Presented By: Jeffrey R. Matsen, J.D. David B. Liptz, CPA. March 2010 by Jeffrey R. Matsen

Transcription

1 CAPTIVES AND WEALTH TRANSFER AND ESTATE PLANNING Presented By: Jeffrey R. Matsen, J.D. David B. Liptz, CPA March 2010 by Jeffrey R. Matsen

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4 Captives are normally formed and controlled by business owner to insure or re-insure the risk of the subject business. 4

5 Reasonable insurance premiums paid to Captives are deductible by the affiliated business entity. 5

6 Insurance companies are provided with special tax incentives. Properly structured premiums may be non taxable to the Captive or offset by deduction for reserves. 6

7 Reserves and tax free surplus may be invested by the Captive and retained in anticipation of future losses or to fund shareholder distributions. 7

8 Because the Captive is part of the structure of the business owner s overall estate plan, if claims against Captive s reserves are less than those projected, reserves grow and Captive ownership becomes more valuable. 8

9 WEALTH TRANSFER PLANNING OPPORTUNITIES A. Captive already in existence with built up value. 1. Ownership by trust for children and grandchildren. 2. Family Limited Partnerships or LLCs. 3. Purchase of life insurance outside of estate of business owner. 4. Sale to Defective Grantor Trust 9

10 WEALTH TRANSFER PLANNING OPPORTUNITIES 4. Sale to Defective Grantor Trust a. Seller retains income tax consequences which in turn reduce his estate for estate tax purposes. b. Dividend distributions to cover installment obligation. c. Sale/Transfer removes Captive from business owner s estate. 10

11 WEALTH TRANSFER PLANNING OPPORTUNITIES B. Newly created Captives 1. Dynasty Trust 2. Family Limited Partnership or LLC. 3. Asset Protection Trusts. a. Nevada b. Offshore Asset Protection Trust 11

12 FAMILY LIMITED PARTNERSHIPS OR LLCs The Family Limited Partnership or LLC is typically utilized in estate plan as vehicle for making leverage or discounted gifts to children or other family members and loved ones. 12

13 FAMILY LIMITED PARTNERSHIPS OR LLCs Minority interests in the FLP or LLC are gifted to junior family members at a substantially discounted value. The discounted value is for lack of marketability and lack of control and can be as much as 50%. 13

14 FAMILY LIMITED PARTNERSHIPS OR LLCs The marketability discount involves the limited marketability of the asset in question and can be applied to both majority and minority interest. The minority interest discount is principally based lack of control. The marketability discount is taken first and then the minority discount interest is applied. 14

15 FAMILY LIMITED PARTNERSHIPS OR LLCs The minority interest discount is granted on the fact that the limited partner interest or LLC member interest lacks management and voting rights, the right to require the entity to redeem the limited partner s interest and restrictions on the limited partner s/member s ability to transfer ownership rights. The limited partner has little ability to control the earnings and distributions, executive compensation, liquidation, future long range planning goals and day-to-day management of the limited partnership or LLC. 15

16 SALE TO INTENTIONALLY DEFECTIVE GRANTOR TRUST Taxpayer creates a revocable trust for heirs and structures it to be a Grantor Trust for income tax purposes by retaining one or more the powers in Code Sections 673 through

17 SALE TO INTENTIONALLY DEFECTIVE GRANTOR TRUST Taxpayer then sells assets to the IDGT that are expected to produce a high total return in exchange for an installment note paying the lowest rate of interest possible. Taxpayer attempts to maximize the gap between the return on the transfer assets and the interest paid because the excess represents tax free transfer from seller to heirs. 17

18 SALE TO INTENTIONALLY DEFECTIVE GRANTOR TRUST Because of the Grantor Trust status, seller is treated as the owner of the Trust for income tax purposes and must pay the tax on the IDGT s income. The result is that the seller s estate is reduced by the amount of the tax paid (thereby reducing estate taxes) and the value in the Trust remains to accumulate for more eventual distribution to seller s heirs. 18

19 SALE TO INTENTIONALLY DEFECTIVE GRANTOR TRUST The income taxes incurred are generally dividend or capital gain income taxes. The income tax rate would be at the current federal and applicable state income tax rates. No gain is recognized on the sale and the interest payments received on the note are not income to the seller because the seller is, in fact, making payments to him/herself. 19

20 SUCCESSION/EXIT PLANNING Captive can be utilized to assist in exit/succession planning. Business owner can structure sale to key employees or to children on much more favorable terms because of existence of Captive. 20

21 SUCCESSION/EXIT PLANNING Captive can purchase life insurance on business owner s life. If Captive is owned by heirs, no estate tax on death proceeds of policy. 21

22 SUCCESSION/EXIT PLANNING There may be income tax on insurance proceeds and alternative minimum tax considerations. The internal buildup of value in a life insurance contract is subject to AMT at the captive level. 22

23 SUCCESSION/EXIT PLANNING Again, if the company is properly structured and recognized as a captive insurance company, then generally the death benefits from a life insurance contract would not be taxable. Captive can purchase stock of business entity from owner s estate (on death of owner) utilizing insurance process. 23

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25 Corporate form of business entity with the shield of limited liability has been invoked for centuries Over the last few decades expending theories of liability and proliferation of litigation has given increased emphasis to asset protection planning to the extent that it is now a well recognized area of practice Potential liability is a major concern to doctors, other professionals and persons of high net worth. 25

26 Why the Increased Liability Exposure? Victim Oriented Society Deep pocket Plaintiff lawyers Increased media and society awareness High notoriety for malpractice and other errors and omissions type of action 26

27 Definition: Inside creditors are those creditors whose claim is directed against the business operation or real estate which is operated and owned inside a business entity. Creditor Business Ops or Real Estate of LLC or LP 27

28 Operating Businesses: C Corporations S Corporations Limited Liability Companies 28

29 Real Estate assets need to be protected! 1. Insurance 2. LLCs or FLPs 29

30 Jointly owned real estate should generally not be held as individuals or in General Partnerships Tremendous liability potential: You MUST consider LLCs or FLPs! 30

31 Real estate should be held in LLC and leased to professional practice or business Equipment can be held in LLC and leased to professional practice or business Separate liability protected entity for different business or practice functions and operations 31

32 ! Definition: Outside creditors are those creditors whose claims arise outside the purview of the business entity and are generally asserted against the business or real estate owner personally. LLC or LP Member/Partner Creditor 32

33 Clients of professionals, i.e., malpractice claims, doctors, dentists, lawyers, CPAs, architects, engineers, etc. Future claimants of real estate investor or business owner. Claims of spouse relative to potential divorce. Claimants and creditors of children or elderly parents. Claimants of high risk business owner. The buyer of a business who subsequently suffers buyer s remorse and goes against seller for fraud, misrepresentation, etc. General tort claimants, i.e., traffic accidents, etc. Contract claimants, i.e., personal guarantees, bonding and other contractual claims. Government agencies, i.e., the IRS, state taxing authorities and environment base claims (extra care has to be taken with respect to planning to protect assets against governmental claims). 33

34 "# Professionals, doctors, dentists, lawyers, CPAs, architects, engineers, etc. Potential recipients of substantial inheritances from parents or other family members. Business owners Sellers of businesses. Individuals with high risk businesses or dealings with investors. Individuals who have to sign personal guarantees and bonds, i.e., contractors and other business owners. Officers and directors of public companies. Owners of boats, airplanes or extreme vehicles. Real estate investors and owners. Celebrities, high net worth and high visibility individuals. Wealthy spouse in second marriage. Children of wealthy individuals. 34

35 ! $%$%! %$%! # %& % The general rule in most states is that creditors can reach the interest of the Trustor (the maker of the trust) of domestic self settled trusts Recently, several states have adopted legislation somewhat similar to various offshore jurisdictions that provide by statute various degrees of asset protection for a trustor s interest as a beneficiary in a self settled trust Alaska, Delaware, Rode Island, Oklahoma and Nevada seem to have the best laws. The big advantage of Nevada is the shorter statute of limitation (2 years) If properly set up and maintained, the Domestic Asset Protection Trust will be a significant barrier to creditors and will afford significant leverage to the debtor with respect to its negotiations with the creditor. This is especially true if the assets of the trust that need to be protected are domiciled in a state which is the domiciliary of the Asset Protect Trust 35

36 DAPT or FAPT 95% Member 95% Member 5% Member 5% Member LLC#1 LLC#2 Real Property Liquid Investments 36

37 "'! "( 1.) To set up your nest-egg and protect your liquid funds 2.) International Connections Relatives or Family Offshore Own Property Offshore Doing Business Offshore 37

38 )! $'#$%! %$%! #%&% A Foreign Asset Protection Trust is a trust that is set up in an offshore jurisdiction which has enabling trust legislation providing for substantial protection against creditors of the trustor One of the greatest advantages of the Foreign Asset Protection is the fact that by its very nature any legal attack against its assets are transferred abroad to a different legal system A foreign Trustee is necessary for the efficacy of the Foreign Asset Protection Trust The biggest advantage in utilizing the Foreign Asset Protection Trust is that assets can be placed offshore beyond the jurisdiction of the U.S. courts 38

39 DAPT or FAPT 95% Member 95% Member 5% Member 5% Member LLC#1 LLC#2 Real Property Liquid Investments 39

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43 Thank you 695 Town Center Drive 7th Floor Costa Mesa, CA Phone: Fax: