case studies in successful ownership · legacy properties •case studies (continued) • case...

Legacy Properties

Case Studies in Successful Ownership

July 9, 2011

Ramsay H. Slugg

National Wealth Strategies Group

[email protected]

Any examples presented are hypothetical and do not reflect specific strategies we may have developed for actualclients. They are for illustrative purposes only. The availability and effectiveness of any strategy is dependent uponyour individual facts and circumstances.

This material is current as of the date specified and is for informational purposes only. It is not a solicitation, or anoffer to buy or sell any security or investment product, nor does it consider individual investment objectives orfinancial situations. While the information contained herein is believed to be reliable, we cannot guarantee itsaccuracy or completeness.

Information in this material is not intended to constitute legal, tax or investment advice. You should consult your legal,

tax and financial advisors before making any financial decisions. If any information is deemed “written advice” within

Disclosure

tax and financial advisors before making any financial decisions. If any information is deemed “written advice” withinthe meaning of IRS Regulations, please note the following:

IRS Circular 230 Disclosure: Pursuant to IRS Regulations, neither the information, nor any advice containedin this communication (including any attachments) is intended or written to be used, and cannot be used, forthe purpose of (i) avoiding tax related penalties or (ii) promoting, marketing or recommending to anotherparty any transaction or matter addressed herein.

U.S. Trust, Bank of America Private Wealth Management, operates through Bank of America, N.A., and othersubsidiaries of Bank of America Corporation. Bank of America, N.A., Member FDIC.© 2011 Bank of America Corporation. All rights reserved.

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Legacy Properties

•Today’s Agenda

• Case Studies

• Washington Update

• Income Taxes

• Transfer Taxes• Transfer Taxes

• Basic Planning Options

• Advanced Planning Strategies

• Revisit the Case Studies

• Summary

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Legacy Properties

•Case Studies

• Case Study #1

• Generation 1 establishes large ranch and plans future ownership through

use of corporation and multiple trusts.

• Generation 2 lives on and passively operates the ranch.

• Generation 3 (2 branches) have divergent views on use and future of the Generation 3 (2 branches) have divergent views on use and future of the

ranch. One branch lives on the ranch; the other does not.

• Generation 4 members do not live on the ranch.

• Generation 5 living, but too young to really be involved.

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This case study is hypothetical for illustrative purposes only and intended to demonstrate the

capabilities of U.S. Trust, Bank of America Private Wealth Management. Names have been changed to

protect privacy. It is not intended to serve as investment advice, since the availability and effectiveness

of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no

suggestion is made about how any specific solution or strategy performed in reality.

Legacy Properties

•Case Studies (continued)

• Case Study #2

• Oil and gas family with no descendants, left estates to trusts which benefit

2 branches of family.

• One branch, no descendants, owns and lives on Hill Country ranch.• One branch, no descendants, owns and lives on Hill Country ranch.

• Not a working ranch, although he built the house, barn, fences, solar

power system and cistern system himself.

• He wants the ranch to be “exactly the same in 100 years as it is today.”

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Legacy Properties


• Case Study #3

• Generation 1 buys and operates a cattle ranch with significant oil & gas.

• Generation 2 continues ownership and operation; at death of Generation 2

husband, the ranch and 3/8 of oil & gas into trust for life of surviving

spouse, then distributes to Generation 3.

• Generation 2 surviving spouse is 90 (also owns 2/8 oil & gas).

• Generation 3 – one branch lives on and works the ranch with Generation 4

(and Generation 5, ages 3 and 5).

• Generation 3 – other branch – “kicked off” the ranch (with Generation 4

children) by Generation 2.

• Aside – down the road from a windmill farm.

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Legacy Properties


• Case Study #4

• Horse ranch owned and operated by husband and wife.

• Operations including stabling and riding by boarders.

• This case will demonstrate ability to partition and otherwise do asset

protection planning.protection planning.

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Legacy Properties


• Case Study #5

• My personal story – my family’s cottage in Maine.

• Generation 1 bought in 1923, left to:

• Generation 2 – my Dad and his 2 brothers, each left their 1/3 to:

• Uncle #1 – to his 2 children, one of whom bought the other out; his kids • Uncle #1 – to his 2 children, one of whom bought the other out; his kids

have no interest in Maine.

• Uncle #2 – to his 2 children, one of whom just gave his 1/6 to his son;

the other (and his children) have no interest in Maine.

• My Dad – to his 4 children, 2 of whom have no children, 1 doesn’t care

about Maine…and me – I love Maine! As do my 3 children!!

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Legacy Properties


• The point(s) of the case studies:

• Significant value.

• Often have limited income generation.

• Notice the frequency (and sometimes depth) of family discord.

• Taxes are often blamed for loss or fractionalization of property; lack of • Taxes are often blamed for loss or fractionalization of property; lack of

planning and/or family discord are usually the bigger culprits.

• Speaking of the lack of planning, that is the:

• Default option.

• Most expensive option.

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Legacy Properties

•Washington Update

• Income Taxes.

• 2011 and 2012.

• Top income tax rate of 35%

• Top dividend rate of 15%

• Top capital gain rate of 15%• Top capital gain rate of 15%

• 2013 (with no Congressional action).

• Top income tax rate of 39.6%

• Top dividend rate of 39.6%

• Top capital gain rate of 20% (?) or 28% (?)

• Health Care Taxes.

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Legacy Properties

•Washington Update (continued)

• Income Taxes – Other Considerations.

• Sales tax deduction.

• Itemized deduction phase-out.

• IRA charitable rollover.

• Conservation easement deduction limits.• Conservation easement deduction limits.

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Legacy Properties

•Washington Update (continued)

• Transfer Taxes.

• 2011 and 2012.

• Estate, Gift and GST Exemption of $5 Million.

• Top rate of 35%.

• Portability.• Portability.

• 2013 (with no Congressional action).

• Estate and Gift Tax exemption of $ 1 Million.

• GST exemption of approximately $1.4 Million.

• Top rate of 55%.

• No portability.

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Legacy Properties

•Basic Planning Options

• Wills/Revocable Trust.

• A/B Planning.

• Powers of Attorney. • Powers of Attorney.

• Business.

• Healthcare.

• Living Will.

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Legacy Properties

•Basic Planning Options (continued)

•Gifting using the $13,000 annual gift tax exclusion.

• Outright.

• In trust.

• Liquid assets.• Liquid assets.

• Illiquid assets.

•Life Insurance Trusts.

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Legacy Properties

•Advanced Planning Options

•This list is by no means exhaustive, nor are the options mutually exclusive.

•We will cover four:

• Family Limited Partnership/Limited Liability Company.• Family Limited Partnership/Limited Liability Company.

• Grantor Retained Annuity Trust.

• Sale to Intentionally Defective Grantor Trust.

• Conservation Easements.

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Legacy Properties

•Advanced Planning Options (continued)

• Family Limited Partnership/Limited Liability Company (FLP).

– Limited partnership under state law with 2 classes of partners.

– General partners “control” management; limited partners usually own

most of the partnership’s profits, losses, and capital.most of the partnership’s profits, losses, and capital.

– Senior generation contributes assets to the FLP, and receives all

partnership interests in return, in a tax-free transaction.

– Senior generation then gifts limited partner interests to next generation(s),

outright or in trust, but retains practical control over the partnership

activities.

– Over time, a substantial amount of wealth can be transferred

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Legacy Properties


• FLP (continued).

• Lack of marketability, and the lack of control, attributable to the limited

partner interests means that they are worth less than their proportionate

share of underlying book value.

• Increases the effectiveness of annual gifts and taxable gifts.

• May be combined with other techniques to increase the efficiency of this

technique.

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Legacy Properties


•Grantor Retained Annuity Trust (GRAT).

• Irrevocable trust into which the senior generation contributes assets, and retains an

annuity (set income interest) for a period of time, with whatever is left at the end

(the remainder) going to the next generation.

• The present value of the remainder is a taxable gift at time of formation.• The present value of the remainder is a taxable gift at time of formation.

• To minimize the taxable value of the gift, the income interest can be made larger,

or longer, which will reduce the value of the remainder.

• If the grantor dies during the income term, everything comes back into the

grantor’s estate (the mortality risk).

• To reduce mortality risk, it is customary to make the income interest only 2 years.

• The end result is that appreciation in the asset above an assumed interest rate is a

tax free gift.

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• Sale to Intentionally Defective Grantor Trust (SIDGT).

• Irrevocable trust, structured so that assets in trust are outside of senior

generation’s estate, but at the same time the trust does not exist for

income tax purposes.

• Senior generation sells assets to the trust for a note.

• Freezes the value of the estate at the value of the note, with any income or

appreciation above the interest rate on the note being a tax free gift to the

next generation.

• Trust can generation skip as well, removing assets and appreciation from

generation 2 estates as well.

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Legacy Properties


• Conservation Easements

• Voluntary restriction on future development of property.

• Difference in the value before and after the restriction is deductible for

income tax purposes.income tax purposes.

• Estate tax reduction for a portion or all of the value of the easement.

• Landowner (Individual, corporation, partnership and certain trusts)

contributes a restriction (which is the easement), in perpetuity, to a

qualified organization (a charity, likely a land trust).

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Legacy Properties


• Conservation Easements (continued)

• The purpose of the easement must be to preserve or protect open space,

habitat (fish, wildlife, plants, ecosystem), scenery, etc., for the public

benefit.

• Does not mean the public has to have access to your land!

• Strict substantiation and appraisal requirements.

• Income tax deduction:

• Up to 50% of adjusted gross income, 15 year carryforward.

• For farmers/ranchers, 100% of adjusted gross income, 15 year

carryforward.

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Legacy Properties


• Conservation Easements (continued).

• Can retain mineral rights, but any surface activity cannot destroy the

conservation activity.

• No surface mining.• No surface mining.

• May be able to partition out the non conservation surface activity.

• Caliche and gravel pits.

• Horizontal drilling activities.

• Windmills ?

• The easement holder is key – use a land trust that knows its’ business.

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Legacy Properties

• Revisit the Case Studies

• Case Study 1

• Likely outcome will be a sale of the entire ranch, or fractionalization

for sale.

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for sale.

• Limited market for sale in the entirety.

• Concern that a conservation easement will affect marketability.

Legacy Properties

• Revisit the Case Studies (continued)

• Case Study 2

• Conservation easement has been recommended.

• Probable value of $1 Million.

• Options:

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• Options:

• Sale of remainder interest to neighbor. Based on retained life

estate, value would be significantly reduced and transfer taxes

avoided.

• Grantor Retained Interest Trust since neighbor is unrelated.

• Sale of the remainder interest to an IDGT.

Legacy Properties


• Case Study 3

• Sad case of family discord.

• Hoped for result:

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• Hoped for result:

• The branch of the family currently living and operating the ranch

will receive the ranch as their share of inheritance.

• The other branch would receive the liquid assets in the trust which

approximate the ranch in value.

• Require the 2 branches to agree!

Legacy Properties


• Case Study 4

• Partitioned the house and 200 acres, held by the husband and wife as

farmstead, exempt from most creditors.

• Rest of ranch contributed to a FLP.

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• Rest of ranch contributed to a FLP.

• Separate corporation was set up to run the horse operations, and it

leased the ranch from the FLP.

• Goal was to isolate as much potential liability in the corporation, with

the FLP acting as an additional liability shield.

Legacy Properties


• Case Study 5

• So far, no family discord, though probably half of the ownership would

welcome a sale.

• Suggested proposal would have continuing family owners buy out the

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• Suggested proposal would have continuing family owners buy out the

selling family owners, rather than a sale to an outside party.

• That requires that the continuing family owners have the resources to

commit to a distant vacation property that they rarely use.

Legacy Properties

• Take Aways

• Plan!

• For taxes.

• For liquidity.

• For family discord.

• Monitor your plan:

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• Monitor your plan:

• Tax changes.

• Financial circumstances change.

• Family and life events.

• Use competent advisors.

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