bob keebler sample presentation - income & estate tax strategies for the new year

Estate & Tax Planning Opportunities in 2012

Robert S. Keebler, CPA, MST, AEPKeebler & Associates, LLP

420 S. Washington St.Green Bay, WI 54301

Phone: (920) 593-1701E-mail: [email protected]

©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.

• 2012 Income Tax Overview• Income Tax Planning Opportunities in 2012• 2012 Estate/Gift Tax Overview• Wealth Transfer Planning Opportunities in 2012

Course Outline

2©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved

2012 Income Tax Overview


• 2012 income tax brackets• Comparison of 2012 vs. 2013 tax rates• 3.8% Medicare “surtax” • 2012 payroll tax cut provisions• Other 2012 tax provisions• Impact of “Super Committee” failure



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2012 Income Tax Brackets


SingleQualified

Widow(er)Married

Filing Jointly

Married Filing

SeparatelyHead of

Household

10% Tax Rate $8,700 $17,400 $17,400 $8,700 $12,400

15% Tax Rate $35,350 $70,700 $70,700 $35,350 $47,350

25% Tax Rate $85,650 $142,700 $142,700 $71,350 $122,300

28% Tax Rate $178,650 $217,450 $217,450 $108,725 $198,050

33% Tax Rate $388,350 $388,350 $388,350 $194,175 $388,350

35% Tax Rate > $388,350 > $388,350 > $388,350 > $194,175 > $388,350

• Capital Gain– 0% rate if you are in the 10% or 15% bracket– 15% rate if you are in the 25%, 28%, 33% or 35% bracket


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Comparison of 2012 vs. 2013 Tax Rates


20122013 & Beyond

10% 15%

15% 15%

25% 28%

28% 31%

33% 36%

35% 39.6%

20122013&

Beyond*

0% 10% / 8%15% 20% / 18%

Ordinary IncomeLong-Term

Capital Gains

*NOTE: In general, the 8% and 18% capital gains rates only apply to long-term capital gains on property that has been held more than five years at the time of sale.

For the 18% rate, the property must be purchased after December 31, 2000.


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3.8% Medicare “Surtax”• Beginning with the 2013 tax year, a new 3.8% Medicare

“surtax” on net investment income will apply to all taxpayers whose income exceeds a certain “threshold amount”. This new “surtax” will, in essence, raise the marginal income tax rate for affected taxpayers.• Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest

marginal income tax rate in 2013) would have a federal marginal rate of 43.4%



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3.8% Medicare “Surtax”


Tax Rate in 2012

Tax Rate in 2013

Tax Rate in 2013+

(w/surtax)10% 15% 15%15% 15% 15%25% 28% 28%28% 31% 34.8%33% 36% 39.8%35% 39.6% 43.4%

NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However, there are times, though unlikely, when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).


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2012 Payroll Tax Cut Provisions• The FICA Old-Age, Survivors, and Disability Insurance (OASDI)

wage base for 2012 is $110,100• Starting on January 1, 2012 and going through February 29,

2012, the FICA-OASDI withholding tax rate will be decreased from 6.2% to 4.2%.

L The 4.2% tax rate only affects the employee’s portion of FICA-OASDI (not the employer’s portion)

• There is a phase-out of the reduced 4.2% FICA-OASDI tax rate for taxpayers whose earned income is in excess of $18,350 wage base for the first two months of 2012

L In this case, there will be a 2% tax on earned income in excess of the $18,350 threshold



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Other Specific Provisions for 2012• IRC Section 179 deduction

L $125,000 maximum deduction for 2012L Deduction phased out after qualified property placed in service during

2012 exceeds $500,000• Bonus depreciation

L Limited to 50% of the cost of property put into service during 2012 tax year (after figuring the IRC Section 179 deduction)

L Must be new property placed into serviceL 50% bonus depreciation in addition to IRC Section 179 deductionL Other limitations

• AMT exemptionL Not “patched” yet for 2012L Single/Head of household = $33,750; Married filing jointly = $45,000



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Other Specific Provisions for 2012• Making Work Pay Credit

L Expired as of 12/31/2011• Child tax credit

L $1,000 per qualifying child (through the end of 2012)L Phased out after AGI goes over a specific amount

• Nonbusiness Energy Property CreditL Expired as of 12/31/2011

• AMT refundable creditL Can claim even if subject to AMTL 2012 last year to claim credit

• American Opportunity Tax CreditL $2,500 credit for first four years of college (through the end of 2012)L Phased out after modified AGI goes over a specific amount



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Impact of “Super Committee” Failure on Income Taxes• Sunset of current tax law to pre-2001 tax law

L Increase in ordinary income tax rates & capital gains tax ratesL Increase in Social Security taxesL Conversion of qualified dividends from long-term capital gains to

ordinary incomeL Decrease in deductible business expenditures (e.g. bonus

depreciation, IRC Section 179 deduction)L Decrease in popular middle-class tax credits (e.g. education

credits, child tax credit)L Phase-outs of itemized deductions and personal/dependency

exemptions reinstated



Income Tax Planning Opportunities in 2012


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Planning Opportunities• Loss harvesting• Income shifting to junior generations• Roth IRA conversions• Other income tax planning ideas



Loss Harvesting – Key Issues• “Wash sale” rule (IRC §1091)• Diminishing value of capital losses• Inefficiency of capital loss offsetting


Loss Harvesting – “Wash Sale” Rule (IRC §1091)• Capital losses are denied to the extent that a taxpayer has

acquired (or has entered into a contract or option to acquire) a “substantially identical” stock or securities within a period beginning 30 days before the sale and ending 30 days after the sale of a stock which was sold at a loss (i.e. “loss stock”)

L This rule also applies to ETFs and index fundsL Disallowed loss on “loss stock” is added to the cost basis of the

new stockL The holding period of the “loss stock” is carried over to the new

stock




Loss Harvesting – Diminishing Value of Capital Losses• Over time capital losses lose their value as a result of a

taxpayer’s cost of capitalL Example: Taxpayer has a $100,000 capital loss in the current tax

year. Assuming a 5% discount rate, the following chart illustrates the diminished value of the capital loss carryover if the loss is recognized ratably over a ten-year period (vs. recognizing the loss all in the current year).

NOTE: The above comparison assumes that the $100,000 capital loss is offset by long-term capital gain taxed at a 20% capital gains tax rate.

Capital Loss Recognized In Current Year

Capital Loss Recognized Over 10

YearsPresent value of tax benefit $20,000 $15,443


Short-Term Gain Long-Term GainShort-Term Loss NEUTRAL INEFFECTIVE

Long-Term Loss EFFECTIVE NEUTRAL

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Loss Harvesting – Inefficiency of Capital Loss Harvesting• In general, capital losses are more tax effective if they can

be used to offset income taxed at higher tax rates (e.g. short-term capital gains and ordinary income)

L Thus, long-term losses used against short-term gains are more tax-efficient than short-term losses being used against long-term capital gains



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Loss Harvesting Strategies• Buy stock of similar company • Double-up “loss stock” – wait 31 days• Double-up “loss stock” – enter into “cashless collar”• Buy call option at-the-money


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Loss Harvesting Strategies – Similar Stock Strategy• Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e.

“loss stock”)• Taxpayer purchases a similar stock (e.g. Pepsi) at any time

prior to (or after) the sale of the “loss stock”L NOTE: The sale and purchase can occur on the same day in that

the two stocks are not “substantially identical”


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Loss Harvesting Strategies – Double-Up Strategy• Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e.

“loss stock”)• Taxpayer purchases the same stock (i.e. Coke) at least 31

days before the anticipated sale date of the “loss stock”



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Loss Harvesting Strategies – “Cashless Collar” Strategy• Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e. “loss

stock”)• Taxpayer purchases the same stock (i.e. Coke) 31 days or more

before the anticipated sale date of the “loss stock”• Taxpayer simultaneously purchases a put option and sells a call

option (to finance the cost of the put option) on the new stock (i.e. a “cashless collar”) with an exercise date 31 days or more from the date of the cashless collar was entered into

• At the expiration date, taxpayer tenders the “loss stock” to the respective counterparty

L Conversely, if the stock price stays inside of the cashless collar’s price range, taxpayer would sell the stock



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Income Shifting to Junior Generations• Shift income to younger family members to reduce income

taxes• Considerations

L Asset protectionL Kiddie taxL Potential taxable giftL Children use income to invest or purchase insurance


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Income Shifting to Junior Generations – Example• Husband and wife gift $10,000,000 of non-voting S-

Corporation stock to their four children (15% each) in 2012L $10,000,000 gift will utilize husband’s and wife’s $5,000,000

lifetime gift tax exemption in 2012• Thus, no gift tax will be incurred on the gift

L Income generated by S-Corporation will pass through to each child (i.e. income shifting)



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Income Shifting to Junior Generations – Example• Assumptions

L Parents’ filing status = Married filing jointlyL Parents’ exemptions = 2L Parents’ itemized deductions = $80,000L Children’s filing status (each child) = SingleL Children’s exemptions (each child) = 1L Children’s standard deduction (each child) = $5,800L S-Corporation income = $2,000,000


OPTION 1 OPTION 2 OPTION 1 OPTION 2 OPTION 1 OPTION 2Gross Income 2,000,000$ 800,000$ 25,000$ 325,000$ 25,000$ 325,000$ Itemized Deductions/Standard Deduction (80,000) (80,000) (5,800) (5,800) (5,800) (5,800) Personal Exemptions (7,400) (7,400) (3,700) (3,700) (3,700) (3,700) Net Taxable Income 1,912,600$ 712,600$ 15,500$ 315,500$ 15,500$ 315,500$

Income Tax 639,282$ 219,282$ 1,900$ 89,012$ 1,900$ 89,012$

PARENT CHILD #1 CHILD #2

ScenariosOption 1 – No PlanningOption 2 – Transfer 15% interest to each child

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Income Shifting to Junior Generations – Example



OPTION 1 OPTION 2 OPTION 1 OPTION 2 OPTION 1 OPTION 2Gross Income 25,000$ 325,000$ 25,000$ 325,000$ 2,100,000$ 2,100,000$ Itemized Deductions/Standard Deduction (5,800) (5,800) (5,800) (5,800) (103,200) (103,200) Personal Exemptions (3,700) (3,700) (3,700) (3,700) (22,200) (22,200) Net Taxable Income 15,500$ 315,500$ 15,500$ 315,500$ 1,974,600$ 1,974,600$

Income Tax 1,900$ 89,012$ 1,900$ 89,012$ 646,882$ 575,330$

ANNUAL INCOME TAX SAVINGS 71,552$

TOTALCHILD #3 CHILD #4

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Income Shifting to Junior Generations – Example


ScenariosOption 1 – No PlanningOption 2 – Transfer 15% interest to each child


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Roth IRA Conversions – Roth IRA Conversion Benefits• Lowers overall taxable income long-term• Tax-free compounding• No RMDs at age 70½ • Tax-free withdrawals for beneficiaries• More effective funding of the “bypass trust”


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Roth IRA Conversions – Roth IRA Conversion Types• Strategic conversions – Take advantage of a client’s long-term

wealth transfer objectives• Tactical conversions – Take advantage of short-term client-

specific income tax attributes that are set to expire (e.g., low tax rates, tax credits, charitable contribution carryovers, NOL carryovers, etc.)

• Opportunistic conversions – Take advantage of short-term stock market volatility, sector rotation and rotation in asset classes

• Hedging conversions – Take advantage of projected future events that will result in the client being subject to higher tax rates within the near future



Roth IRA Conversions – Understanding the Mathematics• In simplest terms, a traditional IRA will produce the same

after-tax result as a Roth IRA provided that:L The annual growth rates are the sameL The tax rate in the conversion year is the same as the tax rate

during the withdrawal years

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Traditional IRA Roth IRACurrent Account Balance 100,000$ 100,000$ Less: Income Taxes @ 40% - (40,000) Net Balance 100,000$ 60,000$

Growth Until Death 200.00% 200.00%

Account Balance @ Death 300,000$ 180,000$ Less: Income Taxes @ 40% (120,000) - Net Account Balance to Family 180,000$ 180,000$

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Roth IRA Conversions – Understanding the Mathematics



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Roth IRA Conversions – Understanding the Mathematics• Critical decision factors

L Tax rate differential (i.e. tax rate in year of conversion vs. tax rate in years of withdrawals)

L Ability to use “outside assets” (i.e. non-qualified funds) to pay the income tax on the conversion

L Time horizon / need for IRA to meet annual living expenses


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Roth IRA Conversions – Understanding the Mathematics• The key to a successful Roth IRA conversion is to keep as

much of the conversion income as possible in the current marginal income tax bracketL However, there are times when it may make sense to convert

more and go into higher tax brackets


10% tax bracket

15% tax bracket

25% tax bracket

28% tax bracket

33% tax bracket

35% tax bracket

Current taxable income

Target Roth IRA conversion amount

“Optimum” Roth IRA conversion amount

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Roth IRA Conversions – Understanding the Mathematics


Other Income Tax Planning Ideas• Acceleration of income into 2011 & 2012

L Sale of bonds with accrued interestL Sale/repurchase of bonds trading at a premium

• Alternative investmentsL Oil & gas investmentsL Gold investmentsL Foreign currency investmentsL Index options

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Other Income Tax Planning Ideas – Acceleration of Income• Beginning 1/1/2013, ordinary income tax rates will increase

to their pre-2001 levelsL Consequently, taxpayers should consider accelerating certain types

of ordinary income (e.g. bond interest, annuity income, traditional IRA income, compensation income) into 2011 and 2012 to the extent that they expect to be in the same tax bracket or higher in future tax years


Sell Bonds in 2012

Collect Interest in

2013Total Income Tax 35,000$ 39,600$

SAVINGS 4,600$

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Other Income Tax Planning Ideas – Acceleration of Income• Example – Sale of bonds with accrued interest

L As of 12/21/2012, Mark has $100,000 of accrued bond interest that will be paid on 1/3/2013. At the advice of his accountant, Mark is considering selling his bonds (at par) before the end of the 2012 tax year to take advantage of the lower income tax rates.

L Assuming that Mark is currently in the 35% tax bracket for 2012 (39.6% in 2013), below is a summary of the tax savings Mark would realize by selling his bonds in 2012 and recognizing the accrued interest income.



Income Tax Savings on Bond Premium 19,800$ Less: Capital Gains Tax on Sale of Bonds (7,500) Net Income Tax Savings 12,300$

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Other Income Tax Planning Ideas – Acceleration of Income• Example – Sale/repurchase of bonds trading at a premium

L In 1993, John purchased $1,000,000 worth of ABC Corp. 11% bonds at par value (which mature on December 31, 2013). On December 31, 2012, John sold his ABC Corp. bonds at 1.05 (i.e. $1,050,000).

L On the next trading day (January 2, 2013) John repurchased the same ABC Corp. bonds for $1,050,000. Under tax law, this $50,000 premium can be used to offset John’s interest income over the remaining life of the bond (i.e. one year).

L Below is the net income tax savings by selling the bonds in 2012 and repurchasing them in 2013:


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Other Income Tax Planning Ideas – Alternative Investments• Oil & gas investments

L Intangible drilling costs (IDCs) provide a large immediate income tax deduction (up to 85% of the initial investment)• Losses, if any, created as a result of IDCs will be ordinary (thus lowering a

taxpayer’s AGI)L Must be a general partner in the first year

• Possible AMT add-back issues if IDCs exceed 40% of AMTIL Depletion and other depreciation (including Section 179 expensing)

provide for additional deductions during the term of the investmentL Additional tax credits may be available for certain oil & gas ventures


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Other Income Tax Planning Ideas – Alternative Investments• Gold investments

L Generally when gold is held as coins or bullion, long-term gains are treated as “collectibles” and taxed at a 28% capital gains tax rate• However, this rule does not generally apply to gold held in mutual funds• Also, this rule does not generally apply to non-exchange-traded (i.e. OTC) options on

gold L Short-term gains are treated as ordinary income

• Thus, if a taxpayer is in a lower tax bracket (i.e. 10%, 15%, 25%), he/she would be better off triggering short-term gain (instead of long-term gain)

L Gold futures are treated as “Section 1256 contracts”, not as “collectibles”• Accordingly, gold futures must be “marked-to-market” (i.e. the unrealized gains/loss

must be recognized each tax year)- However, gains are subject to special tax treatment (i.e. 60% long-term capital

gain / 40% short-term capital gain)L “Wash sale” rule does not apply to “collectibles” losses



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Other Income Tax Planning Ideas – Alternative Investments• Foreign currency transactions

L Recognize ordinary income in 2010 and push ordinary losses to 2011 and later years• Avoids Section 1256 treatment• Choose currencies that do not have futures contracts

• Index optionsL Special gains treatment on certain broad-based listed options (i.e.

60% long-term / 40% short-term)• Thus, for taxpayers in the highest marginal income tax bracket in 2011

this would result in a blended capital gains tax rate of 27.84% ([20% x 60%] + [39.6% x 40%])


2012 Estate/Gift Tax Overview


2012 Estate/Gift Tax OverviewSummary of 2010 Tax Relief Act• On December 17, 2010, the President signed Tax Relief,

Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”) into law

• Key estate/gift tax law provisionsL Reinstatement of estate and GST taxL Higher exemption amountsL Lower tax ratesL Portability of estate tax exemption


2009 2010 (Prior Law)

2010 (New Law)

2011 2012

Top Estate Tax Rate 45% 0% 35% 35% 35%

Exemption $3,500,000 N/A $5,000,000 $5,000,000 $5,120,000

Date-of-Death Basis Increase YES NO

YES(unless estate tax

is not elected)YES YES

Carryover Basis NO YESNO

(unless estate tax is not elected)

NO NO

Note: Under the current law in 2013 the exemption reverts to $1,000,000

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Estate Tax• 2011

L Exemption = $5,000,000L Top marginal tax rate = 35%

• 2012– Exemption = $5,120,000– Top marginal tax rate = 35%

• 2013 (assuming no Congressional action)– Exemption = $1,000,000– Top marginal tax rate = 55%

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Gift Tax• 2011

– Exemption = $5,000,000– Top marginal tax rate = 35%


• 2013 (assuming no Congressional action)– Exemption = $1,000,000– Top marginal tax rate = 55%

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Generation-Skipping Transfer (GST) Tax• 2011

– Exemption = $5,000,000– Top marginal tax rate = 35%


• 2013 (assuming no Congressional action)– Exemption = $1,000,000 (indexed for inflation)– Top marginal tax rate = 55%

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Portability of Estate Tax Exemption• Allows the executor to either utilize the decedent’s

$5,000,000 estate tax exclusion amount or to transfer it to the decedent’s surviving spouse– However, the new law does not allow the decedent to

transfer his/her unused GST tax exemption to the surviving spouse

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Impact of “Super Committee” Failure on Estate Planning• Sunset of current tax law to pre-2001 tax law

L Increase in gift/estate/GST tax ratesL Decrease in estate, gift and GST exemption amountsL Repeal of portabilityL Reinstatement of state death tax creditL Reinstatement of other specific provisionsL Impact on credit for prior gift taxes paid (IRC Section 2012 credit)L Impact on credit for prior estate tax paid (IRC Section 2013 credit)



Wealth Transfer Planning

Opportunities in 2012


• Lifetime gifting• Grantor Retained Annuity Trust (GRAT)• Dynasty trust

L Intentionally Defective Grantor Trust (IDGT)

• Installment sales

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Wealth Transfer Planning Opportunities in 2012


Lifetime Gifting – Annual Exclusion Gifts• Each year a taxpayer may gift up to a specified amount

($13,000 in 2012) to another person (a.k.a. “donee”) without the gift being subject to gift tax

L This transfer is referred to as an “annual exclusion gift”• For married taxpayers, the annual exclusion gift per each

donee is basically doubled (i.e. $26,000 per donee in 2012)

• Neither the gift, nor the future appreciation on the gift is included in the taxpayer’s gross estate

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Lifetime Gifting – Annual Exclusion Gift ExampleA married couple makes annual exclusion gifts to their three children. The table below illustrates the total amount that is removed from their combined gross estate over a period of time:

0% Growth Rate

4% Growth Rate

8% Growth Rate

Year 5 390,000$ 422,473$ 457,595$

Year 10 780,000$ 936,476$ 1,129,952$

Year 20 1,560,000$ 2,322,690$ 3,569,433$

Total Wealth Removed From Gross Estate*

*NOTE: Assumes the annual exclusion gift amount of $13,000 does not change

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Lifetime Gifting – Lifetime Gift Exemption Gifts• During a taxpayer’s lifetime, he/she may make “taxable gifts”

(i.e. gifts that exceed the annual exclusion gift amount) up to a specified amount ($5,120,000 in 2012) without having to pay gift tax

• This transfer is referred to as an “lifetime gift exemption gift”• For married taxpayers, the aggregate lifetime gift tax

exemption is basically doubled (i.e. $10,240,000 in 2012)

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Lifetime Gifting – Lifetime Gift Exemption Gift ExampleA single taxpayer makes a $5,000,000 taxable gift to a trust for the benefit of his children. The table below illustrates the total amount that is removed from the taxpayer’s gross estate over a period of time:

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0% Growth Rate

4% Growth Rate

8% Growth Rate

Year 5 5,000,000$ 6,083,265$ 7,346,640$

Year 10 5,000,000$ 7,401,221$ 10,794,625$

Year 20 5,000,000$ 10,955,616$ 23,304,786$

Total Wealth Removed From Gross Estate



Lifetime Gifting – Tax-Exclusive Nature of Gift Tax• To the extent that a taxpayer makes a gift in excess of his/her

annual exclusion gift amount and his/her lifetime gift tax exemption amount, he/she will incur a gift tax

L The gift tax due on the taxable gift (in excess of the lifetime gift tax exemption amount) is calculated on a “tax-exclusive” basis

L In this case, the gift tax is calculated only on the value of the amount transferred (i.e. the gift)

• For estate tax purposes, the estate tax is calculated not only on the value of the amount transferred, but also the tax that is paid n the transfer (i.e. “tax inclusive”)

• The post-gift future appreciation is not included in the taxpayer’s gross estate

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Estate Tax Gift TaxTotal Taxable Estate / Gift 10,000,000$ 10,000,000$ Effective Tax Rate* 35.00% 25.93%Total Tax (3,500,000)$ (2,592,593)$

Savings -$ 907,407$

* Effective Gift Tax Rate = 35%/135%

Lifetime Gifting – Tax-Exclusive Nature of Gift Tax Example

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NOTE: The IRC §7520 rate for December 2011 is 1.6%

Grantor Retained Annuity Trust (GRAT) • A Grantor Retained Annuity Trust (GRAT) is a type of trust that benefits the grantor’s future generations (i.e. children)

without the imposition of estate or gift tax• To the extent that the actual rate of return on the trust’s assets exceeds the IRS’s rate (a.k.a. IRC §7520 rate), the “excess” is transferred to the trust’s beneficiaries free of any

estate and/or gift tax• All income earned by the trust is taxed to grantor because the trust is “defective” for income tax purposes, thus allowing for a “tax-free” gift to the trust’s beneficiaries

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Grantor(Lead Beneficiary)

Transfer of assets

Annuity payments over a fixed term

GRAT

Payment of gift tax on present value of remainder interest transferred to children (should be at or near $0)

Children* (Remainder Beneficiaries)

IRS

At end of term, any residual assets remaining in the trust pass to the children free of any gift tax

* Instead of naming the children as outright remainder beneficiaries of the GRAT, a grantor trust could be used (thus producing a greater estate tax benefit)

Grantor Retained Annuity Trust (GRAT) – Overview

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Grantor Retained Annuity Trust (GRAT) – Example

BENEFIT: $8,564,102 transferred to beneficiaries estate/gift tax-free

AssumptionsFMV of assets transferred $10,000,000IRC §7520 rate 1.60%Term (years) 10Annual % increase in periodic payment 0%Payment period AnnuallyPayment timing End of period

YearBeginning Balance

Taxable Income Annual

Ending Balance

10.00% Payment

1 10,000,000$ 1,000,000$ (1,090,096)$ 9,909,904$ 2 9,909,904$ 990,990$ (1,090,096)$ 9,810,798$ 3 9,810,798$ 981,080$ (1,090,096)$ 9,701,782$ 4 9,701,782$ 970,178$ (1,090,096)$ 9,581,864$ 5 9,581,864$ 958,186$ (1,090,096)$ 9,449,955$ 6 9,449,955$ 944,995$ (1,090,096)$ 9,304,854$ 7 9,304,854$ 930,485$ (1,090,096)$ 9,145,244$ 8 9,145,244$ 914,524$ (1,090,096)$ 8,969,672$ 9 8,969,672$ 896,967$ (1,090,096)$ 8,776,543$ 10 8,776,543$ 877,654$ (1,090,096)$ 8,564,102$

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Dynasty Trust • A dynasty trust is a type of trust which benefits multiple generations where none of the assets held by the trust are included in either the grantor’s taxable estate or any of the beneficiaries’ taxable estates.

L However, under the tax law, whenever a transfer is made by the grantor to a “skip person” (e.g. grandchild, great-grandchild, etc.) or a trust for their benefit (e.g. dynasty trust), a second level of tax is imposed on the transfer (in addition to gift tax)

L Notwithstanding, a grantor is allowed a lifetime GST exemption on the first $5,120,000 of taxable transfers to “skip persons”

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Dynasty Trust

Discretionary Distributionsto Children for Life

Discretionary Distributionsto Grandchildren for Life

Discretionary Distributionsto Great-Grandchildren

for Life

Future Generations

No transfer tax paid.




GrantorGift*

Advantages• Creditor protection• Divorce protection• Estate tax protection• Direct decedent protection• Spendthrift protection• Consolidation of capital

* Gift should take advantage of any remaining lifetime gift exclusion and lifetime GST exclusion

Dynasty Trust – Overview

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Wealth of Parents 1,000,000$ 1,000,000$ 1,000,000$ Estate Tax Rate 35% 35% 35%Estate Tax 350,000$ 350,000$ 350,000$

Wealth of Children 650,000$ -$ -$ Estate Tax Rate 35% 35% 35%Estate Tax 227,500$ -$ -$

Wealth of Grandchildren 422,500$ 650,000$ -$ Estate Tax Rate 35% 35% 35%Estate Tax 147,875$ 227,500$ -$

Wealth of Great-Grandchildren 274,625$ 422,500$ 650,000$

% of Original Wealth Passing to Great-Grandchildren 27.4625% 42.2500% 65.0000%

Dynasty Trust – Estate Erosion Example

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Intentionally Defective Grantor Trust (IDGT)An Intentionally Defective Grantor Trust (IDGT) is a type of dynasty trust where all income earned by the trust is taxed to the grantor because the trust is “defective” for income tax purposes, thus allowing for a “tax-free” gift to the trust’s beneficiaries.

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Installment Sale to IDGT • A type of transaction whereby a grantor sells a highly-appreciating asset to an IDGT in exchange for an installment note• To the extent that the growth rate on the assets sold to the

IDGT is greater than the interest rate on the installment note taken back by the grantor, the “excess” is passed on to the trust beneficiaries free of any gift, estate and/or GST tax• No capital gains tax is due on the installment sale and no income tax is due on the interest paid because the trust is “defective” for income tax purposes

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Grantor

Gift & sale of highly-appreciating assets

Installment note(s) IDGT

Children, Grandchildren,

Great-Grandchildren & Future Generations

Discretionary distributions of income and principal during the

lifetime of the trust’s beneficiaries

Assets outside of the taxable estates of beneficiaries

Installment Sale to IDGT – Overview

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Short-Term AFR (3 years or less) .20%

Mid-Term AFR (over 3 years, up to 9 Years) 1.27%

Long-Term AFR (over 9 years) 2.80%

Installment Sale to IDGT – December 2011 AFRs

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Installment Sale to IDGT – ExampleAssumptionsFMV of assets transferred $10,000,000Interest rate (AFR) 2.80%Term (years) 10Payment structure Interest-only w/balloon paymentPayment period AnnuallyPayment timing End of period

YearBeginning Balance

Taxable Income Annual

Ending Balance

10.00% Payment

1 10,000,000$ 1,000,000$ (280,000)$ 10,720,000$ 2 10,720,000$ 1,072,000$ (280,000)$ 11,512,000$ 3 11,512,000$ 1,151,200$ (280,000)$ 12,383,200$ 4 12,383,200$ 1,238,320$ (280,000)$ 13,341,520$ 5 13,341,520$ 1,334,152$ (280,000)$ 14,395,672$ 6 14,395,672$ 1,439,567$ (280,000)$ 15,555,239$ 7 15,555,239$ 1,555,524$ (280,000)$ 16,830,763$ 8 16,830,763$ 1,683,076$ (280,000)$ 18,233,839$ 9 18,233,839$ 1,823,384$ (280,000)$ 19,777,223$ 10 19,777,223$ 1,977,722$ (10,280,000)$ 11,474,946$

BENEFIT: $11,474,946 transferred to beneficiaries estate/gift tax-free

68



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Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party.

For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.


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