growing and preserving assets through tax and estate planning - tina davis, ctc | mycfo
TRANSCRIPT
IFG Wealth Management Forum
Growing and preserving assets through tax and estate planning
Tina Davis Milligan, CPA
Managing Director, Family Office Services
>Current and future tax law landscape
>The importance of overall financial planning
> Income tax planning opportunities
>Estate planning opportunities
Agenda
Current and future tax landscape
Tax rates 2012 2013, 2014, 2015, 2016
Ordinary income 39.6% for income over threshold levels1
35% 35%
33% 33%
28% 28%
25% 25%
15% 15%
10% 10%
Alternative minimum tax2 26% / 28% 26% / 28%
Interest Ordinary income rates Ordinary income rates
Long –term capital gains and qualifying dividends 20% for income over threshold levels1,3
15%3 15%3
0%3 0%3
Personal exemption phaseout (PEP) None Restored
Limitations on deductions None Restored
Health care reform increases None 3.8% on investment income4
None 0.9% on earned income
1. For taxpayers whose income exceeds $450,000 for married filing jointly and $400,000 for single filers
2. ATRA permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012 and providing that the exemption amounts will be indexed for inflation in
future years
3. For taxpayers in the 10% or 15% marginal income tax bracket, special 0% rate generally applies. Taxpayers in the 25%, 28% 33% or 35% tax brackets, a 15% maximum rate will
generally apply. Taxpayers in the 39.6% tax bracket will be subject to a maximum rate of 20%.
4. 3.8% on “unearned income” to taxpayers above $250,000 for married filing jointly and $200,000 for single filers
Income taxes
3
Subject to surtax Exempt from surtax
Wages X
Active business income X
Self-employment income X
Gain from sale of active business X
Retirement plan distributions X
Taxable interest X
Exempt interest X
Dividends X
Annuity income X
Passive royalty X
Active royalty X
Rents X
3.8% Medicare “surtax”
Types of income subject to surtax
Estate, GST, and Gift taxes
Estate, gift and generation-skipping tax. ATRA prevented steep increases in estate, gift and generation-skipping transfer (GST) tax that were
slated to occur after 2012 by permanently keeping 2012 exemption level indexed for inflation. In 2015, the estate, gift and GST tax exemption
amounts increased to $5,430,000. However, ATRA also permanently increased the top estate, gift and GST tax rate from 35% to 40% for 2013
and beyond. ATRA also continued the portability feature that allows the estate of the first spouse to die to transfer his or her unused exemption to
the surviving spouse.
Year Estate tax exemption
GST tax exemption
Gift tax exemption
Top estate, gift and GST tax rate
2012 $5.12 million
(portable) $5.12 million $5.12 million 35%
2013 ATRA $5.25 million
(portable) $5.25 million $5.25 million 40%
2014 $5.34 million
(portable) $5.34 million $5.34 million 40%
2015 $5.43 million
(portable) $5.43 million $5.43 million 40%
2016 $5.45 million
(portable) $5.45 million $5.45 million 40%
5
Overall financial planning
0
10
20
30
40
50
60
70
80
Tax planning No tax planning
Without tax planning, significant wealth can be lost to tax bills
$ mm After tax value of assets with tax planning After-tax value of assets with no planning
Value lost to taxes
Tax planning can significantly preserve wealth
Business ownerBusiness
owner's spouseJoint
Revocable Trust
(for Business
owner- non-
probate)
Revocable Trust (for
Business owner's
spouse-non-probate)
Total Includable Family Trust
Charitable
Trust or
Private
Foundation
ILIT for
Business
owner
ILIT for
Business
owner's
spouse
Joint ILITTotal Non-
IncludableTotal
Non-Qualified Assets
Marketable Securities - - 2,500,000 - - 2,500,000 - - - - - - 2,500,000
Total Non-Qualified Assets - - 2,500,000 - - 2,500,000 - - - - - - 2,500,000
Lifestyle Assets
Tangible Property - - - - - - - - - - - - -
Homes - - 1,500,000 - - 1,500,000 - - - - - - 1,500,000
Total Lifestyle Assets - - 1,500,000 - - 1,500,000 - - - - - - 1,500,000
Business Assets
Business Assets 100,000,000 - - - - 100,000,000 - - - - - - 100,000,000
Total Business Assets 100,000,000 - - - - 100,000,000 - - - - - - 100,000,000
Qualified Assets
Tax-deferred investments 500,000 - - - - 500,000 - - - - - - 500,000
Total Qualified Assets 500,000 - - - - 500,000 - - - - - - 500,000
Death Benefit of Life Insurance 1,000,000 - - - - 1,000,000 - - - - - - 1,000,000
Total Assets 101,500,000 - 4,000,000 - - 105,500,000 - - - - - - 105,500,000
Liabilities
Home Mortgage - - - - - - - - - - - - -
Total Liabilities - - - - - - - - - - - - -
Total Net Worth 101,500,000 - 4,000,000 - - 105,500,000 - - - - - - 105,500,000
Non-IncludibleIncluded in estate
Integrated balance sheet
8
Objective:
move assets from
included to non-
includible to
reduce estate, GST
tax
Taxable investments
2.4% Personal residence
1.4%
Business95.7%
Retirement investments
0.5%
Integrated balance sheet allocation
9
Integrated cash flow 2015 2016 2017
Cash Inflows
Employment Inflows
Salary 300,000 0 0
Total Employment Inflows 300,000 0 0
Investment Inflows
Distribution from business for taxes 450,000 0 0
Business sale proceeds 100,000,000 0 0
Income from investments 112,482 3,566,487 3,787,657
Total Investment Inflows 100,562,482 3,566,487 3,787,657
Total Cash Inflows 100,862,482 3,566,487 3,787,657
Cash Outflows
Lifestyle Expenses
Living expenses 300,000 309,000 318,270
Total Lifestyle Expenses 300,000 309,000 318,270
Savings
Investment account 77,585 2,223,426 2,368,676
After-tax business sale proceeds 76,612,912 0 0
Total Savings 76,690,497 2,223,426 2,368,676
Taxes
Federal Income Tax 20,074,358 805,233 857,097
State Income Tax 3,782,176 133,571 141,860
Social Security Tax - employment 7,347 0 0
Medicare Taxes 8,104 95,257 101,753
Total Taxes 23,871,985 1,034,061 1,100,711
Total Cash Outflows 100,862,482 3,566,487 3,787,657
Does this meet your
cash flow needs?
Is this assessment
accurate?
Does this change your asset allocation?
Does this have an impact on other
financial planning goals and objectives?
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Integrated income tax
2015 2016 2017
Regular Tax Calculation
Calculation of Total Income
Employment $300,000 $0 $0
Investment
Interest $17,040 $540,290 $573,796
Dividends $33,143 $1,050,855 $1,116,022
Investment Capital Gains $36,762 $1,165,619 $1,237,903
Capital Gains from Business Sale $99,450,000 $0 $0
Ordinary Business Income $1,000,000 $0 $0
Total Income $100,836,945 $2,756,765 $2,927,721
Total Tax Calculation
Regular Federal Tax $20,074,358 $805,233 $857,097
Alternative Minimum Tax $0 $0 $0
Net Federal Tax $20,074,358 $805,233 $857,097
Social Security Tax - employment $7,347 $0 $0
Medicare Tax - employment $4,800 $0 $0
Medicare Tax - unearned income $3,304 $95,257 $101,753
State Income Tax $3,782,176 $133,571 $141,860
Summary
Total Income Tax $23,871,985 $1,034,061 $1,100,711
Income after Tax $75,990,497 $2,532,426 $2,686,946
Federal Tax Bracket 39.60% 39.60% 39.60%
Effective Marginal Tax Rate 46.85% 46.85% 46.85%
Adjust to meet your cash
flow needs and risk tolerance
Does this change your asset allocation?
Does this have an impact on other
financial planning goals and objectives?
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Tax
Tax
Estimated gross estate: 105,500,000
Estimated administration expenses: (2,025,350)
Debts: 0
Estimated estate taxes: (37,045,860)
Estimated income taxes: (146,886)
Business owner Joint Business owner's spouse Non-includible
101,500,000$ 4,000,000$ -$ -$
Expense and Debts
-$ 1,035,000$
Nonmarital Trust Charity Business owner's spouse Non-includible
5,430,000$ -$ 99,035,000$ -$
Non-includible
66,281,904$ -$ -$
Expense and Debts
37,192,746$ 990,350$
Beneficiaries Charity
Estate disposition Business owner’s spouse survives business owner
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Income tax planning opportunities
• Ongoing review of goals and objectives, asset allocation and tax efficiency
• Capital gain/loss offsetting, as appropriate (consider any capital loss carryovers)
• Consider asset location by placing tax inefficient investments with ordinary income/short term gain investments such as corporate bonds/hedge funds/private equity in tax advantaged accounts such as IRAs or 401ks
• Consider annuities (tax deferred) and life insurance (tax free) where appropriate
• Take Required Minimum Distributions
• Use of tax deductible leverage
• Mortgage interest
• Home equity
• Business interest
• Investment interest to offset investment income
• Maximizing savings to qualified plans such as 401ks and IRAs
• Consider converting traditional IRA to Roth IRA
• Defer or accelerate income based on anticipated tax bracket/rates?
• Accelerate or defer deductions based on anticipated bracket/rates and/or pending legislation or expiring provisions?
• Defer or accelerate losses
• Itemized deduction planning
• Maximize deductions such as taxes, charitable contributions and interest deductions
• Itemized deduction limitation planning
• Alternative minimum tax planning
• Medicare surtax planning
• Estimated tax planning
• Give income producing assets to beneficiaries in a lower tax bracket
Annual planning
considerations
Tax efficient
investment
considerations
Tax efficient
leverage
considerations
Tax efficient
savings
considerations
Income tax planning strategies
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Consider tax efficiency of investment assets – asset
location
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Capital losses are more tax effective when used to offset
income taxed at higher tax rates (e.g., short-term capital gains and
ordinary income)
Short-term gain Long-term gain
Short-term loss Neutral Ineffective
Long-term loss Effective Neutral
Capital loss considerations
Donating shares to charity
• Charitable remainder trust (CRT)
• Charitable lead trust
• Directly to charitable institution
• Donor-advised fund
Defer capital gain
No capital gain
Example: $1 million charitable gift, zero cost basis
Income tax
Capital gains tax
Charitable gift
Embedded capital gains tax liability
Income tax benefit
Out-of-pocket cost of charitable gift
Anticipated future tax rates
40%
20%
$1,000,000
(200,000)
(342,005)
$457,995
Assumes AGI $5 million
*Includes impact of itemized deduction phase-out reinstated in 2011
*
Charitable planning: out of pocket cost of giving
appreciated stock
Example: $1 million cash gift to charity
Income tax
Charitable gift
Income tax benefit
Out-of-pocket cost of charitable gift
Anticipated future tax rates
40%
$1,000,000
(300,005)
$699,995
Assumes AGI $1 million
*Includes impact of itemized deduction phase-out reinstated in 2011
*
Charitable planning: out of pocket cost of cash gifts
Estate planning opportunities
• $14,000 per individual
($28,000 gift splitting
with spouse) per donee
• Direct tuition payments
to educational
institution1
• Direct payments to
health care provider for
medical expenses1
• Gift tax exemption of up to
$5.43 million per individual
• GST and estate tax
exemptions3
– GST trust
• Family limited
partnership (FLP)
• Family limited liability
company (FLLC)
• Family corporation (C
or S corporation)
• Grantor retained annuity trust
(GRAT)
• Intentionally defective grantor
trust (IDGT)
• Qualified personal residence
trust (QPRT)
• Intra-family loan
• Pay gift tax now
rather than paying
estate tax later
Transfer of wealth
excluded from
any gift tax
Transfer of wealth
through GST, estate, and
gift tax exemptions
Transfer of wealth
utilizing discount
strategies
Transfer of wealth
utilizing freeze strategies
(appreciation-only gifts)
Transfer of wealth
through
taxable gifts
Over your lifetime
• Irrevocable life insurance trusts (ILIT)2 • Statutory freeze partnership (FLP or FLLC)4
• Converting traditional
IRA to Roth IRA5
1 To qualify for exclusion, gifts (a) of tuition must be made directly to the educational institution; and (b) for medical expenses must be made directly to the
health care provider 2 Often can be structured to use annual exclusion gifting 3 In 2015, an estate tax is assessed at a top rate of 40% with a $5.43 million estate tax exemption and a $5.43 million GST tax exemption 4 Can serve to both utilize discount and transfer wealth utilizing freeze strategies 5 Paying the income tax in converting a traditional IRA to a Roth IRA is essentially a tax-free gift
Annually
• Marital trust gift
planning
Charitable planning over your lifetime
• Spousal Lifetime Access Trust (SLAT)
Wealth transfer strategies
Testamentary planning (including charitable)
20
Married couple net worth
$<=$4 million
Married couple net worth
$>=$10 million
Federal taxable
estate
$4 million
Federal exemption
used
$4 million
Federal estate
tax
$0
State taxable
estate (Illinois)
$4 million
State exemption
(Illinois)
$4 million
State estate tax
(Illinois)
$0
Federal taxable
estate
$10 million
Federal
exemption
$10 million
Federal estate
tax
$0
State taxable
estate (Illinois)
$10 million
State exemption
(Illinois)
$4 million
State estate tax
(Illinois)
$783,200
2
1
Beware state exemption amounts
Estate tax Generation-
skipping tax
Federal taxable
estate
$0
Federal
exemption
$5 million
Federal estate
tax
$0
Federal taxable
estate
$10 million
Federal
exemption
$10 million
Federal estate
tax
$0
1st spouse to die 2nd spouse to die
2
2
Federal taxable
estate
$0
GST
exemption
$5 million
GST
tax
$0
Federal taxable
estate
$10 million
GST
exemption
$5 million
GST
tax
$1.75 million
1st spouse to die 2nd spouse to die
State estate tax
Federal taxable
estate
$0
State
exemption
$2 million
State estate
tax
$0
Federal taxable
estate
$10 million
State
exemption
$2 million
State estate
tax
$927,000
1st spouse to die 2nd spouse to die
Don’t rely on portability
Take advantage of beneficial wealth-transfer strategies in our current economic environment
October mid-term AFR = 1.67%
October 7520 rate = 2.0%
GRAT
IDGT
Intra-family loan
QPRT
CLT Hurdle rate
Tax-free gift
A P P R E C I A T I O N
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Take advantage of our current economic environment
0
10
20
30
40
50
60
70
80
Tax planning No tax planning
Without tax planning, significant wealth can be lost to tax bills
$ mm After tax value of assets with tax planning After-tax value of assets with no planning
Value lost to taxes
Tax planning can significantly preserve wealth
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