The success of an estate plan, tax and business plan, retirement plan and asset protection plan requires that it be well designed, fully integrated with other business planning and timely and properly implemented. Since 1978, as a founding and senior partner at Stephens & Kray, and former managing partner of the national law firm, Finley, Kumble Wagner, et al., I have been designing proprietary and sophisticated estate, tax and business, retirement and asset protection plans that have been tested and evaluated by partners, successors, and creditor claimants, that include the IRS, the FTC, judgment business creditors and banks.
Most aspects of law are highly technical and therefore most attorneys must rely upon the input and advice from specialists within a given field of practice to design or to challenge the benefits intended from integrated estate, tax and business, retirement, and asset protection plans. For this reason the design, implementation and de-construction of integrated planning requires use of attorneys with unique inter-discipline knowledge and experience. This is most obvious in the area of tax law. At one point or another most every non-tax attorney must call upon a tax attorney to assist in the structuring, analyzing or de-construction of a transaction in a manner that avoids tax pitfalls or unknown tax consequences. As a tax attorney, I gained the experience and knowledge of numerous ways to structure a transaction and to creatively design a novel structure. The ability to identify and construct the most appropriate business organization, related party transactions, and third party transactions to avoid detrimental taxation and unintended results, has been the basis for my proprietary forms of estate, tax and business, retirement and asset protection planning.
My unique background as a Certified Public Accountant, and California attorney since 1977, with years of experience as a corporate, tax, mergers and acquisitions and transactions attorney, has enabled me to design and integrate traditional and widely accepted forms of business and estate planning to achieve desired client objectives and protections. Even as new creditor protection statutes and cases are being added to the law, my form of planning remains highly credible, effective and appears very traditional. My proprietary planning is accomplished through recognized retirement and estate planning trusts that integrate with other traditional operating business entities and agreements. The most important nature of any well drafted document and asset protection plan is that it appears unremarkable when scrutinized by adversarial parties and/or creditors.
Additionally, each client fact situation is different, and for this reason alone, there is no standard form of documentation or planning that can mitigate risk, nor any array of potential problems. However when traditional forms of legal technologies, that include those that are typical to a merger and acquisition transaction, a real estate lease and/or purchase agreement, a technology license agreement, a corporation reorganization, a loan and refinance agreement, a husband and wife living trust and irrevocable children trust, an executive’s compensation agreement, a qualified or non qualified retirement plan, and the list goes on, are available to achieve an estate planning or retirement planning objective, the properly designed mixing and matching of these form of documentation can yield favorable tax, estate, business, retirement planning and asset protection benefits.
I have developed and authored among other proprietary technologies that I use, to mix and match into a tailored estate, business, retirement and asset protection plan, a Private Retirement Trust (“PRT”), a Business Opportunity Trust (“BOT”) and a California Land Trust or Business Trust, each of which can operate independently of the other or can be designed to symbiotically integrate with an estate and business plan, a Delaware Series limited liability company, a domestic LLC, LP and/or corporation, to provide significant asset protection and estate and gift tax savings, without increasing income taxes or minimum California franchise taxes. A listing and brief description of my most widely used technologies are set out below.
California Private Retirement Plan and Trust (the “PRT”)
A California Private Retirement Plan and Trust (referred to as a “PRT”) is a flexible and “tax neutral” (non-qualified) retirement plan and trust that is actuarially funded to enable you to accumulate assets, so that at retirement you can be assured of a minimum monthly or annual retirement benefit. Because the PRT is non-qualified, it is not subject to IRS anti-discrimination and restricted investment rules. In an effort to be a “tax neutral” trust it is designed for income tax purposes to be taxable to the plan participants as a grantor trust, simplifying annual administration. To maintain its tax neutral status, it is recommended to be funded with after-tax employer contributions and/or voluntary contributions. PRT holdings should be entitled to the same California Code of Civil Procedure protections from a participant’s creditors that are afforded to participants under qualified retirement plan assets, making the PRT an excellent vehicle to hold and accumulate existing and future wealth that is needed to supplement retirement benefits. Based upon actuarial assumptions, the PRT can be designed to accumulate a retirement benefit that can range between $200,000 to $7.5 million and up to $15 million+ of existing wealth. Similar to a qualified plan, the plan participant (“beneficiary/participant”) can retain control and discretion to invest and reinvest PRT assets.
Who Should Consider a Private Retirement Plan?
A Private Retirement Plan is the perfect planning tool for moderate to high wealth participants, who have delayed their financial planning and setting out their retirement goals, as well as moderate to high income participants, who seriously want to accumulate wealth for their retirement in a protected retirement trust that is less susceptible to erosion from frivolous life style spending. Additionally the PRT is an exceptional vehicle to reduce the value of a business or company, by creating company/sponsor obligations that guaranty retirement funding, to thereby enable new employees to acquire stock or partnership interests, at reduced prices without having to incur an immediate tax, or deal with alternative minimum taxes that are associated with incentive stock option plans. There are other benefits of a PRT that do not become fully known, until after we engage in a more detailed evaluation of how it can be used.
Business Opportunity Trust (“BOT”)
The BOT is an irrevocable generation skipping “dynasty form of trust” that grants to each generation of life beneficiaries, a degree of control and discretion as Trustee, if of age, to invest and reinvest those assets and financial holdings and the authority to select the remainder beneficiaries and trustees upon the death of the life beneficiary. As a spendthrift trust, assets that accumulate in the BOT are intended to be placed out of reach of creditors of the Trust beneficiaries and also can avoid estate taxes upon the death of the initial and possibly later life beneficiaries, regardless of the amount of appreciation in value, until the trust by it terms must terminate. The BOT’s life beneficiary has rights that are most similar to the rights a surviving spouse has in a unified credit trust, bypass trust or marital trust. The BOTs are perfect vehicles for investing small sums of financial assets (typically funded using annual gift tax exclusion gifts that are currently allow each parent to gift $13,000 per year per child/trust, gifts that do not exceed the donor’s unified credit for gifts, earlier established at $1.0 million and through the end of 2012 at $5.0 million, or loans bearing interest at the Applicable Federal Rate or AFR) into projects and other business opportunities that can experience significant appreciation in value. The BOT can form and own an LLC that to manage investment opportunities. It can attract capital from investors or lenders (including the PRT), to finance a project, assigning or sharing the profits in a manner that is consistent with arms-length transactions. Our Trust form attempts to grant to each life beneficiary, the most liberal rights and authorities to determine how property will pass to heirs or later generations.
Who Should Consider a BOT.
Because the BOT is structured to protect Trust assets from the reach of a beneficiary’s creditors, and can avoid further estate and gift taxation on appreciation in the value of Trust property previously taxed at the time when gifted, it may provide long term and generational benefits that exceed those of the PRT, especially if there is a chance that BOT assets will significantly appreciate in value. Depending upon the method used for funding the BOT, either the settlor or the first life beneficiary can be deemed as the taxpayer, instead of the Trust that can also be made taxable as a complex trust. Making the initial life beneficiary as the taxpayer, allows that beneficiary to sell property to the Trust, without incurring income taxes, allowing the life beneficiary to shift the appreciation in asset values to the Trust and remainder beneficiaries, and protect those asset values from creditors and estate and gift taxes.
Generation Skipping Trusts for Children and Issue (“GST”)
The GST is typically established as part of a “revocable living trust” and will not be funded until the death of one or both parents, at which time the GST becomes an irrevocable BOT, operating just like a BOT, a unified credit trust or bypass. The GST is distinguishable from the BOT as to GST income and gains that are retained in the GST. These are taxable to the GST at trust tax rates and GST income and gains that are distributed are typically taxable to the distributee/beneficiary. The BOT can to some extent predetermine and change how the BOT income and gains will be taxable. The GST and BOT will typically name the child beneficiary as the initial and sole Trustee upon attaining a specific age or maturity. The GST and BOT grant to its child beneficiary all of the rights and benefits of a life beneficiary to access trust income and principal. The GST however will presumably be funded with significant assets, specifically the child beneficiary’s pro-rata share of assets that are exempt from estate and generation skipping transfer taxes (currently the child’s pro-rata share of the available unified credit). Funding in excess of exemptions from generation skipping transfer taxes (GSTT) are taxable as if part of the child’s estate, but are segregated under the terms of the Trust to minimize these taxes.
Combination Uses for PRT/BOTs and Other Estate Planning Techniques.
When a grantor’s wealth or equity in an asset is conveyed to a PRT, by encumbering that wealth with a secured note, the net equity value or the fair market value (“FMV”) of the underlying asset is significantly reduced. As a result the encumbered asset may be a good candidate for sale, or gift to a qualified residence trust, or a BOT, or family limited partnership or LLC. In the case of a sale to a BOT or other entity, the BOT or other entity will own the asset and all of the appreciation in value, offering protection of existing and future wealth and appreciation from creditors and with the proper planning from estate and gift taxes. The current or existing equity and wealth will be owned by the PRT while the future wealth and appreciation will be owned by the BOT or buying entity.
Business Trusts are “common law” trusts, that when first made popular were called “Blind Trusts”, Massachusetts Business Trusts or Massachusetts Trusts. These trusts were initially used to own real estate in an era where corporations were prohibited from owning real property. They are typically taxable like an LLC, and were in wide use before LLCs were allowed by statute. Today they are most often used by politicians (and called “Blind Trusts”) who want to divorce themselves from the investment activities of their investment advisers. The Business Trust terms expressly protect the Trust beneficiaries from liabilities incurred from the operations of the Business Trust. These trusts retain as confidential their Trust beneficiaries and holdings. They can be organized and operated as a closely held mutual fund owned by family members or close associates or as to hold real property investment (also called “Land Trusts”), and integrated to achieve a variety of client objectives.
The Delaware Series LLC System.
I have developed and documented system designed to take full advantage of the legal benefits granted under Delaware law by authorizing the creation and use of the Delaware Series limited liability company (“LLC”). The purpose of an LLC is typically to insulate the members/shareholders from the liabilities of the LLC business and/or property. Use of multiple LLCs are traditionally used to protect the liabilities generated from one LLC business and/or property from any other LLC properties. Use of multiple LLCs creates the burdens of owning multiple LLC entities and the potential for multiple minimum California franchise taxes, California LLC gross receipts taxes, multiple tax reporting and other administrative burdens of owing business multiple entities. Using a single LLC that owns a number of valuable properties does not provide very good asset protection, as all of your eggs will be in the same basket, and any claimant or creditor of one property can reach all of the properties owned by that single LLC. The DE Series LLC is intended to give you all of the benefits of multiple LLC through a single LLC, that creates any number of “Cells” or Series.
Income Tax Issues.
My typical trust document is drafted to be income tax neutral, to the maximum extent authorized under the Internal Revenue Code (“IRC”). The IRC contains provisions intended to eliminate (i) unnecessary income tax filings and (ii) possible assignment of income to lower tax bracket beneficiaries, by either (a) “disregarding” the existence of an entity for income tax purposes, or (b) declaring a trust or entity “defective” for income tax reporting purposes. These income tax provisions typically do not affect the gift and estate tax status of property that is gifted out of a donor’s taxable estate. While these provisions do tend to increase income tax revenues (without affecting gift and estate taxes), they can be orchestrated in a manner that provide material benefits to a donor of property, a parent, or the operator of real property or a trade or business.
Common Pot Trusts (for Insurance and Other Investments).
These types of trusts include special provisions typically incorporated into a BOT, GST or ILIT that aggregates the annual gift tax exclusion (now $13,000 per year) available to a donor for gifts to his or her children, issue and spouses of issue, to expand the annual gifting that can be made without consuming the donor’s unified credit. In operation these Trusts are structured to primarily provide for the life beneficiaries, with a remainder to others whose remainder interest can be modified by the life beneficiary. Donees of gifts are credited with vested capital accounts that are recoverable only at the discretion of the Trustee, or upon termination of the Trust, which may not occur for several generations.
Traditional Sophisticated Estate Planning Techniques – Valuation Discounts, IDGTs, and Grantor/Charitable Annuity Trusts.
The most popular form of traditional estate planning involves gifting techniques that shift future appreciation of business or assets to younger generations, and also takes advantage of valuation discounts. Valuation discounts are market discounts typically applied to family limited partnership or family limited liability company (“FLP” or “FLLC”) interests, or any co-owned property interest, when the property transfer does not include total control over the business or property, reality in a limited resale market for the exact interest that is being sold or gifted. This valuation discount lowers the asset value that is subject to a gift tax or estate tax. Other popular techniques include “intentionally defective grantor trusts” or” IDGTs”. These trusts impose federal and state income taxes on the grantor or parent, allowing the trust beneficiaries to participate in income and appreciation in value, without the burden of income and capital gains taxes, therefore shifted to the obligation of the grantor or parent. Obligation of the grantor or parent is effectively a “tax free” gift to the trust. There are other more specialized trusts, annuities and gifting techniques that allow the grantor to retain economic rights for a period of years, and give the property away to children, heirs or charities, through recognized IRS safe harbors, that are intended to reduce the estate and gift tax and in some cases the income taxes attributable to the property being transferred.