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Preserving the Larger Estate

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

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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

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