11 12 02 Want To Save A Fortune On Taxes

2012
Want To Save A
FORTUNE
On Income Taxes?

Givner & Kaye,
A Professional Corporation 1
Owen@GivnerKaye.com

Want To Save A Fortune On Taxes?

The Best Planning Is Done At The
Beginning Of The Year:
1. More time to review the alternatives.

2. Time to calmly and carefully put the structures in place.

3. Advisors are not hassled with year-end crises.

4. Able to adjust to the actual results throughout the year.

Givner & Kaye,
Owen@GivnerKaye.com 2


What We Will Cover:
1. The Big, Easy Deductions. P. 5
1.1. Defined Benefit Pension Plans. P. 6
1.2. Captive Insurance Companies. P. 15
2. Charitable Alternatives. P. 25
2.1. Grantor Charitable Lead Annuity Trusts. P. 26
2.2. Charitable Remainder Annuity Trusts. P. 31
2.3. Charitable Limited Partnerships. P. 36
3. Investments. P. 39
3.1. Oil and Gas. P. 40
3.2. Real Estate (Component Depreciation). P. 43
4. Questions and answers. P. 47

Givner & Kaye,


Our Process
Four Phases – Four Engagements – Four Fixed Fees
(so the client does not feel “on the clock”).

Review – Design – Implement - Maintain

Givner & Kaye,
A Professional Corporation


The Big, Easy
Deductions

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Defined
Benefit
Pension Plans

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Tax Qualified Employee Retirement Plan
Joe
Trustee
Plan
Owner committee

The corporation The Plan The Trust
(Plan Sponsor)
$ $

Employees/
participants

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There are two types of plans: one that defines how much goes in – one
that defines how much goes out

Corporation
(plan sponsor)
Money goes in – define (limit) the contribution

Retirement
Trust Money goes out – define
(limit) the benefit

Employee/
Participant

Givner & Kaye,
Bruce@GivnerKaye.com 8


If you limit how much goes in (IRC
Section 415(c) - $49,000), then there is
no limit on how much goes out. So if you
are going to buy Qualcomm at $1 and
Defined have it go to $100, do so in a defined
Contribution contribution plan; it will not impact your
Plan future contributions.

Employee/
Participant

Givner & Kaye,


If you limit how much goes out (IRC
Section (b), (d) - $195,000), there is no
specific limit on how much goes in. So if
Defined
you want a contribution of more than
Benefit
$49,000 per person, you need a defined
Plan
benefit pension plan.

Employee/
Participant

Givner & Kaye,


In General:
Sample maximum contributions at various ages:
35 – 5 years past service - $65,000 + DC plan @ 6% of comp + $16,500 in 401(k) X 2 spouses in
year one is $190,000. Over 5 years it’s $1,000,000.

45 - $130,000 + $30,000 X 2 spouses = $320,000, or $1,600,000 over 5 years.

55 - $237,000 + $30,000 X 2 spouse = $534,000 or $2,670,000 over 5 years.

Plus life insurance.

Using the “cushion method” the amount in the first year might be it could be 3 to 4 times that amount
(though zero in the second year).

Givner & Kaye,


Monthly Benefit Contribution
at RA 62

Helen 11/16/63 $60,000 $4,878.00 $ 29,276.00

Michael 3/26/74 $40,000 $2,402.00 $ 11,045.00

George 10/6/77 $45,000 $3,450.00 $ 12,147.00

Lucy 9/5/70 $30,000 $1,773.00 $ 9,871.00

Paul 8/29/76 $25,000 $1,173.00 $ 4,131.00

Steven 11/18/79 $40,000 $1,615.00 $ 5,009.00

Gary 8/2/75 $90,000 $3,403.00 $ 13,658.00

Jane 10/25/57 $250,000 $7,634.00 $226,464.00

Sam 9/2/51 $250,000 $7,667.00 $306,102.00

Totals $617,703.00 [86.2% for bosses]

Givner & Kaye,


Is There A Good Set Of Facts?
1. You cannot determine if the facts are good simply by
talking to your CPA.
2. You cannot determine if the facts are good simply by
talking to a third party administrator or actuary.
3. The proper construction of the facts is a process that we
must discuss with you and help you create. It must be
conducted under the attorney‐client privilege.
4. The presentation of the facts is absolutely critical to the
outcome and will make the difference between an attractive
plan and one that will not work.
Givner & Kaye,


Givner & Kaye,


Captive
Insurance
Companies
(“wealth captives”)

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Captive Insurance Companies
for the Middle Market

Originally used only by the very largest companies,
captives are no longer the exclusive tool of those in the
Fortune 500. There are now well over 5,000 captives
writing over $50 billion in annual premiums. Many of
these captives insure middle market companies and
successful professionals.

Givner & Kaye,


IRC Section 831(b)
A small property and casualty insurer with
annual premium income not exceeding $1.2
million pays no tax on its underwriting profits
but is taxed solely on its investment income. In
this case, the business that pays premium to a
captive deducts the premium expense while the
captive pays no tax on the underwriting profits.

Givner & Kaye,


Estate Planning

Estate planning is an important business
continuity consideration for closely held companies
and for their owners. A CIC can be a key component
in estate planning with the captive being owned by
or for the benefit of the next generation (a dynasty
trust) and so enabling a lifetime transfer of pre-tax
underwriting profits.

Givner & Kaye,


Common Captive Coverage
Property & Casualty

* Director & Officer * Subsidence
* General Liability * Exclusions
* Employment Practices * Deductible Reimbursement
* Litigation Defense * Difference in Conditions
* Construction Defect * Difference in Limits
* Warranty * Workers’ Compensation
* Mold

Givner & Kaye,


Captive Insurance Company: Deducting $1,200,000 Per Year
Diagram 1: Pre-Setup

Wilmington Trust
Company
David
(or some other Delaware
Trust Company)

Grantor
David Dynasty Trustee
Trust
(Delaware –
Perpetual)
$300,000

We commonly set up
the trusts which own
David’s heirs the captives in
Nevada.

Givner & Kaye,


Diagram 2: Set Up The Captive

David Dynasty
Trust
(Delaware –
Perpetual) The captive is exempt from
Delaware business income tax.
It is treated as one enterprise
100% owner Delaware LLC and, therefore, subject to only
(taxed as a “C” corporation for one $5,000 minimum annual
Federal income tax purposes) premium requirement. Each
$500,000 series can receive up to $1.2
million tax free under IRC
Section 831(b).

Series “A”: Series “B”:
Property & Health Plan
Casualty Risks Liabilities

Givner & Kaye,


Business Captive Insurance Company: Deducting $1,200,000 Per Year
#1
Diagram 3: Operating The Captive Alternative #1

Business Delaware Business
#2 LLC #12

Business Business
#3 #11

Business Business
#4 #10

Business
Business
Business Business Business #9
#8
#5 #6 #7

Each business must pay a premium of 5% - 15% of the $1,200,000 total.

Givner & Kaye,


Diagram 3: Operating The Captive Alternative #2

Delaware
LLC

49% of the 51% of the Captive
Operating premiums premiums Manager’s
Business Pool

Assume the captive manager re-insures 40% of the risk. Then 11% of the risk
is shared among the pool. If there are 8 members of the pool and one has a
$1,200,000 casualty, then the other 7 members lose $171,000 each.

Givner & Kaye,


Diagram 4: Using The Captive’s Profits

Delaware
David Dynasty
LLC
Trust
(Delaware – Dividends
Perpetual)

David as
manager

LLC used to
LLC used to
buy real
buy real
estate and
estate and
other
other
investments
investments

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Charitable
Alternatives

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Grantor
Charitable Lead
Annuity Trust

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Gives $600,000 of LLC units

CLAT
Mom
$464,000 charitable deduction

8.3% per year
- $50,000 – for
10 years
Children’s trust gets what is left
at the end of the 10 year period
Children’s Charity
Trust

Givner & Kaye,


Charitable Lead Annuity Trust – Alternate #1
Bunching The Deduction Up Front
October, 2011 Section 7520 rate of 1.4% (lower is better)
$1,000,000 of real estate generating $50,000 per year in an LLC
Valuation discounts of 40% make it $600,000 generating $50,000
$50,000 is an 8.333% payout on $600,000
10 Year Term, Remainder To Children
Immediate Charitable Gift of $463,542 (77.257%), which saves Mom $209,000
if in a 45% state and Federal bracket [13 year term is 98.4% gift!!]
Gift to the children’s trust of $136,459, for which a 709 must be filed
Mom is taxed on the income each year so she gives back the charitable
deduction that was bunched up front

Givner & Kaye,


Charitable Lead Annuity Trust – Alternate #2
Deduction Up Front, No Taxable Income Later
October, 2011, Section 7520 rate of 1.4%
$1,000,000 of muni bonds generating $40,000 per year in an LLC
Valuation discounts of 30% make it $700,000 generating $40,000
$40,000 is a 5.7% payout (annuity) on $700,000
10 Year Term, Remainder To Children
Immediate Charitable Gift of $369,921 (53%), which saves Mom
$166,464 if in a 45% state and Federal bracket [20 years = 99% gift!!]
Gift to the children’s trust of $330,079, for which a 709 must be filed
Mom is taxed on muni bond income each year (zero)
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Doesn’t Have To Be A Gift Over To The Children – Can Come Back To Mom

Gives $1,000,000

CLAT
Mom

5% per year -
$50,000 – for
Mom gets what is 10 years
left at the end of
the 10 year
period
Charity

Givner & Kaye,


Charitable
Remainder
Annuity Trust

Givner & Kaye,


Charitable Remainder Annuity Trust
October, 2011 Section 7520 rate of 1.4%
But We Are Allowed To Use August’s 2.2%
(Higher interest rate is better)
(Longer retained term yields lower deduction)

$1,000,000, 10 Year Term, 5% payout to Mom
Immediate Charitable Gift of $555,535, which saves Mom $250,000 if
in a 45% state and Federal bracket

20 year term results in a $198,000 charitable deduction ($89,000 tax
savings)

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Gives $1,000,000

Mom CRAT

Charity gets what
5% per year is left at the end
- $50,000 – of the 10 year
for 10 years period

Charity

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CRAT
August Section 7520 rate of 2.2%
Mom, age 71, Retains 5% income for life

Immediate Charitable Gift of $416,710, which saves Mom $187,520 if
in a 45% state and Federal bracket
[not significantly different than the results of a 20 year term]

Note: Will Not Work For A 70 year old!!!

Givner & Kaye,


Gives $1,000,000

Mom CRAT

Charity gets what
5% per year is left when mom
- $50,000 – passes away
for her life

Charity

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Charitable
Limited
Partnerships

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Donate 97% of LP interests
Mom and Dad Charity

3% GP

Limited Partnership
Contribute $1.0 of Becomes the 97% LP
appreciated
property

97% of $1.0 X 90% (to allow for 10% valuation discounts) = $873,000 charitable deduction
which saves $392,850 in income tax, but the $1,000,000 stays in the limited partnership.

Givner & Kaye,


The end result is that you have a limited partnership which you control.
However, the largest limited partner is a charity. You must make a distribution of 5%
of the value of the assets each year, and 97% of that distribution will be to the
charity. You must make that distribution so that the charity realizes and reasonable
return on its investment. Beyond that, you can make appropriate investments with
the limited partnership assets, e.g., loans to your business, investments in real
estate that you like, etc.

This is an attractive way to control capital at an attractive cost, especially if
you have an interest in benefitting charity.

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Investments

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Oil
and
Gas

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EXAMPLE (adapted from Hard Rock Partners 2011-a, L.P.):

No Oil & Gas Investment Oil & Gas Investment ($50,000 investment)

Gross income $200,000 Gross income $200,000
Taxable income $200,000 IDC deduction ( 50,000)
Taxable income $150,000

State Tax 6.5% $ 11,875 State Tax 6.5% $ 8,625
Federal Tax $ 44,070 Federal Tax $ 30,070

Total Tax $ 55,945 Total Tax $38,695

Tax Savings $17,250 (34.5% of $50,000)

The cash flow often runs 10% per year for decades.

Givner & Kaye,


Economics:

Gas prices are low, meaning any increase will improve investor
returns
U.S. is the Saudi Arabia of natural gas
Work with an experienced operator that has (i) drilled hundreds of
wells and (ii) excellent track record in existing developed fields
Risk diversification in multi-well programs
Return of initial investment in tax benefits and cash in 5 to 8 years
Residual income for decades

Givner & Kaye,


Real Estate

Givner & Kaye,


Two methods of depreciation for Commercial Properties:
Straight-line method - depreciated over 39 years.
Stipulates that an asset must be depreciated by equal amounts each year
over its useful life.
Example:
You buy a commercial shopping center for $10,000,000. The land the center
resides on is worth $4,000,000 (40%). The building is valued at $6,000,000.
Current law allows you to depreciate commercial properties by equal
amounts annually over 39 years.
$6,000,000/39 years = $153,846 annually
Or calculate by multiplying the building percentage by 2.56%.

Givner & Kaye,


Accelerated Depreciation –
Same $10.0 one story Shopping Center. Reasonable Cost Segregation
allocations and related depreciation figures ($6.0 to Building, $4.0 to land):

5 year property 28% of $6,000,000 = $1,680,000
7 year property 3.5% of $6,000,000 = $ 210,000
15 year property 11.84% of $6,000,000 = $ 710,400
39 year property 56.66% of $6,000,000 = $3,399,600

Here is the resulting First Year Depreciation:
5 year property = $ 672,000
___________
Total Depreciation in year one: $890,209

Givner & Kaye,


Accelerated Depreciation –

Value of building 6,000,000
Bldg.
Segregation Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Totals
5 year property 1,680,000 672,000 403,200 241,920 145,152 87,091 1,549,363
7 year property 210,000 60,000 42,857 30,612 21,866 15,618 170,954
15 year property 710,400 71,040 63,936 57,542 51,788 46,609 290,916
39 year property 3,399,600 87,169 84,934 82,756 80,634 78,567 414,061

Totals 6,000,000 890,209 594,927 412,831 299,440 227,886 $2,425,294

Givner & Kaye,


Questions and Answers

Send us e-mail:

Bruce@GivnerKaye.com
Owen@GivnerKaye.com
Kathy@GivnerKaye.com

Givner & Kaye,

11 12 02 Want To Save A Fortune On Taxes

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