10/24/2014 TABLE OF CONTENTS. 1. Federal Income Tax Brackets. 2. Phase Out Of Itemized Deductions. 3. Phase Out Of Personal Exemptions

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1 FEDERAL AND NEW YORK INDIVIDUAL INCOME AND ESTATE/GIFT TAX LANDSCAPE Presented at the FPA of LI s 15 th Annual Symposium, October 31, 2014 Speakers: Richard Bloom, CPA, PFS, MST and Michael Rudegeair, CPA, CFP TABLE OF CONTENTS 1. Federal Income Tax Brackets 2. Phase Out Of Itemized Deductions 3. Phase Out Of Personal Exemptions 4. New York and New York City Income Tax Brackets 5. New York Non Resident Audit Guidelines Revised June 1, Net Investment Income Tax 7. Federal Estate/Gift/GST Exemption Amounts And Tax Rates 8. New York Exemption Amount and Tax Rates Effective April 1, New York Changes To Trust Taxation Effective April 1, Ten Ideas For Year End Income and Estate Tax Planning 2 FEDERAL INCOME TAX BRACKETS 1

2 FEDERAL INCOME TAX BRACKETS Marginal Tax Bracket Married Filing Jointly (and Qualifying Widow(er)) for 2014 Taxable Income Over But Not Over Married Filing Jointly (and Qualifying Widow(er)) for 2015 Preliminary* Taxable Income Over But Not Over 10% $ 0 $ 18,150 $ 0 $ 18,450 15% 18,150 73,800 18,450 74,900 25% 73, ,850 74, ,200 28% 148, , , ,450 33% 226, , , ,500 35% 405, , , , % 457, ,850 Taxpayers filing as Head of Household reach the highest bracket at $432,200 in 2014 ($439,000 in 2015*) Taxpayers filing as Single reach the highest bracket at $406,750 in 2014 ($412,200 in 2015*) Taxpayers filing as Married Filing Separately reach the highest bracket at $228,800 in 2014 ($232,425 in 2015*) These brackets are indexed for inflation. * Per Bloomberg BNA 2015 Projected Tax Rates 4 PHASE OUT OF ITEMIZED DEDUCTIONS PHASE OUT OF ITEMIZED DEDUCTIONS Phase out of Itemized Deductions starts at AGI of: Tax Year 2014 Tax Year 2015 Preliminary* $305,050 For Married Filing Jointly (and Surviving Spouse) $309,900 $279,650 For Heads of Households $284,050 $254,200 For Single Filers $258,250 $152,525 For Married Filing Separately $154,950 * Per Bloomberg BNA 2015 Projected Tax Rates 6 2

3 PHASE OUT OF ITEMIZED DEDUCTIONS Operation Itemized Deductions are reduced by 3% for each $2,500 (or fraction thereof) by which AGI exceeds the threshold amounts (above); Itemized Deductions cannot be reduced by more than 80%; Which Itemized Deductions are phased out? Itemized Deductions subject to reduction: taxes (state & local income taxes, general sales tax, real estate taxes, or personal property taxes), mortgage interest, charity, and other misc. itemized deductions; Itemized Deductions not subject to reduction: medical expenses, investment interest expense, casualty and theft losses; Note that medical expenses, investment interest expenses, and casualty and theft losses are already subject to their own limitations. 7 PHASE OUT OF PERSONAL EXEMPTIONS PHASE OUT OF PERSONAL EXEMPTIONS Personal Exemption in 2014: $3,950 ($4,000 in 2015*) Phase out of Personal Exemptions for AGI of: Tax Year 2014 Tax Year 2015 Preliminary* $305,050 $427,550 For Married Filing Jointly (and Surviving Spouse) $309,900 $432,400 $279,650 $402,150 For Heads of Households $284,050 $406,550 $254,200 $376,700 For Single Filers $258,250 $380,750 $152,525 $213,775 For Married Filing Separately $154,950 $216,200 Operation Personal Exemptions are reduced by 2% for each $2,500 ($1,250 for married taxpayers filing separate returns) or fraction thereof by which AGI exceeds the applicable threshold amounts (above); When AGI reaches the top of the range (above), the Personal Exemptions are reduced to zero * Per Bloomberg BNA 2015 Projected Tax Rates 9 3

4 NEW YORK AND NEW YORK CITY INCOME TAX BRACKETS NEW YORK STATE INCOME TAX BRACKETS Married Filing Jointly (and Qualifying Widow(er)) for 2014 Marginal Taxable Income But Tax Bracket Over Not Over 4.00% $ 0 $ 16, % 16,700 22, % 22,950 27, % 27,150 41, % 41, , % 156, , % 313,850 2,092, % 2,092,800 These brackets were first indexed for inflation for tax year NYS Alternative Minimum Tax has been repealed for years after NEW YORK CITY INCOME TAX BRACKETS Married Filing Jointly (and Qualifying Widow(er)) for 2014 and beyond Marginal Taxable But Base Bracket Surcharge Tax Bracket Income Over Not Over 2.907% $ 0 $ 21, % 14% 3.534% 21,600 45, % 14% 3.591% 45,000 90, % 14% 3.648% 90, , % 14% 3.876% 500, % 14% 12 4

5 NEW YORK CITY INCOME TAX BRACKETS MCTMT Self employed individuals are subject to the MCTMT when net earnings from self employment (attributable to the MCTD) exceed $50,000 This threshold increased in 2012 from the original $10,000 threshold Family Tax Relief Credit Refundable $350 credit for qualifying (middle income) families for tax years * Eligible taxpayers: NYS Residents, who claim one or more dependents under the age of 17 Who had NY adjusted gross income between $40,000 $300,000 Base years: 2014 credit based on 2012 tax information; checks were mailed to qualifying taxpayers already 2015 and 2016 credits will be claimed on the NYS tax return, and eligibility for those years will be based on that current year s tax return *NY Tax Law section 606(vv), amended by Ch. 59 (S.B. 6359) Laws 2014 applicable for taxable years beginning on or after January 1, SUMMARY OF 2014 INCOME TAX RATES New York City Resident Top Marginal Bracket (on Passive Income): Tax and Adjustments Rate Federal Top Bracket 39.6% Adjustment for phase out of Itemized Deductions 1.2% Net Investment Income Tax (on investment income) 3.8% NYS Top Bracket 8.82% NYC Top Bracket 3.876% Estimated Tax Savings from State/City Tax Deduction* 5.0% Combined Top Bracket % * Assumes taxpayer is not subject to AMT 14 NEW YORK NON RESIDENT AUDIT GUIDELINES REVISED JUNE 1,

6 NEW YORK NON RESIDENT AUDIT GUIDELINES REVISED JUNE 1, 2014 NYS Residency Two Tests Domicile test, or Statutory Residency test Domicile Where the taxpayer s permanent and primary home is located Where one resides with the intent to permanently remain Statutory residency Taxpayer spends more than 183 days in the state, and Maintains living quarters or a permanent place of abode in the state 16 NEW YORK NON RESIDENT AUDIT GUIDELINES REVISED JUNE 1, 2014 Gaied case (Gaied v. New York State Tax Appeals Tribunal, No. 26 (N.Y.2014)) John Gaied was a NJ resident He maintained a home on Staten Island for his parents He didn t live there, but he paid all the expenses, and occasionally stayed there. His use of the apartment was periodic, and he didn t leave any personal possessions in the apartment The NYS Tax Appeals Tribunal ruled that he was a statutory resident (2011), primarily because he owned the apartment But the NY Court of Appeals unanimously (7 0) reversed that decision (early 2014), primarily because he wasn t the primary user of the apartment Takeaways from the case: First time the NY Court of Appeals ruled on and interpreted permanent place of abode (PPA) The Court of Appeals restricted the definition of PPA from the Tax Department s broad interpretation, to a narrower definition requiring that the PPA relate to the taxpayer and that the taxpayer have a residential interest in the property The Court accused the Tax Department of trying to tax people living out of state as residents; the original intent of the statute was the opposite: to prevent people living in the state from being taxed as non residents 17 NEW YORK NON RESIDENT AUDIT GUIDELINES REVISED JUNE 1, 2014 NY Non Resident Audit Guidelines Revised June of 2014 The NY Tax Department continues to interpret broadly the definition of permanent place of abode The Guidelines relationship test is the same as the 2012 version, despite the NY Court of Appeals decision in Gaied that a taxpayer must have a residential interest in the property Two notable Tax Department examples: The Tax Department will still treat out of state domiciliaries as residents if they have access to an apartment, which is not used more often by anyone else The Tax Department will still treat former domiciliaries as residents if their old residence is fully furnished and accessible, even if it is listed for sale 18 6

7 NET INVESTMENT INCOME TAX NET INVESTMENT INCOME TAX Enacted by the Health Care and Education Reconciliation Act (HCERA) of 2010; effective for tax years beginning in 2013 The Net Investment Income Tax of 3.8% applies when Net Investment Income (NII) exceeds: Note: these amounts are NOT INDEXED FOR INFLATION (except for Trust & Estates) Tax Year 2014 Tax Year 2015 $250,000 For Married Filing Jointly (and Surviving Spouse) $250,000 $200,000 For Heads of Household $200,000 $200,000 For Single Filers $200,000 $125,000 For Married Filing Separately $125,000 $12,150 For Trusts & Estates $12,300 (Preliminary*) * Per Bloomberg BNA 2015 Projected Tax Rates 20 NET INVESTMENT INCOME TAX Who is subject to the NII tax? Individuals, and estates and trusts Charitable lead trusts (CLT) Either the grantor of grantor CLT, or The trust itself, if a non grantor CLT Who is exempt from the NII tax? Non resident aliens and wholly charitable trusts Charitable Remainder Trusts (CRTs) are not subject to the tax But the income beneficiaries of CRTs may be subject to distributions of NII (or accumulated NII) Individuals are taxed on the lower of: Net Investment Income Modified Adjusted Gross Income (MAGI) in excess of these threshold amounts (above) MAGI is AGI plus excluded foreign income ( 911(a)(1)) Trusts are taxed on the lower of undistributed NII or MAGI in excess of the threshold 21 7

8 NET INVESTMENT INCOME TAX What is Net Investment Income? Investment Income net of allowable expenses Investment Income includes: Interest, dividends, annuities, royalties and rents Net capital gain from disposition of (investment) property Income from passive activities Income from a trade or business of trading in financial instruments or commodities Investment Income includes a partners distributable share, even if no cash is distributed from the partnership What is not Investment Income? Income from a trade or business in which the taxpayer materially participates (i.e. nonpassive income) Gains from the sale of a trade or business in which the taxpayer materially participates 22 NET INVESTMENT INCOME TAX What are allowable expenses? Investment expenses, including Investment interest expense State income taxes Miscellaneous investment expenses What income is excluded from Investment Income? Tax exempt income Distributions from retirement plans Wages Income already subject to self employment tax 23 NET INVESTMENT INCOME TAX Passive vs. non passive income All passive income is subject to the NII tax Income (other than portfolio income) is passive if the taxpayer does NOT materially participate in the activity generating the income Passive income can be offset by passive losses, but the net is subject to NII Non passive income cannot offset passive losses, is not subject to NII, but might be subject to self employment income 24 8

9 FEDERAL ESTATE/GIFT/GST EXEMPTION AMOUNTS AND TAX RATES FEDERAL ESTATE/GIFT/GST EXEMPTION AMOUNTS AND TAX RATES Tax Year Lifetime Gift Exemption Estate Tax Exemption GST Exemption Estate Tax Rate (Top Rate) Gift Tax Rate (Top Rate) GST Tax Rate (Flat Rate) 2013 $5,250,000 $5,250,000 $5,250,000 35% 35% 35% 2014 $5,340,000 $5,340,000 $5,340,000 40% 40% 40% 2015 $5,430,000 preliminary* $5,430,000 preliminary* $5,430,000 preliminary* 40% 40% 40% * Per Bloomberg BNA 2015 Projected Tax Rates 26 FEDERAL ESTATE/GIFT/GST EXEMPTION AMOUNTS AND TAX RATES Unified Estate and Gift Tax Rates as of January 1, 2014: Marginal Taxable Income But Tax Bracket Over Not Over 18% $ 0 $ 10,000 20% 10,000 20,000 22% 20,000 40,000 24% 40,000 60,000 26% 60,000 80,000 28% 80, ,000 30% 100, ,000 32% 150, ,000 34% 250, ,000 37% 500, ,000 39% 750,000 1,000,000 40% 1,000,

10 FEDERAL ESTATE/GIFT/GST EXEMPTION AMOUNTS AND TAX RATES Portability The lifetime exemption unused by a decedent may be transferred to a surviving spouse (for Federal estate and gift tax purposes) Called DSUE Deceased Spouse Unused Exemption Making the election Election to port the DSUE to the surviving spouse is made on a timely filed Federal estate tax return (Form 706) A Federal estate tax return must be filed to elect portability, even if the estate is not otherwise required to file (e.g. gross estate under $5,340,000 in 2014) Portability has been available since 2011 Estates which did not file to elect portability for deaths during 2011, 2012, and 2013 may file before the end of 2014 to make this election (Rev. Proc ) Estates filing a Federal return only to elect portability may be able to complete a simplified return showing estimated asset values Eligible estate must pass only to a surviving spouse, and/or to charity* * Temp. Reg T(a)(7)(ii)(A) 28 FEDERAL ESTATE/GIFT/GST EXEMPTION AMOUNTS AND TAX RATES Using DSUE A surviving spouse adds the DSUE to his/her own Basic Exclusion Amount Note that DSUE is not indexed for inflation, and will not grow as a taxpayer s own Basic Exclusion Amount increases When making lifetime gifts, DSUE is used before a taxpayer s own Basic Exclusion Amount Only the last deceased spouse s DSUE is available for a surviving spouse Example: Taxpayer s wife dies and her executor elected portability; the taxpayer may remarry and continue to use his 1 st wife s DSUE; if his second wife were to die, the 1 st wife s DSUE is no longer available, even if the 2 nd wife does not have any unused exemption to transfer to the taxpayer This is why it is important to use DSUE before a taxpayer s own Basic Exclusion Amount. And why it may be advisable to fully utilize DSUE by making lifetime gifts 29 NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1,

11 NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1, 2014 Increased exemption: a) Through March 31, 2014 $1,000,000 b) April 1, 2014 to March 31, 2015 $2,062,500 c) April 1, 2015 to March 31, 2016 $3,125,000 d) April 1, 2016 to March 31, 2017 $4,187,500 e) April 1, 2017 to December 31, 2018 $5,250,000 [Note long year] f) As of January 1, 2019, the New York estate tax exemption amount will be the same as the federal estate tax applicable exclusion amount By 1/1/2019 the federal estate tax applicable exclusion amount could be close to $6m. Top Estate tax rate remains at 16%. Note that the current rate schedule in the NYS Statute (NY Tax Law section 952(b)) is only for deaths between April 1, 2014 through March 31, 2015 The NYS legislature will have to fix this with the next budget legislation before April 1, NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1, 2014 Estate Tax Cliff When a taxable estate exceeds 105% of the basic exclusion amount, it will pay tax on the ENTIRE estate, and not only the portion over the basic exclusion amount. The exemption is phased out between 100% and 105% of the basic exclusion amount. The Estate Tax Cliff has always existed It is now shifted from $1,000,000 in 2013 to $2,062,500 as of April 1, 2014 And the marginal rate swing is created by the exemption phase out There is no change to the estate tax consequence for estates under $1m (not taxable under prior or current law) There is no change to the estate tax consequence for estates that exceed 105% of the NY exclusion amount (same tax payable under prior or current law) 32 NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1, 2014 In 2014, the basic exclusion amount is $2,062,500 (105% of the exclusion is $2,165,625) Client Date of Death Net Taxable Estate Exclusion is reduced to NYS Estate Tax Excess Marginal Rate Abigail 7/1/2014 $2,000,000 (no reduction) $0 $0 0% Bernard 7/2/2014 $2,100,000 $1,312,500 $49,313 $37, % Carolyn 7/3/2014 $2,150,000 $312,500 $101,238 $87, % Douglas 7/4/2014 $2,175,000 $0 $112,800 $112, % 33 11

12 NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1, 2014 QTIP Background: a) Property outright to a surviving spouse is eligible for an unlimited marital deduction; b) Property in trust to a surviving spouse might be eligible for the marital deduction: i. Trust must have the proper terms, AND ii. Election must be made; State only QTIP now permitted Allows a separate QTIP election on qualifying trusts for state estate purposes*; If a federal QTIP election is made, then the election must be made for NY. But what if no federal return is required, but filed anyway (e.g. to elect portability)? EXAMPLE: George dies in 2014 with an estate of $4m, so he is not required to file an estate tax return. However, almost $2m of his estate is taxable in NY. That portion of his estate is going to his surviving spouse. He doesn t want to make a Federal QTIP election, but wants to make a state only QTIP election. This has been allowed since March 16, 2010 NYS Office of Tax Policy issued guidance in TSB M 10(1)M allowing a state only QTIP election when a federal return is not required. Now the permission is statutory. Still must follow the Federal election when a Federal return is required. * NY Tax Law section 955(c) 34 NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1, 2014 Other NYS Notes State only alternative valuation election is allowed*: A federal alternative valuation election is binding for New York estate tax purposes If no federal return is filed (and therefore no federal alternative valuation election made), then a state only alternative valuation election may be made Like the federal election, it may only be made if it will decrease the value of the NY gross estate and the amount of NY estate tax. NYS s Generation Skipping Transfer tax has been repealed in its entirety; This tax applied to taxable distributions and taxable terminations. No NY State portability. * NY Tax Law section 954(b)(2) 35 NEW YORK EXEMPTION AMOUNT AND TAX RATES EFFECTIVE APRIL 1, 2014 Taxable Gifts are added to the NYS gross estate; What gifts are added back: Taxable gifts, as reported on a Federal gift tax return; Within three years of death; and Gifts made while a resident of New York State Gifts of real or tangible personal property having a location outside New York State are NOT added back* Gifts made AFTER 3/31/2014 and BEFORE 1/1/2019 * see Estate Tax Technical Memorandum TSB M 14(6)M issued 8/25/

13 NEW YORK CHANGES TO TRUST TAXATION EFFECTIVE APRIL 1, 2014 NEW YORK CHANGES TO TRUST TAXATION EFFECTIVE APRIL 1, 2014 Changes to taxation of: Resident Exempt Trusts, and Incomplete gift Non Grantor ING Trusts What is a Resident Exempt Trust? Criteria for Exemption*: All of the trustees are domiciled outside of New York state; All real and tangible trust property is located outside of New York state; and All trust income and gains are derived from sources outside of New York state. * NY Tax Law section 605(b)(3)(D) 38 NEW YORK CHANGES TO TRUST TAXATION EFFECTIVE APRIL 1, 2014 Changes to taxation of Resident Trusts exempt from NYS income tax Excess distributions to NYS resident beneficiaries (over age 21) are subject to NYS tax; Distributions of income from Resident exempt trusts to NYS resident beneficiaries are naturally subject to NYS tax Excess distributions means: Accumulated income, Earned after 1/1/2014, Distributed in excess of the current year s DNI, Which was not previously taxed in New York; Similar to existing throwback rules applicable to foreign trusts (and previously to domestic trusts) 39 13

14 NEW YORK CHANGES TO TRUST TAXATION EFFECTIVE APRIL 1, 2014 Example: Trust created by Nathan in New York, for the benefit of his son Sam (who also lives in New York). The trustee is Matthew (who lives in Massachusetts) and the trust holds only brokerage assets.; The Trust qualifies as a Resident Exempt Trust under NY Law; During , the trust earns $50,000 per year, and no distributions are paid to Sam Federal tax is paid by the trust on all of its earnings; no NYS tax is paid on any of the income After three years, the trust has accumulated income of $150,000 because no distributions were made In 2017, the trust earns another $50,000, and distributes $120,000 to Sam The first $50,000 of the distribution is current year DNI and is taxable to Sam (both Federal and NYS) The next $70,000 of the distribution is an excess distribution; Federal tax has been paid on this amount, but not NYS tax; this amount is taxable to Sam as a Resident of NY receiving excess distributions from an exempt resident trust 40 NEW YORK CHANGES TO TRUST TAXATION EFFECTIVE APRIL 1, 2014 Changes to taxation of Incomplete gift Non Grantor ( ING Trusts): Incomplete gift non grantor ( ING ) trusts, otherwise nontaxed as Resident Exempt Trusts, will be taxed as grantor trusts for NY income tax purposes. Private Letter Rulings (March 7, 2014) DING and NING Delaware/Nevada Intentionally Non Grantor Trusts Grantor for Estate tax purposes (includable in the grantor s estate), but Non Grantor for Income tax purposes (taxed as a non grantor trust) State income tax planning tool 41 TEN IDEAS FOR YEAR END INCOME AND ESTATE TAX PLANNING 14

15 TAX PLANNING #1 Bracket Management The art of recognizing or deferring income (or deductions) to keep a taxpayer in one tax bracket and out of another bracket Income Taxes Deferring income (e.g. wage bonuses) will reduce this year s taxable income Making charitable gifts can lower your taxable income Opening and funding a qualified retirement plan, if you are self employed Defer capital gains until next year; recognize losses in an investment portfolio to offset any year to date gains Alternative Minimum Tax Prepaying state taxes may cause an AMT tax and reduce the expected benefit of the prepayment 43 TAX PLANNING #2 Net Investment Income Tax Planning Consider reallocating portfolio to increase allocation to tax exempt income to reduce NII tax exposure Consider reallocating portfolio to growth assets, and reduce the amount of dividend paying assets Watch out for retirement plan distributions they are not taxable as NII, but they can raise your AGI and may cause a NII tax Look into current grouping elections for passive activities as the result of the NII tax in 2013, or the first year that a taxpayer is subject to the NII tax 44 TAX PLANNING #3 Consider material participation standard of Aragona to reduce exposure to NII tax First, a recap of the case Frank Aragona Trust v. Commissioner, 142 T.C. No. 9 (March 27, 2014) Trust had 6 trustees, 3 of whom are full time employees of an LLC wholly owned by trust who manages rental real estate Tax court held that if trustees are individuals, work on a trade or business as part of their trustee duties, work can be considered personal services Trust qualified for rental exception under Sec 469(c)(7) Determination in the absence of regulatory guidance Trusts have received no regulations from the IRS to clarify when a trust can materially participate in a business activity Various cases (including Aragona) provide a broad outline for taxpayers to follow When a trust can treat an activity as non passive, it can avoid the NII tax, and cannot be subject to self employment tax

16 TAX PLANNING #4 Consider residency and ability to move to different jurisdiction Moving out of NYC to another part of NYS avoids any NYC income tax on all income Moving out of NYS (e.g. to CT) avoids NYS income tax on all non sourced income (e.g. portfolio income) Moving out of the Northeast to FL (or another state without income tax) avoids NYS tax on all non sourced income, and all state taxes on portfolio income Changing Residency: Changing means changing your domicile, that is your permanent home It requires severing almost all ties to your current domicile, to avoid uncertainty in your intention to move out of state 46 TAX PLANNING #5 Charitable Contributions Charitable donations of cash to a public charity can be deducted up to 50% of a taxpayer s AGI The excess can be carried forward (for 5 years) Donations of property to a public charity can be deducted up to 30% of a taxpayer s AGI Donations of the FMV of appreciated marketable securities provide a charitable deduction, and avoid capital gains recognition if the securities were sold Consider funding a Donor Advised Fund You enjoy a current deduction for the amount contributed And you can advise the Fund to make donations in future years. ALWAYS get a contemporaneous, written description of the contribution from the charity in order to qualify for a tax deduction This includes donations that taxpayers make to their own private foundations 47 TAX PLANNING #6 Annual Estate Planning Update Review existing Wills and estate plans Wills, and any Living Trusts Health Care Proxies and Living Will Powers of Attorney Retirement Plan beneficiary designations Life insurance documents Update giving plans to utilize increase in exemption amount $90,000 increase in exemption from 2013 to 2014 Consider implications of U.S. v. Windsor (and Rev. Rul ) U.S. v. Windsor requires Federal government to recognize same sex marriages valid under state law Review estate documents (e.g. spousal bequests) Review retirement account beneficiary designations including joint and survivor annuity elections Consider replacing individual life insurance policies with survivorship policies Consider splitting gifts between spouses 48 16

17 TAX PLANNING #7 Low Interest Rate Estate Planning Consider estate planning techniques that take into consideration the low interest rate environment Grantor Retained Annuity Trusts (GRATs) Grantor puts property into trust for a term of years Trust pays annuity back to grantor (note: trust is taxes as a grantor trust) Annuity is structured to bring gift taxes down to zero (or almost zero) Property growth in excess of the 7520 rate (2.2% in November 2014) passes out transfer tax free to designated beneficiaries (e.g. children) Senior Family Members Appreciating Asset Annuity Interest GRAT (Grantor Trust) Remainder Junior Family Members 49 TAX PLANNING #7 Intra family loans Example: Parent lends funds to a child Loans must bear an interest rate; government determines the minimum rate before below market rate rules apply; November 2014 rates are: Short term (0 3 years): 0.39% Mid term (over 3 years 9 years): 1.90% Long term (over 9 years): 2.91% Senior Family Members Cash Note Junior Family Members 50 TAX PLANNING #7 Charitable Lead Annuity Trusts (CLATs) Similar to a GRAT, but the annuity is paid to a charity Present value of annuity to charity is a charitable deduction for gift tax purposes Property growth in excess of the 7520 rate (2.2% in November 2014) passes out transfer tax free to designated beneficiaries (e.g. children) A grantor type CLAT makes the trust income taxable to the grantor, and the grantor can take a charitable deduction for the discounted present value of the charitable annuity A non grantor CLAT results in no charitable deduction for the grantor; instead the trust takes a charitable deduction each year against the trust income (usually resulting in no tax) Donor Assets CLAT Annuity Charitable Organization Beneficiary 51 17

18 TAX PLANNING 2.6% 7520 Rate 2.4% 2.2% 2.0% Jan 14 Feb 14 Mar 14 Apr 14 May 14 Jun 14 Jul 14 Aug 14 Sep 14 Oct 14 Nov TAX PLANNING #8 Review need for life insurance Periodic policy review: Policy ownership (outright, or in trust) Insurer s financial position Expected v. actual returns Beneficiaries of policies Changing need for insurance: Births and deaths Marriage or divorce Mortgages and unfunded college costs Operational review: Crummy letters 53 TAX PLANNING #9 Paradigm shift in estate planning Estate Tax vs. Basis Step up Assets which benefit most for estate inclusion and basis step up: Creator owned copyrights, trademarks, patents & artwork Basis is cost in the hands of the creator owner; step up to FMV in the hands of the estate Negative Basis commercial real property Basis adjusted at death; future owners generally enjoy 754 adjustments Artwork, gold & other collectibles Basis adjusted to FMV at death; if sold shortly thereafter, 28% gain avoided Low Basis Stock Basis adjusted to FMV at death; if sold shortly thereafter, 20% gain avoided 54 18

19 TAX PLANNING #10 Lifetime Gifting A regular plan of small gifts made for many years can, over time, greatly reduce your taxable estate Gifts made up to the amount of the annual exclusion ($14,000 in 2014) are free of gift tax Married spouses can give away a combined $28,000 A couple with two children and four grandchildren can give away $168,000 per year Six years of such gift giving would remove over $1,000,000 from the couple s taxable estate Direct payments of medical or educational expenses can be made in addition to the annual exclusion Gifts to grandchildren s 529 plans allow the funds to grow without any income tax consequences 55 TAX PLANNING #10 Consider gifts in excess of the annual exclusion Utilization of a taxpayer s lifetime exemption is tax efficient Especially the utilization of DSUE (discussed earlier) Example: A taxpayer who has fully utilized her lifetime exemption chooses to make a $2m gift to her children, and must pay $800,000 in gift taxes; a total of $2,800,000 is removed from her taxable estate If the $2,800,000 were in her estate, the estate tax would be $1,120,000, leaving only $1,680,000 to her children The Federal government takes in an extra $320,000, out of the pockets of the children 56 QUESTIONS? 57 19

20 RICHARD J. BLOOM, CPA, PFS, MST PARTNER (P) ( ) Richard has more than 20 years of experience delivering specialized personal tax and financial planning services to high net worth individuals, including closely held business owners, executives, and hedge fund managers. He provides tax consulting; income and estate tax planning; federal, state and local tax compliance services; and representation before federal and state tax authorities for such individuals. Richard works with clients on multi generational tax planning, philanthropic planning, wealth preservation strategies, and risk management. Prior to joining WeiserMazars, Richard held senior executive positions at two prominent family office advisory firms and was National Leader of Trusts and Estates at a major accounting firm. He has over 17 years of Big 4 personal financial planning experience. Richard received his Bachelor of Science in Accounting from the University of Delaware and his Master of Science in Taxation from Seton Hall University. He is a Certified Public Accountant in New Jersey, a Personal Financial Specialist and a licensed insurance advisor (Life, Accident, Health or Sickness and Variable). Richard is a member of the American Institute of Certified Public Accountants Personal Financial Planning Section and the New Jersey Society of Certified Public Accountants. 58 MICHAEL F. RUDEGEAIR, CPA, CFP SENIOR MANAGER (P) ( ) Michael.Rudegeair@WeiserMazars.com Michael has over 15 years of experience as a tax and wealth adviser for high net worth individuals, trusts, estates, and private foundations. He provides income tax consulting (including personal and fiduciary income tax); transfer tax consulting (including gift, estate, and generation skipping transfers); federal, state and local tax compliance services; representation before federal and state tax authorities; and trust administration services. Prior to joining WeiserMazars, Michael worked for a multi family office and two regional accounting firms. His clients include individuals, multi generational families, family trusts, family limited partnerships, and private foundations, with net worths between $20M and $135M. Michael received his Bachelor of Science in Ag. Economics (Business Management) from Cornell University, a Certificate in Accounting from Hofstra University, and a CFP Certificate from New York University s School of Continuing and Professional Studies. He is a Certified Public Accountant in New York, and a Certified Financial Planner certificate holder. Michael is a member of the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants (NYSSCPA). He is chair of the NYSSCPA Trust & Estate Administration committee, and a member of the Estate Planning, Personal Financial Planning, and Professional Ethics committees. 59 WEISERMAZARS LLP A full service firm with national focus and international reach Since 1921, WeiserMazars LLP has provided a unique combination of foresight and experience when fulfilling client needs in accounting, tax and advisory services. Whether on the local level or internationally, the firm guides clients through their dayto day operations and works with them to ensure they have the right financial structure in place to meet their business goals. Our reputation for integrity and quality has been earned by providing our clients with proactive, value added guidance at every stage of the business lifecycle. Defining features of our firm include: Over 100 partners and approximately 650 professionals in eight U.S. offices Named one of the top accounting firms in the country by Accounting Today An integrated, customized approach Our full service platform integrates accounting, auditing, tax and advisory services seamlessly to best address the critical issues our clients face Focused industry training our team members at all levels receive specialized industry training so that they are familiar with a client s total business environment International Capability We are the independent U.S. member firm of the Mazars Group, one of the world s most prominent international accounting, audit, tax and advisory services organizations with: Access to over 14,000 professionals in more than 70 countries on six continents International reach uncommon in firms with such an intense focus on coordinated, client centric service Expertise on global issues, cultures and techniques 60 20

21 WHAT MAKES WEISERMAZARS EXCEPTIONAL Why Choose WeiserMazars? At WeiserMazars, we build long-term, mutually beneficial relationships with our clients, and strive to exceed expectations at every step of our association. Quick, accurate technical issue resolution Exceptional service Effective communication Quick, Accurate Technical Issue Resolution WeiserMazars dedicated Technique & Innovation Team ( T&I ) defines and promotes policies and procedures which ensure that the firm delivers the highest quality assurance services complying with professional standards. T&I monitors compliance with a view toward continuous improvement in the efficiency and effectiveness of client service deliverables. Because of T&I s proximity to the rest of the WeiserMazars team, we are able to resolve complex technical challenges quickly and accurately, presenting a quality alternative to larger firms by remaining entrepreneurial and client focused. Exceptional Service Our integrated service platform brings together our national and international professional experts in audit, tax and SEC services. We offer consistency and quality full service solutions with a high degree of personal attention. Multiple partners assigned to each client account ensures top notch service and that a high level contact is always available. Continuity in team composition means that WeiserMazars professionals grow with you throughout the engagement as experts in your business specific needs and cycles. We are well versed in current industry trends and constantly monitor the changing landscape to identify new trends. Effective Communication Frequent contact between WeiserMazars and your team keeps the focus squarely on your needs. We provide open, interactive and direct communication with management, and our comprehensive, periodic reports and meetings mean that you are never surprised by financial developments. 61 CONTACT Richard Bloom Partner (P) (E) Richard.Bloom@weisermazars.com Michael F. Rudegeair Senior Tax Manager (P) (E) Michael.Rudegeair@weisermazars.com Visit us at: Follow us on: DISCLOSURE This information is not intended to interpret laws or regulations, or to address specific client situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax advisor. This presentation is intended as general guidance and information. It does not constitute legal advise or address the requirements of particular situations. Please consult a professional for such specific advice. Copyright 2014 WeiserMazars LLC. All rights reserved