© 2013 WealthCounsel, LLC Surviving and Thriving in 2013 and Beyond 1 A WealthCounsel Presentation.

Surviving and Thriving in 2013 and Beyond

1A WealthCounsel Presentation

Introducing Your Presenters . . .

C. Dennis Brislawn, Jr.William A. Conway

What Changed in 2013

• Federal Estate Tax Exemption – $5,250,000 – Inflation-adjusted

• Generation Skipping Tax Exemption – $5,250,000– Inflation-adjusted

• Annual Exemption – $14,000

• Obama Admin Proposal to Reduce Estate, GST, and Gift Tax Exemptions to $3,500,000

What Changed in 2013

• State Estate Tax– Decoupling– Additional Tax Structures

• Income Taxes– Dividends– Step-up in Basis

• ObamaCare• Medicaid• Health Care Decision-Making

2013 Income Tax Rates

• 10%, 15%, 25%, 28% rates from Bush Administration tax cuts made permanent

• 33% and 35% rates made permanent up to certain threshold levels -Single taxpayers $400,000 Married filing jointly $450,000

Head of households $425,000Married filing separately $225,000

• Amounts of income above these threshold levels are taxed at 39.6%

Threshold amounts adjusted for inflation

2013 Capital Gains & Dividends• Maximum rate stays at 15% for taxpayers with

incomes at or below threshold amounts• Tax rate increases to 20% for taxpayers above

threshold amounts on previous slide• 3.8% Medicare Surtax applies on AGI over $250,000

joint; $200,000 single • This results in a 23.8% tax rate on capital gains and

dividends to higher income taxpayers

2013 Itemized Deduction Limitation• Limitations on itemized deductions applies as AGI rises above

the following threshold amounts: Single taxpayers $250,000 Married filing jointly $300,000

Head of households $275,000Married filing separately $150,000

• Itemized deductions are phased out at a rate of 3% over the threshold levels, up to a maximum of 80%

• Deductions not included – investment interest, medical expenses and casualty and gambling loses

2013 Personal Exemption Phaseout

• The exemption phaseout starts once adjusted gross income (AGI) exceeds your threshold:

- $250,000 (single)- $300,000 (married/joint)- $275,000 (head of household)- $150,000 (married filing separately)• For each $2,500 of AGI over threshold, personal

exemption deductions ($3,900) are reduced by 2%

2013 Personal Exemptions Phaseout Range

Filing Status Phaseout Begins Phaseout Ends

Married Filing Jointly 300,000 422,500

Single 250,000 372,500

Head of Household 275,000 397,500

0.9% Medicare Payroll Surtax in 2013

• The Medicare payroll surtax on employees is increased by 0.9% on earned incomes over $200,000 for single filers and $250,000 for joint filers

3.8% Medicare Surtax on Investment Income in 2013

• New Medicare surtax of 3.8% on investment income is added for AGIs in excess of $200,000 for single filers and $250,000 for joint filers

2013 Tax Rates

What to Do Now – The < $5.25M Client• Estate tax issue is off the table for this strata of client. The

estate-planning drivers will be:

• Income tax minimization planning• Detail-oriented trust and estate administration

Desired distributions Asset protection

Probate avoidance Appreciation removal

Naming decision makers Generation skipping

Tax avoidance Retention of financial benefit

Exemption leveraging Retention of control

What to Do Now – The < $5.25M Client

• Income tax minimization strategies– Charitable trust planning to create a partially

taxable income stream for the philanthropic– Partially taxed single premium annuities (SPIA) are

attractive in this environment– The Alaska Community Property Trust provides a

double stepped-up basis and is programmed into WealthDocx

• Family Income Shifting Through Family Entities• Installment Sales of Real Estate and Business

Assets or Entities • Tax-Free Cash Value of Life Insurance Held

Within an Accessible Grantor Retirement Trust

• Remove or Reduce IRA and 401K Assets from Owner and Beneficiary Income Taxes (IRA Annuitization and Life Insurance Within an ILIT)

• Retirement Trust for Maximum IRA Stretch • Potential IRA/401K Roth Conversions

Increase the depth of our client service:•Elder law issues, avoiding estate depletion to fund nursing home costs and long-term care insurance•“Legacy Planning” - an expanded conversation with clients about how they can pass their non-financial wealth and preserve family harmony (using heirloom property, for example)

“Endangered Strategies”- Obama Budget

• Obama Proposals make these “endangered strategies”: – Grantor trusts still avoid estate tax, including (IDGTs)

and (ILITs)– Discounts are still allowed on non-business interests

or for transfers to minority interests– The 10 year minimum term for Grantor Retained

Annuity Trusts (GRATs) was not enacted – 2 year rolling GRATs remain available

– No 90-year limit on the GST tax exemption was adopted. Dynasty Trusts are still possible

What to Do Now – The > $5.25M Client

• Money can be loaned or property sold for an installment note with 3 - 9 year rates as low as .87% in January 2013 (1% Section 7520 rate)

• Ideal time for intra-family loans and sales

Business Tax Extensions-Opportunities

• Reduction in S Corporation recognition period - 5-year (formerly 10 years) holding period for built-in gains tax for sales occurring in 2012 and 2013. Carry forwards and installment sale rules are also clarified.

• 100% exclusion for capital gain from sale of qualified small business stock extended for stock acquired before January 1, 2014 if the stock is owned longer than five years. – The AMT preference rules do not apply.

Addressing Change

Flexibility & Certainty

Addressing Change

• Flexibility- Trust Protectors/Advisors- Marital Deduction Formulas- Disclaimers- Revocable Irrevocable Trust- Self-Settled Trusts – 14 states

Addressing Change

• Certainty

- Freeze Transactions

- After-Care Planning

What’s NOT Changing

• The Fundamentals– Avoiding Living & Death Probate– Protection of Surviving Spouse– Philanthropic Objectives– Planning for Heirs

• Youth• Responsibility & Skill• Divorce Protection• Preventing “Affluenza”

• Business Planning-BusinessCounsel BizDoxs – Entrance– Growth– Maintenance– Mergers/Acquisitions – Exit

• Retirement Planning– Roth IRA Conversions– IRA Planning Via “StandAlone” Retirement Trusts– Stretch– Annuitization & Replacement– Reengineering Closely-Held Businesses

Income Tax Planning

•Mobility to avoid state income taxes- Seven states impose no income tax, EG. Texas,Fla,Wy- Two states tax only dividend and interest income

•Income Shifting – within Family

•Opportunity Shifting- newly Established Businesses

• Elder Law Planning

• Special Needs Planning

• Asset Protection Planning

• Need for Life Insurance – Debt Liquidity– Income Replacement– Estate Equalization– Pay State Death Taxes – 21 States, EG. Md,DC,Pa,NY,etc– Wealth Replacement for Charitable Giving– Buy-Sell– Capital Gains Tax Liquidity (post-mortem)– Supplemental “Tax Free “Retirement Planning

A Few Questions

1. How have you responded to change?

2. What has worked?

3. What has not worked?

4. What do you need to succeed?

What’s Changing in Financial Services

• Products/Services

• Advisory vs. Commission

• Equity Indexed Products

• Private Annuities

• Captive Insurance Companies

What’s NOT Changing in Financial Services

• Need for Estate Planning

• Need for Client Centric Planning

• Financial Compliment to Legal Solutions

Reframe Your Referral Network

Developing a Teamwork Approach that Produces Consistent Results

Inclusion of the Entire Team

ClientAttorney

InvestmentAdvisor

InsuranceAgent

Reframe Your Approach to Client Prospects

The Client Meeting

• Tax Concerns– Income Tax Concerns– Estate Taxes, now or future

• Family Concerns– Asset Protection for/from Children– Asset Protection for Self– Second Marriage Protection for Spouse– Marriage/Divorce Protection for Children

The Client Meeting

• Disability Concerns– Guardianship

• Creditor Concerns– Frivolous Lawsuits

• Long Term Care– Resources Available– Nursing Home Draining Resources

• Post-Death Concerns– Probate– Fighting

The Client Meeting

• Business Concerns– Losing Business to Lawsuits– Loss of Asset Protection – Entity Piercing– Lack of Exit Plan – Out-of-Date Buy-Sell Agreements– Lack of Maintenance Plan

Expanding Your Solution Set

• Thriving Strategies : Post AFTA-Math

Issue Driven Solutions New Rules 1. Reduce and/ or eliminate current and future

income taxes

2. Asset Protection

3. Provide means for future estate and generation-skipping tax inoculation

Old ingredients, new recipes

New Thriving Solutions For the New Rules

Recipes for New Income Tax Solutions Using

Old and New Ingredients

Some Legal Recipe Ingredients• Revocable “Living” Trusts• Irrevocable Trusts

– Irrevocable Life Insurance Trusts (ILITs}– Stand Alone “Dry” IRTs, - EG. for IRAs – Intentional Grantor Trust for Asset Protection– Inter- Vivos QTIPs

• Family LPs & LLCs• Retirement Plans (IRAs, 401(k)s)

Some Financial Recipe Ingredients• Life Insurance

– Insured• Single Life• Survivorship

– Design Options • Low premium , high death benefit• High premium , low death benefit• Single premium , Modified Endowment (MEC)

Some Financial Ingredients

• Life Insurance– Types

• Cash Value Policies– UL, guaranteed or non– Variable UL – non-guaranteed only– Equity indexed, guaranteed or non– Whole Life –guaranteed

• Term Policies

Some Financial Ingredients

• Annuities – Right Tool for the Right Job – Deferred= “Surprise” LIFO Income Tax

– Immediate Annuities• SPIAS (Single Premium Immediate Annuities)

– Flavors of Immediate Annuities• Life only• Longer of Term of Years or Life• Multiple Lives

Annuitize the IRA

• Purchase an Immediate Annuity(within the IRA) Using Some IRA Assets

• Use Annuity Distribution from IRA to fund:– Payment of Income Tax Due– Life Insurance Premiums for Tax Free Inheritance– Increase Standard of Living

• Life Insurance Trust (ILIT)Owns Life Insurance

Annuitize the IRA

IncomeIncome

Annuity

ILITILIT

OwnerOwnerHeirsHeirs OwnerOwner

Annuitize the IRA

• Advantages– Pension like performance – Guaranteed lifetime income (not tied to market

performance)– Eliminates income tax to heirs on inherited assets– Eliminates all estate tax/GST if coupled with ILIT – Guaranteed death benefit to age 100 and beyond

• Disadvantage– Depends on health- for insurability– Some of IRA is now committed to income generation

Annuitize the IRAA. Existing Plan at Death

$1,000,000 IRA - 300,000 Income Tax$ 700,000

To Beneficiaries

B. Existing Plan at Death

$1,000,000 IRA - 400,000 Estate Tax - 300,000 Income Tax$ 300,000 To Beneficiaries

Annuitized IRA Plan

$1,000,000 Insurance within ILIT

$1,000,000 Beneficiaries Estate, Income GST Tax Free

Annuitize the IRA

– Example:IRA owner: age 70, healthy male (non-smoker}IRA value: $1,000,000Tax Rate: 30%

– Result:Annual Annuity Payment $75,350Less Income Tax at 30% ($22,600)Less Annual Ins. Premium ($25,000)Net Net Annual Income $27,750

Annuitize CASH/BONDS

• Variation- May Use CD’s or BONDS (guaranteed assets) to Purchase an Immediate Annuity

• Creates a self funded tax favored “pension”

• Use the Annuity Payments to fund:– Income Tax Due – much reduced because of exclusion– Insurance Premiums for Enhanced Wealth Transfers– Increase Standard of Living

• Life Insurance Trust Owns Life Insurance

Annuitize CASH

CASHCASH

AnnuityAnnuity

ILITILIT

OwnerOwnerHeirsHeirs OwnerOwner

IncomeIncome

Annuitize CASH

– Example: Life OnlyCASH owner: age 80, healthy male –non smoker Account value: $1,000,000Tax Rate: 30%

– Result:Annual Annuity Payment $113,300

Taxable Portion is ONLY $15,732 really!Less Income Tax at 30% ($ 4,720)Less Annual Ins. Premium ($ 55,000)Net Net Annual Income $ 53,580

Annuitize CASH

• Advantages– Dramatically increases after tax cash flow (not income),

guaranteed for life (not tied to market performance – in ‘pension like fashion ‘)

– No income/estate tax to heirs on ILIT owned insurance – Ties guaranteed insurance policy to guaranteed cash

• Disadvantages– Largely depends on insurability

Annuitize Your CASH

A. Existing Plan at Death

$1,000,000 CASH - 160,000 State Estate Tax

$ 840,000 To Beneficiaries

Annuitized CASH Plan

$1,000,000 BeneficiariesEstate, Income,GST

Tax Free

IRA Retirement Trust

• Guarantees Income Tax Deferral “Stretch” Plan

• Asset/Divorce Protection for Beneficiaries

• Opportunity for Significant Income Deferral While Providing Trust Benefits

Stand-Alone Retirement IRA Trust

Stand-Alone Retirement/Education

• Income Tax Free 529 Held by Trust During Life

• All Assets are Asset Protected

• Enhanced by IRA Proceeds at Death

• All Assets Are Income Tax Free or Deferred

Life Insurance Retirement Trust • ILIT with Carefully Drafted Loan Provisions to Provide

Supplemental Retirement Benefits to Grantor and Spouse

• Trust Owned Low Death Benefit, High Cash Value Policy

• Spouse or Grantor May Borrow Cash Value -Tax Free

• Maintain Estate Tax Exclusion for Death Benefits

“Have It Both Ways”

Survivorship Life Policy as Legacy Gift• Survivorship (second to die) Policy as alternative

investment within ILIT

• Policy design is opposite of Retirement ILIT –for maximum insurance leverage

• Thus low cash value, high death benefit policy

• Estate Tax, Income Tax and GST Legacy Gift

Self-Settled Asset Protection Trusts

• Hot Trend in Law

• 14 States and counting

• Gift tax defective? – Could be, especially where no estate concerns

• Logic behind law

Intergenerational Income Shifting• Children (over 22) are in lower income tax brackets

• Parents have high income tax

• Create FLP/LLC (with low/no discounts) family entity

• Hire Family Managers- W-2 or 1099 income on/off switch

• Gifts of Interests to Children –”Opportunity Shifting”

• Frees up annual exclusion gifts for other purposes

New Rules Reducing/Eliminating Discounts

• Discounts from entity no longer needed

• New battleground is income not estate tax

• Continued asset protection desired

• Amend all previous “discount clauses” in FLP/LLC agreements to provide “put right”, or withdrawal right etc.

New Rules –Income Tax Avoidance Community Property Trusts

“Normal "Tax Result, sale if both spouses are alive:

FMV $ 3,500,000Basis (100,000)Capital Gain $3,400,000

Capital Gains Tax 23.8%State Tax 6%Total Cap Gain Tax $1,020,000

Strategy : Community Property Trusts

Non-Community Property StateSale After 1st Spousal Death

Deceased Spouse’s FMV $1,750,000

Adjusted Basis $1,750,000 Capital Gain -0-

Non Community Property State

Surviving Spouse FMV $1,750,000

Adjusted Basis - 50,000

Capital Gain $1,700,000 Combined Tax Rate 30% Total Tax $ 510,000

Community Property State Sale After 1st Spousal Death

$3,500,000

Community Property State

$3,500,000

• How does the Holder of the Power of Attorney and/or Successor Trustee gain control over:

• Passwords for Financial Accounts ?• Facebook/Social Media /Photo Accounts ? • Restate all Trusts / Create New POAs

Restatements for Digital Assets

Review of Thriving Strategies

• IRA Annuitization• Stand-Alone Retirement Trusts• Retirement Life Insurance Access ILITs• “Guaranteed” Survivorship Life Policy within

an ILIT as a Legacy Gift• Self-Settled Asset Protection Trusts

Review of Thriving Strategies• Domestic Self-Settled Asset Protection Trust• Income Shifting with Family Entities• Reducing or Eliminating Discounts• Community Property Trusts –Alaska Sited • Amendment/Restatements to All POAs/ Estate

Plans For Access to Digital Assets-

Additional Thriving Strategies

• Senior Asset Protection Trust

• Maintenance Programs

• Life Insurance Audits- Especially ILIT owned

• Social Security Analysis and Payout Strategies

Thank You

© 2013 WealthCounsel, LLC Surviving and Thriving in 2013 and Beyond 1 A WealthCounsel Presentation.

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Transcript of © 2013 WealthCounsel, LLC Surviving and Thriving in 2013 and Beyond 1 A WealthCounsel Presentation.

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