Advanced Marketing Forum Question

Life Income with Property Ownership

Question:
Elderly wealthy client has been developing real estate with his grandson. Their next project (which they have an option on the land) is a 46 Unit apartment complex that will be 60% regular rent and 40% affordable housing with tax credits attached. Normally they split the income from their dealings.

This time the Client wants to do the project in a LLC with the grandson owning 51% AND OTHER GREAT-GRANDCHILDREN owning the rest. The LLC will develop the property and the income generated from the project will go to the elderly client for his remaining life even though he does not have an ownership interest. The idea behind this is the removal of the asset from the grandfather’s estate but still give him the cash flow etc.

I'm not sure if I understand how this situation is unfolding but I would like to know if this set up does in fact accomplish something worthwhile to justify going through the special set up.

Reply:
In terms of what the client is planning to do, it is ok but I would offer the following caveats:

If the grandfather wants to receive a majority of the income, then he should either be a majority owner of the LLC/partnership or he should put it into a GRAT where he can get income for a period of time and then keep the assets are out of the estate.

He should also be careful about gifting and GSTT issues since he is planning to gift to his grandchildren and great-grandchildren. The GSTT exemption is currently $1,100,000 per donor, and in this situation any gifts above the annual exclusion amount should have GSTT allocated to them to avoid the tax in the future (or if making gifts to a trust, all of the gifts should be covered by the GSTT exemption).

Rachna D. Balakrishna
Assistant Vice President/Associate Counsel
Manulife Financial, US Insurance
73 Tremont Street Boston, MA 02108
Phone: (888) 266-7498 x4423
Fax: (617) 854-4440
E-mail: rachna_balakrishna@manulife.com

* The foregoing is for broker/agent use only, and is intended solely for informational purposes. Nothing contained herein should be construed as legal or tax advice, and should not be relied upon for such. Legal and tax advice should only be obtained from your attorney or qualified tax professional.

CES Insurance Agency, Inc., Commonwealth Equity Services, Inc., and all of their officers, subsidiaries, and affiliates explicitly disclaim any consequences from unauthorized use of this material.