Using Real Estate for Succession Planning & Wealth Transfer to the Next Generation. Scott M. McCullough Callister, Nebeker & McCullough

Transcription

1 Using Real Estate for Succession Planning & Wealth Transfer to the Next Generation Scott M. McCullough Callister, Nebeker & McCullough (801)

2 Succession Planning Is About Family Edward Henry Callister Legal Society 7 children 5 boys & 2 girls 5 boys followed their father into the law 2 girls married lawyers One of whom was my great grandmother Irene Callister who married Vern McCullough 59 descendants are lawyers or married lawyers

3 Succession Example Family Farm Grandpa bought farm land (in rural Utah far from any development) Gifted it to two boys (g2) who ran the farm, commercialized it and bought out their sisters (everyone was happy and treated equal) Boys now want to transfer land to their sons (g3), but now land is in the heart of town and quadrupled in value (at least) far in excess of estate and gift tax exemptions and in excess of what g3 can cash flow to purchase from their sisters Issue: how to pass the land to g3, keep inheritance equal among all children, and not have to fire sale the land to pay estate tax

4 The Estate Tax Issue Federal Estate Tax Exemption: $5.45m per person or $10.9m per couple Utah does not have a State Estate Tax (other states do) Use it during life, or at death 40% tax for everything over Includes: real estate, life insurance death benefit, retirement accounts, bank accounts, personal property, everything!

5 Estate Tax Strategies Pay the Tax 40% over $5.45m ($10.9m) $6m check painfully delivered last month Give to Charity - $90m foundation Private Foundation or DAF* IRA to charity (next slide) Buy Insurance - $10m second to die policy

6 Donor Advised Funds A donor-advised fund, or DAF, is a public charity made up of individual donor accounts. It allows donors to make a charitable contribution, receive an immediate tax benefit (avoid tax on the sale of the asset) and then recommend grants from the fund to their favorite charities over time. Example: sale of land; sale of race horse

7 Estate Tax Planning Strategies cont Leave title of the family land to oldest son That s how they did it biblically Give land to children now (please don t) No probate and no estate tax right? No step up in basis! Estate Tax Planning Strategies Annual Gifting Land to LLC discounted LLC interest to trust! IDGT s (other ideas like GRAT s; CRUT s etc.)

8 What is an Intentionally Defective Grantor Trust (IDGT) An IDGT is a special type of irrevocable trust designed intentionally with an income tax defect While the client is deemed the owner of the IDGT for income tax purposes, the assets of the IDGT are out of the client s estate for estate and gift tax purposes CLIENT IS STILL RESPONSIBLE FOR ALL INCOME TAX PAYMENTS AND THIS IS A GOOD THING

9 Why do we use IDGTs Sales to the IDGT are ignored for income tax purposes because they are, in effect, sales to one s self avoid capital gain tax Freeze the value of the asset for estate tax purposes so all appreciation occurs outside of the taxable estate Transfer assets to the next generation in trust Use only a small portion of estate/gift exemption Asset Protection For grantor and beneficiaries

10 SALE TO IDGT EXAMPLE - SALE Family LLC Owns real estate with rental income of $700,000 annually Goal: transfer business to children, get paid! 1. Discount valuation done on membership interest ($7m) 2. Gift of approximately $700,000 cash is made to IDGT 3. LLC membership interest sold to IDGT in exchange for promissory note of $7m (no gain recognized tax avoided approx. $2m) Client (interest only (2.62%), balloon in 20 years) (Lower interest rates and term if desired) 4. Family LLC makes distributions to IDGT of approximately $700,000 per year 5. IDGT pays client approximately $700K per year on note with AFR interest (or interest only payments if needed) to cover note payments AND taxes Note Payments to Client 6. Within approx. 14 years Client is paid off, child owns the LLC in trust where it is protected INTENTIONALLY DEFECTIVE GRANTOR TRUST (Utah asset protection trust) Grantor: Client Trustee: Spouse & Child Beneficiaries: client & spouse; child; grandchildren

11 SALE TO IDGT EXAMPLE - GIFT Family LLC Owns real estate with rental income of $700,000 annually Goal: transfer business to children AS A GIFT 1. Discount valuation done on membership interest ($7m) 2. Gift of approximately $700,000 cash is made to IDGT 3. LLC membership interest sold to IDGT in exchange for promissory note of $7m (no gain recognized tax avoided approx. $2m) Client (interest only 0.81%), balloon in 3 years) Refinance as needed 4. Family LLC makes distributions to IDGT of approximately $700,000 per year 5. IDGT pays client approximately $700K per year on note with AFR interest (or interest only payments if needed) Note Payments to Client 6. Client uses note payments to cover income taxes and uses annual gift exclusions to forgive portions of the note 7. When note is paid or forgiven child owns the LLC in trust INTENTIONALLY DEFECTIVE GRANTOR TRUST (Utah asset protection trust) Grantor: Client Trustee: Spouse & Child Beneficiaries: client & spouse; child; grandchildren

12 When to Consider An IDGT Business succession planning When there is the potential for a dramatic appreciation of asset value ESTATE FREEZE Asset protection Marital Planning when a Pre-Marital Agreement may not work Pre-nups; post-nups and no-nups the new world

13 Asset Protection The Sliding Scale Insurance 100% Rev. Trusts Domestic Irrev. Trusts Offshore Irrev. Trusts Assets LLCs/Corps owned in clients own Name Statutory Protection Only Advanced planning with full disclosure to place assets out of reach of potential future creditors Strategic ownership of assets/ compartmentalizing risk 0% Assets owned in clients own Name Judgment Proof Not hiding assets Not misrepresenting

14 Questions??? Comments