tax-exempt planning

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


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


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


Issues to Consider When Funding A CRT with Investment Real Estate

• Clear title

• Marketability

• Environmental hazards

• Maintenance

• Pre-arranged sales

• Debt

• Type of CRT


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?


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


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?


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


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


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


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


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)


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


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


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


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


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


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


THANK YOU

We sincerely appreciate the time you have given us today!

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