Curing Obsolete Estate Plans
in Light of ATRA
John F. Bergner
Barbara A. Sloan
Carol A. Cantrell
1
Reverse Thinking For Estates Safely
Under $10.43 Million Inspired by ATRA
 Avoid valuation discounts
 Avoid annual exclusion gifts
 Avoid the by-pass trust
 Cause inclusion of assets in the estate
 Avoid grantor trust status
2
Important Planning Considerations
 Income taxes
 Transfer taxes
 Fiduciary duties and liabilities
 Ethical duties
 Administrative matters
 Creditors and spouses.
3
Valuation Discounts
 Features
justifying discounts:
Fractional interests in property
Minority interest in an entity
Restrictions on transfer, distributions,
liquidation, and withdrawal
 Compare
transfer tax savings to income
tax cost
4
Eliminate Partnership Discounts
 Purchase
additional partnership interests to
gain control.
 Amend partnership agreement to reduce
discounts:
 Allow a partner to withdraw at will.
 Redefine “fair value” on withdrawal as going
concern value without discounts.
 Require annual distributions to the partners.
 Allow liquidation without unanimous vote.
5
Eliminate Partnership Discounts (cont.)
 Redeem
a partner’s interest at market value.
 Liquidate
the entire partnership.
 Beware
of marketable securities that can
trigger income tax on distribution.
Marketable Securities - FMV
Inside Basis of securities
Outside Basis of partnership interest
$1,600,000
1,200,000
$ 1,000,000
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Liquidation of Partnership
 Distribution
of marketable securities.
Partner A
Partner B
Total
FMV of Securities
$ 800,000
Basis of Securities
Appreciation
Amt.Treated Like Cash
600,000
600,000 1,200,000
200,000
200,000
400,000
$ 600,000 $ 600,000 $1,200,000
Outside Basis in Pship.
Gain on Distribution
500,000
$100,000
$ 800,000 $1,600,000
500,000 $1,000,000
$100, 000 $ 200,000
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Eliminate Fractional Discounts
 Merge
fractional interests by purchase, sale,
swap or gift.
 Transfer fractional interests to an entity.
 Draft a co-owners' agreement that allows each
co-owner to force a sale at FMV.
8
Cause Inclusion of Trust Assets
in Settlor's Estate
 Settlor
exercises a swap power or buys low
basis assets from a grantor trust.
 Settlor
becomes trustee of a trust not subject
to an ascertainable standard.
 Invoke
the reciprocal trust doctrine.
 Settlor
purchases a remainder interest in a
GRAT.
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Purchase Remainder in a GRAT
Grantor buys the remainder interest in a GRAT.
There are 7 annuity payments left of $112,495
each. The GRAT property is worth $1,250,000.
• The net present value of the remaining annuity
payments using a 2.2% discount (the long-term
AFR rate) is $722,502.
• Grantor pays the remainder beneficiaries
$527,498. [$1,250,000-$722,502=$527,498].
•
10
When IRC § 2036 Applies

Determine whether § 2036 may apply.
 “gross estate includes property that the decedent
“made a transfer (except a bona fide sale…) by trust
or otherwise, under which he has retained for his
life..the possession..enjoyment..or right to..income...”

For example:
 Partnership formalities ignored, minimal assets retained,
disproportionate distributions, no non-tax purpose, etc.
 Grantor lives in the home free after the QPRT ends.
 Donor uses artwork, jewelry, etc. that she gave away.
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Cause Inclusion of Trust Assets
in Beneficiary's Estate
 Trust
distributes low basis assets to a
beneficiary.
 Trust
cashes out a beneficiary.
 Beneficiary
purchases the remainder interest in
a bypass trust or other trust (not a QTIP).
 Terminate
the trust.
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Cause Inclusion of Trust Assets
in Beneficiary's Estate (cont.)
 Avoid
funding the bypass trust. (Olsen v. Comm’r,
TCM 2014-58).
 Family settlement agreement
 Judicial reform
 Decant
to a trust where the beneficiary has a
general power of appointment.
 Beneficiary exercises a special power of
appointment to trigger the Delaware Tax Trap.
13
Cause Inclusion of Trust Assets
in a Third Party's Estate
 Gift
appreciated property to a elderly or ill
family member more than a year before death.
 Exercise
a special power of appointment in favor
of an elderly or ill family member.
 Exercise
a special power of appointment in favor
of spouse who leaves the property to the one
who exercised the power.
 Add
or change trust beneficiaries.
14
Change Ownership of Spousal Assets
Spouse gifts appreciated separate property to the
spouse with a short life expectancy.
 Convert separate property to community property
if not sure who will die first.

15
Avoid the 3.8% Medicare Tax on the Trust
 Appoint a trustee who is active in the business.
(Aragona Trust v. Comm’r, 142 TC No. 9 (2014)).
 Distribute the passive activity to a beneficiary who
is active in the business.
 Toggle grantor status on or off depending on
whether the beneficiary or the trustee is active.
 Make distributions to the beneficiaries up to the
$200,000/$250,000 MAGI limit.
16
Avoid the 3.8% Medicare Tax (cont.)
 Trust transfers marketable securities to an LLC so
that capital gains of the LLC are included in DNI
and carry out to the beneficiary. (Crisp v. United
States, 34 Fed Cl 112 (1995)).
 Trust transfers marketable securities to a new SCorp and makes a QSST election, treating the
beneficiary as the owner.
17
Turn Off Grantor Trust Status
 Release the power that causes grantor status.
 Replace the trustee with an independent
trustee if the trust allows unlimited
discretionary distributions.
 Relinquish the power to distribute income to
grantor's spouse.
 Use trust principal (not income) to pay
premiums on a life insurance policy, if that is
the only reason the trust is a grantor trust.
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Caution Before Turning
Off Grantor Trust Status
 At the time a grantor renounces his grantor powers,
the grantor is considered to have transferred
ownership of the property to the trust, now a
separate taxable entity. (Reg. § 1. 1001-2(c) Ex. 5).
 The grantor may recognize gain on a deemed inter
vivos transfer of property if the transfer would
otherwise be taxable. (i.e. relief of debt).
 Unanswered questions:
What are the tax consequences to the trust?
Does this also apply to termination of grantor status
on account of death?
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