2. Business Planning After TC&JA of 2017 (Tax Cuts & Jobs Act or TCJA)

3. Tax Cuts & Jobs Act Consider: Everything we talk about in this session
is in the context of
Potentially lower federal business taxes!

4. Tax Cuts & Jobs Act Lowers federal business taxes:
‘C’ corporation’s top Federal tax bracket = 21%
Pass through entities - Code §199A

5. New Code §199A Up to 20% Deduction for Pass Through Entities and Sole Proprietorships

6. Tax Cuts & Jobs Act Pass through entities: ‘S’ corporations
Partnerships
Limited Liability Companies (LLCs)
Sole Proprietorships
Top marginal rate with full deduction 37% x (1-20%) = 29.6%

7. Code §199A 20% Deduction for Pass-Through Entities
If Combined
Individual Taxpayer Taxable Income is
Married Filing Jointly
or Single Filer 1
Less
Than
$315,000
$157,500 2
Within
the Range
$315,000 - $415,000
$157,500 - $207,500 3
Greater
$415,000
$207,500
Then Deduction Equals
20% of QBI*
Phased out Pro-Rata
Service Business?
If Yes Deduction = $0
If No Go to Separate Test
Deduction Equals Lesser of:
QBI x 20%
The Greater of
W-2 Wages x 50%
W-2 Wages x 25% + 2.5% x Unadjusted Basis of Qualified Bus. Property (still subject to depreciation)
* QBI = Qualified Business Income = Business Profits

8. Code §199A 20% Deduction for Pass-Through Entities
Service Business - Principal asset is skill of 1 or more of its employees:
Service Business
Exceptions
Law
Accounting
Medical & Health
Financial Services
Consulting
Athletics
Architecture
Engineering

9. Code §199A 20% Deduction for Pass-Through Entities
Combined Income Less Than
$315,000 Married filing jointly
$157,500 Single filer
Full 20% deduction for qualified business income

10. Code §199A 20% Deduction for Pass-Through Entities
If Combined Income in the Range
$315,000 - $415,000 Married filing jointly
$157,500 - $207,500 Single filer
Phase out deduction
Example ($340,000 MFJ income)
20% x [1 - (Income - $315,000)/$100,000]
20% x [1 – ($340,000 - $315,000)/$100,000
20% x (1 – 25%) = 15%

11. Code §199A 20% Deduction for Pass-Through Entities
Combined Income Greater Than
$415,000 Married filing jointly
$207,500 Single filer
Treatment depends whether business is a Service Business or not

12. Code §199A 20% Deduction for Pass-Through Entities
If combined Income Greater Than
$415,000 Married filing jointly
$207,500 Single filer
If Service Business, deduction = $0
If non-Service Business, treat each business separately, deduction = Lesser of:
QBI x 20%
The Greater of
W-2 Wages x 50%
W-2 Wages x 25% + 2.5% x Unadjusted Basis of Qualified Bus. Property (still subject to depreciation)

13. Deduction for Passthrough Entities (LLC, PS, ‘S’ Sole Proprietorship)
Code §199A
Deduction for Passthrough Entities (LLC, PS, ‘S’ Sole Proprietorship)
Start Here
Taxable Income ≤
$157.5 (Single)
$ (MFJ)
Taxable Income ≥
$207.5 (S)
$415 (MFJ)
Service
Business?
***
Stop No
Deduction No
Yes
Yes
Yes No No
Deduction =
QBI* x 20%
20% Deduction Reduced x
(QBI - $157.5)/$50K
(QBI - $315)/$100K
Deduction Equals Lesser of:
QBI x 20%
The Greater of
W-2 Wages x 50%
W-2 Wages x 25% + 2.5% x Unadjusted Basis of Qualified Bus. Property (still subject to depreciation)
*QBI (Qualified Business Income):
Qualified trade or business
Net income, gain, deduction and loss to
Determine taxable income of business.
I.E. Business Profits
***Service Business:
Principal asset is skill of 1 or more of its employees:
Exception
Not a Service Business:
Architecture
Engineering
Law
Accounting
Medical & Health
Financial Services
Consulting
Athletics
**MFJ (Married Filing Jointly)

14. Code §199A – Example 1 Lindsay (single)
Net business income from her consulting business (sole proprietorship with no employees) of $140,000.
Her taxable income from other sources after deductions equals $150,000.
Her §199A deduction is $28,000 (20% of $140,000 business income)
The wage and capital limitation, as well as the professional services restriction, don’t apply because
She is under the income threshold of $207,500 for a single tax payer.

15. Code §199A – Example 2 Cheryl (married) has Her §199A deduction is $0
Net business income from her Law firm (S Corp. with 7 employees) of $440,000.
Her §199A deduction is $0
The Service Business restriction applies, because she exceeds the top married income threshold of $415,000.

16. Code §199A – Example 3 Tim (married filing jointly) has
Net business income from his retail business (S Corp. with 5 employees) of $350,000.
His business has
$300,000 of W-2 wages (including W-2 of $100,000 for himself)
Qualified property originally purchased for $2,000,000 (still depreciable)
His §199A deduction is $70,000, the Lessor of:
$70,000 (20% of $350,000 business income), or
Greater of
$150,000 (50% OF $300,000 wages) or
$125,000 [$75,000 (25% of $300,000 wages) + $50,000 (2.5% of $2M qualified property)]

17. Code §199A Strategies to Maximize Deduction
Increase owner’s salary to increase W-2 Wages x 50%.
Gift business to separate non-grantor trusts
For example one trust per child and grandchild.
Each trust
Is a separate taxpayer
Has less than $157,500 of income
Gets the full 20% of QBI deduction.
Spin off separate operating business. For example, spin off medical practice real estate into separate LLC.

18. Code §199A Deduction for Passthrough Entities (LLC, PS, ‘S’ Sole Proprietorship)
Key Information:
Each individual owner’s total taxable income net of deductions
Type of business (service vs. non-service, architecture, engineering)
Business profits (business income net of expenses, depreciation & losses)
Total W-2 wages of business including owners’ salaries (exclude business income)
Owners salaries (W-2)
Qualified property (depreciable property used in operating business that is still being depreciated)
It is up to the client’s legal and tax advisors to determine whether client qualifies for Code §199A deduction.

19. Structuring the Buy-Sell Review
Stock Redemption vs. Cross Purchase
Cash Basis vs. Accrual Basis Taxpayer
Wait-and-See Buy-Sell
Trusteed Cross Purchase

20. Structuring the Buy-Sell
Stock (or Entity) Redemption
Benefits:
One policy per shareholder (regardless of # of shareholders)
No Transfer-for-Value following death of a shareholder
Drawbacks:
Reduced stepped up basis for survivors
Exception: cash basis taxpayers that are flow-through entities (see below)
AMT exposure on life insurance owned by ‘C’ corporations only
Cross Purchase
Stepped up basis for survivors
No AMT exposure
Multiple policies = n x (n-1)
Transfer of decedent’s policies following death (potential transfer-for-value)

21. Cash vs. Accrual Basis Taxpayer ‘S’ Corporation, Partnership or LLC (Flow-Through Entities)
Realizes income or deductions as soon as
There is a legal right to income
There is a legal obligation to pay the expense
Even though the business has not yet
Received the income or
Paid the expense
Cash Basis Taxpayer
Recognizes income and deductions as soon as
The income has actually been received or the expense paid

22. Cash or Accrual Basis Taxpayer ‘S’ Corporation, Partnership or LLC (Flow-Through Entities)
Life insurance payable to a flow through entity
Increases the owners’ basis pro-rata.
Tax free when paid out – decreases owners’ basis
Note: This is how the tax free character is maintained.

23. Accrual Basis Taxpayer Redemption ‘S’ Corporation, Partnership or LLC (Flow-Through Entities)
For an accrual basis taxpayer, upon death
Owners’ (including decedent’s) basis increases pro-rata
Decedent’s basis increase is “wasted” since the estate receives a stepped up basis

24. Cash Basis Taxpayer Redemption ‘S’ Corporation, Partnership or LLC (Flow-Through Entities)
For a Cash Basis Taxpayer
Business Entity is an ‘S’, LLC or PS
Structure buy-sell as a redemption
Benefits
The surviving owners can receive a full step up in basis
One policy per owner

25. Cash Basis Redemption ‘S’ Corporation, Partnership or LLC (Flow-Through Entities)
Upon the death of a shareholder:
Entity redeems decedent’s interest with a promissory note.
Surviving owners hold 100% of the ownership interests.
Entity closes the tax year (i.e. creates a partial tax year).
In the new tax year,
Business files death claim
Life insurance proceeds allocated to the surviving shareholders
100% of the basis is allocated to the survivors

26. Wait-and-See Buy-Sell
Situation
Parties want flexibility to fund buy-out with either (or both)
Business funds
Personal funds
Address transfer-for-value in multiple shareholder setting
In a ‘C’ or ‘S’ corporation, following the first death, possible transfer-for value violation when survivors purchase decedent’s interest in remaining policies.
Wait and See Buy-Sell
Structure
Business option to redeem
Individual option to purchase balance
Business obligation to redeem
Funding
Individual policy ownership
Use business funds to redeem shortfall
Business can purchase policies from decedent’s estate
Note: Over time, converts cross purchase to redemption.

27. Trusteed Cross Purchase
Benefit: One policy per owner.
“Trustee” owns policies and executes terms of the agreement on behalf of the individual shareholders (cross purchase)
As an escrow agent, “Trustee” is agent of the individual shareholders and stands in the shoes of each individual shareholder
It is a cross purchase buy-sell (stepped up basis) with fewer policies
In a ‘C’ or ‘S’ corporation, following the first death, possible transfer-for value violation when survivors purchase decedent’s interest in remaining policies.

28. Trusteed Cross Purchase
When to use
Owners don’t trust each other to execute the terms of the agreement or simply want to ensure that agreement is executed according to its terms.
Business has two owners
Multiple owners of
PS or LLC
‘C’ or ‘S’ corporation where shareholders also own common interest in a PS or LLC
Following death of an owner, surviving owners are comfortable shifting policies to the business (combined trusteed and wait-and-see buy sell)

29. Structuring the Buy-Sell What’s New?
Partnership Redemption
Endorsement Buy-Sell

30. Partnership Buy-Sell Application: Multiple shareholders concerned with
Number of policies in a cross purchase or
Transfer for value following first death. I.E. ‘C’ or ‘S’ corporation who don’t have commonly owned PS or LLC interest
‘C’, ‘S’, PS or LLC accrual basis taxpayer who want to do a redemption to reduce number of policies.
Owners with multiple businesses looking to centralize insurance and limit number of policies.

31. Partnership Buy-Sell Partnership (or LLC) owns the policies
Policies are the sole assets of the partnership
Partnership is the owner and beneficiary
Partners manage partnership (not a separate trustee)
Partnership is a cash basis taxpayer

32. Partnership Buy-Sell – Cross Purchase
LI PS is a Cash Basis Taxpayer
Equal partners (1/3rd each)
A contributes ½ premiums on B & C
B contributes ½ premiums on A& C
C contributes ½ premiums on A & B A
LI Only Partnership
Core Business LI On A
Operating Business(es)
Need Buy-Sell
Can be
‘C’ or ‘S’ Corp.
Partnership
LLC
A Dies
LI Partnership redeems A’s interest for a promissory note
(A’s interest in policies insuring B & C)
Partnership closes the tax year
Partnership collects proceeds (basis allocated to two remaining 50/50 partners)
Partnership distributes proceeds to B & C
B & C purchases A’s Interest
A continues to pay premiums on B
B continues to pay premiums on A
No transfer-for-value B LI On B LI On C
Review Slide Content C
PS Owner & Benef.

33. Partnership Cross Purchase
Upon death of a shareholder
Policy proceeds paid to the partnership
Split the tax year so that basis increase allocated to surviving partners
Each partner uses proceeds to purchase decedent’s
Interest in the business
Interest in the policies on the surviving partners (part of formula clause)
An existing trusteed cross purchase can be converted to a partnership agreement.

34. Endorsement Buy-Sell The Basics: Endorsement Cross Purchase
Each insured
Owns policy insuring his or her own life
Endorses death benefit to non-insured partner
Non-insured partner pays one-year term cost
If large discrepancy in premiums (due to age or health), can equalize premiums through bonus plan
Last man standing really wins
Is the endorsement a transfer-for-value?

35. Endorsement Buy-Sell Transfer-for-value
A transfer for a valuable consideration of a life insurance contract or any interest therein.
Exceptions
Insured (including to defective grantor trust wrt insured)
Transferee takes basis of transferor (Gift)
Transfer to a partner (PS or LLC) of the insured
Transfer to a corporation in which the insured is an officer or shareholder

36. Example 1 - Endorsement Cross Purchase
Perm LI
on A
A Pays One-Year Term Cost on
$2.5M Coverage on B’s Life
Parties
Cross Endorse
$2.5M DB
For Buy-Sell B
B Pays One-Year Term Cost on
$2.5M Coverage on B’s Life
Perm LI
on B
Review Slide Content

37. Example 1 - Endorsement Cross Purchase - Flexibility
A Dies 1st - $3.5M DB:
B will receive $2.5M for B-S
A’s Family $1M + $2.5M B-S
$3.5M
UL G
on A
Extra $1M fbo Family
Parties
Cross Endorse $2.5M
For Buy-Sell B
$2.5M
VUL
on B
Opt II
Review Slide Content
B Dies 1st - Opt II increasing DB:
A will receive $2.5M for B-S
B’s Spouse will receive DB = CV + $2.5M B-S
Policy Emphasizes Accumulation

38. Example 1 - Sell the Business
UL G
on A
Opt II
$3.5M UL G fbo Family
+ Sale Proceeds
A’s Family
Parties Tear Up Endorsements
Now Personally Owned LI
No Transfer!
No Transfer-for-Value!
B & Spouse B
$2.5M VUL for Income
+ Sale Proceeds
$2.5M
VUL
on B
Opt II
Review Slide Content

39. Example 2 - Endorsement Cross Purchase with Trust
A Gifts Premiums UL
on A
Opt II
ILIT fbo A’s Family
Parties ILITs’
Cross Endorse $25M B
Review Slide Content
B Gifts Premiums UL
on B
Opt II
ILIT fbo B’s Family

40. Example 2 - Endorsement Cross Purchase with Trust
A Gifts Premiums UL
on A
Opt II
ILIT fbo A’s Family
Tear up Endorsement B
Review Slide Content
B Gifts Premiums UL
on B
Opt II
ILIT fbo B’s Family

41. Example 3 - Endorsement Cross Purchase with Trust
A Gifts Premiums UL
on A
Opt II
ILIT fbo A’s Family
Parties ILITs’
Cross Endorse NAAR B
Review Slide Content
B Gifts Premiums UL
on B
Opt II
ILIT fbo B’s Family

42. Recapitalization Separating Control and Value (For ‘C’ and ‘S’ Corporations)

43. Control of the business
Step 1:
Recapitalize business into voting and non-voting shares
Voting 100% Control 1% Value
Non-Voting 0% Control 99% Value
Step 2 – Upon First Death:
Surviving brother purchases voting
Note: Allow deceased brother’s ILIT to buy-back.
Place voting shares in a voting trust
Note: Voting shares are legally owned by deceased brother’s
ILIT but are subject to the terms of the voting trust.