planning opportunities for income tax & business transition or second star to the right &...

FPA Presentation - 3-16-2011 1

Planning Opportunities for Income Tax & Business Transition

orSecond Star to the Right & Straight on Till Morning

Presented by:

Robert S. Lipsey

Peter J. May

2011Are these the changes you expected?

The uncertainty continues

as we get closer to 2013

it will get worse…or better?


What we will cover today

• Key changes in the new law• Opportunities – what has really changed?• Opportunities – 2011 & 2012 & Beyond• Business Planning Concepts• Questions


Disclaimer

• This communication is not a covered opinion as defined by Circular 230 and is limited to the Federal tax issues addressed herein. Additional issues may exist that affect the Federal tax treatment of the transaction. The communication was not intended or written to be used, and cannot be used, or relied on, by the taxpayer, to avoid Federal tax penalties.

• This Presentation is for educational use only.

• Does not constitute a complete analysis of all issues on this subject.

• Not intended for use for a specific client.


Income Tax Changes – Let’s Review

2011 Federal Tax Rates Single Married Filed Jointly

10% $0-$8,500 $0-$17,000

15% $8,500-$34,500 $17,000-$69,000

25% $34,500-$83,600 $69,000-$139,500

28% $83,600-$174,400 $139,500-$212,300

33% (36%) $174,400-$379,150 $212,300-$379,150

35% (39.6%) Over $379,150 Over $379,150


Tax Changes – Comments

• An extension of 2010 rates• Tax-bracket thresholds increased slightly• Standard deductions up slightly


Tax Changes – Additional Details

• Itemized deduction - state/local sales tax [2011]• Repeal of personal exemption phase-out [2012]• Repeal of itemized deduction limitation [2012]• Increase of AMT exemption amounts• Extension of 15% LTCG [2012]• Extension of 15% Qualified Dividends [2012]• Payroll Taxes – 2% reduction - employees & self-employed [2011]


Tax Changes – Additional Details

• Bonus Depreciation• Section 179 Expensing• Grant Programs – Wind, Solar, Renewables• Tax Credits - Railroad Track Maintenance• Enhanced Deductions for select donations


Quick Review of Estate & Gift Tax Changes

• $5 million estate tax exemption • $5 million gift tax exemption• $5 million GST tax exemption• Portability for Estate & Gift tax but not GST Tax

– Unless renewed portability & the amount of the exemption is only for 2011 & 2012


Current Proposals for Additional Changes

• FY 2012 Budget Proposal• ….. “except for higher income taxpayers”• Itemized deduction limitation• Personal exemption phase out• Itemized deduction cap of 28%• and the list goes on and on…..


Current Changes….Yet to Arrive

• Medicare taxes– 0.9% additional tax [2012]– 3.8% qualified unearned income tax [2012]


Debt is nothing like we have seen in the history of the U.S. (Heritage Foundation)

• U.S. is $13 -$14 trillion in debt• States have billions in unfunded liabilities –

they are broke!• Obama health care “trillions”• The math doesn’t work• Where will the money come from?


Prediction of the future


Back to the Future

• What happens if the estate tax goes to 55% (again!)?

• What happens if it reverts to 2009 tax levels?• Is it the tax?….or,• Is it how do I control where my business goes

and what happens that is important?


Family Owned Business Issues

• Family Relations Concerns– Active vs. Inactive– Competent vs. Incompetent– Skippy



• Income Concerns Between Family Members– Fair vs. Equal– Value for Job Well Done– Value for Heir / Bloodline



• Control Concerns– Family Members– Key Employees



• Transition Concerns– Estate Timing– Recapitalization– Cash Flow “affordability”



• Family Relations Concerns• Income Concerns Between Family Members• Control Concerns• Transition Concerns


Transferring a Business(some methods)

• Revenue Neutral Sales



• Installment Sales



• SCIN’s



• Sales to Grantor Trusts



• GRAT Planning



• Revenue Neutral Sales• Installment Sales• SCIN’s• Sales to Grantor Trusts• GRAT Planning


Comparison for sample individualResults for specific individuals may vary

550,000

1,918,300

663,926

547,248

915,780

721,042

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Gift Now Do Nothing Installment Sale Interest Only G R A T S C I N

Transfer Cost ComparisonTotal Net Present Values


Transfer Mechanisms @ present value

250,000

350,000

450,000

550,000

650,000

750,000

850,000

950,000

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

NPV over Time

Gift

Nothing

Installment

Int Only

GRAT

SCIN


Does the Act CreateA False Sense of Security?

• 2 year window?• Can you give away $5 million?• Is it too soon to act?• Revolving Door Complex?


Valuation Planning Techniques

• Book



• Adjusted Book



• DCF



• Capitalization



• Comparables



• Book• Adjusted Book• DCF• Capitalization• Comparables


Somethings No One Thinks About

• Artwork / Collections / TPP• Ability to “unbalance”

– Your estate plan– Your current income tax strategy

• Life Insurance• Art Funds


Some other questions we have gotten


I don’t know what to do – I don’t have successors for my business.

I don’t want to sell now.


Alternative Succession Planning if

No Family Succession Plan

• Some situations are helped by creating a “synthetic stock plan”– How it works:

• Synthetic stock is created for a percentage of the “equity stake” in the company

• Synthetic stock is awarded over time; for example 30% equity stake is awarded, at passing they key people need only purchase 70% of the value of the company, hence the “leg up.”


“I’ve done my planning – everything is in a series of LLC’s”


LLC’s(What they don’t do)

• Without additional planning an LLC is not a transfer mechanism

• An LLC may assist as a control mechanism, but without additional planning it doesn’t completely shift the income stream


My plan is to use an ESOP- I get income tax deductions,

raise capital&

it is part of my estate transfer plan.


ESOP Issues

• Repurchase liability• Control beyond the current family ownership• Valuation may be in conflict with your estate

valuation; and cause a higher value and more estate tax


Closing Remarks & Questions

• Planning should be considered based on all the facts available

• Instead of looking for what is there, • Look for what is not

• We have enjoyed the time today


Thank You

Robert S. Lipsey

[email protected]

Peter J. May

[email protected]

mailto:[email protected]

mailto:[email protected]

planning opportunities for income tax & business transition or second star to the right &...

Documents

additional tax

income tax changes

estate tax exemption

gift tax exemption

tax changes comments

federal tax issues

federal tax treatment

federal tax penalties