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Understanding the R-CLAT Transaction

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Presentation on theme: "Understanding the R-CLAT Transaction"— Presentation transcript:

1 Understanding the R-CLAT Transaction
Phillip W. Hegg, JD, LLM PH Consulting Services

2 What The R-CLAT Is All About
Giving It All Away. . . . . . Getting An Income Tax Deduction . . . . . . Getting It All Back Again Client's Income

3 The Next 40 Minutes Is All About Money

4 The Next 40 Minutes Is All About Money
Your Client’s Money

5 What The R-CLAT Is All About
Step Forward - Examples Of The End Results Hoped To Be Achieved Client's Income

6 Example 1 – RCLAT Plan (Supplemental Income)
Client's Income

7 Example 2 – RMD-CLAT Plan (Wealth Transfer)
Client's Income

8 Example 3 – Business/Asset Sale (Supplemental Retirement)
Client's Income

9 High Net Worth/High Income Clients
33%

10 High Net Worth/High Income Clients
IRS

11 High Net Worth/High Income Clients
IRS

12 High Net Worth/High Income Clients
IRS STATES

13 High Net Worth/High Income Clients
Our Responsibility As Advisors

14 High Net Worth/High Income Clients
Whose Money Are We Dealing With?

15 High Net Worth/High Income Clients

16 Whose Money Is It Anyway?
Client's Retained Income Allocated To Taxes

17 High Net Worth/High Income Clients
With Planning . . .

18 HNW Clients - Putting More Money to Work
Allocation to Tax Plan Allocation to Taxes

19 HNW Clients – Government Subsidization of Your Plan
Allocation to Tax Plan Allocation to Taxes 97.14%

20 Comparison of Deductible Plans
Defined Benefit Plans V RCLAT Plan

21 Implementation of DB Plan v RCLAT Plan
Client Allocation to Tax Plan Tax Deferral Allocation to DB Plan Allocation to Taxes Client Income Allocation to DB Plan 97.14%

22 Exiting the Plans – RCLAT Plan v. DB Plans
Distributions Non-Taxable Distributions 100% Income Taxable Taxable Distribution Attributable to "Tax Subsidy" Taxable Distribution Based on Client Contribution To DB Plan Non-Taxable Distributions To Client and Family Group Distributions to Charity

23 Implementing a R-CLAT Plan

24 Who Is The Optimal Client?

25 Creating the Structure
The Client High Net-Worth High Income Single Event Large IRA/QP Philanthropic Other Client

26 Creating the LLC Structure
Client

27 Structure of the LLC Client LLC

28 Structure of the LLC Client LLC Classes of Ownership Class A Units
Class B Units Operating Agreement Attributes of Units Valuation Issue LLC

29 Contribution to the LLC
Client LLC

30 Contributions to LLC Client Client’s Contribution LLC

31 Contributions to LLC Client Client’s Contribution LLC Cash
IRA/QP Distributions Investment Assets Business Interests (Other than S Corp) Other Client’s Contribution LLC

32 Issuance of Interest for Contribution
Client Contribution LLC

33 Issuance of Interest for Contribution
Client LLC Issues Cl A, CL B Units Contribution LLC

34 Issuance of Classes of Unit Interests
Client Class A Units, Class B Units to Client to Client and Spouse Other LLC Issues Cl A, CL B Units Contribution LLC

35 Issuance of Interest for Contribution
Client Contribution Cl A, CL B Units LLC

36 The Charitable Lead Annuity Trust
Client Charitable Lead Trust Contribution Cl A, CL B Units LLC

37 The Charitable Lead Annuity Trust
Client CLAT Structure Term Payout Structure Other Charitable Lead Trust Contribution Cl A, CL B Units LLC

38 Contribution of Class A Units to CLAT
Client Contribution Cl A, CL B Units LLC Charitable Lead Trust

39 Contribution of Class A Units to CLAT
Client Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Charitable Lead Trust

40 Contribution of Class A Units to CLAT
Client Contribution of Cl A Units to CLAT Value of Class A Units Valuation Issues Other Contribution Cl A, CL B Units LLC Charitable Lead Trust

41 Contribution of Class A Units to CLAT
Client Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Charitable Lead Trust

42 LLC Operations LLC Operations Client Charitable Lead Trust LLC
Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Charitable Lead Trust

43 LLC Operations LLC LLC Operations Client Investment of Contributions
- Allocation to Investment Broker’s Determination - Allocation to Insurance IUL Contracts Investment Insurance Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

44 LLC Operations LLC LLC Operations Client Charitable Lead Trust
Determining % Allocation - Importance of % - Effect on Grantor Taxed Income Investment Insurance Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

45 LLC Investment Allocations
A Slight Diversion?

46 LLC Investment Allocations
Why Life Insurance?

47 Why Life Insurance In The Plan?
1. Insurance as an investment/asset class 2. Grantor trust rules

48 Why Life Insurance In The Plan?
Insurance as an investment As an asset of a trust or other entity

49 Why Life Insurance In The Plan?

50 Why Life Insurance In The Plan?

51 Why Life Insurance In The Plan?
But Does That Tell The True Story of Why Life Insurance ? No Question It Is A Excellent Investment Taking Into Consideration The Attributes of a Life Insurance Policy

52 Why Life Insurance In The Plan?
But The Next Statement from the Client “I Can Make More in Investments, Hedge Funds, Real Estate, Etc., Etc., Etc., . . .”

53 Why Life Insurance In The Plan?
The Answer “Can You Really Taking Into Consideration All Factors”

54 Comparative Analysis of Available Investments

55 What’s Happening to Hedge Funds?
Do You Believe?

56 Why Life Insurance In The Plan
Do You Believe In Life Insurance As An Asset Class?

57 Why Life Insurance In The Plan
More Importantly – Are You Able To Explain To Explain In “Relatable” Terms - The Concept of Asset Class - How Life Insurance As An Asset Class Compares to Other Investments

58 Why Life Insurance In The Plan
The Grantor Trust Rules

59 Grantor Trust Rules IRC § 671 – “Where it is specified in this subpart that the grantor shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor those items of income, deductions, and credits against tax of the trust attributable to that portion of the trust to the extent that such items would be taken into account in computing taxable income or credits against the tax “

60 Grantor Trusts and Insurance in the Plan
Why Is This Important? All Grantor Trusts (ILITs, IDGITs, Etc.) Impute To The Grantor, To Be Included On His/Her Individual Tax Return, The Items of Income and Deduction As Set Forth in The Grantor Income Tax Provisions of IRC §§

61 How Does The Grantor Income Rules Affect The RCLAT?
60% Inv/40% Ins Allocation

62 How Does The Grantor Income Rules Affect The RCLAT?
Income Attributed to Residual Beneficiaries to Grantor 60% Inv/40% Ins Allocation

63 How Does The Grantor Income Rules Affect The RCLAT?
Income Attributed to Residual Beneficiaries to Grantor 60% Inv/40% Ins Allocation 15% Inv/85% Ins Allocation

64 How Does The Grantor Income Rules Affect The RCLAT?
Income Attributed to Residual Beneficiaries to Grantor 60% Inv/40% Ins Allocation Income Attributed Grantor to Residual Beneficiaries

65 How Does The Grantor Income Rules Affect The RCLAT?
The Difference Between a 60%/40% and 15%/85% Allocation Gross Income $3,079,808 v $221,986 Grantor Taxation $1,858,520 v $102,047

66 Back to the Structure

67 LLC Operations LLC Client LLC Charitable Lead Trust Investment
Insurance Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

68 LLC/CLAT Operations LLC
Client Distributions – LLC to CLATt - Annual Distributions - Amount Determined by Operating Agreement - Level or Increasing Payout - Generally matches CLAT Payout Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

69 LLC/CLAT Operations LLC
Client Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

70 Charities or Foundation
CLAT Distributions Client Distributions by CLAT Charities Donor Advised Funds Foundations Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units Charities or Foundation LLC Investment Insurance Charitable Lead Trust

71 Charities or Foundation
CLAT Distributions Client Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units Charities or Foundation LLC Investment Insurance Charitable Lead Trust

72 Ongoing Operation of the Plan
What’s In It For The Client?

73 LLC Distributions to Client/Family
Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units Charities or Foundation LLC Investment Insurance Charitable Lead Trust

74 LLC Distributions to Client/Family
To Client If Designed for Retirement Benefits To Spousal Access Trust Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

75 LLC Distributions to Client/Family
To Family If Designed as Wealth Transfer Family Trusts Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

76 LLC Distributions to Client/Family
Distributions to Charities Additional Income Tax Deduction on Contribution Charitable Trusts/DAFs Contribution of Cl A Units to CLAT Contribution Cl A, CL B Units LLC Investment Insurance Charitable Lead Trust

77 What The R-CLAT Is All About
The End Results of the Process Client's Income

78 Example 1 – RCLAT Plan (Supplemental Income)
Client's Income

79 Example 2 – RMD-CLAT Plan (Wealth Transfer)
Client's Income

80 Example 3 – Business/Asset Sale (Supplemental Retirement)
Client's Income

81 What The R-CLAT Is All About
Giving It All Away. . . . . . Getting An Income Tax Deduction . . . . . . Getting It All Back Again Client's Income

82 What The R-CLAT Is All About
Client's Income

83 What The R-CLAT Is All About
Client's Income

84 What The R-CLAT Is All About
Client's Income

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