FINDING LEVERAGE IN ESTATE AND CHARITABLE PLANNING. Howard County Estate Planning Council May 14, 2015

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1 FINDING LEVERAGE IN ESTATE AND CHARITABLE PLANNING Howard County Estate Planning Council May 14, 2015 Presented By Kim Olson Managing Director BKA Private Wealth Management Group

2 ESTATE PLANNING SOLUTIONS FOR A HNW FAMILY WITH A CLOSELY HELD BUSINESS CLIENT PROFILE Clients are in their Mid-60 s with 3 Children and 8 Grandchildren. They are DC Residents and have been married 42 years. Total Net Worth is $41mill with $25mill of that being a privately held business. The business is very sellable. It is an S Corp wholly owned by an LLC with Mr/Mrs Client owning 100% of LLC Shares. Children don t work in the Business. Currently Gifts $28k/yr to each Child and $14k/yr to each Grandchild. Goals/Concerns 1. Wants to sell the Business in 5-10 years. 2. Live Comfortably in Retirement. 3. Never run out of $$$. 4. Leave as much as they can to Children/Grandchildren. 5. Concerned about Estate Taxes. If both Clients passed away tomorrow their total Federal/DC Estate Tax bill would be $11.7mill. Sooo what are effective solutions for reducing the size of the Clients Taxable Estate and minimizing the affect of future Estate Taxes?

3 SOLUTIONS Remove $8,000,000 of the Company Stock by utilizing a Discounted Gift of LLC Shares to an Irrevocable Trust f/b/o the Children/Grandchildren. The Discount is 30% so a $8,000,000 of Company Stock equates to a $5,600,000 gift. That will be accounted for as $2,800,000 each from Mr/Mrs Clients lifetime Gift Exemptions. This removes all future growth of this asset from the taxable estate. After removing the $8mill of Stock from the Estate if they both passed away tomorrow the total Federal/State Estate Tax Bill would $11,776,080. In 10 years this would be $19,636,718 with a 4% growth rate on the Estate s Assets. To at least cover today s Estate Taxes we implemented a $12,000,000 Guaranteed 2 nd to Die Life Insurance Policy to be owned by the Children s Trust. The Premium for this Policy is $232,358 yr for 20 years then it s paid up. But the Children s Trust doesn t have Cash. So what s the Solution??? The Solution is a GRAT + an Intra-Family Loan. 1. Mom & Dad Set up a GRAT using company stock with a 30% discount. $3,000,000 of Stock becomes $2,100,000 in the GRAT after the 30% Discount. 2. Concurrently Mom & Dad set up an Intra Family Loan to the Children s trust for $232,358 yr so the Trust can pay the Premiums for the 2 nd to die Life Insurance Policy. Mid Term AFR Rate is 1.53% and the Long Term Rate is 2.30%.

4 HERE S HOW THE GRAT AND INTRA-FAMILY LOAN LOOK

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6 SUMMARY At the end of the day what have we accomplished for this family We removed $8,000,000 of Company Stock and it s potential future growth from the taxable estate with the discounted gifting of Shares to the Children s Trust. We further potentially removed another $1mill - $3mill from the taxable estate with the Stock in the GRAT when the Company is sold in 5-10 years. We implemented a $12,000,000 Survivor Life Insurance Policy in the Children s trust. This is income and Estate Tax free and provides liquidity at the 2 nd death of Mr/Mrs Client. Initiated the Planning Process for this Family s Estate that will be in place for the next 2 generations. This provided the impetus to develop a relationship with the Next Generation.

7 A 3 Pronged Approach to Creating a Significant Charitable Income Stream as well as a Lasting Legacy Endowment CLIENT PROFILE Client is a Partner in the Litigation Department at a large law firm. High Income client whose income has been on the rise for the last 5 years. Total net worth today is in the $7mill range. Mr. 52 / Mrs Children both are in College 4 th Generation at the school from that family. Their father, grandfather and great grandfather attended. In addition to paying tuition for both Children they also contribute $25k/yr to the College. Client recently settled a large case and had an extra $4mill of income in Client wants to Minimize some of the tax burden from the $4mill extra income, create an annual income stream for the College and create a large sum for a significant endowment fund at their death.

8 SOLUTIONS $1,000,000 of the $4,000,000 he received in extra income is put into a Charitable Lead Annuity Trust CLAT with a term of 20 years. This generates an income of $59,990/yr for the charity for the 20 year term of the CLAT. This gives him a 100% Tax Deduction for the entire $1mill he put into the CLAT. This will also replace and increase the $25k/yr he s been contributing and enable him to redirect that gift for a Lasting Legacy Endowment for the College. Plus Philosophically he didn t want to give $1mill at once since he didn t want people knowing he s given $1,000,000 at once to the college and all the publicity that comes with that no matter how anonymous he wanted to be. Additionally at the end of the term of the CLAT the remainder will go to an irrevocable trust for his children. This was not the goal it s just part of a CLAT and it was of interest to the client and a selling point for making this type of donation. For the Endowment aspect of their wishes They set up a $10,000,000 Second to Die Life Insurance Policy with the College as Owner. They will make tax deductible gifts every year to the College for the annual Premiums of $84,204 /yr. The premiums are set up on a 20 year Guaranteed basis at which point the policy is paid up. HERE S HOW THE CLAT LOOKS AND WORKS

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10 SUMMARY At the end of the day what have we accomplished for this client and his Alma Mater? The College now has a Guaranteed Income Stream of $59,900 /yr for the next 20 years. $59k of gifting represents an increase in the clients annual gifting to the College of almost 2.5x their regular annual gifting. The client received a $1,000,000 Tax Deduction by setting up the CLAT. This will offset some of his higher than normal income for the year. When the CLAT Term expires the remainder goes to his children in a Protected Trust. At the Death of Mr/Mrs Client the College will receive $10,000,000 from the Life Insurance Policy to create an Endowment.

11 UTILIZING CASH BALANCE PLANS TO SIGNIFICANTLY INCREASE QUALIFIED PLAN CONTRIBUTIONS Issues: People are living longer and Health Care Costs will continue to increase as people get older. Clients want to maximize the amount they have for their Retirement Years. No one wants to run out of $$$. Income Tax rates for High Income Earners approach 50% for residents of MD, DC, NY, NJ and other states as well. SEP s have a max contribution limit of $52k / yr. 401k s only allow for contributions of $17,500 + a $5,500 Catch up. Adding a Profit Sharing Plan to a 401k still has the same maximum of $52k just like the SEP. Annual Qulaified Plan Contributions of $52k/yr just aren t enough to create a large retirement plan balance. High Income Clients are looking to stash more cash on a Tax Deductible basis for Retirement. For the right client a Solution is a Cash Balance Plan. Cash Balance Plans may or may not have Life Insurance. If they are a part of the plan as an asset class then the client has tax deductible life insurance. Plans with Life Insurance can make greater contributions to the plan. The Death Benefit of the Life Insurance can even be sent to an Irrevocable Trust so that the net amount at risk the Death less the Cash Values in the policy are income and Estate Tax Free.

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13 THANK YOU FOR ATTENDING. KIM CAN BE REACHED AT: Kim Olson Managing Director Estate Planning & Insurance P: F: kim.olson@bkapwm.com BKA Private Wealth Management Group Protecting and Preserving your Wealth. Registered Representative of The Leaders Group, Inc. Member FINRA /SIPC.