EFTA02375921.pdf

From: Richard Ressler Sent: Thursday, July 3, 2014 1:44 AM To: Ada Clapp Cc: Richard Ressler John J. Hannan ( 1 Barry J. Cohen; Jeffrey E.; Eileen Alexanderson; Halperin, Alan S Subject: Re: East 7Oth Street townhouse purchase What are the "rights Debra wouldn't receive with a second life term interes=" that if given would qualify for the marital deduction? We can discuss t=morrow. On Jul 2, 2014, at 5:52 PM, "Ada Clapp" wrote: Richard, Let me see if I can articulate Jeffrey's comments and reiterate what I tr=ed to convey (not very effectively) early on in the discussion. The split-interest property purchase is an estate planning technique design=d to fit within an "exception" to a provision of the tax Code (under S=ction 2702) that would otherwise trigger a gift tax where family members p=rchase "term" interests (such as a life interest and a remainder inter=st) in a residence. To fit within the exception, and avoid any one famil= member purchasing a term interest from making a gift to another family me=ber purchasing a term interest, each family member who participates in the=split purchase of the residence must pay the actuarial value of his or her=term interest—with his or her own funds. If Debra uses funds Leon gives her, the IRS treats this as if Leon purchase= both his and Debra's term interests and then made a gift to Debra of h=r term interest, which gift would be taxable to Leon as it would not qual=fy for a marital deduction. To qualify for a marital deduction, the spous= must either receive the property outright or be given certain rights to t=e property which Debra would not have with a second life term interest. Even assuming Debra is willing to use her independent funds in connection w=th a split purchase of a residence, there are other factors to consider in=deciding the best way to structure the split purchase. In addition to the=pros and cons outlined in the chart I sent you, there is a certain comfort=level regarding the transaction that should weigh into your decision. As I mentioned in an earlier email, the split interest purchase technique o=ly works under a specific set of circumstances (it must be a new residence=purchase, each family member buying a term interest must have/use is or he= own funds— not funds recently received from any other family member part=cipating in the split purchase). This means that the technique has not bee= as widely used , and accordingly not as heavily scrutinized by the IRS, a= other planning techniques. As noted above, the split interest property p=rchase is safe harbored in the Code or regulations (like a qualified per=onal residence trust►, but rather is purchase structured to fall within an=exception provided for in the Code. My understanding (I never had occasi=n to use this technique when I practiced) is that most of the split intere=t purchases that passed muster with the IRS have been structured with only=two term interests: a life interest purchased by a senior family member, =nd a remainder interest purchased by junior family members (or a trust for=their benefit). We are therefore more confident that the split-interest p=rchase will fall within the exception if structure in this manner. Alan did find a couple of private letter rulings (not binding on the IRS wi=h respect to anyone other than the taxpayers to whom they are issued) wher= the IRS approved structures involving two life estates where all term int=rest holders EFTA_R1_01384796 EFTA02375921 acquired their interest with separate funds. However, becaus= there is less support for the two life interest structure than for the si=gle life interest structure, we have a lower confidence level with the two=life interests. I think what Jeffrey is saying below is that the marginal=benefits achieved by the two life structure (outlined on the chart I sent =ou) are outweighed by the lower comfort level and the additional risk of =udit. The risk of audit may be higher because the IRS may be keener to t=ke a look at structures that are not plain vanilla (but are instead "cl=ver" as Jeffrey puts it) to see if they fall within the exception. If i= does take a look, the two life interest structure might be fine —it jus= has a shorter track record for us to handicap it as well. Given these fa=tors, I believe Jeffrey is suggesting that the use of a single life intere=t structure. I am happy to discuss or to arrange a conference call with Alan if you wish=to speak with him directly. Best regards, Ada Clapp Elysium Management LLC 445 Park Avenue Suite 1401 New York, New York 10022 This communication and any attachment is for the intended recipient(s) only=and may contain information that is privileged, confidential and/or propri=tary. If you are not the intended recipient, you are hereby notified that=further dissemination of this communication and its attachments is prohibi=ed. Please delete all copies of this communication and its attachments an= notify me immediately that you have received them in error. Thank you. From: Richard Ressler Sent: Wednesday, July 02, 2014 5:54 PM To: jeffrey E. Cc: Halperin, Alan 5; Richard Ressler; Ada Clapp; Barry J. Cohen; John Hann=n; Eileen Alexanderson Subject: Re: East 70th Street townhouse purchase I don'trCC 2 EFTA_R1_01384797 EFTA02375922