WHAT CORPORATE COUNSEL NEEDS TO KNOW ABOUT TRUSTS

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WHAT CORPORATE COUNSEL NEEDS TO KNOW
ABOUTTRUSTS ESTATES
ACC Charlotte Chapter Jessica Mering
Hardin Heidi E. Royal Robinson Bradshaw
Hinson, P.A.
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Opportunities in Estate Planning

• Direct disposition of assets at death
• Provide for family members
• Ensure chosen friends, family members or advisors
  will make financial and medical decisions upon
  death or incapacity
• Implement business succession plans
• Minimize income tax liability
• Minimize transfer taxes (estate, gift and
  generation-skipping)
• Limit liability and protect assets

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Basic Tools

• Financial Power of Attorney
• Health Care Power of Attorney and Living Will
• Will
• Revocable Trust
• Beneficiary Designations

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Transfer Tax Considerations

• Federal estate, gift and generation-skipping
  transfer tax 40 tax rate on amount in excess of
  lifetime exemption
• 5,430,000 lifetime exemption amount in 2015
  (indexed for inflation in future years)
• Portability of estate tax exemption amount
  between spouses
• 14,000 annual exclusion from gift tax
• No state estate, gift or generation-skipping tax
  in North Carolina or South Carolina

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Probate

• Court-supervised procedure to inventory a
  decedents assets, pay debts and expenses and
  distribute property to beneficiaries
• Information is on the public record
• Limited ability to sell real property
• Court fees based on asset values (capped at
  6,000 in NC no cap in SC)

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and Ways to Avoid Probate

• Joint property with right of survivorship
• Assets passing by beneficiary designation (life
  insurance, retirement accounts, annuities)
• Transfer on death/pay on death account
• Funded revocable trust

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When to Transfer

• Transfers taking effect at death
• Will/revocable trust
• Life insurance
• Retirement benefits
• Joint property with right of survivorship
• Transfer on death accounts
• Lifetime transfers (sales and gifts)

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How to Transfer

• Outright or in trust?
• Second marriage
• Ability of children to manage assets
• Protection from creditors

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What to Transfer

• Closely-held business interests
• Interest in operating business
• Transfer restrictions
• Voting/non-voting shares
• Childrens disparate needs/abilities
• Interest in family holding company
• Governing instruments
• Available discounts
• Cash/marketable securities
• Real estate

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Transferring Corporate Interests

• Transfer restrictions
• Governing instruments of closely-held entities
  (operating agreement, shareholders agreement)
• Stock ownership and retention guidelines
• Restrictions due to entity classification, such
  as S-corp
• Permissible or mandatory buy-back provisions
• Funding the buy-back
• Valuation

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Tax-Efficient Transfers

• Irrevocable life insurance trust
• Intentionally defective grantor trust
• Grantor retained annuity trust

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Irrevocable Life Insurance Trust

• Insured creates irrevocable trust for benefit of
  family members (spouse or other relative may
  serve as trustee)
• Trust purchases life insurance policy on life of
  insured or insured gives existing policy to trust
• Insured makes annual gifts to trust
  (beneficiaries have right to withdrawal)
• If not withdrawn by beneficiaries, trustee uses
  annual gifts to pay life insurance premiums
• At insureds death, life insurance proceeds are
  paid to trust free of estate tax for distribution
  to beneficiaries (or to be held in further trust
  or used to purchase illiquid assets from estate
  to provide estate with liquidity)

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Defective Grantor Trust

• Donor creates irrevocable trust for benefit of
  family members (best for non-relative to serve as
  trustee)
• Donor transfers cash/marketable
  securities/business interests to trust (valued
  for gift tax purposes at date of transfer)
• Trust income is taxable to donor but retained by
  the trust
• Donors payment of income tax is not an
  additional gift to trust
• Trustee may distribute trust property to
  beneficiaries
• Property not includible in donors estate at
  death all appreciation escapes estate/gift tax
• Donor can sell assets to trust in return for a
  promissory note (no income tax consequences when
  payments are made)

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Grantor Retained Annuity Trust

• Donor creates irrevocable trust for benefit of
  family members (donor may serve as trustee during
  early years)
• Donor transfers cash/marketable
  securities/business interests to trust (valued
  for gift tax purposes at date of transfer) and
  retains the right to receive an annuity
• Trust income is taxable to donor during annuity
  term
• Assets transferred to trust present value of
  all annuity payments (nominal taxable gift at
  transfer)
• All appreciation in excess of annuity amounts at
  end of annuity term escapes estate tax if donor
  survives the stated annuity term
• Assets may continue in trust beyond annuity term

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Structuring the Transfer

• Gifts of voting stock in corporation
• Grantor cannot retain the right to vote the
  transferred shares
• Grantor trust status must be structured to
  prevent any retained voting rights
• Solution
• Create two classes of stock voting and
  non-voting
• Include different provisions in trust to achieve
  grantor trust status

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Structuring the Transfer

• Gifts of stock in S-corp
• Is trust an eligible S-corp shareholder?
• Solution
• Create grantor trust for income tax purposes
• Qualified Subchapter S Trust (QSST) One income
  beneficiary, all income must be distributed to
  income beneficiary, income taxed at beneficiary
  level
• Electing Small Business Trust (ESBT) Multiple
  beneficiaries, income taxed at trust level

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Trusts Income Tax Considerations

• Who bears income tax liability for transferred
  assets?
• Grantor trusts
• Toggling grantor trust status
• Net investment income tax (Medicare tax)
• Compressed income tax rates for trusts
• Material participation by grantor, trustee or
  beneficiary

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Reimbursement for Income Taxes

• Defective grantor trust can trustee reimburse
  grantor for income taxes paid by grantor?
• Yes, if trustee is not related or subordinate to
  grantor and there is no implied agreement
• No, if trustee is related or subordinate to
  grantor

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Trusts Non-Tax Considerations

• Duration
• Perpetual (dynasty) trusts permitted
• Fiduciary
• Corporate vs. individual trustee
• Power to remove and replace trustee
• Distribution standards
• Distributions at ages/milestones
• Equality among beneficiaries

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Investment Opportunities Private Securities
Offering

• Trust as investor accredited investor?
• Consider value of trust assets (5M)
• Consider trustee (bank)
• Closely-held family business as investor
• Consider value of entity assets (5M)
• Consider equity owners (individuals who qualify
  as accredited investors)

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• Jessica Mering Hardin
• [phone]
• jhardin_at_rbh.com
• Heidi E. Royal
• [phone]
• hroyal_at_rbh.com