Post-Election and Year-End Planning By: Todd Angkatavanich, Jonathan Blattmachr & James Brockway (with Special Thanks to Martin M. Shenkman, Esq. of Fort Lee, NJ) 1 General Disclaimer The information and/or the materials provided as part of this program are intended and provided solely for informational and educational purposes. None of the information and/or materials provided as part of this power point or ancillary materials are intended to be, nor should they be construed to be, the basis of any investment, legal, tax or other professional advice. Under no circumstances should the audio, power point or other materials be considered to be, or used as independent legal, tax, investment or other professional advice. The discussions are general in nature and not person specific. Laws vary by state and are subject to constant change. Economic developments could dramatically alter the illustrations or recommendations offered in the program or materials. 2 1
Election Donald Trump has publicly announced his tax plans for the country So have the Republicans (through Paul Ryan, Speaker of the House) A Better Way Our Vision for a Confident America 51 Republican Senators and 239 Republican Representatives, but how aligned are they with Trump? 3 How the Table in Washington Is Set: Republican President, House and Senate (51 Votes) Trump Victory and Republican Control Senate breakdown: 51 Republicans, 48 Democrats, and 1 election still undecided in Louisiana House breakdown: 239 Republicans, 193 Democrats, and 3 elections still undecided (1 in California and 2 in Louisiana) Lame Duck Session? 4 2
Senate Procedural Approaches Filibuster intended to delay a measure from being brought to a vote Requires 60 votes to overcome a filibuster Budget reconciliation intended to allow consideration of a concurrent resolution on the budget with debate limited to 20 hours After changes are made, requires 51 votes and cannot be filibustered Budget reconciliation? 10 year impact 5 Possible Tax Changes: House Ways & Means: Republican Blueprint Income Tax - Personal Top individual rate reduced to 33% Proposals simply provide for a 50% exclusion for cap gains, dividends and interest income No mention of holding period and 50% exclusion extended to interest Elimination of individual AMT Elimination of 3.8% Net Investment Income Tax Limits on itemized deductions (other than charitable contributions and home mortgage interest) Disallow deduction for interest on new loans 6 3
Possible Tax Changes: House Ways & Means: Republican Blueprint Income Tax - Business Corporate income tax rate, in general, lowered to 20% Repatriation of previously untaxed foreign earnings taxed at 8.75% (if cash) or 3.5% otherwise Maximum 25% tax rate on business passthru income (e.g., partnership or S corporation) Immediate write off for capital expenditures Elimination of corporate AMT Elimination of net business interest deductions Elimination of special-interest deductions and credits (but for R&D) Lower or no tax on business income generated by sales of US goods overseas Taxation of carried interest at prevailing ordinary income rates 7 Possible Tax Changes: House Ways & Means: Republican Blueprint Transfer Taxes Elimination of estate tax and the generation-skipping transfer tax No mention of the fate of gift tax Carryover basis for assets held in estate 8 4
Possible Tax Changes: Tax Proposals of the Trump Administration Income Tax - Personal Top individual rate reduced to 33% 20% rate retained for long term capital gains and qualified dividends Elimination of individual AMT Elimination of 3.8% Net Investment Income Tax Cap and limits on itemized deductions (limited to charitable contributions and home mortgage interest with $200,000 cap) 9 Possible Tax Changes: Tax Proposals of the Trump Administration Income Tax - Business Corporate tax rate, in general, reduced to 15% Repatriation of previously untaxed foreign earnings taxed at 10% Maximum tax bracket on business passthru income is 15% Elimination of corporate AMT Choice of immediate write off for capital expenditures or deduction of business interest, but not both Taxation of carried interest at prevailing ordinary income rates 10 5
Possible Tax Changes: Tax Proposals of the Trump Administration Transfer Taxes Repeal of death taxes what is this intended to mean? No mention of fate of gift tax Mark to market taxation (?) for inherited assets at death on assets in excess of $10 million (married couple) No mark to market protection for asset transfers to private foundations 11 What Will Likely Happen? Consistencies between House Blueprint and Trump Administration Reduction of individual rates to 33% maximum Elimination of AMT for individuals and corporations Repeal of the 3.8% Net Investment Income Tax Limitations on itemized deductions Taxation of carried interest at prevailing ordinary income rates Corporate tax rate reduction Repatriation of untaxed foreign income at reduced rate Continuation of low rates for investment income Repeal of estate and generation skipping transfer tax 12 6
Is Transfer Tax Repeal Likely? What are the Possibilities? Full repeal? Phased repeal? Carry over basis? A Canadian type capital gains tax on death? With limited exemption amount? Inheritances treated as income? Other? Timing of changes? How permanent is permanent repeal? 13 What Could Inhibit These Tax Changes? Infrastructure expenditures Deficit hawks (Projected $3 to 7 trillion addition to deficit) Everything in Washington is for sale it s only a question of price What is more important? Corporate tax reduction? Increasing the GDP? Individual income tax reduction? Estate tax elimination? A stronger military? Others? Excessive benefits for top 1%? 14 7
If All of Estate, GST and Gift Taxes Repealed? Opportunities to reset family structure without technical impediments Structure profits in trusts without Section 2701 gift concerns Structure family deals on the merits Senior family members take control of family entities without Section 2036 exposure Shift assets from outright distribution trusts to long-term trusts (preferred partnerships with low preferred coupon to short trust and growth to long) 15 If All of Estate, GST and Gift Taxes Repealed? Liquidate QTIP trusts to combine % shares with surviving spouse and get a higher combined value for basis purposes at death (subject to $10M limit) Distributions out of QDOTs to non-citizen surviving spouse Section 2801 post-expatriation donee tax? 16 8
If All of Estate, GST and Gift Taxes Repealed? NRAs invest into US situs asset through wholly revocable trust no U.S. estate tax issue Eliminate Section 2104(b) strings implication Carried interest planning into multigenerational trusts without vertical slice limitations Joint purchases and sales of remainder interests without Section 2702(c) constraints 17 Possible 2016 Income Tax Planning Accelerate deductions into 2016 (state income tax [but see Rev Rul 2002-82), property taxes, charitable, etc.) Accelerate contributions to IRAs, etc. Postpone IRA Roth Conversion or be ready to recharacterize by the time of the filing of the 2016 return Consider postponing income (gains, dividends, business income) until next year Accelerate tax credits Take losses and gains this year to offset each other Consider gifts of appreciated property to others in lower tax brackets before any possible capital gains taxes at time of gift. Do ING trusts this year for the same reason 18 9
Potential 2017 Income Tax Planning If gift tax is repealed, income tax flexibility is significantly increased Interest deductions to payor with interest taxed at 16.5% to holder would place premium on related party leverage Conversion of non-business income to business income? Basis planning using gifts, partnerships, cash out refinancings and multiple grantor trusts Variable life insurance (PPLI) and deferred variable annuities State income tax planning by shifting residency of taxpayer Transfers to NRAs CLATs with reversions 19 2017 Section 457A Exposure Alive and well Recognize in 2017 rather than 2016 Grantor CLAT Remainder to taxpayer Remainder to dynasty trust No ETIP limitation PPLI In trust without gift tax limitations Throwback leverage planning between trusts High or low preferred coupon partnerships no gift tax issues Leveraged preferred partnerships to increase growth of lower income tax rate beneficiaries 20 10
What about the Proposed Section 2704 regs? What do they portend? What will the final ones do? When will they be effective? Should action be taken now? 21 Section 2704 Planning in Process Many practitioners have been inundated with Section 2704 planning What should practitioners inform clients? What should be done with existing planning in process? Should it be completed? 22 11
BLUF Bottom Line Up Front on 2016 Section 2704 Planning 2016 year end planning is not only about Section 2704 but about what our new administration might enact. Most practitioners believe it highly unlikely that the Section 2704 Regulations will be finalized in time to become effective by 12/31/16. Planning should proceed since the effective date of reform legislation is not determinable. However, as the likelihood of a year end effective date has diminished practitioners can use the respite, if realized, to better plan transactions. Less time pressure means more deliberate planning. More time means transactions can be spread over a longer time period than initially anticipated in order to minimize problems time-compressed planning might have caused. Time should be considered in light of proposals the new administration might present. 23 Wills and Revocable Trusts Cannot eliminate tax planning provisions until law is confirmed to have changed Should consideration of repeal be added to documents in process? What should be done? Alternative dispositions ( I leave my estate this way if there is an estate tax in effect at my death or that way if there is none. I leave my estate this way if there is a capital gains tax at death. ) 24 12
State Estate Tax If the Federal estate tax is repealed, what happens to state estate taxes? Any state with an estate tax likely would have to adopt and administer a separate system Presumably, those states (e.g., Kentucky, Pennsylvania) that have inheritances taxes could continue current law 25 Tax Motivated Planning What Relevance? CLATs (non-grantor primarily) GRATs Note sale transactions (ISGTs) Annual exclusion gifts Use of the remaining lifetime exemption Allocation of used GST exemption to existing transfers Others? 26 13
Market to Market Freeze Planning Under a Trump Tax System If death tax repealed, there could be a mark to market capital gains tax at death (for estates above $10 million) Freeze parent s assets to contain growth (ideally below $10 million threshold) Shift appreciation to children to minimize capital gains tax at death Preferred partnerships (Section 2701 not applicable presumably) Sale for Note to Grantor Trust (shift appreciation gain on note?) Multigenerational Trust Planning Scenario I shift growth to child capital gain ultimately at child s death Scenario II shift growth to multigenerational trust no mark to market at child s death? Contribute appreciated assets to partnership and partnership uses other contributed cash to buy life insurance policy, with policy then distributed to senior generation 27 Estate Planning Reasons Regardless of Transfer Taxes Proper governance structure Successive/buy-sell planning Certainty planning Funneling mechanism Awards valuation mismatch Asset protection Long term wealth preservation Next generation involvement and education Lifetime wealth transfers to children and lineal descendants Federal and state income tax planning 28 14
Questions? Thank you. Todd Angkatavanich Todd.Angkatavanich@withersworldwide.com (203) 974-0398 Jonathan Blattmachr J.Blattmachr@hotmail.com (212) 328-0300 James Brockway James.Brockway@withersworldwide.com (203) 974-0309 29 15