2013
VADA
Family
Convention
FINANCIAL PLANNING
ASSOCIATION
– NATIONAL
Greenbrier
CAPITAL
Year End Tax Planning Update
By: John P. Dedon
1775 Wiehle Avenue, Suite 400
Reston, Virginia 20190
(703) 218-2131
John.Dedon@ofplaw.com
Virginia Business Magazine
January 4, 2013
Congress Provides Business Owners
A Grappling Hook
By: John P. Dedon
Yes Virginia, there is a Santa Claus, and yes
Virginia business owners, Congress did provide estate
tax relief by enacting the American Taxpayer Relief
Act of 2012. The relief is not a first class ticket off
the cliff, as that would have been estate tax
elimination, but considering the alternatives, it is a
soft descent down the cliff.
1
2012 Law Highlights
• $5 million exemption indexed for inflation
• 40% estate tax rate
• Gift opportunities remain…for now
•
•
•
Discounting
Dynasty Trusts
GRATs and Intentionally Defective Trusts
2
Estate Tax :
Year
Exemption Amount
2013 Forward:
$5 Million gift and estate
exemption: 40% tax rate
Permanent?
President’s Proposal
Reversion to 2009: 45%
rate & $3.5 M exemption
beginning in 2018
3
President Obama’s Budget
Proposal: Continued
• Limit GRATs: 10 year minimum term and
remainder have some value.
• Limit dynasty trusts to 90 years protection
from GST tax
• Eliminate stretch IRAs for non-spouse
beneficiaries. 5 year requirement.
• Limit sales to grantor trusts (estate tax
inclusion on assets sold to grantor trusts)
4
Annual Exclusion
1) Make $14,000 annual exclusion gifts
(Outright; Crummey Trusts)
2) Pay Tuition for education
3) Pay Medical Expenses
5
Power of the Annual Exclusion
$14,000 per year, “use it or lose it”
Example: Mom and Dad have three kids
and 5 grandchildren
$14,000 x Two x Eight x 20 years =
$4,480,000
Potential estimated estate tax savings
$1,792,000
6
Interplay of Estate and Income
Tax Planning Post-ATRA
 Decision between gifts and bequests more complex
- Income tax basis of property received by gift versus bequest:
 Gifts – “carry-over” basis
 Bequests – “step-up” in basis to fair market value at death
- Effect of large, inflation adjusted federal estate tax
exemption
 Can shelter more property from federal estate taxes
 Heirs receive basis step-up
 Benefit magnified in states with income taxes but not
estate taxes
- Must compare total income/capital gains taxes on later sale
of gifted property vs. estate taxes on inherited property 7
Income Tax Planning PostATRA
 Individuals now face much higher income tax exposure:
- Maximum federal individual tax rates
 39.6% income ($400,000 (single) / $450,000 (married))
 20% capital gain ($400,000 / $450,000)
 40% estate and gift tax rate ($5.25MM exemption in 2013)
- “Pease limitation” on itemized deductions for adjusted gross
income (AGI) over $250,000 / $300,000
 Effectively raises federal income tax rates by 1.2%
- State income and/or estate tax exposure can increase rate to
50%:
 E.g., VA – 5.75% income & no estate / MD – 5.5% income
& 16% estate / DC 8.95% income & 16% estate / CA –
13.3% income & no estate / NY – 9% income & 16% estate
8
Planning for the Couple with
Assets under $10.5 Million
• Focus on asset management and
income tax planning
• Trusts to protect and manage
inheritance
• Income tax planning may be more
important than transfer tax planning
• Portability v. Traditional Credit Shelter
Trust
9
Planning for the Couple with
Assets in Excess of $10.5 Million
• Continue to use transfer tax planning
techniques
-
Gifts to GST trusts
Sales to grantor trusts
GRATs
Charitable lead trusts
• Watch basis of gifted assets
10
Remaining Threats To Family
Assets
Potential Creditors
39.6% Income Tax
IRS
3-6% Probate & Legal Expenses
40%
11
TAKE CARE OF BASICS
Wills
 Revocable Living Trusts
 Advanced Medical Directives (Living
Wills)
 Powers of Attorney

12
Proper Planning Will Allow You to . . .
Give what you have,
To whom you want,
When you want, and
In the way you want
And Pay Less for:
Court Costs
Attorney’s fees
Estate Taxes
13
Other Fundamental Planning Issues
• Children with creditor, financial, or marital
problems
• Children from a previous marriage and
second spouse
• Children with special needs (parents)
• Spouse who would need help managing and
investing funds – now or later
14
Probate
Cost
Time Delays
Publicity
Property In Multiple States
Hassle
Avoid Probate With Revocable Trust
15
Assets
Retirement
Liquid
Insurance
Closely Held
Business
Total
16
Two Case Studies
Mr. and Mrs. Rich E. Couples
Dad
Mom
2 Children
17
Profile
•
•
•
Married
$10 Million +
Real estate, retirement plans, other
liquid assets, life insurance
18
Assets
$ 2,500,000
$ 4,000,000
Retirement
Liquid
Insurance
Total
$ 450,000 $100,000
$15,000,000
$ 2,000,000 $250,000
$ 2,450,000 $350,000 $21,500,000
19
Grand Total = $24,300,000
Objectives
•
•
•
•
•
•
Provide for surviving spouse
Provide for children at second death
Eliminate probate
Eliminate or avoid estate tax
Eliminate or avoid estate tax in
perpetuity
Asset protection to protect
children from divorce, creditors
20
Solutions – Case Study I
Step I
•
Wills, Revocable Trusts with credit trust
and marital trust for surviving spouse,
Powers of Attorney and Medical
Directives.
21
Solutions
Step II
•
•
•
Focus on $4 million Property
Husband creates LLC and transfers house
to LLC
Use $5,250,000 exemption amount
22
$4 Million
1% Equity
100% Voting = 100% Control
Grantor
99% of Equity
Trustee
Trust
$3,960,000
Before
Discount
Beneficiaries =
Wife and Children
23
Why
•
•
Estate and GST Exemption Applied $5,250,000 + Appreciation Estate Tax Free
Asset Protection
Spouse
• Children
•
•
•
•
•
Access
Husband has control through LLC voting
interest and access through Trust during
marriage
Wife is Trust beneficiary
Keep it in Family
24
Problems (and Solutions)
Divorce
• Death
• Life Insurance (for protection
and as an investment)
• Section 2036
• Pay Rent
•
25
Same Plan – Different Assets
• Corporation or LLC
• Gift/Sale
• Private Annuity
26
Solutions – Case Study II
Step I
•
Wills, Revocable Trusts with credit trust
and marital trust for surviving spouse,
Powers of Attorney and Medical
Directives.
27
Solutions
Step II
•
•
•
•
Focus on $10 million of marketable
securities
Spousal access Trusts
Each spouse transfers his and her own
assets to the other’s Trust
Use exemption amount and file gift tax
return
28
Trustee
Grantor
Husband’s
Trust
$5 Million
Beneficiaries =
Wife and Children
29
Trustee
Grantor
Wife’s Trust
$5 Million
Beneficiaries =
Husband and Children
30
Why
•
•
Estate and GST Exemption Applied - $10
Million + Appreciation Estate Tax Free
Asset Protection
Each Other
• Children
•
•
Access
31
Problems (and Solutions)
•
Legal Issues
Support
• Reciprocal Trust
•
•
•
Divorce
Death
• Life
Insurance (for protection
and as an investment)
32
Why Not a GRAT?
33
Rethinking Life Insurance
after ATRA
• What are the reasons for buying the existing
amounts and types of life insurance? Are
they still valid?
• If to create estate liquidity, does it still make
sense with a $10+ million exemption
between spouses?
• If in a trust, how best to deal with policies
that exceed current needs?
34
Rethinking Life Insurance
after ATRA
• Should high net worth clients use some or all
of their transfer tax exemption to purchase a
single pay policy?
• Consider the income tax advantages of life
insurance for those in the 39.6% bracket and
subject to the 3.8% Medicare surtax.
• If held individually, should whole life policies
be retained to provide tax-free borrowing or
to supplement retirement funding?
35