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Myth #2: Estate planning only has financial benefits.

Avoid Violating Self-Dealing Rules

As a recent PLR illustrates, transfer of assets from an estate to a private foundation may trigger exposure

A transfer of assets from an estate to the decedent's private foundation (PF) may inadvertently trigger self-dealing issues.  A recent Private Letter Ruling illustrates the application of the  “estate administration exception” to the self-dealing rules, in the context of a note issued in conjunction with a prior sale to an irrevocable trust.1

Interest in Company Sold to Irrevocable Trust

In this ruling, the decedent had sold an interest in his company to an irrevocable trust for a note.  Under his will and revocable trust document, the note (as part of the residuary estate) would pass to several beneficiaries, including his PF.

Possible Self-Dealing

In general, the Internal Revenue Code imposes a self-dealing excise tax on certain transactions between a PF and a disqualified person.2   For purposes of this rule, the term  “disqualified person” includes trusts in which the PF’s founder's family members have more than a 35 percent beneficial interest.  Because both the decedent’s revocable and irrevocable trusts fit this definition, the PF's receipt of the note and any subsequent payments of principal and interest from the irrevocable trust to PF would have constituted self-dealing.

Note Exchanged for Cash and Non-Voting LLC Shares

To overcome this result, instead of distributing the note to the PF, the executor proposed to exchange the note for cash and non-voting shares in a newly formed limited liability company (LLC) and then distribute the cash and non-voting LLC interest to the PF.  As a result, the PF, as an LLC unit holder, would receive payments of principal and interest from the LLC, as it receives such payments from the irrevocable trust.  This exchange met the five requirements for the estate administration exception because:  (1) the executor had the power to sell the note; (2) the executor will seek probate court approval of the transaction; (3i) the sale/exchange transaction would occur before the estate is terminated; (4) the estate would receive an amount which equals or exceeds the fair market value of the PF’s interest in such property; and (5) the transaction results in the PF receiving an interest at least as liquid as the one it gave up.

As to this last requirement, the IRS noted that the non-voting units are backed by the note, all interest payments made on the note will be distributed annually, there are no sale or transfer restrictions on the non-voting units and the non-voting units can’t be changed. Furthermore, the LLC agreement provided that upon any default on the note, the LLC “shall immediately take all necessary actions to foreclose on and collect payment of the note from the Borrower and/or Guarantor,” which would place the PF in the same position as if it controlled the note directly. Therefore, the PF would receive an interest at least as liquid as the interest it would have received.

The IRS further noted that while the irrevocable trust (as a disqualified person) remained the obligor on the note, the PF's retention of non-voting units in the LLC and its receipt of passive income from the LLC didn’t constitute an act of self-dealing.  Among other factors, the IRS noted that the relationship between the PF and LLC didn’t reflect a loan or an extension of credit.  In addition, the PF didn’t control the LLC, because the PF would only hold non-voting interests.

Exception Requirements Satisfied

The IRS concluded that the exercise of the executor’s power to contribute assets from the estate and the note to the LLC; the receipt of consideration by the estate of voting and non-voting units in LLC; and the distribution of such non-voting units and cash from the estate through the revocable trust to the PF, satisfied the requirements for the exception to self-dealing.  In addition, the LLC’s retention of the note, receipt of payments on the note and distributions of such payments aren’t acts of self-dealing.

This ruling illustrates the importance of reviewing and planning for any self-dealing exposure before the distribution of any estate assets to a PF.

Credit Suisse Securities (USA) LLC (CSSU) does not provide tax or legal advice. This information is for educational purposes only and is intended to provide a general overview of the topics discussed. CSSU makes no representation as to their accuracy or completeness and CSSU accepts no liability for losses arising from the use of the material presented. References to legislation and other applicable laws, rules and regulations are based on information that CSSU obtained from publicly available sources that we believe to be reliable, but have not independently verified.


1. Private Letter Ruling 201446024 (August 21, 2014).

2. Internal Revenue Code Section 4941(a); Treasury Regulations Section 53.4941(d)-(2)(c)(1). 

3. IRC Section 4946(a)(1). 




TAGS: Philanthropy
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