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Income Tax Planning for High-Income Individuals: Defined

Benefit and Other Plans, Tax Reform OpportunitiesTUESDAY, JULY 30, 2019, 1:00-2:50 pm Eastern

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July 30, 2019

Income Tax Planning for High-Income Individuals: Defined Benefit and Other Plans, Tax Reform Opportunities

Lisa R. Featherngill, Head of Legacy &

Wealth Planning

Abbot Downing

[email protected]

Alex Nahoum, EA, FCA, MAAA, Actuary

Danziger & Markhoff

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

A N E S T A B L I S H E D P A R T N E R

A Wells Fargo Business

© 2019 Wells Fargo Bank, N.A. All rights reserved

Tax Planning for High-Income TaxpayersJuly 30, 2019

Lisa R. Featherngill | Head of Legacy and Wealth Planning, Abbot Downing

Wells Fargo & Company and its affiliates do not provide legal or tax advice. Please consult your tax and legal advisors to determine how this general information

may apply to your own specific situation. Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A. and its various

affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

A N E S T A B L I S H E D P A R T N E R

Table of Contents

6

Taxes, Brackets and Rates

Planning for Capital Gains and Losses

Charitable Planning

Defined Benefit and Cash Balance Plans

Retirement Plan Design and 199A

Roth Conversion

Qualified Opportunity Zone Program

State Tax Planning

01

02

03

04

05

06

07

08

Taxes, Brackets and Rates

7

2 0 1 9 I N C O M E TA X B R A C K E T S

8

Source: Keebler and Associates

37%

35%

32%

24%

22%

12%

10%

$612,350+

$408,200

$312,450

$168,400

$78,950

<$19,400<$9,700

$39,475

$84,200

$160,725

$204,100

$510,300+

MarriedSingle

I N D I V I D U A L TA X R AT E S A N D B R A C K E T S

9

Ordinary Income

2017

Ordinary Income

2019

Long Term Capital Gains

2017

Long Term Capital Gains

2019

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000+

$9,325$37,950

$91,900

$191,650

$416,700

$418,400

10%15%

25%

28%

33%

35%

39.6%

$37,950

$418,400

$9,700

$39,475

$84,200

$160,725

$204,100

$510,300

$39,375

$434,550

0%

15%

20%

12%

22%

24%

32%

35%

37%

10%0%

15%

20%

Single

Source: IRS 2019 Tax Tables

2 0 1 9 S TA N D A R D D E D U C T I O N

10


Standard Deduction

Married/Joint $24,400

Single $12,200

Head of Household $18,350

Dependents $1,100

Married/separate $12,200

Additional Standard Deductions

Married, age 65 or older or blind $1,300*

Married, age 65 or older and blind $2,600*

Single, age 65 or older or blind $1,650*

Single, age 65 or older and blind $3,300*

For dependents with earned income, the deduction is the greater of $of $1,100 or earned income +$350 (up to the applicable

standard deduction amount of $12,200).

2 0 1 9 A LT E R N AT I V E M I N I M U M TA X

11


AMT Exemption AMT Rates

Exemption Phased out on excess over

Married taxpayer filing

jointly/surviving spouse

$111,700 $1,020,600

Single Taxpayer $71,700 $510,300

Married taxpayer filing

separately

$55,850 $510,300

Estate and trusts $25,000 $83,500

Married taxpayer jointly income up to

$194,800*26%

Married taxpayer filing jointly income

over $194,800*28%

*97,400 if MFS

2 0 1 9 M E D I C A R E S U R TA X

12


The Medicare #% surtax is imposed on certain types of unearned income of individuals, trusts, and estates with income specific thresholds

For individuals, the surtax is imposed on the lesser of the following:

▪ Net investment income for the tax year

▪ The amount by which the modified adjusted gross income (MAGI) exceeds the threshold amount in that year

The Threshold Amounts

Single Filers Married filing jointly Married filing separately

$200,00 $250,000 $125,00

For trusts and estates, the surtax is imposed on the lesser of the following:

▪ The undistributed net investment income for the tax year

▪ The excess (if any) of the trust’s or estate’s adjusted gross income over the dollar amount at which the highest tax bracket begins ($12,750 in 2019)

2 0 1 9 K I D D I E TA X

13


Taxable Income

Over But not over

$0 $2,600

$2,600 $9,300

$9,300 $12,750

$12,750

Pay +% on excess Of the amount over

$0 10% $0

$2,600 24% $2,600

$1,868 35% $9,300

$3,075 37% $12,750

Taxable Income

Planning for Capital Gains and Losses

14

2 0 1 9 R AT E S F O R L O N G T E R M C A P I TA L G A I N S ( A N D Q U A L I F I E D D I V I D E N D S )

15


Filing status 0% 15% 20%

Single $0–$39,375 $39,376–$434,550 Greater than $434,550

Married filing jointly/ surviving spouse

$0–$78,750 $78,751–$488,850 Greater than$488,850

Married filing separately $0–$39,375 $39,376–$244,425 Greater than$244,425

Head of household $0–$52,750 $52,751–$461,700 Greater than$461,700

Trust/estate $0–$2,650 $2,651–$12,950 Greater than $12,950

R U L E S A N D P L A N N I N G

16


Rules

• Net short term gains and losses

• Net long term gains and losses

• Net short term and long term for net capital gain

– Short term = ordinary tax rate

– Long term = preferred tax rate

Planning

• Try to hold investment for 12 months for long term treatment (almost one-half the rate of short term)

• Work with investment advisor to harvest losses if anticipate net gain position

– Watch wash sale rules across all accounts

– Works especially well if net short term gain

• Work with investment advisor to contribute securities with significant gains (see charitable giving)

• Avoid purchasing mutual funds with expected capital gain distributions

• Watch for capital gain distributions from funds even in down years

• Rebalance portfolio regularly

• If anticipate tax bracket increasing in future, harvest capital gain and repurchase security

– Works especially well when security would be sold soon or taxpayer is in a very low bracket currently

– Does not work well if client would otherwise obtain basis step up (death is near term)

• Consider other strategies to defer recognition of gain: Qualified Opportunity Funds, Installment Sales or Charitable Remainder Trusts for example

Charitable Planning

17

T H E P H I L A N T H R O P I C D I A L O G U E

18

Questions to Contemplate

To begin developing or continue refining philanthropic goals, it is important for donors to discover their philanthropic passions by considering some of the following questions…

• What have been the donor’s most meaningful experiences in life?

• What has presented the greatest challenge to the donor?

• Which people and incidents have most shaped the donor’s views and ideals?

• What priorities are important to the donor and donor’s family?

• What are the donor’s most important values (education, culture, physical, recreational, work, spiritual, material)?

• How important is giving back to the community?

• How important is passing on the values of giving to the donor’s children and grandchildren?

• What charities has the donor already given to or been involved with? Why?

• Is the donor currently engaged in charitable giving?

• What are the donor’s charitable passions?

L I F E T I M E G I F T I N G V S . T E S TA M E N TA R Y G I F T I N G

19

A donor’s goals and individual situation will dictate whether one makes charitable contributions during life or through a testamentary estate plan. If one makes charitable gifts during life, donors have the further decision of whether to make a largelump sum contribution or to engage in more of a structured lifetime gifting program. The following chart shows potential advantages and potential drawbacks to each approach. They are general in nature and dependent on the specific charitable technique utilized and the donor’s goals.

1. If a gift is made directly to charity, the charity will generally have immediate use of the funds while the donor will generally not have control over the use of the funds. However, if an outright gift is made to an entity such as a private foundation or donor advised fund, the donor should generally be able to direct the ultimate charitable recipient over time and thus provide an element of control even after the contribution is made. Likewise, the true benefit would not inure to the ultimate charitable recipient until received from the private foundation or the donor advised fund.

2. For lifetime gifts made to a Charitable Remainder Trust, the donor or donee’s family may be able to receive an income stream for a period of time, depending on how such gift is structured.

3. Charitable giving can be structured to be private, if desired.

Lifetime Giving Testamentary GiftingProvision in Estate Plan

Potential Advantages

• Immediate impact to charitable cause1

• Income tax deduction and other tax benefits

• Donor and family witness the impact to charitable cause

• Donor can “test” charity with use of the funds by seeing how the charity puts the funds to use

• Retain control/usage of asset during life2

• Estate tax deduction

Potential Drawbacks

• Loss of control1

• Loss of use of assets and associated cash flow for donor2

• Assets not available for family at death

• May raise family’s or public’s awareness of wealth during life3

• No impact to charity during life

• Cannot “test” the charity with the use of the funds

• Limited flexibility

• No lifetime income tax benefits

C O M PA R I S O N C H A R T: TA X D E D U C T I O N S

20

Gifts Made

During Life

Outright to

Public Charity

Charitable

Remainder

Trust (CRT)1

Charitable Lead

Trust (CLT) -

Grantor2

Charitable Gift

Annuity1

Private Grant

Making

Foundation

Donor Advised

Fund

Income tax

deduction limits

on Cash Gifts

60% AGI Dependent on

named charity

(60% or 30% of

AGI)

30% AGI 60% AGI 30% AGI 60% AGI

Income tax

deduction limits

on Gifts of

Appreciated

Property

30% AGI Dependent on

named charity

(30% or 20% of

AGI)

20% AGI 30% AGI 20% AGI 30% AGI

Carry-over

Available

5 Years 5 Years 5 Years 5 Years 5 Years 5 Years

Gift Value of

Appreciated

Property

Fair Market Value

(FMV)

Dependent on

named charity

Adjusted Basis3 FMV Adjusted Basis3 FMV

Gift and Estate

Tax Deduction

Yes Yes - actuarial

calculation

Yes - actuarial

calculation

Yes - actuarial

calculation

Yes Yes

General Tax Treatment Of Contributions

1. Income tax and charitable gift tax deduction for CRT and Gift Annuity based on actuarial value of charitable interest.

2. Immediate income tax deduction for CLT available for grantor CLTs, subject to adjusted gross income (AGI) limits noted. Non-grantor CLTs do not receive an immediate income tax deduction.

3. For “qualified appreciated stock,” the value of the gift is the fair market value.

O V E R V I E W C H A R T: C H A R I TA B L E G I F T I N G S T R AT E G I E S

21

Gifts Made During Life Outright

Private Foundation

(Non-Operating) Donor Advised Fund (“DAF”)

Description Donor makes an outright

gift to a qualified charitable

organization.

A nonprofit organization created,

funded, and controlled by a

single donor or family, when

donor’s objective is to make

grants to worthy causes.

Fund created by donor via a gift to public

charity. Donor recommends grants.

Most Commonly Used Immediate benefit to charity

when simplicity is desired

In pursuit of a philanthropic

gifting strategy lasting for

multiple generations

In pursuit of a philanthropic gifting strategy

lasting for multiple generations

Use of Funds by Charitable

Organization

Immediately As funds are paid out by

foundation as selected by donor;

a distribution of 5% of net

investment assets is required.

As funds are paid out by foundation as

selected by donor.

Donor Control Loses control once gift to

charity is completed unless

gift is donor-restricted

Donor can retain complete

control over investments and

grant making, subject to IRS

requirements

Donor recommends grants and has control

over investments subject to investment

options; final grant decisions rest with the

sponsoring charity.

Income Stream to Non-Charitable

Beneficiary (e.g., Donor)?

No No No

Remainder Interest/Split-Interest

Trusts

n/a n/a – Foundation can continue in

perpetuity if documents provide

n/a – DAF can continue in perpetuity if

documents allow

O V E R V I E W C H A R T: C H A R I TA B L E G I F T I N G S T R AT E G I E S ( C O N T . )

22

Gifts Made During Life Charitable Remainder Trust Charitable Lead Trust Charitable Gift Annuity

Description Donor gifts assets to a trust in

return for an income stream to one

or more non-charitable

beneficiaries for an express period

of time. A qualified charity receives

the remainder of the trust assets at

the end of the period.

Donor gifts assets to a trust and a

charity receives an income stream

(the “lead interest”) for an express

period of time. The remainder interest

passes to one or more non-charitable

beneficiaries at the end of the period.

Donor transfers assets to a charitable

organization in exchange for the

charity’s promise to make fixed annuity

payments generally to donor or donor’s

spouse for their lifetime.

Most Commonly Used Donor desires to receive an income

stream while obtaining an income

tax deduction; often used to avoid

an immediate capital gains tax on

the sale of highly appreciated

assets.

Estate freeze vehicle that can transfer

wealth to family members at reduced

or no gift and estate tax cost.

Donor desires a fixed income stream

for life while obtaining an income tax

deduction; often used as a tax deferral

tool when contributing appreciated

assets.

Use of Funds by Charitable

Organization

End of trust term Annually – during the term of the trust Immediately but has continued

obligation to make annuity payments to

annuitant

Donor Control Donor may be able to change

charitable remainder beneficiary,

but trust is generally irrevocable

Donor should not retain right to

change charitable beneficiary for non-

grantor and super grantor charitable

lead trusts as it may trigger estate

inclusion.

Donor loses control

Income Stream to Non-

Charitable Beneficiary (e.g.,

Donor)?

Yes, during term specified by trust

(lifetime or period of no more than

20 years)

No Yes, for lifetime

Remainder Interest Charity Non-charitable beneficiary (typically

children or grandchildren)

n/a – Charity receives any remainder

after annuity payments end

Q U A L I F I E D C H A R I TA B L E D I S T R I B U T I O N S ( Q C D )

23

Requirements

• Donor must be at least 70 ½

• QCDs must be payable directly to the charitable organization

• QCDs may be made to multiple charities and may be made at multiple times throughout the year,

however there is a $100,000 limit per year per donor. If filing jointly, a spouse can also make a QCD

from his or her own IRA within the same tax year up to $100,000 (spouse must also be at least 70 ½).

• QCDs may only be made to public 501(c)(3) charities: Private foundations, donor-advised funds,

supporting organizations and split-interest charitable trusts are not eligible.

• QCDs may only be distributed from Traditional IRAs, Inherited IRAs, and IRA Rollovers. SEP IRAs and

SIMPLE IRAs that are no longer receiving contributions must first rollover into an IRA Rollover before

being eligible to make QCDs. A QCD is permitted from a Roth IRA as well, although distributions from a

Roth IRA may already be tax-free.

Considerations

• QCD strategies are generally only beneficial to someone who wants to minimize taxable income and is

planning to make charitable donations regardless of the method.

• An itemized deduction is not allowed for QCDs. Donors should consider whether making the QCD and

lowering Adjusted Gross Income is better than receiving an itemized deduction.

– Instead of a QCD, it may be more beneficial to take the RMD and offset taxable income by

donating low basis securities in order to obtain the itemized tax deduction and avoid capital gains

taxes.


[email protected]

© 2019 Danziger & Markhoff LLP

• Tax-Incentivized Savings

- Immediate tax deduction on “traditional” contributions

with tax-deferred growth

- Tax-free growth and withdrawal for “Roth” contributions

• Creditor Protection on Qualified Retirement Plan Assets

• Attraction/Retention Tool For Employees

- Vesting schedule acts as “golden handcuff” for key

employees

Benefits of Qualified Retirement Plans

© 2019 Danziger & Markhoff LLP 26

“The term ‘individual account plan’ or ‘defined contribution plan’

means a pension plan which provides for an individual account

for each participant and for benefits based solely upon the

amount contributed to the participant’s account, and any

income, expenses, gains and losses, and any forfeitures of

accounts of other participants which may be allocated to such

participant’s account” (ERISA Section 3(34))

Defined Contribution Plan

27© 2019 Danziger & Markhoff LLP

Defined Benefit Plan

“The term ‘defined benefit plan’ means a pension plan other

than an individual account plan” (ERISA Section 3(35))

Plan Contribution + Actual Investment Earnings = Retirement Benefit

(Defined by Plan) (Variable) (Variable)

Retirement Benefit – Assumed Investment Earnings = Plan

Contribution

(Defined by Plan) (Defined by Plan) (Variable)

Defined Contribution Plans


Defined Benefit Plans

2018

Maximum Benefits Defined Contribution $55,000

401k Maximum Deferral <50 years 18,500

Catch-Up >50 years 6,000

Maximum Benefits Defined Benefit 220,000

Maximum Compensation 275,000

Social Security Taxable Wage Base 128,400

Highly Compensated Employee 120,000

2019 IRS Limits

2019

$56,000

19,000

6,000

225,000

280,000

132,900

125,000


• Limits Based On Maximum Annual Annuity Payable At Age 62

($225,000 for 2019)

• Lump Sum Equivalent At Age 62 is $2,887,500

• Limit Phased-In Over 10 Years Of Plan Participation

• Maximum Accumulation of $288,750 Per Year

Defined Benefit Plans


Current Age CompensationCash Balance

Contribution

40 $225,000 $96,000

52 225,000 175,000

60 225,000 261,000

Defined Benefit PlanSample Maximums


• Coverage Testing

- DB coverage based on total employees

- 2 or fewer employees – need to cover 100%

- otherwise need the lesser of 40% or 50 people

• Investments need to be pooled (no individual direction)

• Vesting generally a 3 year “all or nothing” schedule

Defined Benefit Compliance Points


• Cash Balance Design

• Contribution based on current income

• Level Funding (same amount each year)

• Past Service Plans

• Requires prior years of service/pay

• Irregular cash flows (personal injury attorney, etc.)

• Exit strategy applications (e.g. sale of business)

Defined Benefit Plan Design Options


Projected Pension Benefit

Based upon your present salary, your Monthly Pension

Benefit at Normal Retirement Age 65 (payable for life):$10,269

Current Accrued Benefit

Portion of Projected Monthly Pension that you

have accrued to date ("accrued benefit"):$1,191

Vested portion of accrued benefit: 40%

Current vested monthly accrued benefit: $476

Sample Participant Benefit StatementDefined Benefit Pension Plan


Participant Vested Monthly Benefit Lump Sum Payable*

Age 25 $476 $10,818

Age 35 $476 $17,421

Age 45 $476 $28,055

Age 55 $476 $46,790

Age 65 $476 $75,412

Lump Sum ValuesDefined Benefit Pension Plan

*Based on November 2018 Interest Rates


Beginning Balance

Contribution Earnings Ending Balance

$100,000 $50,000 $4,000 $154,000

Current Value of Plan Benefit

Vested Portion of Benefit: 100%

Current Vested Cash Balance: $154,000

Sample Participant Benefit StatementCash Balance Plan


• Pay Credit: Employer will contribute on behalf of Participants

• Fixed % of Participant's Salary each year

(e.g., 50% of $280,000 = $140,000)

• Fixed $ amount each year

• Interest Credit: Account will grow at fixed % per year

• Indexed (e.g. 30 Year Treasury Rate)

• Flat rate (e.g. 4% Annually)

• Account Balance: Annual statement shows Account's "Cash

Balance"

Cash Balance Plans


Employee Compensation Contribution% of Compensation

% of Total

Dentist [Age 53] $280,000 $62,000

$91,000 - 91%

Spouse [Age 50] 41,000 29,000

Staff [Age 57] 50,000 2,205 [4.41%]

$9,085 - 9%

Staff [Age 40] 49,000 2,161 [4.41%]

Staff [Age 36] 39,000 1,720 [4.41%]

Staff [Age 29] 37,000 1,632 [4.41%]

Staff [Age 25] 31,000 1,367 [4.41%]


Cash Balance & New ComparabilityCase Study #1 (Dental Practice)

EmployeeNew Comparability Cash Balance Totals % of Total

Dentist [Age 53] $62,000 $90,000 $152,000$183,500

92%Spouse [Age 50] 29,000 2,500 31,500

Staff [Age 57] 2,500 1,250 3,750 (7.5%)

$15,450

8%

Staff [Age 40] 2,450 1,225 3,675 (7.5%)

Staff [Age 36] 1,950 975 2,925 (7.5%)

Staff [Age 29] 1,850 925 2,775 (7.5%)

Staff [Age 25] 1,550 775 2,325 (7.5%)

Cash Balance & New ComparabilityCase Study #1 (Dental Practice)



% of Total

Partner [Age 65] $280,000 $62,000

$180,000 - 87%Partner [Age 62] 280,000 62,000

Partner [Age 49] 280,000 56,000

Assoc. [Age 44] 178,000 5,340 [3.00%]

Assoc. [Age 38] 147,000 4,410 [3.00%]

$27,489 - 13%

Assoc. [Age 37] 147,000 4,410 [3.00%]

Assoc. [Age 35] 140,000 4,200 [3.00%]

Staff [Age 55] 65,000 2,867 [4.41%]

Staff [Age 46] 52,000 2,293 [4.41%]

Staff [Age 31] 46,000 2,029 [4.41%]

Staff [Age 27] 44,000 1,940 [4.41%]


Cash Balance & New ComparabilityCase Study #2 (Law Firm)

Employee New Comp Cash Balance Totals % of Total

Partner [Age 65] $62,000 $138,000 $200,000

$546,000

94%Partner [Age 62] 62,000 138,000 200,000

Partner [Age 49] 56,000 90,000 146,000

Assoc [Age 44] 5,340 0 5,340 (3.0%)

$36,990

6%

Assoc [Age 38] 4,410 0 4,410 (3.0%)

Assoc [Age 37] 4,410 0 4,410 (3.0%)

Assoc [Age 35] 4,200 0 4,200 (3.0%)

Staff [Age 55] 4,550 1,300 5,850 (9.0%)

Staff [Age 46] 3,640 1,040 4,680 (9.0%)

Staff [Age 31] 3,220 920 4,140 (9.0%)

Staff [Age 27] 3,080 880 3,960 (9.0%)

Cash Balance & New ComparabilityCase Study #2 (Law Firm)



% of Total

Owner [Age 75] $280,000 $62,000

$248,000 - 97%Owner [Age 73] 280,000 62,000

Owner [Age 52] 280,000 62,000

Owner [Age 50] 280,000 62,000

Staff [Age 35] 45,000 1,985 [4.41%]

$8,733 - 3%

Staff [Age 32] 40,000 1,764 [4.41%]

Staff [Age 30] 40,000 1,764 [4.41%]

Staff [Age 27] 38,000 1,676 [4.41%]

Staff [Age 25] 35,000 1,544 [4.41%]


Cash Balance & New ComparabilityCase Study #3 (Family Business)

EmployeeNew Comparability Cash Balance Totals % of Total

Owner [Age 75] $62,000 $158,000 $220,000

$880,000

98%

Owner [Age 73] 62,000 158,000 220,000

Owner [Age 52] 62,000 158,000 220,000

Owner [Age 50] 62,000 158,000 220,000

Staff [Age 35] 3,375 0 3,375 (7.5%)

$14,850

2%

Staff [Age 32] 3,000 0 3,000 (7.5%)

Staff [Age 30] 3,000 0 2,850 (7.5%)

Staff [Age 27] 2,850 0 2,100 (7.5%)

Staff [Age 25] 2,625 0 2,625 (7.5%)

Cash Balance & New ComparabilityCase Study #3 (Family Business)


• Sole Proprietors / Independent Contractors

• Real Estate Brokers, etc.

• 1099 / Schedule C Income

• Mom & Pops

• Supplemental Incomes

• Director's Fees

• Speaking / Writing Fees

• Consulting Fees

• Executor’s Commissions

• Trustee’s Commissions

• Sale of Business

Defined Benefit Plan Special Applications(No Employees)


Current Age CompensationCash Balance

Contribution

401(k) Deferral

+ 6% PS

Total

Contribution

40 $280,000 $96,000 $35,800 $131,800

52 280,000 175,000 41,800 216,800

60 280,000 261,000 41,800 302,800

Single ParticipantCash Balance & 401(k)/6% PS


YearCash Balance Plan

Contribution

Past Service Plan

Contribution

1 $100,000 $150,000

2 $100,000 $ 75,000

3 $100,000 $ 75,000

Target Total $300,000 $300,000

Cash Balance Plan vs. Past Service PlanCash Flow Options

Based on November 2018 Interest Rates



Contribution

Past Service Plan

Contribution

1 $100,000 $200,000

2 $100,000 $ 50,000

3 $100,000 $ 50,000

Target Total $300,000 $300,000





Contribution

Past Service Plan

Contribution

1 $100,000 $300,000

2 $100,000 $ 0

3 $100,000 $ 0

Target Total $300,000 $300,000




• Prospect age 59 – independent contractor

• 1099 income historically $225,000

• 2019 income expected to be $450,000

• 2020 and future income will revert to $225,000 range

Past Service – Case Study


Year1099

Income

Defined

Benefit

Contribution

401(k)

Contribution

Taxable

Income

1 $450,000 $400,000 $25,000 $25,000

2 $225,000 $200,000 $25,000 $ 0

3 $225,000 200,000 $25,000 $ 0

TOTAL $900,000 800,000 $75,000 $25,000

Past Service Case StudyReal Estate Broker – Age 59


Notes:

— Section 199A - Qualified Business Income (QBI) Deduction

— Will apply on an individual by individual basis

— Focus is ancillary benefits through plan design

Tax Reform and Pension Applications


Brief Primer - Qualified Business Income Deduction

• For ”Pass-Through Entities” (S-Corps, Partnerships, Sole

Proprietors, LLCs taxed as any of the above)

• Generally the lesser of 20% of the Business Income

(Schedule C or K-1 income) or 20% of taxable income*

• Specified Service Business**

• Phased out where owner/partner’s taxable income falls between

$321,400 and $421,400 ($160,700 and $210,700 if single)

• Disallowed where owner/partner’s taxable income is $421,400

($210,700 if single) or higher



Brief Primer - Qualified Business Income Deduction

• *Additional details of 199A will not apply in these examples

• **Specified Service Business defined as:Any business involving the performance of services in the fields of health, law,

accounting, actuarial science, performing arts, consulting, athletics, financial services,

brokerage services, or any trade or business where the principal asset of such trade or

business is the reputation or skill of one or more of its employees or owners, or that

consist of investing, investment management, trading or dealing in securities.

Note: Architects and Engineers specifically excluded from regulations

• Assume for these examples that any other (non-business)

income is offset by the taxpayer’s deductions (either

standard or itemized)



• S-Corp deduction limit is 25% of total wages

• $56,000 contribution requires $224,000 in wages ($56K x 4)

• 401(k) deferrals in qualified plans do not count toward limit

• Employer deduction is $37,000 ($56,000 - $19,000)

• $56,000 contribution requires $148,000 in wages ($37K x 4)

• $76,000 can be taken as an S-Corp distribution

• Medicare savings of roughly $2,200…big deal.


SEP vs. Qualified Plan (S-Corp) - New Tax Law

SEP Qualified Plan

A Business Income $377,400 $377,400

B Shareholder Wages (W-2) $224,000 $148,000

C 401(k) Deferral N/A $ 19,000

D Employer Contribution $ 56,000 $ 37,000

ES-Corp Distribution (K-1)

(A – B – D)$ 97,400 $192,400

F

Net Taxable Income

(Before 199A)

(B – C + E)

$321,400 $321,400

G199A Deduction

(E x 20%)$ 19,480 $ 38,480

H

Net Taxable Income

(After 199A)

(F – G)

$301,920 $282,920



SEP Qualified Plan

A Business Income $377,400 $377,400

B Shareholder Wages (W-2) $240,000 $148,000

C 401(k) Deferral N/A $ 25,000

D Employer Contribution $ 56,000 $ 37,000

ES-Corp Distribution (K-1)

(A – B – D)$ 97,400 $192,400

F

Net Taxable Income

(Before 199A)

(B – C + E)

$321,400 $315,400

G199A Deduction

(E x 20%)$ 19,480 $ 38,480

H

Net Taxable Income

(After 199A)

(F – G)

$301,920 $276,920



(Over 50)

No Retirement Plan Retirement Plan

A Net Schedule C Income $421,400 $421,400

B Plan Contribution N/A $100,000

C

Net Taxable Income

(Before 199A)

(A – B)

$421,400 $321,400

D199A Deduction

((A – B) x 20%)DISALLOWED $ 64,280

E

Net Taxable Income

(After 199A)

(C – D)

$421,400 $257,120

Sole Proprietor – Specified Service Business


Pros:

• New Roth balance grows tax-free

• Roth IRAs not subject to Required Minimum Distributions

(Balance can continue growing for the lifetime of the

individual and their spouse)

Cons:

• What if the resulting balance decreases?

• Entire IRA balance is taxable immediately!

Alternatives?


Roth ConversionsPros & Cons

Situation A:

• Client over the income threshold – not eligible for Roth IRA

Solution:

• Client funds $6,000 into “non-deductible” IRA

(not deductible, earnings tax-deferred)

• Non-deductible IRA immediately converted to Roth IRA

• Basis = $6,000, taxable amount = $0

• Client has indirectly funded a Roth IRA!


Roth Conversion Alternatives“Backdoor” Roth IRA

Situation B:

• Same as Situation A, but the client has a separate IRA with a

balance of $60,000.

Problem:

• All IRAs are treated as one for conversion purposes

• If Client funds/converts $6,000 non-deductible IRA, basis will

only be 10% ($6,000 / $66,000)

• Basis = $600, taxable amount = $5,400



Situation B:

• Same as Situation A, but the client has a separate IRA with a

balance of $60,000.

Solution:

• Client rolls $60,000 IRA balance into Qualified Plan

• Client funds/converts $6,000 non-deductible IRA, basis is

back to 100%



Situation C:

• Same as Situation A, but the client has an IRA with a

balance of $60,000 AND an existing non-deductible IRA with

a balance of $18,000 ($9,000 basis/$9,000 earnings)

Solution:

• Client rolls $60,000 IRA balance into Qualified Plan

• Client rolls $9,000 earnings from the existing non-deductible

IRA into Qualified Plan

• Client funds $6,000 non-deductible IRA and is able to

convert the full $15,000



Can we go higher than $6,000 ($7,000 if 50+)?

Annual 401(k) limit of $19,000 ($25,000 if age 50+) can be

contributed as a Roth 401(k) rather than a traditional (pretax)

401(k).

Roth 401(k) has NO INCOME LIMITATION


Roth Conversion AlternativesRoth in Qualified Plans

Voluntary After-Tax Contributions

• Function exactly like non-deductible IRA contributions

(not deductible, earnings tax-deferred)

• Can be converted within a Qualified Plan and rolled out to a

Roth IRA

• Treated as separate and distinct account within the plan so

no aggregation rule

• Annual Addition Limit of $56,000 applies

• $19,000 (or $25,000) 401(k) PLUS $37,000 after-tax

• Potentially $56,000/year Roth contribution!

• *Subject to separate IRS nondiscrimination testing


Roth Conversion AlternativesRoth in Qualified Plans

Qualified Opportunity Zone

66

O P P O R T U N I T Y Z O N E S – A B R I E F H I S T O R Y

67

Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal”, eig.org

Investing in Opportunity Act, was introduced in February of 2017 and championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and Representatives Pat Tiberi (R-OH) and Ron Kind (D-WI)

Qualified Opportunity Zones (QOZ) were created in the Tax Cut and Jobs Act of 2017, the tax package passed in December 2017. New Section 1400Z of the Internal Revenue Code provides the tax law related to the program. There is bipartisan support for this program.

The goal of the program is to incent investors via tax benefits to invest capital gains in economically-distressed communities (the defined Qualified Opportunity Zones) in order to spur economic development and jobs creation. Investments can be made in businesses or real estate (Qualified Opportunity Zone Property) through a Qualified Opportunity Zone Fund.

In May 2018 the IRS published the list of approximately 8,700 Qualified Opportunity Zones. They exist in every state and all territories, and are based on 2010 census tracts.

Proposed Regulations were published October 19, 2018 and April 17, 2019 to provide clarification of the law.

Opportunity Zone funds have recently come to market and have been primarily focused on investment in qualified opportunity zone properties.

https://www.congress.gov/bill/115th-congress/house-bill/828

Q U A L I F I E D O P P O R T U N I T Y Z O N E TA X B E N E F I T S

68

Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal” , Novogradac website, eig.org

Potential tax benefits if gain is invested in a Qualified Opportunity Fund within 180 days

Deferral of federal capital gains taxes on realized gains until December 31, 2026

• Any capital gain

• All US taxpayers are eligible: individuals, partnerships, C-corporations, S-corporations, trusts, REITs, estates, and certain other pass-through entities.

• The original gain retains all of its characteristics (including tax rate) until the earlier of the date on which the investment in a Qualified Opportunity Zone Fund is sold or exchanged, or December 31, 2026

Reduction of taxes owed:

• If the investment in a QOZ Fund is held 5 years prior to the end of 2026 then there is a 10% exclusion of the deferred gain (for example, if your tax was based on $100 it is now based on $90)

• If the investment is held another 2 years (total of 7 years) prior to the end of 2026 then the exclusion of the deferred gain becomes 15% (for example, the tax on the $100 is now on $85)

• An investor would need to invest prior to the end of 2019 to potentially realize the full 15% exclusion of deferred gains

Elimination of federal capital gain taxes on the appreciation of the new investment made in the QOZ Fund if it is held for 10 years

• Taxable income could be generated during the holding period (some may or may not be sheltered)

NOTE: 7 states currently do not provide tax benefits (MA, NC, MN, AZ, CA, PA, MS)

Q U A L I F I E D O P P O R T U N I T Y Z O N E T I M E L I N E

69

Time line of investing in a QOZ Fund:

Today (2019) 2024 2026 2026 (YE) 2029 to 20465 yrs 7 yrs 10 yrs

Invested capital Eligible for 10% Eligible for 15% Original capital No capital gains tax on

in QOZ Fund basis increase on basis increase on gain tax due QOZ Fund investment

deferred capital gains deferred capital gains (note: QOZ investment appreciation if continue

since held 5 years since held 7 years is still locked up) to hold it

Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal”, Novogradac website

**The 2017 Tax Cuts and Jobs Act added Internal Revenue Code section 1400-z.

Q U A L I F I E D O P P O R T U N I T Y F U N D S

70

Source: AD publication “Qualified Opportunity Zones: What the Proposed Regulations Reveal”, Novogradac website

To qualify for the tax benefits, gains must be invested in a Qualified Opportunity Fund with 180 days

Requirements:

➢ At least 90% of fund assets must be invested in QOZ Property (Business or Real Estate purchased after 12/31/2017)

• Measured twice a year

➢ “Qualified Opportunity Zone business”

• At least 70% of assets are located in the zone

• At least 50% of revenue is derived from conducting business in the zone

• Can be partnership or corporation

• No “sin” businesses or golf courses

➢ Real Estate Investments in QOZ

• Must be original use of the property or substantial improvement (double investment in real property within 30 months)

➢ The fund has limited time to deploy capital

• Working Capital exception

➢ According to Novogradac, there are almost 200 opportunity funds available as of July 24, 2019. These funds are seeking over $48b of capital. https://www.novoco.com/resource-centers/opportunity-zone-resource-center/opportunity-funds-listing

https://www.novoco.com/resource-centers/opportunity-zone-resource-center/opportunity-funds-listing

S O M E Q U E S T I O N S T H E N E W R E G U L AT I O N S A N S W E R E D

71

Source: Proposed Regulations and Supplemental Information published by Department of Treasury on April 17, 2019

New Proposed Regulations Issued April 17, 2019

1. Are distributions from a QOF taxable? Yes, to the extent the value of the distribution exceeds the taxpayer’s basis in the Qualified Opportunity Fund.

2. What happens if a property in a QOF is sold within 10 years? Gains from sales of property within a fund will flow to the investor. This creates a natural conflict between the fund sponsor, who may want to maximize the investment return before the 10 year holding period, and the investor who will want to wait 10 years in order to obtain a tax free return of gains. However, investors can sell QOFs and reinvest in another QOF within the 10 year period without triggering gain. Thus, creating separate entities for each project provides maximum flexibility so that the entity may be sold rather than the property. Proposed regulations state that, if a property is sold within a QOF, the fund manager has 12 months to reinvest the cash proceeds in another property.

3. Is there a basis adjustment at death? Is gain accelerated? No basis adjustment but the gain is not triggered either.

4. Does a QOF really only have 180 days to invest capital? According to the new proposed regulations, capital received within 180 days of a testing date will be ignored from the calculation of 90% QOZ investments.

5. What is “original use”? The first time a property is eligible for depreciation, unless it has been abandoned more than 5 years.

6. Can you gift an interest in an Opportunity Zone? Yes, but not without triggering the deferred gain, unless it’s to a Grantor Trust.

State Tax Planning

72

P L A N N I N G F O R S TAT E I N C O M E TA X S AV I N G S

73

State taxes have become an important focus in planning, especially now that the Federal deduction is limited to $10,000

Incomplete Gift Non-Grantor Trust (ING)

• The trust must be created in a state that does not tax trust income

• The income from the trust must not be taxable by the grantor’s home state

• The trust must allow discretionary distributions to the settlor without making the trust a grantor trust

• Transfers to the trust must be incomplete gifts for federal gift tax purposes without making the trust a grantor trust

Source: Keebler and Associates

I N G T R U S T S T R U C T U R E - E X A M P L E

74

This example is hypothetical and is provided for informational and educational purposes only.

Donor/Grantor ING Trust

Beneficiaries Distribution Committee

1. Donor, resident of a high-

income tax state, creates an ING

Trust and transfers income-

producing or appreciated assets

with low cost basis to the Trust.

Under federal tax law transfers to

the ING Trust are not completed

gifts, therefore no gift tax return is

required to report the transfer.

2. The ING Trust is established in a state with

no income tax. The ING Trust implements a

corporate trustee which is domiciled in the no-

income tax state. Receipt of income or the

triggering of capital gain within the ING Trust is

attributed to the no-income tax state rather

than the grantor’s state of residence with high

income taxes.

3. The Distribution Committee

determines payout of trust assets

to any named beneficiary.

Typically the grantor and two or

more other beneficiaries of the

ING Trust sit on the Distribution

Committee.

4. The grantor and the grantor’s

children or other friends or family

members are all permissible

beneficiaries. Subject to approval

by the Distribution Committee, the

grantor may receive assets from

the ING Trust.

Income-producing or low-basis

assets likely to be sold.

P L A N N I N G F O R S TAT E I N C O M E TA X S AV I N G S

75

Completed Gift Trusts (non-grantor)

• Utilize temporarily doubled estate/gift/GST (Generation Skipping Tax) exclusion

Changing Residency

• Domicile testing

• Time in and nexus to state leaving

D I S C L O S U R E S

76

Abbot Downing, a Wells Fargo business, provides products and services through Wells Fargo Bank, N.A. and itsvarious affiliates and subsidiaries and has agreed to provide the foregoing materials for educational purposes only.Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report is not intended to advise or recommend that any particular investment action be taken.The information contained herein represents estimated hypothetical results, calculated based upon the information andassumptions that you provided or are disclosed including inflation rates and target rates of return. Any use of the terms“Recommend” or “Propose” are based on, and only intended to represent a possible solution based on the disclosedassumptions. Please review the data and assumptions provided in this report for accuracy. The results and proposalsdepend directly on the accuracy and completeness of the information you provided. Financial statements are un-auditedand have not been certified or independently verified. The information does not attempt to address all financial issuesthat may impact you, and is limited to educational information with respect to the specific financial planning topicsprepared for you.

Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your tax and legal advisors todetermine how this information may apply to your own situation. Whether any planned tax result is realized by you,depends on the specific facts of your own situation at the time your taxes are prepared.

All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specificinvestment product.

© 2019 Wells Fargo Bank, N.A. All rights reserved. Member FDIC. Confidential.

Thank You

Lisa R. Featherngill, Head of Legacy and

Wealth Planning

Abbot Downing

[email protected]


Danziger & Markhoff

[email protected]

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