KEEPING THE FAMILY BUSINESS IN THE FAMILY Prepared by: Julius H. Giarmarco, Esq. Cox, Hodgman Giarmarco, P.C. 10

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Round 230 DISCLAIMER THESE MATERIALS ARE NOT INTENDED OR WRITTEN BY THE AUTHOR TO BE USED, AND THEY CANNOT BE USED BY YOU (OR ANY OTHER TAXPAYER) FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU (OR ANY OTHER TAXPAYER) UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.

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KEEPING THE FAMILY BUSINESS IN THE FAMILY Prepared by: Julius H. Giarmarco, Esq. Cox, Hodgman & Giarmarco, P.C. 101 W. Huge Beaver Road, tenth Floor Troy, MI 48084 (248) 457-7200 jhg@disinherit-irs.com

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CIRCULAR 230 DISCLAIMER THESE MATERIALS ARE NOT INTENDED OR WRITTEN BY THE AUTHOR TO BE USED, AND THEY CANNOT BE USED BY YOU (OR ANY OTHER TAXPAYER) FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU (OR ANY OTHER TAXPAYER) UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. 

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Techniques to be Discussed Grantor Retained Annuity Trusts Grantor Trusts Private Annuities Self-Canceling Installment Notes Valuation Discounts

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Grantor Retained Annuity Trust Typical Features Grantor exchanges pay delivering resources (i.e., S company stock, FLP/FLLC interests) to an unalterable trust f/b/o youngsters. Grantor holds the privilege to a settled annuity installment for a set term of years. At end of term, the benefits staying in the GRAT go to the rest of (the kids). In the event that grantor bites the dust before the set term, the advantages in the GRAT return to his/her domain.

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Grantor Retained Annuity Trust Typical Features The danger of incorporation can be "protected" against with life coverage on the grantor's life. The blessing charge esteem is the FMV of the advantages exchanged to the GRAT, less the present estimation of the annuity intrigue and the estimation of the inversion. The grantor is saddled on all pay and acknowledged picks up on trust resources regardless of the possibility that these sums are more noteworthy than the annuity installment. All wage and gratefulness in overabundance of that required to pay the annuity aggregate for the advantage of the remaindermen.

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Grantor Retained Annuity Trust IRC §7520 Rate 5% Grantor's Age 60 Term of Trust 10 Annual Growth of Principal 5% Pre-reduced FMV $3,000,000 Income Earned by Trust (8% x $3M = $240K) 8% Discounted FMV $2,000,000 Percentage Payout (12% x $2M = $240K) 12% Payment Period Annual Annual Annuity Payout $240,000 Value of Grantor's Retained Interest $1,727,208 Taxable Gift Value of Residual Interest in Trust $272,792

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Grantor Retained Annuity Trust Economic Schedule Beginning 5% 8% Annual Annual Year Principal Growth Income Payment Remainder 1 $3,000,000 $150,000 $246,000 $240,000 $3,156,000 5 $3,758,783 $187,939 $308,220 $240,000 $4,014,942 10 $5,425,367 $271,268 $444,880 $240,000 $5,901,516 Summary $3,000,000 $2,008,150 $3,293,366 $2,400,000 $5,901,516

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Intentionally Defective Irrevocable Trust ("IDIT") Do Nothing During Life FMV of S Corporation = $5,000,000 Dividend Distributions = 10%/year Corporation's Growth Rate = 3%/year Donor's Life Expectancy = 20 years At Death FMV of S Corporation = $ 9,031,000 Estate Tax (45%) = $ 4,063,950 Children's Inheritance = $ 4,967,050

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IDIT Recapitalization Recapitalize the S Corporation Donor claims 10%, voting offers Donor possesses 90%, non-voting offers Obtain a qualified evaluation substantiating a valuation rebate for the non-voting offers running from 10% to 40%

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IDIT Obtain Appraisal S Corporation No Discount With 35% Discount 10% $500,000 $500,000 voting 90% $4,500,000 $2,925,000 Non-voting Donor Retains 100% Voting Control Donor Transfers 90% of Corporation's an incentive out of his/her domain

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IDIT Fund Trust Establish Intentionally Defective Irrevocable Trust ("IDIT") Power of substitution - IRC §675(4)(c) Power to acquire without security - IRC §675(3) Power in non-unfavorable gathering to include beneficent recipients – IRC §674(b)(5) Gift 10% of shares (all non-voting) to IDIT utilizing $325,000 of blessing duty exception This "seed" cash dodges potential home incorporation under IRC §2036 Can apportion GST exclusion to IDIT

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IDIT Fund Trust Sell 80% of shares (all non-voting) to IDIT Promissory Note with term of 20 years Interest installments just (every year) with inflatable installment at end of 20 years IRS accepted loan fee is 5.5% (long haul AFR) No capital additions expense, and grantor not exhausted independently on premium installments Alternatives to a portion note Private annuity Self-scratching off portion note ("SCIN")

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IDIT Donor IDIT/Dynasty Trust Donor endowments 10% of S Corp stock Donor holds control as 10% voting shareholder (10% x $5,000,000 = $500,000 less 35% markdown = $325,000) $500,000 FMV Donor gets $193,000 every year (from premium installment and profits on the 10% voting offers) Donor offers 80% of S Corp stock $4,000,000 FMV (80% x $5,000,000 = $4,000,000 less 35% rebate = $2,600,000) IDIT pays premium just for a long time of $143,000 yearly Donor pays salary duties of $210,000 ($500,000 x 42%) - for yearly setback of $17,000 IDIT procures 10% on $4,500,000 = $450,000/year ($2,600,000 x 5.5%) IDIT's Cash Flow $450,000 ($143,000) $307,000 Paying IDIT's wage charges is likeness tax-exempt blessing

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IDIT Cash Flow $450,000 ($143,000) $307,000 Excess income could be utilized for reinvestment, buy of land, as well as buy of disaster protection . IDIT

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Sale to IDIT Illustration Grantor Gifts S Corp Stock $500,000 Grantor Sells S Corp Stock $4,000,000 Taxable Gift $325,000 IDIT Issues Note $2,600,000 Discounted Face Principal & Interest $5,460,000 Value of IDIT in 20 Years $18,419,940

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Private Annuity Sale of $1M of S Corporation Stock (with premise of $100K) Parent (Age 70) Child Annual Payout of $109,469 Annuity may not be secured. Every installment is separated into capital pick up ($58,065), intrigue wage ($44,953), and a nontaxable recuperation of premise ($6,452). Accept the Section 7520 Rate is 5%. Tyke can't deduct any piece of installments. At the point when parent passes on, installments end. Count accept a 16 year future. Standard valuation tables might be utilized if annuitant has no less than a half likelihood of living one year. On the off chance that the annuitant gets by for no less than year and a half, the half test is ventured to have been met. Regs § 1.7520-3(b)(3) and 25.7520-3(b)(3).

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Self Canceling Installment Note ("SCIN") Instead of a standard portion take note of, the deal can be paid with a SCIN. In Estate of Costanza , the Sixth Circuit, for a situation emerging out of Michigan, perceived a SCIN as a real exchange. A SCIN is a portion note that by it's terms is smothered at the passing of the merchant. With a SCIN, nothing is incorporated into the merchant's gross bequest (like a private annuity).

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Self Canceling Installment Note ("SCIN") The buyer must pay a "chance" premium to the dealer as thought for the cancelation highlight. In any case, there is no statutory or administrative direction with respect to how the hazard premium ought to be figured. Clearly, the premium can be reflected as an expansion in the business cost, or as an increment in the loan cost.

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Self Canceling Installment Note ("SCIN") IRC §7520 Rate 5.00% FMV of Property $2,600,000 Cost Basis $1,000,000 Initial Down Payment $0 Age 60 Term of Note 10 years Type of Note Interest Only AFR 5.50% Payment Period Annual

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Self Canceling Installment Note ("SCIN") Risk Premium Principal Interest Mortality Risk Premium (Principal) $263,567 N/A Total Sale Price $2,863,567 $2,600,000 Principal Amount of Note $2,863,567 $2,600,000 Mortality Risk Premium (Interest) N/A 1.2790% Total Interest Rate 5.5000% 6.7790%

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IRS Support for IDITs Rev. Rul. 85-13 There is no capital pick up on deals between a grantor and a grantor trust. Rev. Rul. 2004-64 The installment of wage charges by the grantor in the interest of a grantor trust does not constitute a blessing to the trust's recipients. On the off chance that a free trustee has the optional energy to repay the grantor for money imposes, this does not bring about the trust to be burdened in the grantor's domain under IRC Sec. 2036(a)(1). Karmazin versus Magistrate This blessing charge review, which was settled out of court, treated a deal to a grantor trust as a true blue deal. Trust was financed with 10% seed cash.

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IDIT GRAT versus Accepted markdown rate is AFR Only note is incorporated into grantor's bequest Can dispense GST exception End stacking with inflatable installment Assumed rebate rate is IRC §7520 rate All trust resources incorporated into grantor's domain Cannot distribute GST exclusion on account of ETIP principles Annuity can't surpass 120% of earlier year's annuity

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IDIT GRAT versus Can't decrease blessing to zero as a result of seed cash Unintended blessing might be limited with a "recipe" blessing Potential capital pick up if grantor kicks the bucket while note is exceptional Non-statutory strategy Can lessen blessing to zero with Walton GRAT Unintended blessing is limited if annuity is a rate of FMV No capital pick up if grantor bites the dust amid the term Statutory method

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"When I go, I anticipate taking no less than two of my home duty legal advisors with me."

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The End. Much obliged to You!

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