Oklahoma Bar Journal
Integrated Estate Planning for the Protection and Succession of the Family Business
By Philip R. Feist
A successful family business is certainly worth preserving and protecting. The primary economic driver that makes the United States the unrivaled economic powerhouse of the world is its family businesses. These account for the majority of U.S. gross domestic productivity.1 Considering the statistics, it appears the most efficient, effective and successful vehicle for harnessing ingenuity to exploit economic opportunity and to create wealth, is the family business.
A 1987 study2 suggested that two out of three family businesses fail to make it through the second generation, and 3-5 percent fail to make it to the fourth generation. However, these statistics are deceptive to the extent they leave us with the impression these family businesses failed economically, since the companies included in the study were those that ceased to exist because they were sold at a profit.3 Further, “[m]ore recent research suggests successful families often experience ‘transgenerational entrepreneurship,’ in which one generation inspires the next generation of entrepreneurs, but often in new ventures,”4 which would rather indicate family business succession by transition into new fields of endeavor, not extinction.
PERSONAL INTERESTS ARISING FROM THE FAMILY DYNAMIC
The law of property allocates who has a right to own and enjoy what, in what amount and when. The family relationship gives rise to special legal rights in property. Spouses5 and minor children6 have a right to be supported by the family business owner (FBO) client’s property during life. At death, family owned business equity that is the separate property of an FBO may be disposed of by last will and testament or under the terms of an estate planning trust, free of the claims of a surviving spouse.7
When an FBO dies, the surviving spouse has rights to claim 1) ownership of an undivided share of the FBO’s property,8 2) use of the marital residence,9 3) possession of household tangible personal property,10 4) exempt property11 and 5) a discretionary support allowance during the pendency of the administration of the FBO’s estate.12 An FBO’s surviving minor children have a right to be supported and continue to live in the family residence as well.13 Finally, unless the FBO affirmatively says otherwise in a legally effective testamentary instrument, the children will also have a right to an intestate share of the decedent’s estate.14
Rights of a surviving spouse can be altered by an artfully drafted and timely executed prenuptial agreement,15 postnuptial agreement16 or by a property agreement after marriage that transmutes joint industry property interests into the separate property of each of them.17 A surviving spouse also has no rights in a decedent’s separate property that is otherwise disposed of by will,18 deed, joint tenancy19 or beneficiary designation.
Therefore, to preserve the value and to protect ongoing enterprise operations, the FBO will want to execute legal documents that grant control authority, specifically with regard to the family owned business, and that provide for at-death allocations of interests in the family owned business to the surviving spouse and children.
BUILDING THE RING OF LEGAL STEEL AROUND THE FAMILY BUSINESS
There are compelling reasons for segregating ownership, control and management of unique assets from other assets. For instance, a “gun trust” is designed to hold title to class three firearms, such as machine guns and suppressors. Likewise, because of the special value and unique characteristics and management requirements of a family owned business, ownership and control of this asset should also be the subject of its own estate planning documents.
Prudent estate planning for the FBO client will take into consideration the various, often-competing expectations of stakeholders other than the client, to legally manage some of those expectations and to erect a bulwark against others. These include the expectations of a surviving spouse and children, of family owned business co-owners (if any) and of the employees, vendors and customers of the business upon whose continued loyalty the viability and profitability of the company depends. What is needed is clear and effective control authority and prudent equity interest transfer protocols.
Another unseen potential claimant against the FBO’s interest in the company also exists – the unexpected, nonconsensual judgment creditor, who will want to reach family owned business equity held in the FBO’s name or in the names of the successors in interest. Particular attention should be paid to planning for those estate liabilities which, under Oklahoma law, will become the continuing obligations of the surviving spouse20 after the FBO’s death.
Finally, integrated estate planning for the FBO client will strategize to minimize erosion of family wealth from income and transfer taxation.
Some Suggested Essential Planning Documents
The following are some suggested essential planning documents to provide for continuity of authority for operating the family owned business, to protect its operations from outside interference from family members in the absence of the FBO and to put the family owned business and its assets beyond the reach of creditors of the FBO and his or her spouse.
Equity Trust. Family owned business equity should be held by the trustee of a stand-alone revocable trust (equity trust) that is separate from the client’s regular estate planning asset management trust. The trustee of this equity trust would usually be the client, and the authority of successor trustees should be limited in matters relating to 1) the sale or other transfer shares or units, or any interest in these, without the consent of the FBO-grantor’s spouse or, if there is none, then any child of the grantor who is employed as an executive of the company and 2) the removal without cause, or the refusal without cause, to employ in an appropriate position, a member of the principal’s family. If the family owned business has multiple corporate shareholders or limited liability company members, the trustee should be authorized to enter into buy-sell and related agreements (such as liquidity funding arrangements) as an exception to the restriction on power to sell or transfer shares or units. Also, the trust agreement should include authority for the trustee to sell family owned business equity, or interests in equity, to the grantor’s spouse or other family members, including, but not limited to, by contributing shares or units to qualified grantor retained annuity trusts (GRAT) and participating in the purchase of GRAT remainder interests.
The trust agreement for the FBO’s regular estate planning trust should provide that its trustee shall be subject to any direction given to him or her by the trustee of the equity trust for the purpose of facilitating the financial well-being of the family owned business, including making additional capital contributions to it and guaranteeing third-party loans made to it.
In order to maintain objective administration of family owned business equity held in an equity trust, the power to remove and replace a successor trustee upon grantor incapacity or death could be held by a trust protector, who could be an executive officer of the family owned business, instead of family member beneficiaries having this power.
For the sake of efficiency, an equity trust should provide a streamlined nonjudicial mechanism for establishing a presumption of grantor incapacity, such as a professional determination which sets out the essential findings21 which are the basis for concluding that the grantor is not able to make informed decisions concerning the administration of the trust. To help disincentivize a palace coup by a family member, the successor trustee of the trust could be the same person as the attorney-in-fact appointed under the grantor’s specific durable power of attorney (discussed later), and the professional determination has to be made by the grantor’s personal physician or other qualified professional designated by his or her personal physician.
The equity trust agreement should include flexibility mechanisms that allow it to be modified to adapt to the changing circumstances of an incapacitated FBO grantor, and of the grantor’s spouse and remainder beneficiaries, including a limited inter vivos power of appointment, exercisable by a trust protector, to appoint (i.e., make gifts of) shares or units to the FBO’s spouse, ancestors (to get a “stepped-up basis” (discussed later)) and descendants.
After the death of the grantor and his or her spouse, family owned business equity still held by the equity trust could continue to be held, in trust, for the benefit of the grantor’s descendants. To dampen a sense of financial inequity among family members who are not employed by the family owned business, the equity trust could provide that an amount equal to the greater of 1) the average of all compensation paid to all family-member employees of the company and 2) the compensation of the highest paid family member employed by the company, be distributed to the equity trust to be disbursed, in equal amounts, among the family members who are not employed by the company. If the equity trust holds a controlling interest in the company, then the trustee would be in a position to compel this result. Coordinating the measuring compensation of employed family members with cash disbursements through the equity trust to other family members could also restrain extravagant compensations being paid to family-member employees of the company.
During his or her lifetime, the grantor should enter into an agreement with the family owned business that, at the direction of the trustee, 1) the company will be recapitalized to provide for various classes of equity having different voting powers and distribution preferences consistent with the company’s tax status, if that is relevant (i.e. S-Corp one-class-of-stock requirement) and 2) the company will redeem any amount of its equity held by the trust, subject to specific capital and cash flow metrics of the company at the time so as not to unduly burden its financial health and capacity. Recapitalization will give the trust flexibility in allocating family owned business equity among various beneficial interests, and redemption will permit the trust to liquidate equity for final distribution to a beneficiary in termination of that beneficial interest in the trust. As an alternative, the trust could be the beneficiary of life insurance22 on the life of the grantor or of any trust beneficiary, to enable the trust to liquidate any beneficial interest in family owned business equity without having to require the company to redeem those shares or units.
Finally, the equity trust agreement should include a mandatory alternative dispute resolution protocol that includes mediation, arbitration of any issues not settled in mediation and resort to the courts if there is a beneficiary who does not agree in mediation and who does not accept an arbitration result, with the legal fees and costs of all litigation parties being currently paid from the trust share of that beneficiary, subject to equitable reallocation of the fees and costs burden by the court upon entry of a final judgment.
Durable Powers of Attorney. If there is a reason family owned business equity should not be held in trust, then the FBO client should have two durable powers of attorney (DPOA) – one to manage the client’s nontrust property interests, generally, and a second one to exercise family owned business equity powers.
The client’s regular asset management DPOA could appoint as attorney-in-fact a person who is familiar with the client’s personal and financial priorities. However, this DPOA should expressly exclude from the scope of agent authority the exercise of the client’s powers and prerogatives as an equity owner of the company. Further, as discussed earlier with regard to the powers of the equity trust successor trustee, this general DPOA agent should be subject to any direction given to him or her by the attorney-in-fact of the client’s specific DPOA for the purpose of facilitating the financial well-being of the family owned business, including making additional capital contributions to it and guaranteeing third-party loans made to it.
With regard to a specific DPOA that deals solely with matters relating to family owned business equity, the attorney-in-fact should be someone who is familiar with the operations of the family owned business, such as one of its executive managers. This DPOA should also define the scope of agent authority as being limited to the exercise of powers inherent in or incident to the principal’s ownership of family owned business shares or units, with restrictions similar to those set out earlier on the powers of an equity trust successor trustee, as these relate to the sale or transfer of family owned business equity and employment of family members by the family owned business.
FBO Client’s Will. The last will and testament of the FBO should provide that family owned business equity not held in trust is transferred to the client’s equity trust and not to his or her generic asset management trust. To help neutralize family disputes that could disrupt the family owned business that is part of the FBO’s estate, an in terrorem no-contest clause can be included in the will, but these are disfavored and strictly construed.23 A more effective provision might be something like, “Any person who claims an interest in my estate other than what I have provided for in this, my last will and testament, is hereby given $2, and no more, as his or her entire and final interest in my estate.”
Creditor Protection. The planning lawyer likely has a duty to discuss asset protection options with his or her FBO client. Particularly potent statutory creditor exempt status is given to assets held in an Oklahoma family wealth preservation trust,24 which can be settled as a revocable trust.25 The FBO could settle a preservation trust as a second equity trust to hold family owned business shares or units as well as an undivided interest in the appreciation of assets held in the client’s regular revocable estate planning asset management trust. While the grantor should not be a trustee of his or her preservation trust, and cannot be a beneficiary of the trust,26 a preservation trust agreement can provide for grantor access to trust value by, for instance, a renewable annual line of credit loan secured by the client’s regular estate planning asset management trust and by pledge of his or her nontrust property. The preservation trust agreement should incorporate the pre-emptive, efficiency and flexibility provisions discussed in the White Water Estate Planning: Asset Planning to Survive to the Next Generation four-part continuing legal education webinar series offered by the Oklahoma Bar Association on September 2018.
Other Drafting Considerations. Five other considerations should be discussed with the FBO as part of an integrated estate plan.
First, organize an Oklahoma “Series LLC.”27 The FBO client’s preservation trust (or, after the client’s death, his or her continuing equity trust) could be the manager of the main or “host” LLC, and family owned business shares or units that otherwise would be transferred to the FBO’s individual beneficiaries by gift or at death could instead be allocated to a series of the LLC which has as its member-owner and manager an irrevocable trust that the client has settled for the benefit of that individual. This use of a Series LLC provides triple-layer protection for the beneficiary’s interest in family owned business equity, namely 1) the statutory liability shield for the series,28 2) the charging order as the sole creditor remedy 29 and 3) the protections drafted into the irrevocable trust.30
Second, the irrevocable trust settled by the FBO to be the member-owner and manager of an LLC series, as explained earlier, would receive any distributions made by the company with regard to the family owned business equity held by the series. The trust could then make distributions to the beneficiary subject to the terms set out in the irrevocable trust agreement.
Third, provide that the family owned business has more than one owner (such as trusts settled for the benefit of the FBO’s children), with the FBO client (or his or her equity trust, or preservation trust) owning all voting family owned business equity. Also, consider holding family owned business shares or unit, owned by client and his or her spouse as tenants by the entirety – this ownership form has the same survivorship feature as joint tenancy with right of survivorship, but it becomes a tenancy in common upon divorce without the necessity of executing any conveyance documents. Lastly, multiple ownership of a limited liability company also gives an overlay of protection31 in addition to the statutory “charging order only” remedy of creditors of an LLC.
Fourth, all family owned business equity owners should be subject to a buy-sell agreement which provides that, at the death of a family owned business equity owner, the agreed-on purchase price32 of the equity is distributed to a transition trust settled by the family owned business itself, having an executive officer of the company as its trustee and, as beneficiaries, the deceased family owned business equity owner’s spouse and children. This trust should give the surviving spouse (or, if there is none, then each child, with regard to his or her own share) a limited inter vivospower to appoint trust property to the trustee of any other trust settled by the deceased family owned business equity owner or by the family owned business executive officer (who presumably would be compliant with any reasonable terms the surviving spouse might request). Such a provision keeps the value of the decedent’s equity interest out of probate and also protects that value from creditors of the decedent’s successors in interest.
Fifth, while Oklahoma law will govern the internal administration of an Oklahoma family owned business, the question to be considered is, “How could a non-Oklahoma court judgment affect ownership interests in family owned business equity?” The answer is:33 first, when an individual who lives outside Oklahoma holds family owned business shares or units in his or her own name;34 second, when state taxing authorities assert the right to reach the economic interest of a beneficiary of an Oklahoma trust that holds family owned business equity;35 third, when an Oklahoma trust that holds family owned business shares or units has jurisdictional minimum contacts with another state.36 Consider also that the value of the interest of a trust beneficiary in trust-owned family business equity – even as a remote contingent remainder beneficiary – can be included in divorce property settlement calculations if governing law gives the divorce court powers of equitable distribution.37
THE TAX YETI
The drafting lawyer will want to consider the big footprint on the client’s integrated estate plan made by income, gift, generation-skipping and estate taxes.
Concerning income taxes, some primary issues are 1) the transfer of trust tax liability to the grantor or to a beneficiary by application of the grantor trust rules,38 2) material participation rules39 for purposes of the passive loss rules, 3) the installment sale rules,40 4) minimum interest rate requirements for intra-family loans,41 5) planning to avoid the “net investment income tax,”42 6) the availability of the 20 percent qualified business income deduction new IRC §199A43 and 7) with regard to state income taxation, the very favorable Oklahoma exemption from capital gains tax for proceeds from the sale of qualifying corporate shares or LLC units.44
Concerning lifetime transfers of property, gift tax considerations include the fact that the federal gift tax is calculated on an “exclusive” and not (as is the estate tax) on an “inclusive” basis. The other important consideration is that gifts are received with a “carryover basis” as opposed to“stepped-up basis” if the same property were to be included in the decedent’s taxable estate.45 However, gifts made upstream to older family members that will be included in their taxable estate, can come back to the donor’s family with a stepped-up basis, taking advantage of the upstream decedent’s estate and generation-skipping transfer tax exclusion amounts.
Finally, the integrated estate plan drafting lawyer should also consider the income and transfer tax efficiencies of the FBO client using discounted-value family owned business equity to fund a qualified GRAT46 that has the client’s spouse as its beneficiary (resulting in a marital deduction gift transfer); the beneficiary spouse could then sell the remainder to an irrevocable grantor trust that he or she has settled for the benefit of his or her children, with a zero income47 and transfer tax result to the beneficiary spouse. Further, if the GRAT is a “Walton GRAT,”48 a favorable estate tax result if the grantor dies during the GRAT term.
Concerning estate taxation, there is one option for lessening the effect of the tax on the family business, and there are three avenues of escape from this tax. The first option is to make installment payments under IRC §6166, where the value the decedent’s interest in the family owned business is more than 35 percent of the adjusted gross value of his or her taxable estate. The three escape avenues are 1) applying the decedent’s available estate tax exclusion;49 2) utilizing the 100 percent marital deduction;50 3) utilizing the 100 percent charitable deduction.51 A final consideration is the issue of basis step-up for assets held in a decedent’s single-member LLC.52
Planning for a zero-estate tax result could combine all three of these escape avenues. At the first death, a credit shelter trust could be funded to the extent of the available estate tax exclusion, and then excess estate value could be allocated to a qualified terminal interest property (QTIP) trust,53for the marital deduction. At the death of the surviving spouse, the remainder of the QTIP trust could be contributed to a testamentary charitable lead annuity trust54 that has the children or other descendants (or trusts for these) as remainder beneficiaries; this charitable lead annuity trust would have a term and an annuity distribution percentage that result in a remainder actuarial value of zero.
With regard to the generation-skipping transfer (GST) tax, at the death of the first spouse to die, the decedent’s available GST tax exclusion55 could be allocated to a GST trust56 and the QTIP trust in favor of the surviving spouse could be a “reverse QTIP” that makes the surviving spouse the “transferor” of the QTIP trust remainder for GST tax purposes,57 with the result that the surviving spouse’s GST tax exclusion is allocated to the QTIP remainder when that spouse dies.58 This GST planning will also take into account issues relating to how interests held in trust,59 as opposed to “direct skip” distributions, are taxed for GST purposes.
Finally, as a capstone to this aperçu of relevant federal taxation issues, the integrated estate plan drafting lawyer should look for opportunities to take advantage of two other planning tools. First, consider setting a multigenerational trust to make gift-tax exempt and GST tax exempt payments for beneficiaries’ qualified medical and educational expenses,60 perhaps as an alternative wealth transfer equalizer in place of giving family owned business equity to children who are not engaged in the company. Second, consider making gift-tax free marital deduction transfers to an inter vivosQTIP trust that gives the beneficiary spouse a limited testamentary power to appoint the remainder of trust property to, or among, a surviving spouse and children, resulting in 1) protection of QTIP trust property from creditors of the grantor and of the beneficiaries, 2) a stepped-up basis for the QTIP trust remainder, 3) utilization of the beneficiary spouse’s estate tax exclusion at his or her death and 4) with a reverse QTIP election, utilization of the QTIP spousal beneficiary’s GST tax exclusion as well.
ABOUT THE AUTHOR
Philip Feist is of-counsel with the law firm of Doerner Saunders Daniel & Anderson LLP in Tulsa. He practices in the areas of estate planning, family business planning and asset protection planning. He is a frequent presenter at continuing legal education seminars and received his J.D. from the University of San Diego School of Law.
1. According to the Family Owned Business Institute of Grand Valley State University, there are 5.5 million family businesses in the U.S., contributing 57 percent of the gross domestic product, employing 63 percent of the workforce, responsible for 78 percent of all new job creation and universally outperforming nonfamily businesses ().
2. John Ward, Growing the Family Business: Special Challenges and Best Practices (Wiley, 1987).
3. See, Robert Holton, “A Critical Look at ‘Survival’ Statistics,” Family Business Magazine, at .
4. Id., citing to Zellweger, Nason & Nordquist, “From Longevity of Firms to Transgenerational Entrepreneurship of Families: Introducing Family Entrepreneurial Orientation,” 25 Family Business Review, 136-55 (2012), published online at
5. 43 O.S. §§201, 202.
6. 10 O.S. §83.
7. 84 O.S. §§44(B)(1), 301.
8. 84 O.S. §44(B)(2). For purposes of a surviving spouse’s election right, Oklahoma is not an “augment” state; instead, the surviving spouses election “applies only to property passing by testate succession and/or under the terms of a revocable trust in which a decedent has some interest that survives his death,” and not to other assets such as pay-on-death accounts and life insurance proceeds. Estate of Littleton, 2013 OK CIV APP 94, ¶15.
9. 58 O.S. §311; however, a surviving spouse has no right to occupy a residence that was the separate property of the decedent (Casey v. Casey, 2005 OK 13).
10. 58 O.S. §311.
11. 58 O.S. §312.
12. 58 O.S. §§314, 318.
13. 58 O.S. §314; note that a decedent’s child support obligation does not survive the death of the obligor unless the support order so provides (Whitman v. Whitman, 1967 OK 162).
14. 84 O.S. §§131, 132, 213(B)(2).
15. 43 O.S. §121(B), 84 O.S. §44(A). See, Griffin v. Griffin, 2004 OK CIV APP 58 (setting out elements of a valid prenuptial agreement); Starcevich v. Starcevich, 2014 OK CIV APP 1250 (elements of unenforceability of a prenuptial agreement).
16. See, Griffin at ¶11.
17. 43 O.S. §207.
18. 84 O.S. §44(B)(1).
19. See, Casey at ¶14.
20. Under Oklahoma law, the expenses of a decedent’s medical expenses become, by statute, the liability of a surviving spouse. 43 O.S. §209.1. Also, if a decedent dies within 180 days after his surviving spouse had filed bankruptcy, the spouse’s interest in the decedent’s estate, and as a beneficiary of a life insurance policy, becomes part of the bankruptcy estate. 11 U.S.C. §541(a)(5).
21. The statutory bases for a finding of incapacity in Oklahoma are set out at 30 O.S. §1-111(12).
22. Discussion of tax-efficient ways to structure ownership of life insurance policies is beyond the scope of this article. However, any such discussion would address the relative efficiencies of the irrevocable life insurance trust and the life insurance partnership, transfer for value rules at IRC §101(a)(2), and premium funding mechanisms including the loan (Treas. Reg. §1.7872-15) and economic benefit (Treas. Reg. §1.61-22) split dollar regimes.
23. Barr v. Dawson, 2007 OK CIV APP 38, ¶8.
24. 31 O.S. §12 (in pertinent part: “the corpus and income of a preservation trust shall be exempt from attachment or execution and every other species of forced sale and no judgment, decree, or execution can be a lien on the trust for the payment of debts of a grantor, except a child support judgment.”).
25. 31 O.S. §13.
26. 31 O.S. §§11(5)(c), (11)(6). Note: Having an inter vivos QTIP trust for the grantor’s spouse is problematic, for these reasons: first, a preservation trust should have a provision that automatically a divorcing spouse from being a beneficiary, but this could disqualify an interest in the preservation trust for QTIP marital deduction purposes; second, if the spouse-beneficiary of the QTIP trust dies and has exercised a testamentary limited power to appoint the QTIP remainder to the surviving grantor spouse, who is also the preservation trust grantor, then the preservation trust grantor would be a disqualifying beneficiary of his or her own preservation trust.
27. 18 O.S. §2054.4.
28. “[T]he debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and, unless otherwise provided in the operating agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of the series.” Id.,in pertinent part.
29. 18 O.S. §2034.
30. These would be limitations on access to beneficial interests by 1) trustee distribution discretion, 2) distributions limited to ascertainable standard purposes and 3) statutory spendthrift protection (60 O.S. §175.25).
31. See, 1) In re Albright, 291 B.R. 538 (D. Colo. April 4, 2003) (with a single-member LLC, there are no fiduciary duties owed to other members, so the bankruptcy trustee, holding all of the equity of the LLC, could dissolve the entity and reach its assets for the benefit of creditors); and 2) In re Baldwin, 463 B.R. 142 (10th Cir. BAP, July 11, 2006) (the power of the bankruptcy trustee who held the debtor’s interest in an Oklahoma limited partnership agreement to dissolve the entity, and thus reach its assets, was determined by the terms of the operating agreement and Oklahoma statute).
32. See, Hopson, James F., “Safeguarding the Family Limited Partnership” (Journal of Taxation, November 2014); Hall, Lance S., “Lack of Outside Appraisal Dooms Buy-Sell Formula Value Fix for Estate Tax Purposes.”
33. The three scenarios set out here do not include in rem jurisdiction of another state over family owned business property located in that state (e.g., In re Huber, 493 B.R. 798 (Bankr. W.D. Wash. 2013)), or possible in personam jurisdiction over the company’s equity owners when the company does business in another state without domesticating itself in that state (see, Note, “The Legal Consequences of Failure to Comply with Domestication Statutes,” 110 University of Pennsylvania Law Review 241 (1961)).
34. Jurisdiction is of several kinds: jurisdiction as to what purpose: subject matter (general, or limited; and, federal question jurisdiction in federal court); jurisdiction as to what person: personal (general jurisdiction, for all purposes relating to the defendant, or special jurisdiction, relating to only particular activities of the party in the state); jurisdiction as to property: in rem (relating to property and interests in property located in the state). Further, jurisdiction requires statutory authority, such as state “long-arm” jurisdiction over nonresidents, and federal “diversity” jurisdiction over parties (having citizenship (not, residence, see Riverboat Group, LLC v. Ivy Creek of Tallapoosa, LLC, 2018 WL 654720 (M.D. Ala. Jan. 4, 2018)) and amount-in-controversy requirements).
35. E.g., Cal Rev & T Code §17743; Cal Rev & T Code §17744.
36. Hanson v. Denckla, 357 U.S. 235 (1958).
37. Equitable distribution is a method of allocating property between divorcing spouses, taking into account any and every interest in property a party may have, however remote or contingent. All states except for Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin follow the principles of equitable distribution. See also, Sildon, “Strategies for Dealing with Divorce and the Family Business,” 33 Estate Planning Journal, July 2006 (addresses issues other property settlement issue than equitable distribution).
38. IRC §§671-679. An estate tax-efficient grantor trust power to draft into a trust agreement is the “equivalent value substitution” power, §675(4), exercisable by someone (e.g. a trust protector) other than the grantor (to avoid this power from potentially falling into the hands of a bankruptcy trustee), which will allow a highly appreciated low-basis trust asset to be substituted out of the trust into the grantor’s hands in exchange for cash or a cash equivalent transferred to the trust, with the result that the substituted-out property will be included in the grantor’s estate and receive a stepped-up basis.
39. IRC §469(h)(1); at issue is whether income is the result of passive or active taxpayer participation in a “trade or business.”
40. IRC §453.
41. Intra-family loans are governed by “applicable federal rates” (AFR) promulgated pursuant to IRC §1274, which are the minimum interest rates that must be applied to intra-family short term loans (having a term of three years or less), midterm loans (having a term of three to nine years) and long term loans (having a term of more than nine years). If intra-family loans bear an interest rate less than the relevant AFR, or if interest is not paid annually, the IRS will impute an “original issue discount” rate to the loan on an annual basis (IRC §7872).
42. IRC §1411.
43. 2017 Tax Cuts and Jobs Act §11011(a).
44. 68 O.S. §2358, Sec. F. – “qualifying [capital] gains” are exempt from Oklahoma taxation; these include capital gains from 1) the sale of corporation stock or LLC units of a company having a continuous physical presence in Oklahoma for at least three years, and which are owned “directly or indirectly” by the taxpayer for at least two continuous years, and 2) the sale of real or tangible personal property located in Oklahoma and “directly or indirectly” owned by the taxpayer for at least five continuous years.
45. IRC §1014(a).
46. IRC §2702(b).
47. Rev. Rul. 85-13 (a sale or exchange between a settlor and her grantor trust are disregarded).
48. Walton v. Commissioner, 115 TC 589 (1993) (the value of a GRAT included in the estate of a grantor who dies during its term will only be the present value of the unpaid term annuity amounts).
49. IRC §2010.
50. IRC §2056(b)(5) & (7).
51. IRC §2055.
52. Only property that is acquired from a decedent gets a basis step-up (IRC §1014(a)), and, for a single-member LLC owned by the decedent, this would be the LLC units not the LLC assets. Rev. Rul. 99-5 holds that, since a single-member LLC is a disregarded entity for federal tax purposes, a sale of half of a single-member LLC’s units is a sale of half of the LLC’s assets. However, in Pierre v. Commissioner, 133 TC 24 (2009), the court held that, for federal transfer tax purposes, a gift of units of a single-member LLC is not a gift of the value of assets, but of the units themselves. If this is the case, then a step-up of the basis of LLC units can only bring favorable capital gains tax results upon dissolution of the LLC and a terminating distribution of LLC assets to the heirs/beneficiaries who hold the LLC units. But, I note this critical distinction between a gift transfer of part of a single member’s LLCs units, and a death transfer of all of the single member’s LLC units at death: a transfer of all of units includes the power to dissolve the LLC and reach its assets, and what is acquired from the decedent single member was this power to dissolve; therefore, if this reasoning is correct, a single member LLC would be, in actual fact, a disregarded entity for transfer tax purposes where all LLC units have been transferred, and the basis step-up should logically go to the LLC assets themselves.
53. IRC §2056(b)(7).
54. The IRS has provided a model testamentary CLAT form at Rev. Proc. 2007-46.
55. IRC §2631.
56. Each GST trust should have only one beneficiary, to avoid “gift-over” complications under IRC §2014(e).
57. IRC §2652(a)(3).
58. IRC §2044.
59. IRC §2611(a)(1) (taxable distributions) & §2611 (a)(2) (taxable terminations).
60. IRC §§2503(e), 2611(b); 2642(c); see also, Handler, “Structuring Transfers and Trusts to Qualify for Gift and GST Tax Exclusions Related to Educational and Medical Expenses,” a paper delivered at the 2006 Joint Fall CLE Meeting of the American Bar Association – Section of Taxation, available at .
Originally published in the Oklahoma Bar Journal -- OBJ 90 pg. 42 (January 2019)