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Converting to Nongrantor Trusts to Minimize Income Tax: Maximizing Increased Exemption BenefitsSwitching Off Grantor Trust Features in Existing Trusts, Structuring Multiple Trusts to Preserve Deductions
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
WEDNESDAY, AUGUST 8, 2018
Presenting a live 90-minute webinar with interactive Q&A
Robert S. Keebler, Partner, Keebler & Associates, Green Bay, Wis.
Steven J. Oshins, Member, Oshins & Associates, Las Vegas
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Copyright © 2018 by Steven J. Oshins, Esq., AEP (Distinguished) and Robert S. Keebler, CPA,
MST, AEP (Distinguished). All rights reserved.
Converting to Nongrantor Trusts
to Minimize Income Tax:
Maximizing Increased Exemption
Benefits
Steven J. Oshins, Esq., AEP (Distinguished)
and
Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished)
6
Estate Tax vs. Income Tax
2018 Federal estate tax exemption = $11.18
million
▪ Tax rate = 40%
▪ 99.9% of Americans pay no federal estate tax
Income tax
▪ Highest Federal income tax rate = 37%
➢ Plus 3.8% Net Investment Income Tax
▪ Highest State income tax rate = 13.3% (California)
7
Immediate Gratification
Estate tax planning
▪ No thank you’s from our clients
▪ Thank you’s from our clients’ children
Income tax planning
▪ Thank you’s from our clients
Immediate gratification
8
Saving state income tax is now much more important!
$10,000 limit on deductions for
state and local tax paid
10
Non-Grantor Trust
I hate paying state income
taxes on accumulated trust
income!
11
Non-Grantor Trust
Is there undistributed income?
Solution: Move the trust to a state
with no state income tax
▪ On a state-by-state basis
▪ Take a look at the trust and the state tax
laws
➢ Source income
➢ Domicile of decedent
➢ Domicile of settlor
➢ Location of trustees
➢ Location of beneficiaries
➢ Location of administration
12
Existing Grantor Trusts
Most pre-2018 irrevocable trusts have been set up
as grantor trusts
▪ Income tax planning (both state and federal) is now more important
than estate tax planning
Consider changing grantor trusts to non-grantor
trusts
▪ Avoid state income tax
▪ Sprinkle income to lower state/federal income tax brackets
13
Existing Installment Sales to IDGTs
Consider unwinding existing installment sales to
grantor trusts; or
Split off part of the equity of the trust into a new
non-grantor trust
Example
▪ $1MM gift/$9MM installment sale to IDGT five years ago
▪ Now: $5MM equity/$9MM still owed on installment note
▪ What are some options? [Next slide]
14
Existing Installment Sales to IDGTs
Example
▪ $1MM gift/$9MM installment sale to IDGT five years ago
▪ Now: $5MM equity/$9MM still owed on installment note
▪ What are some options?
Consider unwinding existing installment sale
▪ Pay back the $9MM in cash and in kind
▪ Modify or decant $5MM trust into non-grantor trust
Consider splitting off part of the equity of the trust
into a new non-grantor trust
▪ Leave $1MM equity in trust subject to existing $9MM note
▪ Split off or decant $4MM of assets into separate non-grantor trust
15
Nevada Incomplete Gift Non-Grantor Trust
There must be a way to
save state income taxes on
my personal assets!
16
NING Trust Description
NING Trust
▪ Self-Settled Trust
➢ Must be set up in a DAPT jurisdiction
➢ Jurisdiction must not have a state fiduciary income tax
➢ Jurisdiction must allow retained inter vivos power of appointment
under its DAPT statute
▪ Non-grantor trust for income tax purposes
➢ Distribution Committee made up of adverse parties
▪ Incomplete gift for gift tax purposes
➢ Retained testamentary broad non-general power of appointment
➢ Retained non-fiduciary inter vivos non-general power of
appointment over corpus for HEMS
17
The Opportunity #1
Resident of state with state income tax
contributes low basis asset to NING Trust
▪ Trustee sells low basis asset
▪ Avoids state income tax on the sale
18
The Opportunity #2
Resident of state with state income tax
contributes assets throwing off non-source
income to NING Trust
▪ Trustee continues to invest portfolio
▪ Avoids state income tax on gains
19
Other Use – Sprinkling Income
Many of our clients make annual exclusion gifts (and
sometimes exemption gifts) each year
Rather than making a gift out of their pocket,
consider:
▪ Distribution from NING Trust of $15,000 per year (or
$30,000 per year if Grantor is married) to each intended
beneficiary
➢ Or do much more!...Remember, we have $11.18 million
($22.36 million married) of gift tax exemption
➢ Most of our clients’ children, grandchildren and other
intended beneficiaries are in lower income tax
brackets
20
Exploiting the 2017 Tax Act –Completed Gift Non-Grantor DAPTs
Can we do the foregoing but also give Client access
to the income?
Completed Gift Non-Grantor DAPT
▪ Like a NING Trust, but completed gift
▪ Just need one adverse party to agree to distribution back
to settlor (or to Client’s spouse)
Is there estate inclusion at the settlor’s death?
▪ Who cares?
▪ $11.18MM exemption / $22.36MM exemption if married
▪ For most clients, WE WANT ESTATE INCLUSION!!!
➢ Basis step-up
21
Keep IRC 643(f) in Mind
§ 643(f) TREATMENT OF MULTIPLE TRUSTS For purposes of
this subchapter, under regulations prescribed by the
Secretary, 2 or more trusts shall be treated as 1 trust
if—
(1) such trusts have substantially the same grantor
or grantors and substantially the same primary
beneficiary or beneficiaries, and
(2) a principal purpose of such trusts is the
avoidance of the tax imposed by this chapter.
For purposes of the preceding sentence, a husband
and wife shall be treated as 1 person.
22
Exploiting the 2017 Tax Act
Client sets up:
▪ NING Trust
▪ Separate Non-Grantor Gift Trusts for Child #1, Child #2
and Child #3
▪ Separate Non-Grantor Gift Trusts for GC #1, GC #2, GC #3
and GC #4, GC #5 and GC #6
Yes, that’s 10 trusts.
[See Next Slide…]
23
Exploiting the 2017 Tax Act (cont.)
Depending upon the actual assets and decisions,
each trust may provide…
▪ An extra $10,000 deduction ($3,700 of savings) for state income taxes
paid
➢ If we include some source income and/or if we violate the state long-arm income tax
statute
▪ An extra $1,613.50 for bracket ride-up (first $12,500 of income)
▪ Avoidance of state income taxes
➢ If we draft around the state long-arm income tax statute
▪ Extra IRC §199A pass-thru business income tax deduction
➢ Keep under $157,500
▪ Ability to sprinkle income to each child/grandchild to use their lower
federal/state income tax brackets
▪ For income subject to state income tax, possible lower state income tax
brackets apply by separating the income
24
Exploiting the 2017 Tax Act –Congressional Gift Tax Policy
Decades-long Congressional policy: Do not repeal
the gift tax!!!
▪ The gift tax is a backdrop to the estate tax and to the income tax
▪ 2017 Tax Act: $11.18 million single/$22.36 million married gift tax exemption
▪ Repealed the gift tax for all but the ultra-wealthy!
▪ Oops!
How to exploit this
▪ Distribute taxable income to lower bracket beneficiaries who then gift it back to
their parents; and/or
▪ Window of opportunity to leverage Dynasty Trusts
25
Preexisting Trusts
How can we exploit the 2017 Tax Act with
existing trusts?
▪ Grantor Trust
➢ Decant into a separate Non-Grantor Trust for each
child and each grandchild [Sound familiar???]
▪ Non-Grantor Trust
➢ Decant into a separate Non-Grantor Trust for each
child and each grandchild [Sound familiar???]
26
Decanting a Trust
Just as you can decant wine
by pouring it from its
original bottle into a new
bottle, leaving the
unwanted sediment in the
original bottle, you can pour
the assets from one trust
into a new trust, leaving the
unwanted terms in the
original trust.
27
Private Decanting
There are 26 states with decanting statutes
Seven of those states do not require notice to beneficiaries
1. South Dakota
2. Nevada
3. Tennessee
4. New Hampshire (except
charitable trusts)
5. Delaware
6. Wyoming
7. Arizona
Complete v. Incomplete Gift Trust Planning
Complete Gift Trusts
Traditional estate (tax)
planning
Property generally not
included in the grantor’s
estate
Not dependent on special
provision sin the state trust
code
Incomplete Gift Trust
Planning
Income tax and asset
protection planning
Property generally included in
the grantor’s estate (and
receives a basis adjustment
at death)
Requires the trust to be
formed under the law of a
limited set of states.
Both create an additional taxpayer for Section 199A.28
30
§199A Overview
I. Overview
II. Traditional Businesses
III. Rental Real Estate
IV. Specified Service Businesses
V. Basic Planning
VI. Advanced Planning
VII. Planning with Completed Gift Trusts
VIII.Planning with Incomplete Gift Trusts
31
Basics
Deduction equal to 20% of domestic “qualified
business income” (QBI) from a pass-through entity
Basically, provides an effective top marginal rate of
29.6% [37% x (1 – 20%)]
Applies to trusts & estates
§ 199A, §11011
32
Eligible Taxpayers
Owners of:
▪ Sole proprietorships (Schedule C)
▪ Sole owners (or TIC owners) of rental real estate
(Schedule E)
▪ S-Corporation owners (Form 1120S)
▪ Partnership owners (Form 1065)
33
Four Business Classifications
Non-
Service
Service
Taxable income less than
$315,000 (MFJ)20% deduction 20% deduction
Taxable income greater than
$315,000 but less than
$415,000
Limitation
phased-in
Deduction
phased-out
Taxable income greater than
$415,000
W-2/Property
limit appliesNo deduction
And the Limitations
THE HEART OF PLANNING IS MANAGING TAXABLE INCOME
AND THE WAGE / PROPERTY LIMITATION.
34
IRC 199A Pass-Thru: Eligible Taxpayers
Single Persons - $157,500
Married Couples - $315,000
Estates
Non-Grantor Trusts
▪ NING Trusts
▪ Completed Gift Non-Grantor Trusts
▪ Completed Gift Non-Grantor DAPT
Children
▪ No NIIT
Beneficiary Defective Trust
▪ Beneficiary Defective Trust for your newborn baby! No NIIT!
35
Is it a Service Business per §§1202(e)(3)(A), 475(c)(2), or 475(e)(2)?
Is taxable income over
the threshold?315/157.5
Is taxable income over the
threshold?315/157.5
Deduction = QBI x 20%
Deduction = QBI x 20%
Over fullPhase – in?
Is taxable income over the
full phase-in?Deduction Reduced
Deduction equalslesser of:
· QBI x 20% or
· The greater of:
- W-2 wages x 50%- W-2 wages x 25% + 2.5% of
unadjusted basis
No No
NoNo
No
Yes
Yes Yes
No Deduction
Deduction Reduced
Yes
Yes
36
Calculation of the Deduction
For those with taxable income in excess of $415,000
(MFJ) the deduction is limited to the greater of:
▪ 50% of W-2 Wages
▪ 25% of W-2 Wages plus 2.5% of Qualified Property
Inapplicable to Specified Service Business
Limitations for non-Specified Service Businesses
phased-in from $315,000 - $415,000 (MFJ) of taxable
income
Deduction for Specified Service Businesses phased-out
from $315,000 - $415,000 (MFJ) of taxable income§ 199A, §11011
Simplified
37
Limitation Formula Deduction
W-2 Wages▪ Equal to wage expense [§199A(f)(1)]
▪ Does not include guaranteed payments or payments to
independent contractors
Qualified Property▪ Tangible property being depreciated (e.g. does not include land)
▪ Depreciation period is the latter of the regular depreciation
period or 10-years
Unadjusted Basis▪ Equal to basis immediately after acquisition
▪ Not adjusted for depreciation
§ 199A, §11011
Simplified
38
Calculation of the Deduction
Patrick, a lawyer, owns the building he
practices in:▪ If the building was acquired 40 years ago, it cannot
be considered for the 2.5% test:➢ Recent capitalized improvements or investments are
included
▪ If the building was acquired 5 years ago, it can be
considered for the 2.5% test:➢ All of the capitalized improvements are included
▪ The basis of the land is not included
▪ This limitation does not apply if John’s income was
below $315,000 (MFJ)
§ 199A, §11011
Vanishing Unadjusted Basis
39
Partnerships & S-CorpsAllocable Share Simplified
Partner/shareholder must use their allocable share
for all calculations
Example:
▪ Mike and Karen contribute rental real estate to a FLP and
gift units to trusts for their grandchildren
▪ QBI, W-2 Wages, and Qualified Property is allocated to the
couple and the trusts according to ownership
40
Trust Planning ExampleFamily Involved in Rental Real Estate
Richard and Delores, a married couple, purchased 500 apartment units between 1975and 1990. These are managed by others and they pay no wages. The Qualified BusinessIncome from this activity is about $1,900,000 and their total taxable income is about$2,200,000. The original basis of the improvements is fully depreciated so they have aminimal amount of qualified property; about $750,000. Based on these facts, below is asummary of their QBI deduction in 2018:
QBI Deduction = Lesser of:(a) 20% of net business income: $1,900,000 x 20% = $380,000
(b) 20% of taxable income: $2,200,000 x 20% = $440,000
(c) greater of: (i) 50% of W-2 wages ($0 x 50% = $0) or (ii) 25% of W-2 wages plus2.5% of unadjusted cost basis of assets: [$0 x 25%] + [$750,000 x 2.5%] = $18,750
41
Richard and Delores, gift interests in the entities which own the properties evenly to 15trusts set up for each of their four children and 11 grandchildren. The Qualified BusinessIncome and taxable income for each of these trusts is approximately $126,667. This is lessthan the threshold amount of $157,500 and therefore the limitation does not apply.Based on these facts, below is a summary of their QBI deduction for each trust:
QBI Deduction = Lesser of:
(a) 20% of net business income: $126,667 x 20% = $25,333
(b) 20% of taxable income: $ 126,667 x 20% = $25,333
Trust Planning ExampleFamily Involved in Rental Real Estate
Non-Grantor Trust Required
42
Specified Service Trade or Business
Specified Service Business – defined in §
1202(e)(3)(A):
“any trade or business involving the performance of services
in the fields of health, law, accounting, actuarial science,
performing arts, consulting, athletics, financial services,
brokerage services, or any trade or business where the
principal asset of such trade or business is the reputation or
skill of 1 or more of its employees”
§ 1202(e)(3)(A)
NEW STATUTORY LANGUAGE EXCLUDES ARCHITECTS AND
ENGINEERS FROM THE SPECIFIED SERVICE BUSINESS
DEFINITION
43
Grantor Trusts into Non-Grantor Trusts Summary
Many/most existing irrevocable trusts were
intentionally drafted as grantor trusts
▪ Estate tax savings was more important than
income tax savings
▪ Installment sales
▪ Tax burn
Time to take a good look at existing trusts
▪ Decant into non-grantor trusts?
▪ Unwind existing installment sales?
44
Decanting Grantor Trusts into Non-Grantor Trusts
SummaryHuge opportunity for many of our clients
▪ Tens of thousands of existing irrevocable trusts that should be
changed to non-grantor trusts
▪ State income tax savings
▪ Federal income tax savings
▪ Creating multiple non-grantor trusts
➢ $10,000 per trust state and local income tax deduction
➢ IRC 199A pass-thru business opportunities by creating additional
business owners
➢ §1202
➢ Bracket “Run”
45
Non-Grantor Trusts for Federal and State Income Tax Shifting
Summary
• Income taxed to either the trust or the
beneficiary
– If income is accumulated, then the income is
taxed to the trust
– If income is distributed, then the trust receives
an income tax deduction and beneficiaries
report taxable income
• Trusts may be “incomplete” or “completed”
gift trusts
• IRC § 199A new opportunities
• IRC § 1202 opportunities
46
Steven J. Oshins, Esq., AEP (Distinguished)
Law Offices of Oshins & Associates, LLC
1645 Village Center Cir., Ste. 170
Las Vegas, NV 89134
Phone: 702-341-6000
Fax: 702-341-6001
Website: www.oshins.com
Email: soshins@oshins.com
Robert S. Keebler, CPA/PFS, MST, AEP (Distinguished)
Keebler & Associates, LLP
420 S. Washington St.
Green Bay, WI 54301
Phone: (920) 593-1701
Website: http://www.keeblerandassociates.com
Email: Robert.Keebler@KeeblerandAssociates.com
Thank You ForAttending Today’s Seminar