Presentation on theme: "BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com Tax-Exempt Planning."— Presentation transcript:
BUCKLEY LAW OFFICES, P.C. Tax-Exempt Planning
BUCKLEY LAW OFFICES, P.C. 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. 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. 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. 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. QUESTION: Would the Jones Family secure more income for themselves and leave more to their heirs if they held on to their rental property until their deaths? ANSWER: Maybe
BUCKLEY LAW OFFICES, P.C. Economics of Holding Investment 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. 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 1 st 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) Charity Or Family Foundation
BUCKLEY LAW OFFICES, P.C. Income from CRT Versus Sell & Reinvest Scenario (10% Total Return) YEAR CRT: Principal CRT: 7% CRT: Invested Tax Savings CRT: 7% Income From Invested Savings Sell & Reinvest: Principal Match Income from CRT & Savings 1470,00032,9006, ,80033, ,92937,02934,5432,418383,06639, ,24342,92747,5113,326360,40046, ,91749,76455,0783,855282,27253, ,12857,69063,8514,470108,95762, ,07668,88576,2415,33700 TOTAL (CHARITY)1,268,395 76,24191,76357,693948,020 TOTAL BENEFIT1,436,399 SELL & REINVEST 1,003,713
BUCKLEY LAW OFFICES, P.C. Asset Maximization Comparison for 2-Life CRT
BUCKLEY LAW OFFICES, P.C. 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. 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. 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 Term To Family Charity Or Family Foundation
BUCKLEY LAW OFFICES, P.C. 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. 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. Double Discount Lead Trust (DDLT) Original Property Value $1,800,000 Cost $2,000,000 Gain -$ 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 Term Of 4.99 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, 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, 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. 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. 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. THANK YOU We sincerely appreciate the time you have given us today! QUESTIONS?