Slide 1 2013 VADA Family Convention FPA NCA Greenbrier September 7, 2016 By: John P. Dedon 1775 Wiehle Avenue, Suite 400 Reston, Virginia 20190 (703) 218-2131 John.Dedon@ofplaw.com Slide 2 Financial Objectives Build family wealth during life Control, enjoy and protect it during life Preserve it upon death for beneficiaries 1 Slide 3 Obstacles Income taxes Estate Taxes Probate Costs Predators (Asset Protection) 2
Slide 4 Assets At Risk (4 Areas of Risk) Potential Creditors 40% + Income Tax 3-6% Probate & Legal Expenses IRS Estate Tax (40% > $5 Million) 3 Slide 5 Current Estate Tax Law Federal Estate Tax Exemption $5 Million Indexed for inflation $5,450,000 Portability 40% Federal Estate Tax Rate 4 Slide 6 What is the Future? President Obama s Budget Proposal: $3.5 Million Exemption? Limit GRATs, dynasty trusts, sales to grantor trusts 5
Slide 7 Interplay of Estate and Income Tax Planning in the Modern Era Decision between gifts and bequests more complex - Income tax basis of property received by gift versus bequest: Gifts carry-over basis Bequests step-up in basis to fair market value at death - Effect of large, inflation adjusted federal estate tax exemption Can shelter more property from federal estate taxes Heirs receive basis step-up Benefit magnified in states with income taxes but not estate taxes - Must compare total income/capital gains taxes on later sale of gifted property vs. estate taxes on inherited property 6 Slide 8 Income Tax Planning Individuals now face much higher income tax exposure: - Maximum federal individual tax rates 39.6% income ($400,000 (single) / $450,000 (married)) 20% capital gain ($400,000 / $450,000) 40% estate and gift tax rate - Pease limitation on itemized deductions for adjusted gross income (AGI) over $250,000 / $300,000 Effectively raises federal income tax rates by 1.2% - State income and/or estate tax exposure can increase rate to 50% 7 Slide 9 Planning for the Couple with Assets under $11 Million Focus on asset management s to protect and manage inheritance No gifting for estate tax reasons Income tax planning may be more important than estate tax planning 8
Slide 10 Planning for the Couple with Assets in Excess of $11 Million Continue to use transfer tax planning techniques - Gifts to GST trusts - Sales to grantor trusts - GRATs - Charitable lead trusts - SLATs Watch basis of gifted assets 9 Slide 11 Non-Tax and Non-Administrative Objectives and Concerns Children from a previous marriage and second spouse Children with creditor, financial, or marital problems Children with special needs 10 Slide 12 Brady Bunch 2 nd Marriage His Hers Marriage Issues Special Needs 11
Slide 13 Probate Obstacles Cost Time Delays Publicity Property In Multiple States Hassle Avoid Probate With Revocable Living 12 Slide 14 What is a Revocable Living? Will Substitute Grantor is Beneficiary and is ee No Income Tax Consequence Uses Social Security Number No Return 13 Slide 15 How do Assets Pass Upon Death? Will Revocable Living Beneficiary Designation Title 14
Slide 16 Wills BASIC PLANNING SHOULD INCLUDE Revocable Living s Advanced Medical Directives (Living Wills) Powers of Attorney 15 Slide 17 ASSET PROTECTION 1. Titling of Assets 2. Retirement Plans 3. Life Insurance 4. Homestead 5. Family Partnership and LLCs 16 Slide 18 ASSET PROTECTION AND TITLING OF ASSETS 1. Joint with Right of Survivorship versus Tenants by the Entirety 2. Tenants In Common 3. Community Property 17
Slide 19 ASSET PROTECTION AND LLC S An LLC will allow you to: 1. Charging Order Protection 2. Control Transferred Assets 3. Use with Other Tools for Estate Planning 18 Slide 20 Current Lifetime Gifting Rates 1. $14,000 Annual Exclusion 2. Education and Medical Expenses 19 Slide 21 Four Case Studies Mom Dad 2 Children Grandma 1. Less than $11 million 2. Less than $11 million and asset protection, probate avoidance 3. Greater than $11 million and property transfers using LLC 4. Greater than $11 million and Spousal Access s 20
Slide 22 Case Study 1 Dad Mom Grandma 2 Children 21 Slide 23 Married Profile Less than $11 Million Equity in real estate, retirement plans, other liquid assets, life insurance 22 Slide 24 Assets $ 800,000 Retirement (IRA/401k) Liquid Insurance $ 450,000 $100,000 $ 300,000 $ 900,000 $ 2,000,000 $250,000 Total $ 2,450,000 $350,000 $ 2,000,000 Grand Total = $4.8 million 23
Slide 25 Objectives Provide for surviving spouse Eliminate or avoid estate tax Eliminate probate Provide for children at second death 24 Slide 26 Solutions Wills, Revocable s, Powers of Attorney and Medical Directives. At second death, trusts for children, with distributions at ages 25, 30, and 35. 25 Slide 27 Using Revocable to Avoid Probate First Death or Wife s Upon Husband s Death Spouse Retirement (IRA/401k) Liquid Insurance 26
Slide 28 Second Death $$$ $$$ Health Maintenance Support Education 25 (1/3) 30 (1/2) 35 Balance Need Executor, ee, Guardian 27 Slide 29 Married Case Study 2 Profile Less than $11 Million Equity in real estate, retirement plans, other liquid assets, life insurance 28 Slide 30 Additional Concerns Office condominium asset protection Second Marriage Children, marital issues Probate concerns Grandma s security 29
Slide 31 Assets Grandma $ 800,000 $ 300,000 Office Condo $1,000,000 Retirement (IRA/401k) $ 450,000 $100,000 Liquid $ 900,000 Insurance $ 2,000,000 $250,000 Total $ 2,450,000 $350,000 $ 2,000,000 Grand Total = $5.8 million 30 Slide 32 Objectives Protect from creditors Provide for surviving second spouse Eliminate or avoid estate tax Eliminate probate Protect children at second death from failed marriages Provide for Grandma 31 Slide 33 Solutions Wills, Revocable s with credit trust and marital trust for surviving spouse, Powers of Attorney and Medical Directives. LLC for condo. At second death, trusts for children (no automatic distributions). Special Needs (SNT) for Grandma. 32
Slide 34 Using Revocable to Avoid Probate Upon Husband s Death First Death Credit Marital LLC Condo Retirement (IRA/401k) Liquid Insurance 33 Slide 35 Second Death Special Needs $$$ $$$ $$$ Health Maintenance Support Education Discretionary 34 Slide 36 Case Study 3 Dad Mom 2 Children 35
Slide 37 Married $11 Million + Profile Equity in investment real estate, retirement plans, other liquid assets, life insurance 36 Slide 38 Assets $ 1,200,000 $ 800,000 Retirement $ 450,000 $100,000 Investments $10,000,000 Insurance $ 2,000,000 Investment Properties $12,000,000 Total $14.450,000 $100,000 $12,000,000 Grand Total = $10 million + 37 Slide 39 Objectives Provide for surviving spouse Provide for children at second death Eliminate probate Eliminate or avoid estate tax Eliminate or avoid estate tax in perpetuity Asset protection to protect children from divorce, creditors 38
Slide 40 Solutions Wills, Revocable s with credit trust and marital trust for surviving spouse, Powers of Attorney and Medical Directives. 39 Slide 41 Solutions Focus on $12 million real estate Use $10.9 million exemption amount (gift splitting) Lifetime gifting and discounting File gift tax return 40 Slide 42 Steps: Create LLC transfer real estate to LLC Value real estate Create Dynasty Transfer non-voting LLC interest to Dynasty Dynasty for spouse, children and descendants 41
Slide 43 $120,000 1% 100% Control LLC Real Estate Assets $12 Million 99% Equity No Control ee $11,880,000 Before Discount 42 Slide 44 Exemption Applied Lifetime Gift: 99% = $11,880,000 x 40% = $7,128,000 LLC 99% Interest No Control $11,880,000 Before Discount Beneficiaries = Wife and Children and Descendants 43 Slide 45 Why Estate and GST Exemption Applied $11,880,000 + Appreciation Estate Tax Free Forever Asset Protection for Spouse and Bloodline Access Husband has control through 1% voting LLC interest and access during marriage Wife is beneficiary 44
Slide 46 Mom Case Study 4 Dad 2 Children 45 Slide 47 Married $11 Million + Profile Equity in investment real estate, retirement plans, other liquid assets, life insurance 46 Slide 48 Assets $ 1,200,000 $ 800,000 Retirement $ 450,000 $100,000 Investments $10,000,000 Insurance $ 2,000,000 Investment Properties $12,000,000 Total $14.450,000 $100,000 $12,000,000 Grand Total = $10 million + 47
Slide 49 Solutions Wills, Revocable s with credit trust and marital trust for surviving spouse, Powers of Attorney and Medical Directives. 48 Slide 50 Focus on $10 million of marketable securities Irrevocable Spousal Access s Each spouse transfers his and her own assets to the other s Use exemption amount and file gift tax return 49 Slide 51 Grantor ee Wife s $5 Million Beneficiaries = Wife and Children 50
Slide 52 Grantor ee Husband s $5 Million Beneficiaries = Husband and Children 51 Slide 53 Why Estate and GST Exemption Applied - $10 Million + Appreciation Estate Tax Free Asset Protection Each Other Children Access 52 Slide 54 Problems (and Solutions) Divorce Death Legal Issues Support Reciprocal 523
Slide 55 Wife s Children Husband s Grandchildren 54