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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

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