Welcome to TaxView with Chris Moss CPA Attorney
For those of you married couples who earn substantial income in the entertainment industry, the 2019 best estate plan in my view is to have your Loan-Out LLC owned by a Family LLC or what I refer to as a Holding LLC. Why? If your retired parents, the “grandparents” of your children, have already gifted to you up to the their lifetime exemption---which in 2019 is a record $22.8M married and $11.4M single, the Loan Out estate plan might allow them to “invest” rather than “gift” additional assets to Holding LLC as part of a comprehensive estate plan. Such an investment would transfer assets prior to the 2020 elections, thus avoiding the possible decrease in 2021 of their lifetime exemptions. Ask your CPA Tax attorney to create SLAT/DAPT his and her trusts in one of 17 DAPT friendly states to own the Holding LLC to keep the structure safe and protected when the IRS audits your parents estate years later claiming that the additional investments your parents made were in fact disguised gifts or worse never left their estate at all. How? Stay tuned in to TaxView with Chris Moss CPA Attorney and find out how to bullet proof your entertainment industry Loan-Out estate plan from IRS attack.
As part of a comprehensive estate plan, your CPA tax attorney should create two Lifetime Access Trusts, one for you and one for your spouse integrated within a Domestic Asset Protection Trust state. There are now 17 DAPT states by law: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Both spouses would be trustee for each other, and a third Independent Trustee would be appointed with your children as the beneficiaries. The SLATs would then acquire Holding LLC. Holding LLC would own Loan Out LLC and also own any Rental LLCs operating either commercial or residential real estate. Holding LLC also can convert your primary residence, but not your parents, into a residential rental property where you would end up tenants with Holding LLC as Landlord. You then have your parents without filing gift tax returns make a legal arms length “investment” in Holding LLC as Purdue did in Estate of Barbara Purdue v IRS 2015.
Grandparents, Mr. and Mrs. Purdue, and their tax attorney created the Purdue Holding company PFLLC for various non-tax reasons including asset protection , which acquired all their assets. Various Purdue trusts were created funded with children and grandchildren beneficiaries. Over the years the trusts acquired more and more ownership of PFLLC. After the death of Mr. and Mrs. Purdue, the IRS audited the Estate Tax return and issued a notice of deficiency for estate and gift tax. The Purdue estate appealed to US Tax Court in Estate of Barbara Purdue vs IRS 2015.
Judge Goeke of the US Tax Court asks whether the value of the assets from the Trusts transferred to PFLLC is included in the value of their estate under various IRS clawback provisions in IRS Code 2036(a). The court notes that the purpose of IRS Code Section 2036 is to include the value of testamentary inter vivos transfers in the value of the deceased taxpayer’s gross estate that were not made for a bona fide sales price with adequate and full consideration. The Court further points out that in the context of a Family LLC the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the Family LLC and the beneficiaries received partnership interests proportional to the value of the property transferred.
Judge Goeke argues that this estate plan was more than “circuitous recycling of value” citing Estate of Harper vs IRS 2002. “With regard to recycling of value, we have stated that when a decedent employs his capital to achieve a legitimate non-tax purpose, the Court cannot conclude that the taxpayer merely recycled his shareholdings” citing Estate of Schutt vs IRS 2005. The Court concludes that having found a legitimate nontax purpose for PFLLC we find the transfer as not merely an attempt to change the form in which Purdue held their assets and that full and adequate consideration is satisfied, citing Estate of Stone vs IRS 2012. Purdue wins, IRS loses.
How does this apply to you? Create the SLAT/DAPT to own the Holding LLC in 2019 or 2020. By all means allow your parents to invest in Holding LLC without them retaining any power of appointment type powers for their ownership interest. Do not make the mistake of setting up a Holding LLC and giving a power of appointment to your parents, as did Strangi in Strangi v IRS US Tax Court 2003. Appealed to the 5th Circuit Affirmed 2005. In that US Tax Court case Judge Cohen at the US Tax Court grappled with whether the value of the property transferred by Albert Strangi to the Holding LLC and related LLCs and Corporations was includable in his gross estate pursuant to IRS Code Section 2036(a). The Court concludes that the arrangement placed Strangi in a position to act, alone or in conjunction with others, through his attorney in fact, to cause distributions of property previously transferred to the entities or of income therefrom. Decedent’s powers, absent sufficient limitation, therefore, fell within the purview of IRS section 2036(a). What kind of limitations would be sufficient? The Court cites Supreme Court case US v Byrum. The US Supreme Court argues that the existence of an independent trustee with the sole authority ultimately to pay or withhold income from the trust would be a sufficient limitation. Judge Cohen points out that Strangi owned 47 percent of his family LLC and was the largest shareholder. All decisions ultimately where made by Strangi’s attorney in fact. Strangi of course didn’t have a SLAT/DAPT own the family LLC with an independent trustee, and therefore, IRS wins Strangi Loses.
What does all this mean for the high end Entertainment Loan-Out Industry, asset protection and estate planning? First you can not have a multiple Loan-Outs earning substantial income and expect- if audited by the Government- to win an IRS audit without a comprehensive estate plan set up for non-tax reasons like asset protection and family unity. This requires in my view Holding LLC to own your Loan Out LLC. Second, create a SLAT/DAPT in one of the 17 asset protected states, with an independent trustee to acquire Holding LLC, its 100% owned Loan Out LLC and Rental LLC. Invite your parents to invest in Holding LLC avoiding the IRS Code Section 2036(a) traps discussed in Strangi and Purdue. Make sure the SLAT is created in one of 17 DAPT friendly states. You, but not your parents, can become tenants in your primary home if acquired by Holdings LLC. If you work with a good CPA Tax Attorney who will file all your tax returns including the Holding LLC partnership and your personal returns--- and---who will be around to defend against any IRS audit when your parents pass, you can rest assured that your estate assets will be safe and well protected for many generations to come.
Thank you for joining us on TaxView, with Chris Moss CPA Tax Attorney.
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