Archive for July, 2017

What to Expect from a Trump Tax Reform Plan

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

How Tax Reform Under President Trump Could Affect You

At the end of July, the Trump Administration announced the key principles and goals for tax reform, based on an outline Trump made public in April that touted his tax reform plan as “the biggest individual and business tax cut in American history.” If passed, it would be the first significant tax reform legislation since 1986, when President Reagan implemented two major tax cuts.

Among the tax changes proposed for families are:

Among the tax changes proposed to simplify the tax code are:

Among the tax changes proposed for businesses are:

Breaking Down President Trump’s Tax Reform Proposal

While Trump’s plan has only been released as a largely broad outline, these and other changes could have significant effects on annual tax returns, retirement plans and other investments. It is wise for investors to begin considering the impact of the reforms if they are passed.

The Estate Tax: One significant change the plan proposes is elimination of the estate tax, which currently only applies to the top 1% of the population. As it stands now, a married couple is exempt from taxes on the first $10.9 million of their estate, and would be taxed at a rate of 40% for any amount above that.

Under Trump’s plan, there would be no step-up in basis at death, meaning that capital gains tax on sales of inherited property would still impact wealth transfer tax planning.

The Standard Deduction: Under Trump’s proposal, the standard deduction would double to $24,000 for couples. This would shift many taxpayers from taking itemized deductions to taking the standard deduction. While this move seems favorable for taxpayers, charities fear the lack of tax incentive could reduce charitable gifts.

The Changing Tax Brackets: If you were to move into a lower tax bracket under the proposed new structure, it would be important to assess the impact on your retirement plan. However, as no income ranges have yet been specified, the best plan is to monitor how tax reform efforts unfold and make investment decisions accordingly.

The Alternative Minimum Tax: Eliminating the Alternative Minimum Tax, a tax that has traditionally been viewed unfavorably, would likely benefit high-income earners most as it would eliminate the non-graduated alternative minimum income taxes and allow for deductions that have otherwise been disallowed under the AMT.

The Cap on Itemized Deductions: Trump’s tax reform plan proposes a $200,000 cap on itemized deductions for couples, and would bar single filers from deducting more than $100,000. These proposed changes would most impact high-income earners–couples and singles who make $1 million or more.

Conversely, most itemized deductions would be nixed under Trump’s plan, and the ones that are not on the chopping block may lose their appeal in the face of other changes to the tax code, such as the doubling standard deduction. The tax breaks expected to remain include the mortgage interest deduction and charitable donation deduction.

Changes for Businesses Under Trump’s Proposed Tax Reform Plan

Taxes remain a top concern of business owners, who feel the pinch not just on the profit side, but on the growth side. However, business owners are reporting they feel largely optimistic that Trump’s tax reform proposals will provide more breathing room.

Tax Rate Cut. The plan proposes cutting the small business and corporate tax rate by more than half, from 38% to 15%.

That 15% rate would also apply to partnerships, real estate companies, hedge funds and private equity funds, which are all currently taxed at the income tax rate of 39.6%.

One-Time Repatriation Tax. Corporations holding money overseas will be allowed to bring it back into the U.S. for a one-time repatriation tax that has yet to be specified. This aspect of the plan is followed by a proposal for a “territorial” tax system, which also has yet to be laid out in any detail, but would exclude income earned by businesses overseas.

Closing Loopholes. For corporations or wealthy individuals, Trump’s proposed tax reform plan closes loopholes that include avoiding taxes by setting up offshore businesses.

For business owners concerned with succession, Trump’s proposal to eliminate the estate tax and lower capital gains rates for the highest two tax brackets in his plan could make a significant difference in sales decisions.

The Administration’s July statement calls for Congress to begin moving this tax reform legislation through the House and Senate in the fall. President Trump has made it clear he aims to get something passed this year. While it’s difficult at this juncture to make predictions about the implications to your personal or business finances, we suggest you meet with a financial advisor who can take a knowledgeable view of your portfolio and business to make recommendations based on what these proposed changes would mean for you.

Liquidity Planning for the Family Business

Posted by Melissa Olszak, CFP®, CFA®

3 Key Considerations When Preparing to Sell the Family Business

If you’ve owned and managed a business for any number of years, stepping out of that role and selling the business to a third party can feel like walking into completely new territory, even for the savviest of business owners.

Entering into a liquidity event takes some preparation, not just to get used to the newness of the situation, but to ensure you’re taking the best course of action with your investment.

The Importance of an Exit Strategy

Why is this so important? A recent PricewaterhouseCoopers and Exit Planning Institute survey of former business owners found that 75% of owners regretted the decision a year later based on net proceeds. Because of this possibility, it’s important to begin exploring your exit options early, and to remember it’s not just about financials, but about the long-term impact on you, your family, and your objectives for the wealth you’ve created.

The Decision to Sell the Family Business – Reducing Risk

Whatever your reasons for selling the business, be it a lack of a next generation to operate the business or simply a higher selling value in the current market, how you go about the sale must be done carefully to reduce the risk of regrets.

Where previously you enjoyed a CFO or other professional to manage the wealth from the business, exiting the business causes sudden liquidity that many families do not know how to manage on their own.

Rather than risk missing opportunities prior to the sale (such as wealth transfer and tax savings opportunities) or risk making mistakes after the sale (such as poor investment, cash management and budgeting decisions), there are some specific steps to take to ensure that your liquidity event and future is managed in the most beneficial way for you and your family. You would not want to undermine the wealth generated by the hard work of building the family company.

1. Establish the Right Team of Advisors

When selling your business is on the horizon, one of the key items to do as early as possible is to establish the right team of advisors to help with the transition. This would include a business attorney to help navigate the key business decisions and negotiations, as well as personal advisors–such as a tax specialist, estate specialist, investment advisor, and possibly a family office–to help navigate the key decisions required before, during and after the sale. Establishing advisors helps ensure the wealth generated by your hard work is secured for future generations.

The job of the right team of advisors is to educate you on the various opportunities and decisions, and the trade-offs and outcomes of each. When you are selecting advisors, it’s important to understand whether any of them have any conflicts (i.e. how they are paid) to be sure the advice you are getting is objective and in you and your family’s best interest.

2. Establish an Estate Plan

If you have a sale on the horizon of a family business in which you have a concentrated investment, going through the process of implementing an estate plan will help you focus on, and clarify, your estate objectives–whether they are to support your descendants, give to charities, or a combination. You will also need to determine the best vehicles (trusts, foundations, other) to accomplish your objectives.

If this process is started with ample time before the sale, different wealth transfer opportunities will also be available to save taxes and help structure your estate plan so that it’s more beneficial to you and future generations. This area of planning can be technical and unfamiliar, so it should be started as early as possible to ensure the best results.

3. Learn Cash Management & Investment Management

If you have a large investment in your family business, but historically have not had excess liquidity to invest, selling the business will create a bit of a new world for you and your family–in terms of both having excess cash to spend and excess cash to invest. Planning for the sale in advance allows you to begin considering your investment strategy for the proceeds, and also begin considering what budget and spending can be supported by your investments, particularly if after the sale, you will no longer have a business salary or bonus to cover spending needs. Unfortunately, there are many stories (often with lottery winners), where large inflows of liquidity can lead to overspending and eventual erosion of wealth, so planning for this event in advance is critical.

With all of the steps above, it is important to keep the lines of communication open with your advisors and other family members during the decision-making and business sale process. By applying the same discipline used in owning and operating a successful family business, you should be able to diligently work toward preserving personal wealth before, during and after a sale. Educating yourself throughout the process will help you avoid regret, make better long-term decisions (estate, tax, investment and cash), and will benefit future generations.

The “Who, What, Where, Why, and How” of Private Placement Life Insurance

Posted by Carolyn B.R. Decker, CFP®, CPA, PFS

Who Should Consider A PPLI?
Families with an allergy to income taxes and an appetite for tax-inefficient investments or investment strategies are prime candidates for Private Placement Life Insurance (PPLI). Owners of PPLI, whether an individual, irrevocable trust, or limited liability company, must meet the accredited investor and qualified purchaser requirements.

Because of the life insurance component, medical insurability is a requirement, otherwise the insurance costs can eat into the tax savings benefits, making the strategy less appealing. However, in situations where medical issues do make buying life insurance impractical, you can consider PPLI’s close cousin, the Private Placement Variable Annuity (PPVA).

What is a PPLI?
PPLI is a special type of life insurance structured to have a high cash value compared to a relatively low death benefit. To minimize fee drag, the life insurance component is kept as low as possible, allowing the cash value of the policy to ultimately drive death benefit.

The goal of PPLI is to quickly build up significant cash value within a life insurance policy in order to take advantage of the tax-free treatment of income and gains from the underlying investments within the policy. While PPLI is built on a life insurance chassis, PPLI is first and foremost an income tax strategy for investing, not an estate planning one.

Essentially, it is a variable life insurance policy that allows you to allocate to alternative investments which wouldn’t be available within the more traditional variable universal life policies.

Where to Own a PPLI?
Because the primary goal of PPLI is not estate tax minimization, many investors will own these policies directly, inside of their taxable estate. To the extent sufficient assets are available that are not subject to federal and state estate taxes, certainly owning PPLI in an Irrevocable Trust is possible and preferred.

For clients who are leaving a significant portion of their assets to their private foundation at death, but aren’t ready to irrevocably give up personal access to those assets, investing through PPLI or PPVA can accelerate the process of making those assets effectively income tax-free. The PPLI or PPVA policy would be owned directly, inside the taxable estate. At death, the death benefit is paid out in cash. The value of the death benefit going to charity, which has grown income tax-free, will also pass estate tax-free.

Another application is in conjunction with a Grantor Charitable Lead Trust (CLT). When you fund a CLT, you are able to take an immediate tax deduction, in exchange for including future years’ income generated by the CLT on your personal tax return. A PPLI or PPVA policy can minimize that flow-through income back to you, allowing you to have the benefit of the upfront deduction, but not the continued phantom income.

Why (not) Consider a PPLI?
One of the key requirements to meet IRS guidelines on PPLI involves the policyholder giving up investment control over the underlying assets.

There are many investment options available, in the form of commingled funds, already approved on each carrier’s platform from which a policyholder can choose. In addition, some insurance carriers allow for managed accounts. In these instances, you do have the ability to choose among strategies, and investment objectives, but not individual holdings.

If the IRS deems that you, the investor, have too much control, the PPLI will be treated as if it had never existed in the first place and all income tax benefits will be erased.

A hands-on investor who is not comfortable handing over control of a portion of their investment portfolio may have a hard time getting comfortable with this strategy.

How (much) to Invest in a PPLI?
Sizing of assets dedicated to this strategy is important. Too little, and the benefits are outweighed by the costs. Too much, and liquidity issues can present problems.

No more than 20-30% of a portfolio should be allocated to PPLI, though other illiquid assets in the portfolio need to be taken into consideration in this calculation as well.

We advise clients to fund PPLI with at least $10m to make the investment and complexity worthwhile. This number is largely driven by underlying investments, since many of them tend to be hedge funds with their own minimum funding requirements.

While you can access these funds once invested, that shouldn’t be the plan going into a PPLI policy. There are a few ways to get at the funds invested within a PPLI policy: