Opportunities to Take Advantage of Before Its Too Late

Tax laws are changing at the end of this year.  Take advantage of these opportunities before it’s too late.

Estate Tax Savings’ Techniques:

Gifting:  Use your $5,120,000 gift tax exemption.  Next year, the exemption is scheduled to be reduced to $1,000,000.  If you don’t use the exemption, you could lose it, and there is little downside as long as you don’t need the assets for future sustenance.

Spousal Access Trusts: Create spousal access trusts to use all or a portion of your gift tax exemption.  Your gift tax exemption can be used in a way that still allows you to provide for your spouse.

Valuation Discounts: Utilize valuation discounts for lack of marketability and lack of control. Gift hard to value or fractional interests in property.  By doing so, you can leverage your $5.12 million dollar exemption to remove even more property from your estate.  These valuation discounts for family owned assets and businesses are under scrutiny by the IRS and Congress.  If you wait too long, the law might change and you may lose the opportunity to leave more to your children and grandchildren.

Intra-Family Loans: Make intra-family loans. Interest rates are at all time lows.  By loaning money to trusts for the benefit of your children and grandchildren, you can remove virtually all of the appreciation on the loaned funds from your taxable estate, while knowing the principal is still there and can be paid back should you end up needing it.

Income Tax Savings’ Strategies:

Make Distributions: Make dividend payments from C corporations to take advantage of the current 15% tax rate. Next year, the rate is scheduled to go back up to ordinary income tax rates, and the new Healthcare Surtax could apply in certain circumstances making the highest effective tax rate on dividends 43.4%. That is almost a 200% increase in the tax rate on dividends.

Harvest Capital Gains: Sell appreciated assets now rather than next year.  The current capital gains rate of 15% is scheduled to rise to 20% next year and with the Healthcare Surtax, the highest effective tax rate on capital gains will be 23.8% in 2013.  That’s almost a 60% increase in the tax rate.

Charitable Deductions: Contribute to charities now, when the benefit is 35 cents on the dollar. Proposed legislation will reduce the deduction to 28 cents on the dollar next year.  Consider donor advised funds and private foundations that will allow you to have some control after the gift is made.

Fund 529 Plans: 529 plans are a great way to save for college.  Growth is tax free, and distributions are tax free if used to pay for qualified tuition and living expenses.  You can use up to 5 years worth of annual exclusion gifts in one year – that’s $65,000 per child in one year ($130,000 from a married couple), without using any of your lifetime gift exemption.  Act now because Congress may act to curb, reduce, or make the requirements more restrictive.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Federal Estate Tax Planning

In order to keep the estate tax burden from continually growing in your estate with further appreciation, you may want to do what many other clients have done: introduce some discounting and freezing techniques to your overall estate plan.  Gifting is also important, as each individual can make annual and lifetime gifts tax-free and decrease the size of his or her estate.

A popular freeze technique is where a client’s interest in limited liability companies, corporations, partnerships or real estate (the “Property”) is sold to a defective grantor trust (DGT) in exchange for an installment note. The beneficiaries of the DGT will be the client’s children and their descendants.  It is called a “defective” trust because the trust is a grantor trust, meaning the IRS ignores it for income tax purposes, but not for estate tax purposes (i.e., the grantor trust is “defective” for income tax purposes).

A DGT allows the value of the assets in such trust to be removed from your estates for estate tax purposes; however, the trust and any transaction(s) between the grantor (you) and the trust is disregarded for income tax purposes. For example, you would still pay income taxes on taxable income of the DGT.  This is a good tax result.  Your assets are being used to cover tax liabilities attributable to a DGT. This “tax haircut” is, in essence, gifting (paying someone else’s tax liability), but the IRS does not interpret this activity as gifting.

Your interest in the Property will be sold to the DGT in return for an installment note payable to you.  This will “freeze” the entire value of the Property; for estate tax purposes the unpaid balance of the installment note remains in your taxable estate, while the Property is not.  An income stream is generated for you from the DGT via payments on the installment note.  The payments from the DGT to you are ignored by the IRS since the payments are coming from a grantor trust.  The only “leakage” is the unusually small interest rate we are able to put on the promissory note to you. As discussed, payments on the installment note are typically interest only but we can work with that number based on the income and cash flow generated by the LLC property.  However, keep in mind that it is advisable to pay the interest yearly as the IRS may frown upon a balloon note with the interest and principal payable at the end of the term of the note.

The sale to the DGT allows you to not only freeze the value of the Property in your taxable estate, but to also reduce the size of your taxable estate based on the income taxes paid by you for the DGT’s income taxes, again, the “tax haircut”.  Also, you are able to take advantage of significant discounting in valuing the fractional LLC interests being sold to the DGT.

The non-voting membership interest in the LLC would be partially gifted and partially sold to the DGT in exchange for an installment note.  This way you freeze most of the value of the LLC in your taxable estate, but retain control of the LLC via your continued ownership of the voting membership interest. The underlying property in the LLC would need to be appraised.  The fees for these appraisals can vary depending on the appraiser.  Once those appraisals are received, the non-voting membership interest of the LLC would be valued.  After the non-voting membership interest is valued, we would use this number to determine the sale price for the non-voting membership interest.

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Annual and Lifetime Gifts

Gifting can play an important role in reducing estate tax exposure.  A gift is the transfer of real and personal property such as real estate, stocks, bonds, mutual funds, certificates of deposit, equipment, livestock, or cash, to beneficiaries before your death.  Gifting  removes all future appreciation on the gifted property from the taxable estate.   It can also accomplish income tax savings during life by shifting income producing property from one family member to another who is in a lower tax bracket.

The lifetime gift exemption for 2012 is set at $5.12 million dollars. However, it is scheduled to be reduced to $1 million dollars in 2013 unless Congress acts.  If you don’t use the current gift tax exemption, you could lose it.

In addition to your lifetime exemption, each donor may give $13,000 this year ($14,000 beginning in 2013)  per person, without any gift tax consequences.   To qualify for the annual exclusion, the gift must be a present interest gift (rather than a future interest).   Annual exclusion gifts can be outright or in trust.

Assume that a husband and wife have two children, each of whom is married, and each of whom has two unmarried children. This couple could give away a total of $208,000 this year without using up any part of their lifetime exemption. (Each parent could give $13,000 to each child, each child-in-law, and each grandchild, for a total of eight individual recipients, or $104,000 of gifts for the husband and $104,000 of gifts for the wife.  In 2013, each parent may gift an additional $1,000 per recipient.)

A gift will qualify for the $13,000 annual exclusion only if it is a gift of a “present interest.” Generally, this means that the (current year) gift must be made outright to the recipient, or (in the case of a person under age 21) to a Custodianship under the Uniform Transfers to Minors Act, or to certain kinds of trusts (typically, a “Crummey Trust”.)   The “present interest” limitation may require that the asset given away be income-producing or currently salable by the recipient.

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Now Is The Best Time to Do Estate Planning!

Did you know that now is the best time to do estate planning? In 2012, taxpayers have five compelling reasons to take advantage of a unique tax climate and real estate market enabling them to potentially secure tremendous estate tax savings. Taking advantage of the current favorable estate and gift tax exemptions, historically low property values and interest rates, discounts for lack of marketability, and defective grantor trusts will enable individuals with foresight to preserve and protect their wealth like never before.  But here’s the catch: You must act before January 1, 2013!

Here are the facts:

1. Currently, there is a $5 million lifetime exemption for gift and estate tax. But if Congress and the President fail to act, the $5 million exemption is reduced to $1 million on January 1, 2013. The President’s budget proposed a $3.5 million estate tax exemption and a $1 million gift tax exemption going forward. So the $5 million exemption offers a unique estate planning opportunity that might disappear at the end of the year.

2. Distressed sales are pulling down the market for real estate creating historically low property values.  In addition, appraisals now can use historical data from the recession to reduce business appraisals. With a slowly improving economy, these historically low values might not be around for much longer.

3. The IRS approved interest rates for related party transactions as low as .25% for short term obligations of 3 years or less, 1.15% for obligations between 3 and 9 years, 2.7% for obligations of 9 years or more. These historically low interest rates allow clients to freeze the value of their estate through sales and loans to Defective Grantor Trusts, with any future appreciation (excepting the small amount of interest paid) accruing outside of the client’s taxable estate.

4. Today, discounts for lack of marketability and lack of control can be used to value ownership interests in family owned entities. Simply fractionalizing assets and/or placing them in family owned entities can reduce the value of an estate by substantial amounts (25-40%). The IRS does not like these discounts and is looking to the President and Congress to eliminate their use for family owned entities. The President’s recent budget proposal would eliminate these discounts on family owned entities. If the President and Congress fail to eliminate these discounts, it is likely the IRS will, itself, act to reduce the estate tax advantage of these discounts through regulation. Therefore, time is of the essence to take advantage of these discounts.

5. Today, Defective Grantor Trusts can be used to reduce estate tax exposure. Defective Grantor Trusts are recognized for estate tax purposes but disregarded for income tax purposes. This allows us to transfer assets to the Defective Grantor Trust without income tax consequences. The President’s 2012 budget would cause grantor trusts to be disregarded for estate tax purposes (like they are for income tax purposes), thus eliminating their use for reducing estate tax exposure. While the President’s budget won’t pass this year, it is an indication of what future legislation might hold as the President and Congress look to increase revenues.

The next 7 months present an exceptional window of opportunity for individuals to make wealth transfers and decrease the size of their taxable estate.  Unless the President, the Senate, and the House of Representatives all agree otherwise, income and estate taxes will increase dramatically on January 1, 2013. Those who understand will take full advantage of this estate planning opportunity before it’s too late.

If you need help with your estate plan or would like to learn more, please do not hesitate to contact us at (404) 255-7400.

 

Defined Value Gifting Validated in Wandry v. Commissioner!

Hoffman & Associates has used defined value gifting as a way to reduce valuation risk in gifting hard to value assets since the early 1990s.   The idea is that a taxpayer should be able to gift a defined value amount of an asset rather than a fixed percentage of an asset.  

The IRS has long contested the use of defined value clauses as against public policy because they reduce the IRS’ incentive to contest asset valuations.  In the case of Joanne M. Wandry, et al. v. Commissioner, T.C. Memo 2012-88 (March 26, 2012), the Tax Court took the defined value gift issue head on and found the IRS arguments unpersuasive.

Mr. and Mrs. Wandry owned LLC units of Norseman Capital, LLC.  An independent appraiser determined that the  value of a 1% interest in the LLC was worth $109,000.  Mr. and Mrs. Norseman desired to gift to their children and grandchildren defined value amounts of the LLC as follows:

Name

Gift Amount

Kenneth D. Wandry

$261,000

Cynthia A. Wandry

$261,000

Jason K. Wandry

$261,000

Jared S. Wandry

$261,000

Grandchild A

$11,000

Grandchild B

$11,000

Grandchild C

$11,000

Grandchild D

$11,000

Grandchild E

$11,000

Total Gifts

$1,099,000

 The Wandrys executed assignments to their children and grandchildren with defined value amounts and containing the following adjustment clause in case the IRS later found that the LLC was improperly valued by the appraiser:  “the number of gifted [LLC] units shall be adjusted accordingly so that the value of the number of units gifted to each person equals the amount set forth above”.

In the years following the gifts, the Wandrys’ gift tax returns and the LLC income tax returns reported the children and grandchildren as an owner of a percentage of the LLC.  So each child reportedly owned a 2.39% ($261,000/$109,000) and each grandchild reportedly owned a .1% ($11,000/$109,000) interest.  

Years later, the IRS audited the gift tax return and found that a 1% LLC interest was, at the time of the gift, actually worth $150,000.   The IRS disregarded the defined value clause in the assignment, arguing that it is against public policy because it’s enforcement would virtually eliminate the incentive for the IRS to audit valuations of gifted property.  The IRS concluded that because the tax returns reported that the children owned a 2.39% interest, that must be the amount gifted to them.  And if a 2.39% LLC interest was gifted, then the value must be $385,500 (2.39% x $150,000) rather than $261,000.   The result of the audit was a taxable gift in excess of the Wandrys remaining lifetime gift tax exemption.

Mr. and Mrs. Wandry and the IRS eventually stipulated that a 1% interest in Norseman was worth $132,000, but the issues of whether the defined value formula clause and the adjustment clause were enforceable went before the Tax Court.  The IRS argued that the gift tax returns and the income tax returns were admissions of the transfer of fixed percentages.  It also argued the adjustment clause was void for federal tax purposes as against public policy on the grounds that it was a condition subsequent to completed gifts.  The taxpayers argued that the assignments only transferred defined value amounts (not percentages) and that public policy concerns regarding the adjustment clause did not apply because the value was set on the date of the gift.  

The Court found that the taxpayers’ intent and actions proved that only the dollar amounts of gifts were intended and that the public policy arguments regarding the adjustment clause were without merit.   As such, the Tax Court validated use of defined value formula gifts as an estate planning technique for reducing exposure to later valuation adjustments by the IRS.  This case was a big win for the Wandrys and for taxpayers and estate planners around the country.

If you need help with your estate plan or would like to learn more, please do not hesitate to contact us at (404) 255-7400.

Georgia Education Expense Tax Credits: Do Not Wait!

June is the new November The Georgia Dept. of Revenue is approving education expense tax credits at 3½ times the rate for 2011. As of Mar. 16, the DOR had approved $8.6 million in tax credits. In 2011, the tax credit cap was met in November. This year, the cap is likely to be met in June—if not sooner. In 2011, 2,700 Georgia taxpayers were denied participation in the education expense tax credit program. Don’t let this happen to you in 2012! Apply today for your tax credit approval.