Trust Test 3
Settlement options for life insurance policy
- Can be paid out in cash for life insurance policy or there is the interest option (ex. company keeps policy amount and pays interest); Fixed amount: amount of policy paid out in installemtns. Fixed period: company holds the proceeds but pays guranteed interest rate over a certain period. Annuity option. - We'll go with cash option, because otherwise its delegating and well as violating duty to take and keep control.
Husband has 50 million, Wife has 50 million,
- Can have Credit Shelter Trust and Marital Deduction trust. 11,180,000 passes in credit shelter and 38,820,000 passes into martitle deduciton trust. Wife's plan is the exact same since they don't know who will die first. Credit shelter says income to wife, 5 and 5, remainder to daughter. Maritle deduction says at lest all income paid anully to wife. Since 11,180,00 can be passed estate tax free and so can the money passed to spouse, this plan allows no estate tax.If wife dies second, her 50 million pls the 38,820,000 passed from husband is taxed. This was good because it dealys taxation. Now, however, portibility makes this obsolete and no better than ordinary will. Portability lets married couples pass 22 million estate tax free. Some spouses still use formrer plan
2 Types of Charitable Trust: Charitable Remainder annuity Trust & Chariable lead trust
- Charitable remainder: Bill and Aaron are both 65 and went to Campbell; no children and home worth 300,000. Also have farm that for development purposes is worth 30 million. Income tax basis is 100,000. Options: 1. Sell the farm: End up paying capital gains tax and cost of sell from broker. They end up netting 20 million, and they put it in a CD that pays 4%. They get 800,000 in taxable income per year. 2. Transfer land to trust: They are beneficary and Campbell University is remainderman. Duty of impartiality prevents Bill and Mary from being favored for it to produce income for them while they are alive, although sometimes the charity would shut up and allow it, making it so that the income tax chariatble deduction was way overstated from what it really was. Congress said if you want to do it, you have to havee a CRAT: annuity that lets creator select % of inital value of trust (at least 5%) instead of income in its traditonal sense Ex. 5% of 30 million each and every year for their liftime regardless of value of principle. OR CRUT: unitrust is a fixed percentage of adjusted value of property, so if property value dobles then payment doubles and vice cersa. OR Pooled Income Fund: trustee is the charity. EX. Bill and mry transfer land, Bobby Bill transfers stock, and hundreds of others transfer something into pooled income fund for a chairirty. Each person doesn't recieve income from property they gave, rather a % of all income generated
If you have a corporate bond and company is trustee, what are your duties?
- If not defaulted (failure to make payments): 1. Authenticate bonds 2. Registar of bonds: keep records of bonds. Important for coupon bonds formally. - If defaulted 1. Do everything possible to make company pay. Even if they have to raise money by making cuts like firing employees, or otherwise they can sue you/your organizaiton
Powers of Appointment tax consequences of lapse in power
- Incoe beneficary has noncumulative right to demand principle: "100 million trust income to Billy remainder to Adam." Document says Billy is entitled to income and noncumultive (doesn't carry over) annual right to demand 20 million from principle. If Billy skips making a demand in 2018, then its a lapse in power and we genrally consider this to be a gift. Exception is 5 and 5 rule: lapse is a relase only to the extent that power to demand exceeds greater of 5,000 or 5% of principle. In example, 5% of 100 million is 5 million and he had right to demand 20 million, so every year he lapses in power its a 15 million taxable gift to adam. From a drafting standpoint, this is why beneficary should not have right to demand greater of 5 and 5 rule. DONT SAY A SPECIFIC DOLLAR AMOUNT (like the 100 million)
Types of employee benefit plans
- Pension: defined benefit plan/trust. Employee provides benefit that he is trying to provide. Ex. Campbell defines benefits that they'd like to provide is 80% of employees average income over their final 5 years of employeement. So if Witherspoon's average income over last 5 years is 100,000 then they'd like to provide 80,000 for him. If its an intergrated plan, then SS in inlcuded, and the employer would pay less than the 80 and let the SS handle the rest of the 80. If nonintergrated, employee gets SS + full 80 paid by employer. If they set up a nonintergrated plan, will write a check each year to trustee, who will invest it with the goal of making it so that enough money will be in the plan to let employer pay the employee in their full retirement when the time comes; so how much is to be contributed each year? This info needs to be provided to actuary: 1. Ages of employee 2. Sex of employee (women live longer than men) 3. Historical turnover rate 4. Anticipated death rate 5. Benefit you want to provide 6. Anticipated income on the contributions. Using this, the actuary tells them how much to contribute each year. In this pension/defined benefit plan, they have to make this contribution no matter what each year.
Types of employee benefit plans: IRA (**look up vesting and how long you can be required to work before participating)
- limitations of when you can draw out benefits - limitations to what you can contrubute - Two types: 1. Traditional: lets you get an up-front income tax deduction. Ex. If you contribute 5,000 to it and up front is 100, you only pay tax on the 95. When you finally draw out form the IRA, you pay full amount on what its grown to (not just what you contributed) 2. Roth: No up-front income tax deduciton. Contribution after tax deducted from it. When you withdraw, its income-tax free. Don't try to time it so that its a good time on the market... don't be hasty and withdraw too early; let it keep accumulating.
2 Types of Life Insurance Trust: Business Liquidation (INCOMPLETE)
1. Business liquidation: A) Key man trusts: Coverage set up on one partner who is especially important to the worth of the business B) Funded Cross Buy/sell agreement: "A,B,C are all partners, whcih means it termaintes on one's death and their estate is entitled to 1/3rd share of the company. How will 1/3rd be paid off without liquidation or debt? They need to enter into the agreement when all are alive, each buying a policy on the other two. Each of the 6 polices is payable to a trustee, who pays the estate of the dead partner in exchange for their interest in the business. Issues: if value of company doubles, insruance coverage needs to be interest. Also, they want their interest to pass to their child; but if they do this, B and C might conllude to ignore the family and their interest, which would make it hard to sell if they change their mind. If a corpaotion instead of partnership and all earn 1/3rd, when one dies their stock goes to family and it doesn't dissolve; BUT other two can still collude against the family's interest, which can decrease the value of the stock; if the other two hate each other and can't get along, it also decreases its value; if they collude, unlike partnerhsip, not entitled to profit. The other two can agree not to pay the family interest dividends and can instead do somehting like increasing their own salaries if they happen to hold a position within the corporation.
Power of appointment can be exercised...
1. During their lifetime: 2. At death 3. At either one
Settlement of estates: The Geico Lizard dies. As executor of his estate, we follow 4 steps..
1. Martial the assets: gather up and take control of assets 2. Pay debts, taxes, or expenses 3. Collect anyhting due to the estate 4. Distribute whatevers left to whoever is suppose to take it. OR 1. Procedure to appointment as executor: ex. if testator owned grocery store and managed and operated it, before we're even appointed we should make sure perishable goods are taken care of. 2. Appointment of executor 3. Assembling the property 4. Safe-keeping the property 5. Interim management of property: 6. Paying debts, taxes, and expenses: 7. Accounting to the court for the administration of the estate 8. Distributing the property
Types of bonds:
1. Mortgage bond: collateral backs up repayments; probelm is some collateral isn't as much as the bond issuance. 2. Debenture bond : No collateral; lending money on good faith and credit of the company 3. Income bond: Bondholder can only go against income of the corporation 4. REvenue bond: only thing bondholder can go against revenue (ex. Municipal bond for E-Twon; only tax revenue not town hall or other buildings_ 5. Sinking-Fund: On the date bonds are to be repaid, the CEO of the company is totally unprepared, so with a Sinking-Fund it would work out since the corporaton would have made a contribution to the "sinking fund" every year, which is invested by the trustee so that upon maturity there is hopefully enough to payback. 6. Convertible bond: If an indenture says holders can exchange each bond for 20 shares of stock up until maturity date. Can make corporate bonds more attractive than municipal. Ex. If market price of stock if $40 per share an issuance and you paid 1,00 for bonds then you would not want to convert now because you'd only have 800. Converstion price tells us that break even point would be 50 per share. Convertible bonds usally pay less inteest than non-convertible's since they have this right included. Conversion price will be well above mrket price. Something investors might be benefit form in the long-run. Stockholders might get mad at this since more holders would dilute the value of the stock.
Purposes of employee benefit plans
1. Provide for employees who become incapacitated before retirement. 2. Provide a pension income 3. Provide a share of the profits 4. Enable them to become part owners in the company 5. Reward employees for distintive service\ 6. Encourage employees to be productive 7. Reduce turnover and attract employees
Agency relationships
1. Safe-keeping agency: All your function is to safe-keep property thats been intrusted to you 2. Custodial agency: Have some type of ministerial duty (like collecting interest, dividends, etc) 3. Managing agency: Actively manage the property (typically portfolio). May or may not can be agressive in trying to grow managing agency account depending on if the document allows us; not every managing relationship account will be the same in this way - Ex. Billy Bob is meeting with Sheldon Addilson the "big enchaladia" of their relatonship is to have an big irrevocable living trust with everything in it. Probably not gonna be this at first because he's a very wealthy man who deals with several other banks as well. Most likely will need convince him to bring more and more of his assets over over time. Managing agency account is typically the inital relationship you'll establish with a very wealthy person. This is why they're important.
Step 7: Account
After submitting initial account & inventory to clerk, now submit a final to them. Hopefully they will declare that we have completed our job as executor
If you have a contributory plan, do you want to contribute before tax dollars or after tax dollars?
Always before tax
Charitable lead trust
Consider to be inverse of charitable remainder trust. They operate for a set term and payments are made to one or more charitable beneficaries during that time period. After this period is up, the reminder is distrubted to a non-charitable remainderman like a family memeber. Can save income, state, and gift tax on money ultimately passed to a fmaily memebr. - "A (10 million cash) to T income to Campbell for a set time period (up to 20 years), remainder to A's son B." Campbell recieves the income and realized capital gains that belong to principle for 20 years. - People started telling chairity to shut up and to let trustee violate imprtality rule to focus on growth. Congress stopped this by making the chairity recieve a fixed percanetage of inital value of at least 5%. In the previosu example, if Campbell reieves 5% on 8 million, A gets income tax deduction and if principle is 30 million in 20 years then you've passed 30 million to B and only paid gift and estate tax on 2 million.
Vesting schedule example: year one 5,000 year 2 5,000 year 3 5,000 year 4 5,000. At end of year 2 account grown to 14,000, 32,000 at year 4, 68,000 at year 6. Vesting schedule tells you how much you would forfit if you left the company. Ex. At year 2 20% vested, year 6 60% vested, etc. If left at year 2, you forfit 80% of your account. - What can a vesting scheudle not do? - What about your contributions to a plan (assuming its contributory)?
Discriminate in favor of highly paid executives - Your contirbutions are 100% vested.
Other ways to give to charity
Does NOT have to be in trust (test question). write a check and give as a gift; can also give apprecaited property like stock, real estate, gold, babe ruth card, etc. If income tax basis is 100,000 and fair market value is 1,000,000 then selling a property would be taxable on its capital gain, which can be a big chunk and can bring your total cost to 1 million + tax. You get a deduction, because its a gift, of 1,000,000 but not enough. Giving stock can be esprically bad since if you hold it for a lost it could have been used to offset it against a capital gain.
Employee Benefit Trust
ERISA: Employee retirement income security act - Employee benfit plan or trust: "any fund estblished for one or more employers for providing employees, their families, or their dependents medical care, hostpital care, disability benefits, retirement benefits, annuity benefits, and healthcare services that meet statutory requirements." (plans not mutually exclusive) - Self-administerd plan: the employer provides the funds and administers the plan without the aid of a trustee or insurance company. - Insured plan: employer or trustee purchases life insruance or annuity contracts - Trustee plan: employer provides cash, trustee invest it and pays out certain benefits. - Split-Fund Plan: combination of trustee and insured plna - Non-contributory plan or contributory: Only employer makes contribution vs employer and employee make contributions - Negotiated plan: a plan thats worked out among a number of companines within an industry. Ex. Union negotiates plan that if an employer quits Toyota that keep their benefits as long as they stay in the same industry but just go to a different company - Qualified plan: Three tax results: when employer makes contribution its tax deducitble to them, earnings accumulate income tax deferred, and employee pays income tax on benefits when they're finally paid. Test for it being qualified: has to be nondiscrimantory (cannot discrimnate in favor of highly paid officers and executives of company) & must cover a sufficetn specified portion of the employees (does not have to cover all employees) & purpose of plan must be to offer employees either a share of profit or retirement income & It must be established with the intention that it will be a permenant plan. & It must be in writing & it must be communicated formally to the employees
Types of employee benefit plans: ESOP
Employee Stock Owernship Plan 1. Stock purchase trust: can buy certain number of shares each year at a discount. 2. Stock bonus trust: Company gives you X number of shares; - This helps employees have loyalty and feellike they have a stake in the company
Types of bonds #6: Reemable/callable bonds
Ex. 2048 maturity date, 5% bond, 1,000 par, by Duke Power. This 5% is the current maket rate, whih changes over time. When maket rates go above or below 5, then the price moves inversely. - If you look out a 9% morgage and interest rates drop, then you'd like refinance. Opposite is also true. Knowing that interest rates flucuate over time, corporations also like to refinance bonds if things are or are not in their favor...have power to call bonds in. Typically does not work out in the investors favor, with it being redeemed at the worst possible time for them since pirces and interest rates move in opposite directions. - **look up**To make attractice, they have to pay a higher intrest rate like an extra 0.5% compared to whatever the market rate is.
Step 8: Distribute what we have to whoever is suppose to take it
Ex. Distribute to Campbell a rock he is suppose to take under the will. Need to make sure he signs off on it and send to clerk of court and then and only then are we done. If everything going inot trust with Ian as beneficary, his right to income begins upon the person's death even though he does not recieve it until the estate closes something like a year and a half later.
2 Types of Life Insurance Trust: Personal Insurance Trust
Ex. Father has 100,000,000 worth of real estate, and daughter is age three. Big estate tax/liquidity problem. ILIT (irreovacble life insruance trust) for benefit of daughter. Bank buys life insurance policy on father for 40 million..payable to the ILIT; setting it up as ILIT solves liquidity pobrlme without increasing tax liability of estate. Will of Father says "everything to the ILIT trust" (pourover will). Estate tax laibility is 40 million. Same trust officer handles trust and estate, so he switches hats and allows the 40 million policy in the ILIT to be used to cover the estate tax. When the estate closes, only the real estate is left in the trust. - If father is sued and estate owes this money upon his death, the officer does not have to switch his hats and lend the money to the estate to pay it. Doesn't have to lend money to daughter either. - If it wasn't payable to ILIT, 140 million would be taxable and could be reached by creditor/lawsuit - Can you have an unfunded ILIT (only thing it holds is the policy)? Yes. A funded trust would be if it holds the policy and enough other assets so that trustree can pay the premiums over lifetime - If the premiums on the policy were 200,000 per year, when the Father writes the check each time, its subject to gift tax each time. - If at some point father doesn't make premium payments, there is a duty to notify beneficary and let them know so they might can pay them IF its spelled out in the document. Can dip into principle to pay premiums IF spelled out in document. - Unlike term policy, Whole life policy is soemthing sold as an investment and insurance vechicle, since it builds up its cast value over its life. However, fine print says the projections for the annual return will probably not be met. If you bought a term policy and used excess to invest in mutual fund, it will probably be worth more than wholelife policy's cash value will be. - Trustee can compromise in a situation like if the creator comitted suicide (making the insurance company not have to pay) and if they sue insruance company they might not win; ONLY If spelled out in document.
Step one of settling estate: Procedure prior to appointment as executor
Ex. John Elliot dies and names his bank as executor in his will; suppose to be testamentory trust. - Before we are appointed as executor do everything we can to help the family. (ex. family is traumatized from his death so we show up and offer to help with funeral arrangements, having grass mowed, helping family home for travel). Not technically one of our duties, but its a great way to help in building a relationship. - NOT going to: knock on door and say "we're the bank, we're in charge, and we're gonna tell you how to handle things." - Get will: If we know that their will is sitting in the vault in our bank downstairs, we cannot just go look at ut and open the safe deposit box. Need to go through the clerk of court first. Never open the safe deposit box alone; heirs might accuse you of stealing something. - Can also do practical things to protect his property: ex. So far we've offered to help family and gotten will, so now we do things like change the locks on the house's door (prevent family members from taking what they percieve as their share too early), but make sure key is given to his wife and kids if he doesn't live alone.
Step Four: Safe-keeping of property
Ex. Louise lives alone and has 80,000 remnants in his home and 100,000 antiques in home. I need to have security system installed ASAP and get it properly climate controlled. Even have it climate controlled in a state with semi-good client to prevent things like frozen water lines bursting. If climate was farmer, do whatever reasonable to take care of it, inlcuding building sheds.
Tax consequences of charitable lead: When setting up the trust, IRS determines PV of the total gift to chairity over the life of the trust (usally based on length of trust, amount paid to chairity each year, and expected return on investment). This amount is not subject to estate or gift tax. The remainder is what the non-chairitable beneciary is suppose to recieve; only gift or estate tax is paid on this. If the trust grows, when the amount is then paid to beneficary its not taxable then.
Example: 10,000,000 gift to charity. 8 million estimated by IRS to be total PV of gift to chairity. Therefore 2 million is paid in gift tax and if the chairity grows to be 30 million its passed to beneficary without having to pay tax again and the total gift tax only being applied to the 2 million up front. - Note: All chairtble leads are irrevoakble trust. No changing your mind
Step two of settling estate: Appointment as exectuor process
Get Application for Letters Testamentary from lawyer because when you probate (prove) the will you want to leave clerk of court's office with this document. - Two ways to probate: 1. Prbate in common form: go to clerk and bring witnesses and letters testemeroy application form lawyer and clerk usally will grant it too you. 2. Probate in solem form: go to court and all interested parties have to get notified and get to present. Benefit, despite taking longer, is it is much more difficult to go back and contest the will. Ex. Aaron has one child but is living everything to his mistress; as trustee you want to go with this option because the child will most likely try to contest; letting them contest in the courtroom and present everything they have makes it more difficult for them to contest later without new evidce. Doesn't matter if we don't like the mistress because our duty is to defend the will. - Surety bond: protects estate if executor if a dishonest executor/trust officer like an embezzler takes from the estate. If bank is executor bank does not have to buy this bond; another reason to go with corporate fiduary. - Other things to be doing as soon as leave courthouse: notice to creditors in local newspaper(has to be printed) in general cirruclation (important because they have only 9 months to submit a claim, so do this immediately); discontinuing any subscirptions they had, turning off electricity in home if they live alone; write local financial instituion to see what kind of accounts they held there; assemble property/martial assets by first submitting an inital inventory within three months of qualification listing everything they died owning and estimate of their value to clerk of court, and this also helps determine estate tax liability (we want property valued on the lowest or higher that appriaser can justify: if wife is taking highest value they cn justify or lowest they can jsutify if going to person's son [because there will be estate tax if going to son and not wife]; basis is only important if they sell at capital gains rate, so for right now we're ignoring that beacuse son may never sell but will defintely pay estate tax. IRS might send letter disputing their value and burden of proof is on us and can do two things: pay and sue for refund OR . Bottom line: dont ask appriaser to do anyhting unethical and go too far. If less than 11,180,000 and thus no estate tax, value as high as posisble for if and when they sell it
Doctrine of Cypres
If charitable purpose fulfilled and general chairtable intenton found, then the money can go to another chairity.
Step Five: Interim management of property
In the interim, make short-term investment strategy during settlement of estate. (not long term stradeg yet) - Take care of debt and tax expenses
ILLIT's usefulness?
Liquidity and building an estate.
Corporate Trust
One set up to secure outstanding bond issuances. Ex. Duke Power decides to issue 500 million worth of corporate bonds. Par value of these bonds is 1,000 and are paid 5% interest. They mature in 2048. - Beneficaries of corporate trust are the bondholders, not the company. - Trust Indenture Act of 1939: Purpose to protect the investiing public. Dealt with the issuance of securites, especially bonds. A bond is technically an indenture, which is a contrct between bondholder and company. This act made bonds meet certain test before being issued: 1. Trustee must be given sufficent power, rights, dutires, and reponsibilites to enable it to protect the bondholder. 2. Relationship between trustee, investment banker, and corporation must be restricted so that there is no possibility of collusion 3. Corporation must make finanical reports to the trustee - Inssurance not covered by the act: 1.) Intrastate offering of bonds are bonds that are sold only to the residents of the state where the company is located; 2.) nonpublic offering: only offered to a small, distinct group of people no matter where they are (Ex. Aiden offers bonds only to 20 people he happens to know that live in different states; OR Witherspoon offers bonds only to the Buies Creek Rotary Club)
Charitable Trust
Philanthropic area of trust. 1. Must be set up for an indefinte number of people: "Set up for releif of poverty worldwide."Can narrow it down to relief of poor some small town or even "whorthy American protestant widows and orphans of Buie's Creek" NOT "releif of the poor who live at 315 Ash street bladenboro." even though nobody is specially named (kinda the opposite of the rule against perpetuity) 2. Must be set up to acheive a charitable purpose: 1. Relief of poverty 2. Advancement of religion 3. Advancement of education 4. Any other purpose benefical to the community 3. Rule against perpetuity does not apply, so it can be set-up to last forever. - Kenja vs Chatam: Man was finaliest of Moorehead scholarship, and young man who claimed he was qualified as anyone else sued. Case was not heard on merits becasue a potential benefiacry to charitable trust cannot sue. Only attonry general of NC can sue the trustee of a charitable trust. Recently law has changed so that potential beneficary also has the right to sue, like a regular beneficary. If it were brought today, his case would have been heard.
What happens if someone dies and they don't name an executor?
Someone still has to settle the estate if nobody is apponted and/or they die intestate; this party is called an administrator. - Administrator CTA: Testator has failed to name exectutor, so this person is appointed by the court. - Adminsitrator DBN: Testator died without a will - Adminstrator CTADBN: Testator has a will and an exectuor, but they resign or are removed, so court appoints this person.
Foundation
The same as a charitable trust for the very wealthy (ex. billionairs) and set up for another of chairitable purposes and not just one. - Ex. Reyonolds foundtion and Duke Foundation.
Two options for employer: 5,000 raise or set up qualified plan of some type and make a contribution each year of 5,000.
They need to talk to employees. Most would probably want the raise and will say they'll accumulate their own savings. Problem is, the 5,000 raise is gonna be less after income tax. This amount might then be placed in a CD with rate of return of 4%. Rule of 72 says if you divide 72 by rate of return, it tells you how long it takes to double your money. Using this formula and if an employee in age 20, then at age 74 they'll have 24,000.....this is subject to inflation. The contribution in qualified plan would have procted it from taxes and for things like a mutual fund, you could have earned more; if mutual fund, were example 12%, then your money would double every 6 yers. - If this were a contributory plan, meaning employees have the option of making a contribtuion or must make one if emloyer does, then what they'd receive in the long run would double. Your contribution should be made "before tax dollars" so taxation on your contribution can be delayed.
Powers of Appointment
Two types: general and limited/special - General example: A to T income to B reaimder to whoever B shall appoint; doesn't have to be that broad: also be genral power of appointment if you had the right to appoint to yourself, your estate, your creditors, or creditors of the estate. Key word being OR. Right to appoint to any of these four makes it a general power form tax law persepctive - Limited example: A to T income to B remainder among B's children as B shall see appoint. - In both examples, from a drafting standpoint, who takes if B fails to appoint is missing. Should have "Taker in Default" clause that says something to the effect of "If B fails to appoint, then to C" for genral or for limited "If B fails to appoint, then equally among B's children" - From a practical standpoint, with a limited/special power we are trying to account for the needs of the different children. Ex. If one kid is a hobo and the other is an investment banker, one needs to be more taken care of as the mother sees fit. When this is created, they don't know which children will be more in need than the others. Probelm is, some of the children might get angry. - Generally, if someone dies holding general power of appoint that property its taxed in their estate, even though the property is not held in fee simple or something like that BUT if pre-1942 power its included only if you excercise the estate . If will not be taxed/included in their estate if limited. - "A to T income to B reaimder to whoever B shall appoint if B fails to appoint than to C." B can say no to power of appoint and right to income, or one or the other. In these situations where B refuses, its treated as if B died before A/testator. Then C takes everything. Did B make a taxable gift to C? What if he said I want income but not power of appointment...taxable gift? In first scenario taxable gift could be the full value of the benefits in the trust. In second scenario, if theres a gift it would not be the full amount in the trust since B is taking then you calculate value of the gift by estimating how much B will take based on their age (Ex. take at age 50 and estaimate they take 78 million out of 100 million full benefits; 22 million is the gift passed to C). To determine if it is indeed a gift in either scenrio, if they said no to income and/or power of appointment in 9 months its a qualified disclaimer and not a gift; if a day beyond 9 months its consider to be a relase (aka a gift).
Types of employee benefit plans: Profit-sharing plan
Unlike a pension/defined benefit plan, it gives employees an incentive to work hard and make the company profitable. Its a defined contribution plan. Ex. Campbell promises every year to contribute 10% of gross profits of the school. If no profits, then no required contribution. Accomplishes: 1. Increasing emplomake them more productivity 2. Making them more innovative 3. Make them feel like they have a stake in the company.
Example of funded buy-sell agreement: Business worth 90 million and 3 partners. Each's share is 30 million. They get insruance policies on each other with each person buying a 15 million policy on the other. When one dies and family is entitled to 30 million, they can recieve it without having to borrow or liquidate the business. Whats another benefit?
When one partner dies all property they own, inlcuding property share, could be subject ot estate tax (in this case it would be since over 11,180,000). IRS might dispute the value of their interest, so this helps (though not conclusive in itself) prove their real interest since its a contract that uses an appropriate method to value the business thats spelled out in agreement. - B) It would be worthless when.. Ex. Family owned partnership is very profitable and valuation method is based on tangible assets and much of what they used is leased. In this case, a family-owned business is not helped very much. - IF a corporation and says "1/3rd of stock" compan won't dissolve upon death of partner and stock can still be passed to family. This agreement can still be used even though liquidation and debt not gonna be an isue. However, might not be wise since remaining partners can collude. - Partnership vs corporation: with partnership you need funded cross buy-sell agreement with corporation you also have the option of single purchase agreement with company itself instead of on individual stockholders (but not tax deduticble_
Example of family who needs personal life insurance trust: Husband is 42 and has 401K, wife is 33 and has 401K, and daughter is age 1. Home is 250,000; mortage 175,000; CD 50,000. They don't have anything net-wroth wise, so they need life insurance for their estate. Should they get whole life or term policy?
Whole-life builds up cash value over time as an insruance vechicle. - Ex. 1,000,000 whole life policy with 5,000 premiums per year. On term policy they are 1,000 per year. They would be better of doing the term policy and investing 4,000 difference in another investment.
Bill and Mary instead of putting money in charitable remiander put it in CRAT.
Would rather have 1.5 million(5% of 30,000,000) than 800,000 each year. - Income tax charitable deduction is limiated to 35%. For 1.5 million this is 525,000 deduction for year one. Choice between 800,000 fully taxable or income tax only on 975,000,000. When they're both dead, everything goes to Campbell. - If they have a child, they can have a CRAT and an ILLIT of 30 million. Then the property still takes the property and daughter takes insruance policy in ILLIT and gets the family home coverd by it estate tax free. If it were a 5% CRUT instead of CRAT, then is balance in trust doubled then their income doubles. Can do "great things" with a combination of thse three.
