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InKnowVision March 2013 HNW Technical PPT - Liquidity Needs in Estate Planning

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In this presentation we’ll be looking at the problem seen in many large estates - The lack of liquidity to deal with estate equalization and liquidity for areas such as estate taxes and charitable funding.

Many of our clients have significant private businesses or extensive real estate holdings that represent a large percentage of the family wealth. There is often a large shortage of liquidity to deal with the division of these illiquid assets among family members as well as pay any estate taxes that may be levied on the estate. Of course if estate taxes do need to be paid there is a limited window when money can be raised and often times this means selling property at a less than opportune time.

In this session we will look at various designs for creating liquidity.

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InKnowVision March 2013 HNW Technical PPT - Liquidity Needs in Estate Planning

  1. 1. InKnowVision’s Monthly HNW Webinar Series Technical Webinar ©2013. InKnowVision LLC. All rights reserved. www.inknowvision.com
  2. 2. Upcoming Webinars: April 17th – Private Annuity & SCINs @InKnowVision(630) 596-5090 www.InKnowVision.com All Content Copyright © 2013 InKnowVision, LLC InKnowVision TheComplexEstate
  3. 3. Did you miss our marketing webinar last week? “A new marketing program centered on captive insurance companies.” Email chelsea@ikvllc.com or Jessy@ikvllc.comhttps://www.slideshare.net/inknowvision/hnw-client-attraction-tool www.InKnowVision.com All Content Copyright © 2013
  4. 4.  Buy-Sell Buddies Fantastic Farmers Business Owner | Real Estate | Family Stock Lover www.InKnowVision.com All Content Copyright © 2013
  5. 5.  Second generation company owners Business thriving FMV-$60M plus Each partner’s net worth - $35M Unfunded buy sell No cash for estate tax www.InKnowVision.com All Content Copyright © 2013
  6. 6.  How much liquidity needed?  Determining value of business  Appraisal?  Agreement? Settling on terms  Single pay  Pay over time Insurance choices  Term vs. permanent www.InKnowVision.com All Content Copyright © 2013
  7. 7.  Individual Ownership vs. Trust Ownership  Estate tax reduction vs. capital gains www.InKnowVision.com All Content Copyright © 2013
  8. 8. AssumptionsEstate Tax Rate 35% Capital Gains Tax Rate 25%Value of 1/2 interest in Company 30,000,000Each owner owns $30M of insurance to buy out estate of deceased shareholderSeller Buyer If owner dies with stock in estate Insurance proceeds Received 30,000,000 Value in estate 30,000,000 Purchase price on shares 30,000,000 Step up in basis (to estate) 30,000,000 Buyers new basis in shares 30,000,000 Sales Price 30,000,000 Capital Gain - Sale price (1/2 interest) 60,000,000 Cap Gains Tax @25.00% - Capital Gain 30,000,000 Cap Gains Tax (1/2 interest) @25.00% 7,500,000 Value of surviving Spouses estate today 30,000,000 Assumed growth rate of reinvested sales proceeds 5% Number of years until death of surviving spouse 10 Value if spouse dies 10 years into the future 48,866,839 Estate Tax at 35.00% 17,103,394 Total Estate and CG Tax 24,603,394Each owner owns $15M of insurance to buy out estate of deceased shareholder. $15M will be in ILITValue of 1/2 interest in Company 15,000,000 ILIT 15,000,000Seller Buyer If owner dies with stock in estate Insurance proceeds received 15,000,000 Value in estate 15,000,000 Purchase price on shares 15,000,000 Step up in basis (to estate) 15,000,000 Buyers new basis in shares 15,000,000 Sales Price 15,000,000 Capital Gain - Sale price (1/2 interest) 60,000,000 Cap Gains Tax @25.00% - Capital Gain 45,000,000 Cap Gains Tax (1/2 interest) @25.00% 11,250,000 Value of surviving spouses estate today 15,000,000 Assumed growth rate 5% Number of years until death of surviving spouse 10 Value if spouse dies 10 years into the future 24,433,419 Estate Tax at 35.00% 8,551,697 Total Estate and CG Tax 19,801,697
  9. 9.  Health underwriting  Tobacco  Lifestyle  Drug and Alcohol Dangerous activity underwriting  Mountain climbing  Scuba  Car racing Financial underwriting  Substantiating the need for insurance www.InKnowVision.com All Content Copyright © 2013
  10. 10.  Review of all  Corporate documents  Ownership interests  Shareholder agreements  Bank covenants  Estate planning documents  Buy sell agreement www.InKnowVision.com All Content Copyright © 2013
  11. 11.  $25M of term insurance issued to fund buy-sell agreement www.InKnowVision.com All Content Copyright © 2013
  12. 12.  Two farming families Net worth  Family 1 - $40M  Family 2 - $40M Partners in all ventures 10 year plan to sell out of family real estate www.InKnowVision.com All Content Copyright © 2013
  13. 13. ASSETS VALUESCASH AND EQUIVALENTS 616,632MARKETABLE SECURITIES - EQUITIES 1,758,000CLOSELY HELD BUSINESS 34,034,000RESIDENTIAL REAL ESTATE 1,175,000TOTAL 37,583,632 Husband 77 Years Old Uninsurable Wife 78 Years Old Table B-D www.InKnowVision.com All Content Copyright © 2013
  14. 14. Year Estate Tax Liquidity2012 $9,600,000 $2,350,0002013 $18,300,000 $2,350,000 Where will the money come from? www.InKnowVision.com All Content Copyright © 2013
  15. 15.  Sell business interests to GDOT for a note 32 year note  Accruing interest/balloon note Leave note to charity in event of death  No estate tax Insure children to pay off the note  Children have the use of the property during their lives Re-evaluate as farm sales occur  Look for new opportunities www.InKnowVision.com All Content Copyright © 2013
  16. 16.  $10M of term-daughter $10M of term-son $20M or GUL-survivorship on siblings Paid for with business profits www.InKnowVision.com All Content Copyright © 2013
  17. 17.  Client owns  Business - $15M  Family Corporation Stock - $25M (pretty liquid)  Real Estate - $10M  Collectibles - $7M Goals  Keep business  Keep family stock  Keep real estate www.InKnowVision.com All Content Copyright © 2013
  18. 18. $7 0,0 00,0 00 $6 0,0 00,0 00 $5 0,0 00,0 00 $4 0,0 00,0 00 After other planning techniques - $3 0,0 00,0 00 $2 0,0 00,0 00 $1 0,0 00,0 00 $- nt 13 17 19 22 24 26 28 11 12 14 15 16 18 20 21 23 25 27 29 30 re 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ur C F am ily Stock F am ily Stock S o ld Esta te T a xTh is ch art com p ares th e am ou n t o f you r Fam ily sto ck so ld to p ay e state taxe s un d er th e p rop o se d p lan . www.InKnowVision.com All Content Copyright © 2013
  19. 19.  Income - $1.2M Expenses - $1.2M Need cash flow for premium ($250k per year) www.InKnowVision.com All Content Copyright © 2013
  20. 20.  Suggestion #1  Sell collectibles  Objection – no basis – high tax rate (28% plus state) Solution  CRT for collectibles www.InKnowVision.com All Content Copyright © 2013
  21. 21.  Suggestion #2  Refinance commercial real estate www.InKnowVision.com All Content Copyright © 2013
  22. 22.  Suggestion #3  Captive Insurance Company  Use reserves in future to pay life premiums www.InKnowVision.com All Content Copyright © 2013
  23. 23.  $15M of GUL in force www.InKnowVision.com All Content Copyright © 2013
  24. 24. 715 Enterprise DriveOak Brook, IL 60523(630) 596-5090www.inknowvision.com Scott@ikvllc.com (630) 470-6480 @InKnowVision InKnowVision, LLC InKnowVision TheComplexEstate Google+ All Content Copyright © 2013

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