1. THE GLOBAL FOODBANKING NETWORK
TONI DIPRIZIO, ENGAGEMENT PARTNER
CANNY CHEN, AUDIT MANAGER
Preparing your 2012 Income Tax Return
Tips and Traps
My Best Tax Planning Ideas in 2016
“A few of my favorite things” – The Sound of Music
BRIAN T. WHITLOCK CPA, JD, LLM
TAX PARTNER

2. SIMPLE INCOME TAX PLANNING
1) IRA Conversion to ROTH
2) Section 529
3) Non-Grantor CLAT
STRAIGHT FORWARD ESTATE PLANNING
4) ILITs (Crummey/Cristofani vs. Fully Funded)
5) Spousal Lifetime Access Trust
6) Working with IDIOTs
7) Split Interest Purchase
PLANNING FOR THE NIIT
8) Where and how you invest? Plus the Personal Holding Company = M1
9) Shifting the focus of the Material Participation Rules
BUSINESS IDEAS
10) Unfunded Non-Qualified Deferred Compensation
11) Unfunded Death Benefit Plan
12) Section 104 Income Injury Exclusion
13) Interest Charge –Domestic International Sales Corporation
Things You Should Know

3. Higher Individual Rates change the Game
• Marginal Income Tax Rates Married Filing Joint (MFJ) (indexed for inflation)
Calendar Year 2016
•- up to $ 18,550…………………10%
•- $18,550 to $ 75,300…………..15%
•- $75,300 to $151,900…………..25%
•- $151,900 to $231,450…………28%
•- $231,450 to $413,350…………33% (plus NIIT)
•- $413,350 to $466,950…………35% (plus NIIT)
•- over $466,950 ………………….39.6% (plus NIIT)
• Net Investment Income Tax (NIIT) - 3.8% if MAGI above $200,000 (single)/$250,000 (MFJ)
3.8% Obamacare Excise Tax on Investment Income for Even Middle Class
• Pease Amendment – Itemized deductions phased out at 3% of AGI in excess of $311,300 in 2016
Itemized Deductions are limited for Middle Class
• State Income Tax Rates
• Illinois Income Tax Rate – 5%
• Top California Income Tax Rate = 13.3% over $500k Single; over $1 million MFJ
All Income Tax Rates are Higher

4. CONTRIBUTION LIMITS
In 2015 and 2016, you can contribute $5,500 ($6,500 if you are over 50 years of age) to
a Traditional IRA if you have earned income in that amount.
DEDUCTION LIMITS
You can deduct the amount of the contribution made to a traditional IRA (or make a
contribution to ROTH IRA) if your MAGI under $61,000 for 2015 and 2016 (single or
Head of Household) or $98,000 if Married filing Joint and neither you nor your spouse
participate in another qualified pension plan. Deductions are phased out above the limits.
NONDEDUCTIBLE CONTRIBUTIONS TO TRADITIONAL IRAs and CONVERSIONS
You can make non-deductible IRA contributions, without any MAGI limitation, if you have
earned income of at least the amount contributed. Similarly, there are MAGI limitations
on the conversion of an traditional IRA to a ROTH IRA.
CONVERSIONS
When converting a Traditional IRA to ROTH you must pay tax on the difference between
the FMV of the account converted less the tax basis of amount converted. CAUTION:
Your Basis in the converted account may be diluted if you have other IRAs or
ROLLOVER IRAs.
ROTH IRAs

5. PAYING FOR COLLEGE
Section 529 Accounts are a great way to save for college, but even if they are
underfunded, if you pay for tuition using the 529 as an intermediary you save.
STATE OF ILLINOIS BRIGHT START PLAN
• Illinois allows you to deduct $10,000 that is deposited in a Bright Start Account
• There is no minimum period that the funds must remain in the account
• $10,000 contributed on January 1 can be used to pay a portion of the tuition bill and a
deduction of $10,000 may be claimed on IL-1040 = Savings $500
Section 529s

6. Non-Grantor Type Charitable Lead Trust (CLAT)
STEP 1: Gift assets to trust
CHARITY
• IRREVOCABLE TRUST
• NET INCOME AND CAPITAL GAINS
ARE TAXABLE TO TRUST, BUT TRUST
GETS DEDUCTION FOR CURRENT
CHARITABLE DISTRIBUTION
• PV OF REMAINDER INTEREST IS A
GIFT OF A FUTURE INTEREST MAY
USE GIFT/ESTATE TAX CREDIT
• CAVEAT: GST MAY NOT BE
ALLOCATED TO GIFT OF REMAINDER
CLAT
STEP 2: Distribute required
amounts to charity
REMAINDER BENEFICIARIES
(OUTRIGHT OR IN TRUST) IF REMAINDER
BENEFICIARY IS PERSON OTHER THAN THE DONOR
THEN GIFT
GIFT TAX IMPACT
FMV OF THE TRANSFERRED ASSETS
- PV OF ANNUITY INCOME STREAM
= GIFT OF A “FUTURE” INTEREST
INCOME TAX IMPACT
INCOME IS EXCLUDED FROM
DONOR IRS FORM 1040 AND
STATE INCOME TAX
STEP 3: Upon termination, the
remainder beneficiaries receive
the balance of assets
INCOME TAX DEDUCTION
NONE

7. NON-GRANTOR CLATs do not produce an individual Income
Tax deduction for the Grantor/creator of the trust
NON-GRANTOR CLATs permits the creator of the trust to
fund charitable gifts with “Pre-Tax Income”
Using Pre-Tax Income is more efficient then using taxable income and
trying to offset the income with a deduction.
• Charitable deductions do not reduce NII
• Charitable deductions do not reduce State Taxable Income
• Charitable deductions are be limited by a % of AGI
• All deductions are phased out when AGI is more than $311,300
• Personal Exemptions are phased out for high income taxpayers.
Similar to Charitable contributions made from an IRA, Flexible Spending
Accounts (FSA) for Medical Premiums and Childcare, or HSA for Medical
Expenses
Income Tax Benefits of Non-Grantor CLATs

8. Example: Josephine has $350,000 of income. $100,000 is from
interest, dividends, and rents. She gives $30,000 to charity each
year.
The charitable gift do not reduce her 3.8% NII, or her 5% Illinois Income Tax in
addition she loses $900 of itemized deductions and a portion of the personal
exemptions for herself and her husband.
• Josephine transferred income producing assets into a CLAT that will receive
$30,000 of investment income and transfer $30,000 to her Donor Advised Fund
or various charities.
• The remainder interest in the CLAT passes to Josephine’s husband at the end
of 5 years.
No gift and estate tax savings since the remainder passes to spouse, but
NOTE: Income tax savings = 10% or over $3,000 per year for 5 years = $15,000
by using pre-tax dollars instead of tax deductible dollars.
Income Tax Benefits of Non-Grantor CLATs

9. Irrevocable Life Insurance Trust (Super Trust)
STEP 1: Gift premium $ to trust
Annual Exclusion requires Crummey/Cristofani
DONOR
• Irrevocable trust
• Trust is owner and beneficiary of Life
Insurance Policies
• Net income and principal to Donor’s spouse
(and Donor’s descendants if desired), at
trustee discretion, for health education,
maintenance, and support
• Testamentary Limited Power of
Appointment for Donor’s spouse
• Upon spouse’s passing, unappointed assets
are distributed outright or held in separate
trusts for Donor’s descendants
ILIT
STEP 2: Trustee pays
insurance premiums
Donor’s spouse can be the
Trustee, but distributions
should be limited to health,
education, maintenance, and
support.
DONOR’S BENEFICIARIES
(OUTRIGHT OR IN TRUST)
GIFT AND
ESTATE TAX
Donor may utilize lifetime
exemption and may
utilize generation
skipping transfer tax
exemption for transfer;
gift tax return may be
required
INCOME TAX
Trust will be
considered a
grantor trust for
income tax
purposes, therefore
all income will flow
through donor’s
1040
STEP 3: Upon the death of the Donor’s
spouse, Insurance proceeds
are not included in the estate of
the Donor’s spouse for estate
tax purposes.
The Donor’s beneficiaries
receive the balance of assets.

10. Spousal Lifetime Access Trust (SLAT)
STEP 1: Gift major assets to trust
Use portion of unified credit to move more
DONOR
• Irrevocable trust
• Can purchase insurance, but can also hold
other assets CONSIDER OVERFUNDING
• Net income and principal to Donor’s spouse
(and Donor’s descendants if desired), at
trustee discretion, for health education,
maintenance, and support
• Testamentary Limited Power of
Appointment for Donor’s spouse
• Upon spouse’s passing, unappointed assets
are distributed outright or held in separate
trusts for Donor’s descendants
SLAT
STEP 2: Trustee can make
discretionary distributions of
income and principal to the
Donor’s spouse and Donor’s
descendants if desired.
Donor’s spouse can be the
Trustee, but distributions
should be limited to health,
education, maintenance, and
support.
DONOR’S BENEFICIARIES
(OUTRIGHT OR IN TRUST)
GIFT AND
ESTATE TAX
Donor may utilize lifetime
exemption and may
utilize generation
skipping transfer tax
exemption for transfer;
gift tax return may be
required
INCOME TAX
Trust will be
considered a
grantor trust for
income tax
purposes, therefore
all income will flow
through donor’s
1040
STEP 3: Upon the death of the Donor’s
spouse, the assets are not
included in the estate of the
Donor’s spouse for estate tax
purposes.
The Donor’s beneficiaries
receive the balance of assets.

11. Intentionally Defective Income Only Trusts - IDIOTs
 Similar to SLAT but with additional Leverage
 Grantor Retains Powers under Section 671 – 677 which are not included Section 2032 - 2044
 Sale of Stock to Intentionally Defective Income only Trust (IDIOT) Rev. Rul. 85-13
 Leveraged gifting vehicles – Take advantage of Low interest rates [Rev. Rul. 2016-1]
• Short Term interest rate - .75 for January 2016
• Mid Term interest rate—1.81% for January 2016
• Long Term interest rate – 2.65% for January 2016
• Section 7520 rate – 2.2% for January 2016
• Low to moderate risk for gift tax purposes for shareholders
• Generation Skipping Tax is easier avoid with IDIOT
• Example – Shareholder transfers 10% of the nonvoting stock of a closely held S Corporation worth $5 million to an
irrevocable trust that is treated as a Grantor Type Trust for Income tax purposes. If structured as a gift it would use up $5
Million of gift and estate tax credit equivalent. If structured as a sale in exchange for a $5 million note with interest payable
at 1.81% that would balloon in the 9th year, no credit is used. Payments of interest and principal can be made using S
Corporation distributions. After the note is paid in full, the stock would be inside of the trust for the benefit of the
shareholder’s family. When the shareholder dies, the value of the nonvoting stock would escape gift and estate tax.
 Push the envelope? Consider a SCIN or a Private Annuity

12. Intentionally
Defective
Income
Only
Trust
(for benefit of family)
Grantor
Gift or Sell Income
Producing Asset
1) Note with market rate of interest;
2) SCIN with a premium; or
3) Private Annuity
Intentionally Defective Income
Only Trust (IDIOT)
Note: Seed money required. The IDIOT should have a net worth before the sale of approximately 10% of
the value of the assets being transferred by sale in order to avoid IRC Section 2036 claim that the grantor
had a retained interest in the assets sold.

13. Split Interest Purchase of Residence
The Facts
Jack (70) and Jill (68) previously created an IDIOT their kids and grandkids, and they gifted a large
amount of assets to the IDIOT in 2016 when it looked as if the $5 million exemption might disappear.
They want to purchase a $5 million residence in Lake Geneva. They have heard about Qualified
Personal Residence Trusts but they are not interested in the concept of paying rent to their kids some
day.
The Strategy
Instead of either party purchasing the entire interest, the Jack, Jill and the idiot could each purchase a
split interest in the real estate. Jack and Jill purchase the right to live in the residence and the IDIOT
purchase the right to get 100% at the death of the survivor of Jack and Jill.
According to the 1990 Census and the Required Minimum Distribution regulations they have a joint life
expectancy of between 18.4 and 22.7years. Jack and Jill would need to pay roughly $1,800,000 and
the IDIOT would pay $3,200,000.
The Result
The life estate is a wasting asset at the death of the survivor “Nothing” is included in the estate of the
surviving spouse. $1,800,000 transfers estate tax free.

14. Manage Investment Goals with directed investments
• Retirement - Save inside of Qualified Plans, IRAs, Roth IRAs
• Education – Save inside of §529
Convert investment income to self-employment income (Schedule C)
• Offset with contributions to Qualified Plans, IRAs, Roth IRAs
• If already in excess of FICA limits - SE income is only being subjected to the Medicare Tax and
the Additional Medicare Tax
• BENEFIT: 50% of the SE tax would be deductible for income tax purposes
Personal Holding Companies – C Corporation
• “Every Person is entitled to one good dog and one good C Corporation” – Blackman
• C Corporations are not subject to NIIT but be careful
o Appreciating assets should not be owned by C Corporation
o Portfolio investments and family loans as corporate assets
• WATCH FOR TAX TRAPS:
• IRC §269 - Principal Purpose to Avoid Income Tax [Note: IRC §1411 is part of
Subtitle A – Income Taxes]
• IRC §351(e) - Transfer of appreciated assets to an investment company =
recognition of gain
Avoiding the NIIT
Planning for Individuals

15. Mastering the Trust Rules will save $$$$$
1) Who must satisfy the Trust Material Participation Test?
• Grantor Trusts = Grantor
• (Sections 671 through 679 of the Internal Revenue Code)
• Qualified Subchapter S Trust (QSST) Trusts = Beneficiary
• Non-Grantor Trust (Complex Trust or ESBT) = Trustee
2) Can I change the taxable character of the Trust?
• Convert Grantor Trust to a Non-Grantor Trust? Terminate Grantor Powers
• Convert Non-Grantor Trust to a Grantor Trust? Make a Loan to the Grantor
• Convert a QSST to an ESBT? File ESBT Election
Avoiding the NIIT
14
Planning for Trusts

16. Unfunded NQDC
Design Variables for Non-Qualified Deferred Compensation
• Age of Beneficiaries
• Amount and Number of Payments
• Interest Rate
Tax Characteristics of Payments
• Estate Taxes
• Only Payments required after Death will be an Estate Asset
• Income Taxes
• Deductible to Business and Taxable to Employee
• Income in Respect of a Decedent, if payments survive death
• FICA and MHIT Taxes
• Compensation for Past Services – Taxable when paid
• Compensation for Present and Future Services – Taxable when earned and vested
• KEY: If earned and vested year when compensation is above FICA limit only subject to MHIT.

17. Non-Qualified Plan Examples
Description Funded Public/Private Funding
Cash Bonus Plans No Both Not required
Secular and Rabbi
Trusts
Yes Both Yes
Unfunded NQDC No Private Employer Liability
NQ Stock Options No Public Quasi
Stock Appreciation
Rights
No Both Employer Liability
Phantom Stock No Private Employer Liabiltiy
Death Benefit Both Both Not required
Life Insurance Yes Both Yes
Long Term Care
Insurance
Yes Both Yes

18. NQDC: Funded vs. Unfunded
Plan Type Coverage Taxation of
Benefits
ERISA Creditor
Protection
Unfunded Limited to select
group of
management or
highly
compensated
employees
Benefits
generally
taxed when
paid
Very limited
application
Benefits
subject to
claims of
employer’s
creditors
Funded Any employee may
be covered
Benefits
generally
taxed when
vested
ERISA
applies
Benefits
protected from
employer’s
creditors

19. • Benefits subject to Payroll Tax as earned and vested
• Prepay MHIT Tax
• Benefits not subject to income tax until received
• Watch out for Section 409A
• Benefits not subject to second payroll tax when paid
• FICA savings offsets early payment of MHIT in 2 ½ years
• If benefits paid for term certain, then unpaid balance is
includable in estate and income taxable as IRD
• If benefits terminate at death, like an annuity, then
nothing is includable in estate and no IRD
Unfunded NQDC For Owner

20. (1) The Death Benefit exclusion only applies to benefits
paid under a life insurance contract
(2) Exclusion does not apply to self funded Death Benefits
(DBO Plans). However, a death benefit only plan (also
called “survivors benefit”) is excluded from estate tax.
Estate of Anthony F. DiMarco v. Comm., 87 TC 653 (1986), 7 EBC 2239, acq. in result in part 1990-2 CB 1;
Rev. Rul. 92-68, 1992-2 C.B. 257.
Example: Under a DBO Plan, Company pays cash to the designated beneficiary
of the employee. This amount is deductible to the company as compensation, and
subject to income tax in the hands of the recipient. However, it is exempt from
payroll taxes and estate tax.
Section 101 – Certain Death Benefits
Exclusions from Income & Estate Taxation

21. DBO Plans – The “Great Equalizer”
Income Tax Impact
Deductible to Business But Taxable to Recipient = Neutral
• If S Corporation – Deduction will flow thru to shareholders
• Caveat - Reasonable Compensation Test
• Past Service can be significant Factor
Payroll Taxes
Past Service and Salary History is Test
• Not subject to payroll taxes since paid after death
Gift and Estate Taxes
Liability reduces Taxable Value of Business, if unfunded
Benefit is excludable from the Taxable Estate of the Employee
• Provided employee has not retained right to change beneficiary
• Best to pay as a benefit to second generation than spouse

22. Section 104 – Compensation for accident or injury
Maxwell v Comm, 95 TC 107 (July 31, 1990)
Facts: TP and spouse were founders, controlling shareholders and
principal officers of corporation. TP suffered fractured arm in mixing
machine. Off work for 6 to 8 weeks. Spouse assumed duties.
TP retained attorney. Corp retained separate attorney. Plaintiff’s attorney
sent a demand letter for $137,500. Settled for $122,500. No lawsuit was
ever filed.
• Corp deducted as “Miscellaneous Office Expense” Section 162
• Employee excluded payment under Section 104
Exclusions from Income

23. • The IC-DISC first came about in 1984
• I.R.C. Section 991 – 997.
• Unlike other exporting incentives the IC-DISC has yet to be
challenged by the World Trade Organization (WTO).
• Extraterritorial Income Exclusion repealed American Jobs
Creation Act of 2004
• With the current low dividend rates the IC-DISC is now an
attractive tax saving vehicle.
Interest Charge Domestic International Sales
Corporation (IC-DISC)

24. Commissions paid by export Corporation to IC-DISC
• Fully deductible at regular tax rate 39.6%
• Revenue not taxable income to IC-DISC
• Dividend taxed at 20% (15% Savings)
• Plus low rate of interest
• Save on Rate differential – 19.6%
Ownership of IC-DISC
• Minors or Parents (dependents)
• Trusts, partnerships, corporation and foreign persons.
• Roth IRA? (Deduct at 35% taxed at 0%)
• WARNING: Commissioner v. Summa Holdings (2015)
What are the Benefits of IC-DISC?

25. • Domestic Corporation
• Formed by U.S. exporter/shareholder
• One class of stock, with a par or stated value of at least $2,500
on each day of its fiscal year
• Unanimous shareholder consent (See Form 4876-A)
• Must maintain its own set of books and records
• Not required to have:
• Office Space
• Employees, or
• Tangible assets
• Cannot be a member of a controlled group of corporations with a
Foreign Sales Corporation
Requirements for an IC-DISC?

26. Questions?
Brian T. Whitlock, CPA, JD, LLM
Plante & Moran, PLLC
10 S Riverside Plaza
Chicago, IL 60606
Phone (312) 207-1040
E-mail: brian.whitlock@plantemoran.com