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An estate planning method for minimizing transfer tax liability with respect to the transfer of the value of stock options from a holder of stock options to a family member of the holder. The method comprises establishing a Grantor Retained Annuity Trust (GRAT) funded with nonqualified stock options. The method maximizes the transfer of wealth from the grantor of the GRAT to a family member by minimizing the amount of estate and gift taxes paid. By placing the options outside the grantor's estate, the method takes advantage of the appreciation of the options in said GRAT. In one embodiment the method also maximizes the amount transferred to the family member by keeping as many of the options as possible in the GRAT until immediately prior to the termination of the GRAT, when the grantor substitutes an equivalent value of assets into the GRAT for the remaining options, and then exercises the options. The method is used for evaluation purposes in establishing the GRAT, and responds to...

Inventor: Robert C. Slane
Original Assignee: Wealth Transfer Group, L.L.C.
Primary Examiner: Robert P. Olszewski
Secondary Examiner: Andrew J. Fischer
Attorneys: Moore & Van Allen PLLC, Matthew W. Witsil, Dominic J. Chiantera
Current U.S. Classification: 705/36.00T; 705/35
International Classification: G06F/1760

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Citations

Cited PatentFiling dateIssue dateOriginal AssigneeTitle
US6058377Feb 9, 1998May 2, 2000The Trustees of Columbia University in the City of New YorkPortfolio structuring using low-discrepancy deterministic sequences

Referenced by

Citing PatentFiling dateIssue dateOriginal AssigneeTitle
US7693770Jul 12, 2005Apr 6, 2010JP Morgan Chase & Co.Method and system for creating and marketing employee stock option mirror image warrants
US7765144Nov 26, 2003Jul 27, 2010JP Morgan Chase BankMethod and system for transfer of employee stock options
US7769664May 10, 2007Aug 3, 2010Guaranteed principal investment system, product and method
US7769666Sep 17, 2003Aug 3, 2010J.P. Morgan Chase BankMethod and system for transfer of employee stock options
US7877303Sep 23, 2002Jan 25, 2011Lincoln National Life Insurance CompanySystem and methods for tracking the relative interests of the parties to an insurance policy
US8007486Mar 19, 2007Aug 30, 2011TechnoflexMethod and set for transferring a fluid between two containers
US8090639Jan 29, 2010Jan 3, 2012JPMorgan Chase Bank, N.A.Method and system for creating and marketing employee stock option mirror image warrants
US8180700Apr 15, 2011May 15, 2012Morgan StanleyTransaction system for employee stock options and other compensation programs

Claims

1. A method for minimizing transfer tax liability of a grantor for the transfer of the value of nonqualified stock options to a family member grantee, the stock options having a stated exercise price and a stated period of exercise, the method performed at least in part within a signal processing device and comprising:

establishing a Grantor Retained Annuity Trust (GRAT);
funding said GRAT with assets comprising stock options, the stock options having a determined value at the time the transfer is made;
setting a term for said GRAT and a schedule and amount of annuity payments to be made from said GRAT; and
performing a valuation of the stock options as each annuity payment is made and determining the number of stock options to include in the annuity payment.

2. The method of claim 1 wherein the amount of the annuity is set by determining an optimum percentage of said GRAT assets that will be said annuity with the purpose of reducing the taxable gift value.

3. The method of claim 1 wherein the step of funding includes contributing supplemental assets in addition to the stock options.

4. The method of claim 3 wherein said supplemental assets comprise an amount of cash.

5. The method of claim 4 wherein the amount of cash to be included in said transfer to said GRAT is equal to at least the first year's annuity, whereby the cash may be used to defer the payment of said options in said annuity by including some or all of said cash in at least one annuity payment, thereby reducing the number of said options required to be paid as part of said annuity, and increasing the number of said options remaining in said GRAT.

6. The method of claim 5 wherein the amount of cash comprises an additional amount of cash at least equal to the total of the end of year evaluated option values for one option for each year in the life of the GRAT, whereby said additional amount of cash may be used to pay the difference each year between the required annuity payment and the value of the options included in the annuity payment.

7. The method of claim 4 wherein the amount of cash to be included in said transfer to said GRAT is equal to at least the first year's annuity on an estimated present value basis assuming a rate of return on the cash in said GRAT, whereby the cash may be used to defer the payment of said options in said annuity by including some or all of said cash in at least one annuity payment, thereby reducing the number of said options required to be paid as part of said annuity, and increasing the number of said options remaining in said GRAT.

8. The method of claim 7 wherein the amount of cash comprises an additional amount of cash at least equal to the total of the end of year evaluated option values for one option for each year in the life of the GRAT, whereby said additional amount of cash may be used to pay the difference each year between the required annuity payment and the value of the options included in the annuity payment.

9. The method of claim 3 wherein said supplemental assets comprise an amount of stock.

10. The method of claim 1 further comprising the step of removing some or all of the stock options from said GRAT and substituting into said GRAT assets of equivalent value.

11. The method of claim 10 wherein the step of removing some or all of the stock options and substituting into said GRAT assets of equivalent value is performed following the final annuity payment but prior to the termination of said GRAT.

12. The method of claim 1 further comprising the step of determining the term of said GRAT depending on the grantor's life expectancy and the nonqualified stock option life expectancy.

13. A method for minimizing transfer tax liability of a grantor for the transfer of the value of nonqualified stock options to a family member grantee, the stock options having a stated exercise price and a stated period of exercise, the method performed at least in part within a signal processing device and comprising:

establishing a Grantor Retained Annuity Trust (GRAT);
funding said GRAT with assets comprising stock options, the stock options having a determined value at the time the transfer is made;
setting a term for said GRAT and a schedule and amount of annuity payments to be made from said GRAT;
performing a valuation of the stock options as each annuity payment is made and determining the number of stock options to include in the annuity payment; and
establishing an Irrevocable Life Insurance Trust (ILIT) that provides a life insurance policy on the grantor with the family member grantees as named beneficiaries, said ILIT to receive said assets of said GRAT on said GRAT's natural termination.

14. The method of claim 13 wherein the amount of the annuity is set by determining an optimum percentage of said GRAT assets that will be said annuity with the purpose of reducing the taxable gift value.

15. The method of claim 13 wherein the step of funding includes contributing supplemental assets in addition to the stock options.

16. The method of claim 15 wherein 'said supplemental assets comprise an amount of cash.

17. The method of claim 16 wherein the amount of cash to be included in said transfer to said GRAT is equal to at least the first year's annuity, whereby the cash may be used to defer the payment of said options in said annuity by including some or all of said cash in at least one annuity payment, thereby reducing the number of said options required to be paid as part of said annuity, and increasing the number of said options remaining in said GRAT.

18. The method of claim 17 wherein the amount of cash comprises an additional amount of cash at least equal to the total of the end of year evaluated option values for one option for each year in the life of the GRAT, whereby said additional amount of cash may be used to pay the difference each year between the required annuity payment and the value of the options included in the annuity payment.

19. The method of claim 16 wherein the amount of cash to be included in said transfer to said GRAT is equal to at least the first year's annuity on an estimated present value basis assuming a rate of return on the cash in said GRAT, whereby the cash may be used to defer the payment of said options in said annuity by including some or all of said cash in at least one annuity payment, thereby reducing the number of said options required to be paid as part of said annuity, and increasing the number of said options remaining in said GRAT.

20. The method of claim 19 wherein the amount of cash comprises an additional amount of cash at least equal to the total of the end of year evaluated option values for one option for each year in the life of the GRAT, whereby said additional amount of cash may be used to pay the difference each year between the required annuity payment and the value of the options included in the annuity payment.

21. The method of claim 15 wherein said supplemental assets comprise an amount of stock.

22. The method of claim 13 further comprising the step of removing some or all of the stock options from said GRAT and substituting into said GRAT assets of equivalent value.

23. The method of claim 22 wherein the step of removing some or all of the stock options and substituting into said GRAT assets of equivalent value is performed following the final annuity payment but prior to the termination of said GRAT.

24. The method of claim 13 wherein said ILIT is established at the time said GRAT is established.

25. A method for minimizing transfer tax liability of a grantor for the transfer of the value of nonqualified stock options to a family member grantee, the stock options having a stated exercise price and a stated period of exercise, the method performed at least in part within a signal processing device and comprising:

establishing a Grantor Retained Annuity Trust (GRAT);
funding said GRAT with assets comprising stock options, the stock options having a determined value at the time the transfer is made;
setting a term for said GRAT and a schedule and amount of annuity payments to be made from said GRAT;
performing a valuation of the stock options as each annuity payment is made and determining the number of stock options to include in the annuity payment;
determining an optimum percentage of said GRAT assets that will be said annuity with the purpose of reducing the taxable gift value;
including an amount of cash in said transfer to said GRAT at least equal to the first year's annuity on an estimated present value basis assuming a rate of return on said amount of cash in said GRAT;
deferring the payment of said options in said annuity by including some or all of said cash in at least one annuity payment, thereby reducing the number of said options required to be paid as part of said annuity, and increasing the number of said options remaining in said GRAT; and
establishing at the time said GRAT is established an Irrevocable Life Insurance Trust (ILIT) that provides a life insurance policy on said grantor with said family member grantees as named beneficiaries, said ILIT to receive said assets of said GRAT on said GRAT's natural termination.

Drawings