Family Wealth Conference. September 27-28, 2012

Transcription

1 Family Wealth Conference September 27-28, 2012

2 Strike When the Iron Is Hot: Tax Strategies to Prepare for 2013 s Uncertainty Family Wealth Conference Julie Alcala William Blair & Company Bart Massey Deloitte Moderated By: Michael Lee William Blair & Company The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of William Blair & Company.

3 Introduction Key considerations for 2012 year end tax planning Current Tax Landscape Lame Duck & Election Issues Income Tax Planning Estate/Gift Tax Planning

4 Current Tax Landscape

5 Current Income Tax Landscape Provision * Ordinary 35.0% Extended 39.6% Income Tax Rates 33.0% Extended 36.0% 28.0% Extended 31.0% Top Rates on Investment Income Long-term capital gains 25.0% Extended 28.0% 15.0% Extended 15.0% 10.0% Extended 15.0% 15.0% Extended 20.0%* Qualified Dividends 15.0% Extended 39.6%* AMT Exemption $47,450 (S) $72,450(M) $48,450 (S) $74,450(M) $33,750 (S) $45,000 (M) $33,750 (S) $45,000 (M) *Additional 3.8% Medicare surtax may apply

6 Lame Duck & Election Issues

7 Initial Observations Congress is gone! No tax legislation expected to be enacted before the elections Both parties digging in for post-election Lame Duck fight January 1, 2013 U.S. goes over the fiscal cliff, unless Congress and President intervene beforehand For 2013, the disagreement for tax centers on share of burden for highincome individuals; for long-term, role and size of government Copyright 2012 Deloitte Development LLC All rights reserved

8 Prediction of Lame-Duck Largely contingent on election results and the mood about the economy. Could likely see status quo election Strong showing by either party would influence direction of lame duck, perhaps deferring issues until the new winners come into office Range of outcomes include: Expiration of all tax cuts, Temporary extension of all tax cuts Extension of cuts, while slightly increasing tax burden on high-income taxpayers Timing of final action on outstanding tax issues is likely to occur very late in December Copyright 2012 Deloitte Development LLC All rights reserved

9 What We Know Despite Uncertainties Tax rates will not go down beginning 2013 Timing of final action on outstanding tax issues is likely to occur very late in December Could likely see status quo election Allowing tax cuts to expire, then reinstating seems like a taxpayer catastrophe, even though politicians believe it might help Copyright 2012 Deloitte Development LLC All rights reserved

10 Planning? Remain engaged with legislative process Review potential planning issues well before lame duck so that decisions can be made quickly once the legislative path is clear Copyright 2012 Deloitte Development LLC All rights reserved

11 Looking at the Candidates Current Law (2013) Pres. Obama Romney Proposal Capital Gains 20% 15% for middle 0% for married filers 18% if purchased after 12/31/00 and held for more than five years income earners 20% capital gains for higher income earners earning less than $200,000 15% for higher income earners Dividends 39.6% 20% capital gains Ordinary income tax rates for higher income earners Estate Tax Top Rate: 55% Top Rate: 45% Exemption: $1 Million Exemption: $3.5 million 0% for married filers earning less than $200,000 15% for higher income earners Repeal Estate Tax AMT $33,750 (single) $45,000 (married) Three year AMT Patch Repeal AMT Other Items Additional 3.8% Medicare surtax on investment income Limit itemized deductions and exclusions to 28% on high income taxpayers

12 Income Tax Planning

13 Income planning: Medicare Tax PPACA imposes: A 3.8% Medicare contribution on unearned income - Includes dividends, interest, capital gains, annuities, royalties and rental income - Excludes income from qualified plan distributions and income derived from the ordinary course of a business (non passive activity) - Applies to individuals with Modified Adjusted Gross Income (MAGI) over $200,000 for single taxpayers and $250,000 for married taxpayers filing joint returns. Applies to estates and trusts in the top tax bracket (currently $11,650 for 2012) AND An additional.9% Medicare tax on earned income -Applies to earned income over $200,000 for single taxpayers and $250,000 for married taxpayers filing joint returns.

14 Income Planning: Medicare Surtax Examples Scenario 1: June, single taxpayer has $100,000 in wages and $125,000 in investment income. Her MAGI is $225,000. MAGI $225,000 Threshold $200,000 Subject to surtax (lesser of) $25,000 or $125,000 (net investment income) Surtax amount $950 Scenario 2: June and Bob, married filing joint have $600,000 in wages and $200,000 in investment income. Their MAGI is $800,000. MAGI $800,000 Threshold $250, Subject to surtax (lesser of ) $550,000 or $200,000 (net investment income) Surtax amount $7,600

15 Income Planning: Qualified Dividends and Capital Gains Type of Investment Income Short-term Capital Gains 35% 39.6% Long-term Capital Gains 15% 20% Nonqualified Dividends 35% 39.6% Qualified Dividends 15% 39.6% 1 Plus Medicare unearned income tax

16 Income Planning: Roth Conversions Income tax cost of conversion likely lower in 2012 versus 2013 Income tax due in year of conversion at ordinary income tax rates Roth distributions not part of MAGI

17 Income Planning: Roth Conversion Decision Can you afford to leave the IRA untouched throughout retirement, funding your expenses through other sources of YES NO income instead? Will you be in the same or higher tax bracket in the future? YES NO Can you pay the tax on the conversion by using funds from outside the IRA? Can you convert without ih negatively affecting your current income tax planning? Can you continue to fulfill your other financial planning objectives (e.g. charitable giving)? YES YES YES NO NO NO Your wealth transfer plan will likely benefit from a Roth conversion You may still benefit from a Roth IRA conversion, but it is advisable to run a specific cost-benefit analysis

18 Income planning: Timing of Income/Deductions Income: Bonuses Deductions: Self-employment Income Retirement Plan Distributions Harvest Long-Term Capital Gains State and Local Income Tax Payments Real Estate Tax Payments Charitable Contributions Watch out for: Return of Itemized Deduction Phase-Outs AMT

19 Other Risks Associated with Tax Reform While many high-income individuals would welcome lower tax rates, these tax cuts will likely be paid for by eliminating credits, deductions and other types of tax expenditures leveraged by high-earners. Thus far no one seems to be identifying charitable contributions as a target, although the president s s limit of tax benefits associated with itemized deductions impacts contributions to some degree. There is a possibility that if rates were dropped low enough that the preferential tax benefits provided to investment income would be eliminated, similar to the 1986 TRA. Enacting corporate tax reform without simultaneously dealing with individual income tax reform could create new tax disparities iti for those who own interests t in pass-through entities. Copyright 2012 Deloitte Development LLC All rights reserved

20 Estate Tax Planning

21 Estate Tax Outlook TAX TYPE Rate 2011 Exemption 2012 Exemption 2013 Rate 2013 Exemption GIFT 35% $5M $5.12M 55% $1M ESTATE 35% $5M $5.12M 55% $1M GST 35% $5M $5.12M 55% $1M Estate tax rates and exemptions are scheduled to return to 2001 amounts Estate, Gift and Generation Skipping Transfer Tax rates from 35% in 2012 to 55% in 2013 Exemption amount lowers to $1 million in 2013 from $5.12 in 2012 Potential for changes to estate tax strategies Valuation discounts for certain family held entities Change in requirements for Grantor Retained Annuity Trusts ( GRATs ) Limitations on Duration for Generation Skipping Transfers Coordination of fincome Tax and Transfer Tax Rules for Grantor Trusts

22 Estate Planning More Important Than Ever Take Care Splitting Gifts: Example: During Bob and June decide to make a $7 million gift to a Dynasty Trust for their children and descendantsd They elect to split the gift so that each is treated as having made a gift of $3.5 million Bob and June each have $1.62 million of gift tax exemption remaining Suppose the gift tax exemption goes down to $3.5 million Bob and June have exhausted their exemptions by splitting the gift If Bob and June did not split the gift Reported the gift as a $5.12 million gift from Bob, and $1.88 million gift from June June has $1.62 million of exemption remaining that can be applied for other gifts Spousal Lifetime Access Trust ( SLAT ): Spouse establishes an irrevocable trust for the benefit of the other spouse / children / descendants Trust is funded with a $5.12 million gift During the beneficiary spouse's lifetime, the Trustee can make distributions as needed for health, education, maintenance and support Possible for each spouse to create a SLAT that benefits the other spouse [Approach with caution]

23 Estate and Gift Tax Legislation Range of risk spans from pre-2001 estate and gift tax structure ($1 million/55 %) to current structure ($5 million/35%). Although Obama has recommended the 2009 estate and gift tax structure ($3.5 million/45%). Some Republican push for repeal, including Romney; unlikely Very lucrative $5 million gift tax exemption might be at risk, scheduled to expire at end of 2012 Certain estate and gift tax revenue raising provisions primarily the proposed p change to GRATs continue to be at risk of enactment beyond just in the context of tax reform legislation Copyright 2012 Deloitte Development LLC All rights reserved

24 This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

25 Conclusion Q&A

26 Biography Julie Alcala William Blair & Company Julie Alcala joined William Blair & Company in 2010 as a senior financial planning advisor in the Financial Planning & Advisory Services group. She works with high-net-worth families, business owners, corporate executives, foundations, and endowments in the review of investment and spending policies and wealth planning issues such as cash flow, risk planning, charitable planning, estate planning, and income tax planning. Previously, Ms. Alcala worked at Credit Suisse as a Vice President in their Family Wealth Management Group. Earlier in her career, she worked in public accounting at Deloitte and Andersen serving high-net-worth individuals. Education: B.S., Indiana University.

27 Biography Bart Massey Deloitte Bart Massey is a seasoned tax practitioner in Deloitte s tax policy group in Washington, D.C. With more than 20 years of tax experience, Mr. Massey tracks tax legislative issues that are of interest to the firm s clients, including developments in the areas of individual income tax, estate tax, and employee benefits tax. He regularly provides analyses of tax legislative proposals to the The Wall Street Journal, The New York Times, The Washington Post, and other national publications. Before joining Deloitte, Bart served for five years as an editor and writer for Tax Notes, a national journal on federal tax policy. Education: B.S. in accounting, Auburn University.

28 Biography Michael Lee William Blair & Company Michael Lee is the head of William Blair & Company s Corporate & Executive Services. He focuses on the unique issues that confront owners and executives of private and public companies. Prior to joining William Blair & Company in 2004, Michael was a tax attorney with experience in the areas of wealth, tax, and estate planning. In addition to being a faculty member of John Marshall Law School, Michael also is a Certified Financial Planner and sits on the author s panel for the CCH Journal of Passthrough Entities. He is a member of the American Bar Association, Society of Trust & Estate Practitioners, and Chicago Estate Planning Council. Before entering the practice of law, Michael was an electrical engineer in the Advanced Avionics Systems Group of General Dynamics Space Systems, where he developed advanced guidance, navigation, and control systems for launch vehicles. Education: BSEE, MS, JD, Tulane University; LLM, Chicago Kent College of Law.