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									                       ACADEMIC INTEROFFICE MEMORANDUM

TO:            William N. Horowitz, Adviser

FROM:          Jason E. Havens, LL.M. in Estate Planning Candidate

DATE:          April 21, 2000

RE:            Estate planning for Frank and Ruth Johnson (hypothetical academic case)

         This memorandum addresses Frank and Ruth Johnsons’ ethical, legal, and tax issues,
based on their factual scenario as outlined in several memoranda, letters, and an estate planning
questionnaire. The other materials required by Professor Bruce Stone, namely an engagement
letter (based on ACTEC’s forms), a financial analysis (run on CCH’s ViewPlan, U.S. Trust’s
EPLAN, and NumberCruncher), and two (2) documents, have arrived. As Professor Stone
indicated, this exercise represents only the beginning of the Johnsons’ analysis, planning, and
drafting, and the Johnsons will need to clarify some items to complete their planning.


        In the short-term, the Johnsons need to take the following steps:

       Unified credit planning: the Johnsons need to include language to utilize their unified
       Marital planning: the Johnsons need to include language in their existing or new
        documents that allows transfers to Ruth, a non-citizen spouse, to comply with the marital
        deduction (which, as a worst-case scenario, could be done post- mortem).
       Generation-skipping planning: the Johnsons need to include language to allocate their
        exemptions to specify which transfers should be exempt.

The Johnsons should also consider other items in their long-term planning:

       Marital planning: the Johnsons should design a gifting program, whereby they could
        balance their estates to ensure that Ruth will utilize her full unified credit and transfer
        wealth using the annual exclusion.
       Generation-skipping planning: the Johnsons should probably create exempt trusts for all
        of their children. Additionally, any non-exempt trusts should be made includible in the
        child’s gross estate to avoid any taxable transfers to “skip persons.”
       Business planning: the Johnsons must focus on how they want to structure Frank’s
        business interest. Frank might want to transfer some portion of the interest to their son,
        Sheldon, who is already involved in the business. Note that the plan to take the business
        public dictates that the Johnsons plan very carefully, partic ularly if they want to use
        succession planning. See Dees, infra.
       Asset planning: the Johnsons might want to utilize a qualified personal residence trust for
        their primary or secondary residence.

        Since we discussed each item in detail, seemingly the most efficient method to address
(or revisit) the Johnson’s numerous issues is to discuss each piece of correspondence (paragraph
by paragraph). Following a discussion of the issues, I will analyze the Johnsons’ overall plan
and relate my analysis to my drafted documents. Again, at this point it is premature to embark
on drafting various features of the Johnsons’ estate plan, which would be done after discussing
this analysis with the Johnsons and receiving their comments.


A. Memorandum of March 1, 2000 to Student

        First, an ethical conflict might exist in relation to Rudy Chekhov, the insurance agent
who referred Frank Johnson. As a lawyer, I must serve the best interests of my client. See
Model Rules of Professional Conduct (“MRPC”) 1.5, 1.7, 1.8(f), and 2.1; ACTEC
COMMENTARIES ON THE [MRPC] (3d ed. 1999) at 105, 116-17, 158, 173-75 (life insurance
cases), 186+, and 240. However, a conflict probably does not exist here, where I will
recommend diminishing or altering Rudy Chekhov’s insurance recommendations if such changes
serve the Johnsons. Even if we accepted Rudy Chekhov’s current plan, which might serve the
Johnsons well, the facts do not indicate any existing conflict. (Please note that I included this
issue merely to flag it and not because it necessarily represents a problem in this case, especially
in an age of multi-disciplinary practice, where conflicts will inevitably increase due to the closer
alliance of estate planning attorneys and other professionals.)

        Second, regarding emergency planning before the Johnsons depart for France and
Chechnya, at a minimum I would recommend executing a codicil to their current (poorly-
drafted) wills, which would permit a disclaimer by the surviving spouse to a credit shelter trust
(“CST”) to take advantage of both spouses’ unified credits under Code § 2010 (available for
citizens or residents of the U.S. by reference to Code § 2001). I would also suggest language in
the codicil to create a qualified domestic trust (“QDOT”) for Ruth Johnson (“RJ”) under Code §
2056A, which will be discussed in more detail below. Then Frank Johnson (“FJ”) could leave
property to RJ under the marital deduction, thus deferring wealth transfer taxes. Lastly, a codicil
should incorporate language to take advantage of both spouses’ generation-skipping exemptions.

        With nearly a month to complete any emergency planning (based on the facts), we could
probably “fast-track” the Johnsons’ estate planning and complete new documents before they
leave for their trips. Hence, we could eliminate the need to execute codicils, which would only
accomplish limited objectives. Alternatively, we could draft “interim” documents that would
address many of the Johnsons issues but would leave other issues unaddressed until the
Johnsons’ return.

        Third and finally, in light of FJ’s “scare about his health,” I would draft “elder law”
documents for him, including a healthcare surrogate, a durable power of attorney, and a living
will, before FJ goes on his trip. Those three (3) documents would ensure that RJ or others could
manage FJ’s property interests in the event of FJ’s incapacity. The documents would also
provide FJ’s directions to the family if he needed life support or other healthcare measures after
an accident or a medical emergency.

B. Memorandum of March 1, 2000 to File (main correspondence)

        First, another ethical conflict might exist because FJ wanted to meet with you without RJ.
An estate planning attorney must consider special ethical problems whe n counseling married
clients. See MRPC 1.7; ACTEC COMMENTARIES at 151-52, 175+. Generally, one should
meet with both spouses initially and obtain their consent to mutual representation in a well-
drafted engagement letter. See ACTEC Spousal Engagement Letters (1999) (sent via e- mail).

        Second, as mentioned above, RJ, as a resident alien (i.e., a non-citizen spouse who
resides in the U.S.), can utilize the full unified credit (see Code §§ 2010 and 2001, as opposed to
Code § 2102 ($13,000 for non-resident aliens)) but gifts from FJ to RJ cannot take advantage of
the unlimited marital deduction under Code § 2056. Rather, to use the marital deduction, either
(1) such gifts must comply with Code § 2056(d) through the use of a QDOT under Code §
2056A or (2) Ruth must become a U.S. citizen. See Lawrence, U.S. Estate and Gift Taxation of
the Nonresident Alien with Property in the United States, 24 Miami Inst. Est. Plan. ¶¶ 1000 et
seq. (1990) at 10-21+. RJ’s status complicates the Johnsons’ estate planning, and she should
strongly consider becoming a U.S. citizen. See generally STEPHENS, MAXFIELD et al.,
FEDERAL ESTATE & GIFT TAXATION ¶¶ 5.06[9] and 5.07 (7 th ed. 1996) (discussing non-
citizen spouses).

         Additionally, RJ is limited further by other non-citizen spouse provisions. See id. at 24+.
According to Reg. § 25.2503-2(f), non-taxable gifts to a non-citizen spouse are capped at
$100,000 per year, and under Reg. § 20.2056A-8, jointly-owned property is not presumed to be
owned fifty percent (50%) by each spouse because the default rule is shifted to Code § 2040(a), a
consideration “tracing” rule (except for joint transactions that are not treated as “gifts,” governed
by Code § 2523, discussed below). See STEPHENS, supra, at ¶¶ 11.03[5] and 4.12[10]
respectively. Besides the QDOT, “maximum gift,” and “tracing” rules, RJ’s property might
result in United Kingdom estate taxes because of RJ’s Bermudan citizenship (except for U.S.
situs property (see Code §§ 2104-05) and unless RJ is considered a U.S. domiciliary – a
subjective test (see Estate of Nienhuys v. Commissioner; Rev. Rul. 80-209)), which might trigger
a death tax treaty between the U.K. and the U.S. that would generally (1) eliminate double
taxation, (2) allocate priority of taxation between the nations, and (3) provide for enforcement
and credits (as one of the newer generation death tax treaties); however, note that intangible
personal property is never taxed during life or at death under the treaties (regardless of situs),
foreign corporations offer some planning opportunities, and advantages exist in investing in U.S.
(received in class this semester and available upon request); see also Rev. Rul. 55-163
(discussing a New York revocable trust of a British resident).

         Third, several issues come to mind when considering the circumstances of FJ’s and RJ’s
oldest child, Shirley (Johnson) Miller (“SJM”). To exclude SJM’s husband, Ronald Miller, from
any benefits of FJ’s and RJ’s estate, SJM could serve as trustee of a trust for SJM’s children,
subject to an ascertainable standard, during SJM’s lifetime. To facilitate the Johnsons’ desires to
provide for SJM’s children’s education, three approaches seem applicable: (1) set up a
generation-skipping transfer (“GST”) exempt trust, to which the Johnsons would allocate GST
exemption, for SJM’s children; (2) set up a non-exempt “educational” trust for SJM’s children,
out of which the children’s educational payments would be made direc tly to the appropriate
institution(s) for their education (or their medical care) pursuant to Code §§ 2503(e) and

2642(c)(3) (the GST rule incorporating Code §§ 2503(b) and -(e)); or (3) set up both GST
exempt and non-exempt trusts, and either make SJM trustee with an “expiring” ascertainable
standard (i.e., an ascertainable standard only during life) or give SJM some type of power of
appointment (e.g., testamentary) to ensure inclusion of the non-exempt trust in SJM’s estate,
thereby avoiding GSTs to SJM’s descendants. The third approach, setting up one or more trusts,
represents the preferable alternative for SJM and her descendants.

         Fourth, SJM’s children’s Uniform Transfers to Minors Act (“UTMA”) accounts pose
several problems. Initially, FJ should not serve as custodian after creating the UTMA accounts,
due to inclusion in the donor/trustee’s gross estate under Code § 2038. See STEPHENS, supra,
at ¶ 9.04[5][c] (citing Rev. Rul. 59-357). To remedy that problem, FJ may resign and designate a
successor custodian under Fla. Stat. § 710.121. Also, FJ has made gifts (but maybe not taxable
gifts) to SJM’s children by reporting the UTMA accounts’ interest income on FJ’s and RJ’s
return each year, because such income is “reportable on the minor’s personal income tax return.”
Riley, Basic Estate Planning in Florida § 4.47, BEP FL-CLE 4-1 (1998) (Westlaw citation).

         Regarding extension of those UTMA accounts, FJ incorrectly stated that the UTMA
accounts will terminate at age eighteen (18). Actually, they will terminate when the children
reach age twenty-one (21) (or at death if earlier) under Fla. Stat. § 710.123(1), because these
UTMA accounts were created by gift under Fla. Stat. § 710.105. However, no authority exists
that indicates permissible extension beyond the statutory age in Florida (or under the model
UTMA in the Martindale-Hubbell Digest volume). See generally Henderson, Drafting
Dispositive Provisions in Wills (Part 2), 43 Prac. Law. (No. 5) 15, 17 (1997) (“Mandatory
Distributions” under “Gifts Under the [UTMA],” discussing that some states allow limited
extension of UTMA accounts within a statutory range, while others terminate in all events at a
certain age); Peterson, The [UTMA]: A Practitioner’s Guide, 1995-May Army Law. 3, 10 (1995)
(discussing the same limitations and listing each state’s requirements in Appendix B). To the
contrary, a pertinent article states that a “grantor may not alter the powers of the custodian or
change the age for distribution to the child under the terms of the [UTMA].” Riley, supra, at §
4.43 (emphasis added; citing Fla. Stat. § 710.123). In essence, FJ should have created trusts that
provided what he wanted instead of UTMA accounts for SJM’s children. See id. Such extension
flexibility is available for Code § 2503(c) trusts if a reasonable “window” is allowed whereby the
child may withdraw the trust funds. See STEPHENS, supra, at ¶ 9.04[5][b].

        Fifth, FJ may exclude any provision for educational assistance for the children of their
second child, Jack (“JJ”), but such exclusion seems misguided. I think that we should encourage
FJ to reconsider a provision to help JJ’s children with their education, which would benefit JJ’s
children and reduce FJ’s gross estate through the use of non-taxable gifts. Nevertheless, even if
FJ wants to include his proposed provision, FJ and RJ should arguably state their intention for
doing so within the estate planning documents to avoid any ambiguity or potential dispute.
Because FJ wants to give JJ an outright distribution, as discussed later, JJ is not “disinherited”
under the estate plan as that term is utilized in Fla. Stat. § 732.302.

         Sixth, since the youngest child, Sheldon (“SJ”), is not married to Denise (“D”), D will be
classified as a “skip person” as to FJ (but not as to RJ) under the GST rules. See Code § 2613(a);
STEPHENS, supra, at ¶ 13.03[2]. For that reason, the Johnsons should probably provide for D
and SJ’s children in a similar manner, i.e., by using a GST exempt trust. Again, the Johnsons
may use some of the same trust arrangements for SJ’s children and D as those used for SJM’s

children, discussed above.

        Due to SJ’s involvement in the family business, Home Office Depot (“HOD”), a buy-sell
arrangement or another type of business succession technique might represent an effective way
to move the business to the next generation, as discussed below. Finally, concerning the
complications caused by SJ’s and D’s “alternative lifestyle” (i.e., living together and unmarried),
they might want to consider marriage. Their marriage would not only provide tax advantages in
terms of the marital deduction, joint ownership of property presumptions under Code § 2040(b),
and GST classification as “non-skip persons” under Code § 2613(b), but would also alleviate
ethical conflicts that would arise when representing an unmarried couple. See ACTEC
COMMENTARIES at 118+. Moreover, ethical conflicts still might arise, even if SJ and D were
married, as discussed regarding FJ and RJ. See id.

         Seventh, the Johnsons’ second home in North Carolina might cause dilemmas. An
ancillary probate will occur at the surviving spouse’s death unless the Johnsons move the second
home into a trust. See N.C. Stat. § 28A-26-3 (“Ancillary administration”). A qualified personal
residence trust (“QPRT”) would remove the second home from their gross estates after the
specified term at a reduced transfer tax burden (i.e., the gift tax value of the remainder interest in
the QPRT, which would probably benefit the children as remaindermen, versus the full gross
estate inclusion value of the home), but practical problems exist since RJ is a non-citizen spouse
(e.g., How would one transfer the property when it is owned jointly for property law purposes,
but not for tax purposes until the “termination” occurs under Code § 2523 (discussed below)?).
1997) (“Personal Residence Trusts”). As you suggested in our telephone conversation, FJ and
RJ could own the second home as tenants in common and put half of it in a QPRT, and then FJ
could gift the other half of the property to RJ. Subsequently, RJ would transfer the other half
into the QPRT. This series of transfers would generate fractional interest discounts.

        If the second home is subject to estate taxation in North Carolina, the so-called “pick-up
tax” will apply to tax the home only as much as the allowable state death tax credit under Code §
2011. See State Death Taxes, National Conference of State Legislatures
<> (North Carolina is listed under “Pick-up
only”). However, if the Johnsons spend too much time in North Carolina, North Carolina might
argue that the Johnsons have become residents in an attempt to tax more of their property and
also their income. I think that we should consider hiring a North Carolina attorney, and we
should also take care to ensure that the Johnsons are clearly viewed as Florida residents ( e.g.,
voting, identification, and other indicia of residency).

        Eighth, the business represents arguably the most important planning aspect of the
Johnsons’ estate(s). Initially, a potential ethical conflict exists if we agree to represent both FJ
and his business, HOD. See MRPC 1.13; ACTEC COMMENTARIES at 210+. Also, if FJ and
his equal shareholder, Harry Rogers (“HR”), each retain thirty percent (30%) of HOD after the
proposed initial public offering (“IPO”) of forty percent (40%) of HOD’s shares, a potential
blockage discount might apply to the eventual sale of the retained shares. See Belcher, An Estate
Planner’s Guide to the Valuation of Fractional Interests, FLP Interests and Membership
Interests in LLCs, 10 ABA RPPT Est. Plan. Symposium § A at 21 (1999) (“Blockage and Market
Absorption Discounts”).

         Most notably, before the IPO, FJ might want to “freeze” the value of at least some of his
shares through one of many estate planning transactions. See generally Dees, Using a
Partnership to Freeze the Value of Pre-IPO Shares, 33 Miami Est. Plan. Inst. ch. 11 (1999);
ZARITZKY, supra, at chs. 9 (family corporations), 10 (family partnerships), and 12 (“Making
Large Transfers with Reduced Gift Taxes”: outright and trust transfers, installment sales, SCINs,
private annuities, GRATs, and GRITs to unrelated persons) (all with forms). Although many
planning options exist, the Johnsons’ illiquid family situation narrows the viable options to a
few. To provide comprehensive information, however, selected options are summarized as
follows: (1) outright gift: FJ could give his interest to SJ or others in a tax-exclusive transaction
under Code §§ 2501 and 2511, but control and liquidity issues probably preclude this option; (2)
gift to a grantor-retained annuity trust (“GRAT”): this transaction complies with Code § 2701,
but some of the same issues and risk of inclusion in FJ’s estate probably eliminate this option;
(3) installment sale to a “grantor” trust: this option defers gain recognition, avoids transfer taxes,
and taxes trust income to the grantor, but the payments probably could not be made in the
Johnsons’ scenario; (4) private annuity: the payments also prevent use of this option; (5) self-
cancelling installment note (“SCIN”): this option combines the gain deferral advantage of an
installment sale with the gross estate exclusion feature of a private annuity, but also presents
practical payment problems; or (6) other freeze transactions that comply with Chapter 14 (Code
§§ 2701 et seq.).

         Three viable options seem most appropriate here. A buy-sell agreement, which comes in
two main forms, a redemption (Code § 302) or a cross-purchase, would allow FJ to fix the value
of his HOD interest for estate tax purposes under Code § 2703, and life insurance, including
employer- “subsidized” split-dollar plans, could be used to fund the cross-purchase. See Hesch &
O’Sullivan, Disposition of Business Interests, Miami Grad. Est. Plan. Prog. (2000) (available
upon request). Also, the Johnsons could execute a freeze that satisfies Code § 2701 by
recapitalizing HOD, giving at least ten percent (10%) as junior equity to the children (or SJ
alone, which would represent a $1 million taxable gift here), and attributing to FJ’s retained
preferred interest (1) a cumulative dividend right or “governor” (which, to make sense, is
hopefully much lower than the company’s growth rate), (2) non-discretionary (or actual) voting
rights, and (3) senior liquidation preferences. See Muller, Chapter 14 Valuation, Miami Grad.
Est. Plan. Prog. (2000) (available upon request). However, a family limited partners hip (“FLP”)
probably represents the most attractive option (even though estate growth continues more rapidly
than in a “governor-restricted” recapitalized company), under which some or all of FJ’s HOD
interest could be contributed tax- free to an FLP, with (1) an “S” corporation (which might cause
a problem if RJ, a non-citizen, is an “ineligible” shareholder) or a limited liability company
(“LLC,” which might cause a Florida intangible tax) serving as general partner (with FJ as the
majority shareholder of the general partner) and (2) FJ holding the limited partner interests, the
latter of which could be sold or gifted to (a) others outright, (b) a grantor trust (if immediate
gross estate removal is desired), or (c) a GRAT (with multiple GRATs used in order to minimize
gross estate inclusion risk). (Diagrams of various transactions from Mr. Dees’ 1999 Heckerling
presentation, supra, were transmitted via facsimile.)

        Any business succession planning should carefully consider the “imminent” IPO, as it
was described in the facts. If FJ and his co-owner truly desire to take the business public, then
many of the discussed business succession techniques might not accomplish the Johnsons’
desires. But see Dees, supra (representing a documented approach to freezing an interest before
an IPO). Moreover, FJ needs to inform us if he wants to transfer part or all of his HOD interest

to his son, SJ, who is currently involved in the business.

        If FJ does not transfer all of his HOD interest, other estate planning optio ns exist to
minimize the interest’s estate tax value besides using a buy-sell agreement. Valuation discounts,
including lack of marketability, will apply to FJ’s interest. See Belcher, supra. His HOD
interest might also trigger Code §§ 2057 (qualified family-owned business interest deduction
(“QFOBI”)), 2032A, and 6166. See Lewis, Marital Deduction Planning for Family Business
Owners, 11 ABA RPPT Est. Plan. Symposium § L (2000) (discussing the Code § 2057 deduction
in detail and also its relationship to Code §§ 2032A, 6166, and 303 at § IV).

         Ninth and finally, concerning FJ’s estate plan, his comments indicate that he wants a
revocable “living” trust (“RLT”) and an optimum marital trust, which must provide QDOT
language. As mentioned, distributions to the Johnsons’ children require special planning, and FJ
might not want “equal” distribution of his HOD interest. Each child’s share is discussed as
follows: (1) SJM’s share should probably be divided into GST exempt and non-exempt shares,
with permissive distributions to SJM and for SJM’s children’s education from the latter and a
testamentary general power of appointment in favor of SJM’s creditors to ensure inclusion of the
non-exempt trust in SJM’s estate to preclude GST taxable terminations (with a potential risk of
Ronald obtaining benefits through the elective share); (2) JJ’s share probably will not cause a
GST problem because JJ’s share will be distributed outright, and if JJ dies before FJ’s revocable
trust becomes irrevocable, the GST predeceased ancestor rule under Code § 2612(c)(2) will
apply to JJ’s children; and (3) SJ’s share should also be divided like SJM’s share, with
educational distributions allowable from the non-exempt trust under Code §§ 2503(e) and
2642(c)(3) to avoid GST transfers and a similar power to ensure inclusion of such trust in SJ’s
estate. Essentially, GST exempt and non-exempt trusts should be set up for all of the children,
and a testamentary power of appointment should be used to ensure inclusion of the non-exempt
trust in the child’s gross estate.

        The proposed $2,000 bequest (or $5,000 in the questionnaire) to Pierre du Fresne, the
cousin in Paris, should occur as an inter vivos (“IV”) gift, due to the annual exclusion, the
simplicity of gifting, and the tax- inclusive problem of estate distributions. Finally, RJ’s desire to
make gifts to animal rights organizations might not cause problems with respect to FJ’s estate,
because if a QDOT is utilized, RJ will be limited to income during her life. But a testamentary
power of appointment for RJ might pose problems. A post- nuptial agreement would ensure that
RJ would not undo such estate planning, either through the exercise of her elective share or a
power of appointment in favor of those organizations, but that might not be wise or possible.

C. Memorandum of March 22, 2000 to File

        Several gift issues arose (and then fell) due to FJ’s responses. One of the described
lifetime gift scenarios, namely the series of the UTMA transfers, clearly qualifies for the Code §
2503 annual exclusion and also for the annual exclusion for GST purposes (a separate
determination, particularly when assessing transfers in trust). See STEPHENS, supra, at ¶
9.04[5][c] (citing Rev. Ruls. 59-357 and 73-287). The other lifetime transfers merit specific
analysis, as follows: (1) the 1988 “loan” of $40,000 to SJM and Ron was either an original issue
discount loan (see STEPHENS, supra, at ¶ 10.01[2][f]) or a gift, but it was described by FJ as a
loan (probably a “demand” loan) and shall be treated as such under Code § 7872, with an
imputed interest payment by the borrower at the applicable federal rate (“AFR”) and a

constructive gift of such payment by the lender; (2) the series of gifts to JJ and presumably to
Diane in the 1980s seemingly qualified for the annual exclusion, and even if the gifts were to JJ
alone, FJ and RJ could split those gifts under Code § 2513(a)(1) and Reg. § 25.2513-1(b)(2)
(since both are residents – even though both are not citizens) on a late-filed return under Code §
2513(b)(2) and Reg. § 25.2513-2; and (3) the joint 1994 purchase of the North Carolina home
with FJ’s cash seemingly constituted a deemed gift of $175,000 (i.e., half of the purchase
money) to RJ, which would have exceeded the $100,000 maximum gift rule under Reg. §
25.2503-2(f), thus resulting in a taxable gift of $75,000 to RJ (to which FJ probably would have
applied part of his unified credit on a late return), but “quirky” Code § 2523(i) and its regulations
apply the principles of former Code §§ 2515 and 2515A to this post-1988 purchase to eliminate
any gift upon the acquisition of joint real property with such a donee non-citizen spouse,
discussed below.

D. Letters of February 24, 2000 and March 15, 2000 from Rudolph (“Rudy”) Chekhov

        A couple of Rudy Chekhov’s statements seem imprecise, such as his general
characterization of the unlimited marital deduction when that provision does not apply to RJ as a
non-citizen spouse; his description of the irrevocable life insurance trust (“ILIT”), which actually
replaces tax dollars in the survivor’s estate, mirrors the dispositive provisions in the RLT, and
might be GST exempt; and his statement that insurance proceeds will be used to pay estate taxes,
which could potentially subject such proceeds to taxation under Code § 2042(1). Additionally,
payment of insurance premiums might result in taxable gifts unless enough Crummey
beneficiaries are used properly, with “five-and-five” powers to eliminate both gift and GST
consequences. See Crummey v. Commissioner; Christofani v. Commissioner (holding that a
“naked” ILIT is permissible and does not result in such consequences, although “seed” money
might be prudent). Finally, the Johnsons might not need $5 million of insurance, but they
probably will, even if they freeze the estate tax value of FJ’s business interest, because interests
passed via the marital deduction as well as income paid will be included in the surviving
spouse’s estate (unless the survivor depletes such resources altogether so that no includible
interests remain, which is rather difficult).

        Special issues surround life insurance proceeds, and those issues often arise when
creating an ILIT. See generally STEPHENS, supra, at ¶ 4.14. Of crucial importance, FJ should
not pay any money to any insurance agent to prevent holding any “incidents” of ownership. To
avoid Service attacks, the ILIT should exist (with or without seed money) before any insurance
policy is submitted. Furthermore, the trustee should apply for the policy, obtain a taxpayer
identification number (“TIN”) for the trust, and make all payments from a separate checking
account (set up exclusively for the ILIT). Once the ILIT exists, other policies could be
transferred to it, but caution should be exercised (e.g., problems of transfer-for-value, ineffective
use of GST exemption if other property is added after allocation of exemption, and other

E. Current Wills

       The Johnsons’ current wills, often called “sweetheart” or “I- love-you” wills, are wholly
inadequate, as they do not even utilize either spouse’s unified credit. The current wills also
ignore marital and business planning. Finally, the wills do not contain the witnesses’ self-
proving affidavits (see Fla. Stat. § 732.503), which might result in additional expenses in


F. Estate Planning Questionnaire

        All of the Johnsons’ assets are essentially owned by FJ, due to the joint property
presumption of Code § 2040(a) under Reg. § 20.2056A-8 and the application of Code § 2523,
based on the facts. The business interest in HOD represents the largest asset and would produce
significant estate taxes if it remains as such. Clearly, the Johnsons need to provide more
information, especially regarding how their primary residence was acquired, what should be
done with the business, and how they want to use the maximum gift rule to balance their estates
(unless RJ becomes a U.S. citizen, in which case she may utilize the unlimited marital

        The Johnsons’ joint assets mandate a special discussion. See generally Danforth, 823
T.M., Taxation of Jointly Held Property at § II.B.2.b.(4); Pennell, 843 T.M., Estate Tax Marital
Deduction at § VI.G.1., nn. 402-03 (“For a much too cursory treatment see Regs. § 25.2523(i)-
2(b), which may reveal that the government does not care to get into these issues”). For joint
real property, Reg. § 25.2523(i)-2(b)(1) controls and eliminates any gift on post-1988
acquisitions as well as the election under former Code § 2515 to treat such an acquisition as a
gift; consequently, the gift treatment is delayed until a “termination,” which does not include
death (query when the gift occurs then, if death does not trigger the gift treatment of the original
transaction). See Danforth, supra. For joint personal property, Reg. §§ 25.2523(i)-2(c)(1) and -
2(c)(2) apply to treat such acquisitions as gifts, based upon the retained interest of each spouse or
upon actuarial principles where such retained interests are not ascertained. See id.

        Examples in Reg. § 25.2523(i)-2(b)(4) provide two instances of joint real property
acquisitions by a spouse and a non-citizen spouse. Note that both examples terminate upon the
sale of the real property. Termination is discussed in Danforth, supra, at § II.C.3.c., along with
an excellent summary of the joint property acquisition rules above. The regulations provide no
similar examples for joint personal property acquisitions in the same circumstances. However,
an example is provided in Danforth, supra, at § II.B.2.b.(4), Ex. II-8. That example explains that
such joint personal property interests must be “unilaterally severable” under local law in order to
qualify a portion of the gift as excluded under Code §§ 2523(b) as limited by Code § 2523(i) (2).
Finally, with respect to joint bank accounts and other revocable ownership arrangements, no gift
occurs upon their creation. See id. at § II.B.3. (citing Reg. § 25.2511-2(c)).

        In conclusion, then, the Johnsons’ assets are indeed treated as owned a lmost primarily by
FJ, including their North Carolina home (which would change if RJ became a U.S. citizen, which
is a termination event). More information is needed to analyze the acquisition of their primary
residence in Florida. The only assets that are attributed partially to RJ include their other joint
personal property (except for their joint bank accounts), the acquisition of which probably
resulted in present- interest gifts from FJ to RJ that qualified under the maximum gift rule to RJ,
as summarized in Danforth, supra, at II.C.3.c. (The treatment of the Johnsons’ joint assets might
alter my financial analysis, but more information is required to do an accurate financial analysis


         First, immediate marital planning requires that QDOT provisions be put into place to
ensure marital deduction treatment for assets passing from FJ to RJ. Also, the maximum gift rule
dictates that careful planning be used to move assets from FJ to RJ on an IV basis to give her
enough assets to utilize her unified credit and to balance the estates, if FJ’s intention to avoid
estate taxes upon the first death remains (and it presumably does, even though such estate tax
deferral might not always be mathematically advantageous (see Pennell, supra)). Lastly, the
Johnsons might want to outline a detailed gifting program to utilize annual gift-splitting, which
they may do as U.S. residents.

       Second, the Johnsons need to consider business succession planning. The best option
seems to be an FLP, which could be created without transfer taxes if desired. An FLP would
allow FJ to continue to control the business through a corporate general partner, while divesting
himself of ownership by selling or gifting limited partnership interests.

        Third and finally, regarding trust planning, probate avoidance through the use of a
revocable trust (subject to “grantor” treatment under Code §§ 671-79, particularly Code § 676)
seems to be the accepted mode in Florida. As for the trusts created under the revocable trust, my
drafted trust document creates separate trusts for children and for descendants of children, with
exempt and non-exempt GST trusts. My trust document also restricts any distributions to such
descendants to ages twenty-five (25) and thirty (30), with no possibility that distributions will be
paid to children’s former spouses. However, my document really cannot implement a QPRT,
which might be a good idea for the North Carolina (and even the primary) residence, although a
risk of gross estate inclusion looms for the entire term and rent payments (which might be
covered by someone’s (e.g., a child’s) annual exclusion as the payments become due) would be
required after the term if the Johnsons continue to live in a “post”-QPRT residence.

         My drafted documents attempt to incorporate all of the Johnsons’ desires, including all
restrictions on children and descendants, the power to dispose of and manage the business, HOD,
and QDOT provisions to accomplish marital planning for RJ, the non-citizen spouse.
Nevertheless, the Johnsons need to review these documents and address issues that have not been
discussed, such as business succession planning during lifetime, joint property status, and gifting
plans to balance their estates (unless RJ agrees to become a U.S. citizen, which would greatly
simplify their planning, especially in terms of utilizing the unlimited marital deduction for gifting
purposes). Estate planning is a process, and that process has just begun for the Johnson family.


        The Johnsons need some rather unique business, gift, and marital planning. Additionally,
several ethical issues need to be addressed in our employment agreement with the Johnsons. But
after additional information is gathered from the Johnsons, I think that we can implement their
desires through the use of trusts, a pour-over will, and a family limited partnership to hold FJ’s
business interest and eventually transfer that interest to SJ, if indeed FJ desires that his youngest
son take the business.


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