View
28
Download
0
Category
Tags:
Preview:
DESCRIPTION
Tax-Exempt Planning. AKA How to Give It Away And Still Make Money AKA Creative Charitable Solutions to Business Problems for Presentation by 501(c)(3)’s. Sample Client Problems Solved with Tax-Exempt Planning. High Capital Gains Owed If Sell Property Fully Depreciated Real Property - PowerPoint PPT Presentation
Citation preview
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Tax-Exempt PlanningTax-Exempt Planning
AKA
How to Give It Away How to Give It Away
And Still Make MoneyAnd Still Make Money
AKA
Creative Charitable Solutions to Creative Charitable Solutions to Business Problems for Business Problems for
Presentation by 501(c)(3)’s Presentation by 501(c)(3)’s
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Sample Client Problems Solved with Tax-Exempt Planning
• High Capital Gains Owed If Sell Property
• Fully Depreciated Real Property
• C Corporations with Significant Retained Earnings
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Trust has assets donated by a donor Has a Trustee (can be the donor) Is a Contract Has income beneficiary(ies) entitled to a fixed
percentage of trust assets. Normally valued annually Gives remainder to charity (e.g. family foundation) Avoids capital gains on sale of transferred assets Donor entitled to a charitable income tax deduction
Strategy #1
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Issues to Consider When Funding A CRT with Investment Real Estate
• Clear title
• Marketability
• Environmental hazards
• Maintenance
• Pre-arranged sales
• Debt
• Type of CRT
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Meet Bill & Mary Jones
• 65 & 63 years old, with 42 year old son
• AGI is $65,000; estate is $2M
• Would like more retirement income
• Own $500K rental property with a cost basis of $100K that yields $25k in gross income
• Interested in relief from property management during retirement
• Also interested in tax savings?
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
QUESTION: QUESTION: Would the Jones Family Would the Jones Family secure more income for secure more income for themselves and leave more themselves and leave more to their heirs if they held on to their heirs if they held on to their rental property until to their rental property until their deaths?their deaths?
ANSWER: MaybeANSWER: Maybe
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Economics of Holding Economics of Holding Investment Real EstateInvestment Real Estate
• What is real net income if owners deduct income taxes,property taxes, maintenance and repair expense?
• Will the owners ever get relief from property management?
• Will there be estate tax repeal at their deaths?– If not, how much of the asset will be eroded by
estate taxes?– If yes, will heirs be subject to capital gains tax
due to eliminated step-up in basis for transfers exceeding $1.3M?
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
How About A 2-Life CRT?
• Avoid $96,200 in capital gains taxes
• Income tax savings of $36,185, producing $168,004 of income and principal if invested .
• Income of $32,900 for 1st year, $1,268,395 over 26 years.
Assumes 10% total return
Transfer Property
Receive Income
7% Tax-Exempt
Unitrust
End of Term(Actuarially 26 Years)
CharityOr Family Foundation
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Income from CRT Versus Sell & Reinvest Scenario (10% Total Return)
YEAR CRT:
Principal
CRT: Payout @ 7%
CRT: Invested Tax Savings
CRT: 7% Income From Invested Savings
Sell & Reinvest: Principal
Match Income from CRT & Savings
1 470,000 32,900 6,031 422 373,800 33,322
5 628,929 37,029 34,543 2,418 383,066 39,447
10 613,243 42,927 47,511 3,326 360,400 46,253
15 710,917 49,764 55,078 3,855 282,272 53,670
20 824,128 57,690 63,851 4,470 108,957 62,160
26 984,076 68,885 76,241 5,337 0 0
TOTAL (CHARITY) 1,268,395 76,241 91,763 57,693 948,020
TOTAL BENEFIT 1,436,399 SELL & REINVEST
1,003,713
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Asset Maximization Comparison for 2-Life CRT
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000Income
Principal +Income from TaxSavingsInvestmentPrincipal
CharitableLegacy
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Trust has assets donated by a donor Has a Trustee (can be the donor) Is a Contract Has charitable [viable 501(c)(3)] income
beneficiary(ies) entitled to a fixed percentage of trust assets – NOTE: This can be client’s Foundation
Remainder reverts to beneficiary(ies) of donor’s choice (even donor)
Donor entitled to a charitable income tax deduction
Strategy #2
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
How About Mike & Nancy Smith?
• They are on the verge of retirement
• Wish to transfer $3M of commercial real estate (w/basis of $2M) to heirs in near future
• Would like to make transfer while minimizing gift or estate taxes (currently in 50% estate tax bracket)
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
What Is A Lead Trust?
• Gift Tax Deduction of $2,390,229, which reduces taxable gift to $609,771.
• Charity receives annual income of $270,000
• At end of term, family receives assets + tax-free growth, amounting to $5,010,146.
Assumes 10% return of trust assets
Transfer $3M Property
Income to Charity
9% Lead Trust
For Term of
13 years
End of TermTo Family
CharityOr Family Foundation
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Corporate Application of Strategy #2
• Donors Don & Sandy Deed $1M of Their Stock to CLT• Corporation offers to redeem shares of all shareholders• Trustee of CLT accepts offer (Don & Sandy individually do not,
for some reason!) • Corporation uses cash or a loan to purchase CLT interests –
redemption takes retained earnings to zero.• CLT operates just like previous example, and at end game CLT
principal and growth goes to Jones kids (or other remaindermen, as Don & Sandy desire)
• Corporation no longer has any retained earnings, thereby allowing Don & Sandy to form an exit strategy/sell their corporation without the distortion of the retained earnings issue
• At end game, Don & Sandy still own all, but no retained earnings
Problem: C Corp Valued at $3M, Retained Earnings of $1M, Sole Owners Don & Sandy Jones Want to Sell
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
STEP 1: Transfer Property to a Family Limited Partnership (FLP) and get as much as a 40% discount on the transfer value
STEP 2: Transfer some or all of limited partnership interest of FLP to a Lead Trust for a short term (<5 years) RESULTS: Family/Children become owners of property sooner. The double discount lead trust reduces gift tax to zero.
Strategy #3
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Double Discount Lead Trust (DDLT)
Original PropertyValue $1,800,000Cost $2,000,000Gain -$ 200,000
Family Limited Partnership$3,000,000 asset to FLP with 40% FLP discount valued in DDLT at $1,800,000
Trust Principal$1,800,000
TermOf4.99 Years
2. Income of 15% to charity for 4.99 years. No income tax. First year income $270,000 (or 9% of non-discounted principal of $3M). Total charitable payments in 4.99 years = $1,347,300.
1. Gift FLP assets of $3M to DDLT, charitable gift tax deduction of $1,135,377. Deduction reduces taxable gift from $1.8M to $664,623.
Trust to Family
$2,011,599
3. After 4.99 years, trust assets revert to family. Property in FLP may have appreciated to a much greater value ($3,352,665)
Assumes 10% income
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
The WIIFM: NLA Co-Counsel Opportunities
• Tax-exempt planning can be very lucrative – fees can range from $5,000 - $50,000
BUT• If tax-exempt planning saves hundreds of
thousands, perhaps millions, of dollars for client, then fees become negligible
• WIN-WIN for everyone – NLA, co-counsels, and most importantly, client
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
Conclusions
• Tax exempt planning is an innovative tool that can solve some clients’ income, corporate, capital gain and estate tax issues
• Use of sophisticated co-counsel versed in tax-exempt planning allows better service to client
BUCKLEY LAW OFFICES, P.C.BUCKLEY LAW OFFICES, P.C.www.buckleylaw.comwww.buckleylaw.com
THANK YOU
We sincerely appreciate the time you have given us today!
QUESTIONS?
Recommended