Typical Succession Scenario

Transcription

1 Uplifting Gifting: Using Additional Exemption to Maximize Business Succession Planning Eric Green Robert Nemzin Richard Barnes October 21, Typical Succession Scenario Client has substantial portion of wealth tied up in business Client wishes one child to run business ( insider ); other children will not be running business ( outsiders ) Client wishes to achieve fairness in legacy left to insider and outsiders 2 1

2 Typical Succession Client Hesitant to give up control Very concerned with fairness among spouse and children Very concerned with maintaining standard of living Usually needs a major life event or compelling reason to take action 3 Searching for a Compelling Reason Pre-Tax Reform Act of 2010, lifetime transfer options were more limited Estate tax exemptions rising (unlimited in 2010); yet gift tax exclusion remained constant at $1M/$2M Harder to achieve fairness among insider/outsiders because could consume credit just in trying to get business down to insider 4 2

3 Searching for a Compelling Reason 2010 Tax Reform Act Unified Gift, Estate, GST exemptions $5 Million available in lifetime planning $10 Million if splitting gifts with spouse Donors can now make (VERY) large gifts without having to pay gift taxes Portability of Exemption 5 Searching for a Compelling Reason Depressed asset values Historically low interest rates Historically low capital gains rates 6 3

4 Why Act Today? Opportunities exist today that may not in 2013 (or even 2012) If TRA not extended, exemption no longer unified, reverts back to pre EGTRRA levels (adjusted for inflation) in 2013 Many planning techniques are low hanging fruit if looking for revenue offsets Potential loss of valuation discounts Potential minimum GRAT term 7 Searching for a Compelling Reason Two year (15 month) window to take advantage of combined $10M exclusion Allows large seed gifts for IDGT transactions; large gifts of premiums for life insurance Allows large lifetime gifts 8 4

5 American Jobs Act (2011) President s jobs plan submitted to Congress September 12, 2011 Would return estate and gift tax to 2009 levels $3.5 M estate tax exemption $1M gift tax exemption Estate, gift tax rate of 45% 9 Disadvantages to Doing Nothing Exemption amounts may decrease Asset, business values may increase Lose ability to freeze value and get out of estate today before things rebound Other planning tools may be taken away as part of revenue offsets 10 5

6 Disadvantages to Doing Something Clawback If TRA not extended, what is likelihood that transactions done in 2011 or 2012 will be subject to gift, estate or GST tax down the road? Volatility Many techniques work best when assets appreciate; what about double dip? 11 Threshold Questions to Discuss What is client trying to achieve? How much should client give away? What assets should client give away? What happens if the economy double dips? 12 6

7 Proposed Tools Installment Sale to Intentionally Defective Grantor Trust (IDGT) Grantor Retained Annuity Trusts (GRATs) Fractional Interest Gifts Hedging Against Market Volatility Life Insurance/Repurposing ILITs Testamentary Planning Other Opportunities 13 Installment Sale to IDGT Intentionally Defective Grantor Trust Ability to leverage seed gifts, which can be substantial under current law Seed gift should normally be at least 10% of overall trust assets (PLR ) $5M seed gift may support $45M sale; $10M, $90M 14 7

8 15 Effect of Inst. Sale to IDGT Value of sold asset frozen for gift, estate and GST purposes Donor treated as owner of trust for income tax, but not estate tax, purposes Donor pays income off of trust earnings, further depleting estate Assets ultimately distributed or held in further trust for beneficiaries 16 8

9 GRAT Doesn t require seed gift that consumes exemption Transfer of income-producing assets into trust During trust term, trust pays annuity payments to donor At termination, trust distributes assets to beneficiaries

10 Outright Gifts Gift splitting using both spouses exemptions Real estate Business assets 19 Fractional Interest Gifts Land Can achieve discounts through gifts of undivided interests in real estate Simple technique, but be mindful of need for rent if donor = occupant Traditional FLP planning Discounts through gifts of minority interests in FLPs, FLLCs 20 10

11 Fairness with Insider, Outsiders Proposal: transfer business interests to insider, business real estate to outsiders Easier for appraiser to determine fmv rental than to determine what business should be paying in dividends to outsiders May reduce source of tension between insider and outsiders Life insurance for outsiders 21 Hedging Dealing with volatile assets don t want to waste gift tax exemption for asset that later declines in value May need to employ more than one tool to protect against potential downside 22 11

12 Life Insurance/Repurposing ILITs Life insurance still valuable tool Death benefits traditionally used to purchase estate assets to give estate liquidity to pay estate taxes If estate taxes no longer concern, new liquidity may be used for estate equalization Just because an ILIT is an irrevocable trust, doesn t mean it can t be modified if necessary in light of changing circumstances 23 Testamentary Planning Can pass remainder of estate minority shares to receive valuation discounts Traditional valuation planning Use of dynasty trusts to hold business interests General powers of appointment to achieve inclusion in surviving spouse s estate and receive basis step-up 24 12

13 Other Opportunities Unwind Split-Dollar Transactions Loan forgiveness 25 The Disclaimer IRS Circular 230 Disclosure: Pursuant to Internal Revenue Service rules of practice, any tax advice set forth in these materials, however communicated, is not intended or written to be used, and cannot be used, for the purpose of (a) avoiding penalties that may be imposed under the Internal Revenue Code or (b) promoting, marketing or recommending to another party any taxrelated matter addressed herein