Tax Planning with a $5,000,000 Gift Tax Exemption Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP Phone: (920) 593-1701 E-mail:

Tax Planning with a $5,000,000 Gift Tax Exemption Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP Phone: (920) 593-1701 E-mail: Robert.Keebler@keeblerandassociates.com ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Provide an overview of the new law Discuss the powerful planning strategies that are rapidly developing Review the substantial weakness of the portability of the exemption between spouses Analyze income shifting opportunities Explore the spousal access trust Define the important asset protection strategies being developed 3 Course Outline ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Summary of New Law and Reversion in 2013 201120122013 Top Estate Tax Rate35% 55% Estate Tax Exemption$5,000,000 $1,000,000 Gift Tax Exemption$5,000,000 $1,000,000 GST Exemption$5,000,000 $1,000,000 4 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Adjusted for inflation

2010 Tax Relief Act (December 17, 2010) ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. 5 Summary of certain key provisions (not all-inclusive)  Income tax provisions  Extension of lower income tax rates until 2012  Extension of 0%/15% long-term capital gains tax rates until 2012  Extension of favorable tax treatment for qualified dividends until 2012  Extension of other income tax credits  Estate tax provisions  Reinstatement of estate and GST tax  Higher exemption amounts  Lower tax rates  Portability of estate tax exemption  Election out of 2010 Estate Taxes

6 Prior Estate/Gift Tax Law ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. 2010 – No estate tax – No GST tax – $1,000,000 lifetime gift tax exemption amount with a flat 35% gift tax rate on taxable gifts over the exemption amount 2011 & Beyond – $1,000,000 estate tax exemption amount with a maximum estate tax rate of 55% – $1,000,000 lifetime gift tax exemption amount with a maximum gift tax rate of 55%

Summary of Prior & New Estate/Gift Tax Law 20092010 (Prior Law) 2010 (New Law) 2011 (New Law) Top Estate Tax Rate45%0%35% Exemption$3,500,000N/A$5,000,000 Date-of-Death Basis IncreaseYESNO YES (unless estate tax is not elected) YES Carryover BasisNOYES NO (unless estate tax is not elected) NO 7 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Note: Under the current law, in 2013 the exemption reverts to $1,000,000

The new estate/gift tax law which passed in Congress allows an estate to elect out of the estate tax for the 2010 tax year – Effective date of law was made retroactive to 1/1/2010 – $5,000,000 estate tax exemption Indexed for inflation in 2012 – 35% marginal estate tax rate – Election out of the estate tax would result in application of the modified carryover basis rules 8 New Estate/Gift Tax Law ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

The general presumption under the new estate/gift law is that the estate tax applies to all estates in 2010 – Thus, one will need to affirmatively elect out of the estate tax Reunification of the gift and estate tax exemptions – $5,000,000 gift tax exemption (with a 35% gift tax rate) would apply to gifts after 12/31/2010 – Thus, the gift tax exemption in 2010 would remain $1,000,000 (with a 35% gift tax rate) – The exemption returns to $1,000,000 in 2013 – Window of Opportunity 9 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. New Estate/Gift Tax Law

2011 & 2012 Gifts 2011 & 2012 GST Transfers Spousal access trusts Income Shifting “Recapture issue” if exemption returns to $1,000,000 10 A Powerful Window of Opportunity ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

New Generation-Skipping Transfer (GST) Tax Law 11 2010 – GST Exemption Amount: $5,000,000 – GST Tax Rate: 0% – Available regardless of the estate tax election 2011 & 2012 – GST Exemption Amount: $5 Million (per person) – GST Tax Rate: 35% 2013 – GST Exemption Amount: $1 Million (plus inflation since 1998) – GST Tax Rate: 55% ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Unlike a surviving spouse’s ability to utilize a predeceased spouse’s unused unified credit, the new law does not allow a surviving spouse to use the unused GST tax exemption of a predeceased spouse. New Generation-Skipping Transfer (GST) Tax Law 12 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Taxable gifts in 2011 – $5,000,000 lifetime gift tax exemption (with a 35% tax rate on taxable gifts over $5,000,000) – Utilize the additional $4,000,000 of gift tax exemption to shelter future growth from estate tax 15 Tax Planning Opportunities in 2011 & 2012 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

$5,000,000 gifts in trust Spousal access trusts Life insurance trusts Dynasty trusts Income shifting family trusts Asset protection trusts 16 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Tax Planning Opportunities in 2011 & 2012

Concept One spouse transfers up to $5,000,000, in trust, to their spouse, children and future generations. 18 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Spousal Access Trust Benefits Asset protection Estate tax Direct decedent protection Income shifting Risks Reciprocal trust doctrine Grantor trust rules

Reciprocal Trust Doctrine Reciprocal trusts are trusts created by grantors whereby, upon transfer the grantors are in the same economic position as if they had created the trusts for themselves. Example: Mr. and Mrs. Smith create two separate trusts and fund each trust with assets of similar value, wherein, Mr. Smith’s trust provides that upon his death, his wife is a beneficiary of his trust, and Mrs. Smith’s trust provides benefits to Mr. Smith. In this example, the IRS would likely find that the Smiths have reciprocal trusts. Where this is the case, the Internal Revenue Service and/or courts will uncross the trusts and include the value of trust in each of the grantor’s gross estate. 19 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Reciprocal Trust Doctrine U.S. v. Estate of Grace, 395 US 316 (1969) Husband and wife each created a trust, at separate times, that contained identical provisions. The Supreme Court developed a two part test to determine whether a reciprocal trust situation existed: trusts must be interrelated transaction must leave the grantors of the trusts in the same economic position as they would have been in if they had created the trusts naming themselves as life beneficiaries. Court uncrossed the transfers and included the property in the wife’s trust into the husband’s gross estate. 20 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Estate tax-free Income tax-free Utilize the $5,000,000 exemption and the GST exemption amounts Determine need based on 2011 rates or 2013 rates? Irrevocable Life Insurance Trusts (ILIT) 22 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

A type of trust which holds a life insurance policy on the grantor’s life so as to benefit the grantor’s children without the imposition of future estate, gift and/or GST tax. To the extent that the grantor’s estate has insufficient liquid assets to cover the estate tax liability, trust assets can be lent to the estate or used to purchase assets from the estate. To the extent that the grantor does not hold any “incidents of ownership”, none of the trust assets will be included in his/her taxable estate. Irrevocable Life Insurance Trust (ILIT) Liquidity Strategies ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. 23

Grantors (Insured) ILIT (Beneficiary) Annual gifts to cover life insurance premiums Life Insurance Company Payment of premiums Discretionary distributions of income and principal during the lifetime of the trust’s beneficiaries Assets outside of the taxable estates of beneficiaries Payment of death benefit proceeds at death of insured Children & Future Generations Liquidity Strategies Irrevocable Life Insurance Trust (ILIT) ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. 24

A type of trust which benefits multiple generations where none of the assets held by the trust are included in either the grantor’s taxable estate or any of the beneficiaries’ taxable estates. - However, under the tax law, whenever a transfer is made by the grantor to a “skip person” (e.g., grandchild, great-grandchild, etc.) or a trust for their benefit (e.g., dynasty trust), a second level of tax is imposed on the transfer (in addition to gift tax). - Notwithstanding, a grantor is allowed a lifetime GST exemption on the first $5,000,000 of taxable transfers to “skip persons”. Thus, if the grantor allocates all or a portion of his/her GST exemption to the entire transfer, none of the transfer will be subject to GST tax either in the current year or future years. Dynasty Trust Summary of Technique 25 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Dynasty Trust Discretionary Distributions to Children for Life Discretionary Distributions to Grandchildren for Life Discretionary Distributions to Great-Grandchildren for Life Future Generations No transfer tax paid. Grantor Gift* Advantages Creditor protection Divorce protection Estate tax protection Direct decedent protection Spendthrift protection Consolidation of capital * Gift should take advantage of any remaining lifetime gift exclusion and lifetime GST exclusion Dynasty Trust Overview of Technique 26 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Concept Shift income to younger family members to reduce income taxes Considerations Asset protection Kiddie tax Potential $10,000,000 gift Children use income to invest or purchase insurance 29 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Income Shifting

Action Plan Husband and wife gift $10,000,000 of non-voting S- Corporation stock to their four children (15% each) $10,000,000 gift will utilize husband’s and wife’s $5,000,000 lifetime gift tax exemption  Thus, no gift tax will be incurred on the gift Income generated by S-Corporation will pass through to each child (i.e. income shifting) 30 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Income Shifting Example

Assumptions Parents’ filing status = Married jointly Parents’ exemptions = 2 Parents’ itemized deductions = $80,000 Children’s filing status (each child) = Single Children’s exemptions (each child) = 1 Children’s standard deduction (each child) = $5,800 S-Corporation income = $2,000,000 31 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. Income Shifting Example (cont.)

Long-Term Tax Planning Opportunities Lifetime gifting Grantor Retained Annuity Trust (GRAT) Installment sales to an IDGT Life insurance trusts “Tax-burn” strategies Spousal access trust(s) 34 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Gift tax imposed on the donor is calculated based on the value of the gift passing to the donee (after the imposition of gift tax). Estate tax, on the other hand, is calculated based on the total value of the taxable estate, regardless of the net amount passing to the beneficiaries of the estate. Lifetime Gifting Tax Exclusive Nature of Gifts 35 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

A type of trust that benefits the grantor’s future generations (i.e. children) without the imposition of estate or gift tax. To the extent that the actual rate of return on the trust’s assets exceeds the IRS’s rate (a.k.a. IRC §7520 rate), the “excess” is transferred to the trust’s beneficiaries free of any estate and/or gift tax. All income earned by the trust is taxed to grantor because the trust is “defective” for income tax purposes, thus allowing for a “tax-free” gift to the trust’s beneficiaries. NOTE: The IRC §7520 rate for January 2011 is 2.4% Grantor Retained Annuity Trust (GRAT) Summary of Technique 37 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Grantor (Lead Beneficiary) Transfer of assets Annuity payments over a fixed term GRAT Payment of gift tax on present value of remainder interest transferred to children (should be at or near $0) Children* (Remainder Beneficiaries) IRS At end of term, any residual assets remaining in the trust pass to the children free of any gift tax * Instead of naming the children as outright remainder beneficiaries of the GRAT, a grantor trust could be used (thus producing a greater estate tax benefit) Grantor Retained Annuity Trust (GRAT) Overview of Technique 38 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

An IDGT is a type of dynasty trust where all income earned by the trust is taxed to the grantor because the trust is “defective” for income tax purposes, thus allowing for a “tax-free” gift to the trust’s beneficiaries. Intentionally Defective Grantor Trust (IDGT) Summary of Technique 40 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

A type of transaction whereby a grantor sells a highly-appreciating asset to an IDGT in exchange for an installment note.  Note, however, that the grantor should make an initial gift (at least 10% of the total transfer value) to the trust so that it has sufficient capital to make its payments to the grantor. To the extent that the growth rate on the assets sold to the IDGT is greater than the interest rate on the installment note taken back by the grantor, the “excess” is passed on to the trust beneficiaries free of any gift, estate and/or GST tax. No capital gains tax is due on the installment sale to the trust because the trust is “defective” for income tax purposes. Interest income on installment note is not taxable to the grantor because the trust is “defective” for income tax purposes. Installment Sales to an IDGT Summary of Technique 41 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Grantor Gift & sale of highly- appreciating assets Installment note(s) IDGT Children, Grandchildren, Great-Grandchildren & Future Generations Discretionary distributions of income and principal during the lifetime of the trust’s beneficiaries Assets outside of the taxable estates of beneficiaries Installment Sales to an IDGT Overview of Technique 42 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Short-Term AFR (3 years or less).43% Mid-Term AFR (over 3 years, up to 9 Years) 1.95% Long-Term AFR (over 9 years) 3.88% Installment Sale to an IDGT Current Interest Rates – January 2011 43 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

“Tax-burn” Strategy “Bet to live” strategy Utilize “grantor” trusts Grantor pays the income taxes Additional tax-free wealth transfer Hedge with life insurance Long life creates greatest “burn” 45 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Example ASSUMPTIONS FMV of closely-held family business: $10,000,000 Pre-tax rate of return on closely-held family business: 10% FMV of “other” assets: $10,000,000 Pre-tax rate of return on “other” assets: 10% Sale price of closely-held family business: $6,500,000 ($10M sale less 35% discount) Installment note interest rate: 4.5% Income tax rate: 40% Estate tax rate: 45% Estate tax exemption: $3,500,000 46 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

SCIN is used in combination with IDGT IDGT is a “Bet to Live” Strategy SCIN is a “Bet to Die” Strategy Tax Burn SCIN SM Mathematics of Gifting & Inter Vivos Sales Grantor (Child) Grantor (Child) IDGT Sale 53 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved. SCIN

Income tax liability of trust is paid by deemed grantor of the IDGT due to the grantor nature of the trust Tax Burn SCIN SM Mathematics of Gifting & Inter Vivos Sales IDGT Grantor (Parent) Grantor (Parent) Investment (i.e. closely-held stock, marketable securities, etc.) Investment (i.e. closely-held stock, marketable securities, etc.) Cash flow Taxable income IRS Payment of income tax on IDGT’s taxable income 54 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

The Key is to “balance” the “Bet to Die” Strategy with the “Bet to Live” Strategy On the “Bet to Live” side If the Seller Lives to Life Expectancy the Principal and Interest Payments from the Note are used to pay the Income Tax Liability on the Grantor Trust Over Time the Value of the Note is Eliminated along with the Estate Tax on the Note On the “Bet to Die” side - If the Seller Dies Early the Note is “Cancelled” and the Estate Tax is Eliminated Tax Burn SCIN SM Mathematics of Gifting & Inter Vivos Sales 55 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

56 To the extent that the income tax liability on IDGT’s income is greater than installment payments received back from the trust, the excess income tax liability will reduce the grantor’s taxable estate (i.e. “tax burn”). Tax Burn SCIN SM Mathematics of Gifting & Inter Vivos Sales 56 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

If grantor dies during term of SCIN, the note and assets sold to the IDGT are out of the grantor’s estate If the grantor survives the term of the SCIN, then the “Tax Burn” will have eroded the grantor’s estate to the point where the repayment of the note will not increase the grantor’s taxable estate Tax Burn SCIN SM Mathematics of Gifting & Inter Vivos Sales 57 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Initial Burn Point (a.k.a “Tax Burn”) – The point at which the income tax liability paid by the grantor becomes greater than the installment payments received from the trust. Full Burn Point – The point at which any cumulative reinvested “positive transfers” (i.e. installment payment received > tax liability) by the grantor and the SCIN are eliminated by the cumulative effect of the “tax burn.” Tax Burn SCIN SM Mathematics of Gifting & Inter Vivos Sales 58 ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. ©2010 Robert S. Keebler, CPA, MST, AEP All Rights Reserved.

Tax Planning with a $5,000,000 Gift Tax Exemption Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP Phone: (920) 593-1701 E-mail:

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Tax Planning with a $5,000,000 Gift Tax Exemption Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP Phone: (920) 593-1701 E-mail:

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Presentation on theme: "Tax Planning with a $5,000,000 Gift Tax Exemption Presented by: Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP Phone: (920) 593-1701 E-mail:"— Presentation transcript:

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