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socrateaser
socrateaser, Attorney
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Experience:  Retired (mostly)
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Hello Nate, Im back with

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Hello Nate, I'm back with a very different ? In the 90's my account set up a Tax strategy call chairtable split dollar. It was a deal that certain % my life insurance bebefits would go to "partners" after my death. In 2007 The IRS said it was an unexceptable tax benifit strategy. My account said we need now to dissolve the partnerships and pay the partners a % of what they would have recieved from the life insurance at my death. I am questioning why I need to pay the partners since the whole premice of setting up the partnership became nil because of the IRS ruleing. It is a substatial amount $30,000. Also it was over 5 years since the IRS ruleing, is there a statue of limitationfor this? Thanks for your help. Hari XXXXX

Submitted: 1 year ago.
Category: Business Law
Expert:  socrateaser replied 1 year ago.
Good afternoon.

Nate is not a member of the justanswer.com Business Law category. I am a member of the State Bar of California, and a member of the Business, Estate and Tax categories. Please permit me to assist.

Split-dollar charitable arrangements have indeed been invalidated generally by the IRS. See e.g., Gary L. Weiner v. Commissioner; T.C. Memo. 2002-153 (18 Jun 2002).

The issue of a partnership dissolution, however is a different issue. Absent an agreement in the articles of partnership, partnership shares are divisible at dissolution in proportion to the partners' respective contributions. Profits or losses, if any, should have been applied to the partnership accounts in equal proportion during the partnership, and at dissolution each account is distributed to the partner who contributed to his or her partnership account. Cal. Corps. Code § 16401(a)(2) and (b).

Assuming that you contributed all of the payments to the insurance, then you would be entitled to the cash value of your contribution to that insurance on dissolution, plus an equal proportion of any increase in value in the policy due to investment appreciation.

I doubt that your accountant is suggesting that you must split the cash value of your contributions with the other partners, and the appreciation of the policy is probably too small to be of much concern. That's something that you will have to discuss with your accountant.

Please let me know if I can be of further assistance.
socrateaser, Attorney
Category: Business Law
Satisfied Customers: 34634
Experience: Retired (mostly)
socrateaser and 5 other Business Law Specialists are ready to help you
Customer: replied 1 year ago.
Socrateaser, Thank you for your answer.The Life insurance on me is still intact for $500,000( this is reduced from the original $900,000 because of challenge we had making payments) The "gifted" amount of the insurance after my death to the partner that is requesting payment was $85,000. This has been "discounted" to $30,000. My next question is since the IRS deemed the strategy unacceptable (this strategy was the sole reason for this partnership) do we have to pay this,and since the Life insurance policy is still in place why couldn't we have this "gift" still going to the partner after my death without any Tax benifit? Thanks again.hbs (I will be OOT til Tuesday where I'll check in)
Expert:  socrateaser replied 1 year ago.
If the partnership owns the policy, and the policy does not pay unless and until you are deceased, then the benefit is an unvested future interest, subject to change by the policy owner (the partnership). Given that circumstance, if you cash out the policy to recover its value prior to dissolution, then there is no policy benefit to distribute to the other partner. The only value to distribute would be the contributed value of the policy, all of which, if it was contributed by you, would be returnable to you as part of your partnership contribution.

In short, the answer, in my opinion, is that you have no obligation to pay the partner anything, unless there is a separate agreement from the policy itself, which requires you to pay.

Hope this helps.
Customer: replied 1 year ago.

Socrateaser, Thank you very moch. I will use this info to help solve this issue. I may have further questions as I find any new information. I know this will be a new quertion with another charge which I will be glad to pay. Thanks again, Hari xxxx

Expert:  socrateaser replied 1 year ago.
You're welcome and good luck.
Customer: replied 1 year ago.

Hello Socrateaser, After further study here is what I have,. The partnership that was set up to take advantage of the "chairtable split dollar" (csd) method was set up so we are the General Partners and the charitys are limited partners. Future Life insurance benifits and a % of "value " of the General partners assets we "gifted" to the charitys to set up the csd. In the agreement ther is a provision for limited partners to request a buy out. The partnership is not dissolving as I first thought. The charity that is requesting the buy out is doing so because of the IRS desision to rule the csd method unacceptable and they don't want their non profit charity to be exposed to posible scrutiny by the IRS. Do I have a case that says because the only reason the partnership was set up in the first place was to take advantage of the csd and the IRS ruling caused the partner to want a buy out , I don't have to pay since it was non of my doing and the ruling by the IRS was 5 years ago. Thanks again and I won't be able to check your answer til tomorrow eve, Hari Bhajan

Customer: replied 1 year ago.

Hello Socrateaser, After further study here is what I have,. The partnership that was set up to take advantage of the "chairtable split dollar" (csd) method was set up so we are the General Partners and the charitys are limited partners. Future Life insurance benifits and a % of "value " of the General partners assets we "gifted" to the charitys to set up the csd. In the agreement ther is a provision for limited partners to request a buy out. The partnership is not dissolving as I first thought. The charity that is requesting the buy out is doing so because of the IRS desision to rule the csd method unacceptable and they don't want their non profit charity to be exposed to posible scrutiny by the IRS. Do I have a case that says because the only reason the partnership was set up in the first place was to take advantage of the csd and the IRS ruling caused the partner to want a buy out , I don't have to pay since it was non of my doing and the ruling by the IRS was 5 years ago. Thanks again and I won't be able to check your answer til tomorrow eve, Hari Bhajan PS I know this is a new question and will be happy to compensate TXX

Expert:  socrateaser replied 1 year ago.
Well...lemme see here....

A valid express trust must have all of the following elements:

1. A grantor/settlor
2. A trustee
3. Trust property
4. A beneficiary
5. A valid trust purpose

A trust is merely a contract, between the grantor and trustee to hold trust property for the equitable benefit of a third party beneficiary. And, like any contract, it can be rendered void for illegality, or voidable by a party, where the contract was created by a mistaken understanding of the parties, by a party's misrepresentation, and/or where the subject matter is destroyed, where consideration fails, where agreement was coerced, subject to undue influence or the terms were unconscionable/shockingly unfair.

Under the circumstances, it's clear that the original purpose of the contract was seriously mistaken by the parties, though they could not have known about the contractual defect at the time it was made. If you take the position that the trust terms are rendered unlawful, however, then that would void the trust, and a failed trust is considered to "result" back to the grantor. This is the doctrine of "resulting trust," and that is what I would argue, were I representing you in court.

The trust purpose has been rendered invalid by subsequent law, consequently, the trust is invalid, and the result is that the trust property returns to the grantor.

End of story. Whether or not the charities decide to fight this in court, I have no idea -- and whether you would resist a lawsuit, is equally uncertain. You may have to settle to avoid unnecessarily litigation costs. But, the charities would be under the same difficulties, so the next step may be to tell the charities that you believe that the trust purpose is destroyed, and the trust property is therefore returned to you under the doctrine of resulting trust. Then, wait and see how the charities' respective legal counsel respond.

Hope this helps.
Customer: replied 1 year ago.

Wow! Valuable info. I assume when you say "trust" that applies to "partnership". I will present this opinion and see what the charity says, Your explaination really describes what I believe is the case. As I said before I realize this was a new question and I need to comensate, so I guess you need to send me that page that gives me the opportunity to pay. Thanks again, I'll let you know, Hari Bnajan

Expert:  socrateaser replied 1 year ago.
All you have to do is rate my previous answer, or this one, and I will receive additional compensation. Though, since you are a nosubscriber, the system will probably ask you to authorize an additional debit from your payment method (credit, debit card, PayPal, etc.).

Alternatively, you can leave a bonus, if the system still offers the option.

If none of that works, then I'll ask customer service to contact you.

Thanks in advance.
Customer: replied 1 year ago.

Hello socrateaser, Me again, Here is what the person who is representing the chariyt(Flagstaff Med.) sent me back after I sent him your last answer.


you sent yesterday Mon.at 1:35 EST. Wonder what your responce would be? Thanksa, Hari Bhajan


 


The problem is that you gifted a partnership interest not a trust


>interest; it would be best if I or one of our attorneys spoke to your
>lawyer. I believe he opined without understanding your transaction,is
>he aware the transaction was started twenty three years ago?
>
>
>The last thing you want to do is provoke a lawsuit with Flagstaff
>Medical Center.
>
>It would cost you at least as much as the settlement and you will lose
>the suit.
>

>

Expert:  socrateaser replied 1 year ago.
I'm going to close this again. Please refer to my upcoming response in your new Q&A session.

Please do not respond to this memo. It will reopen the session. Thanks.

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