INSURANCE & INVESTMENT PLANNING UNDER THE NEW TAX RULES

Transcription

1 INSURANCE & INVESTMENT PLANNING UNDER THE NEW TAX RULES

2 TAX CUTS AND JOBS ACT OF 2017 Key changes to the tax code under the Tax Cuts and Jobs Act of 2017 include: BUSINESS INCOME TAXES Corporate tax rates Corporate AMT Pass-through owner deduction INDIVIDUAL INCOME TAXES Individual tax rates Individual AMT TRANSFER TAXES Estate taxes Generation-skipping transfer taxes 2

3 EXCESS CAPITAL Excess capital is what is left over and it can only go to three places FAMILY CHARITY IRS DESIGNATED BENEFICIARIES 3

4 ESTATE AND GIFT TAXES $675,000 $1 million $5 million Cumulative Gifting Limits $11 million $675,000 $1 million $1.5 million $2 million $3.5 million Cumulative Exemption Equivalent Limits $0 $5 million $11 million 55% 50% 49% 48% 47% 46% 45% 0% 40% Top Bracket Estate Tax Rates 40% In 2001, the cumulative lifetime gifting limits and the estate exemption upon death were increased. Additionally the estate tax rates were decreased. In 2010 the estate tax decreased to 0% but the lifetime gift limit remained at $1M. In 2010, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended and modified the federal estate and gift tax for two years. The American Taxpayer Relief Act of 2012 made the $5M exemption per person portable for married couples and permanent 2017 Tax Reform, doubles estate and gift exemption to $11M per person. 4

5 TAX REFORM IS GOING TO BE HUGE New Law doubles estate and gift exemption to $11M. Estate taxes retained, top rate 40%. Preserves step up in basis upon death. Changes can be revisited by future congress $11M transfer exemption expires in ten years President Elizabeth Warren?? 5

6 ZERO ESTATE TAX PLAN OPPORTUNITIES How can we take advantage of the doubling of gift exemption and create a multiple of value for your family? The Opportunity Freeze, Discount, Leverage, Transfer all or part of your estate for an ZERO Estate Tax Plan. A Home Run for Planning: 1. FLLCs Family LLC 2. Defective (SLAT) Survivor Lifetime access trust 3. Installment sales at low rates 4. ILIT Irrevocable Life Insurance Trust 6

7 OPPORTUNITY TO TRANSFER ASSETS AND MAINTAIN CONTROL Investment Assets Contributed SENIOR FAMILY MEMBERS LLC Nonvoting Interests Gifted or Sold Over Time Voting & Nonvoting interests Received JUNIOR FAMILY MEMBERS TYPICAL STRUCTURE ON DAY ONE IS 98% NONVOTING, 2% VOTING 7

8 IDGT S: INTENTIONALLY DEFECTIVE GRANTOR TRUSTS Gifts assets you believe will appreciate outside your taxable estate Option to pay taxes on gains equivalent to estate tax free gifts Potential to discount the value of gift upon transfer IDGT PROCESS Make Gift to IGIT Grantor Taxes on Gains IDIT Future Growth Outside Taxable Estate 8

9 IDGT S: INTENTIONALLY DEFECTIVE GRANTOR TRUSTS Transfer assets that you feel will appreciate to a GRAT to benefit your children FMV returns to your estate at the end of the trust period Any growth in excess of FMV is a tax free gift Historically Low Hurdle Rates 1.54% GRAT PROCESS Funding Taxable Estate Annuity Payments GRAT Appreciation Non Taxable Estate 9

10 INSTALLMENT SALE TO A DEFECTIVE TRUST Parents 10% Down Interest only 10 year Balloon Note 100% Managing Member Interest Family LLC Non Member Economics Transfer Assets to a FLLC Gift Seed Capital Installment Sale After 35% discount 2013 Dynasty Trust 10

11 LIFE INSURANCE 1. Income replacement or to protect against a significant liability Mortgage Insurance. 2. Estate Liquidity needs current and projected Liquidity Buy sell agreements Key person Life Payment of transfer expenses Discounting the tax bill 1. Tax Deferred Wrapper on investments Personally owned SLAT s

12 LIFE INSURANCE We turn the gifts into present interest gifts by giving beneficiaries the temporary right to get the gift in cash. INSURANCE INC. Estate Tax Free Death Benefit Money to Pay Premiums Premium Payments PARENT Policy on Parents Life IRREVOCABLE LIFE INSURANCE TRUST 30 Day Right to Take Gift CHILD 12

13 BENEFITS OF LIFE INSURANCE AS AN INVESTMENT Life Insurance is a Unique and Powerful Asset Class Conservative, stable asset class Tax deferred growth of policy values Predictable returns FIFO taxation of distributions Guarantees provided by Insurance Companies Venture like returns for early death Immediate liquidity at maturity Strong IRR at life expectancy Tax free death benefit Positive returns relative to risk Life Insurance Internal Rate of Return % 75.00% 50.00% 25.00% 0.00% 73% 43.94% 40% 25% 23.72% 15.26% 18% 14% 12% 10% 9% 11.08% 8.62% 7.02% 5.91% 5.10% Policy Life (years) IRR 13

14 QUALIFIED PLANS DEFINED CONTRIBUTION 401(k) Profit Sharing DEFINED BENEFIT Traditional CASH BALANCE Hybrid 14

15 HOW DOES CASH BALANCE DIFFER FROM A DB PLAN? DEFINED BENEFIT PLANS CASH BALANCE PLANS Complex formula Unfamiliar/archaic Age-sensitive Account balance, $100,000 Familiar: 401(k) Less age-sensitive 15

16 CONTRIBUTION LIMITS 16

17 CASE STUDY: XYZ WASTE SERVICES Owners Age Compensation Owner 1 62 $ 245,000 Owner ,000 Employees Jones 49 $ 89,000 Keeler 63 88,000 Marion 31 53,000 Baldwin 29 50,000 Dupre 41 48,000 Ophir 25 39,000 Smith 33 40,000 Sabotin 48 35,000 Parotta 22 15,000 Keebler 30 14,000 17

18 CASE STUDY: BASIC PLAN Profit TOTAL Owners 401(k) Sharing CONTRIBUTION 5% of pay Owner 1 $ 22,000 $ 12,250 $ 34,250 Owner 2 16,500 12,250 28,750 Employees 5% of pay Jones 4,450 Keeler 4,400 Marion 2,650 Baldwin 2,500 Dupre 2,400 Ophir 1,950 Smith 2,000 Sabotin 1,750 Parotta 750 Keebler 700 $ 63,000 Subtotal $ 23,550 $ 23,550 Total $ 86,550 Percent to Owners 73% 18

19 CASE STUDY: NEW COMPARABILITY Profit TOTAL Owners 401(k) Sharing CONTRIBUTION 13% of pay Owner 1 $ 22,000 $ 32,500 $ 54,500 Owner 2 16,500 32,500 49,000 Employees 5% of pay Jones 4,450 Keeler 4,400 Marion 2,650 Baldwin 2,500 Dupre 2,400 Ophir 1,950 Smith 2,000 Sabotin 1,750 Parotta 750 Keebler 700 $ 103,500 Subtotal $ 23,550 $ 23,550 Total $ 127,050 Percent to Owners 81% 19

20 CASE STUDY: CASH BALANCE ACTUAL Profit TOTAL Owners 401(k) Sharing Balance CONTRIBUTION Owner 1 $ 22,000 $ 32,500 $ 225,000 $ 279,500 Owner 2 16,500 32,500 25,000 74,000 Employees 7.5% of pay Cash Jones 6,675 $ 650 7,325 Keeler 6, ,250 Marion 3, ,625 Baldwin 3, ,400 Dupre 3, ,250 Ophir 2, ,575 Smith 3, ,650 Sabotin 2, ,275 Parotta 1, ,775 Keebler 1, ,700 Subtotal $ 35,325 $ 6,500 $ 41,825 Total $ 395,325 Percent to Owners 89% 20

21 THE SHARE OF THE PIE BASIC PLAN Percent to Owners 73% NEW COMPARABILITY Percent to Owners 81% CASH BALANCE PLAN Percent to Owners 89% 21

22 IS THE CASH BALANCE PLAN TAX-EFFICIENT? NO PLAN 37% tax ($146,270) 63% to Owners ($249,055) $395,325 37% tax bracket PLAN 11% to employees versus Uncle Sam ($43,486) 89% to Owners ($351,839) +$102,784 22

23 FEATURE #1 ASSETS ARE PORTABLE CASH BALANCE PLAN Rollover IRA OTHER QUALIFIED PLAN 23

24 FEATURE #2 Contribution flexibility among partners Owners/partners can have different amounts contributed for them Partner 1, age 50: $100,000 Partner 2, age 50: $0 Cash Balance Contribution 24

25 FEATURE #3 Contribution amounts can change, but use CAUTION 25

26 FEATURE #3 What if the cash flows decrease? 1. Reduce 401(k) and/or Profit Sharing 2. Amend plan to change contribution amounts 3. Freeze plan 1/1 12/31 Plan amendment deadline (1,000 hours/~june 15) 26

27 FEATURE #4 Funding of the Plan Plan year Funding deadline Funding extension 1/1/18 12/31/18 3/15/19 9/15/19 Filing of the company tax return 27

28 FEATURE #4 Funding Trends Plan year Family businesses 1/1/18 12/31/18 9/15/19 Professional firms 28

29 FEATURE #5 Participation Requirement (how many people need to be in the CB Plan?) 40% of eligible participants Example: 8/20 = 40% OR 50 total 29

30 FEATURE #6 Non-discrimination testing primarily satisfied in the Profit Sharing Plan Profit Cash TOTAL Owners 401(k) Sharing Balance CONTRIBUTION Owner 1 $ 22,000 $ 32,500 $ 225,000 $ 279,500 Owner 2 16,500 32,500 25,000 74,000 Employees 7.5% of pay Jones 6,675 $ 650 7,325 Keeler 6, ,250 Marion 3, ,625 Baldwin 3, ,400 Dupre 3, ,250 Ophir 2, ,575 Smith 3, ,650 Sabotin 2, ,275 Parotta 1, ,775 Keebler 1, ,700 Subtotal $ 35,325 $ 6,500 $ 41,825 Total $ 395,325 Percent to Owners 89% 30

31 BUSINESS INCOME TAXES Reduction in corporate tax rate and repeal AMT PERMANENT reduction in top corporate tax rate from 35% to 21% PERMANENT repeal of the corporate alternative minimum tax (AMT) When corporate taxes go down (a decrease of 40% in max rate), corporations have more capital to spend. When corporate tax rates are lower than individual income tax rates (21% versus 37%), more capital will be retained inside the business. What can corporations do with this windfall? The cost to a Business for life insurance just got cheaper 31

32 BUSINESS INCOME TAXES Business insurance Key person coverage Loan regime split dollar and endorsement Non-qualified deferred compensation (NQDC) plans Focus on accumulated earnings tax (and its exclusions) AMT repeal removes perceived disadvantage of corporateowned life insurance Enhanced focus on designs that retain capital SERPs Elective deferral plans 32 Key person coverage is a permissible purpose Informally Funding NQDC is a permissible purpose COLI-funded entity redemption buy/sell

33 BUSINESS INCOME TAXES Deductions for owners of pass-throughs Deduction up to 20% of pass-through income for business owners Subject to strict rules and testing requirements Unavailable for service-oriented pass-throughs (physician s groups, law firms, etc.), with income over certain limits Applies to S corporations, Partnerships and LLCs electing to be taxed as partnerships. Reduced for owners of all pass-throughs with income over certain limits This deduction sunsets on December 31,

34 BUSINESS INCOME TAXES Deductions for Owners of Pass-Throughs Deductions available may be dependent on total wages paid to employees Higher wages may mean bigger deductions 162 Bonus Plan Employee benefit that creates more ties to company than just cash bonuses 34

35 BUSINESS INCOME TAXES Business Planning Service pass-throughs Split business into two entities with one entity owning the real estate and operating any portions of the business not subject to the personal service limitations This technique will likely result in multiple business entities with the same owners 35

36 INDIVIDUAL INCOME TAXES Reduction in top rate from 39.6% to 37% Standard deduction doubled Personal exemptions eliminated Many itemized deductions eliminated or reduced Deduction for property taxes and/or state/local income taxes limited to $10,000 Deduction for alimony eliminated Mortgage/home equity interest deduction limited. Pease Amendment limitation on deductions is eliminated, meaning that those who continue to itemize can do so without limitation Virtually all income tax provisions are temporary and sunset after

37 INSURANCE & INVESTMENT PLANNING UNDER THE NEW TAX RULES