GROWING AND PRESERVING ASSETS THROUGH TAX AND ESTATE PLANNING - Tina Davis, CTC | myCFO

IFG Wealth Management Forum

Growing and preserving assets through tax and estate planning

Tina Davis Milligan, CPA

Managing Director, Family Office Services

>Current and future tax law landscape

>The importance of overall financial planning

> Income tax planning opportunities

>Estate planning opportunities

Agenda

Current and future tax landscape

Tax rates 2012 2013, 2014, 2015, 2016

Ordinary income 39.6% for income over threshold levels1

35% 35%

33% 33%

28% 28%

25% 25%

15% 15%

10% 10%

Alternative minimum tax2 26% / 28% 26% / 28%

Interest Ordinary income rates Ordinary income rates

Long –term capital gains and qualifying dividends 20% for income over threshold levels1,3

15%3 15%3

0%3 0%3

Personal exemption phaseout (PEP) None Restored

Limitations on deductions None Restored

Health care reform increases None 3.8% on investment income4

None 0.9% on earned income

1. For taxpayers whose income exceeds $450,000 for married filing jointly and $400,000 for single filers

2. ATRA permanently extends AMT relief, retroactively increasing the AMT exemption amounts for 2012 and providing that the exemption amounts will be indexed for inflation in

future years

3. For taxpayers in the 10% or 15% marginal income tax bracket, special 0% rate generally applies. Taxpayers in the 25%, 28% 33% or 35% tax brackets, a 15% maximum rate will

generally apply. Taxpayers in the 39.6% tax bracket will be subject to a maximum rate of 20%.

4. 3.8% on “unearned income” to taxpayers above $250,000 for married filing jointly and $200,000 for single filers

Income taxes

3

Subject to surtax Exempt from surtax

Wages X

Active business income X

Self-employment income X

Gain from sale of active business X

Retirement plan distributions X

Taxable interest X

Exempt interest X

Dividends X

Annuity income X

Passive royalty X

Active royalty X

Rents X

3.8% Medicare “surtax”

Types of income subject to surtax

Estate, GST, and Gift taxes

Estate, gift and generation-skipping tax. ATRA prevented steep increases in estate, gift and generation-skipping transfer (GST) tax that were

slated to occur after 2012 by permanently keeping 2012 exemption level indexed for inflation. In 2015, the estate, gift and GST tax exemption

amounts increased to $5,430,000. However, ATRA also permanently increased the top estate, gift and GST tax rate from 35% to 40% for 2013

and beyond. ATRA also continued the portability feature that allows the estate of the first spouse to die to transfer his or her unused exemption to

the surviving spouse.

Year Estate tax exemption

GST tax exemption

Gift tax exemption

Top estate, gift and GST tax rate

2012 $5.12 million

(portable) $5.12 million $5.12 million 35%

2013 ATRA $5.25 million


2014 $5.34 million


2015 $5.43 million


2016 $5.45 million


5

Overall financial planning

0

10

20

30

40

50

60

70

80

Tax planning No tax planning

Without tax planning, significant wealth can be lost to tax bills

$ mm After tax value of assets with tax planning After-tax value of assets with no planning

Value lost to taxes

Tax planning can significantly preserve wealth

Business ownerBusiness

owner's spouseJoint

Revocable Trust

(for Business

owner- non-

probate)

Revocable Trust (for

Business owner's

spouse-non-probate)

Total Includable Family Trust

Charitable

Trust or

Private

Foundation

ILIT for

Business

owner

ILIT for

Business

owner's

spouse

Joint ILITTotal Non-

IncludableTotal

Non-Qualified Assets

Marketable Securities - - 2,500,000 - - 2,500,000 - - - - - - 2,500,000

Total Non-Qualified Assets - - 2,500,000 - - 2,500,000 - - - - - - 2,500,000

Lifestyle Assets

Tangible Property - - - - - - - - - - - - -

Homes - - 1,500,000 - - 1,500,000 - - - - - - 1,500,000

Total Lifestyle Assets - - 1,500,000 - - 1,500,000 - - - - - - 1,500,000

Business Assets

Business Assets 100,000,000 - - - - 100,000,000 - - - - - - 100,000,000

Total Business Assets 100,000,000 - - - - 100,000,000 - - - - - - 100,000,000

Qualified Assets

Tax-deferred investments 500,000 - - - - 500,000 - - - - - - 500,000

Total Qualified Assets 500,000 - - - - 500,000 - - - - - - 500,000

Death Benefit of Life Insurance 1,000,000 - - - - 1,000,000 - - - - - - 1,000,000

Total Assets 101,500,000 - 4,000,000 - - 105,500,000 - - - - - - 105,500,000

Liabilities

Home Mortgage - - - - - - - - - - - - -

Total Liabilities - - - - - - - - - - - - -

Total Net Worth 101,500,000 - 4,000,000 - - 105,500,000 - - - - - - 105,500,000

Non-IncludibleIncluded in estate

Integrated balance sheet

8

Objective:

move assets from

included to non-

includible to

reduce estate, GST

tax

Taxable investments

2.4% Personal residence

1.4%

Business95.7%

Retirement investments

0.5%

Integrated balance sheet allocation

9

Integrated cash flow 2015 2016 2017

Cash Inflows

Employment Inflows

Salary 300,000 0 0

Total Employment Inflows 300,000 0 0

Investment Inflows

Distribution from business for taxes 450,000 0 0

Business sale proceeds 100,000,000 0 0

Income from investments 112,482 3,566,487 3,787,657

Total Investment Inflows 100,562,482 3,566,487 3,787,657

Total Cash Inflows 100,862,482 3,566,487 3,787,657

Cash Outflows

Lifestyle Expenses

Living expenses 300,000 309,000 318,270

Total Lifestyle Expenses 300,000 309,000 318,270

Savings

Investment account 77,585 2,223,426 2,368,676

After-tax business sale proceeds 76,612,912 0 0

Total Savings 76,690,497 2,223,426 2,368,676

Taxes

Federal Income Tax 20,074,358 805,233 857,097

State Income Tax 3,782,176 133,571 141,860

Social Security Tax - employment 7,347 0 0

Medicare Taxes 8,104 95,257 101,753

Total Taxes 23,871,985 1,034,061 1,100,711

Total Cash Outflows 100,862,482 3,566,487 3,787,657

Does this meet your

cash flow needs?

Is this assessment

accurate?

Does this change your asset allocation?

Does this have an impact on other

financial planning goals and objectives?

10

Integrated income tax

2015 2016 2017

Regular Tax Calculation

Calculation of Total Income

Employment $300,000 $0 $0

Investment

Interest $17,040 $540,290 $573,796

Dividends $33,143 $1,050,855 $1,116,022

Investment Capital Gains $36,762 $1,165,619 $1,237,903

Capital Gains from Business Sale $99,450,000 $0 $0

Ordinary Business Income $1,000,000 $0 $0

Total Income $100,836,945 $2,756,765 $2,927,721

Total Tax Calculation

Regular Federal Tax $20,074,358 $805,233 $857,097

Alternative Minimum Tax $0 $0 $0

Net Federal Tax $20,074,358 $805,233 $857,097

Social Security Tax - employment $7,347 $0 $0

Medicare Tax - employment $4,800 $0 $0

Medicare Tax - unearned income $3,304 $95,257 $101,753

State Income Tax $3,782,176 $133,571 $141,860

Summary

Total Income Tax $23,871,985 $1,034,061 $1,100,711

Income after Tax $75,990,497 $2,532,426 $2,686,946

Federal Tax Bracket 39.60% 39.60% 39.60%

Effective Marginal Tax Rate 46.85% 46.85% 46.85%

Adjust to meet your cash

flow needs and risk tolerance

Does this change your asset allocation?

Does this have an impact on other

financial planning goals and objectives?

11

Tax

Tax

Estimated gross estate: 105,500,000

Estimated administration expenses: (2,025,350)

Debts: 0

Estimated estate taxes: (37,045,860)

Estimated income taxes: (146,886)

Business owner Joint Business owner's spouse Non-includible

101,500,000$ 4,000,000$ -$ -$

Expense and Debts

-$ 1,035,000$

Nonmarital Trust Charity Business owner's spouse Non-includible

5,430,000$ -$ 99,035,000$ -$

Non-includible

66,281,904$ -$ -$

Expense and Debts

37,192,746$ 990,350$

Beneficiaries Charity

Estate disposition Business owner’s spouse survives business owner

12

Income tax planning opportunities

• Ongoing review of goals and objectives, asset allocation and tax efficiency

• Capital gain/loss offsetting, as appropriate (consider any capital loss carryovers)

• Consider asset location by placing tax inefficient investments with ordinary income/short term gain investments such as corporate bonds/hedge funds/private equity in tax advantaged accounts such as IRAs or 401ks

• Consider annuities (tax deferred) and life insurance (tax free) where appropriate

• Take Required Minimum Distributions

• Use of tax deductible leverage

• Mortgage interest

• Home equity

• Business interest

• Investment interest to offset investment income

• Maximizing savings to qualified plans such as 401ks and IRAs

• Consider converting traditional IRA to Roth IRA

• Defer or accelerate income based on anticipated tax bracket/rates?

• Accelerate or defer deductions based on anticipated bracket/rates and/or pending legislation or expiring provisions?

• Defer or accelerate losses

• Itemized deduction planning

• Maximize deductions such as taxes, charitable contributions and interest deductions

• Itemized deduction limitation planning

• Alternative minimum tax planning

• Medicare surtax planning

• Estimated tax planning

• Give income producing assets to beneficiaries in a lower tax bracket

Annual planning

considerations

Tax efficient

investment

considerations

Tax efficient

leverage

considerations

Tax efficient

savings

considerations

Income tax planning strategies

14

Consider tax efficiency of investment assets – asset

location

15

Capital losses are more tax effective when used to offset

income taxed at higher tax rates (e.g., short-term capital gains and

ordinary income)

Short-term gain Long-term gain

Short-term loss Neutral Ineffective

Long-term loss Effective Neutral

Capital loss considerations

Donating shares to charity

• Charitable remainder trust (CRT)

• Charitable lead trust

• Directly to charitable institution

• Donor-advised fund

Defer capital gain

No capital gain

Example: $1 million charitable gift, zero cost basis

Income tax

Capital gains tax

Charitable gift

Embedded capital gains tax liability

Income tax benefit

Out-of-pocket cost of charitable gift

Anticipated future tax rates

40%

20%

$1,000,000

(200,000)

(342,005)

$457,995

Assumes AGI $5 million

*Includes impact of itemized deduction phase-out reinstated in 2011

*

Charitable planning: out of pocket cost of giving

appreciated stock

Example: $1 million cash gift to charity

Income tax

Charitable gift

Income tax benefit

Out-of-pocket cost of charitable gift

Anticipated future tax rates

40%

$1,000,000

(300,005)

$699,995

Assumes AGI $1 million

*Includes impact of itemized deduction phase-out reinstated in 2011

*

Charitable planning: out of pocket cost of cash gifts

Estate planning opportunities

• $14,000 per individual

($28,000 gift splitting

with spouse) per donee

• Direct tuition payments

to educational

institution1

• Direct payments to

health care provider for

medical expenses1

• Gift tax exemption of up to

$5.43 million per individual

• GST and estate tax

exemptions3

– GST trust

• Family limited

partnership (FLP)

• Family limited liability

company (FLLC)

• Family corporation (C

or S corporation)

• Grantor retained annuity trust

(GRAT)

• Intentionally defective grantor

trust (IDGT)

• Qualified personal residence

trust (QPRT)

• Intra-family loan

• Pay gift tax now

rather than paying

estate tax later

Transfer of wealth

excluded from

any gift tax

Transfer of wealth

through GST, estate, and

gift tax exemptions

Transfer of wealth

utilizing discount

strategies

Transfer of wealth

utilizing freeze strategies

(appreciation-only gifts)

Transfer of wealth

through

taxable gifts

Over your lifetime

• Irrevocable life insurance trusts (ILIT)2 • Statutory freeze partnership (FLP or FLLC)4

• Converting traditional

IRA to Roth IRA5

1 To qualify for exclusion, gifts (a) of tuition must be made directly to the educational institution; and (b) for medical expenses must be made directly to the

health care provider 2 Often can be structured to use annual exclusion gifting 3 In 2015, an estate tax is assessed at a top rate of 40% with a $5.43 million estate tax exemption and a $5.43 million GST tax exemption 4 Can serve to both utilize discount and transfer wealth utilizing freeze strategies 5 Paying the income tax in converting a traditional IRA to a Roth IRA is essentially a tax-free gift

Annually

• Marital trust gift

planning

Charitable planning over your lifetime

• Spousal Lifetime Access Trust (SLAT)

Wealth transfer strategies

Testamentary planning (including charitable)

20

Married couple net worth

$<=$4 million

Married couple net worth

$>=$10 million

Federal taxable

estate

$4 million

Federal exemption

used

$4 million

Federal estate

tax

$0

State taxable

estate (Illinois)

$4 million

State exemption

(Illinois)

$4 million

State estate tax

(Illinois)

$0

Federal taxable

estate

$10 million

Federal

exemption

$10 million

Federal estate

tax

$0

State taxable

estate (Illinois)

$10 million

State exemption

(Illinois)

$4 million

State estate tax

(Illinois)

$783,200

2

1

Beware state exemption amounts

Estate tax Generation-

skipping tax

Federal taxable

estate

$0

Federal

exemption

$5 million

Federal estate

tax

$0

Federal taxable

estate

$10 million

Federal

exemption

$10 million

Federal estate

tax

$0

1st spouse to die 2nd spouse to die

2

2

Federal taxable

estate

$0

GST

exemption

$5 million

GST

tax

$0

Federal taxable

estate

$10 million

GST

exemption

$5 million

GST

tax

$1.75 million


State estate tax

Federal taxable

estate

$0

State

exemption

$2 million

State estate

tax

$0

Federal taxable

estate

$10 million

State

exemption

$2 million

State estate

tax

$927,000


Don’t rely on portability

Take advantage of beneficial wealth-transfer strategies in our current economic environment

October mid-term AFR = 1.67%

October 7520 rate = 2.0%

GRAT

IDGT

Intra-family loan

QPRT

CLT Hurdle rate

Tax-free gift

A P P R E C I A T I O N

23

Take advantage of our current economic environment

0

10

20

30

40

50

60

70

80

Tax planning No tax planning

Without tax planning, significant wealth can be lost to tax bills

$ mm After tax value of assets with tax planning After-tax value of assets with no planning

Value lost to taxes

Tax planning can significantly preserve wealth

CTC | myCFO is the “brand” name delivering investment advisory services through CTC myCFO, LLC, an investment adviser registered with the U.S. Securities and Exchange

Commission and a Commodity Trading Adviser registered with the National Futures Association; trust, deposit and loan products and services through BMO Harris Bank N.A., a

national bank with trust powers; and trust services through BMO Delaware Trust Company, a Delaware limited purpose trust company. BMO Delaware Trust Company offers

trust services only, does not offer depository, financing or other banking products, and is not FDIC insured. Not all products and services are available in every state and/or

location.

CTC | myCFO also offers Family Office Services, including tax consulting services, through CTC myCFO, LLC. Family Office Services are not fiduciary services and are not

subject to the Investment Advisers Act of 1940 or the rules promulgated thereunder.

As of September 30, 2014, CTC | myCFO had approximately $41 billion in assets under management or advisement, including $20 billion in discretionary assets under

management and $21 billion in nondiscretionary consulting asset under advisement, and approximately $43 billion in assets under administration and custody.

Capital Advisory Services is a division of CTC | myCFO. Capital Advisory Services are only offered by a division of BMO Harris Bank N.A. in its Chicago, IL and Milwaukee, WI

locations. Banking deposit and loan products and services are provided by BMO Harris Bank N.A. and are subject to bank and credit approval.

BMO Harris Bank N.A. Member FDIC.

NMLS #401052

CTC | myCFO and its affiliates do not provide legal advice to clients. You should review your particular circumstances with your independent legal advisor.

This presentation is for informational purposes only. The information provided is for the prospect’s use and not to be considered as recommendations. Any discussions of specific

securities or strategies are for information purposes only and should not be considered investment advice. Information has been obtained from sources we consider to be

reliable, but we cannot guarantee the accuracy.

This presentation does not constitute an offer to sell or a solicitation to buy any security or investment product. Any offer to sell or solicitation to buy an interest in any private

security, investment product or fund may only be made by receiving a confidential private offering memorandum, prospectus, investment advisory agreement or similar

documents from the investment manager, which describes the material terms and various considerations and risks relating to such security, investment product or fund.

The PAM Awards are awarded annually by Private Asset Management, a financial services industry trade publication. The PAM Awards invites firms to compete for awards in

several categories by providing answers regarding their business model, services offered, growth in client count and assets managed countries of operation, service innovation,

and performance. In addition, The PAM Awards permits firms to provide additional information of their choosing in support of their candidacy. A panel of independent industry

experts selects the nominees and winners based on a number of qualitative and quantitative performance indicators. The PAM Awards do not release statistics on the number of

firms competing. Nomination or receipt of a PAM Award is not necessarily indicative of any particular client's experience or a guarantee that the firm will perform in the future as it

did during the period evaluated by The PAM Awards. "RIA Giants", Forbes, 1/13/11 was based on information, as of September 30, 2012, collected by RIA Database. The rules

for ranking of the Top 50 investment advisors and investment advisories: (1) all firms are registered investment advisors ranked based on discretionary assets under management

as defined by the Securities and Exchange Commission as of Sept. 30, 2010; (2) greater than 50% of their business must serve the retail marketplace; (3) advisors must provide

financial planning services or portfolio management for individuals or conduct due diligence on third-party advisors; (4) they must not be doing business as a broker/dealer, bank

or insurance company; (5) they can neither charge commissions nor have registered representative employees at the firm; and (6) a majority of the RIA’s business must not be

invested in proprietary products.

Disclosure

25

Family Office Exchange (“FOX”) Leading Wealth Advisors are select firms that are leaders in the delivery of integrated wealth management services for their ultra-wealthy family

clients. Each firm recognized by FOX as a Leading Wealth Advisor was evaluated based on FOX’s comprehensive screening criteria which measure whether a firm is providing

an integrated wealth management solution. FOX’s Leading Wealth Advisor screening criteria is based on over 20 years studying the industry, and what wealth owners want and

need at a level of liquid assets greater than $20 million. Each firm recognized as a Leading Wealth Advisor was evaluated based on the following criteria – Financial strength,

Commitment to the multi-generational needs of families, Competency and tenure of senior management and staff, Client driven relationship management, Integrated service

delivery process, Disciplined investment process, Diversified menu of investment products, Comprehensive financial reporting, Integrated technology systems, and Regulatory

and financial compliance. FOX’s Leading Wealth Advisor designation is not based upon any client’s experience with, or endorsement of, such Leading Wealth Advisor.

Forbes magazine is a publication reporting on the world of business and finance. Forbes selection methodology for their Top 50 financial advisors (1/13/2011) was based on the

following criteria - All firms are registered investment advisors ranked based on discretionary assets under management as defined by the SEC as of 9/30/201; Greater than 50%

of their business must serve the retail marketplace; Advisors must provide financial planning services or portfolio management for individuals or conduct due diligence on third-

party advisors; They must not be doing business as a broker/dealer, bank or insurance company; They can neither charge commissions nor have registered representatives at

the firm; and a majority of the RIA’s business must not be invested in proprietary products.

Bloomberg Markets annual ranking is based on data compiled by Bloomberg from information self-reported by multifamily offices. The list was assembled through research by the

Bloomberg Rankings team via a survey of more than 1,000 firms worldwide, using a database of contacts obtained from Portland, Oregon–based FamilyOffices.com. Bloomberg

received responses from 97 firms.

This information is not intended to be tax or legal advice. This information cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on the

taxpayer. This information is being used to support the promotion or marketing of the planning strategies discussed herein. CTC | myCFO and its affiliates do not provide legal

advice to clients. You should review your particular circumstances with your independent legal and tax advisors.

Investment products offered are: NOT A DEPOSIT- NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY- NOT GUARANTEED BY ANY BANK-MAY

LOSE VALUE.

Disclosure

26

For more information about the Imarcus evans Investments

Summits series: [email protected]

mm

GROWING AND PRESERVING ASSETS THROUGH TAX AND ESTATE PLANNING - Tina Davis, CTC | myCFO

Business

Transcript of GROWING AND PRESERVING ASSETS THROUGH TAX AND ESTATE PLANNING - Tina Davis, CTC | myCFO