estate planning for liquidity (60 minutes)value and hard to sell, may also be held. estate plans...
TRANSCRIPT
ESTATE PLANNING FOR LIQUIDITY
First Run Broadcast: September 29, 2016
1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)
Liquidity is an almost universal need in estate planning. When a client dies, death taxes may
need to be paid. Expenses incurred in administration need to be paid. Distributions may be
required under trust instruments. For these and many other reasons, estates need cash. The big
challenge comes when the estate has assets that, though valuable, are not liquid. Assets may
include real estate that is not easily (or at least quickly and profitably) sold. Or a successful
family business may be involved, where ownership stakes are not easily transferred or for which
there is no ready market. Complex financial assets, artwork or other unique property, hard to
value and hard to sell, may also be held. Estate plans must anticipate the need for liquidity and
formulate strategies for providing it or deferring taxes and distributions until liquidity can be
created. This program will provide you with a real world guide to practical strategies for creating
liquidity in trust and estate planning.
Estate planning and administration to obtain liquidity for illiquid assets
Challenges of planning for illiquid assets like real estate, family businesses, and unique
property
Techniques and tools to fund tax liabilities, distributions, expenses and more
Mechanics of electing a deferral of estate tax under IRC Section 6166
Use and advantages of using Gaegin notes to obtain liquidity
Advantages and disadvantages of use of redemptions and buy-sell agreements
Use of life insurance and other financial products to provide liquidity
Speakers:
William Kalish is a partner in the Tampa office of Akerman, LLP. His practice focuses on
advising individual clients and their families on their estate and trust plans, including wills,
revocable trusts, irrevocable trusts, charitable trusts, private foundations, and limited
partnerships. He also practices in probate administration, asset preservation, business succession
planning for family-owned entities, and the division of business interests in the context of
divorce. He is a Fellow of the American College of Tax Counsel, formerly served as chair of
Administrative Practice Committee of the ABA Tax Section, and has served as an Adjunct
Professor of Law at Stetson Law School teaching estate planning. Mr. Kalish received his B.A.
from the University of Pittsburg and his J.D. with honors from George Washington University
Law School.
Jeffrey M. Gad is a partner in the Tampa, Florida office of Akerman, LLP, where his practice
emphasizes representing individuals emphasizing a broad range of probate, business and taxation
related issues. His practice integrates the personal and estate tax planning concerns of individuals
with tax and business planning for their closely-held businesses. He has extensive experience in
all aspects of probate and trust administration, including the preparation of estate tax returns.
Mr. Gad earned his B.S.B.A. from the University of Florida, his J.D., magna cum laude, from
Nova Southeastern University, Shepard Broad Law Center, and his LLM from New York
University School of Law.
VT Bar Association Continuing Legal Education Registration Form
Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT 05601-0100. Fax: (802) 223-1573 PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name ________________________ Middle Initial____Last Name___________________________
Firm/Organization _____________________________________________________________________
Address ______________________________________________________________________________
City _________________________________ State ____________ ZIP Code ______________________
Phone # ____________________________Fax # ______________________
E-Mail Address ________________________________________________________________________
Estate Planning for Liquidity Teleseminar
September 29, 2016 1:00PM – 2:00PM
1.0 MCLE GENERAL CREDITS
PAYMENT METHOD:
Check enclosed (made payable to Vermont Bar Association) Amount: _________ Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # _______________________________________ Exp. Date _______________ Cardholder: __________________________________________________________________
VBA Members $75 Non-VBA Members $115
NO REFUNDS AFTER September 22, 2016
Vermont Bar Association
CERTIFICATE OF ATTENDANCE
Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 29, 2016 Seminar Title: Estate Planning for Liquidity Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.
Estate Planning and Liquidity: Core Concepts
Jeffrey M. Gad, Esq.
(813) 209-5013
William Kalish, Esq.
(813) 209-5035
Akerman | 2
This Presentation does not constitute tax, legal or other advice from
Akerman LLP, and is provided for informational purposes only. Akerman
LLP disclaims any responsibility with respect to assessing or advising the
any attendee as to the legal, tax or other consequences arising from the
attendee’s particular situation. The views and opinions expressed in this
Presentation are those of the presenter, and should not be attributed to
Akerman LLP.
Acknowledgements &
Disclaimers
Akerman | 3
To make sure your illiquid assets are distributed in
accordance with your wishes when you die.
To avoid a “fire sale” of assets to cover taxes and liabilities
which may be triggered at passing (ex. event of default
under mortgage by reason of borrower’s death).
To mitigate potential taxes.
To protect and preserve your assets.
Estate planning to obtain liquidity
for illiquid assets
Akerman | 4
Intestate Estates
For individuals who die without a Will or Trust, the state
where they reside at your death will provide a de-facto
“default” estate plan through the intestacy laws.
This “default” estate plan may result in:
1. undesirable dispositions of your assets;
2. potential exposure to otherwise avoidable tax
liabilities; and
3. potential exposure of your assets to the claims of
creditors.
Akerman | 5
Assets held individually by a decedent at his or her death must be
probated in order for the assets to pass to the beneficiaries under the
decedent’s will. The decedent’s Personal Representative manages
the probate for the decedent’s estate.
Probate requires a listing of the decedent’s assets, notice to creditors
who may have claims against the decedent, and distribution of assets
to beneficiaries.
Only assets held individually by the decedent are subject to probate –
not joint assets, not insurance proceeds payable directly to a
beneficiary, and not assets held by a revocable trust.
A will can direct the decedent’s Personal Representative to “pour
over” all of the assets of a decedent’s estate to a revocable trust.
Wills and Probate If you have a Will and Trust:
Akerman | 6
Grantor: the person who creates the trust;
Trustee: the person who controls the trust and its assets; and
Beneficiaries: those who are entitled to receive the benefits from
the trust, (i.e., income and principal).
Revocable Trusts: Basics
Akerman | 7
A revocable trust is established by a grantor to manage assets both
during his or her lifetime and after his or her death.
A revocable trust is managed by a Trustee, who acts as a fiduciary
(usually the grantor during the grantor’s lifetime).
Assets held in a revocable trust before the death of the grantor are not
included in the grantor’s estate.
A revocable trust can be used as a guardianship or will “substitute.”
A revocable trust can be easily amended or revoked by the grantor
during the grantor’s lifetime.
Revocable trust assets are not exempt from the grantor’s creditors.
Revocable Trusts
Akerman | 8
In 2016, the federal estate and gift tax exemption amount
is $5,450,000 (indexed for inflation).
The annual gift tax exclusion amount is $14,000.
The federal tax rate on estates in excess of the exemption
amount is graduated from 18% to 40% (reaching 40% at
just $1 million).
Federal Estate and Gift Taxes
Challenges of planning for
illiquid assets like real estate,
family businesses, and unique
property
Many entrepreneurs and small business owners are reliant on
their business for satisfying expenses and personal cash flow
needs.
Real estate owners are susceptible to market conditions,
including “bubbles” and tightening restrictions on financing.
Unique property such as artwork and collectibles have limited
liquidity in the form of secondary markets.
Akerman | 9
Outside Sources to Generate
Liquidity
Personal Investments and Marketable Securities.
Buy-Sell Agreements.
Financing options and leverage of business.
Sale of business to family members, through sale to a “defective grantor trust”
or through a Self-Cancelling Installment Note (SCIN).
A sale to a defective trust in exchange for a promissory note may be
an effective method for transferring the future income and
appreciation of assets in a business with little or no gift or estate tax
consequences, while providing a source of income for the grantor.
The overall structure and use of a SCIN is similar to that of an
installment sale to a defective trust as stated above, except that the
promissory note will have provisions which require the termination of
the note upon the seller's death.
Life Insurance.
Life Insurance
Life Insurance is frequently used to help mitigate potential estate
tax liabilities, fund distributions, and generate liquidity post-death;
but can also provide benefits to the owner during life.
Added benefit: Many states exempt cash value and policy
proceeds of life insurance and annuities from creditors.
Life insurance owned through a properly structured irrevocable
life insurance trust (ILIT), will generally exclude death benefit
proceeds from the insured’s estate.
Trust must be irrevocable.
Crummey Notices are required to insure “completed”
annual gifts on premium payments.
3 year look-back rule applies under IRC 2035 with
respect to transfers of existing policies.
Akerman | 11
Deferral of estate tax under
IRC Section 6166 Pursuant to IRC 6166, a personal representative may elect to defer estate
taxes if the decedent’s aggregate interest in one or more closely held
businesses exceeds 35 percent of the decedent's adjusted gross estate.
In order for the estate to defer the payment of estate taxes under IRC 6166,
the following requirements must be satisfied:
The decedent must have been a U.S. citizen or resident at death.
The decedent’s interest in one or more closely held businesses must
comprise more than 35% of the decedent's adjusted gross estate.
The estate's personal representative must make an IRC 6166 election
on a timely filed Form 706 - Federal Estate Tax Return.
If the above requirements are met, the estate tax attributable to the closely
held business(es) may be deferred over a 14-year period. The executor can
elect to pay the estate tax attributable to the closely held business interest in
10 annual installments, commencing within 5 years after the due date.
Use & Advantages of Graegin
Notes
Estate of Cecil Graegin v. Commissioner, T.C.
Memo 1988-477 (Sept. 28, 1988).
A “Graegin note” is a popular option for estates that
lack liquidity to pay estate taxes or other expenses
incurred during the administration of an estate.
This note is often utilized for estates where the
decedent’s primary asset was an interest in a
closely-held business.
Interest paid by an estate through a Graegin Note is
potentially deductible under I.R.C. § 2053(a), which
can reduce the amount of estate taxes due.
There are, however, potential income tax
consequences for the lender, with respect to the
interest payments made on the Graegin Note.
Akerman | 13
Redemptions and Buy-Sell
Agreements
Provides for transition and continuity of business
upon the death of the principal owner.
Helps provide a market for an otherwise illiquid
asset by establishing a price and payment terms.
May help to avoid disputes among the remaining
owners of the business and the decedent’s
estate/heirs.
May provide liquidity for payment of estate taxes
and administrative expenses.
Akerman | 14
IRC Section 2704 Proposed
Regulations that will impact
intra-family transfers
On Aug. 2, 2016, the IRS issued proposed regulations under
Section 2704 of the Internal Revenue Code that would implement
significant changes to valuation of interests in family-controlled
entities for estate, gift and generation-skipping transfer tax
purposes. The new rules are intended to apply to family-owned
or family-controlled entities and are designed to eliminate or
curtail many valuation discounts in connection with transfers of
interests in such entities.
The public hearing on the proposed regulations is on 12/1/16.
If implemented, certain provisions of the proposed regulations will
take effect with respect to transfers that occur on or after the date
the final regulations are published; and others will apply to
transfers occurring 30 or more days after such publication. Akerman | 15