Estate Taxmageddon, Part IV: It’s a bird! It’s a plane! No it’s–Ed Hochuli and the Intentionally Defective Grantor Trust?

When the media spotlight is directed at a professional sports referee, it is seldom to commend him on a job well-done. In fact it’s usually quite the opposite, as anyone familiar with Monday night’s Seahawks-Packer’s atrocity game well knows.

Not so anymore. (Well, for now at least.)

Now that the Great NFL Referee Lockout of 2013 (or Refgate, if you will) has come to a conclusion, public regard for these men – which often is often about as lofty as that reserved for tax collectors – is higher than ever. Men like Mike Carey and Ed Hochuli, accustomed to being invisible at the best of times and derided at the worst, are developing a cult-like following.

That’s not to say anyone walking down the street will mistake either of them for a player of the caliber of Ray Lewis – except perhaps for Hochuli, whose biceps have affectionately earned him the nickname “Hochules” –  but their names are now better known among football fans than those gracing the jerseys of many a benchwarmer.

I have to admit I have soft spot for Hochuli, who sheds his zebra stripes on Monday morning – presumably in a phone booth – to don the disguise of his everyday alter ego as a trial attorney in Arizona. (Clearly the next big comic book superhero.)

“Ed Hochuli biceps” is the Google autocomplete when you begin to search his name.

Yet it’s not merely his simultaneous success in those careers that I appreciate, nor is it not simply the refreshing candor of his official explanations. (He once famously clarified, “There was no foul on the play. The defender was simply overpowered.”) And it’s not because the 61-year-old celebrated the end of the lockout like a Midshipman after a touchdown.

It’s because during the lockout, Hochuli held regular training and review sessions of all the NFL’s referees at his own personal expense to ensure that his men would be ready when the time came to take the field again.

That is leadership.

If only Hochuli would throw a flag on our government for lacking that very quality in recent months.

This is the fourth and final post in our series detailing some of the best strategies available to plan your estate before the fiscal cliff is upon us in January 2013, and in every entry thus far we have pulled no punches in laying the blame for this crisis squarely where it belongs: upon the representatives that we elected – so to a certain extent, upon us.

The difference is that while the multitude chooses the Congress and President that have so far ignored the devastating tax hikes/spending cuts on the horizon, you as the individual can choose to plan now so that you maximize the tax advantages currently available – advantages that will not be available next year or perhaps for years after, given the state of the federal deficit.

Allow me to introduce the Intentionally Defective Grantor Trust. 

Legal geeks call it an IDGT (pronounced “id-jet”) but it’s something that can make a lawyer look like an IDIOT if used incorrectly. In legal parlance, “defective” means that certain advantages are declined in order to preserve other advantages, so don’t think you’d be paying for a trust that’s somehow “broken.”

An intentionally defective grantor’s trust is, as the name suggests, a grantor trust (meaning you created it) for income tax purposes, but not for gift, estate, or generation-skipping transfer (GST) tax purposes. Intentionally defective grantor trusts are especially powerful right now for the same reasons that the Spousal Access Trust and the Irrevocable Life Insurance Trust are such good options: (1) the whopping $5 million gift and generation-skipping tax exemptions and (2) historically low interest rates–both of which will almost certainly be less favorable as of January 2, 2013.

Using an intentionally defective grantor trust, a married couple can currently gift all the way up to $10 million in undivided interests in highly appreciating assets, then sell additional interests in the same assets to the intentionally defective grantor trust. The creative twist afforded by this trust is that the value of both the donated and the sold assets can be discounted due to owning a minority interest. (The theory being if you are in control you would pay more than if you aren’t.) If the assets are wrapped in an LLC or limited partnership, their value may also be adjusted for lack of marketability and lack of control.

The trust then pays an installment note back to the trust maker. Assuming the growth rate on the assets sold to the intentionally defective grantor trust is higher than the interest rate on the installment note, the difference is passed on to the trust beneficiaries free of any gift, estate and/or generation-skipping tax.

Also, because the intentionally defective grantor trust is a grantor trust (i.e., “defective” trust for income tax purposes) (1) no capital gains tax is due on the installment sale, (2) the interest income on the installment note is not taxable to the grantor, (3) and all income earned by the trust is taxed to the grantor, effectively allowing for a tax-free gift to the trust’s beneficiaries equal to the tax burden borne by the grantor. Discretionary distributions of income and principal are made to the trust beneficiaries during their lifetimes, and all assets in the intentionally defective grantor trust remain outside of their taxable estates.

A drafter must ensure the intentionally defective grantor trust has sufficient capital to make its purchase of assets from the grantor commercially reasonable. This means that a lot of technical details need to be dealt with. But it is a plan that is there — for now.

Sound complicated? That’s because it rather is if you’re inexperienced with all the legal nuance required of the process. Which is why you really should meet with a living, breathing attorney to do this rather than picking up some bargain-bin legal software or dialing a telephone paralegal. If an intentionally defective grantor trust gets screwed up then the traditional definition of “defective” doesn’t suffice to indicate the major tax consequences it can have.

We’ll be shifting gears next week to begin a series discussing the asset protection options to capitalize on before Taxmageddon is upon us. For now, just kick back and enjoy watching football with referees whose names you actually now – for the right reasons.

Good luck and good hunting.

This is the fourth and final post in a series discussing the advantages of estate planning in 2012. Click to learn more in Part IPart II, and Part III.

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If you’re interested in discussing business law, asset protection, or raving about Ed Hochuli, find out how to get in touch with us at:  TheFisherLawOffice.com. You can also contact us at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice. If you’re here just because sometimes we have kittens on the blog, get your fix at the Arts and Cats Movement. Click image(s) for source. A portion of this post was borrowed from Vol. 6.3 of The Wealth Counselor, a monthly newsletter for wealth planning professionals. A special thanks is due to Matt McClintock, J.D., and Jonathan Mintz, J.D., of WealthCounsel for use of that information.

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One Response to Estate Taxmageddon, Part IV: It’s a bird! It’s a plane! No it’s–Ed Hochuli and the Intentionally Defective Grantor Trust?

  1. Pingback: Low Interest Rates: Increase Your Income | Planning for Your Wealth

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