A. Integrated Estate Planning Trust

Integrated estate planning involves incorporating an asset protection component into the overall estate plan. The Integrated Estate Planning Trust (“IEPT”) lies at the heart of Domestic Asset Protection Planning. An IEPT will generally involve the use of a Limited Liability Company (“LLC”) and one or more Private Annuities. For example, a typical estate plan involving highly appreciated real property will include the following steps: First, the real property is placed into an LLC in exchange for membership units. The transfer of the property into an LLC is not considered a change of ownership under the Revenue & Taxation Code, and therefore the property is not subject to property tax reassessment. The LLC will provide the first level of asset protection. High risk properties, such as apartment buildings, should be placed into separate LLC’s in order to segregate and protect those properties not involved in a lawsuit. Second, an IEPT is created. An IEPT includes special provisions that allow you as the beneficiary of the trust to be treated as the owner of the trust for income tax purposes, but not for gift or death tax purposes. Third, membership units are transferred to the IEPT in exchange for a deferred Private Annuity.

The highly appreciated real property can be sold by the IEPT without the immediate recognition of capital gain, but first, a second trust structured as a non-grantor trust needs to be created. After the buyer is found, but before opening escrow, the LLC distributes the real property to the IEPT (the holder of the LLC membership units). The IEPT then sales the real property to the non-grantor trust in exchange for a second Private Annuity. This sale results in the real property receiving a step-up in basis to its fair market value at that time. The real property can now be sold to a third party by the non-grantor trust without immediate recognition of capital gain on the sale. There are significant tax and economic benefits to this estate plan because the entire proceeds from the sale can be reinvested and working for you. Also, part of the proceeds held by the non-grantor trust can be used to purchase a Guaranteed Life Insurance Policy on your life.

Most Irrevocable Life Insurance Trusts oftentimes referred to as Wealth Replacement Trusts are structured to receive annual

Integrated Estate Planning Trust

B. Private Annuity

A Private Annuity is a well established estate planning technique that has received broad acceptance by the IRS and the courts. Private Annuities have been around in some form for 75 years. There are many benefits of a Private Annuity such as avoidance of gift and death taxes, protection from creditors and income tax deferral on the sale of appreciated assets. A Private Annuity will avoid gift tax if the fair market value of the property transferred equals the present value of the Private Annuity. A Private Annuity is not subject to fraudulent transfer law because no gift is involved. However, like a gift, a Private Annuity severs ownership of valuable assets, and the fact that it ends at the annuitant’s death makes the Private Annuity very unattractive to creditors.

Generally, Tax Planning and Asset Protection Planning have conflicting outcomes. However, Private Annuities will mitigate the tension between Tax Planning and Asset Protection Planning when they are used as part of an Integrated Estate Plan.

Private Annuity Trust

C. Employee Stock Ownership Plan

Generally, a corporation does not get a tax deduction for redeeming the shares of stock from a shareholder. Paying for the stock in after-tax dollars can cripple a closely held corporation. An Employee Stock Ownership Plan (“ESOP”) can purchase stock from shareholders of a closely held corporation with pre-tax dollars, and thereby, conserve cash inside the corporation. An ESOP can purchase the stock using debt or a Private Annuity. A Private Annuity should be used where the ESOP is purchasing S-corporation stock. An ESOP can provide an exit strategy for shareholders of a closely held corporation. Also, an ESOP can provide an opportunity to diversify family holdings, and increase cash flow. You can keep control over the day-to-day aspects of the corporation because voting rights of the ESOP participants can be limited to mergers, re-capitalizations, dissolutions and the like. There are a number of significant tax benefits to the shareholders and the corporation in selling shares of stock to an ESOP. However, these tax benefits apply only to sales of C-corporation stock. However, the use of a Private Annuity will provide significant tax benefits for a shareholder of an S-corporation. For example, a Private Annuity sale will result in tax deferral. A shareholder can defer taking the payments without causing a current tax problem.

1. FLP with ESOP

An FLP can be used to provide immediate estate and gift tax benefits. For example, a shareholder transfers stock to an FLP in exchange for FLP interests. The FLP then sells the stock to the ESOP in exchange for a Private Annuity. An IEPT created by the shareholder holds the FLP interests. Annuity payments from the ESOP are made to the FLP. The FLP then makes distributions to the IEPT. The money and other assets can accumulate inside the IEPT and remain safe from creditors and outside of your estate for death tax purposes, or be distributed to you or applied for your benefit. Thus, this Integrated Estate Plan gives you many significant tax benefits with exceptional asset protection. Alternatively, the shareholder can sell the FLP interests to a Defective Grantor Dynasty Trust (“Dynasty Trust”)

FLP with ESOP

2. CRT with ESOP

A shareholder of a C-corporation can rollover on a tax-deferred basis 30% of the proceeds from a sale of stock to an ESOP into qualified replacement property. Qualified replacement property generally includes stocks and bonds. If the shareholder is charitably inclined, additional tax savings are realized by contributing the replacement property to a Charitable Remainder Trust (“CRT”). The shareholder receives a current income tax deduction and the CRT can sell the replacement property tax-free. The proceeds from the sale of the replacement property are generally invested in corporate bonds or other high yield investments. The shareholder will receive income payments from the CRT for the rest of his or her lifetime and if married for their joint lifetimes. At the shareholder’s death or on the surviving spouse’s death, as the case may be, a charity or charities of their choice will receive the remaining assets of the CRT. Alternatively, an IEPT can create a CRT and be designated the beneficiary of that trust. Thus, the IEPT will receive the income payments as the beneficiary of the CRT instead of the shareholder. Part or all of the income payments can be used to purchase a Guaranteed Life Insurance Policy on the shareholder’s life. At the shareholder’s death, the insurance proceeds, will pass to his or her children, or other beneficiaries, tax free, and replace the assets that pass to charity under the CRT. Everyone benefits from this Integrated Estate Plan. Even Uncle Sam benefits indirectly to the extent that public funds are not needed to pay for charitable programs because private funds are made available.

D. Welfare Benefit Plans

A Section 419 Welfare Benefit Plan will require Corporate contributions to a Welfare Benefit Fund which is usually a trust. The corporation gets a present deduction for the contribution. A Welfare Benefit Fund makes up part of a plan through which welfare benefits are provided to employees or their beneficiaries. A Welfare Benefit is any benefit other than deferred compensation. For example, death benefits and severance benefits. Welfare Benefit Plans are generally funded with life insurance that more often than not provide for severance benefits. The trust is taxable so life insurance makes sense because there is no tax on the cash value build-up inside the policy.

1. Tying the Private Annuity, ESOP and Welfare Benefit Plan Together

A Shareholder of an S-corporation will sell highly appreciated shares of stock to an ESOP for a Private Annuity. The S-corporation will establish a Section 419 Welfare Benefit Plan and as part of the plan a Welfare Benefit Fund is created as a Wealth Replacement Trust. The S-corporation makes tax deductible contributions to the trust which are used to purchase a Guaranteed

Tying it all together.