the train is leaving the station estate planning in 2012 october 10, 2012 william l. montague...
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The Train is Leaving the Station Estate Planning in 2012 October 10, 2012 William L. Montague Frost Brown Todd LLC [email protected]. 3300 Great American Tower 301 East Fourth Street Cincinnati, Ohio 45202 (513) 651-6920. 7310 Turfway Road Suite 210 Florence, Kentucky 41042 - PowerPoint PPT PresentationTRANSCRIPT
The Train is Leaving the Station Estate Planning in 2012
October 10, 2012William L. Montague
Frost Brown Todd [email protected]
3300 Great American Tower301 East Fourth StreetCincinnati, Ohio 45202(513) 651-6920
7310 Turfway RoadSuite 210
Florence, Kentucky 41042(859) 517-5920
William L. Montague is a member of the Cincinnati and Northern Kentucky law firm of Frost Brown Todd LLC, where his practice is concentrated in estate, business and estate planning, charitable giving and estate administration. He received his B.A. degree, magna cum laude, from Wittenberg University and his J.D. degree from the University of Cincinnati College of Law. Mr. Montague has co-authored several articles and is a frequent speaker on the topics of estate planning, estate administration and taxation. He has been repeatedly recognized as a Best Lawyer in America and Ohio Super Lawyer.
Historic Time PeriodNext 3 Months
Gift Tax Exemption - $5,120,000 sheltered from gift tax ($10,240,000 for a married couple) for gifts in 2012
Depressed Asset Values – The values of many assets, including marketable securities, business interests and real estate, remain low in many cases
Historically low interest rates For loans, the interest rate for a 9 year loan in
October 2012 is .93% For other transactions such as GRATs and
CLATs, the interest rate for October 2012 is 1.2%
Take Advantage of Larger Gift Tax
ExemptionNext 3 Months
Direct Gifts to Children – simple, but not as much protection for the children
Direct Gift to Irrevocable Trust for Children– Protects the gifted assets from estate taxation at the children’s deaths, from the children’s creditors, and from the divorce of a child. Can also provide asset management, if needed
Direct Gift by One Spouse to Irrevocable Trust for Other Spouse and Children – Provides same protections for children, but provides the additional benefit of making assets available to the other spouse if living needs require in the future
Take Advantage of Larger Gift Tax
ExemptionNext 3 Months
Leveraged Gift to Irrevocable Trust for Children– Protects the gifted assets from estate taxation at the children’s deaths, from the children’s creditors, and from the divorce of a child. Can also provide asset management, if needed
Leveraged Gift by One Spouse to Irrevocable Trust for Other Spouse and Children – Provides same protections for children, but provides the additional benefit of making assets available to the other spouse if living needs require in the future
Take Advantage of Low Interest Rates
Next 3 Months Direct Loan to Children – simple, but
not as much protection for the children Direct Loan to Irrevocable Trust
for Children– Protects the gifted assets from estate taxation at the children’s deaths, from the children’s creditors, and from the divorce of a child. Can also provide asset management, if needed
Direct Loan by One Spouse to Irrevocable Trust for Other Spouse and Children – Provides same protections for children, but provides the additional benefit of making assets available to the other spouse if living needs require in the future
Loan to Lifetime
Trust
Loan to Lifetime TrustStep 1: Set up Irrevocable Trust
and Fund it with Cash
Husband & Wife
Irrevocable Trust
$100,000cash
Loan to Lifetime TrustStep 2: Apply Generation Skipping Exemption on Gift
Tax Return
Husband & Wife
Irrevocable Trust
$100,000GST Exemption
Loan to Lifetime TrustStep 3: Loan Money to Irrevocable Trust
Husband & Wife
Irrevocable Trust
$900,000loan
(9 years at .93% interest)
Loan to Lifetime TrustStep 4: Pay Loan Back at End of 9 Years
Husband & Wife
Irrevocable Trust
Original assets $1,000,000 Growth* $740,000
Loan payoff in year 9 ($900,000) Value of Trust in Year 9 $840,000
Payoff of loan$900,000
*Assumes 7% annual total return on investment and annual interest payments of .93%
Leveraged Gift to
Lifetime Trust
Installment Sale to Grantor TrustOriginal Scenario
SteveXYZ
Manufacturing $15,000,000
100 shares100% ownership
$1,200,000 annual distribution
Installment Sale to Grantor Trust
Creation and Funding of Irrevocable Trust
Steve Irrevocable Trust
XYZ Manufacturing
Sale of 50 nonvotingshares ($5,250,000)with 30% discount)
Gift of $600,000 cash
$500,000 in cash and$4,750,000 promissory note
95 nonvoting shares($14,250,000)
5 voting shares($750,000)
3
2
1
Cash Flow(Year 1)
IrrevocableTrust Steve
XYZManufacturing
50% of profitdistributions($600,000) 50% of profit
distributions($600,000)
$600,000note payment
IRS Taxes($526,000)
Installment Sale to Grantor Trust
LifeInsurance
premiumpayments
Installment Sale to Grantor TrustStep Four: Sale of XYZ Manufacturing in 2017 for $30,000,000
Steve Irrevocable Trust
XYZManufacturin
gCash $30,000,000
$882,000promissory
notebalance
50 nonvoting shares
management control
BuyerBuyer assets
Cash $30,000,000
Installment Sale to Grantor TrustStep Five: Distribution of Sale Proceeds
SteveIrrevocabl
e TrustCash $15,000,000
XYZManufacturin
gCash $30,000,000
$882,000promissory
note
50 nonvoting shares
management control
$15,000,000cash distribution 50 voting and
nonvoting shares
$15,000,000cash distribution
After Sale of XYZ ManufacturingOption 1: No Reimbursement for Income
Taxes
IrrevocableTrust
Sales proceeds $15,000,000Payoff of Note ($882,000)
Net proceeds $14,118,000
SteveSales proceeds $15,000,000Note payment $882,000
Income taxes ($7,500,000)Net proceeds $8,382,000
IRS
Installment Sale to Grantor Trust
$882,000promissory
notepayoff
$7,500,000tax
payment
After Sale of XYZ ManufacturingOption 2: Reimbursement for Income Taxes
IrrevocableTrust
Sales proceeds $15,000,000
Tax reimbursement ($3,750,000)Payoff of Note ($882,000)
Net proceeds $10,368,000
SteveSales proceeds $15,000,000Tax reimbursement $3,750,000Note payment $882,000
Income taxes ($7,500,000)Net proceeds $12,132,000
IRS
Installment Sale to Grantor Trust
$882,000promissory
notepayoff
$7,500,000tax
payment
$3,750,000tax
reimbursement
Installment Sale to Grantor TrustBottom Line
$14,118,000* is sheltered from estate tax inside the Irrevocable
Trust at a gift tax cost of $600,000, which is leverage of
more than 23 to 1!
*Assumes Steve will not request reimbursement for income taxes paid on behalf of Irrevocable Trust.
Installment Sale to Grantor Trust
Step One: Recapitalize company into voting and nonvoting shares
Step Two: Seed the irrevocable trust with gifted assets so that the purchaser of nonvoting stock will be a “creditworthy” purchaser
Step Three: Steve sells nonvoting stock to the Irrevocable Trust, free of capital gain taxes, in exchange for an installment promissory note
Step Four: Make note payments back to Steve with cash flow generated by corporate distributions paid to the Irrevocable Trust
Installment Sale to Grantor Trust
Issue #1: The only taxable gift is the gift of the seed money. The sale portion of the transaction is an arms length transfer, and is not subject to gift tax or generation skipping tax.
Issue #2: Be sure that the term of the note is not excessive, or the IRS could argue that the transfer is with a retained life interest. If the note is paid off prior to death, nothing gets reported on an estate tax return
Issue #3: As is the case with all large gifts, valuation is critical!!
Installment Sale to Grantor Trust
Advantages No gain recognized by grantor on sale Payment of income taxes by grantor rather
than by irrevocable trust (reducing the size of grantor’s estate)
Favorable interest rates Payment flexibility / refinancing Protected from estate taxation in multiple
generations Partial disclosure on gift tax return / no
disclosure on income tax return
Installment Sale to Grantor Trust
IRS attack in Karamazin It is preferable to have the trust own
assets other than interests in the entity being sold
If personal guarantees would be required by a commercial lender, they should be used here
There should be sufficient entity income to assure repayment of the note