By Jeremy Spackman, Esq.
Opportunity Shifting is a technique where a client’s parent, grandparent or other person sets up a beneficiary controlled Dynasty Trust for the benefit of the client and the client’s descendants. The client, as trustee of the Dynasty Trust, uses the gift made by the parent or grandparent to invest in a hot business or investment opportunity inside the Dynasty Trust, thereby protecting the opportunity from estate taxes, creditors and divorcing spouses for the duration of the trust.
BENEFICIARY CONTROLLED DYNASTY TRUST
Before explaining the steps involved in an opportunity shifting transaction, it is important to understand a beneficiary controlled Dynasty Trust.
- A Dynasty Trust is an irrevocable trust that can continue for as long as applicable state law allows. If the trust is drafted properly, the trust assets are protected from any creditors or divorcing spouses, as well as estate taxes.
- A beneficiary controlled Dynasty Trust is one where the primary beneficiary is the controlling trustee of the trust. The primary beneficiary, as trustee, can be given essentially the same control of the trust assets he or she would have with outright ownership.
OPPORTUNITY SHIFTING EXAMPLE
As an example to illustrate this technique, assume a potential client is going into a new business deal that will require a nominal capital contribution. Traditional planning would be to have the client form a limited liability company (LLC) and enter into the new deal in the name of the LLC. While this affords the client some asset protection, if the new venture is successful the value of the business is included in the client’s estate for estate tax purposes when he or she dies. Additionally, the LLC ownership interest would likely be considered part of the marital estate in the event of a divorce and the client could lose a portion of the LLC ownership interest in any divorce settlement.
Instead, the traditional method can be enhanced by shifting the opportunity to a beneficiary controlled Dynasty Trust. The client’s parents (or some other third party) would set up a beneficiary controlled Dynasty Trust for the benefit of the client and the client’s descendants. The client’s parents would make an initial gift into the trust. If the client’s parents lack the ability to make a substantial gift into the trust, a nominal gift of a few thousand dollars would suffice. The client can then make a low interest loan to the trust if more seed money is required for the new deal (while there is no hard and fast rule on how much can be loaned to the trust, the unwritten rule is that the IRS prefers no more than a 9/1 debt-to-equity ratio in the trust, so the loan should not exceed nine times the initial gift to the trust). Once the trust is in place, the client, as controlling trustee of the trust, will form an LLC with the trust as the sole member and will contribute the trust funds into the LLC as the initial capital contribution. The LLC will then use these funds to enter into the new business deal. Using this technique, any growth from this new venture is outside of the client’s estate for estate tax purposes. Further, if the trust is drafted properly, the trust assets are protected from the client’s creditors, including a divorcing spouse, due to the spendthrift protection provided by the trust.
As the LLC starts to cash flow, it can make distributions up to its member (i.e., the trust). The client could then request distributions from the trust. The distribution trustee, whom the client would have the power to remove and replace, has the discretion to authorize distributions to the client and/or descendants of the client. Alternatively, the trust could look for other ways to reinvest these proceeds, such as by purchasing life insurance or going into new business deals. This makes the technique even more powerful because the new assets the trust acquires are also outside of the client’s estate for estate tax purposes and also enjoy asset protection.
Therefore, the next time a client asks for the best way to structure a new deal or business opportunity, estate planners should advise their clients to shift their new opportunity into a beneficiary controlled Dynasty Trust.
ABOUT THE AUTHOR
Jeremy B. Spackman is an associate attorney at the law offices of Oshins & Associates, LLC in Las Vegas, Nevada. He practices in the areas of estate, business and asset protection planning. He can be reached at (702) 341-6000 or via e-mail at [email protected].