Top Financial and Tax Planning Strategies for the New Year

Transcription

1 Top Financial and Tax Planning Strategies for the New Year Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates, LLP

2 Today s speaker Robert S. Keebler, CPA/PFS, MST, AEP Keebler & Associates 2

3 Today s objectives Understand the impact of the Tax Cuts and Jobs Act on your clients financial plans Estate, retirement, risk management, investment, and tax planning opportunities to consider with your clients Tips on encouraging clients to take action 3

4 Course Outline Overview Individual Taxation Business Taxation Estate Planning Top 10 Ideas 1. Roth Conversions 2. Retirement Plan Contributions 3. Portfolio Allocation 4. Installment Sales 5. Lumping Charitable contributions 6. Qualified Small Business Stock 7. Non-grantor Trusts 8. Large Exemption Gifts 9. Avoiding Low-Basis Gifts 10. Decanting 4

5 Notable Individual Changes Individual Rates Standard Deduction Personal Exemptions Child/Family Credit AMT SALT Deduction Mortgage Interest Deduction Pease Limitation Senate Overall rate decrease; 7 brackets retained $24,000 (MFJ) Repealed Increased Exemption increased; Exemption phaseout threshold substantially increased Limited to $10,000 in property and state/local income taxes (except for taxes incurred in a trade or business) Limited to interest on up to $750,000 of acquisition indebtedness; Repeals deduction for home equity indebtedness Repealed 5 Individual provisions sunset December 31, 2025

6 Critical Changes Estate & GST tax Doubles the exemption to $11,200,000 in 2018 Sunsets December 31, 2025 Step-up in basis retained at death Business Lowers the corporate rate to 21% Lowers tax liability for certain pass-through business income Increased expensing of capital items Business interest deduction limited Active business losses limited NOL deduction modified Like-kind exchanges limited to real property New markets tax credit retained and opportunity zones added 20% historic rehabilitation credit now claimed over five-years and 10% pre-1936 building rehabilitation credit is repealed 6

7 Modifications Discussed, But Not Included: Changes to the exclusion of gain on the sale of a principal residence Elimination of the specific indemnification method in favor a FIFO basis accounting for marketable securities Reduction of the capital gain rates or changes to the taxation of interest income Elimination of the step-up in basis The five-year rule for inherited IRAs Rothification 7

8 Business income taxation

9 Corporate Tax Rates 2017 & Earlier 2018 & Later 21% flat rate 9 11, 13001

10 Business Pass-through Rate Deduction equal to 20% of domestic qualified business income (QBI) from a passthrough entity Basically, provides an effective top marginal rate of 29.6% Applies to trusts & estates A, 11011

11 Business Pass-through Rate For those with taxable income in excess of $415,000 (MFJ 2018) the deduction is limited to the greater of: 50% of W-2 Wages 25% of W-2 Wages plus 2.5% of unadjusted basis Unavailable to Specified Service Business owner s taxable income in excess of $415,000 (MFJ 2018) Limitations phased-in from $315,000 - $415,000 (MFJ 2018) of taxable income A, 11011

12 Business Pass-through Rate The deduction also cannot exceed the lessor of The Combined QBI Amount, or 20% x (total taxable income capital gain) Combined QBI amount = deduction for each qualified trade or business PLUS 20% of REIT dividends and PTP income A, %

13 Is it a Service Business per 1202(e)(3)(A), 475(c)(2), or 475(e)(2)? No Is taxable income over the threshold? 315/157.5 (MFJ 2018) No Deduction = QBI x 20% Yes Yes Is taxable income over the threshold? 315/157.5 (MFJ 2018) Yes No Deduction = QBI x 20% Over full Phase in? Yes No Deduction Reduced Is taxable income over the full phasein? Yes No Deduction No Deduction Reduced Deduction equals lessor of: QBI x 20% or The greater of: - W-2 wages x 50% - W-2 wages x 25% + 2.5% of unadjusted basis 13

14 Business Pass-through Rate Specified Service Business defined in 1202(e)(3)(A): any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees The final version includes new statutory language to exclude architects and engineers from the 199A Specified Service Business definition A, 11011

15 Business Pass-through Rate Specific Service Trades or Businesses Reducing taxable income below the Threshold Amount for owners of SSTBs is essential planning. 15

16 Business Interest Deduction Businesses with average gross receipts that do not exceed $25,000,000 are exempt (test on a affiliated basis) The proposal would disallow interest expense in excess of 30% of a business s adjusted taxable income Adjusted taxable income is computed without regard to deductions allowable for depreciation, amortization, or depletion Any interest disallowed would be carried forward indefinitely Determined at the tax-filer level (e.g. the partnership not the partners would be subject to testing), but it is determined at the consolidated return level for affiliated corporations At the taxpayer s election, certain real property and construction businesses and farms are exempt (but must use ADS) , 13301

17 Business Interest Deduction Example John and Mary own a number of nursing homes All the facilities are owned by a corporation started by Mary s great grandfather Average gross receipts are about $40,000,000 and adjusted taxable income is about $5,000,000 The business has enormous capital requirements and pays over $2,000,000 of interest annually The legislation limits the deductible amount to $1,500,000 ($5,000,000 x 30%) The excess can be carried forward , 13301

18 NOL Deduction Under current law, NOLs can generally be carried forward twenty years and back two The legislation limits a NOL carryover deduction to offset 80% of taxable income (90% deduction for AMT) The legislation would also eliminate carrybacks (generally) NOLs to be carried forward indefinitely , 13302

19 Loss Rules Amends 461 to add a new subsection (l) Active business loss limited to $500K (MFJ) Applied on taxpayer level (rather than business level) Excess can only be carried forward New fourth tier: Basis Limit At-Risk Limit 465 Passive Loss Limit 469 Active Loss Limit , 11012

20 New Loss Limitation Example Jeff, a married filing jointly taxpayer, owns a single business (in which Jeff materially participates ) which generates a $750,000 loss in Jeff has $2,000,000 of other non-business income Current Law 2017 Tax Bill Other income $2,000,000 $2,000,000 Business loss - 750, ,000 Adjusted Gross Income (AGI) $1,250,000 $1,500,000 NOTE: The $250,000 loss disallowed under the 2017 tax bill will be carried forward to future tax years , 11012

21 Estate Planning

22 Estate & GST Taxes Doubles the Basic Exclusion Amount and GST exemption in ($10,000,000 in 2011 dollars) Retains the 1014(a) basis adjustment ( step-up ) , 11061

23 Tax Brackets for Trusts & Estates Taxable income over But not over Is taxed at 2017 Rates: 2018 Rates: 2019 Rates: $0 $2,550 15% $2,550 $6,000 25% $6,000 $9,150 28% $9,150 $12,500 33% $12, % Taxable income over But not over Tax Bill $0 $2,550 10% $2,550 $9,150 24% $9,150 $12,500 35% $12,500 37% Taxable income over But not over Tax Bill $0 $2,600 10% $2,600 $9,300 24% $9,300 $12,750 35% $12,750 37% 23

24 Estate & GST Taxes Planning for a Future Congressional Reduction in the Exemption Decanting Tax-free gifts (to Dynasty Trusts) to use the higher exemption in anticipation of change IDGT sales Transfers taking advantage of valuation discounts. GST planning Shifting growth Four to eight-year GRATs for those in the middle Force inclusion & obtain a step-up sunset in case of death GST grandfathered trusts/gst exempt trusts Portability elections Springing SLATs (i.e. SLAT with contingent GPOA provision) Increased ease of income shifting Note, it will be difficult to decrease the exemption without creating inequitable results 24

25 Estate & GST Taxes Claw Back Proposed Treas. Reg (c) Provides if a taxpayer dies when the BEA is lower than when the a BEA gift was made there will be no clawback 25

26 The 10 Best ideas to consider for your clients in 2019

27 1. ROTH IRA CONVERSIONS Essential Estate Planning

28 1. Roth IRA Conversions Reasons for converting to a Roth IRA The taxpayer have special favorable tax attributes that need to be consumed such as charitable deduction carry-forwards, investment tax credits, NOLs, etc. The client expect the converted amount to grow significantly Current marginal income tax rate is likely lower than at distribution Cash outside the qualified account is available to pay the income tax due to the conversion The funds converted are not required for living expenses, or otherwise, for a long period The client expects their spouse to outlive them and will require the funds for living expenses The client expects to owe estate tax The client can capture additional 199A deduction 28

29 Individual Income Tax Rates

30 Individual Income Tax Rates ,

31 Individual Income Tax Rates

32 Comparison of MFJ Rates: Income Range Scheduled 2018 rate TCJA 2018 Rate $1 to $19,050 10% 10% $19,051 to $77,400 15% 12% $77,401 to $156,150 25% 22% $156,150 to $165,000 28% 22% $165,001 to $237,950 28% 24% $237,951 to $315,000 33% 24% $315,001 to $400,000 33% 32% $400,001 to $424,950 33% 35% $424,950 to $480,050 35% 35% $480,051 to $600, % 35% Over $600, % 37% 32

33 Individual Income Tax Rates Comparison $800, $700, % $600, % $500,000 $400,000 $300,000 $200, % 33.0% 28.0% 35.0% 32.0% 24.0% $100,000 $- 25.0% 22.0% 15.0% 12.0% 10.0% 10.0% 33

34 Individual Income Tax Rates Comparison - $250,000 & Lower $250, % $200, % 24.00% $150,000 $100, % 22.00% $50, % 12.00% $ % 10.00% 34

35 2. RETIREMENT PLAN CONTRIBUTIONS Essential Section 199A Planning

36 2. Retirement Plan Contributions 2018 IRA / ROTH IRA CONTRIBUTION LIMIT $ 5,500 IRA / ROTH IRA "CATCH UP" $ 1, k ELECTIVE DEFFERAL $ 18,500 $ 401k ELECTIVE DEFFERAL "CATCH UP" 6,000 SIMPLE IRA CONTRIBUTION LIMIT $ 12,500 SIMPLE IRA "CATCH UP" $ 3,000 SEP IRA EMPLOYEE PERCENTAGE MATCH LIMIT 25% SEP IRA SELF-EMPLOYED PERCENTAGE MATCH LIMIT 20% OVERALL LIMIT ON CONTRIBUTIONS TO DCPs $ 55,000 OVERALL LIMIT ON CONTRIBUTIONS TO DCPs (w/ CATCHUP ) $ 61,000 36

37 2. Retirement Plan Contributions 2019 IRA / ROTH IRA CONTRIBUTION LIMIT $ 6,000 IRA / ROTH IRA "CATCH UP" $ 1, k ELECTIVE DEFFERAL $ 19,000 $ 401k ELECTIVE DEFFERAL "CATCH UP" 6,000 SIMPLE IRA CONTRIBUTION LIMIT $ 13,000 SIMPLE IRA "CATCH UP" $ 3,000 SEP IRA EMPLOYEE PERCENTAGE MATCH LIMIT 25% SEP IRA SELF-EMPLOYED PERCENTAGE MATCH LIMIT 20% OVERALL LIMIT ON CONTRIBUTIONS TO DCPs $ 56,000 OVERALL LIMIT ON CONTRIBUTIONS TO DCPs (w/ CATCHUP ) $ 62,000 37

38 2. Retirement Plan Contributions Cash Balance Plans Current Age DC/401k Contribution Cash Balance Allocation Total 35 $ 54,000 $ 70,000 $124, ,000 90, , , , , , , , , , , , , ,000 Please note these are prior-year figures. Data provided by Shore-Tompkins for Keebler & Associates. 38

39 3. PORTFOLIO ALLOCATION TCJA Implications

40 3. Portfolio Allocation Tax Considerations Interest Income Dividend Income Capital Gain Income Tax Exempt Interest Pension and IRA Income Real Estate and Oil & Gas Roth IRA and Insurance Money market Corporate bonds US Treasury bonds Attributes Annual income tax on interest Taxed at highest marginal rates Equity Securities Attributes Qualified dividends at LTCG rate Return of capital dividend Capital gain dividends Equity Securities Attributes Deferral until sale Reduced capital gains rate Step-up basis at death Bonds issued by State and local Governmental entities Attributes Federal tax exempt State tax exempt Pension plans Profit sharing plans Annuities Attributes Growth during lifetime RMD for IRA and qualified plans No step-up Real Estate Depreciation tax shield 1031 exchanges Deferral on growth until sale 199A deduction Oil & Gas Large up front IDC deductions Depletion allowances Roth IRA Tax-free growth during lifetime No 70½ RMD Tax-free distributions out to beneficiaries life expectancy Life Insurance Tax-deferred growth Tax-exempt payout at death 40

41 3. Portfolio Allocation Re-thinking Life Insurance What were the reasons for buying the existing amounts and types of life insurance? Are they still valid? If to create estate liquidity, how much life insurance should you have now? If in a trust, how best to deal with policies that exceed current needs? Does the new estate tax regime provide more opportunities for 1035 exchanges? Does the new income tax regime still provide benefits for those in the top marginal rate? 41

42 4. Installment sales Two Year Technique

43 Installment Sale Overview An installment sale is a type of sale in which the seller sells an asset to another person in exchange for a promissory note paid over a period of time. If executed correctly, the taxable gain recognized by the seller will be deferred until payments are made on the principal of the note. PURPOSE OF STRATEGY: To level income over a longer period of time so as to avoid higher brackets, surtaxes, and or phaseouts. 43

44 Installment Sale Overview IRC 453 allows for deferral of taxation on Installment Sales $5,000,000 annual limitation $10,000,000 annual limitation for married couple Gain is generally deferred until payment occurs Depreciation recapture provisions IRC 453(i) 44

45 Installment Sale Sales to a Related Party Basis Sale from taxpayer to a nongrantor trust or a child receives a basis increase Basis equals the purchase price Warning: does 1239 apply 45

46 Installment Sale Sales to a Related Party Two Year Rule IRC 453(e)(2) provides a sale by a related party within two years results in realization of the original deferral Therefore, the original buyer must wait at least two years and one day to sell the asset to a third-party No realization of the original gain if the sale is at least two years and one day later 46

47 Installment Sale Sales to a Related Party Two Year Strategy Parent has an asset with a large capital gain Parent sells it to a non-grantor trust for the benefit of his or her children and takes back an installment note The trust receives a stepped-up basis in the asset Two years and one day later the trust sells the asset, recognizing little, if any, gain Trust makes payments to Parent who spreads the gain out over the period of the installment note 47

48 5. Lumping Charitable contributions Overcome the Standard Deduction

49 5. Charitable Contributions Public Charities Benefits Overcome doubled standard deduction Elimination of PEASE increases value AGI limit increased from 50% to 60% through 2025 Charitable contributions can significantly increase the 199A deduction 49 IRC 170(b)

50 5. Charitable Contributions Public Charities AGI Type of Property Deductible Amount Limitation Cash Fair market Value 60% Property, if sold, would generate ordinary income or short term capital gain Property, if sold, would generate long term capital gain Tangible personal property used by charity for its exempt purpose Tangible personal property charity sells or doesn t use for its exempt purpose Lesser of Basis or Fair Market Value 60% Fair Market Value* 30%* Fair Market Value* 30%* Lesser of Basis or Fair Market Value 60% *Donor can elect to have 60% of AGI limit apply if amount of deduction is limited to basis. 50

51 5. Charitable Contributions Public Charities Contributions in excess of the Percentage Limitation can be carried forward General Rule: 5 years (6 tax returns) 51 IRC 170(b)

52 5. Charitable Contributions Charitable Remainder Trust Current income tax deduction for the remainder portion of the trust corpus which eventually transfers to charity Unrealized gains are not recognized when contributed to the trust nor when sold by the trust Taxation is deferred until the distributions are made to the income beneficiary Potentially useful structures in the current environment 20-year or lifetime CRT Three year CRT Charitable trusts with real estate 52

53 5. Charitable Contributions Charitable gift annuity A contract entered into between a charity and a donor in which the charity agrees to pay an annuity to the individual donor in return for an amount transferred by the individual to the charity. Like a commercial annuity, each payment that the annuitant receives is made up of a taxable interest portion and a tax-free return of principal. Taxpayer receives a charitable income tax deduction upfront equal to the charity s calculated actuarial remainder interest. It will vary whether the annuity offered by the charity provides a better return than a commercial annuity 53

54 5. Charitable Contributions Charitable gift annuity 54

55 5. Charitable Contributions Charitable Remainder Trust Current income tax deduction for the remainder portion of the trust corpus which eventually transfers to charity Unrealized gains are not recognized when contributed to the trust nor when sold by the trust Taxation is deferred until the distributions are made to the income beneficiary Potentially useful structures in the current environment 20-year or lifetime CRT Three year CRT 55

56 5. Charitable Contributions Donor Advised Fund (DAF) A donor advised fund (DAF) allows for a charitable contribution without making a final decision regarding how funds will be used at the time of the gift. Accepts cash and securities as donations which are immediately tax-deductible. Donations are distributed to charitable uses in future years. Provides a timing difference that can allow a donor to be more generous. 56

57 6. QUALIFIED Small Business Stock New Opportunities with the 21% Rate

58 6. Qualified Small Business Stock Qualified Small Business Stock: The stock must be in a C corporation: Must be a C corporation during substantially all of the taxpayer s holding period Stock must be issued after August 10, 1993 Active business requirement Gross assets cannot exceed $50,000,000 Certain trades and businesses do not qualify 1202 Partial exclusion for gain from certain small business stock 1045 Rollover of gain from qualified small business stock to another qualified small business stock 58

59 6. Qualified Small Business Stock Acquisition Period Exclusion Amount Aug 9, Feb % Feb. 18, 2009 Sept. 27, % Sept. 28, 2010 and after 100% Note, there is a 60% exclusion for empowerment zone businesses 59

60 6. Qualified Small Business Stock Acquisition Period AMT Add-Back Amount Aug 9, May 6, % May 6, 2003 Sept. 27, % Sept. 28, 2010 and after 0% Note, there is a 60% exclusion for empowerment zone businesses 60

61 6. Qualified Small Business Stock The first time the exclusion is claimed it is capped to the greater of: $10,000,000 ($5,000,000 for a married filing separately taxpayer) Ten times the aggregated adjusted basis of the corporations qualified stock disposed by the taxpayer during the tax year (only gain on stock held for ten years is counted) The $10,000,000 limit is reduced in following years by the amount claimed in previous years Adjusted basis is determined without considering any additions to basis after the stock was issued 61

62 Qualified Small Business Stock How Many $10 Million Exclusions Can Be Claimed? Questions Can both spouses claim a $10 million QSBS exclusion amount? Does QSBS lose its qualified status if it is transferred to a trust? Can an individual claim a $10 million exemption amount for himself and create an irrevocable trust to claim a second $10 million exemption amount? If an individual transfers QSBS stock to two or more trusts, will IRC 643(f) apply, treating the trusts as a single trust and barring more than one $10 million exclusion amount? If a taxpayer transfers QSBS to an irrevocable, non-grantor (ING) trust and the trust subsequently sells the assets, will the trust be respected as the seller for federal income tax purposes? 62

63 Qualified Small Business Stock Can Both Spouses Claim a $10 Million QSBS Exclusion Amount? The short answer is no If spouses file separate returns, they each get a $5 million exclusion (IRC 1202(b)(3)) If the spouses file jointly, IRC 1202(b)(3)(B) implies that they share a single $10 million exclusion amount 63

64 Qualified Small Business Stock Does QSBS Lose its Qualified Status if an Individual Transfers it to Trust? IRC 1202(h)(2)(A) provides that if stock is received by gift, the transferee is treated as having acquired the stock in the same manner as the transferor and having held such stock during the period held by the transferor. This means that, assuming that the stock meets all the requirements for QSBS treatment if it was sold by the individual, it will also qualify for QSBS treatment if sold by the trust Thus, if the trust sells the stock, it should receive a 1202 exclusion of up to $10 million 64

65 Qualified Small Business Stock Is the Result different if the Trust is an Incomplete Gift Non-Grantor Trust (ING Trust)? ING trusts have become the favorite strategy for avoiding state income tax The most popular states for creating INGs trusts are Nevada, where such trusts are referred to as NINGs and Delaware, where the trusts are referred to as DINGs As the name indicates, transfers to an ING trust are incomplete gifts This raises the question of whether an incomplete gift qualifies for the special rule under IRC 1202(h)(2)(A) explained on the previous slide 65

66 Qualified Small Business Stock Is the Result Different for ING Trusts? There is no guidance on whether IRC 1202(h)(2)(A) applies only to completed gifts or also includes incomplete gifts. It appears, however, that an incomplete gift to a NING should qualify. The statute doesn t say that the gift must be complete for gift tax purposes It would be treated as a gift for state property law purposes, It would shift income tax exposure from the grantor to the trust 66

67 7. Non-grantor trusts Creating Additional Taxpayers

68 Income Taxation State income taxes are no longer be deductible and trustees should focus on state tax reduction. NINGs will be more popular because state income taxes would no longer be deductible. Treasury bills, notes and bond interest are generally not subject to state income taxes and should be reviewed. It appears that some deductions for professional fees were limited in Conference. The selection of the proper year-end for a 645 estate/trust is an important issue this year. 68

69 7. Non-grantor Trusts Overview Incomplete Gift Non-grantor Trusts A trust settled in state with a trust code which facilitates the strategy Transfer to the trust is not a completed gift and therefore does not incur gift tax because the settlor retains certain powers Trust is a non-grantor trust Useful to avoid income taxation in the settlor s resident state No SALT Pre-2018 W/ING Deduction Income $ 100 $ 100 $ 100 State Tax 5% (5) (5) Federal Tax 35% (33) (35) (35) $ 62 $ 60 $ 65 69

70 Incomplete Gift Non-grantor Trusts Overview Without a state and local income tax deduction, forming an incomplete non-grantor (ING) trust to save state income taxes is even more viable Taxpayer (High Tax State) Transfer Assets Tax Savings Trust (No Tax State) 70

71 Trust Situs Overview Certain states have re-written their trust code in order to attract out of state settlors Situs is significant: Income taxation Litigation jurisdiction Asset protection Rule against perpetuities Validity of certain provisions (e.g. no contest or notice provisions) Decanting & modification Fiduciary requirements Beneficiary location 71

72 Trust Situs Overview 72

73 7. Non-grantor Trusts Income Tax Idea Summary Create additional taxpayers Section 199A deduction SALT deduction Section 1202 exclusion Manage recognition events Section 453 sales 73

74 8. Large exemption gifts Use-it-or-lose-it

75 8. Large Exemption Gifts A Disappearing Opportunity In 2018 the gift, estate and GST tax exemption is $11,180,000 roughly double the amount available prior to the TCJA However, in 2026 the exemption will revert to about half of this level. The Service has specifically decided it will not impose additional tax on those who make exemption gifts before 2026 if death occurs after sunset this creates a huge disappearing opportunity 75

76 Estate & GST Taxes $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Estate Tax Exemption - Past & Projected 76

77 Dynasty Trusts Overview Takes advantage of how the generation-skipping transfer tax (GSTT) is applied; Allows the family to transfer assets down successive generations without additional estate tax Can include other benefits such as creditor protection, divorce protection, and spendthrift protection 77

78 Dynasty Trusts Overview Clients Advantages Estate tax protection Creditor protection Divorce protection Direct descendant protection Spendthrift protection Consolidation of capital Gift* No transfer tax paid. No transfer tax paid. No transfer tax paid. No transfer tax paid. Dynasty Trust Discretionary Distributions to Children for Life Discretionary Distributions to Grandchildren for Life Discretionary Distributions to Great-Grandchildren for Life * Gift takes advantage of the lifetime gift exclusion and lifetime GST exclusion Future Generations 78

79 Spousal Limited Access Trusts Overview A SLAT is a type of domestic asset protection trust (DAPT) in which each spouse creates a trust for the benefit of the other spouse (with the remainder interest passing to his/her heirs). The purpose of this trust is to provide a source of cash flow to the spousebeneficiary while keeping the assets secure from creditors and other legal claims. Takes advantage of the high applicable exclusion amount and can remove substantial appreciation from the estate Donor spouse indirectly retains the ability to access the funds if necessary through distributions to the spouse Caveats reciprocal trust doctrine and no gift splitting 79

80 Spousal Limited Access Trusts Overview Donor Spouse Transfer Assets SLA T For the Benefit of Future Generation s Donee Spouse 80

81 7-Year GRAT for 8-Year Increase in Exemption Overview Estate tax repeal may sunset after 10 years A 7-year GRAT may be great planning If the grantor dies during annuity term, the basis of the property is stepped-up without estate tax If the grantor outlives the annuity term, any appreciation in excess of the 7520 rate transfers without estate tax 81

82 9. Avoiding low basis gifts A Mathematical Trap for the Unwary

83 9. Avoiding Low-Basis Gifts A Trap for the Unwary Basis Basics Basis is generally FMV on date of decedent s death or, if elected, the alternate valuation date (IRC 1014(a)) Appreciated assets receive a step-up in basis at death saves income tax when the property is sold by heirs Depreciated assets receive a step-down in basis deprives heirs of the income tax benefit of claiming a loss when the property is sold 83

84 9. Avoiding Low-Basis Gifts A Trap for the Unwary Basis Basics Donee s basis for computing gain is the same as the donor s basis Donee s basis for computing loss is the lesser of Donor s basis, or FMV of property on date of gift (Reg (a) 84

85 9. Avoiding Low-Basis Gifts A Trap for the Unwary Size of Estate $ 22,400,000 $ 22,400,000 $ 22,400,000 Size of Gift $ 10,000,000 $ 10,000,000 $ 10,000,000 Basis of Gift $ 1,000,000 $ 6,000,000 $ 10,000,000 Built-in Gain $ 9,000,000 $ 4,000,000 0 Built-in Gain 25% Appreciation needed to overcome value of step-up $ 2,250,000 $ 1,000,000 0 $ 5,625,000 1 $ 2,500, % of Appreciation 56.25% 25% N/A $2,250,000/40% = $5,625, $1,000,000/40% = $2,500, % Estate tax exceeds 25% Income tax

86 9. Avoiding Low-Basis Gifts A Trap for the Unwary Size of Estate $ 22,400,000 $ 22,400,000 $ 22,400,000 Size of Gift $ 10,000,000 $ 10,000,000 $ 10,000,000 Basis of Gift $ 1,000,000 $ 6,000,000 $ 10,000,000 Built-in Gain $ 9,000,000 $ 4,000,000 0 Built-in Gain 25% Appreciation needed to overcome value of step-up $ 2,250,000 $ 1,000,000 0 $ 15,000,000 1 $ 6,666, % of Appreciation % 66.67% N/A $2,250,000/(40%-25%) = $15,000, $1,000,000/(40%-25%) = $6,666, % Estate tax exceeds 25% Income tax

87 10. decanting TCJA Impact & Opportunity

88 Decanting Overview Definition: modifying the terms of a trust by distributing its assets to another trust The second trust (receiving trust) can be either new or pre-existing Decanting can be authorized by the terms of the original trust, state law, or perhaps even by common law. 88

89 Decanting Planning Idea Decant to a trust that gives beneficiary a general power of appointment. Trust would be included in beneficiary s taxable estate. IRC Sec Goal: obtain step-up in basis for trust assets at death of beneficiary 89

90 Decanting Value of the Step-Up - Example 90 H dies in 2000 owning XYZ real estate with a value of $400,000. Pursuant to H s estate planning documents, the real estate goes to a credit shelter trust for the benefit of H s wife, W. The new basis of the real estate held in the trust is $400,000 (i.e. the value at H s death). Assume W dies in 2017 when the real estate has appreciated to $1,000,000. The real estate held in the family trust would still have a basis of $400,000. If the real estate is sold following W s death, the gain would be $600,000 ($1,000,000-$400,000). If the trust is decanted into a new trust giving W a GPOA, the trust will be included in W s estate. The real estate would then receive a step-up in basis to $1,000,000 at W s death. Decanting the trust property into a trust over which W has a GPOA could save $120,000 of income tax ($600,000 x 20% capital gain tax).

91 Uses of Decanting Caveats Whether decanting can be used for the applications listed on the previous slides may depend on the applicable state s decanting statute Some state decanting statutes are much more favorable than others Some of the applications may result in unfavorable tax consequences depending on how the tax issues are resolved by the IRS and the courts 91

92 92 Steve Oshins is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He is rated AV by the Martindale-Hubbell Law Directory and is listed in The Best Lawyers in America. He was inducted into the NAEPC Estate Planning Hall of Fame in 2011 and has been named one of the 24 Elite Estate Planning Attorneys by The Trust Advisor and one of the Top 100 Attorneys in Worth. He can be reached at , ext. 2 or soshins@oshins.com. His law firm s website is

93 Bonus idea Section 199A Key Takeaways

94 Bonus Idea. Section 199A Key Planning Takeaways Reduce Taxable Income below the threshold amount Tax-free bonds Life insurance & annuities Real estate investments Oil & gas investments Recognize losses Avoid recognizing gains Charitable contributions Pension plan contributions Increase payroll Accelerate business expenses Cost segregation studies Captive insurance companies Broaden ownership group to those with lower taxable income Gifts to taxpayers with lower taxable income (e.g. children & trusts) 94

95 Bonus Idea. Section 199A Key Planning Takeaways Increase QBI for those below the threshold amount Defer business expenses (e.g. insurance premium or property tax payment plans) Defer acquisitions of new property eligible for 179 or bonus treatment Reduce wages paid Drop S-election to avoid owner s wage Reduce leverage 95

96 Bonus Idea. Section 199A Key Planning Takeaways Pass the Wage or Capital Test Increase qualified property Acquire or improve property before year-end Carefully consider whether items are capitalized or expensed Understand what property will roll-off at year-end Increase Wages Employee bonuses S-election REVIEW AND COMPUTE THE EFFECTIVENESS OF AGGREGATION ELECTIONS 96

97 Bonus Idea. Section 199A Cost Segregations Still Effective REGULAR DEPRECIATION (39-YEAR RECOVERY PERIOD) Depreciation Section 199A Total Amount 1 Deduction 2 Deduction Tax Benefit 3 Year 1 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 2 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 3 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 4 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 5 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 6 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 7 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 8 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Years 9-38 $ 25,641 $ 25,000 $ 50,641 $ 18,737 Year 39 $ 25,641 $ 25,000 $ 50,641 $ 18,737 TOTALS $ 1,000,000 $ 975,000 $ 1,975,000 $ 730,750 PRESENT VALUE (4% Discount Rate) $ 381, $1,000, = $25, $1,000,000 x 2.5% = $25, $50,641 x 37% = $18,737

98 Bonus Idea. Section 199A Cost Segregations Still Effective REGULAR DEPRECIATION (5-YEAR RECOVERY PERIOD) Depreciation Section 199A Total Amount 1 Deduction 2 Deduction Tax Benefit 3 Year 1 $ 200,000 $ 25,000 $ 225,000 $ 83,250 Year 2 $ 320,000 $ 25,000 $ 345,000 $ 127,650 Year 3 $ 192,000 $ 25,000 $ 217,000 $ 80,290 Year 4 $ 115,200 $ 25,000 $ 140,200 $ 51,874 Year 5 $ 115,200 $ 25,000 $ 140,200 $ 51,874 Year 6 $ 57,600 $ 25,000 $ 82,600 $ 30,562 Year 7 $ - $ 25,000 $ 25,000 $ 9,250 Year 8 $ - $ 25,000 $ 25,000 $ 9,250 Year 9 $ - $ 25,000 $ 25,000 $ 9,250 Year 10 $ - $ 25,000 $ 25,000 $ 9,250 TOTALS $ 1,000,000 $ 250,000 $ 1,250,000 $ 462,500 PRESENT VALUE (4% Discount Rate) $ 423, % Double Declining Balance 2. $1,000,000 x 2.5% = $25, Total Deduction x 37%

99 Bonus Idea. Section 199A Cost Segregations Still Effective SECTION 179 EXPENSING / BONUS DEPRECIATION (IRC 199A APPLIES) Depreciation Section 199A Total Amount Deduction 2 Deduction Tax Benefit 3 Year 1 $ 1,000,000 $ 25,000 $ 1,025,000 $ 379,250 Year 2 $ - $ 25,000 $ 25,000 $ 9,250 Year 3 $ - $ 25,000 $ 25,000 $ 9,250 Year 4 $ - $ 25,000 $ 25,000 $ 9,250 Year 5 $ - $ 25,000 $ 25,000 $ 9,250 Year 6 $ - $ 25,000 $ 25,000 $ 9,250 Year 7 $ - $ 25,000 $ 25,000 $ 9,250 Year 8 $ - $ 25,000 $ 25,000 $ 9,250 Year 9 $ - $ 25,000 $ 25,000 $ 9,250 Year 10 $ - $ 25,000 $ 25,000 $ 9,250 TOTALS $ 1,000,000 $ 250,000 $ 1,250,000 $ 462,500 PRESENT VALUE (4% Discount Rate) $ 448, $1,000,000 x 2.5% = $25, Total Deduction x 37% 99

100 Success requires action Resources to help

101 Where to find support Planning & tax advisory services (aicpa.org/growadvisoryservices) brings together tax & planning content o Why should I offer planning & tax advisory services o Where can I find training and resources o What to communicate to clients about the value of these services aicpa.org/pfp; contact the PFP Division staff at financialplanning@aicpa.org aicpa.org/tax; contact the Tax Division staff at taxsection@aicpa.org aicpa.org/taxreform and aicpa.org/pfp/proactiveplanning (updated for tax reform impact on planning) 101

102 Questions?

103 AICPA PFP Section Member Resources PFP Section members, inclusive of CPA/PFS credential holders, have access to resources on the latest planning strategies and trends in personal financial planning services so that they can practice competently and profitably. Visit aicpa.org/pfp/resources. Estate Tax Retirement Investment Insurance & Risk Management Practice Management Legislative/ Regulatory Professional Responsibilities Consumer Content 103

104 Upcoming PFP Section Events Webcasts (View complete schedule for 4 free events per year with CPE for PFP/PFS members) Conferences January :15pm ET February 6 1 2:15pm ET February :45pm ET Navigate education planning under tax reform Blockchain technologies and cryptocurrencies: What you need to know to serve your individual clients How to advise your clients on elder care June 9-13, 2019 AICPA ENGAGE Advanced PFP Conference Advanced Estate Planning Conference Tax Strategies for the High Net Worth Individual Visit aicpa.org/pfp/events. PFP/PFS Members can access the archives (no CPE) for free at aicpa.org/pfp/library. 104

105 CPA/PFS News and Events PFS Referral Program Receive 100% credit to apply toward future CPA/PFS dues by referring a CPA to become a PFS or sit for the PFS exam PFS Exam Register now for upcoming exam windows Discounts, sponsorships and volume pricing available Education Opportunities PFP certificate program: in-depth courses in estate, retirement, tax, investments, insurance, and PFP process In-person and online PFP Boot Camp Self-study PFS exam review course Learn more at aicpa.org/pfs 105