QUARTERLY. Transferring Wealth Using Grantor Retained Annuity Trusts. In This Issue

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1 QUARTERLY 2014 Volume 8 No. 1 Transferring Wealth Using Grantor Retained Annuity Trusts By: Steven J. Oshins, Esq., AEP (Distinguished) A Grantor Retained Annuity Trust ( GRAT ) is an irrevocable trust into which the settlor makes a gift and retains a stream of annuity payments for a term of years, for life or for the shorter of a term of years or life. Most GRATs are for a term of years. The value of the gift for gift tax purposes is determined using the subtraction method. The subtraction method computes the gift by subtracting the present value of the retained annuity stream from the value of the assets transferred to the GRAT. Thus, if the present value of the retained annuity stream is valued at $1 less than the fair market value of the assets transferred to the GRAT, then the reportable gift is $1. At the end of the term of years of the trust, if there are any assets remaining, those assets pass to the remainder beneficiaries free of any gift tax. Thus for a taxable gift of nearly zero, there is the potential of a huge upside. Therefore, the GRAT is one of the leading wealth-shifting vehicles. And because it can be designed without a gift tax, there is no limit as to the value of the assets gifted to the GRAT. A Successful GRAT In order to be successful, the GRAT assets will generally need to outperform the Applicable Federal Rate that exists as of the month the assets are transferred to the GRAT. However, since most GRATs are funded with assets subject to a valuation discount, there is a built-in advantage from the beginning since the annuity payment is determined based on a percentage that is applied to the fair market value of the assets transferred to the GRAT. If those assets are discounted to reflect a lack of voting control and that the business is entity is closely-held and has little marketability, the annuity percentage is applied to a lower-valued asset. The GRAT is successful if the settlor outlives the term-of-years of the trust. If the settlor fails to outlive the term-of-years, then some or all (in most cases, all) of the trust assets are includible in the settlor s estate. Thus, a GRAT is considered a bet-to-live technique. An advisor contemplating the use of a GRAT when preparing for a wealth-shift should consider the probability that the settlor will outlive the term of the trust. Continued on Page 8, Transferring Wealth In This Issue Customize Buy-Sell Agreements to the Business... Four Steps to Branding Yourself as a Trusted Advisor and Winning Lifelong Clients... LLC Planning: Enabling Disregarded Entity Status... Upcoming Education Events... How to Engage the Client or Closing the Deal... The Education Evolution... Are You Missing a Golden Opportunity?... Trust Decanting: A Compelling (and Underused) Strategy for Creative Trust Solutions... The Top 10 Seminar Marketing Mistakes Attorneys Make... Using the S-Election to Save Employment Taxes... Thought Leader Series Webcast... Scan QR code with your smartphone to view online

2 Customize Buy-Sell Agreements to the Business update regularly. By: Edward W. Jacobs, Esq. A good buy-sell agreement ( BSA ) requires the drafter predict which possible terms will be important in years. If your fortune telling skills are rusty, rely on your client s business predictions. Create flexibility by including some general statements along with specifics, and A BSA may be the most important corporate document a business owner ever has. It is often the only place where the owners customize the terms of their relationship and document plans for operations, distribution of cash flow, and eventual business sale or succession. Discussing a BSA raises issues relating to employment rights, dividend policy, the exit strategy, corporate governance, fiduciary duties to each other/prevention of minority oppression, voting trusts, covenants not to compete, different sales prices for certain circumstances (such as bankruptcy, divorce, voluntarily leaving to work for a competitor, loss of professional license, etc.), minority discounts, and a variety of other crucial business issues. While the complexity of the issues and involved parties impulses to dodge hard questions invites postponement, obtaining a baseline BSA now and planning reviews to adjust for business and personal changes enhances business value. What should you discuss with clients to identify their BSA needs? 1. Need for a BSA and Regular Updates: In Forbes, Robert W. Woods says you benefit from a buy-sell, even if it s the only written document the business has. The cost/benefit analysis is compelling. Failing to define a roadmap can lead to disputes. By documenting and updating plans, disputes and indecision are minimized, expectations agreed upon, and uncertainty is reduced. 2. Triggers and Valuation: Typical triggers of a sale are retirement, deadlock, death, disability, voluntary or involuntary transfer, resignation, or termination of employment. Continued on Page 11, Buy-Sell Agreements Four Steps to Branding Yourself as a Trusted Advisor and Winning Lifelong Clients By: Mark Powers and Shawn McNalis, Atticus, Inc. 2 I don t want clients to hire me to solve a one-time problem, says Steve Riley, an Estate Planning and Business lawyer practicing in Tampa, Florida, I want them to work with me for life. Unlike many practitioners who don t focus on creating life-long client relationships, Riley seeks to provide his clients with service and support for the long haul. Everything, from the name of his firm, The Strategic Counsel, to the way he packages his services -- everything his client encounters is designed to elevate his services above that of lawyerfor-hire to that of long-term trusted advisor. This is all part of how he builds his brand. My clients are enrolled in what I call The Lifetime Client Model. I want them to know right up front that we are committed to more than just addressing the issue at hand, says Riley. He isn t concerned that surveys peg CPAs as the most trusted advisors in the United States he believes the approach he takes and the level of service he provides is comprehensive and the trust his team engenders is well-deserved. He s at the leading edge of a trend that has been growing among entrepreneurial attorneys who see the limitations, not to mention the time and expense, of constantly originating and working with new clients. Instead, why not serve a broader spectrum of client needs in-house and do it so well clients regard you as their most trusted advisor? According to David Maister, Charles Green and Robert Galford, authors of True Professionalism, the evolution of the client-advisor relationship is a four-step process that starts the day attorneys first hangs out their shingle. The rest of this article is available online at

3 LLC Planning: Enabling Disregarded Entity Status By: Joseph D. Welch, J.D. The Problem. A common trap in designing LLCs owned by husband and wife (when corporate taxation is not otherwise advantageous) is failure to enable filing as a disregarded entity. Clients and their CPAs are often compelled to file IRS Form 1065, the Partnership Income Tax Return. This effectively serves as an election by the taxpayer to treat the LLC as a Partnership rather than a disregarded entity. (Although the LLC is a pass-through entity, it is no longer a disregarded entity it is now considered a separate and distinct legal entity from the taxpayer and the taxpayer will receive a K-1 from the Partnership.) Most CPAs bristle at having to file partnership returns and many of them are not afraid to voice their displeasure to clients, who then understandably wonder if they have been sold a bill of goods by the attorney. Many attorneys and CPAs create single-member LLCs whenever possible to avoid the dreaded partnership return. However, singlemember LLCs suffer increasingly from liability exposure. In In re Albright, 291 B.R. 538 (Bankr., 2003), the Colorado bankruptcy court held that the LLC Charging Order protection exists for the protection of Debtor s partner, not Debtor, and since a singlemember LLC has no partner to protect, the Creditor will not be limited to the Charging Order remedy. Maryland, Idaho, Florida and Illinois have since followed suit. It appears that Albright has wings, which are not lightly disregarded by attorneys attempting to impart serious asset protection to their clients. Benefits to Obtaining Disregarded Entity Status. Taxpayers who are able to avoid partnership taxation may realize some or all of the following advantages: (1) no partnership filing and record keeping; (2) if married-co-owners were formerly filing on Schedule C in the name of one spouse, only that spouse received credit for social security and Medicare coverage; (3) allows partners to make separate tax elections instead of having the partnership make them for all partners under I.R.C. 703(b), such as: (i) individuals can use individual accounting methods and are not bound by the accounting method selected by the partnership; (ii) individual partners can elect installment treatment; (iii) individual partners can elect whether to expense an asset under I.R.C. 179; (iv) individual partners can decide whether to use accelerated or straight-line depreciation; (v) individual partners can elect to expense or to capitalize intangible drilling costs, etc. Strategies to Obtain Disregarded Entity Status. Possible strategies to obtain disregarded entity status include: (1) File a 761 Election. Filing a 761 election: Only Qualified Entities are allowed to elect out of partnership taxation: The rest of this article is available online at Upcoming Education Events February : 4: 5-6: 11: 18: 18: 19: March : 18: 31: Trust Administration Intensive (Six-Part Virtual Course Feb. 3, 5, 7, 10, 12, 14) Planning for Blended Families - Docxcentric Estate Planning Essentials Course (Atlanta, Georgia) Advisors Forum Expertise for Experts Series: Ten Strategies to Maximize Your Clients Social Security Benefits RLT Drafting Intensive (Six-Part Virtual Course Feb. 18, 19, 21, 24, 26, 28) Advisors Forum Interdisciplinary Webinar Series: Not Your Mother s Retirement Planning Major Changes to Fiduciary Income Tax Planning Tax Camp (Six-Part Virtual Course March 3, 5, 7, 10, 12, 14) Alternative Investments In IRAs Advisors Forum Interdisciplinary Webinar Series: Insurance Planning Charitable Remainder Trust Intensive (Six-Part Virtual Course Mar. 31, Apr. 2, 4, 7, 9, 11) Visit for complete calendar of events. 3

4 How to Engage the Client or Closing the Deal 4 By: Jeffrey R. Matsen, Esq. The other day I had the opportunity of meeting with a more senior couple who was looking for estate and income tax planning. In this article, I will call them Richard and Susan. They had had an opportunity to work with several different attorneys both in their real estate business and to a lesser extent with respect to their estate planning. The couple had a net worth (mostly in apartment buildings) of approximately $20-25 million. They were both actively engaged in the business (especially the husband) but realized that they were now in a position because of their advanced age to be more vulnerable to death, disability, and serious lifestyle change. They had been referred to me by their real estate attorney in whom they had a lot of confidence and with whom they have a track record. Both of them knew that they needed to take some immediate action with respect to putting their estate planning in order, but the husband, although he was several years older than the wife, did not have the same sense of urgency about the situation that she did. They had three or four different real estate rental properties in LLCs and limited partnerships, but the only estate planning they had really done was to have a traditional A-B type living trust. I had requested that they bring with them all of their estate planning and business organization documents. Continued on Page 8, Closing the Deal The Education Evolution By: Matthew T. McClintock, J.D. Virtual learning is becoming ever-popular and results from our social need for educational change. Accessing quality education and training from the convenience of the home or office is the goal of many post-secondary learners. Colleges and universities are offering more and more courses online and creating blended learning environments a mix of traditional classroom lectures and online courses. Travel costs for the learner as well as the lecturer can be spared, subjects can be taught in absorbable sections, and there is no need to leave family or wok obligations. While we have provided a variety of web delivered presentations in the past, WealthCounsel is adapting this learning trend further to expand the way in which we can deliver education to estate planning professionals. In 2014 we ve introduced virtual courses for the first time and are expanding webinar offerings. As it is hard to replace the benefit of live, face-to-face learning, we will continue to offer select workshops across the country. Our flagship event, the Planning for the Generations Symposium, will continue to be an annual event where you can network with hundreds of peers, absorb a variety of topics with one event, and introduce yourself to services and products designed to support your practice with a visit to the exhibit hall. We hope you will join us for this unique industry event, July 16-18, in Denver, Colorado, with immersion precursor workshops July Throughout the year, take advantage of the variety of offerings and select courses that will empower and enhance your practice, your knowledge, and your clients. Here s a sample of what s coming up: Trust Administration Intensive Virtual 6-Part Course February 3-14 Estate Planning Essentials Live 2-Day Workshop Multiple Dates & Locations RLT Drafting Intensive Virtual 6-Part Course February Major Changes to Fiduciary Income Tax Planning Webinar February 19 Alternative Investments in IRAs Webinar March 6 Practice Planning for Estates Under $10 Million Thought Leader Series Webcast March 27 Thriving in Estate Planning Live 2-Day Workshop, Phoenix April Farm Business and Estate Planning Live 2-Day Conference, Minneapolis May RLT Drafting Intensive Live 2-Day Workshop, Minneapolis May Business Planning Essentials Live 2-Day Workshop, Denver July Planning for the Generations Symposium, Denver July This is just a short list of upcoming education events. To see all live, webinar, and virtual opportunities, please visit the WealthCounsel Institute calendar for a comprehensive listing: > Education > Calendar

5 Are You Missing a Golden Opportunity? By: Dale M. Krause, J.D., LL.M. After completing a crisis Medicaid plan for a couple, do you later go back and develop a Medicaid preplan for the healthy spouse? If not, you are missing a golden opportunity! Rather than market for additional clients, which can be very expensive and time consuming, it makes a lot of sense to pursue existing quasiclients healthy community spouses. With the Medicaid cost savings still fresh in their minds, community spouses understand the need to take immediate action. They know that if they wait too long and also need a crisis Medicaid plan they will lose a significant portion of their net worth, thus they re likely to follow your lead. What s the best way for a community spouse to pre-plan? If they are willing to give up control of their finances, they could gift their assets to an irrevocable trust and wait 5 years to apply for Medicaid. In such a case, they would be immediately eligible once those 5 years have passed. However, in the real world, healthy spouses are not inclined to give away their net worth without a small fight or gamble on when they may need long-term care. So, is there a better way to plan? The answer is Yes. By combining a revocable living trust (RLT) with a long-term care insurance policy (LTCIP), they can have it all! The RLT will take care of them during life including incapacity, and will distribute their assets following death free of probate and estate recovery. We know that the average nursing home stay is less than 3 years, the Medicaid rules have a 5 year lookback, and people want to receive long-term care at home or in an assisted living facility before ever considering a nursing home. Therefore, to get adequate protection with a LTCIP I usually recommend a policy with the following features: A reasonable per diem with a 5% annual inflation factor; 5 years of coverage for all levels of care home health, assisted living, and nursing home; A 90-day elimination period; and Lifetime annual premiums. Assuming the policy commences when a community spouse is 65 years of age, requires a per diem of $150, and lives in Michigan, the estimated annual cost of the aforementioned policy is $6, Alternatively, if the community spouse is older, the annual costs would be as follows: Age 70 $7, Annual Premium 75 $9, $12, Note: The aforementioned quotes were provided by Mutual of Omaha 2 and are subject to change. If you add a return of premium rider to the policy a full refund of premiums paid assuming no long-term care claims are made, the estimated annual premiums would be as follows: Age Annual Premium 65 $10, $14, $23, $38, Note: The aforementioned quotes were provided by TransAmerica Life Insurance Company 3 and are subject to change. Mutual of Omaha does not offer a return of premium rider. Even though the return of premium rider appears to make the LTCIP cost prohibitive, your clients will gain comfort knowing that they have not purchased something on the promise of use it or lose it. Instead, a 79 year old will know that if they pay through age 90, die of natural causes without any long-term care services, their RLT will collect a refund of $462, At the same time, had they needed to file a long-term care claim at age 83, they only would have paid premiums of $192, and had available longterm care benefits of $332, which is a huge opportunity! Additionally, with the same facts as above, if the LTCIP your client purchased was Partnership Approved 4 and they exhausted their $332, of benefits, they could apply for Medicaid and be deemed eligible with $332, of countable resources well above the $2,000 limit for regular applicants. If the RLT your client established when you began pre-planning has that amount, or less, all is well very well! So, if you re looking to increase your revenue, work with fewer new clients, and provide amazing financial results, you need to tap into this opportunity. About the Author: For more than 25 years, Dale M. Krause, J.D., LL.M., and Krause Financial Services, have provided Medicaid Compliant Annuities to elder law attorneys and their clients. As a result of his longstanding national practice, Mr. Krause has been labeled The Pioneer of Medicaid Compliant Annuities. 1 Age 79 is the last age that an individual can obtain a LTCIP from Mutual of Omaha or TransAmerica Life Insurance Company. 2 Mutual of Omaha is located in Omaha, Nebraska and has an A+ rating with A.M. Best. 3 TransAmerica Life Insurance Company is located in Cedar Rapids, Iowa and has an A+ rating with A.M. Best. 4 The Long-Term Care partnership is a unique program combining private long-term care insurance and special access to Medicaid. The partnership helps individuals financially prepare for the possibility of needing nursing home care, home-based care or assisted living services sometime in the future. The program allows individuals to protect some or all of their assets and still qualify for Medicaid if the long-term care needs extend beyond the period covered by their private insurance policy. Section 6021 of the Deficit Reduction Act allows for Qualified State Long-Term Care Partnerships. States with approved State Plan Amendments also exclude from estate recovery the amount of long-term care benefits paid under a qualified LTCIP. 5

6 Trust Decanting: A Compelling (and Underused) Strategy for Creative Trust Solutions By: Steven J. Oshins, Esq., AEP (Distinguished), Matthew T. McClintock, J.D., Robert S. Keebler, CPA, MST, AEP (Distinguished) decanting power (e.g., whether the trustee must give notice to beneficiaries, the necessity of beneficiary consent, and the ability to eliminate certain beneficiaries). But the power to essentially change the terms of an irrevocable trust that has outlived its usefulness is a compelling tool that we believe merits deeper understanding. Trust decanting is a creative strategy for changing the terms of an existing trust that fails to meet the grantor s intent, does not provide for the needs of the beneficiaries, falls short of best strategies in a changed legal or tax environment, or some combination of these factors. We believe it is not adequately understood and, thus, not adequately considered when attorneys counsel clients whose irrevocable trust plans no longer suit their strategies. First, an explanation of the term: Trust decanting refers to the act of distributing assets from an existing trust to a new trust designed by the first trust s trustee. Much like decanting a bottle of wine helps to open up the wine to express its better qualities (and eliminate some unfavorable ones), trust decanting allows a trustee to establish more beneficial trust terms for a beneficiary in a new trust, eliminating some unfavorable qualities in a previous trust. Some or all of the assets in the first trust are then distributed or decanted to the new trust to be administered under the more beneficial terms. A trustee s authority to decant generally comes from one of three sources: the original trust instrument, an applicable state statute, or common law. A survey of each of these modes is beyond the scope of this article, but in almost all circumstances the trustee s power to decant is rooted in the trustee s power to distribute property... for the benefit of a trust beneficiary. This power is deemed to be a special power of appointment subject, of course, to a fiduciary standard. The rationale is that if the trustee has the power to distribute property for the benefit of a beneficiary, the trustee may also distribute that property in further trust. Whether decanting an existing irrevocable trust is appropriate for a client will depend on many factors. Wise counsel must carefully examine the various income, gift, estate, and possible GST tax implications of the exercise of a trustee s decanting power. When relying on decanting authority under state law, it s also essential to understand the scope and limitations of the trustee s 6 Though this list is far from exhaustive, following are some reasons to consider decanting an irrevocable trust: Expanding the trustee s decision making authority over principal and income: After ATRA 2012, two factors have combined to make it much less desirable for a trustee to retain income in a nongrantor trust. In 2014 the highest marginal tax rate for ordinary income is 39.6%. Trusts reach this rate at only $12,150 in income for the taxable year. On top of this high rate, the income in trusts is often subject to the additional 3.8% net investment income (NII) surtax under the Affordable Care Act. When further combined with any applicable state income taxes, it s easy to see that holding income in trust is an expensive proposition. Consider decanting to a trust that authorizes the trustee to allocate capital gains to principal and that gives the trustee broad discretion in making distributions of distributable net income (DNI) among trust beneficiaries. Extending the term of the trust: Many trusts are drafted to make birthday cake distributions to beneficiaries at specified ages. This can open the trust assets up to unnecessary estate taxes, creditors, and divorcing spouses (not to mention the beneficiary s own possible bad decisions). The trustee should consider decanting the trust into a long-term Dynasty Trust that lasts for multiple generations. If the decanted trust is already GST exempt, extending the term of the trust will not expose the trust to GST tax liability. Use caution to ensure that the decanting does not result in an actual or constructive addition to the trust, thus tainting the GST exempt nature of the trust. Changing a support trust into a discretionary trust: Many trusts are drafted to give the trustee the power to make distributions to the beneficiaries for their health, education, maintenance and support a so-called support or ascertainable standards trust. These trusts are often available to certain classes of creditors, including divorcing spouses. A discretionary trust, on the other

7 hand, gives the trustee absolute discretion over distributions and thus generally protects the assets from all classes of creditors (depending on the jurisdiction). Correcting drafting errors or ambiguous terms: Many trusts have drafting errors or ambiguous terms that need to be fixed. Some trusts give a trust protector or independent trustee the power to fix these types of errors, while others do not. Decanting the trust into a new trust can cure these problems. Changing the governing law of the trust: The decision to locate or situs a trust in one jurisdiction or another can have far-reaching implications for income tzax, asset protection, and other very important factors. Moreover, the laws in the various states are far from static. Trust laws that are favorable when the trust is drafted may no longer provide the benefits a grantor intended. If a trust does not grant the trustee the power to change the trust s situs, consider decanting the trust from the original state to a more favorable state. (And if the trust grants the power to change situs, but neither the trust nor state law authorizes decanting, consider resitusing to a state that does authorize decanting and then decant to a trust with more favorable terms.) It s important to note that, in order to take advantage of a state s more advantageous tax structure, the old trust s tax nexus must be severed from the original jurisdiction and new tax nexus must be established with the desired jurisdiction. This often means that in addition to opting into a state s governing law, the new trust should name a resident trustee in the desired state, fiduciary records and at least assets should be kept in the desired state, and other administrative formalities must be followed. Modifying powers of appointment: In an era of significantly higher estate tax exemptions than in years past, it may be desirable for a beneficiary to have a general power of appointment over assets to trigger estate tax inclusion over certain assets that would then receive an additional adjustment or stepup in basis when the beneficiary later dies. If an existing irrevocable trust contains appreciating assets, consider decanting to a trust that gives a beneficiary some form of a general power of appointment to improve the capital gains tax treatment of those assets when they re later sold after the beneficiary s death. (Be careful in drafting the new trust that grants the power to avoid having the decanting treated as a recognition event thus triggering tax on gain during the beneficiary s life.) There are many other reasons that a trustee may seek to modify the terms of an irrevocable trust. Other opportunities include changing the appointment and authority of trustees, merging trusts for improved efficiency or severing trusts for greater privacy, adding provisions for a special needs beneficiary, qualifying a trust to own S corporation stock... and the list goes on and on. We believe that decanting may be among the most underused tools in the estate planning industry. It s a path to much greater flexibility, and we believe that it will grow in popularity as more practitioners become aware of these opportunities. About the Authors: Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America. He was inducted into the NAEPC Estate Planning Hall of Fame in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at , ext. 2, at oshins.com, or at his firm s website, Matthew McClintock, J.D. joined the team at Wealth- Counsel in July 2006 and currently serves as Vice President of Education. His personal mission and the mission of the WealthCounsel education team is to help attorneys be better attorneys by growing in knowledge and understanding, help them serve clients better by implementing more complete planning strategies, and enjoy their practices more through improved processes, happy and consistent client relationships, and strong relationships with collaborative advisors. Robert S. Keebler, CPA, MST, AEP (Distinguished) is a partner with Keebler & Associates, LLP and is a 2007 recipient of the prestigious Accredited Estate Planners (Distinguished) award from the National Association of Estate Planners & Councils. He has been named by CPA Magazine as one of the Top 100 Most Influential Practitioners in the United States and one of the Top 40 Tax Advisors to Know During a Recession. His practice includes family wealth transfer and preservation planning, charitable giving, retirement distribution planning, and estate administration. Mr. Keebler frequently represents clients before the National Office of the Internal Revenue Service (IRS) in the private letter ruling process and in estate, gift and income tax examinations and appeals, and he has received more than 150 favorable private letter rulings including several key rulings of first impression. He is the author of over 100 articles and columns and is the editor, author or co-author of many books and treatises on wealth transfer and taxation. The latest book Robert has co-authored: 2012 Estate Planning Tax Planning Steps to Take Now, is now available in both electronic and paper back format. Mr. Keebler has recently been quoted in The New York Times in an article titled: The 1040 Blues where he provided insight on capital gains tax. 7

8 Continued from Page 1, Transferring Wealth Thus, a GRAT is more suited for a younger settlor than an older settlor. A settlor in his/her 80s or 90s should generally use a different technique. Life insurance can be used to hedge against the possibility of the settlor predeceasing the term of the GRAT. One limitation of a GRAT is that the trust cannot generation-skip. Thus, there is a transfer tax at the beneficiary s death. This is a disadvantage that generally makes an alternative technique, the instalment sale to an income tax defective dynasty trust, the better technique. However, one advantage of a GRAT that generally doesn t apply to other wealth-shifting techniques is that there is nearly zero gift tax risk. The reason this is the case is that the trust can use a numerical percentage of the fair market value of the gifted asset in determining the annuity payments. Thus, if the valuation of the gifted asset is doubled on an audit, rather than increasing the value of the gift on a dollar-for-dollar basis, the gift tax value simply doubles. Therefore, if the GRAT is set up as having a gift tax value of $1, then if the IRS audits the valuation of the asset transferred to the GRAT, then the gift tax value is increased from $1 to $2. Many clients feel comfortable knowing that no gift tax will be owed. This makes it ideal for a riskaverse client. Short-Term vs. Long- Term GRATs One strategy is to gift a high concentration in a single publicly-traded stock to a short-term two-year GRAT in order to take advantage of the higher volatility of a shortterm GRAT as opposed to that of a long-term GRAT. As the annuity payments are made to the settler using stock to make those payments in-kind, the settler will often re-grat that stock into new two-year GRATs, a technique called rolling GRATs. By continuing to do this, the settlor will often have some successful GRATs in strong two-year periods and some unsuccessful GRATs during weak two-year periods. If just some of the GRATs are successful, the strategy works well. Another strategy is to structure a high-cash-flow asset, such as a business interest, so that the gift to the GRAT is made using a minority interest, non-voting interest or limited partnership interest. Because of lack of control and lack of marketability discounts, the gift is valued at an amount that is substantially less than pro rata value. The annuity payments are made using the cash flow from the gifted assets. Depending upon the valuation discount and the cash flow, these longer-term GRATs are often approximately six to 12 years in duration. Conclusion The GRAT is one of the leading wealth-shifting techniques. It is ideal for clients who want to move substantial wealth out of their estate, especially when they have minimal gift tax exemption remaining and when the client doesn t want to take on excessive gift tax risk. About the Author: Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America. He was inducted into the NAEPC Estate Planning Hall of Fame in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at , ext. 2, at oshins.com or at his firm s website, Continued on Page 4, Closing the Deal They had also sent me at my request their personal and business income tax returns in advance. Already I knew several things that were important to the way I handled the engagement for these clients: 1. They were already more or less sold on my qualifications; 2. They were ready to move forward if properly induced because of the effort they made to bring all of their documents and tax returns for my review; and 3. The wife, especially (she had set up the appointment), understood the urgency of the situation. In the context of this client meeting, I was ready to move forward to engage and close the deal (representation). Here is how I handled it, and I hope at least some of these techniques will prove useful and beneficial to you I took time to have the clients tell me about themselves, i.e. tell me where they were raised, where they went to school, how they met. I asked questions about their children and their family life. I call this unmasking the client. I think it is critical to find out about the client s personal life and background so that a bond of friendship and trust can develop. When clients start talking about themselves and telling you things that are really not evident or obvious without some disclosure, the client becomes more vulnerable, and that vulnerability creates a bond with you. This is a critical part of the engagement process and often is overlooked by lawyers and professional advisors. 2. I asked the client what their real concerns and objectives were. I wanted them to manifest their needs and hopefully a level of urgency about addressing the needs. The rest of this article is available online at

9 The Top 10 Seminar Marketing Mistakes Attorneys Make By: Philip J. Kavesh, J.D., LL.M. (Tax), CFP, ChFC, California State Bar Certified Specialist in Estate Planning, Tax and Probate Law Although it was over 32 years ago, it feels like just yesterday that I started up my own solo practice. I remember sitting down at my desk and (naively) believing that the phone would ring with clients requesting to book appointments to get their estate plans done. Now, I look back and think how silly that was and, thankfully, how I found and perfected the seminar marketing model to develop my law practice. Over the years, seminar presentations sure have evolved, from overhead transparencies to slide carousel projectors to laptops and LCD projectors. But despite these technical changes, the fundamental rules of successful seminar marketing have remained the same. I learned these rules only after personally presenting thousands of seminars--and making lots of mistakes. Consequently I thought I d assemble what I ve found to be the Top 10 Seminar Mistakes... so you can avoid having to endure lots of trials and errors like I did! Seminar Marketing Mistake #1: Being Too Cheap. There are several ways to market seminars, but many involve a cheap, shotgun approach (such as newspaper flyers or ads on the internet) where you merely hope that you get the right kind of prospective client to pay attention and attend. Direct mail marketing is still, by far, the best way to target your marketing efforts to your ideal client. You may go cheap on the printing and postage of the piece, but a letter in an envelope with a first-class stamp is still the best way to ensure that your mail piece will get opened and read by the right prospective clients. If you are just starting to present seminars and need to polish up your skills, there are some lower cost ways to rev up your seminar marketing, including private seminars to groups, clubs, and organizations; seminars to local professional referral sources (like CPAs or financial advisors); and seminars to your own clients that you can hold at your office. However, eventually you will want to invest in public seminars because the immediate return on investment can be significant! Seminar Marketing Mistake #2: Only Offering One Seminar Date. I find that a lot of attorneys try to save money on a hotel room or other location by only marketing one seminar date, or they only want to spend the time to do one presentation. This gives you only one shot with your prospective clients; you hope that they ll be available at that particular time on that particular day. You should list at least two seminar dates, with different days and times on the same mail piece, for maximum response to your marketing efforts. Seminar Marketing Mistake #3: Not Mailing Enough. The typical rate of response is between one-quarter and one-third of one percent. This means that if you want 15 units (husband and wife being equal one unit ), then you would need to mail at least 5,000 pieces per seminar that you market. So, if you follow this rule of thumb and market at least two seminar dates on the same mail piece, then you should be sending out a minimum of 10,000 pieces per seminar sweep. Seminar Marketing Mistake #4: Offering Dinner or Nothing at All. I ve done my share of dinner seminars and, in my experience, I have not found that model to be very profitable. There are too many people who simply come in for the free meal. It may be a great model for a financial advisor or life insurance agent, who may only need to generate one or two clients to make a tidy profit. But, if you only get one or two new estate planning clients, you ll probably barely cover the cost of dinner, let alone the expense of the mailing and room. However, not offering any kind of refreshments isn t very good either. Something to eat (such as pastries, cookies, fruit platters, or cheese and cracker platters) and drink (including coffee, water, juice, or tea) are the bare minimum refreshments you should have at any seminar to put people in a good mood and keep them awake! We have found Saturday morning breakfast seminars to be a little more expensive than the light refreshment option, but a lot more successful than dinner seminars. People who work or are busy during the week are available to attend. Plus, Saturday breakfast is a great opportunity for existing clients to come to get a refresher and bring along their friends or family members as well. Seminar Marketing Mistake #5: No Confirmation Process. One major mistake that attorneys make is they don t have a pre-seminar attendee confirmation procedure in place. A confirmation letter (or ), with driving instructions, should be sent to all seminar attendees once they register (unless they register a day or two before the seminar). We also call every attendee the day before the seminar, making sure not to leave a message unless it s the third attempt and we can t reach them. Seminar Marketing Mistake #6: No Response Form. This is probably one of the biggest mistakes I see made by attorneys that present seminars. The rest of this article is available online at 9

10 Using the S-Election to Save Employment Taxes 10 By: Robert S. Keebler, CPA, MST, AEP (Distinguished) The S-election is generally thought of as a tool to achieve pass-through taxation of C corporation income to avoid the double tax. However, other domestic entities are eligible for Subchapter S treatment too. Electing Subchapter S treatment may also be a beneficial strategy for many pass-through entities because a portion of income will not incur employment taxes. Business organizations, including those which are not corporations, are eligible to make the election; these include: sole proprietorships, partnerships, limited partnerships (LPs), limited liability companies (LLCs), limited liability partnerships (LLPs), and limited liability limited partnerships (LLLPs). It is very important to note, however, that such entities do not have to incorporate under state law in order to be eligible to make a tax driven election for Subchapter S treatment. In fact, reorganizing for many businesses may have negative consequences, such as increased state taxes and changes in liability protection under state statutes. While the details are quite complicated, the general prerequisites to make the S-election are simple and easily met for many businesses: (1) Be a domestic entity; (2) Have only allowable shareholders, which include individuals who are not nonresident aliens and certain trusts and estates; (3) Have no more than 100 shareholders; (4) Have only one class of stock; and (5) Not be ineligible; e.g. certain financial institutions and insurance companies. 1 In order to receive Subchapter S treatment, Form 2553 must be filed with the Service. The Form outlines a number of requirements and limitations, none of which are prohibitory for many businesses. Nevertheless, it should be noted that the election must be filed within two months and 15 days of the start of the taxable year for which the entity wishes subchapter S treatment to begin and all the shareholders must consent to the election. However, before making the S-election, the benefit of doing so must be carefully analyzed. For pass-through entities, the S-election may be beneficial because a portion of income will not be subject to employment taxes. These taxes include Social Security Tax, the 2.9% Medicare Hospital Insurance Tax, and the 0.9% Additional Medicare Tax. Social Security Tax Social Security Tax is assessed against all wages, salary, tips and Schedule C income at a rate of 12.4%. It is only assessed on income up to the contribution base which is summarized for the coming years on the following table. Year Contribution Base 2013 $ 113,700 In use 2014 $ 117,000 Recently Released 2015 $ 118, $ 123, $ 130, $ 137, $ 144, $ 152, $ 159, $ 165,600 Employees and employers each pay half of the tax. Selfemployed taxpayers pay 12.4% of 92.35% of their wages, salary, tips and Schedule C income. Example 1: Mary has a small accounting office, is selfemployed and expects to make $120,000 in The Medicare Hospital Insurance Tax The Medicare Hospital Insurance Tax is assessed against all wages, salary, tips and Schedule C income at a rate of 2.9%. Employees and employers each pay half of the 2.9% tax while the self-employed pay 2.9% of 92.35% of their income. Example 2: Mary is employed as a nurse anesthetist and her salary is $120,000 in The rest of this article is available online at Projected by the Social Security Administration Income $ 120, contribution base $ 117,000 Lessor of income or contribution base $ 117, % of taxed income $ 108,050 Social Security Tax Owed $ 13,398 Income $ 120,000 Employer s share $ (1,740) Employee s share $ (1,740) Total 2.9% Medicare Tax Owed $ (3,480)

11 Continued from Page 2, Buy-Sell Agreements Typical valuation methods to arrive at the sale price include valuation by a professional, multiples of earnings or capitalization (or cap ) rate, book value, and fair market value. If funding is not available, valuations may be overstated. It is important to customize agreements to the business and marketplace. 3. Insurance Funded BSA: Many BSAs are insurance funded because funding is necessary to provide purchase certainty (not optional). Of course, while the price and funding are set initially, it is very possible that as the value of the business grows, the price may escalate and part of the price must be funded differently. Also consider disability insurance. 4. Most Businesses are Sold Before Death, but how are They Funded? Life insurance funded BSAs don t handle all cases. Most businesses are sold before death. Typical non-insurance funding sources include borrowing, installment sales, deferred compensation, and the owners personal resources. There are ways to structure business assets to fund buyouts over time. Equity can be built in real estate or business equipment and refinanced for the buyout. Relationships can also be developed with the business s bank that allows borrowing. The seller should avoid taking a note that is not properly secured. If this ever occurs, the interest rate should reflect the return equity investors receive because of the default risk. If the funds aren t available from the owners or the business, the only realistic option is to sell the entire business to a third party. 5. Is Cross Purchase or Redemption More Appropriate? There are different ways to structure insurance BSAs: a cross purchase, a corporate purchase or redemption, or partnership- or LLC-owned insurance. There is also different tax treatment and different numbers of policies and costs involved. 6. What Business Matters are in a BSA? BSAs can include all issues related to the parties relationship. BSAs also need to be documented in other places, such as on stock certificates, in operating agreements, or in other corporate documents. 7. What Kind of Fact Situations Do Owners Want Protection From? A. Two out of three owners ganging up on the third. B. Getting fired and having distributions cut off, but still being held responsible for taxes. C. One party with more resources and a structure that allows outbidding the others for control. D. Is there risk of a divorce or a bankruptcy where an interest could become owned by an unwanted party? E. A disagreement among the owners on whether to sell when an offer comes and post-sale employment contracts. F. One employee leaves to work for a competitor. G. Disputes over share-paid equity providers and key executives. H. Minority discount application. I. Protracted litigation. 8. What is the Minimum Asset Protection Planning Required? Asset protection may need to be aligned with the BSA, especially in relation to personal liability after the business interest is sold. Where parties have a high ratio of their assets tied up in a business and personally guaranteed business loans, the owners are at risk. Formation of a corporation or an LLC is a good first step. Another simple step to protect assets is to create creditor protected retirement plans. If funds are slowly (and consisting of reasonable amounts of income without fraudulent conveyances) put into trust for a spouse or children s college funds, the funds generally become protected assets. There are more aggressive steps like selfsettled out of state or offshore trusts, but there are many things that can be done short of these steps. The riskier the business (for example, real estate developers, doctors, commodity traders, etc.), the more some of these steps should be considered. A good agreement today is more valuable than a perfect unexecuted one tomorrow. BSA terms can significantly increase the value of a business interest and represents a great return on investment. About the Author: Edward W. Jacobs earned BA and JD degrees from Northwestern University and an MBA from the University of Chicago. For the last five years he has been in private practice and a member of WealthCounsel. Prior to that he practiced in the law departments of Motorola and Sears Roebuck. 11

12 QUARTERLY CALL FOR ARTICLES! APRIL 2014 The WealthCounsel Quarterly is published in January, April, July, and October. It is a communication tool through which WealthCounsel members can share legal expertise with their colleagues while enhancing their professional exposure within the estate planning community. Members are invited to contribute a legal/technical article or a column on practice-building strategies for the April 2014 issue. Article length should be an average of words. Publishing deadlines for the April2014 issue of The WealthCounsel Quarterly: : Please submit topic idea to reserve space in the layout : Article manuscripts due Reserve space by sending an to WealthCounsel, LLC P.O. Box Madison, WI PRESORTED FIRST CLASS US POSTAGE PAID MADISON, WI PERMIT #2783 THOUGHT LEADER SERIES PRACTICAL PLANNING FOR ESTATES UNDER $10 MILLION Planning for the $10 million estate is more complicated than planning the $100 million estate. Planners must balance a variety of competing client objectives: Maximizing income tax basis at death Minimizing state estate taxes Asset protection and divorce protection And the always present desire for simplicity and cost-consciousness FREE LIVE WEBCAST Thursday, March 27, 1:00 p.m. ET Existing planning must be re-examined in light of the huge changes caused by ATRA. Structuring around portability involves a host of factors the client must consider and creative structures can maximize flexibility. Planning around the 3.8% tax on net investment income and in increased taxes on trusts will become central to trust administration issues. Maximizing flexibility to take advantage of increasing basis without any estate tax cost becomes central to planning. Various current developments impacting planning for the under $10 million family estate will also be addressed during this hour-long webcast. REGISTER NOW FEATURED SPEAKER Stephen R. Akers, J.D. Dallas, TX Managing Director, Bessemer Trust 30 years of experience in estate planning and probate law matters Fellow and Regent of ACTEC Copyright WealthCounsel, LLC 2014 All Rights Reserved.

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