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Perspectives
Wealth Planning Group Newsletter
July 2012
Dear Clients: Welcome to the most recent edition of Perspectives, our wealth planning periodical. In this edition we hope to focus your attention on the ability to implement significant estate and gift tax planning this year. For the remainder of 2012, individuals have the opportunity to effect intra-family giving plans at a level we may not see again. We are at a uniquely beneficial point historically to make gifts to family members, or to trusts for their benefit, given a). the increased amount that can be given at $5.12M per individual or $10.24M for a couple, b). historically low interest rates, c). depressed valuations for most asset classes and d). permissible planning strategies including FLPs, GRATs and valuation discounts. In light of current legislation, this window of opportunity will close at the end of this year and we hope this edition of Perspectives will spur you to review your estate plans with your tax and legal advisors. Sincerely,
Bill Woodson Managing Director, Wealth Planning Group a si CLL )ASU( seitiruceS essiuS tiderC ni ssenisub ASU gniknaB etavirP ehT
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
Editors Note
Dear Clients: As we are now into the second half of 2012, an overview of our current estate and tax landscape as well as a discussion regarding estate and tax planning considerations is in order. The Tax Relief, Unemployment Insurance Authorization and Job Creation Act of 2010 (the Act) created significant changes in the area of wealth transfer planning. Most notably, the Act increased the federal Estate, Gift and GST tax exemption amount for years 2011 and 2012 and reduced the transfer tax rate. The Estate, Gift and GST exemption amount for 2012 is $5.12M per individual, $10.24M per married couple (as adjusted for inflation). The Estate, Gift and GST tax rate is 35% for 2012. As of the time of this publication, it is unclear whether these increased benefits will ultimately be extended, reduced or eliminated. Because of the uncertainty, clients should seriously consider taking advantage of this benefit as the year progresses. Without further Congressional action, beginning in 2013, the Estate, Gift and GST exemption amount will decrease to $1M (with adjustments for inflation for the GST exemption) and the transfer tax rate will increase to a maximum rate of 55% with a surcharge for larger estates. The combination of increased exemption amount, decreased tax rate, low interest rate, and relatively low asset values makes this an opportune time for wealth transfer planning. In the following pages, we discuss numerous planning considerations that may assist you in transferring substantial wealth to your beneficiaries in an efficient manner. Although not all of the planning vehicles discussed may be relevant to your particular situation, simply being aware of your options should better prepare you for planning discussions with your legal and tax advisors. We hope that the information provided is helpful and informative. With warmest regards,
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
In This Issue
Estate Planning Opportunities 5 > Overview of Wealth Transfer Planning Opportunities 8 > Planning with Family Limited Partnerships in 2012 12 > Utilizing the Increased Exemption with a Spousal Lifetime Access Trust (SLAT) 13 > Determining Basis for Gifted and Inherited Property Tax Updates 14 > The Landscape for Taxes: 2012 and 2013 15 > Summary of Key Stated Positions on Taxes Affecting Clients 15 > 2012 Federal Gift/Estate/Retirement Contribution Amounts 16 > 2012 Federal Individual Income Tax Brackets 16 > Income Tax Summary 20102013 16 > Estate Tax Law Summary 20102013 Insurance 17 > Opportunities for Life Insurance in 2012
Cyber Security 19 > Cyber Security Concerns and the High Net-Worth Family Office
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
the estate and gift tax. In 2012, the GST exemption increased to $5.12M per individual (or $10.24M per married couple). Therefore, a grandparent may wish to consider making gifts to grandchildren, whether outright or in a GST trust, to take advantage of the increased exemption. In a properly structured GST trust, assets held in the trust and any future income and appreciation could effectively be shielded from future estate or GST tax. In certain jurisdictions, this type of generationskipping trust can continue in perpetuity (the so-called Dynasty Trust), thereby potentially extending the tax benefits for future generations.(4) Sale to an Intentionally Defective Grantor Trust One effective strategy to leverage the increased gift and GST exemption amount is the use of a sale to an intentionally defective grantor trust (IDGT). Due to the nature of this structure, the IDGT is typically the strategy of choice for GSTplanning. In this strategy, the grantor creates an irrevocable trust and typically funds the trust with a gift of cash. The size of the gift is often determined by the size of the transaction. The trust then purchases an asset with high growth potential from the grantor in exchange for an installment note. The note must include an interest rate equal to at least the monthly Applicable Federal Rate (AFR) in effect at the time of funding. If the trust assets grow beyond the AFR, then the excess appreciation could pass to the beneficiaries of the trust without further transfer tax. For additional leverage, the grantor could sell assets, which qualify for a valuation discount (e.g., interests in a family limited partnership). If the grantor dies during the term of the note, then the fair market value of the note (to the extent the loan has not been repaid) is included in the grantors estate. That value may sometimes be less than the outstanding principal depending on several factors.
(4) The Obama Administration Fiscal Year 2012 Revenue Proposals include a provision that would limit the use of the Dynasty Trust structure to a maximum of 90 years.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
The IDGT is considered a grantor trust for income tax purposes. Therefore, the grantor does not recognize gain or loss on the sale of assets to the IDGT. The grantor is also not taxed on the annual interest payments received from the note. In addition, the grantor is obligated to pay the income tax on the income attributed to the trust, thereby allowing the assets in the trust to more effectively grow for the benefit of the beneficiaries. Because current AFRs are low (e.g., mid-term AFR for July 2012 is 0.92%), it may be possible to shift substantial appreciation to beneficiaries at a relatively low transfer tax cost. The increased lifetime gift and GST tax exemptions also allow for more assets to be sold without incurring an immediate gift tax. In addition, if assets sold can be discounted (i.e., due to lack of marketability, fractional interest, control, etc.), additional wealth may be transferred to beneficiaries. Qualified Personal Residence Trust Transferring a personal residence to a Qualified Personal Residence Trust (QPRT) is a popular estate planning strategy that may help reduce the size of your estate. The increased lifetime gift tax exemption and relatively low value of homes make QPRTs a popular strategy. This strategy consists of a gift of a personal residence to an irrevocable trust. The grantor would retain the exclusive right to use and occupy the personal residence for a period of years. This retained right creates a discount on the value of the home for gift tax purposes. At the expiration of the trust term, the property in the trust would pass to the beneficiaries. The grantor could continue to live in the residence at that time with the consent from the beneficiaries and the payment of fair marketrent. An essential element to consider is the length of the term of the QPRT. This is because the grantor must survive the term of the QPRT in order for this strategy to work. If the grantor dies during the QPRT term, the value of the home is includable in the grantors estate and the estate planning benefits of the QPRT have not been achieved. The transfer of fractional interests in a residence could be used to hedge against the possibility of premature death. For example, a grantor may create three QPRTs with terms of 5, 10 and 15 years. For example, if the grantor transfers a 1/3 interest in the residence to each of the trusts and if the grantor dies in year 12, only the remaining 1/3 interest is included in the grantors estate. Another possibility is for a married couple to create two QPRTs, each with his or her 50% interest in the
property. If one spouse dies during the term of the QPRT, then the other 50% interest in the home belonging to the surviving spouses QPRT could still be successful. A valuation discount may be possible due to the fractional interests involved. During the term of the trust, the grantor is still considered the owner for income tax purposes and could receive the benefit of any income tax deductions related to the property, as well as the tax benefits associated with the sale of a principal residence. A QPRT could be an effective strategy for individuals to transfer valuable residences to the next generation. Depressed real estate values and increased lifetime gift tax exemption could permit the transfer of potentially large amounts of wealth and future growth related to a residence to the beneficiaries at a reduced gift tax cost. Grantor Retained Annuity Trust Another attractive planning strategy in the current low interest rate environment is a Grantor Retained Annuity Trust (GRAT). Over the last couple of years, several bills were introduced in Congress to restrict the use of GRATs. A GRAT is an irrevocable trust to which a portion of the grantors property is transferred with the grantor retaining the right to receive a fixed payout, or annuity, each year for the term of the trust. The GRAT must pay the required annuity each year regardless of the amount of income actually generated by the trust assets. If the trust assets do not generate sufficient income to fund the annuity amount, the trust principal must be utilized to make up any deficiency. When the trust terminates, the assets remaining in the trust pass to the beneficiaries (or a trust for their benefit) without the imposition of any additional transfer tax. However, if the grantor dies before the end of the trust term, a portion or all of the trust assets will be included in the grantors estate for estate tax purposes. Upon the creation of the GRAT, the grantor is deemed to have made a gift equal to the present value of the assets that will pass to the beneficiaries at the end of the trust term. A GRAT is usually structured to set the annuity sufficiently high so that the value of the remainder interest (the value of the gift) is as close to zero as possible. The value of the annuity stream typically equals the value of the assets in the GRAT plus an imputed interest rate (the 7520 rate) a rate that varies monthly, and remains in effect for the term of the GRAT once established. The GRAT allows the transfer of appreciation in excess of
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
the 7520 rate to pass to the beneficiaries without additional transfer tax. If the assets do not appreciate, all of the assets would have been returned to the grantor by the end of the GRAT term without adverse tax consequences. From an income tax perspective, all income tax liability incurred by the GRAT during its term is attributed to the grantor. Assets that have significant potential for appreciation are ideal for GRATs. Because the current 7520 rate is low (e.g., 1.2% in July 2012), a GRAT may shift significant amount of wealth to beneficiaries at little or no transfer tax cost. Charitable Lead Trust For individuals who are charitably inclined, this is an ideal time to consider establishing a charitable lead trust (CLT). A CLT is an attractive option during the current low interest rate environment that could help optimize the increased lifetime gift tax exemption by gifting to family members and charity at the same time. A CLT permits an individual to donate the income stream from an asset to one or more charities for a set number of years or for one or more persons lifetime. The remaining assets of the trust, at the end of the trust term, pass to the beneficiaries (or a trust for their benefit). There are different ways to set up a CLT, either grantor or nongrantor, depending on ones goals and objectives. A grantor CLT permits the grantor an immediate income tax deduction at the time the CLT is established. However, during the term of the CLT, the grantor would be responsible for the income tax liability of the trust. A nongrantor CLT, on the other hand, does not allow the grantor to receive an immediate income tax deduction. The trust would be liable for all income tax consequences. However, during the term of the trust, the trust would receive an income tax deduction for the income stream paid to charity. Zeroed-out CLATs (Charitable Lead Annuity Trusts) allow the transfer of appreciation in excess of the 7520 rate to pass to the beneficiaries. Because current 7520 rates are low, CLATs are an attractive strategy for those who want to benefit family members and charities. If structured as a grantor CLT, the individual could also receive an immediate income tax benefit, which could be beneficial in a high income earning year. Intrafamily Loan The current low interest rate environment is an ideal time to consider loans between family members. For example, a parent may wish to lend money to a child (or a trust for the childs
benefit). The parent must charge a minimum interest rate based on the appropriate AFR. The child can then use the borrowed money to invest for a higher return (or pay off other debt with a higher interest rate). This strategy will generally be successful if the investment returns more than the interest being charged on the note. For individuals with existing intrafamily loans, this may be a good time to consider refinancing using the current lower interest rates. Others may wish to take advantage of the increased lifetime gift tax exemption and forgive any existing intrafamily loans (a forgiveness of loan is deemed a gift to the debtor). Note Regarding Gifts in 2012 Commentators have suggested that there may be a possibility that there will be a clawback of the prior tax benefit. The reason for this uncertainty is based on how the estate tax is computed. In essence, the estate tax takes into account the amount of any post-1976 taxable gifts and adds it back to the taxable estate. The gift tax previously paid is then backed out of the computation. Individuals who make lifetime gifts in 2012 should be aware that because of the potential disparity in the estate, gift and GST exemption and rates in 2013 and beyond (i.e., if the exemption decreases to $1M or another amount), there is some uncertainty as to how prior gifts may be treated. However, even assuming a clawback applies, donors who elect to use their $5.12M gift (and GST) tax exemptions in 2012 should be no worse off than those who pass away without having made those gifts. In fact, there may be benefits to using the $5.12M exemption in 2012. The appreciation on the gifted assets will unlikely be subject to the clawback, even if the gifts themselves are. Also, leveraging the gifts through some of the vehicles discussed above could enable donors to transfer appreciation on assets in excess of the $5.12M exemption. Conclusion Even if additional gifting is not in your current plans, it is critical to review your current estate plan to ensure that it is consistent with existing law and your current wishes, in light of recent changes to legislation. In addition, the increased estate, gift and GST exemption amounts along with decreased tax rate in 2012 may create an opportunity for significant wealth transfer.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
4.
5.
4.
What are the Benefits of an FLP? 1. Transfers of FLP interests generate discounts against the value of the assets owned by the FLP, which may result in gift and estate tax savings. The inherent lack of marketability of the FLP interests and lack of control by the limited partners over the operation of the FLP give rise to these discounts. Transferring FLP interests to family members rather than fractional interests in the actual assets owned by the FLP
What are Some Possible Disadvantages of an FLP? 1. Although FLPs are widely used to lower estate and gift taxes through the application of valuation discounts, the IRS continues to challenge the use of FLPs to generate these discounts. Careful planning is required to avoid any potential IRS issues.
2.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
2.
If a client transfers an FLP interest during his or her lifetime, the transferee interest will not receive a step-up in the income tax basis of either the FLP interest or the transferees share of the FLP assets on the clients death. The client may have increased annual expenses (e.g., accountants and attorneys fees) related to the administration and tax reporting of the FLP.
3.
members to reduce the size of his or her taxable estate. This would be particularly relevant during the remainder of 2012 while the gift tax exemption amount is $5.12M per person ($10.24M for a married couple). The following techniques are among the most widely used, especially this year, to take advantage of the historically high gift tax exemption amounts before they expire: 1. Direct Gift of FLP Interest
Other Issues One Should Consider Before Forming anFLP Before forming an FLP, one should also be aware of the following issues: 1. If the creation and funding of the FLP occurs too close in time to subsequent transfers of interests in the FLP, the IRS may argue that there was a gift on formation essentially that the client made a gift of underlying FLP assets, rather than gifts of the discounted FLP interests to his or her family members. This may cause unintended gift tax consequences to the client. Gifts of FLP units should be made as far into the future as possible following the formation of the FLP. The size of the valuation discount on the transfer of the FLP units will largely depend upon the character of the assets held by the FLP. For example, the valuation discount applicable to units of an FLP that owns liquid assets such as cash, CDs, stocks and bonds will generally be smaller than the valuation discount applicable to units of an FLP that owns non-liquid assets such as real estate. In any event, the valuation discount must be determined by a qualified appraiser. The terms of the FLP agreement, drafted by an experienced attorney, are crucial in determining the appropriate valuation discounts. Care should be taken to address all other issues other than estate and gift tax planning with respect to the formation and operation of the FLP. For example, if real estate subject to a loan will be transferred to the FLP, lender consent may need to be obtained prior to the transfer so as not to trigger a dueon-sale clause in the loan document. If the property has been leased to tenants, lease assignments will need to be executed to reflect the new owner of the property. Property tax issues must be analyzed to ensure that the property is not reassessed upon the transfer of the property to the FLP by the partners or, thereafter, upon the transfer of partnership interests by the client to his or her family members.
2.
FLP interests can be gifted directly to family members or trusts created for their benefit (see below). This is simple to do most FLP agreements allow for these types of transfers without triggering a standard right of first refusal in favor of the other partners. Gifts of FLP interests should qualify for the valuation discounts discussed earlier, thus providing for greater gift and estate tax savings. If the limited partnership interests are gifted outright to individual family members, each individual will become a limited partner in the FLP and must agree to be bound by all of the terms of the FLP agreement. The client would be required to file a gift tax return to report the gift of the FLP interest. If the client does not have sufficient lifetime gift tax exemption available when the gift is made, the client may be required to pay gift tax on the gift. 2. Gift of FLP Interest to IDGT
3.
Rather than gifting an FLP interest directly to a family member, the FLP interest could be gifted to a special type of trust known as an Intentionally Defective Grantor Trust (IDGT). An IDGT is an irrevocable trust generally created by the client for the benefit of a family member such as a child or grandchild. For income tax purposes, the client is taxed on all of the income generated by the IDGT, whether or not distributed to the beneficiary of the IDGT. A gift to an IDGT is an attractive option if a client does not want a beneficiary to own the FLP interest outright (for example, if the beneficiary is a minor), and/or the client desires to pay the income taxes on the income earned by the IDGTs assets, which is tantamount to a tax-free gift to the IDGT beneficiaries of the income taxes so paid. As with the gift of an FLP interest to an individual beneficiary, a gift of an FLP interest to an IDGT would require the donor to file a gift tax return, and possibly pay gift tax on the transfer. The client may also allocate a portion of his generation-skipping transfer (GST) tax exemption to the transfer so that distributions from the IDGT to individuals two or more generations below the client are exempt from GST tax.
Using FLPs in Estate Planning Once the FLP has been formed and funded, the client can engage in a number of different strategies to transfer FLP interests to family
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CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
3.
The transfer could be structured as a sale of the FLP interest to an IDGT, rather than as an outright gift. In the sale transaction, the client would sell an FLP interest to an existing IDGT in exchange for a promissory note with a relatively low rate of interest (but not less than the Applicable Federal Rate released each month by the IRS). The term of the promissory note should generally be long enough to allow the IDGT to pay off the promissory note. The IDGT would use the income from the FLP interest it would then own to make interest and principal payments on the promissory note. This would allow the client to continue to receive an income stream from the FLP interest in the form of interest and principal payments on the promissory note. In addition, all of the appreciation of the FLP interest after the sale would be removed from the clients estate, with the client only retaining in the clients taxable estate the value of the note that has not been paid at death. Often the trust is funded with a seed money gift of at least 10% of the total sale to assure that the note is respected as bona fide debt; clients should consult with counsel on this step and the corresponding gift tax consequences. 4. Transfer of FLP Interest to a GRAT
(GRAT). The GRAT is designed to pay an annuity back to the client for a set number of years. The annuity payment can be in the form of cash (generated from the income of the FLP interest), FLP units, or a combination of the two. The goal of using a GRAT in this context is to pay back to the client the entire value of the FLP interest initially contributed by the client to the GRAT, plus a rate of interest established by the IRS (currently 1.2% for June 2012). At the end of the term of the GRAT, any appreciation on the FLP interest in excess of the specified interest rate would be distributed free of gift and estate tax to the grantors designated family members or trusts for their benefit. Avoiding IRS Challenges on FLP Discounts Over the years the IRS has repeatedly and often successfully challenged the use of FLPs in estate planning. Specifically, the IRS has attempted to reduce or eliminate the valuation discounts taken by taxpayers on the transfer of FLP interests reported on estate and gift tax returns. If the valuation discounts are ignored, the client would be treated as if he or she had transferred the full fair market value of the underlying FLP assets (in the case of a gift or sale of the FLP units) or as if he or she had died owning the underlying assets of the FLP, rather than the FLP interest itself. Fortunately for those who wish to use FLPs in their own estate planning, there are a number of cases and IRS rulings that provide a
One may also transfer all or a portion of his or her FLP interest to a special trust called a Grantor Retained Annuity Trust
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CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
roadmap for establishing and operating an FLP to best protect the structure from an IRS challenge. One should be prepared to do the following: 1. Establish a Legitimate and Significant Nontax Reason for Forming the FLP
One should have legitimate and significant nontax reasons for forming the FLP other than reducing taxes by discounting asset values. For example, obtaining the creditor protection of the limited partnership entity can be a valid and significant nontax reason for transferring an asset into an FLP. Other possible nontax reasons include: 1) allowing for the joint management of family investment assets, 2) allowing for gifts of partnership interests to family members rather than fractionalized interests in the underlying FLP assets, 3) providing for a single pool of assets that would allow the partners access to other investment opportunities that would not otherwise be available to them, 4)providing a mechanism to resolve disputes among the various family members relating to the FLP property, and 5)continuing to keep ownership of the FLP assets within the family by restricting the rights of non-family members to the assets. 2. Observe Partnership Formalities
or automobiles, should not be transferred. The IRS has been successful in invalidating FLPs in numerous cases where the donor/decedent operated the FLP as his or her personal checkbook, as if the assets were still owned by the donor/ decedent in his or her own name. Neither should the client remain in control of the FLP as its general partner without full knowledge and understanding that the IRS could seek to pull back into the clients taxable estate the full value of the FLP interests gifted or sold, notwithstanding such gift or sale, by virtue of such retained control. Conclusion If one closely follows the rules of forming, funding and operating an FLP, the FLP can be a viable and effective estate planning strategy. Anyone considering the FLP strategy should consult with his or her professional advisors, including estate planning counsel experienced in the use of FLPs.
One should treat the partnership as an actual business. If basic partnership formalities are not followed, the IRS may not respect the partnership as a legitimate business entity. Separate books and records for the FLP should be kept. Required state filing should be made on time. A separate bank account for the FLP should be established, and partnership assets should not be commingled with assets of any partner. The partners should attend regular meetings and minutes of those meetings should be recorded. Decisions regarding the management of the FLP assets should be made by the general partner only. Distributions to partners should be made in accordance with the terms of the FLP agreement and in the same proportionate interest as the partners ownership in the FLP. 3. Forego Unrestricted Control and Access of Assets Transferred to FLP Article contributed by Robert Strauss and Jeffrey Geida the law firm of Weinstock, Manion, Reisman, Shore, & Neumann. For over 50 years, the law firm of Weinstock, Manion, Reisman, Shore & Neumann, a Law Corporation, has provided assistance and counsel in the areas of estate planning, probate and trust administration, general business and corporate law, taxation, real estate, trust and estate, and litigation..
One should not transfer substantially all of his or her assets to the FLP, nor should the client have the need for the income of the FLP to pay his or her current or future liabilities (including anticipated estate and gift taxes). The client should retain enough assets outside of the FLP to support his or her standard of living independent of any potential income from the FLP. The client should only transfer investment or business assets to the FLP. Personal use assets, such as personal residences
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
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Utilizing the Increased Exemption with a Spousal Lifetime Access Trust (SLAT)
While many high net-worth married couples may like to take advantage of the gift tax exemption this year ($5.12M per individual or $10.24M per married couple), they may be reluctant to do so because they lose access to the gifted propertys income and principal. A Spousal Lifetime Access Trust (SLAT) may help accomplish the goal of utilizing the increased exemption amount while retaining certain income and principal rights from the trust. In general terms, a SLAT is an irrevocable trust set up by one spouse for the benefit of the other spouse/children/ grandchildren/other beneficiaries. For example, assume a husband creates a SLAT for the benefit of his wife and funds it with his $5.12M gift tax exemption and also allocates his Generation Skipping Transfer (GST) exemption to the gift. During the wifes lifetime, the Trustee (who may be the wife, but it is suggested to have a non-spouse serve as a Co-Trustee) can distribute to the wife, income and principal as needed for her health, education, maintenance and support. The wife can also be given the power to withdraw the greater of $5,000 or 5% of the trust principal annually, and a testamentary limited power of appointment to rewrite the trust provisions upon her death. When the wife passes away, the unappointed trust property (including the appreciation thereon) passes
estate tax free to the children or possibly even more remote descendants depending on state law. An added benefit of a SLAT is that it can protect the beneficiaries from creditors, including ex-spouses. Caveats include that upon the wifes death, the husband loses his indirect access to the trusts income and principal. One solution to this problem is to have the wife create an Irrevocable Life Insurance Trust (ILIT), for the benefit of her husband. The ILIT could be funded to purchase a life insurance policy on the wifes life to replace the wealth lost to the husband in the SLAT (in the event he survives his wife). If necessary, the SLAT can loan the ILIT the funds needed to pay premiums under a split-dollar arrangement. Additionally, in the event of a divorce, the husband would lose access to the trust income and principal. The question often comes up as to whether a married couple can both create SLATs (and ILITs) for the benefit of each other so as to increase the gift to $10.24M. Although possible, the IRS could look through the transactions and apply the reciprocal trust doctrine. That doctrine assumes that each spouse established a trust for his/her own benefit, thus resulting in estate inclusion for each spouse of the trust property. Accordingly, the trusts must be drafted differently. Estate Planning counsel can review the ways in which the trusts can be drafted different enough so as to help avoid estate inclusion of those assets.
SLAT Diagram
$5,120,000
Wife
SLAT
SLAT
$5,120,000
Husband
Husband
Wife
Children
Children
Grandchildren
Grandchildren
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CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
donees basis is the fair market value of the property at the time of gift. For purposes of determining gain, the donees basis is the adjusted basis in the hands of the donor. For example, Mom purchased a share of stock for $100. The stock has since dropped in value to $80. Mom now gifts the stock to Daughter. If Daughter were to sell the stock for $70, she would have a loss of $10 because she must use the fair market value at the time of the gift as her basis to calculate the loss. On the other hand, if Daughter were to sell the stock for $130, then she would have a gain of $30 because she must use Moms adjusted basis as her basis to calculate the gain. If the sale price falls between the donors basis and fair market value at the time of gift, then there is no gain or loss realized. Therefore, it is generally recommended that the donor in this case sell the property to recognize the loss and then make a gift of the sale proceeds to the donee. In regard to large gifts, clients often choose to utilize a trust structure (as opposed to outright gifts) for flexibility, tax efficiency and asset protection. A trust is a separate legal entity and often a separate taxpayer. Therefore, the same rules discussed above apply when determining the basis of the gifted property in the hands of the trust. In the case of a grantor trust, the trust is disregarded and the trust and the grantor are considered the same entity for income taxes purposes. Therefore, the basis of the property remains unchanged. Similarly, if the grantor were to sell property to the grantor trust, there would be no realization of gain or loss and the basis of the property sold remains unchanged. This is a great year for clients to make gifts due to the favorable tax environment. Clients with depreciated assets might take advantage of this opportunity to gift such assets to their children to maximize the use of their increased lifetime gift tax exemption. An understanding of the basis rules is important to the future generation as they contemplate investment options.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
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slated to take place, but made applicable only to the higher income earners (households with greater than $250,000 adjusted gross income). The budget favors a top rate of 39.6%, long term capital gains at 20%, and qualified dividends taxed at ordinary income rates. The Presidents proposal limits itemized deductions to 28%, which for a taxpayer in the 39.6% bracket represents a potential 11.6% rate differential on the value of itemized deductions (such as mortgage interest or charitable contributions). The estate tax and gift tax rates however, would revert to 2009 levels, which allow for a $3.5M estate and GST tax exemption, $1M gift tax exemption and 45% rate. 4. Mitt Romney
We are well into 2012, and it is unlikely we will see significant changes in tax laws affecting clients this year. Much of this years rates are a result of extensions passed in 2010, and it is unlikely to see a two-year extension cut short during an election year. It is also unlikely that there would be enough time after the elections to implement significant changes, and from a practical sense, it would be easier to focus on all of the changes in 2013 or beyond. The maximum ordinary income tax rates are at 35%, long term capital gains and qualified dividends remain at 15%, and an increased estate, gift, and GST exemption at $5.12M at a 35% rate. All of the preceding rates and limits are set to expire December 31, 2012. 2. As Legislated for 2013
GOP Candidate Mitt Romney favors lower income taxes, repealing the AMT (Alternative Minimum Tax) and repealing estate tax. No mention is made with regard to what would happen to the gift tax. His campaign proposals include lowering all income tax brackets by 20% from current levels so that the top ordinary tax rate would be 28%. Long term capital gains and dividends for higher income earners would remain the same as today at 15%. Investment income would be exempt from tax for married households earning less than $200,000. 5. 2013 Outlook
The 2012 tax rates are indirectly a result of President Bushs tax packages passed in 2001 and 2003. The laws enacted lowered tax rates, but on an initial limited time period. As 2010 approached, rather than reform the tax code, Congress passed a mix of 2-year income tax extensions and temporarily modified the estate/gift tax laws. As we near the end of the 2-year extension period, without further Congressional action, we will effectively revert to 2001 tax laws with a few modifications. Namely, top ordinary income tax rates will revert to 39.6%, long term capital gain rates will revert to 20%, and all dividends (including qualified dividends) will be taxed as ordinary income. A new tax, the Medicare surtax, is 3.8% on net investment income, which effectively makes capital gains on larger transactions 23.8%. In addition, the estate and gift tax exemption will revert from the current $5.12M to $1M, with a 55% rate. 3. President Obamas 2013 Budget/Proposals
Given the polls, many experts predict we will continue to have a divided government; the Republicans may keep control of the House and may take control of the Senate, and President Obama may be re-elected. Many experts also predict tax rates for upper income earners will rise, at least until a more comprehensive tax overhaul can be addressed in 2013 or 2014. Again, there is also a possibility that the current laws will be extended for one additional year, in order for a more thorough legislative package to be executed.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
As Currently Legislated
Allow 39.6% and 36% brackets to return for incomes over $250,000 (married filers)
20% capital gains, ordinary income on dividends for higher income earners
Mitt Romney
0% capital gains, dividends, and interest for married filers earning less than $200,000; 15% capital gains and dividends for higher income earners
Repeal AMT
Sources:
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
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GST Tax Rate Estate and GST Tax Exemption Lifetime Gift Exemption Annual Gift Exclusion Basis
35% $5MM
35% $5.12MM*
55% $1MM (GST exemption subject to inflation adjustment) $1MM $13,000 (subject to inflation adjustment) Full step-up in basis
$1MM $13,000 Step-up of $1.3MM (additional $3MM step-up to surviving spouse). Carryover basis for remainder of assets
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CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
Case Study #1
Reduce Taxable Estate by Transferring ExistingPolicies
An individually-owned policy that was originally issued in 1995 and required annual premiums of $71,000 was reviewed by our team. At the time, the insured(s) ages were 73 and 67, the policy had a cash surrender value of $1.05M and a death benefit of $20M. The audit revealed that at the then current interest crediting rate, the policy would lapse at ages 86 and 80 a terribleresult. Utilizing a portion of their increased gift tax exemption (the policyholders had already used their previous gift tax exemptions of $1M each), the policyholders were able to transfer the policy and cash sufficient to fund the policy to age 120 to a newly formed irrevocable trust for the benefit of their children gift tax-free. Importantly, the policy proceeds will not be subject to estate tax assuming that both insureds survive for 3 years after the transfer.
Before the $5.12M gift tax exemption was available, the only way to purchase life insurance within an irrevocable trust without incurring additional gift tax for those who had already utilized their previous exemption amount was to utilize complicated techniques that had the effect of minimizing the amount of premiums that could be paid into a policy each year, minimizing the amount of death benefit that could be purchased and stretching the funding over a long period of time. With the increased exemption amount, high net-worth individuals have an opportunity in 2012 to pre-pay or fully fund insurance policies with face amounts large enough to satisfy expected estate tax liabilities.
Case Study #2
Fully Fund Policies to Provide Estate TaxLiquidity
A 50 year old couple had a $100M estate, most of which was generated through the sale of a closely-held business. Even with nominal growth of the estate, the couple anticipated a future estate tax liability of at least$50M. Using the current exemption amount, the couple was able to transfer approximately $3M (or approximately 3% of their net worth) into trust tax-free, which was then used to pay a single premium on a $50M survivorship contract. As a result, the couple was able to ensure a replacement for the wealth they expected to lose to estate taxes in exchange for a relatively small portion of their current net worth. Without the increased exemption amount, this strategy would have required an additional outlay in gift taxes of over $1M.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
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Case Study #3
Fully Fund Policies to Guarantee Inheritance
A couple, ages 65 and 60, were concerned that although they had a significant estate of $50M, a long life, poor investment performance or unexpected medical expenses could leave them unable to provide an inheritance to their children. As a result, they were unwilling to engage in a lifestyle that they otherwise could afford. The increased exemption amount available to this couple in 2012 was successfully used to fully fund a guaranteed inheritance for their children by purchasing a $10M no lapse guarantee survivorship life insurance contract through a one-time tax-free gift of $1.6M into a trust. Purchasing insurance with guarantees allowed for greater peace of mind for the couple knowing that an inheritance would be available to their families without the risks of extenuating factors.
A common challenge of families with significant assets is balancing philanthropy and the appropriate level of inheritance for future generations. Life insurance has been used for years to address this challenge in the form of the zero estate tax plan, the object of which is to avoid all taxes at death. This is accomplished by the purchase of a specific amount of life insurance for the benefit of children and other family and a specific bequest of the entire taxable estate to charity often a family foundation.
Case Study #4
Zero Estate Tax Plan
A couple with three children was strongly motivated to provide for charity and also wanted to ensure their children were taken care of upon the surviving spouses death. Though they had a net worth of approximately $100M and were capable of accomplishing both objectives, they realized that by avoiding estate taxes, they would be able to provide significantly more to charity. As a result, they were able to utilize $5M of their exemption to provide a tax-free gift into a trust and purchase a $10M policy for the benefit of their children. At the same time, their estate planning documents were revised to ensure that the entirety of their taxable estate was to pass to a private foundation managed by their children.
As the case studies above illustrate, the use of life insurance to utilize an individuals $5.12M exemption amount in 2012 can be a powerful and effective way to accomplish both tax and non-tax planning goals. Considering all of the above, it is important to perform a life insurance audit before the end of the year to determine if your existing coverage is structured to take advantage of this years unique gifting opportunity and to assess whether additional life insurance planning is necessary.
Article contributed by John Meisenbach, founder and CEO of MCM. Since 1961, MCM has partnered with organizations and high net-worth individuals to develop and implement long-term strategic solutions to meet personal and business goals. MCM provides objective consulting across multiple business lines, delivering expertise in insurance advisory, employee benefits, executive benefits, retirement plans, and property and casualty.
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CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
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Staff and Business Processes Create Vulnerabilities On the go families rely on their staff for variety of services, from routine chores to extended travel support to reconciling financial transactions. These kinds of services often have an online component that can ease complexity or increase the business flexibility for the family. As the use of these services increases, the desire for even greater speed and convenience may lead to inadvertent information disclosure since each service provider hosts a small portion of your family picture. It is important that the family office consistently conceal the identity of its principals where ever possible when establishing or using internet conveniences (dry cleaning, ticket booking, limousine service, etc.). Staff should be trained in this requirement, and the relevant family office business policy should be periodically audited.
Vulnerabilities can be exploited in a number of ways. Family offices which permit employees to use their own devices to conduct family business apart from voice calls, or to be responsible for managing the configuration of family issued mobile PCs and phones are further at risk. This is because high net-worth families can be specifically targeted for internet enabled fraud schemes. Spear phishing, or the application of highly tailored fraudulent communications, can appear to come from trusted members of the family network and can be hard to detect, especially by staff members who do not have first-hand acquaintance with the misrepresented person or company. Mitigating online, targeted fraud requires family and staff education. All staff and adult family members should have a basic understanding of how common fraud schemes work. Fundamental online hygiene should be taught and followed, from avoiding certain categories of websites, (gambling, adult sites and related sites) to never clicking on links sent via email. When in doubt, it is much safer to call or text your contact to see if the linked information is legitimate. All of the internet devices used by staff and family should have up to date protections, and include precautions such as screen locks, remote tracking and data destruction capabilities (in the event of loss). Balance Access and Protection Every family is different, and there is no one size fits all solution. This article, intended for the principals and family office managers, is intended to plainly communicate some risks relating to cyber security. However, the benefits and pleasures of online interaction are valuable, so each family and office can find their uniquely tailored answer. As Evgeny Kaspersky, father of the kidnapped teen, said after his son was recovered, find ways to minimize risks instead of prompting minors to ignore guidelines Make your kids play the privacy game and be proud of protecting their family and their future.
4. 5.
6.
7. 8. 9.
10. Online risks are here to stay make your response flexible but sustainable.
Article contributed by Michael Massa of Torchstone Global. Michael consults for Torchstone Global, which discreetly serves world leading individuals, families and organizations with end-to-end risk avoidance solutions. TorchStone provides strategic security advisory services to the worldwide affluent community. For more information, please visit www.torchstoneglobal.com
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CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors.
Bill Woodson Banking and Investment Group and oversaw an Merrill Lynchs Private integrated investment advisory practice for ultra-high net worth families Managing worth from $25 million toPlanningPrior to joining Merrill Director, Wealth $2 billion. Group ranging in net Lynch, 345-6840 (312)Bill was one of the first ten employees at myCFO, an integrated wealth management and technology firm started by Jim Clark (Netscape) bill.woodson@credit-suisse.com and John Chambers (Cisco Systems). At myCFO, Bill ran one of the
Bill came to Credit Suisse from Merrill Lynch where he was a member of
West
firms largest multi-family, family office practices and served as the CFO for myCFO Securities, LLC. Bill also worked as the head of a large multi-national family office with 40 employees and offices in Hong Kong, Vancouver and San Francisco. Bill began his career as a CPA at Arthur Andersen, where he spent a decade providing domestic and international tax advice to wealthy executives, families and business owners. Bill has a masters degree in accounting from New York Universitys Stern Graduate School of Business and a bachelors degree in economics from the University of California, Irvine. He is a frequent lecturer on wealth management and has published a number of articles on the subject. Bill co-founded and is a past president of First Graduate, a mentoring charity that helps young people finish high school and become the first in their families to graduate from college. He also served on the board of The Fulfillment Fund, a college access program for inner-city school children. Bill is a current or past member of the American Institute of Certified Public Accountants (AICPA), the Hoover Institution at Stanford University, the San Francisco and Chicago Estate Planning Councils, the Woodside School Foundation, the Investment Management Consultants Association, and Beta Gamma Sigma (the national honor society for graduate business schools).
Latin America
Alpa Panchal Mark Peterson Head, Western Region (415) 249-2203 The Private Banking USA business in Credit Suisse Securities (USA) LLC is a regulated broker-dealer and investment adviser. It is not a chartered bank, trust company or depository (415) not authorized to accept mark.peterson@credit-suisse.com institution. It is 249-2212 deposits or provide corporate trust services and it is not licensed or regulated by any state or federal banking authority. alpa.panchal@credit-suisse.com
Lisa Drabicki
Emily L. Yetter
Central
Sam Petrucci
Emily L. Yetter is a Vice President in Credit Suisses Family Wealth Lisa Drabicki is a Vice President in Credit Suisse's Family WealthCenter for Wealth Planning groups within Private Management and Management and Center for Wealth Planning groups withinUSA. Private As a Family CFO within Family Wealth Banking Banking USA located in the Chicago office. As a Family CFO within Management, a multi-family office group, Emily works with ultraFamily Wealth Management, a multi-family office group, Lisa works with families to coordinate financial, estate, tax, high net worth ultra-high net worth families to coordinate financial, estate, tax, insurance insurance and investment planning. Emily facilitates her clients and investment planning. She works closely with clients outside tax philanthropic endeavors including administration of family professionals and attorneys. Lisa also serves as a Wealth Strategist foundations. Emily also serves as a Wealth Strategist within the within the Wealth Planning Group where she collaborates with Credit Wealth Planning group where she collaborates with the Suisse Relationship Managers in providing customized and confidential Relationship Managers in providing customized and confidential financial reviews and solutions to prospective and existing clients. financial reviews and solutions to prospective and existing clients. Emily is based in the PRIVATE BA Lisa started her career at Deloitte and Touche providing financial planning Chicago office of Credit Suisse. PRIVATE BANKING USA and tax services to PRIVATE BANKING USA high net worth individuals. Prior to joining Credit Emily ultra-high net began her career with Frye Louis Capital Management, Inc. Suisse, Lisa was a manager at RSM McGladrey advising in 1999. Frye tax worth individuals, families andYetter owners on estate and incomeLouis was purchased by Credit Suisse in 2001 and Jason Cain Lisa Drabicki Emily business merged into Credit Suisse Securities (USA) LLC in January of planning and compliance. 2006. Head, Central Region (312) 345-6811 (312) 345-6817 Lisa is a Certified Public Accountant. She received her Bachelor of (312) 345-6822 lisa.drabicki@credit-suisse.comdegree in Accounting and Master of Science in Taxation CERTIFIED FINANCIAL PLANNER. She received her emily.yetter@credit-suisse.com a from the Emily is Science Bachelor of Arts degree from St. Olaf College and her MBA from University of Illinois. Lisa is also a current member of the American jason.cain@credit-suisse.com DePaul University. Institute of Certified Public Accountants (AICPA) and the Illinois CPA Emily is a current member of the Financial Planning Association and the Credit Suisse Americas Womens Society. Network, a cross-divisional network of Credit Suisse employees dedicated to developing careers through educational and relationship opportunities. Sam began his career at Donaldson, Lufkin and Jenrette in 1999
East
Julia Chu
Alvina H. Lo
Julia between Alvina Lo is a Vice and joined Credit Suisse in 2000 as a result of the mergerjoins Credit Suisse from UBS where she served as a wealth President in Credit Suisses Center for W strategist for the Planning where she the two firms. He is a Director in the Wealth Planning Group Advanced Planning Group. As a resident tax and specializes in estate planning, charitab planning, client estate planning where his specialty is advising ultra high net-worth individuals in subject matter expert, she supported key and related tax and fiduciary matters for high net w individuals. Alvina five key areas: estate planning, income tax planning,relationships with a focus on philanthropy, tax-exempt organization joined Credit Suisse in August 2009 from life insurance, Tweed Hadley & McCloy, LLP where she was an associate philanthropy and wealth education. planning and art succession planning.
He holds a B.A. from the University of Pittsburgh, previously served at the National Endowment for the Arts, the Consulting and Scient Corporation. consulting for Deloitte She J.D. from Widener Law School and LL.M. in Taxation from Villanova Law Foundations Relations office of New York University School of Law, School. Alvina holds a Bachelors of Science from the University of V
Technology. She currently serves City Bar Sam has been featured in the New York Times, quoted in the Wall Private Banking USA business in Crediton the New Yorkregulated broker-dealer and investment adviser. It isUniversity of Pennsylvania, whe magna cum laude, from the not a chartered bank, trust company or depository The Suisse Securities (USA) LLC is a Committee of institution. It is not and to accept deposits or provide corporate Brooklyn not licensed or Street Journal and Financial Times, presented before a number on Art Lawauthorized on the board of thetrust services and it isArts of regulatedUniversity of Pennsylvania Law Revie was a member the by any state or federal banking authority. professional organizationsUSA business in Credit Suisse Securities (USA) Council. Julia receivedLo LL.M. in Taxation from NYU School of the broker-dealer and investment adviser. Order of the Julia and written several articles onregulatedtopic Alvina her It is not a chartered bank, trust company or depository Coif. The Private BankingChu LLC is a institution. trust services and is not licensed or regulated by any state or federal banking authority. of estate planning. It is not authorized to accept deposits or provide corporateLaw, J.D. itfrom Boston University and B.A. from Cornell University.
and the Planned Giving office of the Fashion Institute of where she was a Thomas Jefferson Scholar. She received
(212) 538-5734 (212) 325-8488 Alvina is a published author on estate planning matters and julia.chu@credit-suisse.comPrevious publications include: Managing CLAT Investments, What alvina.lo@credit-suisse.com lectured at the American Bar Association and New York City
trustees need to know to effectively and responsibly overseeof the Estate and Gift Tax Committee of the Ne is a member City Bar. She is charitable lead annuity trusts, (Trusts & Estates, January 2011). a member of the New York and New Jerse bars. Alvina is bilingual and speaks fluent Chinese-Cantone fundamental Chinese-Mandarin. CSSU does not provide legal or tax advice. Please consult with your legal or tax advisors. 21
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