May 2013      

Team Tisser Foundation (TTF) is a non-profit corporation founded by Doron M. Tisser and his wife Laurie. TTF raises money for various charitable purposes and does not focus on any one charity or charitable purpose. The goal is to raise as much money as possible to "Help Make A Difference" by "Improving Life for Others." TTF has made donations to Memorial Sloan-Kettering Cancer Center, Leukemia & Lymphoma Society, Challenged Athletes Foundation, as well as charities helping people affected by natural disasters such as Hurricane Katrina and the Tsunamis. Since 2000, TTF has donated over $250,000 to over 40 different charities. Friends and clients generally donate money to TTF to support Doron's participation in triathlons and marathons. If you would like more information about TTF, please contact Doron at doron@tisserlaw.com, or visit www.teamtisser.org

Quick Links
www.tisserlaw.com
www.teamtisser.org


About
Doron M. Tisser

Doron M. Tisser has specialized in estate and gift planning, tax planning, trust and probate administration, charitable giving, buy-sell agreements, and related areas for over 30 years. Mr. Tisser is one of less than 100 attorneys in California who has been designated as both a Certified Specialist in Probate, Estate Planning and Trust Law, and as a Certified Specialist in Taxation Law by the State Bar of California Board of Legal Specialization.

Mr. Tisser has been chosen by his peers as a Top 100 Super Lawyer in Southern California since 2011. In addition, he has been selected by his peers as Super Lawyer for Southern California since 2009. Mr. Tisser has also been awarded the highest possible rating by his peers, an “A.V.” rating, for the Martindale-Hubbell Law Directory. This rating is based on ethical considerations and legal skills.

Mr. Tisser has been quoted and referenced in many magazines and newspapers across the country including Forbes Magazine, US News and World Report, Wall Street Journal, Los Angeles Times, and Entrepreneur Magazine.

Doron competes in triathlons, including Ironman races, and raises money for charities through Team Tisser Foundation, a non-profit corporation he co-founded with his wife Laurie.

 

What’s Happening

Thank you to those of you who attended our 4th Annual Conference on The State of Estate Planning, which we held on two separate dates in April. The events were very well-attended and we appreciate your feedback.

If you were unable to make it and would like copies of the conference outlines, please contact Laura Stein, at laura@tisserlaw.com.

PRESIDENT OBAMA’S BUDGET PROPOSAL

As we discussed in our January Newsletter, the current estate tax laws are more favorable to high net worth individuals than at any time since estate taxes were established. In addition to high exemption amounts, there are tax planning tools which allow significant transfers of wealth to escape gift and estate taxation.

President Obama released his proposed budget for 2014 (the “Proposal”), which takes aim at both the high exemption amounts and many of the common tax planning tools. This Newsletter will outline the proposed changes, which, if passed, would generally take effect on January 1, 2018. It should be noted that the Proposal states these changes are necessary to raise taxes.

Proposed Exemption Amounts

In the Proposal, the exemption amounts would revert back to 2009 levels, which provide for a $1 million lifetime gift tax exemption and a $3.5 million exemption from estate and generation-skipping taxes. The top tax rate on transfers above this amount would be 45%. There will be no indexing for inflation (as is the case under current law), but portability will remain. The chart below highlights the key differences between the current law and the Proposal.

 

2012 Law

Current Law

President Obama’s Proposal

Estate Tax Exemption

$5,120,000

$5,250,000

$3,500,000

Gift Tax Exemption

$5,120,000

$5,250,000

$1,000,000

Generation Skipping Tax Exemption

$5,120,000

$5,250,000

$3,500,000

Estate Tax Rate

35%

40%

45%

Portability

Yes

Yes

Yes

Indexed for Inflation

No

Yes

No

Grantor Retained Annuity Trusts (GRATs)

President Obama has proposed changes that would effectively eliminate GRATs.

A GRAT is a trust which allows the grantor to transfer an asset into the trust and receive a fixed annuity over a term of years specified in the GRAT. The annuity is approximately equal to the value of the assets transferred into the GRAT, plus an interest rate based on published IRS rates, which are currently very low.

At the end of the term, the annuity has been entirely paid back to the grantor and any appreciation of the assets in excess of what is paid back is transferred out of the grantor’s estate to the beneficiaries.

To highlight how effective this strategy can be, we need to look no further than Facebook’s founder, Mark Zuckerberg. In 2008, Facebook was still a private company, with Mark Zuckerberg owning a large portion of the shares. He placed some of these shares into a GRAT prior to the initial public offering (IPO), at which time they were worth approximately $3 million, based on a Forbes’ magazine estimate.

After the IPO, the shares in the GRAT were worth approximately $40 million. Mark Zuckerberg received his $3 million plus interest back at the end of the term, and over $30 million (not including future appreciation) was transferred out of his taxable estate without paying any gift tax.

The main risk when using a GRAT is not outliving the term. If this occurs, all of the assets, including appreciation, go back into the grantor’s estate and are subject to estate tax. Under current law, there are no restrictions on the how short the term of the GRAT can be.

President Obama has proposed a minimum 10-year term for GRATs. This has two consequences: (1) older individuals will find the strategy too risky, since the planning fails if they do not outlive the term, and (2) the annuity over 10 years becomes so large that it is much harder to rely on appreciation outpacing the annuity payments and providing any estate tax benefit.

Individuals owning an asset they expect to increase significantly in value should consider tax planning using GRATs before the opportunity is gone.

Intentionally Defective Grantor Trusts (IDGTs)

Another tax planning technique that President Obama’s proposal would eliminate is the IDGT.

Generally, if you retain income from an asset you give away, the asset will still be subject to estate taxes at your death. By setting up an IDGT and selling an asset to that IDGT, the grantor can effectively transfer assets out of his or her estate for estate tax purposes while retaining the income.

Here is how the technique works. The grantor sets up the IDGT and then sells an asset such as real estate to the IDGT in return for a promissory note. The IDGT receives the income generated by the property and uses that income to make payments to the grantor under the promissory note.

Under current law, the transfer is respected for estate tax purposes even though the grantor is treated as continuing to own the asset for income tax purposes. This has two important consequences: (1) There is no capital gain to pay on the sale since the transaction is ignored for income tax purposes, and (2) the grantor can continue to pay the income taxes on the income generated by the property even though the income is paid into the IDGT. This is essentially a tax-free gift to the IDGT each year of the income taxes paid.

The Proposal would eliminate this type of planning in its entirety. In the Proposal, any asset which is treated as owned by the grantor for income tax purposes will automatically be included in his or her estate at death. This means that a sale to an IDGT would not accomplish the primary purpose of moving the asset out of the grantor’s taxable estate.

Conclusion

While the current exemption amounts exclude a vast majority of the population from any estate tax liability, the Proposal is a good indication that these exemptions are not guaranteed. A good estate plan should include flexibility, allowing it to adapt to changing estate tax laws and ensure that your wishes are carried out.

The Proposal also demonstrates how the current administration feels about some of the most commonly-used tax planning techniques, including GRATs and sales to IDGTs. Anyone looking to transfer assets using these techniques should consider acting before any of the proposed changes become law.

Even with the current availability of certain tax planning techniques, as interest rates rise, these strategies will become less appealing. The combination of available planning tools and record low interest rates continues to make this a unique time to do estate tax planning. With this is mind, if any of the strategies discussed above would benefit you or your family, it is important to explore them now.

Tisser Law Group, A Professional Corporation | 5425 Farralone Ave, Suite 100 | Woodland Hills | CA | 91367

doron@tisserlaw.com – Doron M. Tisser, Esq.
brian@tisserlaw.com – Brian H. Standing, Esq.
judy@tisserlaw.com – Judy Schwarz, Paralegal

erica@tisserlaw.com – Erica Opperman, Paralegal

laura@tisserlaw.com – Laura Stein, Admin. Director

amber@tisserlaw.com – Amber McBride, Practice Coordinator
heather@tisserlaw.com – Heather Lanet, Admin. Assistant
zion@tisserlaw.com – Zion Dungo, Admin. Assistant
jesus@tisserlaw.com – Jesus Esteves, Admin. Assistant  
This Newsletter is intended to provide legal information only; legal information is not legal advice and you should consult with qualified legal counsel prior to implementing any estate planning. The transmission or receipt of information to or from this Newsletter is not intended to create, and does not create or constitute, an attorney-client relationship. No portion of this Newsletter may be reproduced or used in any manner other than for the private information of the reader without the express written consent of Tisser Law Group, A Professional Corporation. The testimonials throughout this Newsletter were provided by actual clients. To maintain their privacy their names may have been abbreviated. Please note that testimonials do not warrant, guarantee or predict your particular results. Copyright Tisser Law Group, A Professional Corporation 2010. All Rights Reserved.