Article on 10% Funding Myth for Trusts
Richard A. Oshins & Jerome M. Hesch recently published an Article entitled, Economic Substance and the “10%” Funding “Myth” for Trusts (forthcoming 2017). Provided below is a summary of the Article:
This article generally discusses the economic substance issue in terms of deferred sales to IDGTs. However, the analysis is equally applicable to deferred sales to BDITs. Because most BDITs are funded with $5,000, an installment note sale ordinarily will not satisfy the arbitrary 10% rule of thumb. The proper process is to comply with the “reality of sale” concept discussed at length below. Although technically not required, additional safety is obtained by supplementing that analysis with legitimate guarantees.
The authors believe that the theoretical 10% safety net is a “myth” and unsupportable. Nowhere in any case law, published ruling, or administrative pronouncement is the 10% funding required. However, that “rule of thumb” has been cited so often that it appears to have taken on an assumed authority of its own. Many advisors view the 10% threshold as a requirement and will not proceed unless the arbitrary test is met.