Planning Opportunities for
Income Tax & Business Transition
or
Second Star to the Right & Straight on Till Morning
Presented by:
Robert S. Lipsey
Peter J. May
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2011
Are these the changes you expected?
The uncertainty continues
as we get closer to 2013
it will get worse…or better?
What we will cover today
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Key changes in the new law
Opportunities – what has really changed?
Opportunities – 2011 & 2012 & Beyond
Business Planning Concepts
Questions
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Disclaimer
• This communication is not a covered opinion as defined by Circular
230 and is limited to the Federal tax issues addressed herein.
Additional issues may exist that affect the Federal tax treatment of
the transaction. The communication was not intended or written to
be used, and cannot be used, or relied on, by the taxpayer, to avoid
Federal tax penalties.
• This Presentation is for educational use only.
• Does not constitute a complete analysis of all issues on this subject.
• Not intended for use for a specific client.
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Income Tax Changes – Let’s Review
2011 Federal Tax Rates
Single
Married Filed Jointly
10%
$0-$8,500
$0-$17,000
15%
$8,500-$34,500
$17,000-$69,000
25%
$34,500-$83,600
$69,000-$139,500
28%
$83,600-$174,400
$139,500-$212,300
33% (36%)
$174,400-$379,150
$212,300-$379,150
35% (39.6%)
Over $379,150
Over $379,150
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Tax Changes – Comments
• An extension of 2010 rates
• Tax-bracket thresholds increased slightly
• Standard deductions up slightly
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Tax Changes – Additional Details
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Itemized deduction - state/local sales tax [2011]
Repeal of personal exemption phase-out [2012]
Repeal of itemized deduction limitation [2012]
Increase of AMT exemption amounts
Extension of 15% LTCG [2012]
Extension of 15% Qualified Dividends [2012]
Payroll Taxes – 2% reduction - employees & self-employed [2011]
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Tax Changes – Additional Details
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Bonus Depreciation
Section 179 Expensing
Grant Programs – Wind, Solar, Renewables
Tax Credits - Railroad Track Maintenance
Enhanced Deductions for select donations
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Quick Review of Estate & Gift Tax Changes
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$5 million estate tax exemption
$5 million gift tax exemption
$5 million GST tax exemption
Portability for Estate & Gift tax but not GST Tax
– Unless renewed portability & the amount of the exemption
is only for 2011 & 2012
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Current Proposals for Additional Changes
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FY 2012 Budget Proposal
….. “except for higher income taxpayers”
Itemized deduction limitation
Personal exemption phase out
Itemized deduction cap of 28%
and the list goes on and on…..
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Current Changes….Yet to Arrive
• Medicare taxes
– 0.9% additional tax [2012]
– 3.8% qualified unearned income tax [2012]
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Debt is nothing like we have seen in the history
of the U.S. (Heritage Foundation)
• U.S. is $13 -$14 trillion in debt
• States have billions in unfunded liabilities –
they are broke!
• Obama health care “trillions”
• The math doesn’t work
• Where will the money come from?
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Prediction of the future
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Back to the Future
• What happens if the estate tax goes to 55%
(again!)?
• What happens if it reverts to 2009 tax levels?
• Is it the tax?….or,
• Is it how do I control where my business goes
and what happens that is important?
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Family Owned Business Issues
• Family Relations Concerns
– Active vs. Inactive
– Competent vs. Incompetent
– Skippy
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Family Owned Business Issues
• Income Concerns Between Family Members
– Fair vs. Equal
– Value for Job Well Done
– Value for Heir / Bloodline
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Family Owned Business Issues
• Control Concerns
– Family Members
– Key Employees
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Family Owned Business Issues
• Transition Concerns
– Estate Timing
– Recapitalization
– Cash Flow “affordability”
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Family Owned Business Issues
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Family Relations Concerns
Income Concerns Between Family Members
Control Concerns
Transition Concerns
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Transferring a Business
(some methods)
• Revenue Neutral Sales
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Transferring a Business
(some methods)
• Installment Sales
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Transferring a Business
(some methods)
• SCIN’s
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Transferring a Business
(some methods)
• Sales to Grantor Trusts
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Transferring a Business
(some methods)
• GRAT Planning
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Transferring a Business
(some methods)
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Revenue Neutral Sales
Installment Sales
SCIN’s
Sales to Grantor Trusts
GRAT Planning
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Comparison for sample individual
Results for specific individuals may vary
Transfer Cost Comparison
Total Net Present Values
2,500,000
2,000,000
1,918,300
1,500,000
1,000,000
915,780
721,042
663,926
550,000
547,248
500,000
0
Gift Now
Do Nothing
Installment Sale
Interest Only
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GRAT
SCI N
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Transfer Mechanisms @ present value
NPV over Time
950,000
850,000
750,000
Gift
Nothing
650,000
Installment
Int Only
GRAT
SCIN
550,000
450,000
350,000
250,000
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Does the Act Create
A False Sense of Security?
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2 year window?
Can you give away $5 million?
Is it too soon to act?
Revolving Door Complex?
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Valuation Planning Techniques
• Book
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Valuation Planning Techniques
• Adjusted Book
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Valuation Planning Techniques
• DCF
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Valuation Planning Techniques
• Capitalization
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Valuation Planning Techniques
• Comparables
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Valuation Planning Techniques
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Book
Adjusted Book
DCF
Capitalization
Comparables
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Somethings No One Thinks About
• Artwork / Collections / TPP
• Ability to “unbalance”
– Your estate plan
– Your current income tax strategy
• Life Insurance
• Art Funds
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Some other questions we have gotten
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I don’t know what to do – I don’t have successors for my
business.
I don’t want to sell now.
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Alternative Succession Planning
if
No Family Succession Plan
• Some situations are helped by creating a “synthetic
stock plan”
– How it works:
• Synthetic stock is created for a percentage of the “equity stake” in
the company
• Synthetic stock is awarded over time; for example 30% equity stake
is awarded, at passing they key people need only purchase 70% of
the value of the company, hence the “leg up.”
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“I’ve done my planning – everything is
in a series of LLC’s”
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LLC’s
(What they don’t do)
• Without additional planning an LLC is not a
transfer mechanism
• An LLC may assist as a control mechanism,
but without additional planning it doesn’t
completely shift the income stream
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My plan is to use an ESOPI get income tax deductions,
raise capital
&
it is part of my estate transfer plan.
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ESOP Issues
• Repurchase liability
• Control beyond the current family ownership
• Valuation may be in conflict with your estate
valuation; and cause a higher value and more
estate tax
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Closing Remarks & Questions
• Planning should be considered based on all the
facts available
• Instead of looking for what is there,
• Look for what is not
• We have enjoyed the time today
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Thank You
Robert S. Lipsey
[email protected]
Peter J. May
[email protected]
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