Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

Transcription

1 Presenting a live 90-minute webinar with interactive Q&A Converting to Nongrantor Trusts to Minimize Income Tax: Maximizing Increased Exemption Benefits Switching Off Grantor Trust Features in Existing Trusts, Structuring Multiple Trusts to Preserve Deductions WEDNESDAY, AUGUST 8, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Robert S. Keebler, Partner, Keebler & Associates, Green Bay, Wis. Steven J. Oshins, Member, Oshins & Associates, Las Vegas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 1. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted.

2 Tips for Optimal Quality FOR LIVE EVENT ONLY Sound Quality If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial and enter your PIN when prompted. Otherwise, please send us a chat or sound@straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. NOTE: If you are seeking CPE credit, you must listen via your computer phone listening is no longer permitted. Viewing Quality To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

3 Continuing Education Credits FOR LIVE EVENT ONLY In order for us to process your continuing education credit, you must confirm your participation in this webinar by completing and submitting the Attendance Affirmation/Evaluation after the webinar. A link to the Attendance Affirmation/Evaluation will be in the thank you that you will receive immediately following the program. For CPE credits, attendees must participate until the end of the Q&A session and respond to five prompts during the program plus a single verification code. In addition, you must confirm your participation by completing and submitting an Attendance Affirmation/Evaluation after the webinar. For additional information about continuing education, call us at ext. 2.

4 Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: Click on the ^ symbol next to Conference Materials in the middle of the lefthand column on your screen. Click on the tab labeled Handouts that appears, and there you will see a PDF of the slides for today's program. Double click on the PDF and a separate page will open. Print the slides by clicking on the printer icon.

5 Converting to Nongrantor Trusts to Minimize Income Tax: Maximizing Increased Exemption Benefits Steven J. Oshins, Esq., AEP (Distinguished) and Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished) Copyright 2018 by Steven J. Oshins, Esq., AEP (Distinguished) and Robert S. Keebler, CPA, MST, AEP (Distinguished). All rights reserved.

6 Estate Tax vs. Income Tax 2018 Federal estate tax exemption = $11.18 million Tax rate = 40% 99.9% of Americans pay no federal estate tax Income tax Highest Federal income tax rate = 37% Plus 3.8% Net Investment Income Tax Highest State income tax rate = 13.3% (California) 6

7 Immediate Gratification Estate tax planning No thank you s from our clients Thank you s from our clients children Income tax planning Thank you s from our clients Immediate gratification 7

8 Saving state income tax is now much more important! $10,000 limit on deductions for state and local tax paid 8

9

10 Non-Grantor Trust I hate paying state income taxes on accumulated trust income! 10

11 Non-Grantor Trust Is there undistributed income? Solution: Move the trust to a state with no state income tax On a state-by-state basis Take a look at the trust and the state tax laws Source income Domicile of decedent Domicile of settlor Location of trustees Location of beneficiaries Location of administration 11

12 Existing Grantor Trusts Most pre-2018 irrevocable trusts have been set up as grantor trusts Income tax planning (both state and federal) is now more important than estate tax planning Consider changing grantor trusts to non-grantor trusts Avoid state income tax Sprinkle income to lower state/federal income tax brackets 12

13 Existing Installment Sales to IDGTs Consider unwinding existing installment sales to grantor trusts; or Split off part of the equity of the trust into a new non-grantor trust Example $1MM gift/$9mm installment sale to IDGT five years ago Now: $5MM equity/$9mm still owed on installment note What are some options? [Next slide] 13

14 Existing Installment Sales to IDGTs Example $1MM gift/$9mm installment sale to IDGT five years ago Now: $5MM equity/$9mm still owed on installment note What are some options? Consider unwinding existing installment sale Pay back the $9MM in cash and in kind Modify or decant $5MM trust into non-grantor trust Consider splitting off part of the equity of the trust into a new non-grantor trust Leave $1MM equity in trust subject to existing $9MM note Split off or decant $4MM of assets into separate non-grantor trust 14

15 Nevada Incomplete Gift Non-Grantor Trust There must be a way to save state income taxes on my personal assets! 15

16 NING Trust Description NING Trust Self-Settled Trust Must be set up in a DAPT jurisdiction Jurisdiction must not have a state fiduciary income tax Jurisdiction must allow retained inter vivos power of appointment under its DAPT statute Non-grantor trust for income tax purposes Distribution Committee made up of adverse parties Incomplete gift for gift tax purposes Retained testamentary broad non-general power of appointment Retained non-fiduciary inter vivos non-general power of appointment over corpus for HEMS 16

17 The Opportunity #1 Resident of state with state income tax contributes low basis asset to NING Trust Trustee sells low basis asset Avoids state income tax on the sale 17

18 The Opportunity #2 Resident of state with state income tax contributes assets throwing off non-source income to NING Trust Trustee continues to invest portfolio Avoids state income tax on gains 18

19 Other Use Sprinkling Income Many of our clients make annual exclusion gifts (and sometimes exemption gifts) each year Rather than making a gift out of their pocket, consider: Distribution from NING Trust of $15,000 per year (or $30,000 per year if Grantor is married) to each intended beneficiary Or do much more!...remember, we have $11.18 million ($22.36 million married) of gift tax exemption Most of our clients children, grandchildren and other intended beneficiaries are in lower income tax brackets 19

20 Exploiting the 2017 Tax Act Completed Gift Non-Grantor DAPTs Can we do the foregoing but also give Client access to the income? Completed Gift Non-Grantor DAPT Like a NING Trust, but completed gift Just need one adverse party to agree to distribution back to settlor (or to Client s spouse) Is there estate inclusion at the settlor s death? Who cares? $11.18MM exemption / $22.36MM exemption if married For most clients, WE WANT ESTATE INCLUSION!!! Basis step-up 20

21 Keep IRC 643(f) in Mind 643(f) TREATMENT OF MULTIPLE TRUSTS For purposes of this subchapter, under regulations prescribed by the Secretary, 2 or more trusts shall be treated as 1 trust if (1) such trusts have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and (2) a principal purpose of such trusts is the avoidance of the tax imposed by this chapter. For purposes of the preceding sentence, a husband and wife shall be treated as 1 person. 21

22 Exploiting the 2017 Tax Act Client sets up: NING Trust Separate Non-Grantor Gift Trusts for Child #1, Child #2 and Child #3 Separate Non-Grantor Gift Trusts for GC #1, GC #2, GC #3 and GC #4, GC #5 and GC #6 Yes, that s 10 trusts. [See Next Slide ] 22

23 Exploiting the 2017 Tax Act (cont.) Depending upon the actual assets and decisions, each trust may provide An extra $10,000 deduction ($3,700 of savings) for state income taxes paid If we include some source income and/or if we violate the state long-arm income tax statute An extra $1, for bracket ride-up (first $12,500 of income) Avoidance of state income taxes If we draft around the state long-arm income tax statute Extra IRC 199A pass-thru business income tax deduction Keep under $157,500 Ability to sprinkle income to each child/grandchild to use their lower federal/state income tax brackets For income subject to state income tax, possible lower state income tax brackets apply by separating the income 23

24 Exploiting the 2017 Tax Act Congressional Gift Tax Policy Decades-long Congressional policy: Do not repeal the gift tax!!! The gift tax is a backdrop to the estate tax and to the income tax 2017 Tax Act: $11.18 million single/$22.36 million married gift tax exemption Repealed the gift tax for all but the ultra-wealthy! Oops! How to exploit this Distribute taxable income to lower bracket beneficiaries who then gift it back to their parents; and/or Window of opportunity to leverage Dynasty Trusts 24

25 Preexisting Trusts How can we exploit the 2017 Tax Act with existing trusts? Grantor Trust Decant into a separate Non-Grantor Trust for each child and each grandchild [Sound familiar???] Non-Grantor Trust Decant into a separate Non-Grantor Trust for each child and each grandchild [Sound familiar???] 25

26 Decanting a Trust Just as you can decant wine by pouring it from its original bottle into a new bottle, leaving the unwanted sediment in the original bottle, you can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust. 26

27 Private Decanting There are 26 states with decanting statutes Seven of those states do not require notice to beneficiaries 1. South Dakota 2. Nevada 3. Tennessee 4. New Hampshire (except charitable trusts) 5. Delaware 6. Wyoming 7. Arizona 27

28 Complete v. Incomplete Gift Trust Planning Complete Gift Trusts Traditional estate (tax) planning Property generally not included in the grantor s estate Not dependent on special provision sin the state trust code Incomplete Gift Trust Planning Income tax and asset protection planning Property generally included in the grantor s estate (and receives a basis adjustment at death) Requires the trust to be formed under the law of a limited set of states. Both create an additional taxpayer for Section 199A. 28

29

30 199A Overview I. Overview II. Traditional Businesses III. Rental Real Estate IV. Specified Service Businesses V. Basic Planning VI. Advanced Planning VII. Planning with Completed Gift Trusts VIII.Planning with Incomplete Gift Trusts 30

31 Basics Deduction equal to 20% of domestic qualified business income (QBI) from a pass-through entity Basically, provides an effective top marginal rate of 29.6% [37% x (1 20%)] Applies to trusts & estates 199A,

32 Eligible Taxpayers Owners of: Sole proprietorships (Schedule C) Sole owners (or TIC owners) of rental real estate (Schedule E) S-Corporation owners (Form 1120S) Partnership owners (Form 1065) 32

33 Four Business Classifications And the Limitations Taxable income less than $315,000 (MFJ) Taxable income greater than $315,000 but less than $415,000 Taxable income greater than $415,000 Non- Service Service 20% deduction 20% deduction Limitation phased-in W-2/Property limit applies Deduction phased-out No deduction THE HEART OF PLANNING IS MANAGING TAXABLE INCOME AND THE WAGE / PROPERTY LIMITATION. 33

34 IRC 199A Pass-Thru: Eligible Taxpayers Single Persons - $157,500 Married Couples - $315,000 Estates Non-Grantor Trusts NING Trusts Completed Gift Non-Grantor Trusts Completed Gift Non-Grantor DAPT Children No NIIT Beneficiary Defective Trust Beneficiary Defective Trust for your newborn baby! No NIIT! 34

35 Is it a Service Business per 1202(e)(3)(A), 475(c)(2), or 475(e)(2)? No Is taxable income over the threshold? 315/157.5 No Deduction = QBI x 20% Yes Yes Is taxable income over the threshold? 315/157.5 Yes No Deduction = QBI x 20% Over full Phase in? Yes No Deduction Reduced Is taxable income over the full phase-in? Yes No Deduction No Deduction Reduced Deduction equals lesser of: QBI x 20% or The greater of: - W-2 wages x 50% - W-2 wages x 25% + 2.5% of unadjusted basis 35

36 Calculation of the Deduction Simplified For those with taxable income in excess of $415,000 (MFJ) the deduction is limited to the greater of: 50% of W-2 Wages 25% of W-2 Wages plus 2.5% of Qualified Property Inapplicable to Specified Service Business Limitations for non-specified Service Businesses phased-in from $315,000 - $415,000 (MFJ) of taxable income Deduction for Specified Service Businesses phased-out 199A, from $315,000 - $415,000 (MFJ) of taxable income 36

37 Limitation Formula Deduction Simplified W-2 Wages Equal to wage expense [ 199A(f)(1)] Does not include guaranteed payments or payments to independent contractors Qualified Property Tangible property being depreciated (e.g. does not include land) Depreciation period is the latter of the regular depreciation period or 10-years Unadjusted Basis Equal to basis immediately after acquisition Not adjusted for depreciation 199A,

38 199A, Calculation of the Deduction Vanishing Unadjusted Basis Patrick, a lawyer, owns the building he practices in: If the building was acquired 40 years ago, it cannot be considered for the 2.5% test: Recent capitalized improvements or investments are included If the building was acquired 5 years ago, it can be considered for the 2.5% test: All of the capitalized improvements are included The basis of the land is not included This limitation does not apply if John s income was below $315,000 (MFJ) 38

39 Partnerships & S-Corps Allocable Share Simplified Partner/shareholder must use their allocable share for all calculations Example: Mike and Karen contribute rental real estate to a FLP and gift units to trusts for their grandchildren QBI, W-2 Wages, and Qualified Property is allocated to the couple and the trusts according to ownership 39

40 Trust Planning Example Family Involved in Rental Real Estate Richard and Delores, a married couple, purchased 500 apartment units between 1975 and These are managed by others and they pay no wages. The Qualified Business Income from this activity is about $1,900,000 and their total taxable income is about $2,200,000. The original basis of the improvements is fully depreciated so they have a minimal amount of qualified property; about $750,000. Based on these facts, below is a summary of their QBI deduction in 2018: QBI Deduction = Lesser of: (a) 20% of net business income: $1,900,000 x 20% = $380,000 (b) 20% of taxable income: $2,200,000 x 20% = $440,000 (c) greater of: (i) 50% of W-2 wages ($0 x 50% = $0) or (ii) 25% of W-2 wages plus 2.5% of unadjusted cost basis of assets: [$0 x 25%] + [$750,000 x 2.5%] = $18,750 40

41 Trust Planning Example Family Involved in Rental Real Estate Richard and Delores, gift interests in the entities which own the properties evenly to 15 trusts set up for each of their four children and 11 grandchildren. The Qualified Business Income and taxable income for each of these trusts is approximately $126,667. This is less than the threshold amount of $157,500 and therefore the limitation does not apply. Based on these facts, below is a summary of their QBI deduction for each trust: QBI Deduction = Lesser of: (a) 20% of net business income: $126,667 x 20% = $25,333 (b) 20% of taxable income: $ 126,667 x 20% = $25,333 Non-Grantor Trust Required 41

42 Specified Service Trade or Business 1202(e)(3)(A) Specified Service Business defined in 1202(e)(3)(A): any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees NEW STATUTORY LANGUAGE EXCLUDES ARCHITECTS AND ENGINEERS FROM THE SPECIFIED SERVICE BUSINESS DEFINITION 42

43 Grantor Trusts into Non- Grantor Trusts Summary Many/most existing irrevocable trusts were intentionally drafted as grantor trusts Estate tax savings was more important than income tax savings Installment sales Tax burn Time to take a good look at existing trusts Decant into non-grantor trusts? Unwind existing installment sales? 43

44 Decanting Grantor Trusts into Non-Grantor Trusts Summary Huge opportunity for many of our clients Tens of thousands of existing irrevocable trusts that should be changed to non-grantor trusts State income tax savings Federal income tax savings Creating multiple non-grantor trusts $10,000 per trust state and local income tax deduction IRC 199A pass-thru business opportunities by creating additional business owners 1202 Bracket Run 44

45 Non-Grantor Trusts for Federal and State Income Tax Shifting Summary Income taxed to either the trust or the beneficiary If income is accumulated, then the income is taxed to the trust If income is distributed, then the trust receives an income tax deduction and beneficiaries report taxable income Trusts may be incomplete or completed gift trusts IRC 199A new opportunities IRC 1202 opportunities 45

46 Thank You For Attending Today s Seminar Steven J. Oshins, Esq., AEP (Distinguished) Law Offices of Oshins & Associates, LLC 1645 Village Center Cir., Ste. 170 Las Vegas, NV Phone: Fax: Website: soshins@oshins.com Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished) Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI Phone: (920) Website: Robert.Keebler@KeeblerandAssociates.com 46