Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-12-01
2003-05-20
Olszewski, Robert P. (Department: 3627)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
Reexamination Certificate
active
06567790
ABSTRACT:
TECHNICAL FIELD
The present invention relates to estate planning, and more particularly, to a method for minimizing tax liability with respect to the transfer of stock options from a holder of stock options to a family member of the holder.
BACKGROUND ART
Corporations are increasingly awarding their directors and key employees nonqualified stock options, which give the recipient the right to purchase stock at a predetermined exercise price. The right to purchase the stock may begin either immediately or after the end of a vesting period, and may end after periods of, for example, five or ten years. In 1996, a change in the securities law (Rule 16b-3 of the Securities and Exchange Commission regulations) eliminated a nontransferability requirement for options in order to qualify for the exemption from insider trading under that rule. Therefore, many corporations have recently allowed nonqualified stock options to be gifted by recipients to family members or to trusts for their family members' benefit.
Income tax is incurred on the difference between the fair market value of the stock at the time of exercise of the options and the exercise price. Gift tax is incurred at the time the gift of the options is completed, and estate tax is incurred when options or the value realized from the exercise of the options held by a decedent are passed on to heirs or devisees. Estate planning is used to try to minimize the transfer tax liability on the transfer of assets from the option holder to a family member.
While known approaches to estate planning have had and will continue to have their benefits, they require substantial estate and gift taxes to be paid. For many holders of nonqualified stock options, estate and gift transfers are taxed at up to a 55% rate, and in some instances 60%, contributing to significant depletion of wealth. As the use of stock options in compensation has increased, the need for a method to address the transfer tax consequences has become more important.
DISCLOSURE OF INVENTION
The object of the present invention is to provide a means by which a holder of nonqualified stock options may transfer the value of the options to family members with minimum transfer tax liability.
According to the present invention, the holder (grantor) establishes a Grantor Retained Annuity Trust (GRAT) and transfers stock options and possibly other assets to the GRAT. The grantor retains a right to receive an annuity amount stated as a percentage of the initial transfer. The annuity payment comprises cash, stock options, or other assets. At the end of the GRAT's term, the assets of the GRAT are distributed to one or more family member beneficiaries or a trust for the family member's benefit. The taxes on the transfer of assets are minimized by (1) calculating an optimum annuity percentage to reduce the value of the taxable gift, and (2) minimizing estate taxes through use of the GRAT. The present invention also determines the length of the term of the GRAT, beginning and end of year asset value, and the form of payment of the annuity each year based on either estimated or actual input variables as selected by the user.
These and other objects, features, and advantages of the present invention will become more apparent in light of the following detailed description of a best mode embodiment thereof, as illustrated in the accompanying Drawings.
REFERENCES:
patent: 6058377 (2000-05-01), Traub et al.
patent: 2002-24533 (2002-01-01), None
Newlin, Charles F. and Andrey, Gwendolyn S., “STructuring GRATs Under the Section 7520 Regulations”, Estate Planing, 24 Est. Plan. 156 (May 1997).*
IRS Letter Ruling 9248016; 92 TNT 238-44 (Nov. 30, 1992).*
Franz, D.R., “How to Value Gifts of Employee Stock Options,” The Tax Advisor, Dec. 1998, pp. 848-855.
Harrison, L.S., “Using Options to Allow Donees to Have the Donor's Cake and Eat It, Too,” Taxes, Mar. 1999, pp. 277-286.
Renninger, M.K., “Company Stock Option Plans,” Personal Financial Planning, Jan./Feb. 1999, pp. 47-57.
Renninger, M.K., “How and When to Exercise Options,” Personal Financial Planning, Mar./Apr. 1999, pp. 51-62.
American Jurisprudence, Second Edition, vol. 34A (1999 Edition), Federal Taxation ¶¶ 143,001-183,320, pp. 896-902.
Estate Planning & Taxation Coordinator, Grantor Retained Annuity Trust (GRAT), ¶ 39,141, Sep. 7, 1999.
Title 26—Internal Revenue Code, Subtitle A, Chapter 1, Subchapter P, Part V, Subpart A, Sec. 1274, Jan. 26, 1998.
Title 26—Internal Revenue Code, Subtitle B, Chapter 14, Sec. 2702, Jan. 26, 1998.
Title 26—Internal Revenue Code, Subtitle F, Chapter 77, Sec. 7520, Jan. 26, 2000.
17 Code of Federal Regulations Ch. II (Apr. 1, 1999 Edition), § 240.16b-3 Transactions Between an Issuer and Its Officers or Directors, pp. 360-362.
Title 26—Code of Federal Regulations, vol. 12, Part 1, [Revised Apr. 1, 1999], Sec. 1.7520-1, pp. 1011-1012.
Title 26—Code of Federal Regulations, vol. 12, Part 1, [Revised Apr. 1, 1999], Sec. 1.7520-3, pp. 1013-1017.
Title 26—Code of Federal Regulations, vol. 13, Parts 2 to 29, [Revised Apr. 1, 1999], Sec. 20.7520-3, pp. 526-530.
Title 26—Code of Federal Regulations, vol. 13, Parts 2 to 29, [Revised Apr. 1, 1999], Sec. 25.2702-1, pp. 662-663.
Title 26—Code of Federal Regulations, vol. 13, Parts 2 to 29, [Revised Apr. 1, 1999], Sec. 25.2702-2, pp. 663-666.
Title 26—Code of Federal Regulations, vol. 13, Parts 2 to 29, [Revised Apr. 1, 1999], Sec. 25.2702-3, pp. 666-670.
Internal Revenue Bulletin, Revenue Rulings 98-21 and 98-34, Bulletin No. 1998-18, May 4, 1998.
Part I, Section 1274, Rev. Rul. 99-41, Oct. 1999.
National Network of Estate Planning Attorneys, Web Page for Keys to Wealth Section, Dated Oct. 15, 1999.
NumberCruncher, Estate Planning Software, Web Page Information, Dated Nov. 11, 1999.
zCalc, Tax and Estate Planning Software, Web Page Information, Dated Nov. 11, 1999.
Chiantera Dominic J.
Fischer Andrew J.
Moore & Van Allen PLLC
Olszewski Robert P.
Wealth Transfer Group, L.L.C.
LandOfFree
Establishing and managing grantor retained annuity trusts... does not yet have a rating. At this time, there are no reviews or comments for this patent.
If you have personal experience with Establishing and managing grantor retained annuity trusts..., we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Establishing and managing grantor retained annuity trusts... will most certainly appreciate the feedback.
Profile ID: LFUS-PAI-O-3010493