11 12 02 Want To Save A Fortune On Taxes

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Ideas To Save Large Amounts Of Income Taxes

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11 12 02 Want To Save A Fortune On Taxes

  1. 1. 2012 Want To Save A FORTUNE On Income Taxes? Givner & Kaye, A Professional Corporation 1 Owen@GivnerKaye.com
  2. 2. Want To Save A Fortune On Taxes? The Best Planning Is Done At The Beginning Of The Year:1. More time to review the alternatives.2. Time to calmly and carefully put the structures in place.3. Advisors are not hassled with year-end crises.4. Able to adjust to the actual results throughout the year. Givner & Kaye,  A Professional Corporation 2 Owen@GivnerKaye.com 2
  3. 3. Want To Save A Fortune On Taxes? What We Will Cover: 1. The Big, Easy Deductions. P. 5 1.1. Defined Benefit Pension Plans. P. 6 1.2. Captive Insurance Companies. P. 15 2. Charitable Alternatives. P. 25 2.1. Grantor Charitable Lead Annuity Trusts. P. 26 2.2. Charitable Remainder Annuity Trusts. P. 31 2.3. Charitable Limited Partnerships. P. 36 3. Investments. P. 39 3.1. Oil and Gas. P. 40 3.2. Real Estate (Component Depreciation). P. 43 4. Questions and answers. P. 47 Givner & Kaye,  A Professional Corporation 3 Owen@GivnerKaye.com 3
  4. 4. Want To Save A Fortune On Taxes? Our Process Four Phases – Four Engagements – Four Fixed Fees (so the client does not feel “on the clock”). Review – Design – Implement - Maintain Givner & Kaye,  A Professional Corporation Owen@GivnerKaye.com 4
  5. 5. Want To Save A Fortune On Taxes? The Big, Easy Deductions Givner & Kaye,  A Professional Corporation 5 Owen@GivnerKaye.com 5
  6. 6. Want To Save A Fortune On Taxes? Defined Benefit Pension Plans Givner & Kaye,  A Professional Corporation 6 Owen@GivnerKaye.com 6
  7. 7. Want To Save A Fortune On Taxes? Tax Qualified Employee Retirement Plan Joe Trustee Plan Owner committee The corporation The Plan The Trust (Plan Sponsor) $ $ Employees/ participants Givner & Kaye,  A Professional Corporation 7 Owen@GivnerKaye.com 7
  8. 8. Want To Save A Fortune On Taxes? There are two types of plans: one that defines how much goes in – onethat defines how much goes out Corporation (plan sponsor) Money goes in – define (limit) the contribution Retirement Trust Money goes out – define (limit) the benefit Employee/ Participant Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 8
  9. 9. Want To Save A Fortune On Taxes? If you limit how much goes in (IRC Section 415(c) - $49,000), then there is no limit on how much goes out. So if you are going to buy Qualcomm at $1 and Defined have it go to $100, do so in a defined Contribution contribution plan; it will not impact your Plan future contributions. Employee/ Participant Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 9
  10. 10. Want To Save A Fortune On Taxes? If you limit how much goes out (IRC Section (b), (d) - $195,000), there is no specific limit on how much goes in. So if Defined you want a contribution of more than Benefit $49,000 per person, you need a defined Plan benefit pension plan. Employee/ Participant Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 10
  11. 11. Want To Save A Fortune On Taxes? In General: Sample maximum contributions at various ages:35 – 5 years past service - $65,000 + DC plan @ 6% of comp + $16,500 in 401(k) X 2 spouses in year one is $190,000. Over 5 years it’s $1,000,000.45 - $130,000 + $30,000 X 2 spouses = $320,000, or $1,600,000 over 5 years.55 - $237,000 + $30,000 X 2 spouse = $534,000 or $2,670,000 over 5 years.Plus life insurance.Using the “cushion method” the amount in the first year might be it could be 3 to 4 times that amount(though zero in the second year). Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 11
  12. 12. Want To Save A Fortune On Taxes? Monthly Benefit Contribution at RA 62Helen 11/16/63 $60,000 $4,878.00 $ 29,276.00Michael 3/26/74 $40,000 $2,402.00 $ 11,045.00George 10/6/77 $45,000 $3,450.00 $ 12,147.00Lucy 9/5/70 $30,000 $1,773.00 $ 9,871.00Paul 8/29/76 $25,000 $1,173.00 $ 4,131.00Steven 11/18/79 $40,000 $1,615.00 $ 5,009.00Gary 8/2/75 $90,000 $3,403.00 $ 13,658.00Jane 10/25/57 $250,000 $7,634.00 $226,464.00Sam 9/2/51 $250,000 $7,667.00 $306,102.00Totals $617,703.00 [86.2% for bosses] Givner & Kaye,  A Professional Corporation 12 Owen@GivnerKaye.com 12
  13. 13. Want To Save A Fortune On Taxes? Is There A Good Set Of Facts? 1. You cannot determine if the facts are good simply by talking to your CPA. 2. You cannot determine if the facts are good simply by talking to a third party administrator or actuary. 3. The proper construction of the facts is a process that we must discuss with you and help you create. It must be conducted under the attorney‐client privilege. 4. The presentation of the facts is absolutely critical to the outcome and will make the difference between an attractive plan and one that will not work. Givner & Kaye,  A Professional Corporation Bruce@GivnerKaye.com 13
  14. 14. Want To Save A Fortune On Taxes? Givner & Kaye,  A Professional Corporation 14 Owen@GivnerKaye.com 14
  15. 15. Want To Save A Fortune On Taxes? Captive Insurance Companies (“wealth captives”) Givner & Kaye,  A Professional Corporation 15 Owen@GivnerKaye.com 15
  16. 16. Want To Save A Fortune On Taxes? Captive Insurance Companies for the Middle Market Originally used only by the very largest companies,captives are no longer the exclusive tool of those in theFortune 500. There are now well over 5,000 captiveswriting over $50 billion in annual premiums. Many ofthese captives insure middle market companies andsuccessful professionals. Givner & Kaye,  A Professional Corporation 16 Owen@GivnerKaye.com 16
  17. 17. Want To Save A Fortune On Taxes? IRC Section 831(b) A small property and casualty insurer withannual premium income not exceeding $1.2million pays no tax on its underwriting profitsbut is taxed solely on its investment income. Inthis case, the business that pays premium to acaptive deducts the premium expense while thecaptive pays no tax on the underwriting profits. Givner & Kaye,  A Professional Corporation 17 Owen@GivnerKaye.com 17
  18. 18. Want To Save A Fortune On Taxes?Estate Planning Estate planning is an important businesscontinuity consideration for closely held companiesand for their owners. A CIC can be a key componentin estate planning with the captive being owned byor for the benefit of the next generation (a dynastytrust) and so enabling a lifetime transfer of pre-taxunderwriting profits. Givner & Kaye,  A Professional Corporation 18 Owen@GivnerKaye.com 18
  19. 19. Want To Save A Fortune On Taxes? Common Captive Coverage Property & Casualty * Director & Officer * Subsidence * General Liability * Exclusions * Employment Practices * Deductible Reimbursement * Litigation Defense * Difference in Conditions * Construction Defect * Difference in Limits * Warranty * Workers’ Compensation * Mold Givner & Kaye,  A Professional Corporation 19 Owen@GivnerKaye.com 19
  20. 20. Want To Save A Fortune On Taxes? Captive Insurance Company: Deducting $1,200,000 Per Year Diagram 1: Pre-Setup Wilmington Trust Company David (or some other Delaware Trust Company) Grantor David Dynasty Trustee Trust (Delaware – Perpetual) $300,000 We commonly set up the trusts which own David’s heirs the captives in Nevada. Givner & Kaye,  A Professional Corporation 20 Owen@GivnerKaye.com 20
  21. 21. Want To Save A Fortune On Taxes? Captive Insurance Company: Deducting $1,200,000 Per Year Diagram 2: Set Up The Captive David Dynasty Trust (Delaware – Perpetual) The captive is exempt from Delaware business income tax. It is treated as one enterprise 100% owner Delaware LLC and, therefore, subject to only (taxed as a “C” corporation for one $5,000 minimum annual Federal income tax purposes) premium requirement. Each $500,000 series can receive up to $1.2 million tax free under IRC Section 831(b). Series “A”: Series “B”: Property & Health Plan Casualty Risks Liabilities Givner & Kaye,  A Professional Corporation 21 Owen@GivnerKaye.com 21
  22. 22. Want To Save A Fortune On Taxes? Business Captive Insurance Company: Deducting $1,200,000 Per Year #1 Diagram 3: Operating The Captive Alternative #1 Business Delaware Business #2 LLC #12 Business Business #3 #11 Business Business #4 #10 Business Business Business Business Business #9 #8 #5 #6 #7 Each business must pay a premium of 5% - 15% of the $1,200,000 total. Givner & Kaye,  A Professional Corporation 22 Owen@GivnerKaye.com 22
  23. 23. Want To Save A Fortune On Taxes? Captive Insurance Company: Deducting $1,200,000 Per Year Diagram 3: Operating The Captive Alternative #2 Delaware LLC 49% of the 51% of the Captive Operating premiums premiums Manager’s Business Pool Assume the captive manager re-insures 40% of the risk. Then 11% of the risk is shared among the pool. If there are 8 members of the pool and one has a $1,200,000 casualty, then the other 7 members lose $171,000 each. Givner & Kaye,  A Professional Corporation 23 Owen@GivnerKaye.com 23
  24. 24. Want To Save A Fortune On Taxes? Captive Insurance Company: Deducting $1,200,000 Per Year Diagram 4: Using The Captive’s Profits Delaware David Dynasty LLC Trust (Delaware – Dividends Perpetual) David as manager LLC used to LLC used to buy real buy real estate and estate and other other investments investments Givner & Kaye,  A Professional Corporation 24 Owen@GivnerKaye.com 24
  25. 25. Want To Save A Fortune On Taxes? Charitable Alternatives Givner & Kaye,  A Professional Corporation 25 Owen@GivnerKaye.com 25
  26. 26. Want To Save A Fortune On Taxes? Grantor Charitable Lead Annuity Trust Givner & Kaye,  A Professional Corporation 26 Owen@GivnerKaye.com 26
  27. 27. Want To Save A Fortune On Taxes? Gives $600,000 of LLC units CLAT Mom $464,000 charitable deduction 8.3% per year - $50,000 – for 10 years Children’s trust gets what is left at the end of the 10 year period Children’s Charity Trust Givner & Kaye,  A Professional Corporation 27 Owen@GivnerKaye.com 27
  28. 28. Want To Save A Fortune On Taxes? Charitable Lead Annuity Trust – Alternate #1 Bunching The Deduction Up FrontOctober, 2011 Section 7520 rate of 1.4% (lower is better)$1,000,000 of real estate generating $50,000 per year in an LLCValuation discounts of 40% make it $600,000 generating $50,000$50,000 is an 8.333% payout on $600,00010 Year Term, Remainder To ChildrenImmediate Charitable Gift of $463,542 (77.257%), which saves Mom $209,000if in a 45% state and Federal bracket [13 year term is 98.4% gift!!]Gift to the children’s trust of $136,459, for which a 709 must be filedMom is taxed on the income each year so she gives back the charitablededuction that was bunched up front Givner & Kaye,  A Professional Corporation 28 Owen@GivnerKaye.com 28
  29. 29. Want To Save A Fortune On Taxes? Charitable Lead Annuity Trust – Alternate #2 Deduction Up Front, No Taxable Income LaterOctober, 2011, Section 7520 rate of 1.4%$1,000,000 of muni bonds generating $40,000 per year in an LLCValuation discounts of 30% make it $700,000 generating $40,000$40,000 is a 5.7% payout (annuity) on $700,00010 Year Term, Remainder To ChildrenImmediate Charitable Gift of $369,921 (53%), which saves Mom$166,464 if in a 45% state and Federal bracket [20 years = 99% gift!!]Gift to the children’s trust of $330,079, for which a 709 must be filedMom is taxed on muni bond income each year (zero) Givner & Kaye,  A Professional Corporation 29 Owen@GivnerKaye.com 29
  30. 30. Want To Save A Fortune On Taxes? Doesn’t Have To Be A Gift Over To The Children – Can Come Back To Mom Gives $1,000,000 CLAT Mom 5% per year - $50,000 – for Mom gets what is 10 years left at the end of the 10 year period Charity Givner & Kaye,  A Professional Corporation 30 Owen@GivnerKaye.com 30
  31. 31. Want To Save A Fortune On Taxes? Charitable Remainder Annuity Trust Givner & Kaye,  A Professional Corporation 31 Owen@GivnerKaye.com 31
  32. 32. Want To Save A Fortune On Taxes? Charitable Remainder Annuity Trust October, 2011 Section 7520 rate of 1.4% But We Are Allowed To Use August’s 2.2% (Higher interest rate is better) (Longer retained term yields lower deduction)$1,000,000, 10 Year Term, 5% payout to MomImmediate Charitable Gift of $555,535, which saves Mom $250,000 ifin a 45% state and Federal bracket20 year term results in a $198,000 charitable deduction ($89,000 taxsavings) Givner & Kaye,  A Professional Corporation 32 Owen@GivnerKaye.com 32
  33. 33. Want To Save A Fortune On Taxes? Gives $1,000,000 Mom CRAT Charity gets what 5% per year is left at the end - $50,000 – of the 10 year for 10 years period Charity Givner & Kaye,  A Professional Corporation 33 Owen@GivnerKaye.com 33
  34. 34. Want To Save A Fortune On Taxes? CRAT August Section 7520 rate of 2.2% Mom, age 71, Retains 5% income for lifeImmediate Charitable Gift of $416,710, which saves Mom $187,520 if in a 45% state and Federal bracket [not significantly different than the results of a 20 year term] Note: Will Not Work For A 70 year old!!! Givner & Kaye,  A Professional Corporation 34 Owen@GivnerKaye.com 34
  35. 35. Want To Save A Fortune On Taxes? Gives $1,000,000 Mom CRAT Charity gets what 5% per year is left when mom - $50,000 – passes away for her life Charity Givner & Kaye,  A Professional Corporation 35 Owen@GivnerKaye.com 35
  36. 36. Want To Save A Fortune On Taxes? Charitable Limited Partnerships Givner & Kaye,  A Professional Corporation 36 Owen@GivnerKaye.com 36
  37. 37. Want To Save A Fortune On Taxes? Donate 97% of LP interests Mom and Dad Charity 3% GP Limited Partnership Contribute $1.0 of Becomes the 97% LP appreciated property97% of $1.0 X 90% (to allow for 10% valuation discounts) = $873,000 charitable deduction which saves $392,850 in income tax, but the $1,000,000 stays in the limited partnership. Givner & Kaye,  A Professional Corporation 37 Owen@GivnerKaye.com 37
  38. 38. Want To Save A Fortune On Taxes? The end result is that you have a limited partnership which you control.However, the largest limited partner is a charity. You must make a distribution of 5%of the value of the assets each year, and 97% of that distribution will be to thecharity. You must make that distribution so that the charity realizes and reasonablereturn on its investment. Beyond that, you can make appropriate investments withthe limited partnership assets, e.g., loans to your business, investments in realestate that you like, etc. This is an attractive way to control capital at an attractive cost, especially ifyou have an interest in benefitting charity. Givner & Kaye,  A Professional Corporation 38 Owen@GivnerKaye.com 38
  39. 39. Want To Save A Fortune On Taxes? Investments Givner & Kaye,  A Professional Corporation 39 Owen@GivnerKaye.com 39
  40. 40. Want To Save A Fortune On Taxes? Oil and Gas Givner & Kaye,  A Professional Corporation 40 Owen@GivnerKaye.com 40
  41. 41. Want To Save A Fortune On Taxes?EXAMPLE (adapted from Hard Rock Partners 2011-a, L.P.):No Oil & Gas Investment Oil & Gas Investment ($50,000 investment)Gross income $200,000 Gross income $200,000Taxable income $200,000 IDC deduction ( 50,000) Taxable income $150,000State Tax 6.5% $ 11,875 State Tax 6.5% $ 8,625Federal Tax $ 44,070 Federal Tax $ 30,070Total Tax $ 55,945 Total Tax $38,695 Tax Savings $17,250 (34.5% of $50,000) The cash flow often runs 10% per year for decades. Givner & Kaye,  A Professional Corporation 41 Owen@GivnerKaye.com 41
  42. 42. Want To Save A Fortune On Taxes? Economics: Gas prices are low, meaning any increase will improve investor returns U.S. is the Saudi Arabia of natural gas Work with an experienced operator that has (i) drilled hundreds of wells and (ii) excellent track record in existing developed fields Risk diversification in multi-well programs Return of initial investment in tax benefits and cash in 5 to 8 years Residual income for decades Givner & Kaye,  A Professional Corporation 42 Owen@GivnerKaye.com 42
  43. 43. Want To Save A Fortune On Taxes? Real Estate Givner & Kaye,  A Professional Corporation 43 Owen@GivnerKaye.com 43
  44. 44. Want To Save A Fortune On Taxes?Two methods of depreciation for Commercial Properties:Straight-line method - depreciated over 39 years.Stipulates that an asset must be depreciated by equal amounts each yearover its useful life.Example:You buy a commercial shopping center for $10,000,000. The land the centerresides on is worth $4,000,000 (40%). The building is valued at $6,000,000.Current law allows you to depreciate commercial properties by equalamounts annually over 39 years.$6,000,000/39 years = $153,846 annuallyOr calculate by multiplying the building percentage by 2.56%. Givner & Kaye,  A Professional Corporation 44 Owen@GivnerKaye.com 44
  45. 45. Want To Save A Fortune On Taxes? Accelerated Depreciation – Same $10.0 one story Shopping Center. Reasonable Cost Segregation allocations and related depreciation figures ($6.0 to Building, $4.0 to land): 5 year property 28% of $6,000,000 = $1,680,000 7 year property 3.5% of $6,000,000 = $ 210,000 15 year property 11.84% of $6,000,000 = $ 710,400 39 year property 56.66% of $6,000,000 = $3,399,600 Here is the resulting First Year Depreciation: 5 year property = $ 672,000 7 year property = $ 60,000 15 year property = $ 71,040 39 year property = $ 87,169 ___________ Total Depreciation in year one: $890,209 Givner & Kaye,  A Professional Corporation 45 Owen@GivnerKaye.com 45
  46. 46. Want To Save A Fortune On Taxes? Accelerated Depreciation – Value of building 6,000,000 Bldg. Segregation Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Totals 5 year property 1,680,000 672,000 403,200 241,920 145,152 87,091 1,549,363 7 year property 210,000 60,000 42,857 30,612 21,866 15,618 170,954 15 year property 710,400 71,040 63,936 57,542 51,788 46,609 290,916 39 year property 3,399,600 87,169 84,934 82,756 80,634 78,567 414,061 Totals 6,000,000 890,209 594,927 412,831 299,440 227,886 $2,425,294 Givner & Kaye,  A Professional Corporation 46 Owen@GivnerKaye.com 46
  47. 47. Want To Save A Fortune On Taxes? Questions and Answers Send us e-mail: Bruce@GivnerKaye.com Owen@GivnerKaye.com Kathy@GivnerKaye.com Givner & Kaye,  A Professional Corporation 47 Owen@GivnerKaye.com 47

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