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Preserving the Larger Estate

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  1. Preserving the Larger Estate (Estate Tax Magic) Dymond • Reagor • Colville, LLP

  2. Conditions of Use • This presentation is posted under the concept of shareware. • If after viewing the presentation you decide you want to use it, go ahead but, please pay for it. • Cost $75 • Send to:Dymond • Reagor • Colville, LLP8400 E. Prentice Ave., Suite1040Greenwood Village, CO 80111 (303) 793-3400

  3. Proper Estate Planning Caring for loved ones as if you were still there • With your resources • With your love • With your wisdom

  4. The Estate Planning Process • Educate • Design • Draft • Implement It’s Not about Documents - It’s About Results

  5. How to Distribute to Your Heirs • Outright • no protection • In Trust • creditor protection • predator protection • self protection • estate tax protection

  6. Disinheriting that One Relative

  7. Basic Estate and Gift Tax Rules • It’s a tax on everything • Estate and gift taxes begin at 37% • $10,000 annual exclusion* • Unlimited marital deduction • $650,000 unified credit** • Unlimited charitable deduction • Use it or lose it • * Indexed for future inflation • * * Increases to $1,000,000 by 2006

  8. Maximizing the Use ofthe Credit Shelter Exemption • One Dimensional Planning • All to Spouse • Wastes One Unified Credit • Two Dimensional Planning • Use of Credit Shelter Trust on First Death • Saves a Minimum of $258,500 in Estate Taxes

  9. Maximizing the Use ofthe GSTT Exemption • Multi-Dimensional Planning • Create trusts that are exempt from estate taxesfor future generations • Proper lifetime and testamentary allocation ofthe generation-skipping transfer tax exemption • Dynasty Trusts

  10. The Power of Generation-Skipping $ 810,000 Vs. $1,000,000

  11. Preserving the Larger Estate • Create a source of funds to pay Uncle Sam’s Share • Decrease the size of the taxable estate

  12. Creating a Source toPay Uncle Sam • Leave it to your heirs to solve the problem • liquidate assets • borrow • Invest money now • uncertainty • income and estate taxes • Inheritance Trust • income tax free • estate tax free

  13. The Inheritance Trust Annual Gifts Qualify for annual exclusion Irrevocable Trust • Trustee invests gifts • guaranteed return • estate and income tax free • Allows Maker to Control Proceeds • Proceeds Available to Pay Taxes and Expenses • Preserves the Estate

  14. Tom and Cindy Client • Both 57 years of age • Children - Peter, Paul and Mary • Internet Business - just sold to Wahoo • Tax Free Exchange • $3,000,000 - $0 Tax Basis • Wants to retire • After Tax Wants $150,000 per year • 3% annual inflation adjustment

  15. Tom and Cindy Client • 2 Joint Checking Accounts $5,000 • 2 Savings Accounts - 2.5% $40,000 • Investment Accounts - 9.0% $2,000,000 • Cyber Stock - growth 4.0% $3,000,000

  16. Tom and Cindy Client • Family Residence - 4% $600,000 • Rental Value $24,000 per year • 2% annual inflation adjustment • Vacation Residence - 4% $750,000 • Rental Value - $30,000 per year • 2% annual inflation adjustment • Personal Property - 0% $123,000 • 2 IRA Accounts - 8.0% $260,000

  17. Tom and Cindy Client • Current Gross Estate • $6,778,000 • Current Projected Annual Income • $181,000 • Gross Income Needed to Meet After Tax Wants • $217,391

  18. Solution 1 • Draw on Investment Accounts until exhausted • Then Sell Cyber Stock as needed to meet wants/desires

  19. Solution 1 • Good News - will work • Able to meet income needs • Available in PDF Format • Bad News • Failure to diversify • Significant Estate Taxes

  20. Solution 2 • Clients sell cyber stock and add net proceeds to investment account

  21. Sell Asset Asset $3,000,000 $750,000 - Capital Gains Tax $2,250,000 $139,725 Net Annual Income $1,237,500 Estate Taxes $202,500 Gross Annual Income To Heirs $1,012,500

  22. Solution 2 • Good News • Income needs met • Increased Diversification - Safety • Bad News • Huge Capital Gains Tax • Makes it a tough sale • Still have large estate tax

  23. Tax Favored Trusts CHARITABLE REMAINDER TRUSTS

  24. Charitable Remainder Trust Asset CRT Receive annual income for life Receive income tax deduction At Death: Balance Goes to Charity

  25. Solution 3 • Gift Cyber Stock to 9% CRUT • CRUT sells stock and invests in diversifies portfolio returning 9% • Purchase $3,000,000 second to die life insurance policy to be owned by a wealth replacement trust.

  26. Charitable Remainder Trust Asset - $3,000,000 Tax Savings $101,882 CRT $3,000,000 Tax Deduction $328,650 Wealth Replacement Trust Annual Income $186,300 - 28,800 Annual Gift $157,500 At Death: $3,000,000 to Charity $3,000,000

  27. Solution 3 • Capital Gains Taxes • $ 750,000 Less with a CRT • After Tax Annual Income • $17,775 More with a CRT • Estate Taxes • $ 1,237,500 Less with a CRT • Net to Charity • $3,000,000 More with a CRT • Net to Heirs • $1,762,500 More with a CRT

  28. Tax Favored Trusts QUALIFIED PERSONAL RESIDENCE TRUSTS (QPRT)

  29. Qualified PersonalResidence Trust Residence QPRT Retain right to reside in residence for a term of years

  30. Solution 4 • Use 8 Qualified Personal Residence Trusts • 4 each for the Family and Vacation Residence • Family Residence • Cindy contributes 25% interest to 2 QPRT’s • Tom Contributes 25% interest to 2 QPRT’s • Vacation Residence • Cindy contributes 25% interest to 2 QPRT’s • Tom Contributes 25% interest to 2 QPRT’s

  31. Qualified PersonalResidence Trust Residences $1,350,000 QPRT Retain right to reside in residence for term of years 28 years Value of Gift - $382,453 Gift Tax - $210,349 Value of Residence at death $3,892,548 Estate Taxes - $2,140,901

  32. Solution 4 • Removed real estate and future appreciation from gross taxable estate • at a significant discount • Increased transfer of wealth through payment of rent to children

  33. Decreasing the Sizeof Your Estate • Giving it away • annual exclusion and Unified Credit • ILIT’s, CRT’s, and QPRT’s • Reduce the value of what you have • the less what you have is worth theless you are taxed • the Family Limited Partnership • Combining the two • give it away but keep control

  34. Typical FLP Estate Plan GP 2% Limited Partners 98% Mgt. Company Client Client’s Living Trust Gifting Trust

  35. Tax Favored Trusts GRANTORRETAINED ANNUITYTRUSTS (GRAT’s)

  36. Grantor RetainedAnnuity Trust Family Business GRAT Retain income stream for a term of years

  37. Solution 5 • Create a Family Limited Partnership (FLP) with the Investment Accounts • 2% General Partnership Interest - retained through LLC • 98% Limited Partnership - gifted to 2 GRAT’s 10 and 12 year terms

  38. Grantor RetainedAnnuity Trust Family Business $1,960,000 GRAT Retain income stream of $176,400/yr. for term years 28 years Value of Gift - $135,278 Gift Tax - $74,403 Value of Property at death $4,847,579 Estate Taxes - $2,666,168