2011 IJO Protecting And Transferring The Family Jewels

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IJO Presentation in Colorado Springs

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  • This is the cover slide. This slide must always appear first, no edits can be made to it.
  • Use this slide for a two line headline with one author and a headshot to place.
  • Overview of Act Passed during the Lame Duck Session before Congress went on its holiday break. Act extends Bush Era Income Tax Rates Extended
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  • 1.  
  • 2. Protecting and Transferring the Family Jewels Brian T. Whitlock, CPA, JD, LLM
  • 3. Overview
    • Identify your Risks
      • Business Risks
      • Personal Risks
    • Protect Yourself and Your Loved Ones
    • Minimize Taxes and Administration Expenses
    • Transfer your Business
    • Transfer Financial Assets
  • 4.
    • Employee Theft
    • Customer Theft
    • Fire or Business interruption
    • Economic Risk
    Identify your Business Risks
  • 5.
    • Economic Risk
      • Diversification of Investments
      • Diversification of Operations
        • (Wholesale, Retail, Pawn, Service, Repair)
    • Employee Theft
      • Opportunity
      • Incentive
        • (Alcohol/Drugs, Infidelity, Gambling, Medical)
      • Rationalization
    Protection from Business Risk
  • 6.
    • Business Insurance
      • Theft
      • Flood & Fire - Business Interruption
      • Key Person Life/Disability Insurance
      • Workman’s Compensation Insurance
    Protection from Business Risk
  • 7.
    • Shield from Business Liability (Creditors)
      • Sole Proprietorship and General Partners
        • All Personal Assets exposed
        • No shield or limit on liability
      • Limited Partnership
        • Only General Partner exposed
        • Silent partners losses are limit to assets inside Limited Partnership
      • Corporation vs. Limited Liability Company
        • Must respect formalities of entity
        • Liability limited to assets inside corporation
        • Beware of Personal Guarantees
    Protection from Business Risk
  • 8.
    • Priority of Creditors
      • Secured
        • (Mortgage against Real Estate)
        • (UCC against assets)
      • IRS and State Department of Revenue
        • (Trust fund liability for payroll taxes and sales taxes)
      • Personal Guarantee
      • Unsecured Creditors
    Protection from Business Risk
  • 9.
    • Property and Casualty
      • Auto
      • Fire
      • Slander/Libel
    • Personal
      • Medical Health
      • Death
      • Disability
    • Divorce
    Identify your Personal Risks
  • 10.
    • Insurance
      • Personal (Health, Disability, Life, Long Term Care)
      • Property (Auto, Home, Umbrella)
    • Statutorily Protected Assets
      • Homestead Property (e.g., Florida, Texas)
      • Tenants by the Entirety
      • Qualified Plans (pension, IRA, ROTH IRA, etc.)
      • Annuities and Life Insurance
    Personal Asset Protection
  • 11.
    • “ They can’t take what you don’t have”
      • When is it too late to transfer?
        • Preferential payments in Bankruptcy can be unwound
        • State Law – Generally transfers within 180 days
        • Clawback provisions (“Madoff”)
        • Courts can unwind transfers made to “Defraud Creditors”
      • Before there is a problem
        • Estate Planning Reasons
    Personal Asset Protection
  • 12. 2010 Tax Relief Act – Transfer Tax Highlights
    • Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (P.L. 111-312)
    • Signed by President Obama on December 17, 2010
    • Changes options for deaths occurring in 2010
    • Reunifies the estate and gift tax credit beginning in 2011
    • $5 million exemption for deaths occurring in 2011 and 2012
    • Indexes Gift, Estate and GST exemptions for inflation after 2011
    • Sets top estate and gift tax rate at 35% (2010 through 2012)
    • Sunset - January 1, 2013
  • 13. Unused Credit of Spouse is “Portable”
    • Timely Election required
    • “ A deceased spousal unused exclusion amount may not be taken into account by a surviving spouse… unless the executor of the estate of the deceased spouse files an estate tax return on which such amount is computed and makes an election on such return that such amount may be so taken into account”.
    • Return must be filed at the time prescribed by law (including extensions).
    • The election, once made, shall be irrevocable .
    • If multiple spouses, credit limited to lesser of $5 million or unused credit of last spouse to die regardless of election
    • QUERY: What happens after Sunset?
  • 14. Planning Recommendations
    • Revise Wills and Trusts
      • Not Mandatory (traditional A-B works under new law)
        • Separate trusts may be beneficial for GST
      • Watch out for State Tax exemptions, decoupled states
    • Use it or Lose it
      • $5 Million Credit equivalent for 2011 and 2012
      • May not be extended
      • Keys: Choose assets wisely
        • use High basis assets
        • Gift most likely to appreciate
        • Transfer value Keep Control
  • 15. The Family Safety Net (Things you MUST DO)
    • Revocable Living Trusts
      • Minimize the Exposure to Probate
      • Maximize use of $5 million Credit Shelter at Death
        • Separate Trusts in Common Law States will work better
        • Single Trust can work in Community Property States
    • Pour-Over Wills
      • Probate May be Necessary or Advisable
    • Durable Power of Attorney for Health Care
      • Durable Power of Attorney for Property (Possible abuse?)
    • Irrevocable Life Insurance Trust
      • Protect Life Insurance Proceeds from Death Tax
  • 16. Irrevocable Life Insurance Trust
    • Ironies of Insurance
      • Large Dollar Value at Death
      • Small Value During Life
    • Death Benefit is Income Tax Free
    • Death Benefit is Estate Tax Free
      • Without “incidents of ownership”
    • Clifford Crummey Keeps Control
      • Use of Trust to keep Control
      • Problem: Only “Present interest” Gifts count for tax-free $13,000 gifts
  • 17. Remember “ You Ain’t Dead Yet!” Irving L. Blackman CPA, JD What are your Objectives? (Things you Might Do)
  • 18. Transferring your Business “What are your Objectives?”
    • Secure Stream of Income
      • For Life
      • For Life of Spouse/Life Partner
    • Transfer of Business
      • To Family Member
      • To Business Partner or Key Employee
      • To Unrelated Third Party
    • Minimize Taxes
  • 19. Transferring the Business
    • Tax Considerations (Multiple Taxes)
      • Payroll Taxes (FICA, FUTA, SUTA)
      • Corporation Income Taxes
        • C Corporation (15% on first $50,000, top rate 35%)
        • S Corporation (avoid double tax)
      • Individual Income Taxes
        • Ordinary (top bracket 35%)
        • Capital Gains (15%)
      • Gift & Estate Tax
    • Who’s the buyer/transferee
      • Family or Third Party
    • What do you “Want” to get out of any transfer?
  • 20. Buyer/ Transferee Dividend Rec’d - Interest Expense - Income Tax Net Cash available to service debt Seller/ Transferor Interest Income less ordinary Tax Principal less LTGC tax Net Cash to live on Infernal Revenue Service Triple Winner Sale by a “C” Corporation – Most Tax Inefficient KEY: Limit the Taxes by limiting the number of Taxable Transfers
  • 21. Create a Tax Efficient Stream of Income
    • Salary and Fringe Benefits
      • Linked to Financial Health of Business
      • Linked to Physical Health of Owner
        • Must be reasonable compensation to be deductible
    • Distributions from Business
      • Rents
        • Separate if Building outside of Entity
        • If Business failed Building could be rented/sold to others
      • Flow through Entities (Partnership/LLC/S Corp)
        • Linked to Financial Health of Business
        • Not Linked to Physical Health of Owner
        • Discourages Transfer of Equity Ownership
    KEY: Create an Income Tax Efficient Business Environment
  • 22. Create a Tax Efficient Stream of Income
    • Qualified Deferred Compensation Plans
      • Pension/Profit Sharing/SIMPLE/SEP
      • Tax deductible & Income to employee deferred
        • Must not discriminate
    • Non-Qualified Deferred Compensation
        • Discrimination is permitted
      • Top Hat Plan
      • Death Benefit Plan
      • Flow through Entities (Partnership/LLC/S Corp)
        • Linked to Financial Health of Business
        • Not Linked to Physical Health of Owner
        • Discourages Transfer of Equity Ownership
  • 23. Unfunded Non Qualified Deferred Compensation
    • Design Variables for Non-Qualified Deferred Compensation
      • Age of Beneficiaries
      • Amount and Number of Payments
      • Interest Rate
    • Tax Characteristics of Payments
      • Estate Taxes
        • Only Payments required after Death will be an Estate Asset
      • Income Taxes
        • Deductible to Business and Taxable to Employee
        • Income in Respect of a Decedent, if payments survive death
      • Type of Compensation Impacts FICA and MHIT Taxes
        • Past Services – Taxable when paid
        • Present and Future Services – Taxable when earned and vested
  • 24. Case Study
    • Joe (63) and Marie (61) wish to receive $100,000 per year for life. Payments will begin on January 1 st following Joe’s 66 birthday.
      • Calculate Joe and Marie’s joint life expectancy
      • Calculate the present value of the annuity payable over life expectancy
      • Amortize the liability over the three years until Joe’s retirement
      • Add the liability to FICA and Medicare wages, if earned and vested, for W-2 purposes
      • Withhold Pay FICA and MHIT tax on the annual liability, with the 4 th Quarter Payroll Tax
  • 25. Case Study Solution
    • Life Expectancy for Joe (63) and Marie (61)
      • 2000 Census
        • Median until second death 25.9
    • Select Interest Rate
      • Long Term AFR (4.09% Quarterly)
      • Section 7520 Rate (February 2011 2.8%)
    • Calculate present value of annuity beginning in 3 years
      • 23 years of payments of $100,000 at 2.8% $1,714,889
      • Present Value today $1,587,793
    • Amortize Liability over 3 years
      • Interest is $127,096 (difference between $1,714,889 and $1,587,793)
  • 26. Death Benefit Only Plans
    • Income Tax
      • Deductible to Business But Taxable to Recipient = Neutral
        • Caveat - Reasonable Compensation Test
    • Payroll Taxes
      • Past Service and Salary History is Test
        • Not subject to payroll taxes since paid after death
    • Gift and Estate Taxes
      • Liability reduces the Liquidation Value & Adjusted Book Value
      • Benefit is excludable from the Taxable Estate of the Employee
        • Provided employee has not retained right to change beneficiary
        • Best to pay as a benefit to second generation than spouse
  • 27. Keys to Transfer of Business Interest
    • Understanding Valuation of Closely-held Businesses
      • Liquidation Value (the “Floor”)
      • Income Methods
        • Multiple of projected income
        • Discounted Future Cash flows
        • Increasing expenses (NQDC) reduces value
      • Adjusted Book Value
        • Market Value of Assets – Liabilities = Net Worth
        • Increasing Liabilities (NQDC) reduces value
    • Valuation Discounts
      • Lack of Marketability
        • Fractional Interests inhibit value
      • Lack of Management or Voting Control
        • Non-voting stock and limited partnership interests limit value
  • 28. Transfers to Third Parties
    • Increase Expenses – Decrease Value
        • Useful for Transfers to Family Members
    • Decrease Expenses – Increase Value
      • Make sure Compensation reflects Market value
      • Make sure Rents are at Market value
        • Useful for Transfer to Third Parities
    • Convert from C Corporation to S Corporation
      • Maximize access to Cash flow in Mature Business
      • Eliminate Double Tax on Sale of Assets
    KEY: Manage Finances in order to Impact Value
  • 29. Sale of Assets – What does the Seller Own ?
  • 30. Transferring Financial Assets - Beyond the Basics
    • Maximize Exclusions
      • Lifetime Gifts ($5 – 10 Million currently)
      • Annual Exclusions ($13,000/person/year)
    • Minimize Income and Estate Tax on Transfers
        • Leverage off of existing Cash Flows
        • Minimize Valuation by using today’s interest rates
      • Create an Income Tax Neutral Environment
      • Intentionally Defective Income Only Trusts (IDIOTs)
    • Asset Protection – Trusts for others
      • Control & Access
      • Protect Family Members
      • Keep Potential Creditors Away
      • “ They can’t take what you never had”
  • 31. Key Strategies for Family Transfers
    • Non Taxable Transfer - Gift to Trusts
      • Spouse as Trustee = “Control”
      • Spouse as Beneficiary = “Access”
    • Focus on Asset Protection Planning for Donees
      • Keep the Creditors away
        • Spendthrift Clauses
        • Layered Trustees
        • Power to Sprinkle or Spray of Income and or Principal
    • Maximize Flexibility by “Working with IDIOTs”
      • Retain power to borrow cash or substitute assets
      • Spouse as Trustee
      • Spouse as Sprinkle or Spray beneficiary
      • Trust Protectors
  • 32. Grantor Trust AAA Received - No Income Tax 100% available to service debt Seller/ Transferor Interest + Principal (no tax) Income tax on S Corp Income Net Cash to live on Infernal Revenue Service Income Tax on S Corp Income Only Leveraged Transfer to Grantor Type Trust
  • 33. Questions
    • Brian T. Whitlock, CPA, JD, LLM
    • Blackman Kallick, LLP
    • 10 S. Riverside Plaza – 9 th Floor
    • Chicago, IL 60606
    • Phone (312) 207-1040
    • E-mail: [email_address]
    • Linked-in
    • Twitter: @TaxGems
  • 34.