11 12 02 Want To Save A Fortune On Taxes

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2012

Want To Save A

FORTUNE

On Income Taxes?

Givner & Kaye, A Professional [email protected]

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The Best Planning Is Done At The Beginning Of The Year:

1. More time to review the alternatives.

2. Time to calmly and carefully put the structures in place.

3. Advisors are not hassled with year-end crises.

4. Able to adjust to the actual results throughout the year.

Givner & Kaye, A Professional [email protected]

Want To Save A Fortune On Taxes?

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3Givner & Kaye,

A Professional [email protected]

What We Will Cover:1. The Big, Easy Deductions. P. 5

1.1. Defined Benefit Pension Plans. P. 61.2. Captive Insurance Companies. P. 15

2. Charitable Alternatives. P. 252.1. Grantor Charitable Lead Annuity Trusts. P. 262.2. Charitable Remainder Annuity Trusts. P. 312.3. Charitable Limited Partnerships. P. 36

3. Investments. P. 393.1. Oil and Gas. P. 403.2. Real Estate (Component Depreciation). P. 43

4. Questions and answers. P. 47

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Our ProcessFour Phases – Four Engagements – Four Fixed Fees

(so the client does not feel “on the clock”).

Review – Design – Implement - Maintain

Givner & Kaye, A Professional [email protected] 4


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The Big, EasyDeductions

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Defined Benefit

Pension Plans

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Tax Qualified Employee Retirement Plan

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The corporation (Plan Sponsor)

The Plan The Trust

Joe

Owner

Employees/participants

TrusteePlan committee

$ $



Corporation (plan sponsor)

Retirement Trust

Employee/Participant

Money goes out – define (limit) the benefit

Money goes in – define (limit) the contribution

There are two types of plans: one that defines how much goes in – one that defines how much goes out



Defined Contribution

Plan


If you limit how much goes in (IRCSection 415(c) - $49,000), then there isno limit on how much goes out. So if youare going to buy Qualcomm at $1 andhave it go to $100, do so in a definedcontribution plan; it will not impact yourfuture contributions.



Defined Benefit

Plan


If you limit how much goes out (IRCSection (b), (d) - $195,000), there is nospecific limit on how much goes in. So ifyou want a contribution of more than$49,000 per person, you need a definedbenefit pension plan.



In General:Sample maximum contributions at various ages:

35 – 5 years past service - $65,000 + DC plan @ 6% of comp + $16,500 in 401(k) X 2 spouses inyear one is $190,000. Over 5 years it’s $1,000,000.

45 - $130,000 + $30,000 X 2 spouses = $320,000, or $1,600,000 over 5 years.

55 - $237,000 + $30,000 X 2 spouse = $534,000 or $2,670,000 over 5 years.

Plus life insurance.

Using the “cushion method” the amount in the first year might be it could be 3 to 4 times that amount(though zero in the second year).


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Monthly Benefit Contributionat RA 62

Helen 11/16/63 $60,000 $4,878.00 $ 29,276.00

Michael 3/26/74 $40,000 $2,402.00 $ 11,045.00

George 10/6/77 $45,000 $3,450.00 $ 12,147.00

Lucy 9/5/70 $30,000 $1,773.00 $ 9,871.00

Paul 8/29/76 $25,000 $1,173.00 $ 4,131.00

Steven 11/18/79 $40,000 $1,615.00 $ 5,009.00

Gary 8/2/75 $90,000 $3,403.00 $ 13,658.00

Jane 10/25/57 $250,000 $7,634.00 $226,464.00

Sam 9/2/51 $250,000 $7,667.00 $306,102.00

Totals $617,703.00 [86.2% for bosses]

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Is There A Good Set Of Facts?1. You cannot determine if the facts are good simply bytalking to your CPA.2. You cannot determine if the facts are good simply bytalking to a third party administrator or actuary.3. The proper construction of the facts is a process that wemust discuss with you and help you create. It must beconducted under the attorney‐client privilege.4. The presentation of the facts is absolutely critical to theoutcome and will make the difference between an attractiveplan and one that will not work.



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A Professional [email protected] 14


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Captive Insurance

Companies(“wealth captives”)

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Captive Insurance Companies for the Middle Market

Originally used only by the very largest companies,captives are no longer the exclusive tool of those in theFortune 500. There are now well over 5,000 captiveswriting over $50 billion in annual premiums. Many ofthese captives insure middle market companies andsuccessful professionals.

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IRC Section 831(b)

A small property and casualty insurer withannual premium income not exceeding $1.2million pays no tax on its underwriting profitsbut is taxed solely on its investment income. Inthis case, the business that pays premium to acaptive deducts the premium expense while thecaptive pays no tax on the underwriting profits.

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Estate Planning

Estate planning is an important businesscontinuity consideration for closely held companiesand for their owners. A CIC can be a key componentin estate planning with the captive being owned byor for the benefit of the next generation (a dynastytrust) and so enabling a lifetime transfer of pre-taxunderwriting profits.

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Common Captive CoverageProperty & Casualty

* Director & Officer * Subsidence* General Liability * Exclusions* Employment Practices * Deductible Reimbursement* Litigation Defense * Difference in Conditions* Construction Defect * Difference in Limits* Warranty * Workers’ Compensation* Mold

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Captive Insurance Company: Deducting $1,200,000 Per YearDiagram 1: Pre-Setup

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David

Wilmington Trust Company

(or some other Delaware Trust Company)

David Dynasty Trust

(Delaware –Perpetual)$300,000

David’s heirs

Grantor Trustee

We commonly set up the trusts which own

the captives in Nevada.


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Captive Insurance Company: Deducting $1,200,000 Per YearDiagram 2: Set Up The Captive

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David Dynasty Trust

(Delaware –Perpetual)

Delaware LLC(taxed as a “C” corporation for Federal income tax purposes)

$500,000

100% owner

Series “A”:Property &

Casualty Risks

Series “B”:Health Plan Liabilities

The captive is exempt fromDelaware business income tax.It is treated as one enterpriseand, therefore, subject to onlyone $5,000 minimum annualpremium requirement. Eachseries can receive up to $1.2million tax free under IRCSection 831(b).


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Captive Insurance Company: Deducting $1,200,000 Per YearDiagram 3: Operating The Captive Alternative #1

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Business #1

Delaware LLC

Business #2

Business #3

Business #4

Business #5

Business #6

Business #7

Business #8

Business #9

Business #10

Business #11

Business #12

Each business must pay a premium of 5% - 15% of the $1,200,000 total.


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Captive Insurance Company: Deducting $1,200,000 Per YearDiagram 3: Operating The Captive Alternative #2

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Delaware LLC

Operating Business

Captive Manager’s

Pool

Assume the captive manager re-insures 40% of the risk. Then 11% of the riskis shared among the pool. If there are 8 members of the pool and one has a$1,200,000 casualty, then the other 7 members lose $171,000 each.

49% of the premiums

51% of the premiums


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Captive Insurance Company: Deducting $1,200,000 Per YearDiagram 4: Using The Captive’s Profits

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Delaware LLCDavid Dynasty

Trust(Delaware –Perpetual)

Dividends

LLC used to buy real

estate and other

investments

David as manager

LLC used to buy real

estate and other

investments


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Charitable Alternatives

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Grantor Charitable Lead Annuity Trust

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Mom CLAT

CharityChildren’s Trust

Gives $600,000 of LLC units

8.3% per year - $50,000 – for 10 years

Children’s trust gets what is left at the end of the 10 year period

$464,000 charitable deduction


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Charitable Lead Annuity Trust – Alternate #1Bunching The Deduction Up Front

October, 2011 Section 7520 rate of 1.4% (lower is better)$1,000,000 of real estate generating $50,000 per year in an LLCValuation discounts of 40% make it $600,000 generating $50,000$50,000 is an 8.333% payout on $600,00010 Year Term, Remainder To ChildrenImmediate Charitable Gift of $463,542 (77.257%), which saves Mom $209,000if in a 45% state and Federal bracket [13 year term is 98.4% gift!!]Gift to the children’s trust of $136,459, for which a 709 must be filedMom is taxed on the income each year so she gives back the charitablededuction that was bunched up front

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Charitable Lead Annuity Trust – Alternate #2Deduction Up Front, No Taxable Income Later

October, 2011, Section 7520 rate of 1.4%$1,000,000 of muni bonds generating $40,000 per year in an LLCValuation discounts of 30% make it $700,000 generating $40,000$40,000 is a 5.7% payout (annuity) on $700,00010 Year Term, Remainder To ChildrenImmediate Charitable Gift of $369,921 (53%), which saves Mom$166,464 if in a 45% state and Federal bracket [20 years = 99% gift!!]Gift to the children’s trust of $330,079, for which a 709 must be filedMom is taxed on muni bond income each year (zero)

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Mom CLAT

Charity

Gives $1,000,000

5% per year -$50,000 – for 10 yearsMom gets what is

left at the end of the 10 year

period

Doesn’t Have To Be A Gift Over To The Children – Can Come Back To Mom


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Charitable Remainder

Annuity Trust

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Charitable Remainder Annuity TrustOctober, 2011 Section 7520 rate of 1.4%But We Are Allowed To Use August’s 2.2%

(Higher interest rate is better)(Longer retained term yields lower deduction)

$1,000,000, 10 Year Term, 5% payout to MomImmediate Charitable Gift of $555,535, which saves Mom $250,000 ifin a 45% state and Federal bracket

20 year term results in a $198,000 charitable deduction ($89,000 taxsavings)

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Mom CRAT

Charity

Gives $1,000,000

5% per year - $50,000 –for 10 years

Charity gets what is left at the end

of the 10 year period


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CRATAugust Section 7520 rate of 2.2%

Mom, age 71, Retains 5% income for life

Immediate Charitable Gift of $416,710, which saves Mom $187,520 if in a 45% state and Federal bracket

[not significantly different than the results of a 20 year term]

Note: Will Not Work For A 70 year old!!!

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Mom CRAT

Charity

Gives $1,000,000

5% per year - $50,000 –for her life

Charity gets what is left when mom

passes away


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Charitable Limited

Partnerships

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Limited Partnership

Mom and Dad

Contribute $1.0 of appreciated

property

CharityDonate 97% of LP interests

Becomes the 97% LP

3% GP

97% of $1.0 X 90% (to allow for 10% valuation discounts) = $873,000 charitable deduction which saves $392,850 in income tax, but the $1,000,000 stays in the limited partnership.


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The end result is that you have a limited partnership which you control.However, the largest limited partner is a charity. You must make a distribution of 5%of the value of the assets each year, and 97% of that distribution will be to thecharity. You must make that distribution so that the charity realizes and reasonablereturn on its investment. Beyond that, you can make appropriate investments withthe limited partnership assets, e.g., loans to your business, investments in realestate that you like, etc.

This is an attractive way to control capital at an attractive cost, especially ifyou have an interest in benefitting charity.


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Investments

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Oil and Gas

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EXAMPLE (adapted from Hard Rock Partners 2011-a, L.P.):

No Oil & Gas Investment Oil & Gas Investment ($50,000 investment)

Gross income $200,000 Gross income $200,000Taxable income $200,000 IDC deduction ( 50,000)

Taxable income $150,000

State Tax 6.5% $ 11,875 State Tax 6.5% $ 8,625Federal Tax $ 44,070 Federal Tax $ 30,070

Total Tax $ 55,945 Total Tax $38,695

Tax Savings $17,250 (34.5% of $50,000)

The cash flow often runs 10% per year for decades.

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Economics:

Gas prices are low, meaning any increase will improve investor returns

U.S. is the Saudi Arabia of natural gas

Work with an experienced operator that has (i) drilled hundreds of wells and (ii) excellent track record in existing developed fields

Risk diversification in multi-well programs

Return of initial investment in tax benefits and cash in 5 to 8 years

Residual income for decades

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Real Estate

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Two methods of depreciation for Commercial Properties:Straight-line method - depreciated over 39 years. Stipulates that an asset must be depreciated by equal amounts each year over its useful life.Example:You buy a commercial shopping center for $10,000,000. The land the center resides on is worth $4,000,000 (40%). The building is valued at $6,000,000. Current law allows you to depreciate commercial properties by equal amounts annually over 39 years. $6,000,000/39 years = $153,846 annuallyOr calculate by multiplying the building percentage by 2.56%.

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Accelerated Depreciation –Same $10.0 one story Shopping Center. Reasonable Cost Segregation allocations and related depreciation figures ($6.0 to Building, $4.0 to land):

5 year property 28% of $6,000,000 = $1,680,0007 year property 3.5% of $6,000,000 = $ 210,00015 year property 11.84% of $6,000,000 = $ 710,40039 year property 56.66% of $6,000,000 = $3,399,600

Here is the resulting First Year Depreciation:5 year property = $ 672,0007 year property = $ 60,00015 year property = $ 71,04039 year property = $ 87,169___________Total Depreciation in year one: $890,209

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Accelerated Depreciation –

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Value of building 6,000,000

Bldg.

Segregation Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Totals

5 year property 1,680,000 672,000 403,200 241,920 145,152 87,091 1,549,363

7 year property 210,000 60,000 42,857 30,612 21,866 15,618 170,954

15 year property 710,400 71,040 63,936 57,542 51,788 46,609 290,916

39 year property 3,399,600 87,169 84,934 82,756 80,634 78,567 414,061

Totals 6,000,000 890,209 594,927 412,831 299,440 227,886 $2,425,294


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Questions and Answers

Send us e-mail:

[email protected]@[email protected]



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11 12 02 Want To Save A Fortune On Taxes