Private Company Owner Exit Strategy: Window of Opportunity. Joseph Sleeth, Partner

Transcription

1 Private Company Owner Exit Strategy: Window of Opportunity Joseph Sleeth, Partner

2 Wealth Transfer Planning JOE SLEETH, PARTNER TRUSTS & ESTATES 2

3 Estate Tax Estate Tax Free Amount Top Marginal Tax Rate 2012 $5,120, % 2013 and after* $1,000,000 (indexed for inflation) 55% *Assumes that the 2010 Tax Act is not extended by Congress. 3

4 Gift Tax Exemption Amount Top Marginal Tax Rate 2012 $5,120,000 35% 2013 and after* $1, 000,000 (indexed for inflation) 55% *Assumes that the 2010 Tax Act is not extended by Congress. 4

5 GST Tax Exemption Rate of Tax (on all amounts in excess of exemption) 2012 $5,120,000 35% 2013 and thereafter* $1,000,000 (indexed for inflation) 55% * Assumes that the 2010 Tax Act is not extended by Congress. 5

6 Grantor Retained Annuity Trusts (GRATS) Structure: Downside: Upside: Donor transfers property to trust for a fixed term in exchange for an annuity Donor can serve as trustee Principal amount returned to donor only growth transferred to family Annual valuation may be required Growth of assets may not exceed IRS rate Not GST friendly IRS guidance given for this technique Can transfer significant amounts of wealth without incurring gift tax No risk if asset growth is less than IRS rate, trustee simply returns all assets to donor 6

7 Sale to Grantor Trust (IDGT) Structure: Downside: Upside: Donor gifts seed capital to trust prior to sale Trustee buys assets from Donor on an installment note (longterm & low interest rate) Total trust proceeds at maturity of installment note, after payment of interest and principal, is owned by trust Growth of assets may not exceed IRS rate downside risk for trustee No IRS guidance If growth is extreme, may result in extensive wealth transfer Donor can transfer significant wealth without using large portions of gift tax exemption Annual valuation of investment is not necessary GST friendly, maximizes planning for several generations 7

8 Charitable Lead Annuity Trust (CLAT) Structure: Downside: Upside: Donor creates an irrevocable trust which pays a fixed dollar annuity to charity for a stated period At the end of the annuity payment term, the remainder typically passes to children or trusts for their benefit Donor can create a CLAT with no gift tax cost if present value of the annuities equal the contribution Not a tax exempt entity, sales and income earned may be taxable Subject to certain private foundation excise tax rules In most instances, donor does not receive a charitable income tax deduction Benefits charity immediately A method of gifting property with reduced or no gift tax and excludable from donor s estate Ideal when donor wishes to transfer assets but does not want immediate wealth in the hands of the family 8

9 Potential Estate Tax Saving on Gift Assets Example # 1 Estate Tax Savings Assuming Gifted Assets Year Appreciate at 6% 2012 $ , , , , ,120 Estate Tax Savings Assuming Gifted Assets Year Appreciate at 12% 2012 $ , , ,113, ,577, ,096,440 Assumes a $5,000,000 gift in 2012, 35% estate tax rate for 2012, and a 55% estate tax rate for

10 Potential Estate Tax Saving on Gift Assets Example # 2 Estate Tax Savings Assuming Gifted Assets Year Appreciate at 6% 2012 $ , , ,104, ,265, ,436,008 Estate Tax Savings Assuming Gifted Assets Year Appreciate at 12% 2012 $ , ,247, ,586, ,965, ,390,269 Assumes $3.5 million estate tax exemption for , and no clawback with respect to the $5,000,000 gift made in Also, assumes a 35% estate tax rate for 2012 and a 45% estate tax rate for

11 Growth of Gifted Assets Value Assuming a Year Growth Rate of 6% 2012 $5,000, ,300, ,618,000, ,955, ,312, ,691,128 Value Assuming a Year Growth Rate of 12% 2012 $5,000, ,600, ,272,000, ,024, ,867, ,811,708 While 12% may seem like a high growth rate, this technique can be leveraged by using discounted property or carefully selecting assets which are likely to see substantial appreciation from their current values. 11

12 AUSTIN BEIJING DALLAS DENVER DUBAI HONG KONG HOUSTON LONDON LOS ANGELES MINNEAPOLIS MUNICH NEW YORK PITTSBURGH-SOUTHPOINTE RIYADH SAN ANTONIO ST. LOUIS WASHINGTON, D.C FULBRIGHT [ ] 12