Bob Keebler Sample Presentation - Income & Estate Tax Strategies For THe New Year

Estate & Tax Planning
Opportunities in 2012
Robert S. Keebler, CPA, MST, AEP
Keebler & Associates, LLP
420 S. Washington St.
Green Bay, WI 54301
Phone: (920) 593-1701
E-mail: Robert.Keebler@keeblerandassociates.com
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice
contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding
tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related
matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please
contact us.
©2012 Keebler Tax and Wealth Education, Inc.
All Rights Reserved

Course Outline
• 2012 Income Tax Overview
• Income Tax Planning Opportunities in 2012
• 2012 Estate/Gift Tax Overview
• Wealth Transfer Planning Opportunities in 2012

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2012 Income Tax
Overview

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2012 Income Tax Overview
• 2012 income tax brackets
• Comparison of 2012 vs. 2013 tax rates
• 3.8% Medicare “surtax”
• 2012 payroll tax cut provisions
• Other 2012 tax provisions
• Impact of “Super Committee” failure

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2012 Income Tax Brackets
Married
Qualified Married Filing Head of
Single Widow(er) Filing Jointly Separately Household

10% Tax Rate $8,700 $17,400 $17,400 $8,700 $12,400

15% Tax Rate $35,350 $70,700 $70,700 $35,350 $47,350

25% Tax Rate $85,650 $142,700 $142,700 $71,350 $122,300

28% Tax Rate $178,650 $217,450 $217,450 $108,725 $198,050

33% Tax Rate $388,350 $388,350 $388,350 $194,175 $388,350

35% Tax Rate > $388,350 > $388,350 > $388,350 > $194,175 > $388,350
• Capital Gain
– 0% rate if you are in the 10% or 15% bracket
– 15% rate if you are in the 25%, 28%, 33% or 35% bracket

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Comparison of 2012 vs. 2013 Tax Rates
Long-Term
Ordinary Income Capital Gains
2013 & 2013&
2012 Beyond 2012 Beyond*
10% 15% 0% 10% / 8%
15% 15% 15% 20% / 18%
25% 28%
*NOTE: In general, the 8% and 18%
28% 31% capital gains rates only apply to long-
term capital gains on property that has
33% 36% been held more than five years at the
time of sale.
35% 39.6%
For the 18% rate, the property must be
purchased after December 31, 2000.

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3.8% Medicare “Surtax”
• Beginning with the 2013 tax year, a new 3.8% Medicare
“surtax” on net investment income will apply to all
taxpayers whose income exceeds a certain “threshold
amount”. This new “surtax” will, in essence, raise the
marginal income tax rate for affected taxpayers.
• Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest
marginal income tax rate in 2013) would have a federal marginal
rate of 43.4%

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3.8% Medicare “Surtax”
Tax Rate in
Tax Rate in Tax Rate in 2013+
2012 2013 (w/surtax)
10% 15% 15%
15% 15% 15%
25% 28% 28%
28% 31% 34.8%
33% 36% 39.8%
35% 39.6% 43.4%
NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income
reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However,
there are times, though unlikely, when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not
apply to a person in higher tax brackets (31%, 36%, 39.6%).

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2012 Payroll Tax Cut Provisions
• The FICA Old-Age, Survivors, and Disability Insurance (OASDI)
wage base for 2012 is $110,100
• Starting on January 1, 2012 and going through February 29,
2012, the FICA-OASDI withholding tax rate will be decreased
from 6.2% to 4.2%.
̶ The 4.2% tax rate only affects the employee’s portion of FICA-OASDI
(not the employer’s portion)
• There is a phase-out of the reduced 4.2% FICA-OASDI tax rate
for taxpayers whose earned income is in excess of $18,350
wage base for the first two months of 2012
̶ In this case, there will be a 2% tax on earned income in excess of the
$18,350 threshold

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Other Specific Provisions for 2012
• IRC Section 179 deduction
̶ $125,000 maximum deduction for 2012
̶ Deduction phased out after qualified property placed in service during
2012 exceeds $500,000
• Bonus depreciation
̶ Limited to 50% of the cost of property put into service during 2012 tax
year (after figuring the IRC Section 179 deduction)
̶ Must be new property placed into service
̶ 50% bonus depreciation in addition to IRC Section 179 deduction
̶ Other limitations
• AMT exemption
̶ Not “patched” yet for 2012
̶ Single/Head of household = $33,750; Married filing jointly = $45,000

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Other Specific Provisions for 2012
• Making Work Pay Credit
̶ Expired as of 12/31/2011
• Child tax credit
̶ $1,000 per qualifying child (through the end of 2012)
̶ Phased out after AGI goes over a specific amount
• Nonbusiness Energy Property Credit
̶ Expired as of 12/31/2011
• AMT refundable credit
̶ Can claim even if subject to AMT
̶ 2012 last year to claim credit
• American Opportunity Tax Credit
̶ $2,500 credit for first four years of college (through the end of 2012)
̶ Phased out after modified AGI goes over a specific amount

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Impact of “Super Committee” Failure on Income Taxes
• Sunset of current tax law to pre-2001 tax law
̶ Increase in ordinary income tax rates & capital gains tax rates
̶ Increase in Social Security taxes
̶ Conversion of qualified dividends from long-term capital gains to
ordinary income
̶ Decrease in deductible business expenditures (e.g. bonus
depreciation, IRC Section 179 deduction)
̶ Decrease in popular middle-class tax credits (e.g. education
credits, child tax credit)
̶ Phase-outs of itemized deductions and personal/dependency
exemptions reinstated

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Income Tax Planning

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Income Tax Planning
Planning Opportunities
• Loss harvesting
• Income shifting to junior generations
• Roth IRA conversions
• Other income tax planning ideas

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Income Tax Planning
Loss Harvesting – Key Issues
• “Wash sale” rule (IRC §1091)
• Diminishing value of capital losses
• Inefficiency of capital loss offsetting

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Income Tax Planning
Loss Harvesting – “Wash Sale” Rule (IRC §1091)
• Capital losses are denied to the extent that a taxpayer has
acquired (or has entered into a contract or option to
acquire) a “substantially identical” stock or securities
within a period beginning 30 days before the sale and
ending 30 days after the sale of a stock which was sold at
a loss (i.e. “loss stock”)
̶ This rule also applies to ETFs and index funds
̶ Disallowed loss on “loss stock” is added to the cost basis of the
new stock
̶ The holding period of the “loss stock” is carried over to the new
stock

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Income Tax Planning
Loss Harvesting – Diminishing Value of Capital Losses
• Over time capital losses lose their value as a result of a
taxpayer’s cost of capital
̶ Example: Taxpayer has a $100,000 capital loss in the current tax
year. Assuming a 5% discount rate, the following chart
illustrates the diminished value of the capital loss carryover if
the loss is recognized ratably over a ten-year period (vs.
recognizing the loss all in the current year).
Capital Loss Capital Loss
Recognized In Recognized Over 10
Current Year Years
Present value of tax benefit $20,000 $15,443

NOTE: The above comparison assumes that the $100,000 capital loss is offset by long-term capital
gain taxed at a 20% capital gains tax rate.

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Income Tax Planning
Loss Harvesting – Inefficiency of Capital Loss Harvesting
• In general, capital losses are more tax effective if they can
be used to offset income taxed at higher tax rates (e.g.
short-term capital gains and ordinary income)
̶ Thus, long-term losses used against short-term gains are more
tax-efficient than short-term losses being used against long-term
capital gains

Short-Term Gain Long-Term Gain
Short-Term Loss NEUTRAL INEFFECTIVE
Long-Term Loss EFFECTIVE NEUTRAL

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Income Tax Planning
Loss Harvesting Strategies
• Buy stock of similar company
• Double-up “loss stock” – wait 31 days
• Double-up “loss stock” – enter into “cashless collar”
• Buy call option at-the-money

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Income Tax Planning
Loss Harvesting Strategies – Similar Stock Strategy
• Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e.
“loss stock”)
• Taxpayer purchases a similar stock (e.g. Pepsi) at any time
prior to (or after) the sale of the “loss stock”
̶ NOTE: The sale and purchase can occur on the same day in that
the two stocks are not “substantially identical”

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Income Tax Planning
Loss Harvesting Strategies – Double-Up Strategy
• Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e.
“loss stock”)
• Taxpayer purchases the same stock (i.e. Coke) at least 31
days before the anticipated sale date of the “loss stock”

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Income Tax Planning
Loss Harvesting Strategies – “Cashless Collar” Strategy
• Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e. “loss
stock”)
• Taxpayer purchases the same stock (i.e. Coke) 31 days or more
before the anticipated sale date of the “loss stock”
• Taxpayer simultaneously purchases a put option and sells a call
option (to finance the cost of the put option) on the new stock
(i.e. a “cashless collar”) with an exercise date 31 days or more
from the date of the cashless collar was entered into
• At the expiration date, taxpayer tenders the “loss stock” to the
respective counterparty
̶ Conversely, if the stock price stays inside of the cashless collar’s price
range, taxpayer would sell the stock

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Income Tax Planning
Income Shifting to Junior Generations
• Shift income to younger family members to reduce income
taxes
• Considerations
̶ Asset protection
̶ Kiddie tax
̶ Potential taxable gift
̶ Children use income to invest or purchase insurance

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Income Tax Planning
Income Shifting to Junior Generations – Example
• Husband and wife gift $10,000,000 of non-voting S-
Corporation stock to their four children (15% each) in 2012
̶ $10,000,000 gift will utilize husband’s and wife’s $5,000,000
lifetime gift tax exemption in 2012
• Thus, no gift tax will be incurred on the gift
̶ Income generated by S-Corporation will pass through to each
child (i.e. income shifting)

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Income Tax Planning
• Assumptions
̶ Parents’ filing status = Married filing jointly
̶ Parents’ exemptions = 2
̶ Parents’ itemized deductions = $80,000
̶ Children’s filing status (each child) = Single
̶ Children’s exemptions (each child) = 1
̶ Children’s standard deduction (each child) = $5,800
̶ S-Corporation income = $2,000,000

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Income Tax Planning
PARENT CHILD #1 CHILD #2
OPTION 1 OPTION 2 OPTION 1 OPTION 2 OPTION 1 OPTION 2
Gross Income $ 2,000,000 $ 800,000 $ 25,000 $ 325,000 $ 25,000 $ 325,000
Itemized Deductions/Standard Deduction (80,000) (80,000) (5,800) (5,800) (5,800) (5,800)
Personal Exemptions (7,400) (7,400) (3,700) (3,700) (3,700) (3,700)
Net Taxable Income $ 1,912,600 $ 712,600 $ 15,500 $ 315,500 $ 15,500 $ 315,500

Income Tax $ 639,282 $ 219,282 $ 1,900 $ 89,012 $ 1,900 $ 89,012

Scenarios
Option 1 – No Planning
Option 2 – Transfer 15% interest to each child

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Income Tax Planning
CHILD #3 CHILD #4 TOTAL
OPTION 1 OPTION 2 OPTION 1 OPTION 2 OPTION 1 OPTION 2
Gross Income $ 25,000 $ 325,000 $ 25,000 $ 325,000 $ 2,100,000 $ 2,100,000
Itemized Deductions/Standard Deduction (5,800) (5,800) (5,800) (5,800) (103,200) (103,200)
Personal Exemptions (3,700) (3,700) (3,700) (3,700) (22,200) (22,200)
Net Taxable Income $ 15,500 $ 315,500 $ 15,500 $ 315,500 $ 1,974,600 $ 1,974,600

Income Tax $ 1,900 $ 89,012 $ 1,900 $ 89,012 $ 646,882 $ 575,330

ANNUAL INCOME TAX SAVINGS $ 71,552

Scenarios
Option 1 – No Planning
Option 2 – Transfer 15% interest to each child

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Income Tax Planning
Roth IRA Conversions – Roth IRA Conversion Benefits
• Lowers overall taxable income long-term
• Tax-free compounding
• No RMDs at age 70½
• Tax-free withdrawals for beneficiaries
• More effective funding of the “bypass trust”

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Income Tax Planning
Roth IRA Conversions – Roth IRA Conversion Types
• Strategic conversions – Take advantage of a client’s long-term
wealth transfer objectives
• Tactical conversions – Take advantage of short-term client-
specific income tax attributes that are set to expire (e.g., low tax
rates, tax credits, charitable contribution carryovers, NOL
carryovers, etc.)
• Opportunistic conversions – Take advantage of short-term stock
market volatility, sector rotation and rotation in asset classes
• Hedging conversions – Take advantage of projected future
events that will result in the client being subject to higher tax
rates within the near future

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Income Tax Planning
Roth IRA Conversions – Understanding the Mathematics
• In simplest terms, a traditional IRA will produce the same
after-tax result as a Roth IRA provided that:
̶ The annual growth rates are the same
̶ The tax rate in the conversion year is the same as the tax rate
during the withdrawal years

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Income Tax Planning
Traditional IRA Roth IRA
Current Account Balance $ 100,000 $ 100,000
Less: Income Taxes @ 40% - (40,000)
Net Balance $ 100,000 $ 60,000

Growth Until Death 200.00% 200.00%

Account Balance @ Death $ 300,000 $ 180,000
Less: Income Taxes @ 40% (120,000) -
Net Account Balance to Family $ 180,000 $ 180,000

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Income Tax Planning
• Critical decision factors
̶ Tax rate differential (i.e. tax rate in year of conversion vs. tax rate
in years of withdrawals)
̶ Ability to use “outside assets” (i.e. non-qualified funds) to pay the
income tax on the conversion
̶ Time horizon / need for IRA to meet annual living expenses

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Income Tax Planning
• The key to a successful Roth IRA conversion is to keep as
much of the conversion income as possible in the current
marginal income tax bracket
̶ However, there are times when it may make sense to convert
more and go into higher tax brackets

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Income Tax Planning
“Optimum” Roth IRA
conversion amount
35% tax
Target Roth IRA
conversion amount bracket
33% tax
Current bracket
taxable
income 28% tax
bracket
25% tax
bracket
15% tax
bracket
10% tax
bracket

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Income Tax Planning
Other Income Tax Planning Ideas
• Acceleration of income into 2011 & 2012
̶ Sale of bonds with accrued interest
̶ Sale/repurchase of bonds trading at a premium
• Alternative investments
̶ Oil & gas investments
̶ Gold investments
̶ Foreign currency investments
̶ Index options

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Income Tax Planning
Other Income Tax Planning Ideas – Acceleration of Income
• Beginning 1/1/2013, ordinary income tax rates will increase
to their pre-2001 levels
̶ Consequently, taxpayers should consider accelerating certain types
of ordinary income (e.g. bond interest, annuity income, traditional
IRA income, compensation income) into 2011 and 2012 to the extent
that they expect to be in the same tax bracket or higher in future tax
years

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Income Tax Planning
• Example – Sale of bonds with accrued interest
̶ As of 12/21/2012, Mark has $100,000 of accrued bond interest that
will be paid on 1/3/2013. At the advice of his accountant, Mark is
considering selling his bonds (at par) before the end of the 2012 tax
year to take advantage of the lower income tax rates.
̶ Assuming that Mark is currently in the 35% tax bracket for 2012
(39.6% in 2013), below is a summary of the tax savings Mark would
realize by selling his bonds in 2012 and recognizing the accrued
interest income. Collect
Sell Bonds Interest in
in 2012 2013
Total Income Tax $ 35,000 $ 39,600

SAVINGS $ 4,600

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Income Tax Planning
• Example – Sale/repurchase of bonds trading at a premium
̶ In 1993, John purchased $1,000,000 worth of ABC Corp. 11% bonds
at par value (which mature on December 31, 2013). On December
31, 2012, John sold his ABC Corp. bonds at 1.05 (i.e. $1,050,000).
̶ On the next trading day (January 2, 2013) John repurchased the
same ABC Corp. bonds for $1,050,000. Under tax law, this $50,000
premium can be used to offset John’s interest income over the
remaining life of the bond (i.e. one year).
̶ Below is the net income tax savings by selling the bonds in 2012 and
repurchasing them in 2013:
Income Tax Savings on Bond Premium $ 19,800
Less: Capital Gains Tax on Sale of Bonds (7,500)
Net Income Tax Savings $ 12,300

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Income Tax Planning
Other Income Tax Planning Ideas – Alternative Investments
• Oil & gas investments
̶ Intangible drilling costs (IDCs) provide a large immediate income tax
deduction (up to 85% of the initial investment)
• Losses, if any, created as a result of IDCs will be ordinary (thus lowering a
taxpayer’s AGI)
̶ Must be a general partner in the first year
• Possible AMT add-back issues if IDCs exceed 40% of AMTI
̶ Depletion and other depreciation (including Section 179 expensing)
provide for additional deductions during the term of the investment
̶ Additional tax credits may be available for certain oil & gas ventures

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Income Tax Planning
• Gold investments
̶ Generally when gold is held as coins or bullion, long-term gains are treated as
“collectibles” and taxed at a 28% capital gains tax rate
• However, this rule does not generally apply to gold held in mutual funds
• Also, this rule does not generally apply to non-exchange-traded (i.e. OTC) options on
gold
̶ Short-term gains are treated as ordinary income
• Thus, if a taxpayer is in a lower tax bracket (i.e. 10%, 15%, 25%), he/she would be
better off triggering short-term gain (instead of long-term gain)
̶ Gold futures are treated as “Section 1256 contracts”, not as “collectibles”
• Accordingly, gold futures must be “marked-to-market” (i.e. the unrealized gains/loss
must be recognized each tax year)
However, gains are subject to special tax treatment (i.e. 60% long-term capital gain
/ 40% short-term capital gain)
̶ “Wash sale” rule does not apply to “collectibles” losses

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Income Tax Planning
• Foreign currency transactions
̶ Recognize ordinary income in 2010 and push ordinary losses to 2011
and later years
• Avoids Section 1256 treatment
• Choose currencies that do not have futures contracts
• Index options
̶ Special gains treatment on certain broad-based listed options (i.e.
60% long-term / 40% short-term)
• Thus, for taxpayers in the highest marginal income tax bracket in 2011
this would result in a blended capital gains tax rate of 27.84% ([20% x
60%] + [39.6% x 40%])

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2012 Estate/Gift Tax
Overview

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2012 Estate/Gift Tax Overview
Summary of 2010 Tax Relief Act
• On December 17, 2010, the President signed Tax Relief,
Unemployment Insurance Reauthorization, and Job
Creation Act of 2010 (“2010 Tax Relief Act”) into law
• Key estate/gift tax law provisions
̶ Reinstatement of estate and GST tax
̶ Higher exemption amounts
̶ Lower tax rates
̶ Portability of estate tax exemption

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2009 2010 2010 2011 2012
(Prior Law) (New Law)

Top Estate Tax Rate 45% 0% 35% 35% 35%

Exemption $3,500,000 N/A $5,000,000 $5,000,000 $5,120,000

Date-of-Death YES
YES NO (unless estate tax YES YES
Basis Increase is not elected)

NO
Carryover Basis NO YES (unless estate tax NO NO
is not elected)

Note: Under the current law in 2013 the exemption reverts to $1,000,000

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Estate Tax
• 2011
̶ Exemption = $5,000,000
̶ Top marginal tax rate = 35%
• 2012
– Exemption = $5,120,000
– Top marginal tax rate = 35%
• 2013 (assuming no Congressional action)
– Exemption = $1,000,000

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Gift Tax
• 2011
– Exemption = $5,000,000
• 2012
– Exemption = $5,120,000
– Exemption = $1,000,000

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Generation-Skipping Transfer (GST) Tax
• 2011
– Exemption = $5,000,000
• 2012
– Exemption = $5,120,000
– Exemption = $1,000,000 (indexed for inflation)

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Portability of Estate Tax Exemption
• Allows the executor to either utilize the decedent’s
$5,000,000 estate tax exclusion amount or to transfer it to
the decedent’s surviving spouse
– However, the new law does not allow the decedent to
transfer his/her unused GST tax exemption to the surviving
spouse

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Impact of “Super Committee” Failure on Estate Planning
• Sunset of current tax law to pre-2001 tax law
̶ Increase in gift/estate/GST tax rates
̶ Decrease in estate, gift and GST exemption amounts
̶ Repeal of portability
̶ Reinstatement of state death tax credit
̶ Reinstatement of other specific provisions
̶ Impact on credit for prior gift taxes paid (IRC Section 2012 credit)
̶ Impact on credit for prior estate tax paid (IRC Section 2013 credit)

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Lifetime Gifting – Annual Exclusion Gifts
• Each year a taxpayer may gift up to a specified amount
($13,000 in 2012) to another person (a.k.a. “donee”)
without the gift being subject to gift tax
̶ This transfer is referred to as an “annual exclusion gift”
• For married taxpayers, the annual exclusion gift per each
donee is basically doubled (i.e. $26,000 per donee in
2012)
• Neither the gift, nor the future appreciation on the gift is
included in the taxpayer’s gross estate

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Lifetime Gifting – Annual Exclusion Gift Example
A married couple makes annual exclusion gifts to their three
children. The table below illustrates the total amount that is
removed from their combined gross estate over a period of
time:
Total Wealth Removed From Gross Estate*
0% Growth 4% Growth 8% Growth
Rate Rate Rate
Year 5 $ 390,000 $ 422,473 $ 457,595

Year 10 $ 780,000 $ 936,476 $ 1,129,952

Year 20 $ 1,560,000 $ 2,322,690 $ 3,569,433

*NOTE: Assumes the annual exclusion gift amount of $13,000 does not change

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Lifetime Gifting – Lifetime Gift Exemption Gifts
• During a taxpayer’s lifetime, he/she may make “taxable gifts”
(i.e. gifts that exceed the annual exclusion gift amount) up to
a specified amount ($5,120,000 in 2012) without having to
pay gift tax
• This transfer is referred to as an “lifetime gift exemption gift”
• For married taxpayers, the aggregate lifetime gift tax
exemption is basically doubled (i.e. $10,240,000 in 2012)

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Lifetime Gifting – Lifetime Gift Exemption Gift Example
A single taxpayer makes a $5,000,000 taxable gift to a trust
for the benefit of his children. The table below illustrates the
total amount that is removed from the taxpayer’s gross
estate over a period of time:
Total Wealth Removed From Gross Estate
0% Growth 4% Growth 8% Growth
Rate Rate Rate
Year 5 $ 5,000,000 $ 6,083,265 $ 7,346,640

Year 10 $ 5,000,000 $ 7,401,221 $ 10,794,625

Year 20 $ 5,000,000 $ 10,955,616 $ 23,304,786

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Lifetime Gifting – Tax-Exclusive Nature of Gift Tax
• To the extent that a taxpayer makes a gift in excess of his/her
annual exclusion gift amount and his/her lifetime gift tax
exemption amount, he/she will incur a gift tax
̶ The gift tax due on the taxable gift (in excess of the lifetime gift tax
exemption amount) is calculated on a “tax-exclusive” basis
̶ In this case, the gift tax is calculated only on the value of the
amount transferred (i.e. the gift)
• For estate tax purposes, the estate tax is calculated not only
on the value of the amount transferred, but also the tax that
is paid n the transfer (i.e. “tax inclusive”)
• The post-gift future appreciation is not included in the
taxpayer’s gross estate
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Lifetime Gifting – Tax-Exclusive Nature of Gift Tax Example

Estate Tax Gift Tax
Total Taxable Estate / Gift $ 10,000,000 $ 10,000,000
Effective Tax Rate* 35.00% 25.93%
Total Tax $ (3,500,000) $ (2,592,593)

Savings $ - $ 907,407

* Effective Gift Tax Rate = 35%/135%

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Grantor Retained Annuity Trust (GRAT)
• A Grantor Retained Annuity Trust (GRAT) is a type of trust
that benefits the grantor’s future generations (i.e. children)
without the imposition of estate or gift tax
• To the extent that the actual rate of return on the trust’s
assets exceeds the IRS’s rate (a.k.a. IRC 7520 rate), the
“excess” is transferred to the trust’s beneficiaries free of any
estate and/or gift tax
• All income earned by the trust is taxed to grantor because
the trust is “defective” for income tax purposes, thus
allowing for a “tax-free” gift to the trust’s beneficiaries
NOTE: The IRC 7520 rate for December 2011 is 1.6%
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Grantor Retained Annuity Trust (GRAT) – Overview

Transfer of assets
Grantor
(Lead Beneficiary) Annuity payments over a
GRAT
fixed term

Payment of gift tax on present At end of term, any residual
value of remainder interest assets remaining in the trust
transferred to children pass to the children free of any
(should be at or near $0) gift tax

IRS Children*
(Remainder Beneficiaries)

* Instead of naming the children as outright remainder beneficiaries of the GRAT, a
grantor trust could be used (thus producing a greater estate tax benefit)

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Grantor Retained Annuity Trust (GRAT) – Example
Assumptions
FMV of assets transferred $10,000,000
IRC §7520 rate 1.60%
Term (years) 10
Annual % increase in periodic payment 0%
Payment period Annually
Payment timing End of period
Beginning Taxable Ending
Year Balance Income Annual Balance
10.00% Payment
1 $ 10,000,000 $ 1,000,000 $ (1,090,096) $ 9,909,904
2 $ 9,909,904 $ 990,990 $ (1,090,096) $ 9,810,798
3 $ 9,810,798 $ 981,080 $ (1,090,096) $ 9,701,782
4 $ 9,701,782 $ 970,178 $ (1,090,096) $ 9,581,864
5 $ 9,581,864 $ 958,186 $ (1,090,096) $ 9,449,955
6 $ 9,449,955 $ 944,995 $ (1,090,096) $ 9,304,854
7 $ 9,304,854 $ 930,485 $ (1,090,096) $ 9,145,244
8 $ 9,145,244 $ 914,524 $ (1,090,096) $ 8,969,672
9 $ 8,969,672 $ 896,967 $ (1,090,096) $ 8,776,543
10 $ 8,776,543 $ 877,654 $ (1,090,096) $ 8,564,102
BENEFIT: $8,564,102 transferred to beneficiaries estate/gift tax-free
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60

Dynasty Trust
• A dynasty trust is a type of trust which benefits multiple
generations where none of the assets held by the trust are
included in either the grantor’s taxable estate or any of the
beneficiaries’ taxable estates.
̶ However, under the tax law, whenever a transfer is made by the
grantor to a “skip person” (e.g. grandchild, great-grandchild, etc.)
or a trust for their benefit (e.g. dynasty trust), a second level of tax
is imposed on the transfer (in addition to gift tax)
̶ Notwithstanding, a grantor is allowed a lifetime GST exemption on
the first $5,120,000 of taxable transfers to “skip persons”

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61

Dynasty Trust – Overview
Gift*
Grantor Dynasty Trust
No transfer tax paid.

Discretionary Distributions
to Children for Life
Advantages
No transfer tax paid.
• Creditor protection
• Divorce protection Discretionary Distributions
• Estate tax protection to Grandchildren for Life
• Direct decedent protection
• Spendthrift protection No transfer tax paid.
• Consolidation of capital
Discretionary Distributions
to Great-Grandchildren
* Gift should take advantage of for Life
any remaining lifetime gift
exclusion and lifetime GST No transfer tax paid.
exclusion

Future Generations

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62

Dynasty Trust – Estate Erosion Example
W ealth of Parents $ 1,000,000 $ 1,000,000 $ 1,000,000
Estate Tax Rate 35% 35% 35%
Estate Tax $ 350,000 $ 350,000 $ 350,000

W ealth of Children $ 650,000 $ - $ -
Estate Tax $ 227,500 $ - $ -

W ealth of Grandchildren $ 422,500 $ 650,000 $ -
Estate Tax $ 147,875 $ 227,500 $ -

Wealth of Great-Grandchildren $ 274,625 $ 422,500 $ 650,000

% of Original Wealth Passing
to Great-Grandchildren 27.4625% 42.2500% 65.0000%

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63

Intentionally Defective Grantor Trust (IDGT)
An Intentionally Defective Grantor Trust (IDGT) is a type of
dynasty trust where all income earned by the trust is taxed
to the grantor because the trust is “defective” for income
tax purposes, thus allowing for a “tax-free” gift to the
trust’s beneficiaries.

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64

Installment Sale to IDGT
• A type of transaction whereby a grantor sells a highly-
appreciating asset to an IDGT in exchange for an installment
note
• To the extent that the growth rate on the assets sold to the
IDGT is greater than the interest rate on the installment
note taken back by the grantor, the “excess” is passed on to
the trust beneficiaries free of any gift, estate and/or GST tax
• No capital gains tax is due on the installment sale and no
income tax is due on the interest paid because the trust is
“defective” for income tax purposes

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65

Installment Sale to IDGT – Overview

Gift & sale of highly-
appreciating assets
Grantor
Installment note(s)
IDGT

Discretionary distributions of Assets outside of the taxable
income and principal during the estates of beneficiaries
lifetime of the trust’s beneficiaries

Children,
Grandchildren,
Great-Grandchildren
& Future Generations

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66

Installment Sale to IDGT – Example
Assumptions
FMV of assets transferred $10,000,000
Interest rate (AFR) 2.80%
Term (years) 10
Payment structure Interest-only w/balloon payment
Payment period Annually
Payment timing End of period
Beginning Taxable Ending
Year Balance Income Annual Balance
10.00% Payment
1 $ 10,000,000 $ 1,000,000 $ (280,000) $ 10,720,000
2 $ 10,720,000 $ 1,072,000 $ (280,000) $ 11,512,000
3 $ 11,512,000 $ 1,151,200 $ (280,000) $ 12,383,200
4 $ 12,383,200 $ 1,238,320 $ (280,000) $ 13,341,520
5 $ 13,341,520 $ 1,334,152 $ (280,000) $ 14,395,672
6 $ 14,395,672 $ 1,439,567 $ (280,000) $ 15,555,239
7 $ 15,555,239 $ 1,555,524 $ (280,000) $ 16,830,763
8 $ 16,830,763 $ 1,683,076 $ (280,000) $ 18,233,839
9 $ 18,233,839 $ 1,823,384 $ (280,000) $ 19,777,223
10 $ 19,777,223 $ 1,977,722 $ (10,280,000) $ 11,474,946
BENEFIT: $11,474,946 transferred to beneficiaries estate/gift tax-free
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68

Circular 230 Disclosure

Pursuant to the rules of professional conduct set forth in Circular 230, as
promulgated by the United States Department of the Treasury, nothing contained in
this communication was intended or written to be used by any taxpayer for the
purpose of avoiding penalties that may be imposed on the taxpayer by the Internal
Revenue Service, and it cannot be used by any taxpayer for such purpose. No
one, without our express prior written permission, may use or refer to any tax
advice in this communication in promoting, marketing, or recommending a
partnership or other entity, investment plan or arrangement to any other party.

For discussion purposes only. This work is intended to provide general information
about the tax and other laws applicable to retirement benefits. The author, his firm
or anyone forwarding or reproducing this work shall have neither liability nor
responsibility to any person or entity with respect to any loss or damage caused, or
alleged to be caused, directly or indirectly by the information contained in this work.
This work does not represent tax, accounting, or legal advice. The individual
taxpayer is advised to and should rely on their own advisors.

All Rights Reserved
70

Bob Keebler Sample Presentation - Income & Estate Tax Strategies For THe New Year

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