The OneTrust: Estate Planning and Asset Protection in One Vehicle

For a number of years the firm has worked with experienced estate-planning lawyers in the United States to offer the OneTrust to U.S.-resident clients. The OneTrust assembles a comprehensive set of features in a single structure:

• A trust excludible for estate-tax purposes that nevertheless provides for the grantor during life;
• A family limited partnership or family LLC for estate, business, and risk-planning purposes;
• Dynastic features that permit trust assets to escape estate taxation across generations;
• Built-in asset-protection features against the claims of unanticipated creditors;
• Family-office and wealth-management services through a suite of experienced professionals, including SEC-registered investment advisors;
• Complete tax reporting and FATCA compliance;
• Access to a wide range of domestic and international banking institutions;
• A single annual fee that covers the included services.

Certain features of the OneTrust have been confirmed in an IRS private letter ruling. The essence of the ruling permits a trust settlor to fund the trust using the unified credit, retain a discretionary beneficial interest, and still ensure that the trust is excludible from the taxable estate. A dynasty trust may be deployed in this setting to ensure that trust assets remain outside the federal estate and gift tax system.

At the client’s option, the OneTrust includes a domestic or foreign limited partnership or limited liability company. Transfers in trust, or directly to family members, of ownership interests in the FLP or FLLC may qualify for valuation discounts when assessed for transfer-tax purposes. A discounted valuation reduces the transfer-tax cost of shifting assets to succeeding generations and enables older generations to pass larger sums of wealth at the same effective tax cost.

Two illustrations: (i) Discounted gift — M and D contribute $10 million worth of assets to an FLP and assign the bulk of the FLP interests to a dynasty trust established in an asset-protective jurisdiction such as Belize or Nevis. A qualified valuation advisor opines that the FLP interests qualify for a 50% valuation discount; the transfer-tax cost of assigning the interests is $5 million rather than $10 million. (ii) Discounted estate — M survives D, holding an estate worth $10 million; M participates in an FLP alongside the dynasty trust, contributing $10 million for the bulk of the FLP interests; the dynasty trust subscribes to a smaller quantum. With the same 50% discount, the transfer-tax cost of holding to death is $5 million.

For decades, estate-planning attorneys have engaged in discounted-transfer planning using FLPs and FLLCs. To maximize valuation discounts within the framework of IRC § 2704(b), a popular strategy has been to extend voting rights — and a consent or veto power over liquidation — to an unrelated party, often a charitable organization. In Kerr v. Commissioner, 292 F.3d 490 (5th Cir. 2002), the Fifth Circuit upheld the discounts claimed when two charitable organizations were appointed as general partners of an FLP. Treasury has, over the past several years, floated proposals to update the 2704 rules to curb outcomes such as Kerr; the prevailing expectation is that Treasury will issue regulations under the broad authority of § 2704(b)(4) by year-end 2015 to accomplish what Congress has not.

A key feature of the OneTrust is that the restrictions factoring into valuation discounts on FLP or FLLC interests within the OneTrust framework should remain unaffected by the proposed regulations. The reason is that § 2704(b) itself generally does not apply to FLPs or FLLCs that are integral to the OneTrust. The design and integrity of the client’s estate plan continues without interference from the changes likely to emerge.