Family-Controlled LLCs and Partnerships

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Family-Controlled LLCs and Partnerships – How Can the Business Lawyer Avoid Estate and Gift Tax Traps? Steven B. Gorin Thompson Coburn LLP St. Louis, MO Sharon L. Klein Fiduciary Trust Company International New York, NY

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Overview Analyzing business issues in the family setting, including exchanging riches to the cutting edge Drafting purchase/offer understandings; wanting to keep away from home assessment traps brought on by basic purchase offer procedures Profits premiums: extraordinary for money expense and impetus arranging, however look out for blessing and domain charge

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Business Issues in Family Context Fair versus meet Insiders versus outcasts Solutions

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Fair versus Measure up to Equal qualities saw as reasonable Value creation by guardians Value creation by youngsters

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Insiders versus Untouchables Outsiders need appropriations Who controls insiders' remuneration? Who profits by insiders' production of significant worth?

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Solution – Benefit Outsiders Bequeath different resources (distribution of equivalent shares) Life protection Separate land from business operations

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Solution – Buy-Out Outsiders Cross buy versus recovery (business issues) Life protection versus promissory note (business issues) Promissory note versus favored value

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Solution – Control Insiders Tax appropriations to maintain a strategic distance from K-1 K-0 Limit insiders' remuneration Give pariahs a put right

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Solutions – Fair to Insiders? Flexibility to work business Incentives for making esteem Source of well-paying occupation Need division from untouchables

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Shifting Value to Insiders During Life Business openings; advances Leveraged exchanges Discount arranging Financial security to guardians to support above

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Business Opportunities – Business Expansion New working substance claimed by insiders New land element possessed by outcasts or mix Financed by guardians

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Parents Trust(s) for Insiders Gift Loan or advance assurance Small value venture New Operating Business

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Gift Parents Trusts for Outsiders (and Insiders?) advance or advance certification little value speculation New Real Estate LLC rent installments Operating Business Note: Can use for existing or new working business

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Business Opportunities – Loans At or above material government rate (AFR) Credit hazard disregarded yet require goal to reimburse Loan ensure contention Back-to-back advances

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advance Bank Parents Entity security premium security premium Note: Loan from guardians to element ought to be at or above AFR however might be beneath market

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Leveraged Transfers Sale to irreversible grantor trust Grantor held annuity trust

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Sale to Irrevocable Grantor Trust What is an unalterable grantor trust? Irreversible – grantor can't change, so outside bequest impose framework Grantor trust – regarded for money charge purposes as though claimed by grantor Dichotomy created by domain and pay assess statutes not blended

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Sale to Irrevocable Grantor Trust Sale slighted for money impose purposes yet regarded for exchange impose purposes Grantor pays salary charge on trust's pay Grantor can kill grantor trust status

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Funding Trust Grantor Initial blessing (1/9?) Irrevocable Grantor Trust (IGT) Note: Annual prohibition blessing if acquire private letter administering

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Sale Grantor Promissory Note Equity in S Corp. on the other hand p'ship Irrevocable Grantor Trust Note: No duty at a bargain (Rev. Run 85-13)

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Note Repayment S Corp. on the other hand P'ship K-1 money IGT (TIN = grantor's SSN) K-1 note reimbursements Grantor impose installments IRS

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Sale to Irrevocable Grantor Trust Note – premium just in addition to discretionary prepayment Ideal – circulate the majority of business' wage OK – IGT utilizes assess dispersions to reimburse premium and some main Works regardless of the possibility that business does not develop

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Sale to Irrevocable Grantor Trust Valuation hazard – blessing charge Valuation chance – domain charge incorporation Defined esteem proviso – either factor thought or trustee makes isolate share for blessing component

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Grantor Retained Annuity Trust (GRAT) Grantor beginning blessing annuity installments GRAT Note: A GRAT is additionally a grantor trust

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GRAT – Structuring Annuity Payments Defined as rate of starting quality Nominal introductory blessing – for all intents and purposes review verification Payments increment by 20% every year

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GRAT – Making Annuity Payments If long haul GRAT, utilize working income If transient GRAT, utilize value premiums or credit from outsider If utilize value premiums, no salary charge issue however noteworthy valuation issues (evaluation consistently; terrible outcomes if come up short)

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GRAT versus Deal to IGT GRAT – more secure for blessing charge GRAT – bequest incorporation if kick the bucket amid term IGT – more adaptable IGT – better for multi-generational arranging

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Discount Planning Lack of attractiveness Lack of control Use non-voting value premiums Recapitalization regularly required (19 for 1)

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Discount Planning Simple for gifting however be careful appraiser punishments Audit chances more affirmed for deals Estate assess dangers – impose allotment talked about later – conjugal finding examined now

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Discount Planning – Marital Deduction Issues Control premium Voting value to conjugal trust Spouse pulls back voting value

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Discount Planning – Voting Equity Example 25% Marital Trust Surviving Spouse Over time 70% Decedent 30% Credit Shelter Trust Ending: Credit Shelter 30% Marital Trust 45% Surviving Spouse 25%

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Discount Planning – Marital Deduction Issue Marital conclusion incorporates control premium Marital trust not amassed with surviving companion's own particular property Valuation markdown for surviving life partner despite the fact that genuine control as trustee of different trusts

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Protecting Grantor's Cash Flow Partnership solidify Preferred benefits premium Code § 2701 exceptionally confused

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Protecting Grantor's Cash Flow Deferred remuneration Qualified arrangements Defined advantage Defined commitment Employee stock proprietorship arrange (ESOP) Nonqualified arranges (Code § 409A)

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Protecting Grantor's Cash Flow Code § 409A Violation – pay, premium, 20% punishments Cannot quicken installment Defer installment – 12 months + 5 years

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Protecting Grantor's Cash Flow Qualifying occasions Fixed date Separation from administration Disability (limit) Death Change in control (contract)

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Protecting Grantor's Cash Flow Fixed date Informally lessen or concede pay or work past altered date (case next slide)

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Protecting Grantor's Cash Flow Example: Payments 2021-2030 2020 needs to keep working in 2021 2020, concur that part or all of pay earned in 2021 will be paid in 2031 Net impact – concede retirement by one year No deferral of unique installment stream

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Protecting Grantor's Cash Flow If acquire over the long haul to guarantee "sensible" pay, can ensure against neglecting to serve – Grantor holds voting stock, so can evade end by boss without cause Provide demise advantage Provide handicap advantage Consider reward to give incapacity protection rather

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Trusts as S Corporation Shareholders Grantor believe (one grantor) Grantor as proprietor Beneficiary as proprietor (incorporates QSST) Electing private company trust (ESBT) Revocable trust after death (and different exemptions)

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Trust as S Corporation Shareholders Marital trusts are QSSTs Dynasty trusts are frequently ESBTs Can develop trust with essential recipient regarded as the proprietor

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Fiduciary Duties – Investment Diversify unless uncommon conditions Trust could expressly express the extraordinary conditions Prohibiting a deal is troublesome

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Fiduciary Duties – Investment Regarding Undiversified Holdings Consider: Investment Direction Agreements Indemnifications Directed Trusts Document variables prompting to assurance not to broaden

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Fiduciary Duties – Loyalty Keep control to give work to recipient? Trustee's obligation to recipient versus obligation to different proprietors of the business

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Administering Trust Income issues if obligatory pay arrangements and nongrantor Trust may need to keep circulation to pay salary assess Disappoint recipient if trustee, as supervisor of the business, does not have power or slant to make disseminations

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Administering Trust Issues if QSST or other 678 Trust Beneficiary burdened regardless of whether gets appropriation Trustee should seriously think about using energy to alter QSST + surviving life partner second marriage – require impose account cut-off in shareholder understanding

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Buy-Sell Agreement – Overview Estate charge Income assess Securing the purchase offer

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Buy-Sell Agreement - Overview Valuation equation Estate assess division Marital derivation issues

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Buy-Sell – Valuation Control conformity – insider's pay Control alteration – conveyance strategy Marketability change Fair esteem versus equitable esteem

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Buy-Sell – Fixing Estate Tax Value? Must tie amid life and after death Controlling proprietor may have rights that make non-restricting – Blount Family business – Code § 2703 similarity

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Buy-Sell – Fixing Estate Tax Value? Require beginning examination to demonstrate likeness Need occasional evaluation to demonstrate upgraded to keep precise esteem Owners overhaul every year between evaluations

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Buy-Sell – Marital Deduction Issue If IRS decides altered esteem was too low, deal to a man other than life partner Off by $1 can refuse immense conjugal finding Bequeath business enthusiasm to separate trust or inside and out if utilize settled recipe Consider utilizing assessed esteem rather

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Buy-Sell Appraised Value Mechanism for selecting appraiser Disput