For Families wanting to help their ASD/DD Special Needs ... · Charity(ies) How to Provide Income to a Person with ASD or DD 1. Establish a “Special Needs” Trus t—the “extra

For Families wanting to help their For Families wanting to help their ASD/DD Special Needs Adult Children

How to Slash your tax bill, and Do Good f Y lf f H i f Ch ifor Yourself, for your Heirs & for Charity

B b E i CFP®Bob Ericson, CFP®

Ericson Financial Solutions

How to Provide Income & Housing for yourSpecial Needs AdultSpecial Needs Adult

Today’s workshop will coverToday s workshop will coverThe Benefits of Using:

1) Special Needs Trusts

2) Charitable Remainder Unitrusts)

3) Bargain Sale gifts

4) Charitable Lead Trusts


Issue from a Parent’s PerspectiveIssue from a Parent s Perspective

A How to provide lifetime income for theirA. How to provide lifetime income for their ASD or DD Special Needs adult

1. Use a Special Needs Trust

2. They can create a Charitable Remainder yUnitrust (CRUT)


Basic Estate Planning & Estate Tax Structure

FAMILY ASSETS—what IRS estate taxes are based on

Home Checking IRAs Rentals Highly StocksBonds

401ksLife ins.

RentalsAppreciated

Assets

Heirs Gov’tTaxes Charity(ies)

How to Provide Income to a Person with ASD or DD1. Establish a “Special Needs” Trust—the “extra money” fund

It provides money for “extras” while not reducinggovernment assistance

FAMILY ASSETS—what IRS estate taxes are based on


401ksLife ins.

RentalsAppreciated

Assets

Special NeedsTrust

Heirs Gov’tTaxes Charity(ies)ASD/DD

Adult

Tax Structure in the United States in 20131 Personal 2 Personal1. Personal

Ordinary Income Tax

2. Personal Capital

Gains Tax3. Estate Tax 4. Corporate

Income Tax

Fed: up to 39.6% Fed: up to 20% Fed: 40% > $5/10 M Fed: up to 37%pState: up to 13.3%Combined: ~48%

E l

pFed: 3.8% medicareSurcharge > $250kState: up to 13.3%Combined: ~34%

State 0%Combined: 40% >$5/10 M; indexed for inflation; $5.25MSi l $10 5M

pState: up to 10.84%Combined: ~44%

Example:$10 million FMV Corp (5x EBITDAExample:

$1 million taxable income above $450 AGI married/$400,000 single

Example:$1 million long-term capital gain above $450k AGI married; $400,000 single

Single; $10.5M married in 2013

Example:$20.5 million taxable estate

$10 million FMV Corp (5x EBITDA profit)$2 million pre-tax profit~$1 million tax w/out ESOP$8 million payroll (PR)$2 million ESOP contribution (25% PR)$0 illi t / $2 ESOP t

$1M

$480k

$1M

$340k$10 Mtaxable

$4M

$10MFMV

$480,000 tax $340k tax $4 M million tax $0 million tax w/ $2 m ESOP payment

$1M$520k

$1MGain $660k

$16.5M$10.5MExempt

$8mPay-Roll(PR)$2M

$2Mnet$2M

FMV

$1Mnetcost

$profit $0 t

net$ESOPnet

•This is a simplified explanation; many deductions & exemptions apply; consult your tax professional;•Color coding: yellow = taxable amount or other; red = tax owed; green = amount left to family/owner

$1M tcost


FAMILY ASSETSFAMILY ASSETS$10.5 M exemption = $0 M taxable estate @40%


401ksLife ins.

RentalsAppreciated

Assets

Gov’tHeirs$? M

Gov tTaxes$0 M

Charity(ies)$?M

H t P id I f th F il How to Provide Income for the Family & an adult with ASD or DD

2. Establish a Charitable Remainder Unitrust (CRUT)

Think of a CRUT as a “Golden Lottery Money Tree” that provides income first to the donors and then the “remainder” to one or more charities


The Benefits of Charitable Remainder Trusts (CRUTs)

More info & benefits of CRUTs:

The CRUT allo s the c rrent o ners of the assets to maintain a largeThe CRUT allows the current owners of the assets to maintain a large amount of control & flexibility in managing their CRUT:

1. Can be trustees2. Can manage their CRUT assets;3. Can change nonprofits to get money, to include housing agency for their

ASD/DD adult child 4 Not required to notify charities4. Not required to notify charities5. Can make distributions to charities during lifetime (reduces future income)


Basic Estate Planning & Estate Tax Structure#1#1

CRUT“Golden Lottery

Money Tree”

tax deduction

FAMILY ASSETS

Home Checking IRAs Rental Highly A i t d

Lifetimeincome

StocksBonds

401ksLife ins.

RentalProperty

Appreciated Assets(stocks)

“remainder” principal in CRUT goes toCRUT goes to charity after income beneficiaries die

Heirs Gov’tTaxes Charity(ies)

Using a CRUT* to Sell stock, pay no capital gains tax& maximize income to the owner

1. Normal Taxable Sales Net Cash to Owner Annual Income @5%less

1. 0 selling cost

2. $340k tax$1 Millionstock

$660,000 $33,000

Net Cash to Owner Annual Income @5%

5% dist.

Less $340,000 tax

less

2. Charitable Trust Strategy CRUT* Annual Income @5%less

1. 0 selling cost

2. $0 tax$1 MillionLess $0 tax

$1 Million$50,0005% dist.

3. $110k tax ded (11%)

~$50,000 $2,5005% dist.

+ Extra Cash from Tax Deduction + Annual Income @5

Bottom-line benefits of Charitable Trust Strategy

1. Total $ at work for owner $1.05 million $52,5005% dist.Combined CRUT* + Owners $

Combined Income @5%

Extra money working

,

5% dist.2. Extra $ at work for ownerExtra Income to Owner

~$400,000 ~$20,000 60% more

Using a CRUT to Sell a primary residence, pay no capital gains tax& maximize income to owner

1. Normal Taxable Sales Net Cash to Owner Annual Income @5%less

1. $200k selling cost (7%)

2. ~$600k tax (34%)

1. Normal Taxable Sales

$3 Millionhome $2.2 million $110,000

Net Cash to Owner Annual Income @5%

5% dist.

~$600k tax+selling cost

less

CRUT* Annual Income @5%2. Charitable Trust Strategy

1 $100k selling cost (7%) %1. $100k selling cost (7%)

2. $0 tax$3 Millionhome

$200k selling cost

$1.4 million $70,0005% dist.

3. $615k tax ded. (41%)

50%

$1.4 million $70,0005% dist.

+ Liquid Cash to Owner + Annual Income @5

$200k selling cost

less1. $100k selling cost

2. $0 tax

1. Total $ at work for owner$2 8 million $140,0005% dist.

Bottom-line benefits of CRUT Strategy

Combined CRUT* + Owners $ Combined income @ 5%

$2.8 million $140,0005% dist.

2. Extra $ at work for owner $600,000 $30,000 27% more

Using a CRUT to sell a primary residence,pay no capital gains tax & maximize income to the ownerpay no capital gains tax & maximize income to the owner

Taxable Sale CRUT Sample CaseCase Study CRUT (50%) Owners (50%)y ( ) ( )

Gross sales (contract) price $3,000,000 $1,500,000 $1,500,000Less Sales costs (commission + escrow = 7%) (200,000) (100,000) (100,000)Net sales price $2,800,000 $1,400,000 $1,400,000Less cost basis of home (560,000) n/a (280,000)N t t f it l i $2 240 000 $0 $1 120 000Net gross amount of capital gain $2,240,000 $0 $1,120,000Less $250k (single)/$500k (married) exemption (500,000) n/a (500,000)Net amount subject to capital gain $1,740,000 41% tax ded $620,000X capital gains tax rate (est. 30% Fed/State rate) x 34% $615,000 tax ded (615,000) Fed/State capital gains tax due ~$600,000 $0 ~$0p g $ , $ $


Example of how this cash flow could be spentAnnual Cash Flow from Charitable Trust Strategy Sale of $3 Million Home

Total $$140,000

• For your own lifestyle & retirement:For your own lifestyle & retirement:

1. Can take more & better vacations—cruises, timeshares, long road trips $15,0002. Can go out to eat more, buy a newer car, misc. 5,0003 Can remodel home or buy a vacation home or timeshare 25 0003. Can remodel home or buy a vacation home or timeshare 25,0004. Can put more money into retirement plans or pay for assisted living 50,000

Subtotal $95,000• For your kids:

1. **Put more money into your special needs trust, to assist your ASD/DD adult $15,0002. Spend more on kids now, in special classes, to help them get into a good school 5,0003. Gift money to kids now, to help them learn about investing & saving for goals 5,0004 Wh kid t f h l h l th b h li l t 10 0004. When kids are out of school, help them buy a home or live close to you 10,000

Subtotal $35,000

• For charity:

1. Can give more to favorite charities, including one providing housingfor your ASD/DD adult child

Subtotal $10,000


The Benefits of Charitable Remainder Trusts (CRUTs)

Ideal Situations for Use:

When a client is ready to sell a highly appreciated asset: (assets must be appraised and have a potential buyer--one key rule-you cannot have a debt or mortgage on the assets). Examples:

St k/P i R id /A t/J l /GStock/Primary Residence/Art/Jewelry/Gems

Rental Properties: a CRUT has significant advantages vs. a 1031 Exchange. A CRUT will most often create a higher cash flow to the owner and allowA CRUT will most often create a higher cash flow to the owner and allow the owner to diversify their investments in a tax-advantaged trust environment

A closely held business: this can be done with the least tax paid if:1)the company sets up an ESOP (Employee Stock Ownership Plan): 2) the company makes tax-deductible payments to the ESOP; 3) the owners

f Cput some or all of their stock in their CRUTs;


Basic Estate Planning & Estate Tax Structureif family did no other planning #1—CRUT

$10 M

FAMILY ASSETS---$20.5 M base case - $10M CRUT;

$10 M“Golden Lottery

Money Tree”

tax deduction

FAMILY ASSETS $20.5 M base case $10M CRUT;- $10.5 M exemption = $0 M taxable estate @40%

Home Checking IRAs RentalsHighly

AppreciatedLifetimeincome

StocksBonds

401ksLife ins.

Rentals$10 M

Appreciated Real Estate

$10 M

$500kFirst year

“remainder” principal in CRUT goes to

Gov’t

CRUT goes to charity after income beneficiaries die

Heirs$10.5 M

Gov tTaxes$0 M

Charity(ies)$10 M

2 More Strategies to provide housing for their Special Needs Adult

1) Use a “Bargain Sale” Donation, where the real estate owner sells the property to the charity, but at a reduced price. The amount of the reduction is treated as a income tax deductionreduction is treated as a income tax deduction,

2) Set up a Charitable Lead Trust (CLT) where charity benefits2) Set up a Charitable Lead Trust (CLT), where charity benefitsimmediately from an income stream from the CLT, is a way toreduce the value of the assets in the CLT for estate tax; andtitle to them reverts back to family ownership when the CLTtitle to them reverts back to family ownership when the CLTterm is over, usually to a trust to benefit kids or grandkids;


Bargain sale: The sale of an asset to a charity at less thanto a charity at less than fair market value

1) How to use a Bargain Sale to Sell a Rental Propertyto a non-profit to provide housing for ASD & DD clients

1. Normal Taxable Sale Net Cash to Owner

less1. $70k selling cost (7%)

2. $150k tax (34%)

$1 MillionRental$500k

C t b i

$780,000

Cost basis$220,000 tax &

selling cost

*The normal taxable sale is illustrated above.** the assumptions for this simplified case study are that the rental has a $500,000 cost basis

1a. Using a Bargain Sale to sell a rental property to charity at a bargain price,—”gifting assets at a discount”

the problem is the non profit needs a lot of $$$ to do it—the problem is the non-profit needs a lot of $$$ to do it.

2. Bargain Sale Strategy Gift to charity Family net $$300,000

1.$70k selling cost

2. $0 tax$1 Millionrental prop.

$300 000

$700,000-$50,000$650,000

3. $300,000 tax ded

less $0 tax $300,000 -$20,000$280,000$70k selling cost

*A Bargain Sale strategy is illustrated above, ** the assumptions for this simplified case study are that the rental property has a cost basis of $500,000

Using a Bargain Sale to sell a rental property,pay no capital gains tax & leave the owner with a lot of cashpay no capital gains tax & leave the owner with a lot of cash

Taxable Sale Bargain Sale Sample CaseCase Study Charity (30%) Owners (70%)

Gross sales (contract) price $1,000,000 $300,000 $700,000Less Sales costs (commission + escrow = 7%) (70 000) (20 000) (50 000)Less Sales costs (commission + escrow = 7%) (70,000) ~(20,000) ~(50,000) Net sales price $930,000 ~$280,000 ~$650,000 Less cost basis of rental property (500,000) n/a (350,000)Net gross amount of capital gain $430,000 $0 $300,000 Net amount subject to capital gain $430,000j p g ,X capital gains tax rate (est. 34% Fed/State rate) x 34% $300,000 tax ded $300,000 tax ded

Fed/State capital gains tax due ~($150,000) $0 $0Net Cash for each new owner $780,000 ~$280,000 ~$650,000


1b. How to use a Bargain Sale to Sell a Rental Property 1b. How to use a Bargain Sale to Sell a Rental Property to a non-profit to provide housing for ASD & DD clients—

--lower cost basis property--$100k vs. $500k

1. Normal Taxable Sale Net Cash to Owner

less1. $70k selling cost (7%)

2. $280,000 tax (34%)

$1 MillionRental

$100,000C t b i

$650,000

Cost basis$350,000 tax &

selling cost

*The normal taxable sale is illustrated above.** the assumptions for this simplified case study are that the rental has a $100,000 cost basis

1b. Using a Bargain Sale to sell a rental property to charity at a bargain price—”gifting assets at a discount”g p g g

2. Bargain Sale Strategy Gift to charity (50%) Family net cash

$500,000-$35,000$465,000

From rental

1.$70k selling cost

2. $0 tax$1 Millionrental prop.

With $100 0003. $500,000 tax ded

+ $40k taxSavings

$500,000+

With $100,000Cost basis $500,000

$70k selling cost

*A Bargain Sale strategy is illustrated above, ** the assumptions for this simplified case study are that the rental property has a cost basis $100,000..

Using a Bargain Sale to sell a rental property to a non-profit housing agency,p g g y,

pay no capital gains tax & maximize cash to the owner

Taxable Sale Bargain Sale Sample CaseCase Study Charity (50%) Owners (50%)

Gross sales (contract) price $1,000,000 $500,000 $500,000Less Sales costs (commission + escrow = 7%) (70 000) (35 000) (35 000)Less Sales costs (commission + escrow = 7%) (70,000) (35,000) (35,000) Net sales price $930,000 $465,000 $465,000 Less cost basis of rental property (100,000) n/a (50,000)Net gross amount of capital gain $830,000 $0 $415,000 Net amount subject to capital gain $830,000j p g ,X capital gains tax rate (est. 34% Fed/State rate) x 34% $500,000 tax ded $500k tax ded

+$85,000 tax dedFed/State capital gains tax due ($280,000) $0 $0Net Cash for each new owner $650,000 ~$465,000 ~$465k + $40k

$500 000~$500,000


How to Slash your Tax Billo o S as you a

Strategy #2: CLTs (Charitable Lead Trusts)

Think of a CLT as a “Disappearing Houdini Trust” that makes assets disappear for estate tax purposes: it is most beneficial to families with net worth well above the $5.25M or $10.5M exemption, who own high cash flow assets (usually real estate); who have enough other income & assets to life on; and who want to provide big donations to charity immediatelyimmediately.

A CLT provides a stream of income to one or more charities for a specified i d f Aft th CLT i d i th titl t th t t fperiod of years. After the CLT period is over, the title to the assets transfers

back to the family, usually to a trust benefitting the heirs.



The Benefits of Charitable Lead Trusts (CLTse e e s o C a ab e ead us s C s

Ideal Situations for Using a Charitable Lead Trust (CLT)

•When a client owns a rental property or other asset that generates significant ongoing cash flow;

•When a client does not need the cash flow coming from an asset;

•When the client does not want to sell an asset, but is facing estate taxes that would force the estate to sell assets to pay the estate tax;

•When the client wants to benefit charity now, and their family (heirs) later

•When the client wants to avoid estate taxes on the anticipated future appreciation in value



FAMILY ASSETS $20 5 M base caseFAMILY ASSETS--$20.5 M base case;$10.5 M exemption = $10 M taxable estate @40%


401ksLife ins.

RentalsAppreciated

Assets

H i Gov’tHeirs$16.5 M

Gov tTaxes$4 M

Charity(ies)$0

Basic Estate Planning & Estate Tax Structuregwith $10 M CLT

FAMILY ASSETS--$20.5 M base case;FAMILY ASSETS $20.5 M base case; less $10 M CLT; $10.5 M exemption = $0 taxable estate

Home CheckingStocks

IRAs401ks Rentals

Highly-Appreciated

$5.5M StocksBonds

$2M

401ksLife ins.

$1M

Rentals$10 M

Appreciated Assets$2 M

#2 – CLT$10 M

Asset to heirs after CLT done

$500k/ t

Gov’t C ( )

Charity getsIncome first

“Disappearing“Houdini” Trust”

$500k/yr to charity for 20 yrs

Heirs$20.5 M+

Gov tTaxes

$0

Charity(ies)$10 M

For the Family that wants to provide a legacy:they can gift income or assets to athey can gift income or assets to a

Donor-Advised Fund or Private Foundation


Basic Estate Planning & Estate Tax StructureBasic Estate Planning & Estate Tax Structurewith $10m CLT

FAMILY ASSETS--$20.5 M base case;less $10 M CLT; $10.5 M exemption = $0 taxable estate

HomeChecking

Stocks IRAsRentals

Highly-Appreciated

$5.5mStocksBonds$2m

401k$1m

Rentals$10m

AppreciatedAssets

$2m

#3 - CLT$10m

Family Foundation or Donor-Advised

Fund

Asset to heirs after CLT done

$500k/ t

Gov’t

“DisappearingHoudini Trust”

Fund$10m

$500k/yr to charity for period of 20 years

Future Grants

Heirs$20.5m+

Gov’tTaxes

$0

Charity(ies)Future $

How to Provide Income & Housing for yourSpecial Needs AdultSpecial Needs Adult

This workshop coveredthe Benefits of Using:the Benefits of Using:

1) Special Needs Trusts—the “extra money” fund1) Special Needs Trusts the extra money fund

2) CRUTs—the “Golden Lottery Money Tree”

3) Bargain Sale gifts--”gifting assets at a discount”

4) CLTs—the “Disappearing Houdini Trust”


They can provide the following “bottom-line” benefits:

Strategy #1: Special Needs Trusts: (the “extra money” fund): that can be used to supplement government benefits to the special needs adult. The f d b i t d d di t ib ti d b t t ( tfunds can be invested and distributions made by trustees (parents or successor trustees) when money is needed.



Strategy #2: CRUT’s (Charitable Remainder Unitrusts); the “Golden Lottery Money Tree” can provide owners of highly appreciated assets with th t ti l bilit t i lif ti i t t ti ll lthe potential ability to receive more lifetime income; to potentially leave more money to their heirs (if they want to); and to potentially give more money to charity (both now and later)



Strategy #3: A “Bargain sale” donation: where the owner of a rental property sells the property to a non-profit at a discounted price; the amount of h di i d d d i d li i h i lthe discount is treated as a tax deduction to reduce or eliminate the capital gain on the portion the family retains.



Strategy #4: CLT’s (Charitable Lead Trusts); the “Disappearing Houdini Trust” can provide owners of high cash-flow assets with the potential ability to d h i f i d f d h f hdonate more to charity now, for a period of years, and then to transfer the assets to their heirs with little or no estate tax. CLTs are best for assets the family does not plan to sell.


Questions?

Contact Bob Ericson, CFP

Ericson Financial Solutions408-358-5850

[email protected]

Documents

For Families wanting to help their ASD/DD Special Needs ... · Charity(ies) How to Provide Income to a Person with ASD or DD 1. Establish a “Special Needs” Trus t—the “extra