sufficient cash flow or other assets Client does not have sufficient cash flow or other assets available and wants to avoid selling assetsavailable and wants to avoid selling assets


Critical Planning Points With the BDIT!Critical Planning Points With the BDIT!

Private premium financing arrangementsPrivate premium financing arrangements– The arrangement must accrue interest at the AFR and The arrangement must accrue interest at the AFR and

pay the accrued interest with the principal at the end pay the accrued interest with the principal at the end of the term so that there is no deemed gift to the BDITof the term so that there is no deemed gift to the BDIT

Private split-dollar arrangementsPrivate split-dollar arrangements– The arrangement must be a contributory arrangementThe arrangement must be a contributory arrangement– The BDIT, from its own funds, must contribute the The BDIT, from its own funds, must contribute the

economic benefit portion of the premiumeconomic benefit portion of the premium

Therefore, initially the BDIT must be independently Therefore, initially the BDIT must be independently funded with sufficient assets to make these funded with sufficient assets to make these paymentspayments


Premium Financing OverviewPremium Financing Overview

Personal (“private”) loansPersonal (“private”) loansRegular bank loansRegular bank loans pay interest in cashpay interest in cash accrue interestaccrue interest

Current trends: interest rates, estate taxesCurrent trends: interest rates, estate taxesPlanning flexibility Planning flexibility lend, don’t give lend, don’t giveNon-equity split dollarNon-equity split dollarExit strategiesExit strategies


Private Financing: How It WorksPrivate Financing: How It Works

Life InsurancePolicy

PremiumsIns.

Co.

Client(s)

Loans

Interest

Gifts (= interest)

TRUST

Private Financing: Why Do It?Private Financing: Why Do It?

Low gifts Low gifts – interest < premiuminterest < premium

Generally lower interest rate than bank loanGenerally lower interest rate than bank loan

Gift tax efficient—gifts other than cash can be madeGift tax efficient—gifts other than cash can be made– However: No gifts allowed with the BDIT!However: No gifts allowed with the BDIT!

FlexibilityFlexibility


Private Financing: Risks & DrawbacksPrivate Financing: Risks & Drawbacks

Does it make financial sense over the long term?Does it make financial sense over the long term?

Interest rates vary unless a lump sum is loanedInterest rates vary unless a lump sum is loaned

The cost of an increasing death benefit vs. the cost of a The cost of an increasing death benefit vs. the cost of a static death benefitstatic death benefit


Bank Financing: How It WorksBank Financing: How It Works

Lender


PremiumsIns.

Co.

Client(s)

Interest

Gifts (= interest)

Loans TRUST

Bank Financing: Why Do It?Bank Financing: Why Do It?

Lower out of pocket cost Lower out of pocket cost interest < premiuminterest < premium

Gift tax efficientGift tax efficient– However – No gifts allowed with the BDIT! However – No gifts allowed with the BDIT!

Other people’s moneyOther people’s money

Minimize the need to sell performing assetsMinimize the need to sell performing assets


Bank Financing: Risks & DrawbacksBank Financing: Risks & Drawbacks

Does it make financial sense?Does it make financial sense?

Interest rate uncertaintyInterest rate uncertainty

Lender uncertaintyLender uncertainty

Additional time and expensesAdditional time and expenses

Collateral requirements in addition to policyCollateral requirements in addition to policy

Is grantor’s personal guarantee a gift?Is grantor’s personal guarantee a gift?



PremiumsIns.

Co.

Non-Equity Split Dollar: Non-Equity Split Dollar: How It WorksHow It Works

Client(s)

Prem. Payments

Term cost

Gifts (= term cost)

TRUST

Non-Equity Split Dollar: Non-Equity Split Dollar: Why Do It?Why Do It?

Term cost < premiumTerm cost < premium

Term cost < interestTerm cost < interest

Gift tax efficientGift tax efficient– However – No gifts allowed with a BDIT!However – No gifts allowed with a BDIT!


Non Equity Split DollarNon Equity Split Dollar Risks & Drawbacks Risks & Drawbacks

Failure to terminate plan before:Failure to terminate plan before:

– CV significantly > premiums CV significantly > premiums

– Term cost gets too big (leverage is lost)Term cost gets too big (leverage is lost)

Works best for younger insuredsWorks best for younger insureds


Contact InformationContact Information

Robert G. Alexander, EsqRobert G. Alexander, Esq

Alexander & Klemmer, S.C.Alexander & Klemmer, S.C.

933 N. Mayfair Road, Suite 301933 N. Mayfair Road, Suite 301

Milwaukee, Wisconsin 53226Milwaukee, Wisconsin 53226

Tel: 414-476-5020Tel: 414-476-5020

E-mail: [email protected]: [email protected]



1. the beneficiary defective inheritor’s trust (“bdit”) “a powerful new wealth planning...

Documents

alexander2010 richard

bdit2010 richard

strategies2010 richard

bequests2010 richard

attorney richard

asset class2010 richard

wealth depletion

alexandertopics cont