2012 estate tax planning landscape overview
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2012 Estate Tax Planning Landscape Overview. Presented by: Justin Ransome and Robert Perez AICPA Trust, Estate, and Gift Tax Technical Resource Panel. NOTE:This is an audio only event. The presentation will stream through your computer, so please make sure your speakers are on. - PowerPoint PPT PresentationTRANSCRIPT
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.
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Tax Section Personal Financial Planning Section
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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
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Agenda
Transfer Taxes in 2012
Transfer Tax Planning Techniques
Planning Considerations in 2012
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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)
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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
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Gift and Estate Tax – portability
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
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Gift and Estate Tax – portability
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
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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
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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
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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
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Agenda
Transfer Taxes in 2012
Transfer Tax Planning Techniques
Planning Considerations in 2012
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Transfer Tax Planning Techniques
Outright Gift
Family Limited Partnership (FLP)
Grantor Retained Annuity Trust (GRAT)
Sales to Intentionally Defective Grantor Trust (Sale to IDGT)
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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
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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)
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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
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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
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FLP
FLP2. Limited & General Interests
1. Assets
3. Limited Interest
Senior FamilyMembers
Junior FamilyMembers
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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
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FLP – advantages
Control over assets and distributions
Simplifies gift-giving and management of estate
Investment flexibility and efficiency
Asset protection
Valuation discounts
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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
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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
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GRAT
GRAT2. Income Interest
1. Property
3. Remainder Interest
Children
Parents
Tax Section Personal Financial Planning Section
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
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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
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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
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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
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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
Total Estate $64,255,448
Benefit of GRAT $18,407,782
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Sale to IDGT
Parents IDGT
1. Gift “Seed” Property2. Assets
3. Note
5. Remainder Interest
4. Interest Payments
Children/Grandchildren
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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
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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
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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
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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
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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
Total Estate $82,819,429
Benefit of Sale to IDGT $36,971,763
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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
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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
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Agenda
Transfer Taxes in 2012
Transfer Tax Planning Techniques
Planning Considerations in 2012
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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
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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)
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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
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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
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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
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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
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