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Recall that Section 83 triggers the recognition of compensation income upon the disposition of NQSOs whether or not the transfer is at arm’s-length. 21 If the employee is the sole participant in the LP or LLC, there is little doubt that the interests she takes back in the exchange equal the FMV of the NQSOs contributed. No discounts should apply because immediately after the transfer she can withdraw the contributed assets and receive back full value. However, the question of value becomes somewhat more murky if others participate in the formation of the LP or LLC, since in that case the value of LP or LLC interest may be eligible for the discounts. Nevertheless, transferring NQSOs to an LP or LLC represents an exchange for value. While Section 721(a) offers non-recognition treatment upon a transfer of “property” to a partnership in exchange for a partnership interest, the rules of Section 83 should override this safe harbor. The income generated by any transfer of the options is compensation income and not the proceeds of the sale or exchange of an asset, capital or otherwise. However, if the employee takes back all the LP or LLC interests at formation, the check-the-box regulations provide that the entity will be disregarded. Instead, the employee will be treated as the continuing owner of the transferred NQSOs and their tax attributes. 22 As a consequence, the transfer of the NQSOs to an LP or LLC owned entirely by the employee should be ignored until the LP or LLC acquires another equity owner. When the employee transfers an interest in the LP or LLC, then the LP or LLC should spring into existence for tax purposes. The 100%-owner should be treated as transferring the NQSOs to the LP or LLC in exchange for the interests the owner holds at that time. 23 This deemed transfer should be subject to Section 83. Therefore, the employee should be treated as receiving compensation income equal to the FMV of the LP or LLC interests received when he transfers interests to his heirs or to trusts for them. As noted above, at that time the interests should not qualify for discounts, so the 21 The question of arm’s-length status seems to affect only whether Section 83 continues to apply to the future exercise or disposition of options by the transferee, not the amount or timing of the income generated in the initial transfer. 22 See Reg. Section 301.7701-2(a). 23 Cf. PLR 200222026. – 9 – compensation income should equal the FMV of the NQSOs. However, because of the relationship of the employee to the LP or LLC, the deemed transfer should be treated as a non-arm’s-length transfer, even though he is deemed to have received full FMV for the NQSOs. As a result, the employee will be exposed to additional tax upon the exercise of the options by the LP or LLC. The result is a bit different if the LP or LLC admits additional partners at formation. However, the tax consequences should be similar. 24 Upon formation, the employee should be treated as making a non-arm’s length transfer of the NQSOs to the LP or LLC, causing the employee to recognize income equal to the FMV of the interests he receives at formation. So, the exercise of the options by the LP or LLC will expose the employee to a second incidence of tax under Section 83. However, since partnership status exists from the outset, there is the possibility that the measure of the income at formation could be less, if discounts are justified by the lack of marketability and control. Nevertheless, the adverse income tax consequences certainly make this strategy problematic. 25 24 The following analysis assumes that the other participants contribute assets in exchange for their interests. If they do not, then the transaction is likely to be treated as a gift of the requisite portion of the NQSOs by the employee to the other participants, followed by their exchange of those NQSOs for their ownership interests. Cf. TAM 200432015. These deemed gifts, of course, would be non-arm’s-length transfers (as would the deemed transfers to the LP or LLC), meaning that the employee would remain exposed to Section 83 for subsequent events. Hence, the deemed transfers by the donees to the LP or LLC should trigger compensation income to the employee, as should the later exercise of the options by the partnership. The author is aware that some commentators cite 2 private letter rulings for the proposition that a donative transfer to a partnership does not trigger recognition under Section 83. See PLRs 199927002 and 199952012. However, it is doubtful that these rulings can be read that way. In characterizing donative transfers as non-arm’s-length, the rulings specifically refer only to gifts to individuals and trusts, not partnerships. This indicates that the rulings did not actually address the tax issues arising from a donative transfer to partnerships. 25 Note that non-arm’s-length treatment probably applies in these situations regardless of the percentage ownership actually obtained by the employee at formation. A partnership is related to the employee if the employee holds as much as 20% of the LP or LLC. Even if the employee actually holds less (which is unlikely if the LP or LLC is being used as a wealth transfer device), he/she
will also be treated as owning interests held by family members. See Regs. Sections 1.83-7(a)(1) and 1.707- 1(b)(3). – 10 –
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Sponsored by 2013 Probate & Trust L
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Minnesota CLE’s Copyright Policy
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Faculty & Planners* Jill A. Adkins
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Table of Contents Plenary Day 1 Non
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17. Marital Deduction Planning and
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PLENARY DAY 1 Non-Tax Case Law Upda
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1. *In re Estate of Neuman and In r
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3. Edwards v. Gillis ..............
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I. UNIFORM PROBATE CODE A. Effect o
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conceived until after decedent’s
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granddaughter. Ultimately, the cour
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the benefit of the person for whose
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814 MCA, which provides that a divo
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524.3-203, persons who are nominate
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also been the sole personal represe
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within the prescribed time set out
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mother’s estate, had breached fid
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plan. The court found that Brown wa
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power of attorney was, in fact, a l
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questions before the court were the
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E. Adverse Possession 1. *Jokela v.
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presumption. Finally, the court fou
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death, her daughter, in her capacit
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3. Estate of Nuo Djeljaj, 954 N.Y.S
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C. Trust Construction but that the
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4. *In the Matter of the Frank J. R
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adding the “general charitable in
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may provide that at least a substan
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including those created for the ben
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D. Spendthrift Clauses Finally, the
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decedent’s execution of a financi
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not negligent. On appeal, the court
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purchasing the insurance but determ
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H. Trust Accounting Disputes 1. Chu
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settlor’s death in 2005, the trus
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entitled to a jury trial because th
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other manner whatsoever disposing o
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the trial judge rejected - as highl
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F. Inter Vivos Gifts community over
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V. POWER OF ATTORNEY A. Improper Us
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FEDERAL TAX UPDATE Important Develo
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• The preferential rates for net
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3. Planning for the Wannabes: Deali
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Suppose, for example, that a marrie
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ESTATE AND GIFT TAX PLANNING AFTER
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after the first spouse’s death),
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First, they will want one or more g
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In Estate of Christiansen v. Commis
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Grandchild A 11,000 Grandchild B 11
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In the end, Wandry is correctly dec
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RECENT VALUATION CASE OF INTEREST (
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uncertainties, ahypothetical buyer
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So portability is achieved by givin
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(5) Special rules. (A) Election req
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million, and H2’s executor makes
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standard, but saves the rest for th
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THE IMAPCT OF WINDSOR ON ESTATE PLA
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Decanting: Refining an Old Vintage
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DECANTING: REFINING AN OLD VINTAGE
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XI. Trustee Liability .............
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D. Change Governing Law E. Trustee
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absolute discretion for some modifi
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K. Court Approval. Court approval i
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eliminate beneficiaries or change t
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precisely, to make certain exceptio
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appointment created under the new t
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If contributions to the original tr
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Qualified personal residence trusts
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enefit the beneficiaries by convert
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B. Notice Required. Other states re
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of the particular state, apparently
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tax consequences. See Tax Effects a
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(ii) at the time the exempt trust b
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BIBLIOGRAPHY Articles 1. Farhad Agh
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APPENDIX I STATE DECANTING STATUTES
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ALTERNATIVE PLENARY Tax Issues (For
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I. MINNESOTA ESTATE TAX - LIFETIME
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NOTE: In the examples below, I will
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At his death, he leaves the followi
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total federal gross estate (line 1)
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Note: in several of the examples ab
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C. Source of Charitable Gift - Ordi
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Many tax preparers relied on that r
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RESULT: •Because the amount paid
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III. DEDUCTION OF MORTGAGE INTEREST
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•Estates with net taxable assets
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05/20/13 HOUSE RESEARCH ANALYST JM
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SECTION 1 Funding Education: The Gi
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E. Five-Year Proration Required ...
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I. Saving and Paying for Higher Edu
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1. TAM 199941013. In Technical Advi
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. Estate Tax. Assuming that the don
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exclusion. If contributions to the
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distribute principal for GC’s ben
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sample trust language was used wher
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university, or (iii) making reasona
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treatment granted by section 529 wi
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and the beneficiary’s family duri
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eginning with the year of the contr
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Rule 5. If, by the due date for fil
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2. Attach Explanation. An explanati
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It is impossible for an account own
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were not making other gifts to thei
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a. Proposed Regulations Tax the Ben
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Prop. Treas. Reg. § 1.529-1(c). D.
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SECTION 2 Avoiding the Uncommon Dif
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2. Discouraging Bad Behavior ......
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problems in a document but so can a
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B. Who suffers from a drafting prob
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succeed to the preceding trustee’
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“ (a) Property a testator, while
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home. When devising recreational re
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to allow the beneficiary to pay off
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The remaining principal and any acc
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outright and free of trust. If eith
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D. Incentive Trusts 1. Encouraging
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that exemptions or deductions allow
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F. Family Business Succession. The
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3. Problems with Allocation of Fami
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SECTION 3 Unlimited Duration Trusts
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3. CONCLUSION .....................
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*In 1995, Delaware enacted legislat
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2. Exercise the power of appointmen
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ii. States: 1. Alaska 43 - 1,000 ye
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4. CONCLUSION vii. New Jersey viii.
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the “prudent man rule” required
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Additionally, many advisors are dra
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investment committee and/or distrib
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1. Significant change in asset allo
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Please see example below of a typic
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IV. DECANTING 1. INTRODUCTION Decan
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. States May Limit Trustee’s Auth
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V. VIRTUAL REPRESENTATION 1. INTROD
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ecome entitled to an interest, if i
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VI. PRIVACY OF COURT RECORDS 1. INT
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iii. Statutes c. South Dakota Proce
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VII. DOMESTIC ASSET PROTECTION AND
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property interests. 206 This can be
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11. EXTINGUISHMENT OF CREDITORS’
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13. SPENDTHRIFT TRUSTS As previousl
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SECTION 4 Drafting and Administerin
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1. Supplemental&SpecialNeedsTrust B
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iii. Discretionary Trust Trusts cre
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v. Vehicle One vehicle used to tran
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ii. Legal Guardian It is generally
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ii. SSA Determination Anyone receiv
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eimburse the State following the be
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else uses the computer from time to
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h. Revocable vs. Irrevocable i. Spe
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Qualified Disability Trust (QDT) ex
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(1) An inventory of Trust assets an
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Assistance benefits paid on behalf
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SECTION 5 Notable North Dakota Nuan
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I. North Dakota Real Property A. No
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a Statement of Claim is recorded by
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1. Any grantee or grantee’s autho
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By North Dakota Information Technol
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insolvent estates. Has priority ove
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(2) Would be a permissible distribu
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o North Dakota has two (2) pooled t
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G. The value of currently owned min
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* * * * * * * * * * * * * * lease r
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eceived, are not considered to be t
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disqualifying transfer provisions i
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ONLINE NORTH DAKOTA RESOURCES Title
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Table of Contents The Beauty and Bu
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--volatility in the financial marke
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For the trustee: If an individual t
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VII. Duty to keep records and provi
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specific information like their fin
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An alternative structure might be t
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--Intellectual property which may i
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SECTION 7 “Bleak House” Reviste
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PROBATE INSTITUTE 2013 HARD TIMES:
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TIP THREE: FOR REALLY BAD FIDUCIARI
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with disfavor on attempts to depriv
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E. Undue influence 1. Must prove te
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Page 395 and 396: STATE OF MINNESOTA COUNTY OF MCLEOD
Page 399 and 400: 5. For such other and further relie
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Page 407 and 408: notations in the memo portion indic
Page 409 and 410: Page 12 costs charged by private de
Page 411 and 412: The Well-Prepared Executive: Person
Page 429 and 430: Stock Options: Sales, Gifts, & Tran
Page 431 and 432: the stock has been held for more th
Page 433 and 434: the initial appraisal is arranged f
Page 435 and 436: not property for purposes of Sectio
Page 437: emains the owner for income tax pur
Page 441 and 442: ealm of the estate tax. This is con
Page 443 and 444: eneficiary, as the case may be, wil
Page 445 and 446: CONFIDENTIAL Appendix
Page 447 and 448: Summary of Option Strategies 5. to
Page 449 and 450: Summary of Option Strategies 10. Co
Page 451 and 452: Transferring an asset via a GRAT re
Page 453 and 454: A CRT can result in greater total v
Page 455 and 456: IRA Rollback Strategy Pension Rescu
Page 457 and 458: Use Interest Rate Swaps to Lock in
Page 459 and 460: How does a 10b5-1 plan work? 1 2 3
Page 461 and 462: SECTION 9 Spousal Elections Under M
Page 463 and 464: 1. INTRODUCTION Minnesota, as in ma
Page 465 and 466: . 1969 Version In the 1969 statutor
Page 467 and 468: each other. 11 The statutory notes
Page 469 and 470: (b) Personal property not exceeding
Page 471 and 472: category includes properly gifted t
Page 473 and 474: .) Next, assets owned by the spouse
Page 475 and 476: 4. Unspoken fourth: The spouse and
Page 477 and 478: Table of Contents Crummey Power Pro
Page 479 and 480: however, that my Spouse’s power t
Page 481 and 482: Estate or the proceeds of such asse
Page 483 and 484: such Power Holder is entitled to wi
Page 485 and 486: 1.2 Discretionary Payments From Ini
Page 487 and 488: didn’t occur) a long time ago? 1
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Upon my spouse's incapacity or deat
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Trustees of the Separate Trusts *Op
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Unfilled Trustee Vacancy If the off
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the independent special trustee. An
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Removal and Replacement of Trust Ad
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Definitions 6 Compensation Any Trus
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Trust Asset Diversification and Con
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As a Grantor Retained Annuity Trust
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ultimate burning out of the sun and
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Granting and Exercising Powers of A
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POWER TO CHANGE LIMITED POWER INTO
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Single Fund QTIP Marital Trust Inco
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5.8 Reverse QTIP Election. The Trus
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SECTION 11 Federal and Minnesota In
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Federal and Minnesota Individual Ta
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qualifying charities. Distributions
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iii. In the Reesink case, taxpayer
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The 10% threshold applies to all ta
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A Baker’s Dozen of Dangerous Assu
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In short, domicile is the combinati
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choice of law process in the render
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Germany is one such example of a co
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The US State Department lists the v
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In every other case, a foreign trus
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SECTION 13 Drafting Documents With
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Drafting With the Corporate Trustee
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date, then include a copy with the
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step daughter two months before her
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2. Borrowing in an irrevocable trus
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estrictive access to principal. Con
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SECTION 14 The Current Status of Wi
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I. History of the Wisconsin Trust C
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d. A final accounting is required b
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a. ULC promulgated the uniform prin
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3. Irrevocable trusts may be modifi
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7. A trustee may delegate its dutie
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fiduciary or confidential relations
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6. The new code will eliminate the
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. The standard of care that applies
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23. The subchapter dealing with lia
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Electronic reproduction of 2011−1
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Fiduciaries and Fighting Families:
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3. Who should attend 4. Agenda or f
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TABLE OF CONTENTS I. INTRODUCTION .
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I. INTRODUCTION MEDICAL ASSISTANCE
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has decided to increase reimburseme
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the problems they cause for some co
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change only when Social Security pa
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PRACTICE TIP: When the Asset Assess
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2014. i. If the community spouse do
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g. making income or asset methodolo
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less than the asset’s value on th
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amount of the transfer was $25,000.
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Example: the transfer penalty and t
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allow a recipient's current income
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facility admission or readmission t
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The NF LOC Initiative has been hard
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was not [sic] made exclusively for
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1. Prior to February 8, 2006, the p
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follows: [Undue hardship] exists wh
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claim in both Estate of Barg and In
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federal law. See 42 U.S.C. § 1396p
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called "MA for Adults Without Child
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The starting point for redesign of
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programs, available in the State. S
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If the enrollee is required to sati
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Art. 2, Sec. 4, amends Minn. Stat.
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Art. 2, Sec. 30, amends Minn. Stat.
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MARITAL DEDUCTION PLANNING: First C
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(1974); PLR 7902020 (ruling gift to
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(A) Then do your other language—d
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to any jurisdiction.” Michael Mul
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2) Fractional share: As the value o
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d) The amount subject to the electi
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Form 706 is due nine months from th
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C. Gift Tax 1. EGTRRA partially sev
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three years, when Fred would have t
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equired beginning date, and they wi
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SECTION 18 Estate Planning Issues f
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Table of Contents 1. Initial consid
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termination notices should be filed
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If the Fiduciary is released from p
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c. Relief is requested by using For
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when ordinarily due. Use, for examp
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SECTION 20 Portability Under the Ne
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I. HOW TO MAKE THE ELECTION PORTABI
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espect to such an estate, for beque
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decedent, which together is the amo
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of the surviving spouse’s death.
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GSTT election or a portability elec
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VI. THE TEMPORARY REGULATIONS PART
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(c) Credit limitation. The applicab
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(7) Requirements of return— (i) G
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property of the marital trust relat
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(ii) Application. H’s DSUE amount
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(i) If the executor of the decedent
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Table of contents This section list
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death. Thus, the decedent’s DSUE
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SECTION 21 New Lawyer Panel: “Wha
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I. Introduction Building & Managing
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Being the beneficiary of a trust Fu
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clients what you are doing for them
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Be aware, however, that sometimes y
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Estate and Trust Administration 101
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Obtain Asset Information You should
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2. Other “Non-Probate” Assets S
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(ii) the pages of the trust agreeme
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The total value of the probate asse
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Surviving Your First Probate Procee
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4. Closing the estate - Statement t
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Table of Contents Estate Planning t
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. In order to qualify for the $14,0
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1. Minnesota does not have a gift t
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a. Within 9 months of a completed l
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in excess of the applicable estate
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Preparing Your First Estate and Gif
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E. Other Notable Items There are a
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SECTION 22 Small Estates Panel - Pr
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I. Introduction Disclaimers have lo
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epresentative.The writing should in
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IV. The Disclaimer-Based Estate Pla
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Grandchild B $11,000 Grandchild C $
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formula similar to the one used inW
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Small Estates Panel Peter M. Hendri
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assets must have been subject to an
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A. The Doctrine of Advancements, Ho
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promissory notes and/or mortgages,
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advancements. The Court opined that
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a) Filing a gift tax return for gif
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TABLE OF CONTENTS I. INTRODUCTION 1
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emains private both during the owne
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for many of the same reasons as a w
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I. REVOCATION BY SPOUSE NOT IN TITL
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TODD, the county Medical Assistance
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PRACTICE TIP: To avoid the complica
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Subd. 3.Rights of creditors and rig
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A transfer on death deed that other
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conveyance or transfer is condition
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COMMENT: See above Question and Ans
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SECTION 24 Sales of Real Estate: Fr
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B. Listing Agreement 1. Key terms a
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c. Deed/Title d. Deferred Taxes/Ass
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A. “Property” Documents 1. Deed
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SECTION 25 A Gift for All Donors: A
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I. INTRODUCTION. Often philanthropi
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4. The trustee of a CRT may be an i
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4. If a trust is measured by the li
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III. RETIREMENT ACCOUNT GIFTS. A.
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C. Income Tax On Withdrawals from R
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. P might consider making such a gi
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vii. viii. Income taxes. Amounts di
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v. Income tax. The IRA with S as be
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3. The trustee of the CLT makes def
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V. PRIVATE FOUNDATIONS. A. Definiti
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4. Net Investment Income. An excise
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c. Ordinary Income Property. Only t
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SECTION 26 Incentive/Disincentive P
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PLANNING AND DRAFTING FOR THE USE O
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descendants, the client clearly wil
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E. Special Family Needs. In some fa
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age and the child or grandchild cou
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D. Division of Trust. Since incenti
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SCHEDULE 1 SAMPLE PROVISIONS 1. Def
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6. Distributions to Match the Benef
Page 927 and 928:
cooperate with the trustees in esta
Page 929 and 930:
16. Other Resources. In making disc
Page 931 and 932:
expenses; (B) to provide a Benefici
Page 933 and 934:
Grantors further recognize, should
Page 935 and 936:
dental insurance premiums, or other
Page 937 and 938:
the Trustee on a regular basis for
Page 939 and 940:
(B) (C) (D) Trustee’s Authority t
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(3) The costs of initial whole body
Page 943 and 944:
SECTION 27 New Law Update - Changes
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A committee was formed within the V
Page 947 and 948:
than one attorney-in-fact is design
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I, (the above named Principal),here
Page 951 and 952:
Acknowledgment of notice to attorne
Page 953 and 954:
IMPORTANT NOTICE TO THE ATTORNEY(S)
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Estate Planning and Administration
Page 957 and 958:
iii. Former attorney and Ebay selle
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client to make such a list. In assi
Page 961 and 962:
1. A reminder to update the digital
Page 963 and 964:
the Will and not the Trustee in the
Page 965 and 966:
iii. Minn. Stat. § 609.891: Unauth
Page 967 and 968:
c. If device is password protected,
Page 969 and 970:
1. When planning ahead, review of s
Page 971 and 972:
n. For a blog, consider whether the
Page 973 and 974:
EXHIBIT A Digital Asset Inventory I
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8. Is there any sensitive informati
Page 977 and 978:
Table of Contents I. Client with Di
Page 979 and 980:
1.6(b)(3) to reveal information abo
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Probate & Trust Law Section Conference Manual ... - Minnesota CLE

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