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Tax Update and Savings Strategies for High Net Worth Individuals. Michael A. Africk Tuesday February 14, 2012. Learning Objectives . Review some changes impacting your income taxes in 2012 and 2013 (maybe) Learn various strategies that can reduce one’s gift and estate taxes

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tax update and savings strategies for high net worth individuals

Tax Update and Savings Strategies for High Net Worth Individuals

Michael A. Africk

Tuesday February 14, 2012

learning objectives
Learning Objectives
  • Review some changes impacting your income taxes in 2012 and 2013 (maybe)
  • Learn various strategies that can reduce one’s gift and estate taxes
  • Review potential business planning techniques
about cliftonlarsonallen cla
About CliftonLarsonAllen (“CLA”)
  • More than 50 years of quality, service and experience
  • Among the nation's top-10 accounting firms
  • Unprecedented emphasis on serving privately held businesses and their owners
  • 3,600 professionals, including 500+ partners
  • More than 90 locations in U.S.
  • Organized through industry lines
cla primary industry services
CLA Primary Industry Services
  • Agribusiness and Cooperatives
  • Construction and Real Estate
  • Commercial and Service
  • Dealerships
  • Employee Benefit Plans
  • Financial Institutions
  • Health Care
  • Manufacturing and Distribution
  • Nonprofit and Governmental
cla highly specialized services
CLA Highly Specialized Services
  • Organized as public accounting/advisory, wealth advisory and outsourcing entities
  • Strong partner engagement leadership
  • Understanding the goals of the owners
  • Understanding the goals of key management
  • Focused on improving your business
  • Recognized as technical leaders within industry
  • Continually developing services that can make our clients more successful
construction and real estate group
Construction and Real Estate Group
  • Serving over 600 contractors and real estate companies
  • More than 60 professionals devoted to industries
  • Typical $5m-$250m, some smaller and some larger
  • Expertise claims assistance and litigation support services
  • Mergers and acquisitions – negotiation and due diligence
  • Operational and Lean Accounting consulting
  • Valuation and purchase/sale price analysis
  • Governance and strategic consulting
  • Core assurance services
  • Cost allocation and FAR audits
construction and real estate industries
Construction and Real Estate Industries
  • Heavy Construction/Heavy Highway
  • General Contractors
  • Special Trade Contractors
  • Engineering, Architecture and Surveying
  • Real Estate Holding Companies
  • Industrial Rental/Development
  • Commercial Rental/Development
  • Housing Development
  • Land Development
  • Property Management
small business jobs act of 2010
Small Business Jobs Act of 2010
  • Signed in September 2010
  • Improved Section 179 Depreciation
    • New and used property purchased in 2010 and 2011
    • Increased to $500,000, phase out starts at $2.0
  • Extended Bonus Depreciation
    • Retroactive restated for 2010
    • New tangible property only
    • 50% bonus depreciation
    • Contractors will also benefit
small business jobs act of 20101
Small Business Jobs Act of 2010
  • S Corporation Built-In Gains Tax
    • Holding period reduced to 5 years
      • Sale in 2011
    • Holding period reinstated to 10 years
      • Sale in 2012, thereafter
  • Break on Self Employment Tax
    • Health insurance is deductible from SE Tax
tax relief and job creation act of 2010
Tax Relief and Job Creation Act of 2010
  • Signed in December 2010
  • Bush tax cuts and business incentives expire in 2010
  • Extended Bush cuts to 2012
  • Extends business incentives through 2012
  • Extends gift and estate exemptions through 2012
  • Reduced social security tax for employee 2% through December 2011
tax relief and job creation act of 20101
Tax Relief and Job Creation Act of 2010
  • Ordinary Income Tax Rates Sunset in 2012

2011/12

Ordinary Rates

35%

33%

28%

25%

15%

10%

2013

Ordinary Rates

39.6%

36%

31%

28%

15%

15%

tax relief and job creation act of 20102
Tax Relief and Job Creation Act of 2010
  • Other Favorable Tax Rates will Sunset in 2012

2011/12 Rates

LT Cap Gain – 15%

Qualified Div – 15%

2013 Rates

LT Cap Gain – 20%

Qualified Div – 39.6%

  • Selected Extenders
    • AMT exemption (2011). Watch for extension
    • Non phase out of personal exemptions (2012)
    • Higher education credit (2012)
    • IRA Charitable Contributions (2011)
tax relief and job creation act of 20103
Tax Relief and Job Creation Act of 2010
  • Business Extenders
    • Research and Development Credits (2011)
    • Expensing of remediation costs (2011)
  • Energy Extenders
    • Maximum $2,000 Energy efficient installations (2011)
    • Maximum $500 Energy efficient appliances (2011)
    • Biodiesel Tax Credits (2011)
    • Alternative Fuel Tax Credits (2011)
    • Fuels Credits (2011)
tax relief and job creation act of 20104
Tax Relief and Job Creation Act of 2010
  • Estate and Gift Tax Restoration
    • Significantly increased the federal exemption
    • Portability of unused portion to surviving spouse
    • Heightens need to properly file estate tax returns
    • Planning Opportunity
      • High exemption levels
      • Low asset values
      • Low interest rates
      • More on this later
tax relief and job creation act of 20105
Tax Relief and Job Creation Act of 2010
  • Increased the gift and estate exemptions

* 2012 index inflated to $5,120,000

tax relief and job creation act of 20106
Tax Relief and Job Creation Act of 2010
  • Extends Section 179
    • New and used qualified property
    • Sets 2012 limit at $125,000
    • Limited by profits earned
    • Section 179 before bonus depreciation
    • Will increase Job % complete for certain assets
tax relief and job creation act of 20107
Tax Relief and Job Creation Act of 2010
  • Improved Bonus Depreciation
    • Only new tangible property
    • Sets 2011 at 100% and 2012 at 50%
    • Includes leasehold improvements
      • Cannot be lease between related parties
      • Common ownership of 80%
    • Contractors lose tax advantage
      • Decoupling not available in 2011
      • Bonus Depreciation for job related equipment
      • Increases job % complete
      • Do not expect tax savings
    • Increase bonus depreciation on cars by $8,000
tax relief and job creation act of 20108
Tax Relief and Job Creation Act of 2010
  • Section 179 and bonus depreciation

* Benefits contractors through decoupling

tax relief and job creation act of 20109
Tax Relief and Job Creation Act of 2010

ACTION STEPS:

  • Consider accelerating income into 2012
    • Trigger capital gains by sale of securities
    • Elect out of bonus depreciation and/or Section 179
    • Defer business expenses and itemized deductions
    • Convert traditional IRA to Roth
  • Consider increased gifting in 2012
    • More on this later in the presentation
patient protection and affordable care act
Patient Protection and Affordable Care Act
  • Signed in March 2010
  • Beginning in 2013, individuals and trusts will be subject to a Medicare HI (surtax) of 3.8%
  • Those with modified gross income over $200,000/$250,000 will be subject to tax
patient protection and affordable care act1
Patient Protection and Affordable Care Act
  • Tax on net investment income
    • Interest and Dividends
    • Net capital gains
    • Rents and Royalties
    • Consider earnings from passive activities
  • Example
    • MFJ taxpayer with income of $300,000
    • MFJ taxpayer with net investment income of $40,000
    • Since income exceeds threshold by $50,000, all of the net investment income would be subject to 3.8% tax
    • If net investment income was $60,000 taxed on $50,000
patient protection and affordable care act2
Patient Protection and Affordable Care Act

ACTION STEPS:

  • Convert traditional IRA to Roth in 2012
  • Structuring of interest from related parties
  • Utilize tax-deferred investments to control of timing of income, e.g., annuities, life insurance cash values and deferred comp
  • Maximize qualified plan and deductible IRA contributions in 2013
  • Municipal bonds
  • Trigger Installment sales
complex income and estate tax savings ideas
Complex Income and Estate Tax Savings Ideas

NameAcronymUse

Employee Stock Ownership Plan ESOP Eliminate Income Taxes

Succession Planning

Reciprocal Trust Arrangement ------ Estate Planning

Grantor Retained Annuity Trust GRAT Estate Planning

Succession Planning

Family Limited Partnership FLP Estate Planning Opportunity

esop what is it
ESOP – What is it?
  • An ESOP is a Tax Qualified, Defined Contribution, Employee Benefit Plan (ERISA)
  • “Qualified” in that sponsoring company and selling shareholder receive various tax benefits
  • Invests primarily in the stock of the sponsoring company
  • Provides ownership to employees
esop how does it work leveraged
ESOP – How does it work? (Leveraged)

1. CompanysetsupanESOPTrust

2

2. Bank or SH lend $ to Company

3. Company lends $ to ESOP

4. ESOP buys stock from SH (s)

Company

Lender

5. SH’s relinquish stock with collateral to bank

3

ESOP

6. Shares are allocated to the accounts of eligible employees within the ESOP based on salary

5

1

4

7. Employees receive stock or cash after they retire or leave the company, a vesting schedule applies

Shareholders

6

Employees

esop when should it be used
ESOP – When should it be used?
  • Shareholder’s retirement or buyout
  • Equity instrument for raising capital
  • Charitable giving plans
  • Family transitions
  • Interested in eliminating income tax
  • Company’s with strong employee management
  • Encourage employee ownership
  • Create benefit for Employees
spousal trust what is it
Spousal Trust – What is it?
  • Creating two irrevocable trusts
  • Typically done with spouses
  • Good to have similar types of assets
  • The goal is to reduce or possibly eliminate estate taxes
  • Need good counsel for structure
  • Watch for “Reciprocal Trust Doctrine”
spousal trust how does it work
Spousal Trust – How does it work?

S1

S2

  • S1 forms Trust
  • S1 contributes $5m
  • S2 is beneficiary
  • C1 and C2 are beneficiaries

$5.0m

$5.0m

  • S2 forms Trust
  • S2 contributes $5m
  • S1 is beneficiary
  • C1 and C2 are beneficiaries

S2

S1

C1

C1

C2

C2

spousal trust when should it be used
Spousal Trust – When should it be used ?
  • Control over assets is desired
  • Assets in trust are likely to appreciate
  • Sufficient liquid assets in both trusts
  • After consulting with estate planner
  • After consulting with estate lawyer
grat what is it
GRAT – What is it?
  • An irrevocable trust
  • GRAT has a specific term (2 – 10 years)
  • Parent transfers property to GRAT
  • Parent receives a fixed annuity payment
  • Assets revert to children
  • IRS Interest rate at 1.4%
  • Zero-Out GRAT creates no gift taxes
grat how does it works
GRAT – How does it works?
  • Benefits best seen with example
  • Facts for example
    • Use a two year GRAT
    • Transfer 10% of S Corp Stock to GRAT
    • Value of Company is $20,000,000
    • Minority interests get discounts
    • Gift of 10% estimated at $1,400,000 (30% discount)
grat how does it works1
GRAT – How does it works?
  • At end of term, stock goes to beneficiary

Gifts Assets to Zeroed-out GRAT

10% shares of CLA Construction Valued at $1.400,000

Receives 2 annuity payments from GRAT of approx. $720,000

grat how does it work
GRAT – How does it work?
  • End of term, Parent received $1,440,000
  • Assume you sell Company for $20,000,000
  • 10% to child is $2,000,000
  • Just moved $600,000, plus taxes out of your estate
  • S Corporation provides cash flow to fund annuity payments
grat when should you used it
GRAT – When should you used it?
  • S Corporations stock transfers
  • Minimize estate taxes
  • Considering sale of Company
  • Parent (Grantor) pays income taxes
  • Goal is to outperform interest rate if no sale of stock
  • If GRAT does not outperform wasted cost of GRAT
  • Fairly flexible
flps what is it
FLPs - What is it?
  • A partnership created by the transfer of property by two or more individuals
  • Allows for joint ownership of family-owned assets
  • Two classes of partners – general and limited

“FLP 1”

“FLP 2”

  • Allows for transfer of FLP interests
  • Enables discounts on the transfer of the FLP interests
diagram of cla family limited partnership
Diagram of CLA Family Limited Partnership

Formation and Funding of Family Limited Partnership

Phase One

CLA Family Limited Partnership

.5% GP interest

.5% GP interest

$2,50,000 assets

$2,500,000 assets

49% LP interest

49% LP interest

John CLA

Mary CLA

diagram of cla family limited partnership1
Diagram of CLA Family Limited Partnership

Gifting of FLP Interests (Discounted)

John CLA

Mary CLA

24.5% LP interest

24.5% LP interest

24.5% LP interest

24.5% LP interest

Susie CLA

(daughter)

Bobby CLA

(son)

Susie CLA

(daughter)

Bobby CLA

(son)

diagram of cla family limited partnership2
Diagram of CLA Family Limited Partnership

Final Structure of FLP

CLA Family Limited Partnership

John CLA

(.5% GP interest)

Mary CLA

(.5% GP interest)

Bobby CLA

(49% LP interest)

Susie CLA

(49% LP interest)

flps when should it be used
FLPs – When should it be used?
  • Shifting Income to lower brackets of children and grandchildren
  • Removes appreciation from estate
  • Minority and Marketability discounting
  • Great time with $5.0 exemption
  • Asset protection
questions
Questions
  • Michael A. Africk, CPA
  • Mike.africk@cliftonlarsonallen.com
  • 847-597-1810

Construction and Real Estate Team (Chicago)

Jeff Tyner Herb Brenner Mariana Aguilar

Rob Nowak Shane Turner Suk Szeto

Dave English Jennifer Richards

Beth Silver Dan Kirby