Tax Planning Right Now Under Trump

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1 BRUCE GIVNER OWEN D. KAYE KATHLEEN GIVNER NEDA BARKHORDAR JACQUELINE BURBANK SUITE WILSHIRE BOULEVARD LOS ANGELES, CALIFORNIA PHONE (310) (818) FAX (310) (818) I. LIKELY MAXIMUM 2017 RATES COMPARED TO MAXIMUM 2016 RATES. Ordinary (Earned) Income. 2016: 39.6% federal plus (13.3% X 60.4% = ) % = % 2017: 33% federal plus 13.3% 1 = 46.3% = 97.2% (a reduction of % in the rate itself). Ordinary (Passive) Income. Capital Gain. 2016: 39.6% federal plus (60.4% x 3.8% = ) % % = % 2017: 33% federal plus 13.3% = 46.3% = 92.73% (a reduction of % in the rate itself) in the A.M.T. 2 Passive. 20% + 3.8% % = 37.1% Materially Participating. 20% % = 33.3% 2017: depends on what rate you believe will be enacted. Compare: Trump 20% % = 33.3% House (1/2 max. pers rate) 16.5% % = 29.8% II. passive will be 33.3% 37.1 = 89.76% or 29.8% 37.1% = 80.3% Materially particip g 33.3% (same) or 29.8% 33.3% = 89.5% LIKELY 2017 NEVADA ADVANTAGE. Ordinary (Earned) Income (Maximum). Before: % vs. 39.6% = 83.14%. An % rate advantage (the deductible California tax rate). Now: 46.3% vs. 33%. 33.3% 46.3% = 72%. A 13.3% rate advantage (California tax no longer deductible). 1 No deduction for state and local taxes. 2 Both President Trump and the Republican plan eliminate the A.M.T. 3 Can Congress have a transition period of several years in which the A.C.A. stays in existence, while it comes up with a replacement, in which it repeals the 3.8%? If so, that creates a huge hole in the deficit.

2 Page 2 of 16 Capital Gain. Before: Passive: 37.1 vs Nevada was 64% of California tax. Now: Materially Participating: 33.3 vs. 20. Nevada was 60% of California tax. Trump: 33.3% vs. 20%. Nevada will be 60% of California tax. III. GOP: 29.8% vs. 16.5%. Nevada will be 55.4% of California. LIKELY OTHER 2017 CHANGES Unincorporated Businesses. Trump: 15%. House: 25%. Creates incentive to be classified as pass-through business instead of wages, making us a nation of self-employed contractors Itemized Deductions. Trump: Does cap of $200,000 joint and $100,000 single increase taxes for those who pay high (i) mortgage interest; (ii) state sales and income taxes; and (iii) health care? Or is that negligible since they would have been subject to AMT? House GOP: eliminate all itemized expenses but charitable gifts and mortgage interest International Planning. Need for inbound planning will increase as motive to come to U.S. increases. (Will the opportunity to do so be available? Almost certainly it will be for the wealthy.) Probably less expatriations, less desire to bury profits abroad Ordinary Income Tax Planning. Slightly less motive to defer income into pensions. More motive to convert to Roth IRAs. Less incentive to make charitable gifts. Less incentive to use component depreciation Entities. More incentive to use C corporations due to 15% corporate tax rate; lower personal rate on dividends; and 1202 exclusion of $10,000,000 of gain. Less concern about the B.I.G. on a C corporation electing S status due to lower corporate tax rate.

3 Page 3 of Capital Events. Less incentive to wait until death of a parent to get a step-up in basis (assuming the estate tax survives 4 ). IV Real Estate. Less incentive for 1031s or other techniques to defer or eliminate capital gain Business Sales. Less incentive to do 453(e) 2 year deferral structures, among others ORDINARY INCOME TAX PLANNING In General. What has been will be again, What has been done will be done again; There is nothing new under the sun. Ecclesiastes 1:9 Should we accelerate income into 2017? Or defer it into 2018? If there is a new tax bill impacting ordinary income tax rates, it is most likely to be retroactively effective to January 1, 2017, so we will not have the option. That means that we should be doing planning as usual. So if the client s goal is, in light of the fact that the maximum bracket in California is likely to be only insignificantly lower than in 2016, to lower his or her income tax bill, we should return to the planning we were doing in If the client wants to pursue a move to Nevada, sooner, rather than later, is the advice. Reasonable expectations. There are no grand slam homeruns. Only singles and doubles. This is not In 2003 California adopted R&T Code 19774, the economic substance doctrine, with a 40% penalty. In 2010 Congress adopted 7701(o), the economic substance doctrine, with a 40% penalty. The IRS does not like circular flows of funds. The IRS does not like anything that results in the deduction of life insurance. The IRS reads the internet. Courts do not support tax structures that rely on highly technical readings of the law. In 2011 the U.S. Supreme Court, in Mayo Foundation v. U.S., confirmed that even interpretive regulations are entitled to the highest form of deference The Usual Suspects. Defined Benefit Pension Plans. The safest. $6,000,000 ultimate accumulation. Per person! 4 Kellyanne Conway said President George W. Bush s 2001 tax cuts are a model for what Trump seeks to do.

4 Page 4 of 16 Even 80 employees is not too many. Beating the controlled and affiliated service group rules. Beating the required minimum distribution rules. Beating an overfunding problem. Micro-captive ( 831(b)) Insurance Companies. CLATs. Notice transaction of interest Form Congress supports, witness the increase to $2,200,000. Impact of President Trump s election. New captives: putting the 2017 return on extension. Good exit strategy with permanent 5 year transition to S status. Caution: U.S. v. Crithfield & Donaldson, July 12, 2017, guilty of conspiracy to defraud the U.S. and of willfully aiding the submission of a false and fraudulent income tax return for the Business Protection Plan. Despite legal opinion that the deductions were more likely than not deductible under 162. See diagram and calculations below. Charitable Limited Partnerships. Adkisson s November 24, 2013 Forbes column: Notice re S corporations. V CAPITAL GAINS TAX PLANNING In General. If you think the House rate is going to prevail, the argument to Pay The Tax And Pocket The Proceeds is stronger than ever as 29.8% is a heck of a rate. If you are convinced that that rate is unattainable, and the rate is going to be 33.3%, then the same analysis applies in 2017 as in 2016: people with large capital gains are going to want to examine alternatives to paying all of the tax Timing. As with every type of planning, this is arguably the most important element: the farther in advance you set up the structure before the liquidity event, the more likely it is to withstand hostile government scrutiny. For the safest structures, e.g., the sale to a children s trust, this is a requirement: it must be more than 2 years before the sale to the cash outside buyer. For other structures, it is not required, but highly recommended. For example, for a Nevada non-grantor trust, arguably you should transfer the stock to the NNG and wait four (4) years before the NNG sells the stock. Using a limited partnership with an IRC Section 754 election, a minimum of one year should transpire

5 Page 5 of 16 between the contribution to the partnership and the partnership s sale of the asset, and more time is even safer Statutory (e) 877A Others. Charitable LLC. Sale of LP interests followed by a 754 election. Sale to a technically unrelated, but friendly, third party. Use of partnership to move basis from one asset to another. Professional third party: Deferred Sales Trust. Professional third party: Monetized Installment Sale. (IRS Audit?) Nevada non-grantor trust. VI TRANSFER TAX PLANNING Guessing The Future Federal. The speaker at a seminar I attended last week said that it is 75% certain that Congress will repeal the estate tax State. The same speaker at the same seminar last week said that if Congress repeals the estate tax it is 75% certain that California will adopt an estate tax. See the materials at the end about Senator Scott Wiener s S.B That will (i) increase the motive for families to become Nevada residents; and (ii) create an income tax disaster due to the lack of a step-up in basis What Would Repeal Look Like? Is immediate repeal possible? Or will it look like the Bush 10 year reconciliation? If repeal occurs, will there be a $10,000,000 free step-up in basis? Will the gift tax (which backs up the income tax) also be repealed? 6.3. Planning. For older people and those with impaired life expectancies, make the estate tax disappear now. You can rescind the transactions if you do so by 12/31/17. Any irrevocable trusts to which gifts are made can have protectors who can un-do the trusts or add the donor as a beneficiary. You can revoke or amend irrevocable trusts using Probate Code 15403(a).

6 Page 6 of 16 Charitable Lead Annuity Trust 100% Deduction 6.5% growth at capital gains rate Balance to children s trust (could otherwise be back to parents) Trustees Mom and Dad $1,000,000 contribution Charitable Lead Annuity Trust $1,088,000 in 15 th year $20,000 Per year for 14 years; $1,020,000 in 15 th year Children s Trust Public Charity or Private Foundation or Donor Advised Fund

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