1 Real Estate Profits: A Matter of Timing and Technique O Presented by James F. Normandin, President Memorial Medical Center Foundation 2801 Atlantic Avenue Long Beach, CA (562) The material presented is for educational purposes only and should not be considered to be legal or accounting advice and prior to implementation of any of the ideas presented, one should seek the counsel of their tax and/or legal advises. Tax-Wise Exit Strategies SIOR Palm Spring 2006 Conference

2 Question is…what now? How can I transfer these values to my heirs? Minimize the tax bite after 20 years of depreciation deductions? Mitigate estate taxes? Pass the office building to a son and/or daughter? Will a combination of gift and sale strategies achieve my goals? Transferring highly appreciated real estate values to the next generation provides a special challenge. After all the wrangling over estate tax repeal in both Houses, most observers would consider a permanent exemption equivalent at 2009’s $3.5 million about the best we can expect. Considering such an exemption amount, $10 million of property market value makes for a $6.5 million taxable transfer at death. At 2009s 45% tax rate the question becomes…what do you advise your executor or trustee to sell? To show you the planning possibilities and oversimplify in the process…if that $10 million property were placed in a 7% charitable lead trust and passed 14 years later to your heirs (with all its appreciated value)…your estate would pay no tax.

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4 Mr. and Mrs. Property Owner are faced with a dilemma that everyone ultimately must come to terms with, do we… Keep? Sell? Gift? Let’s explore some of the options available to Mr. and Mrs. Property Owner of 1031 Property: Keep in mind: Humanics before mechanics James F. Normandin, President - Memorial Medical Center Foundation

5 Outright Sale $10,000,000 Mr. and Mrs. Property Owner, Age 76 and 74, Sells their Building Results Cost Land $800,000 Cost Building 950,000 Accum. Dep. (950,000) Adjusted Basis 800,000 FMV, land and building $10,000,000 Federal Tax Liability if sold: Proceeds $10,000,000 Less Commission (5%) (500,000) Less Adjusted Basis (800,000) Gain 8,700,000 Section 1250 Gain$950,000 Tax S&F (33%) (313,500) Capital Gain $7,750,000 Tax S&F (22%) (1,705,000) Total Tax Liability if sold $2,018,500 Selling costs ($500,000) After tax cash proceeds if sold $7,481,500 (less commission & tax) Mr. and Mrs. Property Owner invest net proceeds at 5.5% = annual income of $411,482

6 Bargain Sale Arrangement  Purchase of a property by a charity for less than its fair market value, Cash/Installment Note or both;  Donor receives income tax deduction for difference between FMV of property and purchase price;  Some capital gains tax relief on appreciated property;  Can be appropriate for encumbered property – donor’s equity is the deduction. James F. Normandin, President - Memorial Medical Center Foundation

7 Bargain Sale $10,000,000 Gift $3,500,000 Family Donor Advised Fund Grants to areas of interest $5,000,000 amortized at 6% over 15 years LTCG Taxes $231,000 Net Cash $1,269,000 “Bargain Installment Sale” of The Building $1,500,000 Cash Paid $42,183/M Term Income $7.594,711 $3,500,000 Charitable Deduction 42% tax Bracket = Taxes saved $1,470,000

8 Charitable Remainder Trust  Assets transferred to an individually managed and invested trust, from which donor or named beneficiary receives income and charity(s) receives remainder;  Benefits include: Immediate income tax deduction for value of charity’s remainder interest (per IRS tables); Avoidance of capital gains tax on appreciated property transferred to trust; Annuity trusts provide fixed income on initial value; Unitrusts provide variable income based on changes in principal value – FLIP provisions provide more flexibility. James F. Normandin, President - Memorial Medical Center Foundation

9 Mr. and Mrs. Property Owner Give their Building to their CRUT, MMCF as trustee. $10,000,000 Mr. and Mrs. Property Owner Receive: Income of $8,398,985* over their joint lifetime; Income tax deduction (over six years) of $4,252,600, carryover to shelter income or used to sell other assets. (Mr. and Mrs. Property Owner also avoid initial taxation.) *Trust earns 7.0% net of fees and expenses. Charitable Remainder Trust Scenario #1 James F. Normandin, President - Memorial Medical Center Foundation

10 $10,000,000 in a Charitable Remainder Trust with income to Mr. and Mrs. P.O. For Their Joint Lifetime and to the survivor. Charitable Legacy $10,422,692 to one or more public charities. Family Oversight an additional legacy. $10,000,000 $6,017, 078 net Income $4,,252,600 Income Tax Deduction *trust earns 7.00% net of fees and expenses. $1,786,0924 tax savings 42% S&F total cash after Tax $7,803,102

11 Mr. and Mrs. Property Owner Give 50% of their Building to CRUT/MMCF and 50% to their children. $10,000,000 $5,000,000 in a Charitable Remainder Trust with income to Mr. and Mrs. P.O. $5,000,000 (5%) in a Charitable Remainder Trust with income to Children for 20 yrs. Mr. and Mrs. P. O. receive: Income of $4,199,493 over their lifetimes; Income tax deduction of $2,126,300. (Tax savings 42% $893,046) Children receive: Income of $5,680,202* over 20 yrs.; Income tax deduction of $1,856,665. (Tax save $1779,799) Present value of gift $3,143,335* * Mr. and Mrs. PO used $44,000 of annual exclusion and $2 Mil of lifetime exclusion, net taxable 1, Charitable Remainder Trust Scenario #2

12 Mr. and Mrs. Property Owner Income Gives 50% UDI to a Charitable Remainder Unitrust and a 50% UDI to her two children, Dora and Sal utilizing individual FLIP Unitrust. $10,000,000 $5,000,000 in a Charitable Remainder Trust with income to Mrs. Seymour $2,500,000 in a Charitable Remainder Trust FLIP with income to Son for life M&M Income receives: Income of $4,199,493 over their joint lifetimes; Income tax deduction of $2,126,300. (Additional deduction $1,524,425) Daughter receive net income to 65 then full distribution for life. Income of $6,547,414* over her lifetime; Present value of gift $1,765,700* * Mr. and Mrs. PO used $44,000 of annual exclusion and $2M lifetime exemption, and taxable gift of $1,431,575. Charitable Remainder Trust Give it Twice Plan Scenario #3 $2,500,000 in a Charitable Remainder Trust FLIP with income to Daughter for life Son receives net income to 65 then full distribution for life. Income of $4,491,340 over his lifetime; Present value of gift $1,709,875*

13 Zero-Tax: Part Gift, Part Sale Scenario # 4 Case Study Mr. and Mrs. Property Owner own an appreciated asset with a FMV of $10,000,000 and a tax basis of $800,000. They like the idea of using a CRT to avoid capital gain taxes, but they also would like some of the principal for liquidity and personal needs. Mr. and Mrs. Property Owner own an appreciated asset with a FMV of $10,000,000 and a tax basis of $800,000. They like the idea of using a CRT to avoid capital gain taxes, but they also would like some of the principal for liquidity and personal needs. A Possible Solution... A Possible Solution... TAX James F. Normandin, President - Memorial Medical Center Foundation

14 Sale and Trust Asset$10,000, Gift $6,000,000 Charitable Income Tax Deduction $2,551, Sell $4,000,000 for cash for cash Results: ZERO TAX Sale $4,000,000 Prorated Basis/Costs $ (530,000) Capital Gain $3,470,000 C.G. Tax/1250 Tax $ 796,364 Trust$6,000,000 Income Tax Ded.$2,551,560 Tax 42% $1,071,655 LTCG and 1250 Tax Liability is recovered through tax savings. LTCG and 1250 Tax by-passed with CRT $1,377,000. Charitable Remainder Trust $6,000,000 CRT income for life $5,039,391 Remainder to Charity's) $6,253,615

15 Lead Trust: The “Wait Awhile Trust” Scenario #5 $10,000,000Donor Gift or estate tax deduction: $5,153,346 Income to charity Through Family Donor Advised fund or Family Donor Advised fund or Family Named Supporting Foundation 509(a)(3) Family Named Supporting Foundation 509(a)(3)$7,500,000 $10,000, year CLT 15-year CLT Asset / Principal to heirs $14,416,188* *Property value is assumed to appreciate at 2% per year. $1,987,285 saved in gift or estate taxes.