Which Asset Transfer Strategy is Right for You?

Transcription

1 Which Asset Transfer Strategy is Right for You? August 27, 2014 Larry Powell CSH Dave Benedetto Taft Mark Gaudet CSH Andy Woods Taft

2 First Webinar: Is Estate Planning Still Important With A $5 Million Exemption? An on-demand version of the webinar can be found on Clark Schaefer Hackett s website at under the Guidance<Webinars section or can be found directly through the link provided below: million-exemption/

3 Discussion Outline I. Current Environment for Estate & Gift Tax Planning II. Common Estate & Gift Planning Techniques Grantor Retained Annuity Trusts (GRAT) Intentionally Defective Irrevocable Trusts (IDIT) Qualified Personal Residence Trusts (QPRT) III. IV. Income Tax Benefits Which Approach is Best for You?

4 Section I Current Environment for Estate & Gift Tax Planning

5 Current Environment for Estate & Gift Tax Planning Less restriction on gifting techniques (discounting, GRAT terms, etc.) o o Administration s Greenbook discusses 10 year minimum term on GRAT s Treasury proposals on limiting valuation discounts for family transfers Uncertainty of the future (deficit concerns, Congressional discord, etc.) Low interest rates High exemption amounts (historically) Low transfer tax rates (historically) How much revenue does the government need?

6 Current Environment for Estate & Gift Tax Planning Income Tax Considerations Estate Planning Transfer Tax Considerations Non-Tax Considerations Income Tax Rates vs. Transfer Tax Rates Basis Considerations Gift Basis Death Basis Unaffected Basis (Grantor Trusts) Grantor Trusts Gift Tax Estate Tax Generation-Skipping Transfer Tax Valuation Discounts Non-Taxable Transfers GRATs Gift Exclusions Grantor Trusts (payment of someone else s income tax) Where do you want your property to go? Charitable Planning Held in Trust (restrictions on access to the assets) Asset Protection

7 Section II Common Estate & Gift Planning Techniques

8 Common Estate & Gift Planning Techniques We will have a detailed discussion on three popular wealth transfer techniques o o o Grantor Retained Annuity Trusts (GRAT) Intentionally Defective Irrevocable Trusts (IDGT) Qualified Personal Residence Trusts (QPRT) We will discuss how these techniques can be powerful tools in transferring wealth at potentially low transfer tax costs

9 Common Estate & Gift Planning Techniques GRAT A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust in which a grantor transfers property for the benefit of one or more beneficiaries and retains an annuity interest for a term of years. Each year the GRAT will pay the Grantor a fixed annual annuity as defined by the terms of the Trust and IRC Section 7520 rate at time of funding. The annuity may be structured as either a fixed amount each year or an escalating payment each year (not to exceed 120 percent of previous years payment).

10 Common Estate & Gift Planning Techniques GRAT (Cont d) At the end of the Trust term, any remaining property in the GRAT passes to the remainder beneficiaries with no further gift tax consequences. The amount of the taxable gift for transfer tax purposes is the Fair Market Value of the property transferred minus the value of the Grantor s retained annuity interest. GRAT may be structured so that the Grantor s Retained Annuity s Actuarial Value is almost equal to the value of the property transferred, therefore resulting in little gift tax consequences.

11 Common Estate & Gift Planning Techniques GRAT Example Taxpayer (Grantor) (1) Gifts $1.0 mm of XYZ Company stock to GRAT Grantor Retained Annuity Trust (GRAT) (3) Taxpayer Reports taxable gift to IRS Internal Revenue Service (2) GRAT pays annual annuity to taxpayer as defined by terms of Trust (4) At end of GRAT term, Trust remainder passes to beneficiaries Beneficiaries Assumptions 5 year term IRC Section 7520 Rate = 1.4% Total return of stock = 6% Grantor transfers $1.0mm of XYZ Company stock to GRAT in February 2014

12 Common Estate & Gift Planning Techniques GRAT Economics Fixed Payout Year Beginning Principal Annual Income Annuity Payment Remainder 1 1,000,000 60, , , ,523 51, , , ,137 41, , , ,308 31, , , ,470 21, , ,021 Summary $205,406 $1,042,385 $163,021 Summary results Annuity paid to taxpayer over term of GRAT => $1,042,385 Projected remainder to Trust beneficiaries => $163,021 Taxable gift reported to IRS => $1

13 Common Estate & Gift Planning Techniques GRAT Economics Escalating Annuity Payout Year Beginning Principal Annual Income Annuity Payment Remainder 1 1,000,000 60, , , ,220 55, , , ,438 48, , , ,041 39, , , ,836 26, , ,726 Summary $229,351 $1,047,625 $181,726 Summary results Annuity paid to taxpayer over term of GRAT => $1,047,625 Projected remainder to Trust beneficiaries => $181,726 Taxable gift reported to IRS => $1

14 Common Estate & Gift Planning Techniques IDIT Intentionally Defective Irrevocable Trust is an Irrevocable Trust that is not included in the grantor s gross estate and transfers of property to trust are completed gifts for gift tax purposes. However, income from the trust is taxable to the grantor. IDITs are a powerful estate planning technique that reduces a grantor s taxable estate through asset transfers and payment of trust tax liability by grantor. Grantor establishes an IDIT and then sells assets to the trust for an installment note. The installment note pays the lowest amount of interest based on the Applicable Federal Rate (AFR). Any appreciation of the trust assets above the AFR is transferred to the trust beneficiaries without any additional transfer taxes.

15 Common Estate & Gift Planning Techniques IDIT Example Grantor (3) Grantor pays gift tax on initial seed to IDIT IRS (1) Grantor transfers cash to IDIT as a seed gift (at least 10% of proposed sale) (2) Grantor sells company stock to IDIT for an installment note at current AFR. (4) All income tax attributes are reported by grantor. Intentionally Defective Irrevocable Trust (IDIT) Beneficiaries (5) Once note to grantor has been paid, stock and appreciation transfer to trust beneficiaries. Note Grantor will pay gift tax upon initial funding of IDIT. Interest income on note payable from IDIT not taxable to grantor as a result of Grantor Trust. Note payable from IDIT may be structured as balloon note. Company stock and appreciation pass to beneficiaries with no additional gift tax consequences.

16 Common Estate & Gift Planning Techniques QPRT Can only be used with a personal residence. Grantor transfers personal residence to QPRT and retains a term interest. QPRT is a way to make a gift with a built in discount based on a retained term interest. Unlike a GRAT, transfer tax savings may be realized even if the residence does not appreciate in value.

17 QPRT ILLUSTRATION Transfer Date: 8/ Rate: 2.20% Principal: $2,000,000 Grantor s Current Age: 60 Term of Trust: 12 After-Tax Growth: 5.00% Comb. Death Tax Bracket: 40.00% With Reversion? Yes Grantor s Age When Trust Terms Ends: 72 Value of Nontaxable Interest Retained by Grantor: $749,860 Taxable Gift (Present Value of Remainder Interest): $1,250,140 Property Value After 12 Years: $3,591,713 Potential Death Tax Savings: $936,629 (Combined Bracket times [Value of Property minus Taxable Gift]) Qualified Annuity that Must be Paid Annually if Entire Trust Ceases to be a QPRT: $77,862

18 Section III Income Tax Benefits

19 Income Tax Benefits All three of the techniques discussed previously are taxed as grantor trusts. Thus, 100% of the income is taxable to the grantor. This is a very important benefit as the tax paid further reduces the estate of the grantor, and increases the value that is transferred to the beneficiaries.

20 Section IV Which Approach is Best for You?

21 Which Approach is Best for You? The Power of Flexibility. No one size fits all approach. Ensuring non-tax objectives are met.

22 Questions on Estate Planning? Questions Let s hear it! Larry Powell CSH lpowell@cshco.com Dave Benedetto Taft dbenedetto@taftlaw.com Mark Gaudet CSH mgaudet@cshco.com Andy Woods Taft amwoods@taftlaw.com

23 Which Asset Transfer Strategy is Right for You? August 27, 2014 Larry Powell CSH Dave Benedetto Taft Mark Gaudet CSH Andy Woods Taft Thank You!