10 Tax-Efficient Strategies For High-Net-Worth Investors

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  • I want to also bring to your attention the weekly webinars we hold every Friday at 4 EST. The Friday webinars are part of the Financial Advisor Webinar Series and are not about Advisor Products and its partners. They are not promotional but rather feature speakers and topics that I have come to know about in my role as a reporter who has covered the industry and written about personal finance since 1983.The Friday webinars are part of Advisors4Advisors, a portal for advisors, and they feature some of the luminaries of the financial advisory profession. For instance, this Friday we have compliance consultants Bryan Hill and Chris Winn, who will speak about 2011 Compliance Planning.
  • If you haven’t already done so, I encourage you to check out Advisors4Advisors.com. We currently have 50 hours of webinar recordings that are eligible for CFP CE credit, and we have lots of other great reasons to use the site. A favorite of many advisors is our aggregation of industry and investment news right on our home page or in daily digest emails that we send to you. We do this so you don’t have to spend time searching the web for information, because you can get it all from us.As a reminder to those who haven’t attended our webinars before, to get CFP CE credit for today’s session, please enter your CFP ID number in the Post Webinar survey. It will appear automatically when you leave the webinar. To receive credit, you’ll need to attend for at least 50 minutes.If you’re not a CFP, you can pursue credit on your own by using the “Thank you for attending” email that you’ll receive tomorrow.If you’re short on credits, you can get up to 40 hours if you’re a subcriber to Advisors4Advisors. When you registered for today’s webinar, you had a chance to opt in for a free 6-month trial to A4A. If you missed it, just register for another upcoming webinar.
  • Besides our over 80 hours of on-demand webinar replays and our news aggregation, A4A is popular because it’s an online community for advisors, with already roughly 3,000 registered on the site. We’re asking all those advisors to review their software applications and we’re building a great resource for those who are considering switching to a new financial planning system or CRM for example. Think of it as a CNET for financial advisors.
  • We also have a team of bloggers who write about topics ranging from compliance, technology, business management, marketing, financial planning, and industry news. Now we also have a new investment blog. Every few days, leading industry pros will write about key investing topics.
  • To get these free tools, just click the “Rewards” Tab in your profile. When you registered for today’s webinar, you had a chance to opt in for a free 6-month trial to A4A. If you took advantage of that, you’ll receive an email with further instructions. If not, just register for another upcoming webinar and you can opt-in for the trial.By the way, to get CE credit for today’s webinar, please enter your CFP ID in the Post webinar survey. We’ll process it for you automatically with the CFP Board. If you’re not a CFP, you can use the “Thank you for attending” email that will be sent to you tomorrow and try to pursue credit on your own.
  • If you haven’t already done so, I encourage you to check out Advisors4Advisors.com. We currently have 50 hours of webinar recordings that are eligible for CFP CE credit, and we have lots of other great reasons to use the site. A favorite of many advisors is our aggregation of industry and investment news right on our home page or in daily digest emails that we send to you. We do this so you don’t have to spend time searching the web for information, because you can get it all from us.As a reminder to those who haven’t attended our webinars before, to get CFP CE credit for today’s session, please enter your CFP ID number in the Post Webinar survey. It will appear automatically when you leave the webinar. To receive credit, you’ll need to attend for at least 50 minutes.If you’re not a CFP, you can pursue credit on your own by using the “Thank you for attending” email that you’ll receive tomorrow.If you’re short on credits, you can get up to 40 hours if you’re a subcriber to Advisors4Advisors. When you registered for today’s webinar, you had a chance to opt in for a free 6-month trial to A4A. If you missed it, just register for another upcoming webinar.
  • If you haven’t already done so, I encourage you to check out Advisors4Advisors.com. We currently have 50 hours of webinar recordings that are eligible for CFP CE credit, and we have lots of other great reasons to use the site. A favorite of many advisors is our aggregation of industry and investment news right on our home page or in daily digest emails that we send to you. We do this so you don’t have to spend time searching the web for information, because you can get it all from us.As a reminder to those who haven’t attended our webinars before, to get CFP CE credit for today’s session, please enter your CFP ID number in the Post Webinar survey. It will appear automatically when you leave the webinar. To receive credit, you’ll need to attend for at least 50 minutes.If you’re not a CFP, you can pursue credit on your own by using the “Thank you for attending” email that you’ll receive tomorrow.If you’re short on credits, you can get up to 40 hours if you’re a subcriber to Advisors4Advisors. When you registered for today’s webinar, you had a chance to opt in for a free 6-month trial to A4A. If you missed it, just register for another upcoming webinar.
  • I want to also bring to your attention the weekly webinars we hold every Friday at 4 EST. The Friday webinars are part of the Financial Advisor Webinar Series and are not about Advisor Products and its partners. They are not promotional but rather feature speakers and topics that I have come to know about in my role as a reporter who has covered the industry and written about personal finance since 1983.The Friday webinars are part of Advisors4Advisors, a portal for advisors, and they feature some of the luminaries of the financial advisory profession. For instance, this Friday we have compliance consultants Bryan Hill and Chris Winn, who will speak about 2011 Compliance Planning.
  • 10 Tax-Efficient Strategies For High-Net-Worth Investors

    1. 1. Friday, March 4, 2011, at 4 p.m. ESTFinancial Advisor Webinar Series Robert Keebler Keebler & Associates LLP2011 Tax-Efficient Investment Strategies Andrew Gluck, Moderator Editor, Advisors4Advisors.com
    2. 2. Upcoming Webinars Friday, --- TBA March 11 How Would A Gold Crash, Revolution InPraveen Ghanta, Friday, Mideast, Or Energy Crunch Affect Your Raj Udeshi March 18 Portfolios? Friday, Marc Julie Cooling Industry Trends Affecting RIAs h 25 Friday, Ryan Shanks Five Factors In Leaving A Wirehouse April 1
    3. 3. • Advisor News Aggregated Daily• Investment, Technology & Industry• Practice Management• 45 Hours Of CFP® CE Videos “A4A cut my research time in half” Kathleen Iola Iola Financial Group © 2011 Keebler & Associates, LLP, All Rights Reserved.
    4. 4. © 2011 Keebler & Associates, LLP, All Rights Reserved.
    5. 5. Advisors Review Their Apps © 2011 Keebler & Associates, LLP, All Rights Reserved.
    6. 6. See New Investment and Marketing Blogs
    7. 7. Tools1. We email you membership link2. Sign in, rate apps, fill in profile © 2011 Keebler & Associates, LLP, All Rights Reserved.
    8. 8. CFP® CE Credit• Enter CFP® ID in post-webinar survey• CE credit automatically submitted• Must attend at least 50 minutes• Replays: post-webinar quiz requiredCIMA® - CIMC ® - CPWA® - CE Credit You submit CE Form to IMCA http://www.imca.org/cms_images/file_71.pdf Other Certifications• Submit “Thank You For Attending” Email to obtain credit
    9. 9. • Estate, tax, and retirement planning expert • Partner, Keebler & Associates LLP – Highly-rated speaker on Advisors4Advisors – Family wealth transfer and preservation planning – Charitable giving – Retirement distribution planning – Estate administration • Representation for private letter rulings and IRS estate, gift, and income tax examinations and appeals – Over 150 favorable private letter rulings in past 15 years – Member, CCH Financial & Estate Planning Advisory Board Robert S. Keebler – Author, 100+ articles & books on wealth transfer & taxation Partner • Honors Keebler and Associates LLP – CPA, MST, AEP (Distinguished) (920) 593-1700 – Accredited Estate Planners (Distinguished) award from Nationalrobert.keebler@keeblerandassociates.com Association of Estate Planners & Councils (2007) www.keeblerandassociates.com – Top 100 Most Influential Practitioners In U.S. (CPA Mag.) – Top 40 Tax Advisors To Know During A Recession (CPA Mag.) – Featured columnist for CCH’s Taxes Magazine
    10. 10. Robert S. Keebler, CPA, MST, AEP (Distinguished) Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI 54301 Phone: (920) 593-1701 Robert.Keebler@keeblerandassociates.comCircular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice containedin this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penaltiesunder the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If youwould like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.
    11. 11. Today’s Outline• Estate Tax Overview• Income Tax Overview• Tax Asset Classes• Surtax Overview• Loss Harvesting• Roth IRA Conversions• Annuity Planning• “Inherited” IRAs• Life Insurance Planning © 2011 Keebler & Associates, LLP, All Rights Reserved.
    12. 12. Summary of New Estate Tax Law and Reversion in 2013 2011 2012 2013Top Estate Tax Rate 35% 35% 55%Estate Tax Exemption $5,000,000 $5,000,000 $1,000,000Gift Tax Exemption $5,000,000 $5,000,000 $1,000,000GST Exemption $5,000,000 $5,000,000 $1,000,000 Adjusted for inflation © 2011 Keebler & Associates, LLP, All Rights Reserved.
    13. 13. Income Tax OverviewCurrent and Future Tax Rates Ordinary Income Capital Gains 2013 & 2013 & 2011 & 2012 Beyond 2011 & 2012 Beyond* 10% 15% 0% 10% / 8% 15% 15% 15% 20% / 18% 25% 28% *NOTE: In general, the 8% and 28% 31% 18% capital gains rates only 33% 36% apply to long-term capital gains on property that has been held 35% 39.6% more than five years at the time of sale. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    14. 14. TAX ASSET CLASSES Interest Capital Gain Tax Exempt Pension Real Estate, Dividend and Oil & Gas Roth IRA Income Income Interest Income IRA Income and Tax and Exempt Insurance - Taxable -Preferential Rate Bonds - Tax - Tax Free -Deferral Deferred - Tax Growth/ until sale Preferences Benefits  Money  Equity  Equity  Bonds issued by  Pension plans Real Estate Roth IRA market securities Securities State and local  Profit sharing  Depreciation  Tax-free  Corporate Governmental plans tax shield growth during bonds Attributes Attributes entities  Annuities  1031 lifetime  US Treasury  Qualified  Deferral exchanges  No 70½ RMD bonds dividends at until sale Attributes Attributes  Deferral on  Tax-free LTCG rate  Reduced  Federal tax  Growth during growth until distributions Attributes  Return of capital exempt lifetime sale out to  Annual capital gains rate  State tax exempt  RMD for IRA beneficiaries income tax dividend  Step-up and qualified Oil & Gas life expectancy on interest  Capital gain basis at plans  Large up  Taxed at dividends death  No step-up front IDC Life Insurance highest deductions  Tax-deferred marginal  Depletion growth rates allowances  Tax-exempt© 2011 Prepared by Robert S. Keebler, CPA, MST, AEP (Distinguished) payout atKeebler & Associates, LLP deathAll Rights Reservedrobert.keebler@keeblerandassociates.comPursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intendedor written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer forsuch purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or otherentity, investment plan or arrangement to any other party.For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding orreproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by theinformation contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. © 2011 Keebler & Associates, LLP, All Rights Reserved.
    15. 15. Spinning Straw into Gold• Life Insurance – Death Benefit Approach• Life Insurance – Retirement Approach• Life Insurance – Annuity Hedge• Roth Conversion(s)• Life Insurance to Amount to Facilitate Roth Conversions at the First Death• “Leap-Frog” Annuity• Tax-Free Annuity Distributions to Purchase Long-Term Healthcare © 2011 Keebler & Associates, LLP Al Rights Reserved.
    16. 16. Financial Planning Strategies in Wake of the New 3.8% Medicare “Surtax” © 2011 Keebler & Associates, LLP Al Rights Reserved.
    17. 17. 3.8% Medicare “Surtax” Overview Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” will apply to all taxpayers whose income exceeds a certain “threshold amount”. This new “surtax” will, in essence, raise the marginal income tax rate for affected taxpayers. • Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) would have a marginal rate of 43.4%!
    18. 18. 3.8% Medicare “Surtax” Overview Tax Rate in Tax Rate in Tax Rate in 2013+ 2011 & 2012 2013 (w/surtax) 10% 15% 15% 15% 15% 15% 25% 28% 28% 28% 31% 34.8% 33% 36% 39.8% 35% 39.6% 43.4% NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However, there are times when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).
    19. 19. 3.8% Medicare “Surtax” OverviewAPPLICATION TO INDIVIDUALS – the new Medicaresurtax is equal to 3.8% times the lesser of the following: 1. “Net investment income”, OR 2. The excess (if any) of – a. “Modified adjusted gross income” (“MAGI”) for such taxable year, over the b. “Threshold amount” © 2011 Keebler & Associates, LLP Al Rights Reserved.
    20. 20. 3.8% Medicare “Surtax” OverviewAPPLICATION TO ESTATES AND TRUSTS – the new Medicaresurtax is equal to 3.8% times the lesser of the following: 1. Undistributed “net investment income” for such taxable year, or 2. The excess (if any) of – a. “Adjusted gross income” (as defined in section 67(e) for such taxable year, over the b. Dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year ($11,200 in 2010). © 2011 Keebler & Associates, LLP Al Rights Reserved.
    21. 21. 3.8% Medicare “Surtax” OverviewThree critical terms associated with the 3.8% Medicare surtax:• “Net investment income”• “Threshold amount”• “Modified adjusted gross income” (“MAGI”) © 2011 Keebler & Associates, LLP Al Rights Reserved.
    22. 22. 3.8% Medicare “Surtax” Overview• “Net investment income”: is defined as interest, dividends, annuities, rents, royalties, income derived from a passive activity, and net capital gain derived from the disposition of property (other than property held in an active trade or business), reduced by deductions properly allocable to such income.• Specifically, this does not include the following: 1. Income derived from an active trade or business; 2. Distributions from IRAs or their qualified plans; 3. Any income taken into account for self-employment tax purposes; 4. Gain on the sale of an active interest in a partnership or S corporation; or 5. Items which are otherwise excluded or exempt from income under income tax law, such as interest from tax-exempt bonds, capital gain excluded under IRC 121, and veteran’s benefits. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    23. 23. 3.8% Medicare “Surtax” OverviewTypes of Income Subject to Surtax Subject to Surtax Exempt from Surtax Wages X Taxable Interest X Exempt Interest X Dividends X Annuity Income (withdrawals) X Annuity Income (inside annuity) X Passive Royalty X Active Royalty X Rents X © 2011 Keebler & Associates, LLP, All Rights Reserved.
    24. 24. 3.8% Medicare “Surtax” Overview “Threshold amount”: is the key factor in determining the “lesser of” formula for purposes of calculating the surtax. Threshold amounts • Single taxpayers - $200,000 • Married taxpayers - $250,000 • Estates/trusts - $11,200 (i.e. top income tax bracket in 2010) © 2011 Keebler & Associates, LLP Al Rights Reserved.
    25. 25. 3.8% Medicare “Surtax” Overview “Modified adjusted gross income” (“MAGI”): is the amount that is compared to the “threshold amount” to determine the “net investment income” that is subject to the surtax. MAGI equals: • Adjusted gross income (i.e., Form 1040, Line 37) PLUS • Net foreign earned income exclusion (i.e., gross income excluded under the foreign earned income exclusion less certain deductions or exclusions that were disallowed due to the foreign earned income exclusion) © 2011 Keebler & Associates, LLP Al Rights Reserved.
    26. 26. 3.8% Medicare “Surtax” OverviewExamples Example 1: John, a single taxpayer, has $100,000 of salary and $50,000 of net investment income for MAGI of $150,000. The 3.8% surtax would not apply because his MAGI is less than $200,000. Example 2: Linda, a single taxpayer, has $225,000 of net investment income and no other source of income. The 3.8% surtax would apply to $25,000 of income (the lesser of investment income of $225,000 or the excess of $225,000 MAGI over $200,000 “threshold amount”). SOLUTION: Shelter Investment Income Example 3: Terry & Tina, married filing jointly, have $300,000 of salaries and no net investment income. The tax 3.8% surtax will not apply because they have no investment income. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    27. 27. 3.8% Medicare “Surtax” OverviewExamples Example 4: Peter & Paula, married filing jointly, have $400,000 of salaries and $50,000 of net investment income. They will pay the 3.8% surtax on $50,000. Example 5: Sarah & Scott, married filing jointly, have $200,000 of salaries and $150,000 of net investment income for total MAGI of $350,000. The 3.8% surtax would apply to $100,000 of income (excess of $350,000 MAGI over $250,000 threshold amount). Example 6: Randy, a single taxpayer, age 69, has investment income of $200,000 and is not subject to the surtax. In the following year, Randy has an RMD from his IRA of $125,000. In this case $325,000 of MAGI exceeds the $200,000 threshold and $125,000 is subject to the 3.8% surtax. SOLUTIONS: Shelter Income and Review Roth Conversions © 2011 Keebler & Associates, LLP Al Rights Reserved.
    28. 28. 3.8% Medicare “Surtax” OverviewExamples Example 7: The John Smith Trust has investment income of $51,000 and has made no distributions during the current tax year. In this case, $39,800 of income ($51,000 - $11,200 top bracket amount) will be subject to the 3.8% surtax. Example 8: David and Veronica, married filing jointly, have pension and IRA income and tax-exempt interest income. The 3.8% surtax does not apply regardless of income because they have no “net investment income”. Example 9: In 2012, Jill, age 60 and single, has wages of $200,000 and taxable interest income from CDs of $100,000. SOLUTION: During 2012 Jill moves half of her investments into an annuity and purchases a life insurance policy with the remaining CDs. Because of this planning, in 2013 all of her interest income is sheltered in either the annuity or the life insurance policy. Thus, Jill is not subject to the 3.8% surtax. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    29. 29. 3.8% Medicare “Surtax” OverviewExamplesExample 10: The Anita Jones Trust has net investment income of$100,000 and made a distribution of 100% of that income during thecurrent tax year. In this case, the trust will not be subject to the 3.8%surtax (but the trust beneficiaries might be subject to the 3.8% surtaxbased on their own tax situations).Example 11: Gary and Barb, married filing jointly, have $130,000 ofpension income and $115,000 of net investment income. Further, Garywithdrew $50,000 from his Roth IRA. Given these facts, none of theinvestment income is subject to the 3.8% surtax because Gary andBarb’s MAGI ($245,000) was below the $250,000 threshold amount.Example 12: Same facts as Example 11, except that Gary withdrew$50,000 from his traditional IRA. In this situation, $45,000 [($130,000 +$115,000 + $50,000) - $250,000] of net investment income would besubject to the 3.8% surtax. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    30. 30. Planning Around the “Surtax”Strategies for Reducing “Net Investment Income” • Municipal bonds • Tax-deferred annuities • Life insurance • Rental real estate • Oil & gas investments • Choice of accounting year for estate/trust • Timing of estate/trust distributions © 2011 Keebler & Associates, LLP Al Rights Reserved.
    31. 31. Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Municipal Bond Example • Jacob, a single taxpayer, on average has $180,000 of salary income, $5,000 of interest income and $15,000 of dividend income each year. Recently, Jacob inherited $1,000,000 from his uncle and has determined that he would like to invest the money either in: (a) taxable corporate bonds earning 7% or (b) tax-exempt municipal bonds earning 4.5%. Assuming that Jacob is in the 36% marginal income tax bracket for the 2013 tax year and lives in a state without an income tax, below is a summary of the after-tax yield on each investment: • Corporate bond Municipal bond • 4.214% 4.5% • {7% x [1 – (36% + 3.8%)]} • © 2011 Keebler & Associates, LLP Al Rights Reserved.
    32. 32. Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Tax-Deferred Annuity Example • Lisa, a single taxpayer, has recently been approached by her financial advisor to consider investing in a tax-deferred non-qualified annuity. At the advice of her CPA, Lisa decided to invest $500,000 in a tax- deferred non- qualified annuity earning 5% per year. Assuming that Lisa has $200,000 of gross income and is in the 28% tax bracket for the next 10 years, below is a summary of the tax savings achieved by investing in a tax-deferred non- qualified annuity versus investing in a non-qualified diversified investment portfolio (i.e. a taxable brokerage account) earning 6% interest per year on a pre-tax basis.Taxable Brokerage Account Tax-Deferred Non-Qualified Annuity Beginning Income @ Income Tax Ending Beginning Income @ Income Tax Ending Year Balance 6% @ 31.8% Balance Balance 5% @ 0.00% Balance Difference 1 $ 500,000 $ 30,000 $ (9,540) $ 520,460 $ 500,000 $ 25,000 $ - $ 525,000 $ 4,540 2 $ 520,460 $ 31,228 $ (9,930) $ 541,757 $ 525,000 $ 26,250 $ - $ 551,250 $ 9,493 3 $ 541,757 $ 32,505 $ (10,337) $ 563,926 $ 551,250 $ 27,563 $ - $ 578,813 $ 14,887 4 $ 563,926 $ 33,836 $ (10,760) $ 587,002 $ 578,813 $ 28,941 $ - $ 607,753 $ 20,751 5 $ 587,002 $ 35,220 $ (11,200) $ 611,022 $ 607,753 $ 30,388 $ - $ 638,141 $ 27,119 6 $ 611,022 $ 36,661 $ (11,658) $ 636,025 $ 638,141 $ 31,907 $ - $ 670,048 $ 34,023 7 $ 636,025 $ 38,161 $ (12,135) $ 662,051 $ 670,048 $ 33,502 $ - $ 703,550 $ 41,499 8 $ 662,051 $ 39,723 $ (12,632) $ 689,142 $ 703,550 $ 35,178 $ - $ 738,728 $ 49,586 9 $ 689,142 $ 41,349 $ (13,149) $ 717,342 $ 738,728 $ 36,936 $ - $ 775,664 $ 58,322 10 $ 717,342 $ 43,041 $ (13,687) $ 746,696 $ 775,664 $ 38,783 $ - $ 814,447 $ 67,752 NOTE: The 31.8% income tax rate in the taxable brokerage account scenario is the sum of Lisa’s marginal income tax rate (28%) plus the 3.8% surtax because her gross income was over the threshold amount. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    33. 33. Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Tax-Deferred Annuity - “Leap-Frog” Annuity • PROBLEM: MAGI is too high during working years and investment income subject to the 3.8% surtax and a higher income tax rate • SOLUTION: Invest the bond portion of the portfolio in a tax-deferred annuity deferring ordinary income until lower bracket retirement years – this “Leap-Frogs” over the high income “surtax years” © 2011 Keebler & Associates, LLP Al Rights Reserved.
    34. 34. Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Life Insurance Example • Tim, a married-filing-jointly taxpayer, recently paid a $250,000 single premium to purchase a $2,000,000 second-to-die whole-life life insurance policy. At the end of Year 10, Tim withdrew $50,000 from the policy’s cash value when it was worth $450,000. • Given these facts, none of the $200,000 of earnings to-date ($450,000 current cash value - $250,000 initial premium), or any future earnings within the life insurance policy, are subject to the 3.8% surtax until Tim withdraws more than his initial single premium amount. • Further, even if Tim withdraws earnings from the life insurance policy in a future tax year, none of the earnings will be subject to the 3.8% surtax, provided that Tim’s MAGI (which would include the earnings withdrawn from the life insurance policy) is below the “threshold amount” (i.e. $250,000 for married-filing-jointly taxpayers). © 2011 Keebler & Associates, LLP Al Rights Reserved.
    35. 35. Planning Around the “Surtax”Strategies for Reducing “MAGI”Roth IRA Conversions Roth IRA benefits • Lowers overall taxable income long-term • Tax-free compounding • No RMDs at age 70½ • Tax-free withdrawals for beneficiaries • More effective funding of the “bypass trust” PURPOSE OF STRATEGY (as it relates to the 3.8% surtax): To lower MAGI below the “threshold amount” over the long-term. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    36. 36. Loss HarvestingLoss Harvesting Considerations • Losses relating to individual taxpayers • Losses relating to trusts/estates • Losses relating to charitable remainder trusts (CRTs) • Loss charitable lead trusts (CLTs) © 2011 Keebler & Associates, LLP Al Rights Reserved.
    37. 37. Loss HarvestingLoss Harvesting Issues • “Wash sale” rule (IRC §1091) • Diminishing value of capital losses • Inefficiency of capital loss offsetting © 2011 Keebler & Associates, LLP Al Rights Reserved.
    38. 38. Loss HarvestingWash Sale Rule (IRC §1091) Capital losses are denied to the extent that a taxpayer has acquired (or has entered into a contract or option to acquire) a “substantially identical” stock or securities within a period beginning 30 days before the sale and ending 30 days after the sale of a stock which was sold at a loss (i.e. “loss stock”) • This rule also applies to ETFs and index funds • Disallowed loss on “loss stock” is added to the cost basis of the new stock • The holding period of the “loss stock” is carried over to the new stock CAUTION: The wash sale rules apply to both IRAs and taxable investment accounts. Thus, if there is a loss incurred on a stock in a taxable investment account and a “substantially identical” stock is purchased within an IRA during the 61-day period, then the wash sale rules will apply (see Rev. Rul. 2008-5). © 2011 Keebler & Associates, LLP Al Rights Reserved.
    39. 39. Loss HarvestingInefficiency of Capital Loss Offsetting In general, capital losses are more tax effective if they can be used to offset income taxed at higher tax rates (e.g. short-term capital gains and ordinary income) • Thus, long-term losses used against short-term gains are more tax-efficient than short-term losses being used against long- term capital gains Short-Term Gain Long-Term Gain Short-Term Loss NEUTRAL INEFFECTIVE Long-Term Loss EFFECTIVE NEUTRAL © 2011 Keebler & Associates, LLP Al Rights Reserved.
    40. 40. Roth IRA Conversions © 2011 Keebler & Associates, LLP Al Rights Reserved.
    41. 41. Roth IRA ConversionsBenefits of Converting to a Roth IRA • Lowers overall taxable income long-term • Tax-free compounding • No RMDs at age 70½ • Tax-free withdrawals for beneficiaries • More effective funding of the “bypass trust” • Surtax Planning © 2011 Keebler & Associates, LLP Al Rights Reserved.
    42. 42. Roth IRA ConversionsTypes of Roth IRA Conversions • Strategic conversions – Take advantage of a client’s long-term wealth transfer objectives • Tactical conversions – Take advantage of short-term client-specific income tax attributes that are set to expire (e.g., low tax rates, tax credits, charitable contribution carryovers, NOL carryovers, etc.) • Opportunistic conversions – Take advantage of short-term stock market volatility, sector rotation and rotation in asset classes • Hedging conversions – Take advantage of projected future events that will result in the client being subject to higher tax rates within the near future © 2011 Keebler & Associates, LLP Al Rights Reserved.
    43. 43. Roth IRA ConversionsUnderstanding the Mathematics “Optimum” Roth IRA conversion amount 35% tax Target Roth IRA conversion amount bracket 33% tax Current bracket taxable income 28% tax bracket 25% tax bracket 15% tax bracket 10% tax bracket © 2011 Keebler & Associates, LLP Al Rights Reserved.
    44. 44. “Inherited” IRAs © 2011 Keebler & Associates, LLP, All Rights Reserved.
    45. 45. “Inherited” IRAsOverview • An IRA is treated as “inherited” if the individual for whose benefit the IRA is maintained acquired the IRA on account of the death of the original owner • Under the tax law the IRA assets can be distributed based upon the life expectancy of the beneficiary © 2011 Keebler & Associates, LLP, All Rights Reserved.
    46. 46. “Inherited” IRAsSpouse Beneficiaries • Exception to “inherited” IRA rules • Only available to surviving spouse • Allows spouse to rollover the deceased IRA owner’s IRA into a new IRA in the spouse’s own name – In this case, the spouse is treated as the new IRA owner • This allows the spouse to defer having to take required minimum distributions (RMDs) until he/she turns age 70½ – Spouse may use the Uniform Lifetime Table to determine distributions • This allows for a greater “stretch” period © 2011 Keebler & Associates, LLP, All Rights Reserved.
    47. 47. “Inherited” IRAsNon-Spouse Beneficiaries • Utilizes the exemption to the five year rule • Avoids IRA assets being subject to estate tax in spouse’s estate • Achieves “inherited” IRA to the degree that required minimum distributions (RMDs) occur over life expectancy of the designated beneficiary − Life expectancy of non-spouse beneficiary is determined in year after year of the IRA owner’s death by reference to the Single Life Table and then is reduced by a value of one each subsequent year © 2011 Keebler & Associates, LLP, All Rights Reserved.
    48. 48. 401(a)(9) Regulations Death Before Required Death On or After Required Beginning Date Beginning DateDesignated Life Expectancy Life ExpectancyBeneficiary Rule Rule Non- Owner’sDesignated Five-Year Rule “Ghost” LifeBeneficiary Expectancy Rule © 2011 Keebler & Associates, LLP, All Rights Reserved.
    49. 49. “Inherited” IRAsExample IRA Transfer to Family $1,100,000 $993,194 $965,679 $1,000,000 $900,000 $800,000 $700,000 $601,269 $624,042 $600,000 $500,000 10 Year Immediate Distribution IRA Payable to Non-Qualified Beneficiary (Five-Year Rule) IRA Payable to Surviving Spouse (Spousal Rollover) IRA Payable to Child © 2011 Keebler & Associates, LLP, All Rights Reserved.
    50. 50. “Inherited” IRAsExample (cont.) IRA Transfer to Family $1,917,956 $2,000,000 $1,727,638 $1,750,000 $1,500,000 $1,250,725 $1,205,083 $1,250,000 $1,000,000 20 Year Immediate Distribution IRA Payable to Non-Qualified Beneficiary (Five-Year Rule) IRA Payable to Surviving Spouse (Spousal Rollover) IRA Payable to Child © 2011 Keebler & Associates, LLP, All Rights Reserved.
    51. 51. Annuity Planning • Roth Life-Time Annuity Strategy • Annuity-Life Insurance Hedge © 2011 Keebler & Associates, LLP Al Rights Reserved.
    52. 52. Planning with Roth Annuities CONCEPT Roth IRA is converted to an Immediate Annuity • Protected against market volatility • Protected against future income tax increases • Protected against longevity risk © 2011 Keebler & Associates, LLP Al Rights Reserved.
    53. 53. Life Insurance Planning © 2011 Keebler & Associates, LLP Al Rights Reserved.
    54. 54. Life Insurance Planning • Inherited IRA “Tax Spiral” • Life Insurance has an Asset Class • Life Insurance has an Alternative to Retirement Plans • Life Insurance versus Traditional IRA • Life Insurance versus Roth IRA © 2011 Keebler & Associates, LLP Al Rights Reserved.
    55. 55. IRA-ILIT Strategy © 2011 Keebler & Associates, LLP, All Rights Reserved.
    56. 56. Life Insurance PlanningInherited IRA “Tax Spiral” Dilemma ISSUE: Perhaps the single biggest issue with an inherited IRA is that the IRA owner’s estate oftentimes needs to utilize the IRA to pay the applicable estate tax liability. The payment of the estate tax using IRA funds, in turn, causes additional income tax to be incurred at higher income tax rates. As a result, between 60% to 80% of IRA could be lost to taxes. (This is known as the Inherited IRA “tax spiral”.) © 2011 Keebler & Associates, LLP Al Rights Reserved.
    57. 57. Life Insurance PlanningInherited IRA “Tax Spiral” Dilemma Net to Family Estate Tax 32% 45% Income Tax 23% © 2011 Keebler & Associates, LLP Al Rights Reserved.
    58. 58. Life Insurance PlanningInherited IRA “Tax Spiral” Dilemma SOLUTION: Establish an Irrevocable Life Insurance Trust (ILIT) to hold a life insurance policy whereby the death benefit proceeds can be used to provide liquidity to the IRA owner’s estate, thereby preserving the inherited IRA. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    59. 59. Life Insurance PlanningIrrevocable Life Insurance Trust (ILIT) • A type of dynasty trust which holds a life insurance policy on the grantor’s life so as to benefit the grantor’s beneficiaries without the imposition of future estate, gift and/or GST tax. • To the extent that the grantor’s estate has insufficient liquid assets cover the estate tax liability, trust assets can be lent to the estate or used to purchase assets from the estate. • To the extent that the grantor does not hold any “incidents of ownership”, none of the trust assets will be included in his/her taxable estate. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    60. 60. Life Insurance PlanningIRA-ILIT Strategy Overview IRAAnnual distributions Annual gifts to cover life insurance Payment of premiums IRA Owner (Insured) premiums* ILIT Life Insurance Company (Beneficiary) Payment of death benefit proceeds at death of insured Discretionary distributions of Assets outside of the taxable income and principal during the estates of beneficiaries lifetime of the trust’s beneficiaries Children * NOTE: Gifts to the ILIT will use IRA owner’s annual gift exclusion and/or lifetime gift exemption. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    61. 61. Life Insurance PlanningIRA-ILIT Strategy Example Net IRA Balance to Family $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- 5 10 15 20 Year IRA w/Insurance IRA w/o Insurance ASSUMPTIONS IRA Balance $ 1,000,000 Life Insurance Death Benefit $ 1,000,000 Annual Premium $ 45,000 Growth Rate 6.00% Income Tax Rate - Annual Withdrawals 25.00% Income Tax Rate - Lump-Sum 35.00% Estate Tax Rate 45.00% © 2011 Keebler & Associates, LLP Al Rights Reserved.
    62. 62. Example Net Wealth to Family $5,463,373 $4,821,812 $3,146,717 $2,866,235 $2,157,937 $1,627,266 $1,488,597 $753,045 Year 10 Year 20 Year 30 Year 40 Traditional IRA w/Insurance Roth IRA w/Annual GiftingAssumptions Assumptions (cont.)IRA owner’s age - 50 After-tax rate of return (Taxable investment account) - 5%Traditional IRA balance - $1,000,000 Income tax rate (Traditional IRA distributions) – 35%Roth IRA balance (after payment of income tax on conversion) - $650,000 Insurance death benefit - $1,000,000Pre-tax rate of return (Traditional IRA/Roth IRA) - 7% Annual insurance premium - $10,000 © 2011 Keebler & Associates, LLP, All Rights Reserved.
    63. 63. IRA-Annuity Strategy © 2011 Keebler & Associates, LLP, All Rights Reserved.
    64. 64. IRA-Annuity Strategy • IRA assets are used to purchase lifetime annuity contract • Every year as annuity payments are credited to the IRA and then distributed to the account owner, the IRA distributions are used to pay premiums on a life insurance policy held in an Irrevocable Life Insurance Trust (ILIT) • At the account owner’s death, neither the IRA (due to the cancellation-at-death feature of the annuity) nor the ILIT will be included in the account owner’s taxable estate © 2011 Keebler & Associates, LLP, All Rights Reserved.
    65. 65. IRA-Annuity StrategyOverview Traditional Annuity payments Insurance IRA Company- A IRA withdrawals IRA Owner Transfer of cash to pay premiums (i.e. gift) Payment of premiums Insurance ILIT Company- B Death benefit proceeds © 2011 Keebler & Associates, LLP, All Rights Reserved.
    66. 66. IRA-Annuity StrategyOverview Inside taxable estate Outside taxable estate Traditional ILIT IRA $2,000,000 $0 Because the annuity Because the trust is irrevocable cancels at death, the IRA and the gifts are “completed does not have any value gifts” for gift tax purposes, none for estate tax purposes of the policy proceeds will be included in the taxable estate (provided the transferor has no “incidents of ownership” over the policy) © 2011 Keebler & Associates, LLP, All Rights Reserved.
    67. 67. IRA-Annuity Strategy IRA Only TrustExample Yr 1 $ IRA 970,000 $ Estate Tax (485,000) $ (Brokerage Account) - $ Net Wealth to Family 485,000 5 $ 827,478 $ (413,739) $ 305,431 $ 719,170 10 $ 585,507 $ (292,753) $ 699,910 $ 992,663 15 $ 246,129 $ (123,065) $ 1,209,399 $ 1,332,463 20 $ - $ - $ 1,731,151 $ 1,731,151 25 $ - $ - $ 2,235,864 $ 2,235,864 30 $ - $ - $ 2,887,726 $ 2,887,726 IRA-Annuity Strategy Trust (Life Net Wealth to Yr IRA Estate Tax Insurance) Family 1 $ - $ - $ 2,000,000 $ 2,000,000 5 $ - $ - $ 2,000,000 $ 2,000,000 10 $ - $ - $ 2,000,000 $ 2,000,000 15 $ - $ - $ 2,000,000 $ 2,000,000 20 $ - $ - $ 2,000,000 $ 2,000,000 25 $ - $ - $ 2,000,000 $ 2,000,000 30 $ - $ - $ 2,000,000 $ 2,000,000 ASSUMPTIONS: Pre-Tax Growth Rate on IRA = 7.00% After-Tax Growth Rate on Brokerage Account = 5.25% Combined Income Tax Rate = 45.00% Beginning IRA balance = $1,000,000 Annual Pre-Tax Withdrawal From IRA = $100,000 Annual Life Insurance Premium = $55,000 © 2011 Keebler & Associates, LLP Al Rights Reserved.
    68. 68. IRA-Annuity StrategyExample Net Wealth to Family $3,500,000 $3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $- 1 5 10 15 20 25 30 IRA Only IRA-Annuity Strategy © 2011 Keebler & Associates, LLP Al Rights Reserved.
    69. 69. To be added to our newsletter, please emailrobert.keebler@keeblerandassociates.com © 2011 Keebler & Associates, LLP, All Rights Reserved.
    70. 70. Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. © 2011 Keebler & Associates, LLP Al Rights Reserved.
    71. 71. Robert S. Keebler Partner Keebler and Associates LLP (920) 593-1700 robert.keebler@keeblerandassociates.com www.keeblerandassociates.comPlease Fill In Exit Survey When You Leave
    72. 72. CFP® CE Credit• Enter CFP® ID in post-webinar survey• CE credit automatically submitted• Must attend at least 50 minutes• Replays: post-webinar quiz requiredCIMA® - CIMC ® - CPWA® - CE Credit You submit CE Form to IMCA http://www.imca.org/cms_images/file_71.pdf Other Certifications• Submit “Thank You For Attending” Email to obtain credit
    73. 73. Upcoming Webinars Friday, --- TBA March 11 How Would A Gold Crash, Revolution InPraveen Ghanta, Friday, Mideast, Or Energy Crunch Affect Your Raj Udeshi March 18 Portfolios? Friday, Julie Cooling Industry Trends Affecting RIAs March 25 Friday, Ryan Shanks Five Factors In Leaving A Wirehouse April 1

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