Succession Planning in Light of Tax Reform and Other Developments

SUCCESSION PLANNING IN LIGHT
OF TAX REFORM AND OTHER
DEVELOPMENTS
August 20, 2018 | Hilton Cleveland Downtown
PRESENTED BY: Gary A. Zwick, Esq. | TELEPHONE: 216.928-2902 | EMAIL: gzwick@walterhav.com

Tax Reform Changes affecting
Succession Planning
• Corporate tax rates – increased on the first
$50,000 from 15% to 21%
• Corporate tax rates – decreased on income
over $100,000 from 35% to 21%
• Corporate AMT repealed
• QBID may require increases in FICA wages for
owners
• Individual tax rates reduced
2WALTERHAV.COM 216.781.1212 2 A TOP TEN CLEVELAND-BASED LAW FIRM

Tax Reform changes (cont’d)
• Top tax rate on owners of flow through
entities that get the maximum QBID could be
29.85%

• Double tax on C corporations now under 40%
• Estate and gift tax exemptions now
$11,180,000 per person but basis step up on
death continues even though many will have
no estate or gift tax.
• Miscellaneous itemized deductions no longer
deductible. State and Local taxes severely
limited

Tax reform changes (cont’d)
• Standard deduction raised to $24,000 MFJ and
$12,000 for all others. Reduces deductibility
of charitable contributions.
• Roth conversion re-characterizations no longer
allowed
• Like kind exchanges now apply only to real
estate
• Gains on sale of a business can be rolled tax
deferred into opportunity zone funds

• Transfer for value rule using a partnership
requires a bona fide business relationship
• Rev Rul. 2009-13 dicta reducing basis in a life
insurance policy by the term insurance costs is
repealed.

Other recent developments
affecting succession
• Small captive insurance companies under
attack – Avrahami case
• Aggressive split dollar technique under attack
– compare Morrissette with Estate of Cahill
• Taxpayers (particularly in 6th circuit) winning
cases of IRA owned businesses – Summa
Holdings, Swanson, Bross Trucking

Effect of these changes
• Some cross purchase buy sells will be changed
to redemption buy sells
• Some split dollar arrangements will be
switched from loan regime to economic
benefit regime
• Some planners will abandon the best
techniques because no transfer tax benefit but
they should not

Effect of these changes (cont’d)
• Capital Gains tax rates for MFJ 0% if income
less than about $79,000 and 15% if income
less than about $479,000. Additional 3.8% tax
on capital gains if income over $250,000 but
0% if on active flow through entity capital gain

GRAT
10
Corporation
100%
Father
FBO Children
1. Annuity replaces parent’s salary
2. Parent may continue to work for company
3. Parent taxed on S corporation income – RR 85-13
4. K-1 in excess of annuity creates reduction of parent’s estate by tax due on income
5. After annuity ends, grantor trust can continue for estate reduction
6. Tax reimbursement clause – RR 2004-64
7. Mortality risk & favorable 2039 Regs.
8. GST issues
9. Zero out
10. SERP Sale Opportunity
11. Has the effect of a tax deductible buyout – beneficial even without transfer tax
Annuity
Irrev. Grantor Trust
WALTERHAV.COM 216.781.1212 10 A TOP TEN CLEVELAND-BASED LAW FIRM

Sale to Grantor Trust
11
S Corp
100%
Mother
Principal&
interest
1. Note payment replaces parent’s salary (formula sale – King case)
2. Parent may continue to work for the company
3. Parent taxed on S income – RR 85-13
4. K-1 in excess of note payment creates reduction of parent’s estate by tax due on income
5. After note payments end, grantor trust can continue for estate reduction
6. Tax reimbursement clauses – RR 2004-64
7. Seed money
8. GST issues
9. IRS attack
• Woebling case
• Interest rate on note (Anecdotal)
10. Variation – Prepay Note with Bank Loan and toggle off grantor powers to get parent money tax free-see next panel
11. SERP Sale Opportunity
12. Has the effect of a tax deductible buyout – beneficial even without transfer tax
Stock
Irrev. Grantor Trust

12
S
Corp.
BANK
Step 6
Repay Loan
from Profits
GRANTOR
TRUST
Step 3
Mirror
Loan to
Trust
FBO
FAMILY
PAREN
T
Step 4
Pay off
Note
Sale of
Stock
Step 1
Step 5
Renounce Grantor
Powers
Results
A. Parent sells without tax
B. Child gets basis in stock
C. Parent takes less money for
stock
Sell Company Stock Without Tax

Parent
1. Parent previously sold S corp to DGT
2. Sale did not step up basis in stock
3. DGT still a grantor trust or may toggle
back on
4. Parent is elderly or not healthy
5. Parent “substitutes” cash for S stock in
trust tax free
Cash $10 million
Marketable Securities $5 million
Home $1 million
Total: $16 million
FBO Children &
lineals
6. Parent dies owning S stock
7. Estate not increased in value
8. S stock basis steps up to $10 million
9. Parent leaves stock to child in his will
13
The DGT Unwind
Irrevocable Grantor
Trust
S corp stock value $10
million, basis $1 million
S
Corp

Estate of Clara M. Morrissette,
146 T.C. 171 (2016)
14
Gen1
Grandma
ILIT
(insures
Gen2)
Insurance
Company
What is the value of the Note due back in the Estate?
See Estate of Cahill, TCM 2018-84
(Split Dollar Economic Benefit Regime)
Premium Payment
Premium
repayment
Cash Values and
Death Benefits
Premium
Advances
After Gen1’s death, Gen2 may:
- Keep policy intact
- Withdraw or borrow on cash values
- Surrender policy for all cash values
Hurdles:
- Insurance carrier restrictions
- Valuation of the Note
- Understanding concept/risks
Schematic provided by Larry Rothstein, CLU, Cornerstone Consulting Group LLC, Cleveland, Ohio

15
Questions?
Gary A. Zwick
216.928.2902 (direct)
gzwick@walterhav.com

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