2012 Estate Tax Planning Landscape Overview

2012 Estate Tax Planning Landscape Overview

Presented by:

Justin Ransome and Robert PerezAICPA Trust, Estate, and Gift Tax Technical Resource Panel

The views expressed by the presenters do not necessarily represent the views, positions, or opinions of the AICPA or the presenter’s respective organization. These materials, and oral presentation accompanying them, are for educational purposes only and do not constitute accounting or legal advice or create an accountant-client or attorney-client relationship.

NOTE: This is an audio only event. The presentation will stream through your computer, so please make sure your speakers are on.

If you prefer to listen by phone, call 1-877-456-7681 and, when prompted, enter conference code 4213578915.

http://intranet.aicpa.org/AICPA%20Teams/Communications/Communications%20-%20311312/brand/AICPA%20Logos%20%20Web/PFP%20Section/JPEG/AICPA-Web-PFP_right_1c.jpg

Tax Section Personal Financial Planning Section

To contact support, click here:

For a copy of the presentation, click the Handouts button to open a window with a downloadable PDF :

Navigating the webinar platform:

2


Submitting questions during the presentation:

Click the Q&A button in the toolbar below:

Click then type your question in the box and click ‘submit’.

If possible, we will answer questions as we go. We have also built in some time for additional questions at the end of the presentation.

3


Speakers' Biographies

Robert Perez• Principal Shareholder• Robert Perez LLC• AICPA Trust, Estate, and Gift Tax Technical Resource Panel Member

Justin Ransome• Partner, Washington National Tax Office• Grant Thornton LLP• AICPA Trust, Estate, and Gift Tax Technical Resource Panel Past Chair

4


Agenda

Transfer Taxes in 2012

Transfer Tax Planning Techniques

Planning Considerations in 2012

5


Gift and Estate Tax – rates and exemption

Gift and estate tax are re-unified

Top marginal gift and estate tax rate is 35 percent

Amount exempt from gift and estate tax is $5 million• Portable between spouses• Indexed for inflation beginning in 2012 (5.12 million)

6


Gift and Estate Tax – portability

Applicable exclusion amount is sum of "basic exclusion amount" and "deceased spousal unused exclusion amount" (DSUEA) Basic exclusion amount is $5 million, indexed for inflation beginning in 2012 ($5.12 million)DSUEA is lesser of• Basic exclusion amount or • Excess of

- Basic exclusion amount of last deceased spouse over- Amount with respect to which tentative estate tax is

determined on estate of that spouse

7



Susan and John are married and live in a noncommunity property state. Susan has assets of $2 million in her name, and John has assets of $7 million in his name. They have no joint assets and neither has made any taxable gifts. Susan dies in 2011 and leaves her assets to their children.

John's DSUEA is $3 million – the lesser of:1.Basic exclusion amount with regard to Susan of $5 million or2.The excess of $5 million over sum of Susan's taxable estate of $2 million and adjusted taxable gifts of zero

If John dies in 2012, applicable exclusion amount is $8 million

8



Advantage of portability is it eliminates necessity to try to equalize estates of two spousesIf poorer spouse dies first, that spouse's unused exclusion amount is not wastedAs tempting as it may be to avoid effort to equalize, it is still a necessity until portability becomes permanent As of now portability applies only if first spouse dies after January 1, 2011 and surviving spouse makes gifts or dies before December 31, 2012Portability does not apply for GSTT purposes

9


Gift and Estate Tax – clawback

If 2010 Act sunsets and estate tax reverts to maximum rate of 55 percent and exemption amount of $1 million, question arises whether taxpayer who made gifts in 2011 and 2012 lose benefit of $5 million exclusion amount upon deathQuestion revolves around what credit amount is to be used in computing gift tax payable• Under 2010 Act, it is amount as of date of death• Under prior law, it is as of date of gift• After 2001 Act sunsets, Code is to be administered as if 2001

Act "had never been enacted"

• Thus, credit was never more than $345,800

10


Generation-Skipping Transfer Tax

Tax rate is 35 percent

GST exemption is $5 million • GST exemption is indexed for inflation starting in 2012 ($5.12

million)• Not portable between spouses

2001 Act provisions preserved• Automatic allocations to indirect skips• 9100 relief for missed allocations and elections• Retroactive allocations for unnatural orders of death• Trust severances for GST tax purposes

11


Transfer Tax Status 2009-2013

Estate, Gift and GST Tax Rates and Exemptions

Estate Tax Gift Tax Generation-Skipping Transfer Tax

Exemption Top Rate Exemption Top Rate Exemption Top Rate

2009 $3,500,000 45% $1,000,000 45% $3,500,000 45%

2010 $5,000,000* 35%* $1,000,000 35% $5,000,000 0%

2011-12 $5,000,000**(portable) 35% $5,000,000** 35% $5,000,000** 35%

2013+ $1,000,000 55% $1,000,000 55% $1,000,000** 55%

*May elect to apply law under EGTRRA (i.e., no estate tax in 2010, carryover basis)**Adjusted for inflation

12


Agenda




13



Outright Gift

Family Limited Partnership (FLP)

Grantor Retained Annuity Trust (GRAT)

Sales to Intentionally Defective Grantor Trust (Sale to IDGT)

14


Outright Gift – overview

Individuals may give up to $13,000 annually without gift tax consequences

In 2012, an individual may make taxable gifts of $5.12 million during life before incurring a gift tax liability

15


Outright Gift – advantages

True freeze technique

Removes income and appreciation on gifted property from estate

Gifts are tax-exclusive (i.e., value of gift does not include value of tax)

16


Outright Gift – example

Evan is divorced and has four childrenHe has an estate worth $55 million in 2012Evan gives each of his children assets worth $1.25 millionEvan dies in 2021Assume that amount excluded from estate tax returns to $1 million in 2020 and maximum estate tax rate is 55%Assume assets grow at 7% per year after tax

17


Outright Gift – example

Do Nothing GiftGross Estate in 2021 $101,115,257 $91,922,961Estate Tax $55,267,591 $50,916,829

Net Estate $45,847,666$41,006,132Gift in 2012 $9,192,296

Total Estate $50,198,428

Benefit of Outright Gift $4,350,762

18

Tax Section Personal Financial Planning Section 19

FLP

FLP2. Limited & General Interests

1. Assets

3. Limited Interest

Senior FamilyMembers

Junior FamilyMembers


FLP – overview

Partnership created to facilitate transfer of wealth from one generation to next generationTransfer tax benefit of creating FLP is reduction in gift/estate tax value of assets transferred to FLP when such assets are ultimately transferred to younger generationsReduction in value is result of discounts associated with transfer of limited interests in FLPApplicable discounts include minority interest, lack of marketability and/or lack of controlHigh IRS scrutiny

20


FLP – advantages

Control over assets and distributions

Simplifies gift-giving and management of estate

Investment flexibility and efficiency

Asset protection

Valuation discounts

21


FLP – example

Evan is divorced and has four childrenHe has an estate worth $55 million in 2012Evan transfers $8 million of assets to a family LLC and gives each of his children a $1.25 million interest in LLC valued based on 37.5% discountsEvan dies in 2021Assume that amount excluded from estate tax returns to $1 million in 2021 and maximum estate tax rate is 55%Assume assets grow at 7% per year after tax

22


FLP – example

Do Nothing Gift of LLCGross Estate in 2021 $101,115,257 $86,407,583Estate Tax $55,267,591 $47,883,371

Net Estate $45,847,666$38,524,212

Gift in 2012 (no discount) $14,707,674Total Estate

$53,231,886

Benefit of Gift of LLC $7,384,220

23


GRAT

GRAT2. Income Interest

1. Property

3. Remainder Interest

Children

Parents


GRAT – overview

Estate freeze technique used to transfer appreciation of assets in excess of section 7520 rate to younger generations

Value of retained interest reduces value of transfer to GRAT for gift tax purposes

Value of retained interest may be set equal to value of assets transferred to GRAT ("zero out") and, thus, there would be no gift tax consequences of transfer to GRAT

25


GRAT – advantages

To extent assets transferred to GRAT appreciate at a rate in excess of section 7520 rate over annuity term, such “excess” appreciation inures to benefit of remainder beneficiaries free of additional transfer tax

Because a GRAT is a “grantor trust” for income tax purposes, all income tax consequences associated with GRAT are responsibility of grantor, therefore preserving assets in GRAT that will ultimately pass to remainder beneficiaries

26


GRAT – interest rates

Section 7520 rate (120% of mid-term applicable federal rate) for month in which transfer is made to GRAT is “hurdle rate” which assets have to beat in order for GRAT to produce an estate tax benefitAs interest rates rise, all other factors remaining same, benefit of GRAT decreases$55M transfer, 5M gift, 9 year annuity term, 7% appreciation

Rate Amount Removed from Estate1.2% $30,514,7092.4% $26,333,4394.8% $17,605,401

27


GRAT – example

Evan is divorced and has four childrenHe has an estate worth $55 million in 2012Evan transfers all his assets to a family LLCEvan transfers his entire interest in LLC to a GRAT with a term of 9 years and a $5,000,000 present value remainder interest (based on a 37.5% discount and section 7520 rate of 1.2% (for July 2012)) which will be distributed to his children upon termination of annuity interest – Evan will receive an annuity of $3,462,852 ($5,540,653 undiscounted) per yearEvan dies in 2021Assume that amount excluded from estate tax returns to $1 million in 2021 and maximum estate tax rate is 55%Assume assets grow at 7% per year after tax

28


GRAT – example

Do Nothing GRATGross Estate in 2021 $101,115,257 $66,364,743Estate Tax $55,267,591 $36,859,809

Net Estate $45,847,666$29,504,934GRAT in 2012 $34,750,514


Benefit of GRAT $18,407,782

29


Sale to IDGT

Parents IDGT

1. Gift “Seed” Property2. Assets

3. Note

5. Remainder Interest

4. Interest Payments

Children/Grandchildren


Sale to IDGT – overview

Estate freeze technique that involves sale of assets to an “intentionally defective grantor trust” for an installment note

Installment note generally set for a term of 5 to 9 years and interest rate set at section 7872 rate commensurate with term of installment note

Because IDGT is a disregarded entity for income tax purposes, sale does not trigger income tax consequences

31


Sale to IDGT – advantages

Removes appreciation in excess of section 7872 rate from grantor’s estate without additional transfer tax consequences

Greater wealth transfer benefit if property sold to IDGT is discounted property and distributions from discounted property can service installment note

Excellent vehicle to transfer wealth to grandchildren and younger generations

32


Sale to IDGT – interest rates

Applicable federal rate for month in which sale takes place (commensurate with term of note) is “hurdle rate” which assets have to beat in order for Sale to IDGT to produce an estate tax benefitAs interest rates rise, all other factors remaining same, benefit of Sale to IDGT decreases$5M gift, $50M sale, 9 year note, 7% appreciation

Rate Amount Removed from Estate 2%$39,137,268 4%$27,159,279 6%$15,181,290

33


Sale to IDGT – example

Evan is divorced and has four childrenHe has an estate worth $55 million in 2012Evan transfers all his assets to a family LLC and gives a $1.25 million interest in LLC valued based on 37.5% discounts to a trust for benefit of each of his childrenEvan sells remaining LLC interests to children’s trusts for a $29,375,000 9 year balloon note with interest at 0.92% (July 2012 mid-term AFR) per yearEvan dies in 2021Assume that amount excluded from estate tax returns to $1 million in 2021 and maximum estate tax rate is 55%Assume assets grow at 7% per year after tax

34


Sale to IDGT – example

Do Nothing Gift and SaleGross Estate in 2021 $101,115,257 $32,612,051Estate Tax $55,267,591 $18,295,828

Net Estate $45,847,666 $14,316,223Gift and Sale in 2012 $68,503,206


Benefit of Sale to IDGT $36,971,763

35


GRAT/Sale to IDGT – comparison

Sale to IDGT GRAT AdvantageStatutorily sanctioned No Yes GRATProtection against revaluation No1 Yes GRATCreate without taxable gift Maybe2 Yes GRATProtection if assets decline in value No Yes3 GRATGrandchildren as beneficiaries Yes No SaleAble to terminate early Yes4 No SaleBalloon payment Yes No SaleIncome tax consequences if grantor Possible5 No GRAT dies during note termAmount includible in estate if grantor Unpaid FMV Sale dies during term Principal of Trust

1. May use valuation clause to negate gift tax effect of revaluation 2. If seed gift in excess of credit amount 3. Assuming GRAT is “zeroed-out” 4. Note should allow for prepayment 5. Questionable whether death triggers gain if note still outstanding

36


Comparison

Outright Gift Gift of LLC GRAT Sale to IDGT$91,922,961 $86,407,583 $66,364,743 $32,612,051$50,916,829 $47,883,371 $36,859,809 $18,295,828$41,006,132 $38,524,212 $29,504,934 $14,316,223 $9,192,296 $14,707,674 $34,750,514 $68,503,206$50,198,428 $53,231,886 $64,255,448 $82,819,429

$4,350,762 $7,384,220 $18,407,782 $36,971,763

37


Agenda




38


Planning Considerations for 2012

Large Gift

Interests in Closely-Held Family Business

Grantor Retained Annuity Trust

Sales to Intentionally Defective Grantor Trust

Generation-Skipping Transfer Tax Planning

39


Large Gift

Amount exempt from gift tax jumped dramatically from $1 million to $5.12 million (for 2012)Increase may be only temporary – December 31, 2012Gift tax rate is only 35 percent – may revert to maximum of 55 percent in 2013Gifts during 2012 eliminate future appreciation in value of gifted property from transfer taxesGift of $5 million in 2012 instead of in 2013 results in an instant gift tax savings of $2,045,000 ($2,111,000 if gift of $5.12 million)

40


Interests in Closely-held Family Business

Increased gift tax applicable exclusion amount of $5.12 million can be further leveraged by gifts of interests in closely-held family businesses valued using these discountsDiscounts for minority interests and lack of marketability• Legislative proposals to limit use of discounts for closely-held

family businesses have not been enacted• Discounts continue to be viable estate planning tool

Even if discounts are legislatively restricted in future, donor has eliminated value representing discounted value from transfer taxes

41


GRAT

GRATs continue to be valid estate planning tool for • Wealthy individuals • Individuals who may again be subject to estate taxes in 2013

and beyond • Individuals who are subject to state estate taxes

Current low AFR rates to value retained interest as well as low values for assets to be transferred to GRATs continue to make GRATs an important estate planning technique Legislative proposals to require a 10-year minimum term GRATs have not been enacted

42


Sale to IDGT

Seed money for sales to IDGTsTraditionally IDGT required to have 10 percent equity• If funded with $1 million tax-free gift, $10 million of assets could

be sold to IDGT• Now increase funding by another $4 million tax-free gift, an

additional $40 million can be sold to IDGT when section 7872 rates are currently low – 0.92 percent mid-term rate for July 2012

Additional gift to existing transaction to allow IDGT to pay off notePresident has provision in 2012 budget to eliminate benefits of IDGTs

43


Generation-Skipping Transfer Tax Planning

Utilize increased GST exemption of $5.12 million (for 2012)Create new trusts to which GST exemption may be allocated• If created in state with no rule against perpetuities, trust can last

forever • Trust will always be exempt from GSTT

Consider late allocation to trust that is non-exempt or partially exemptRemember that GST exemption is allocated to trust based on value of trust at date of late allocation

44


Thank You!

You only have 5 1/2 months to act

45


Questions

46


Upcoming EventsNext Tax Power Hour: Starting Off Right – Roadmap to starting a firm today• Thursday, July 19th from 1 – 2 pm (Free, no CPE available)

Other Tax Section webinars• July 24th (2 pm) Nuts & Bolts of a Partnership’s §754 Election

- Register today: 1.5 Hours CPE (Tax Section Members can attend Free/No CPE)

• July 26th (1 pm) Tax Practice Quality Control- Register today: 1.0 Hour CPE (Tax Section Members can attend

Free/No CPE)• August 14th (2 pm) Using E-Services in Your Tax Practice

- Register today: 1.5 Hours CPE (Tax Section Members can attend Free/No CPE)

47

http://tax.aicpa.org → CPE & Events

47

http://www.aicpa.org/InterestAreas/Tax/CPEAndEvents/Pages/TaxPowerHourEventdetails.aspx

http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/Tax/Practice/PRDOVR~PC-WBC12240I/PC-WBC12240I.jsp

http://www.aicpa.org/InterestAreas/Tax/CPEAndEvents/Pages/FreeandNoCPE.aspx







Save the Date…

Registration links coming soon for:Tax Related Identity Theft

• August 7th at 1 pm (1.0 hour CPE)

Small Business Retirement Plans• August 8th or 9th (1.0 hour CPE)

Cancellation of Debt• August 15th at 1:00 pm (1.0 hour CPE)

Visit the CPE & Events page for registration links.

48

http://www.aicpa.org/INTERESTAREAS/TAX/CPEANDEVENTS/Pages/default.aspx


How did you like today’s webinar?

Please complete a quick evaluationand let us know!

Click here to complete the evaluation.49

2012 Estate Tax Planning Landscape Overview

Documents

Transcript of 2012 Estate Tax Planning Landscape Overview