prohibited trasaction

[Guest mringo]

Scenario: There currently exists an irrevocable trust trusteed by our client's brother. The only thing in the trust is a life insurance policy where the trust is the beneficiary. Client wants to gift personal money to the irrevocable trust. The trust is going to form a preferred LLC. The plan will then buy stock in the LLC which in turn will buy property. The plan will receive a fixed rate of 6% from the LLC. Is this a prohibited transaction? Is this a violation of the exclusive benefit rule? Client's attorney said West Coast law firms have been doing this and there have been court cases won regarding this. Of course he would not cite any.

This smells bad to me, of course client is going with what attorney is saying. Anybody know about these?

[Guest mringo]

nothing????

[Bird]

You might want to clarify what plan you are talking about - I assume it's your client's plan? Does the plan have participants other than your client?

There's probably a PT in there somewhere, depending on who the beneficiaries are and attribution, but I don't hold myself out as an expert and am only commenting because you're begging.

How is this investment going to be valued? That issue, and the costs involved, is usually enough to nip this kind of stuff in the bud for my clients.

[GBurns]

I did not respond not because there were just too many vague issues, but because I am tired of pointing out to people that they are allowing slick sales pitches to cloud their judgement.

You posted "Of course he would not cite any." If the salesman cannot give any cites or cannot substantiate his position, Why are you wasting your time trying to prove his case for him? You do not know enough about what he is presenting so you will never have a valid conclusion. If you cannot prove him wrong, he will have won by default, because if there is nothing wrong then logically it must be right.

A salesman and any one presenting a position bears the uonus of proving their position. If he/she cannot then Show them the door!!

Questions:

What allows your client to contribute to his brother's trust?

What type and purpose of trust?

The trust is going to form the LLC but "the plan" will buy stock, What is this "the plan"?

Aside from the points raised by Bird, Will the client's attorney be willing to render his opinion approving the transaction in writing? If yes, is the client familiar with the IRS rules regarding opinion letters and tax shelter penalties? If No, then there is your answer.

As you said, it smells, but clearing the air should be done by the promoters of the scheme, then you determine its validity. Let them provide the proof.

[SoCalActuary]

Let me understand the facts:

An independent trust fund (presumably a taxable trust) performs two transactions.

You did not indicate who are the beneficiaries of the trust.

First, it accepts a gift from your client.

Second, it forms an LLC to invest funds, specifically to buy property. The LLC is also a taxable entity. You do not describe if it is taxed as a corp or a partnership. You did not describe who the members are, nor the pass-through of ownership.

Your client has a qualified plan that buys stock in the newly formed LLC.

Is there a PT? While I don't know, I would suggest you document who are the beneficiaries of the arrangement, how profits will be taxed from the LLC, and whether the members of the LLC are interested parties. Then your answer will be clearer.

There is some recent activity where trusts form new corporations, but I don't follow it closely, and I don't want to practice law, so I can't give you the reference. So you should decide if you want to do the legal research, pay for the research from a knowledgable attorney, or just get out of the way.