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Tax-Exempt Planning

Tax-Exempt Planning. AKA How to Give It Away And Still Make Money AKA Creative Charitable Solutions to Business Problems for Presentation by 501(c)(3)’s. Sample Client Problems Solved with Tax-Exempt Planning. High Capital Gains Owed If Sell Property Fully Depreciated Real Property

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Tax-Exempt Planning

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  1. Tax-Exempt Planning AKA How to Give It Away And Still Make Money AKA Creative Charitable Solutions to Business Problems for Presentation by 501(c)(3)’s BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  2. Sample Client Problems Solved with Tax-Exempt Planning • High Capital Gains Owed If Sell Property • Fully Depreciated Real Property • C Corporations with Significant Retained Earnings BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  3. Strategy #1 Charitable Remainder Trusts (CRT) • Trust has assets donated by a donor • Has a Trustee (can be the donor) • Is a Contract • Has income beneficiary(ies) entitled to a fixed percentage of trust assets. Normally valued annually • Gives remainder to charity (e.g. family foundation) • Avoids capital gains on sale of transferred assets • Donor entitled to a charitable income tax deduction BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  4. Issues to Consider When Funding A CRT with Investment Real Estate Clear title Marketability Environmental hazards Maintenance Pre-arranged sales Debt Type of CRT BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  5. Meet Bill & Mary Jones • 65 & 63 years old, with 42 year old son • AGI is $65,000; estate is $2M • Would like more retirement income • Own $500K rental property with a cost basis of $100K that yields $25k in gross income • Interested in relief from property management during retirement • Also interested in tax savings? BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  6. QUESTION: Would the Jones Family secure more income for themselves and leave more to their heirs if they held on to their rental property until their deaths?ANSWER: Maybe BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  7. Economics of Holding Investment Real Estate • What is real net income if owners deduct income taxes,property taxes, maintenance and repair expense? • Will the owners ever get relief from property management? • Will there be estate tax repeal at their deaths? • If not, how much of the asset will be eroded by estate taxes? • If yes, will heirs be subject to capital gains tax due to eliminated step-up in basis for transfers exceeding $1.3M? BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  8. Avoid $96,200 in capital gains taxes Income tax savings of $36,185, producing $168,004 of income and principal if invested . Income of $32,900 for 1st year, $1,268,395 over 26 years. Assumes 10% total return How About A 2-Life CRT? 7% Tax-Exempt Unitrust Transfer Property Receive Income End of Term (Actuarially 26 Years) Charity Or Family Foundation BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  9. Income from CRT Versus Sell & Reinvest Scenario (10% Total Return) BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  10. Asset Maximization Comparison for 2-Life CRT BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  11. Strategy #2 Charitable Lead Trusts (CLT) • Trust has assets donated by a donor • Has a Trustee (can be the donor) • Is a Contract • Has charitable [viable 501(c)(3)] income beneficiary(ies) entitled to a fixed percentage of trust assets – NOTE: This can be client’s Foundation • Remainder reverts to beneficiary(ies) of donor’s choice (even donor) • Donor entitled to a charitable income tax deduction BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  12. How About Mike & Nancy Smith? • They are on the verge of retirement • Wish to transfer $3M of commercial real estate (w/basis of $2M) to heirs in near future • Would like to make transfer while minimizing gift or estate taxes (currently in 50% estate tax bracket) BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  13. Gift Tax Deduction of $2,390,229, which reduces taxable gift to $609,771. Charity receives annual income of $270,000 At end of term, family receives assets + tax-free growth, amounting to $5,010,146. Assumes 10% return of trust assets What Is A Lead Trust? Transfer $3M Property 9% Lead Trust For Term of 13 years Charity Or Family Foundation Income to Charity End of Term To Family BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  14. Donors Don & Sandy Deed $1M of Their Stock to CLT Corporation offers to redeem shares of all shareholders Trustee of CLT accepts offer (Don & Sandy individually do not, for some reason!) Corporation uses cash or a loan to purchase CLT interests – redemption takes retained earnings to zero. CLT operates just like previous example, and at end game CLT principal and growth goes to Jones kids (or other remaindermen, as Don & Sandy desire) Corporation no longer has any retained earnings, thereby allowing Don & Sandy to form an exit strategy/sell their corporation without the distortion of the retained earnings issue At end game, Don & Sandy stillown all, but no retained earnings Corporate Application of Strategy #2 Problem: C Corp Valued at $3M,Retained Earnings of $1M, Sole Owners Don & Sandy JonesWant to Sell BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  15. Strategy #3 Double Discount Lead Trust STEP 1: • Transfer Property to a Family Limited Partnership (FLP) and get as much as a 40% discount on the transfer value STEP 2: • Transfer some or all of limited partnership interest of FLP to a Lead Trust for a short term (<5 years) RESULTS: • Family/Children become owners of property sooner. The double discount lead trust reduces gift tax to zero. BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  16. Double Discount Lead Trust (DDLT) Original Property Value $1,800,000 Cost $2,000,000 Gain -$ 200,000 Trust Principal $1,800,000 Trust to Family $2,011,599 Term Of 4.99 Years Family Limited Partnership $3,000,000 asset to FLP with 40% FLP discount valued in DDLT at $1,800,000 2. Income of 15% to charity for 4.99 years. No income tax. First year income $270,000 (or 9% of non-discounted principal of $3M). Total charitable payments in 4.99 years = $1,347,300. 3. After 4.99 years, trust assets revert to family. Property in FLP may have appreciated to a much greater value ($3,352,665) 1. Gift FLP assets of $3M to DDLT, charitable gift tax deduction of $1,135,377. Deduction reduces taxable gift from $1.8M to $664,623. BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com Assumes 10% income

  17. The WIIFM: NLA Co-Counsel Opportunities • Tax-exempt planning can be very lucrative – fees can range from $5,000 - $50,000 BUT • If tax-exempt planning saves hundreds of thousands, perhaps millions, of dollars for client, then fees become negligible • WIN-WIN for everyone – NLA, co-counsels, and most importantly, client BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  18. Conclusions • Tax exempt planning is an innovative tool that can solve some clients’ income, corporate, capital gain and estate tax issues • Use of sophisticated co-counsel versed in tax-exempt planning allows better service to client BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

  19. THANK YOU We sincerely appreciate the time you have given us today! QUESTIONS? BUCKLEY LAW OFFICES, P.C. www.buckleylaw.com

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