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Advanced Planning Strategies Create New Sales Opportunities

Strategies to be Covered. Advanced Planning with GRATsGeneration Skipping with GRATsNew Regs.Short Term v. Long Term GRATsEstate Planning with

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Advanced Planning Strategies Create New Sales Opportunities

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    1. Advanced Planning Strategies Create New Sales Opportunities 2008 Fall Sales Meeting September 14-16, 2008 Richard A. Oshins Oshins & Associates, LLC 1645 Village Center Circle, Suite 170 Las Vegas, Nevada 89134 702.341.6000 / 702.341.6001 Fax www.oshins.com

    2. Strategies to be Covered Advanced Planning with GRATs Generation Skipping with GRATs New Regs. Short Term v. Long Term GRATs Estate Planning with “Disregarded Entities” Defective Trusts on Steroids QPRT Substitutes

    3. Strategy #1 Advanced Planning with GRATs

    5. Potential Disadvantages of GRATs Survivorship Feature Generation Skipping Tax Exemption cannot be allocated until after the retained interest terminates

    6. Estate Tax Survivorship Feature If Grantor survives the term. Tax-free shift Growth in excess AFR Valuation discount If Grantor does not survive the term. Inclusion Treas. Reg. § 20.2036-1(c)(2)

    7. Estate Tax, cont. Heads - I Win/Tails - I Break Even Heads – I Win/Tails – I Win

    8. GST Tax Aspects GST Planning – Remainder Sale/Gift The “ETIP” Problem Finessing the GST issue

    9. Sale or Gift of Remainder Interest Gift or Sale of Remainder Interest Remainder beneficiary transfers entire interest Gift or purchase (price FMV under IRC § 7520) LTR 200107015 CLAT Remainder (IRC § 2642(e)) IRS Rules Two Transfers

    10. Generation Skipping GRAT Concept

    11. Transfer of Remainder Interest – Protective Planning Protective Planning Transfer to GST exempt trust which has non-skip beneficiaries Transfer of “remainder equivalent” Reacquire remainder interest before end of annuity period

    12. Short Term – Rolling GRATs High payout needed to produce low gift Often receive – “in-kind” distributions such as Publicly Traded Stock Not suitable for hard to value assets

    13. Long Term GRAT Works well with hard to value assets Locks-in low interest rates Reduces risk of law changes Survivorship risk

    14. Conventional Thinking with Publicly Traded Stocks Conventional thinking does not: Allow the GRAT to in effect buy wholesale and pay back retail Lock in present low interest rates Lock in the strategy from changes in the law Enable you to fully exploit the very low early payment feature of a graduated GRAT Take advantage of the disregarded entity concept Effectively use the generation-skipping GRAT strategy

    16. Goal To Transfer Substantial Wealth Transfer tax-free Income tax-free

    17. Primary Wealth Shifting Strategies IDGT – Note Sale Non-controlling interest sold to income tax defective trust in exchange for an installment note, generally interest only with a balloon payment. GRAT – IRC § 2702 Gift to trust in exchange for an annuity substantially equal in value to transferred property Generally annuity increases by 20% a year

    18. Concepts we will be using Income Tax Defective Trust Disregarded Entity The Estate Planner’s Dream – “Passing on More Than Meets the Taxable Eye”

    19. Disregarded Entity Single owner entity that has not elected to be classified as an association (corporation) Entity existence ignored A “tax nothing” Concept similar to Defective Trust Concept

    20. Disregarded Entity Non-Income Tax Characteristics Entity Existence – Respected Transfer Tax Purposes Estate, Gift and GSTT Creditor Protection Purposes State property law controls

    21. Rev. Rul. 2004-77 Eligible entity with two owners under local law If one owner is disregarded as an entity Then eligible entity cannot be a partnership It’s a disregarded entity unless it elects to be taxed as an association

    22. Sample Client Profile $10 million real estate property Cash flow 5% - appreciation 5% Three children Desire to give one-third to each child Assume 40% valuation discount Assume AFR 6% Annual Mid-term Rate 5%

    23. “GRAT” Grantor Retained Annuity Trust

    24. Our Unique Problem Major assets have a low cash flow - 5% Actual payment of the annual annuity must be made. Treas. Regs. § 25.2702-3 Desire to contribute discountable assets and receive annuity back in cash

    25. Low Cash Flow GRAT For transfer tax purposes, no aggregation of transfers to separate trusts. Rev. Rul. 93-12

    26. GRAT Illustration Graduated 10-Year: 5% income, 5% growth §7520 Rate: 6.00% Income Earned by Trust: 5.00% Term: 10 Annual Growth of Principal: 5.00% Pre-discounted FMV: $10,000,000 Discounted FMV: $6,000,000 Percentage Payout: 5.69699% Annual Annuity Payment Growth: 20.00% Value of Grantor's Retained Interest: $5,999,990.11 Taxable Gift: $9.89

    27. GRAT Illustration Graduated 10-Year: 5%income, 5% growth

    28. Options to Pay Annuity “In Kind” distributions of LLC interests Grantor trust – no income tax on payments “in kind” of appreciated property Discountable Appraisal and valuation problems Future growth back in estate Reduces wealth transfer Violates to goal of receiving assets back not subject to discounts

    29. Options to Pay Annuity, pg.2 Purchase the property from the LLC LLC owns 100 % of property Purchase is of 100% of property No discount Can be by note Potential cash flow issue Can use GRAT annuity payments to alleviate cash flow problems

    30. How Does The “Disregarded Entity”/GRAT Income Tax Combo Work? GRATs are grantor trusts. IRC §§ 673(a),677(a) Each GRAT is “owned” by the grantor for income tax purposes Entity with a single owner is disregarded. IRC § 7701

    31. GRAT Illustration Graduated 20-Year: 2%income, 6% growth § 7520 Rate: 6.00% Income Earned by Trust: 2.00% Term: 20 Annual Growth of Principal: 6.00% Pre-discounted FMV: $10,000,000 Discounted FMV: $6,000,000 Percentage Payout: 1.27810% Annual Annuity Payment Growth: 20% Value of Grantor's Retained Interest: $5,999,996.99 Taxable Gift: $3.01

    32. GRAT Illustration Graduated 20-Year: 2%income, 6% growth

    34. What is a QPRT Grantor transfers residence to trust Grantor retains: Right to use and occupy residence for specified term; and Contingent reversionary interest

    35. QPRT Disadvantages Which We Want to Eliminate or Reduce __________________________________________ Large gift Mortality Risk Prohibition against reacquisition To live in residence To obtain step-up in basis at death Complex, rigid regulatory requirements

    36. QPRT v. GRAT Unified credit used QPRT substantial GRAT insignificant Term – risk of inclusion QPRT substantial GRAT term can be condensed Right to reacquire property in GRAT To own To obtain basis step-up Remainder interest transfers at lower cost in GRAT

    37. QPRT v. IDGT Sale v. Gift Survivorship feature Right to reacquire property To own To obtain basis step-up General skipping

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