A. Stephen McDaniel Wyatt Tarrant & Combs LLP

1. THE CHANGING WORLD OF ESTATE PLANNING A World of Uncertainty and OpportunityWhere Have We Been? Where Are We Going?“Predictions are difficult – especially about the future” Yogi Berra A. Stephen McDaniel Wyatt Tarrant & Combs LLP

2. A BRIEF HISTORY OF TIME Trusts Date Back A Few Thousand Years To Ancient Egypt The Will/Trust World As We Know It Appeared In The 8th Century – English Clergy Began Acting As Executors And Trustees The First Wills Were Nuncupative Lots of Contests In Terrorem Clauses Appeared

3. A BRIEF HISTORY OF TIME Advisors Began Calling Themselves “Lawyers” In The 12th Or 13th Century Few Had Offices Most Practiced Out Of Bars Or Pubs Early Wills Were Interesting – “Lex Testamentaria” (1590) – Early Text Girls 12 Could Make a Will Boys Had To Be 14 (Immature Even Then) An “Old Man” Who Forgets His Name Cannot Make Will

4. A BRIEF HISTORY Continued Attorneys Established The First Trust Companies In The U.S. And England Many Became Wealthy Managing Estates Corporate Trusts First Appeared In The Early 1800’s – Farmers Fire Insurance And Loan Company Of New York Was One Of the First 1906 - Congress Enacted Laws To Allow Banks To Be Trustees By 1920 Over 1300 Banks Offered Trust Services

5. A BRIEF HISTORYContinued By 1980 Over 4,000 Banks Offered Trust Services & Controlled The Business Trust Assets Jumped To Over One Trillion Dollars Today Bank Trust Companies Have Less Than Half of the Trust Business And The Numbers Are Falling! Private Trust Companies Are Now The Rage Wyoming Private Trust Companies I Found 2,907 Non Bank Trust Companies On The Internet

6. FEDERAL ESTATE TAXHow Has it Changed? A Brief History Of The Law #1 Even Before I Was Born: Egyptians (700 B.C.), Romans & Greeks Tax Estates 1798: First Federal Death Tax Is Passed To Pay For The Revolution Taxed Inheritances of Over $50 It Is Repealed In 1802 1862: The Death Tax Reappears To Pay For The Civil War It Is Repealed In 1870

7. FEDERAL ESTATE TAXHow Has it Changed? A Brief History Of The Law #2 1898: The Estate Tax Reappears, This Time To Pay For The Spanish American War Is It Proper “To Stand By The Grave Side Of A Dead Father And Collect Tax” Senator Allen The Tax Is Repealed In 1902 But Factors That Existed Around The Turn Of The Century Caused The Debate To Continue Jekyll Island

8. FEDERAL ESTATE TAXHow Has it Changed? A Brief History of the Law #3 1916: First Estate Tax - $50,000 Exclusion 1924: First Gift Tax - $3,000 Exclusion 1948: Marital Deduction: ½ of the estate Maximum Rate 77% 1976: Increased Exclusion from $60,000 to $175,625 (’81) 1981: Increased Exclusion to $600,000 (’87) and Gift Tax Exclusion to $10,000 Unlimited Marital Deduction

9. FEDERAL ESTATE TAXHow Has it Changed? A Brief History of the Law #4 1997: Taxpayer Relief Act Call For Increase In Exclusion To $1 Million 2000: The Battle For Repeal Heats Up Tractor At the White House 2001: Everything Is Changed: Welcome To The State Of Confusion Ten Years Of Uncertainty Ten Years Of Change – What Year You Die Matters

10. FEDERAL ESTATE TAXHow Has it Changed? A Brief History of the Law #5 2010: The Sky Falls. No Tax But…. How Did That Happen? Blanch Lincoln & John Kyle Refused To Vote For a $3.5 Million Exemption The Sky Falls: No Death Tax The “Winners”: At Least 6 of Them Dan Duncan (Intergy) - $ 9 Billion George Steinbrenner (Yankees) - $1.1 Billion

11. FEDERAL ESTATE TAX EXEMPTION • 1975 - $60,000 • 1987 - $600,000 • 2002 - $1,000,000 • 2005 - $1,500,000 • 2006 - $2,000,000 • 2009 - $3,500,000 • 2010 – NO TAX • 2011 - $5,000,000 • 2014 - $5,340,000

12. ESTATE TAX STATISTICS 1976: 139,000 Estates Subject To Tax 7 ½% Of All Estates Subject To Tax 1996: 32,000 Taxable Estates Less Than 2% Subject To Tax $17 Billion In Revenue 2000: 52,000 Taxable Estates $24.4 Billion In Revenue 2012: (Revenue Was From 2011 Deaths) 3,738Taxable Estates Less then 1/4% Subject To Tax $ 8.5 Billion In Revenue

13. Tax (000,000) $14.3 $24.4 $21.7 $13.2 $ 8.5 ESTATE TAX REVENUE Year 1995 2000 2005 2010 2012 Taxable Returns 36,588 52,000 20,250 6,711 3,738

14. ESTATE TAX REVENUE 2012 Tax (Billions) $ .1 $ 1.2 $ 1.9 $ 5.3 $ 8.5 Taxable Returns 237 999 502 405 3,738 Year Under $5M $ 5M to 10M $ 10M to 20M Over $20M Total

15. WHERE DO WE GO FROM HERE? • Obama Proposal – It Is Not Over Until It Is Over! As We Move toward the next election There is More to Discuss • Fiscal year “Green book” Proposals 2014 • Reinstate the $3.5 Million exemption in 2018 • Move th3 top Tax rate to 45% • No indexing • Retain Portability • No Clawback

16. WHERE DO WE GO FROM HERE? • Fiscal year “Green book” Proposals 2014 Continued • Require GRATS to Run For At Least 10 Years • Limit GRATS to Run for life plus 10 years • Killing the 99 year Grat • Limit GST Exemptions to 90 Years • Require Basis Consistency • Limit Crummey Withdrawal Rights to $50,000 a Year • Strangely, the provisions to Reduce Discounting on Family Entities is gone!

17. WHERE DO WE GO FROM HERE? • Republican Proposal – They Have Not Given Up! • Abolish the Death Tax

18. WHERE DO WE GO FROM HERE? • Lobby Money Is The King! • Millions Went Into The 2012 & 2014 Elections • Millions More will go into the 2016 Elections • Tax Foundation Survey (2009) • Estate Tax Is The “Most Unfair Tax” • 2/3 Of The Population Are For Repeal • Possible Results – It Is Not Over! • The Fight Will Continue To Repeal The Death Tax • If Repeal Is Not An Option The Tax Rate Is The Battle Field

19. STATE INHERITANCE TAX Under Prior Law States Received A Part Of The Federal Estate Tax – State Death Tax Credit - 6% To 16% Of The Federal Share Of The Tax Since 2005 The Credit Is Gone – Along With $5 Billion To The States 20 States (more or less) Have Decoupled From The Federal Law or Have Their Own State Inheritance Tax Do You Know Which States?

20. DEATH TAX So What Does All Of This Mean To You?

21. DOCUMENTS MUST BE FLEXIBLE • What If The Federal Exemption Changes Again? • What If The Federal Estate Tax Is Repealed? • What If The State Changes The Inheritance Tax Law? • What If Your Assets – Or Values – Change? • What If You Are No Longer Capable Because Of Illness Or Accident To Change Your Plan?

22. Blowing in the Wind • We Are In The Midst Of The Most Radical Changes In The Estate Planning Profession Since The Federal Estate Tax Was Reinstated For The 4th Time In 1916 • Death Taxes No Longer Drive The Train • In 2014 Fewer Than 4,000 Estates Will Be Subject To Death Tax • That Is Less Than 1/2 Of 1 % Of Those Who Die

23. A CHANGING WORLD • Previous Tax Tools Are Turned Upside Down • Will We Argue For Higher Values To Increase Basis? • Will We Reverse The “Defective “ Trust Concept? • Remember The Old Clifford Trusts? • Will Marital Deduction Planning Be More Complex? • You Might Want To Actually Leave Assets In The Estate Of The Surviving Spouse To Increase Basis At The 2nd Death

24. A CHANGING WORLD • American Society has changed • Married Couples 1950: 78% 2010: 48% • Married with Children 1950: 43% 2010: 20% • By age 85 Women outnumber men by 4 to 1 • 47% of American families support a minor or adult child or an elderly parent • 15% support both

25. A CHANGING WORLD 49 million 79 million 41 million 71 million 23 million • Silent Generation • Baby Boomers • Gen X • Gen Y • Gen Z

26. MY TOP TEN (More or Less)THINGS YOU NEED TO CONSIDER 10 5 9 1 6 4 7 8 2 3

27. WINDSOR v. U.S. Doc # 12-2335-cv (10-12) • Edie & Thea Start Committed Relationship In 1962 • 1993 Registered As Domestic Partners – New York • Married In Canada In 2011 • Thea Died • Edie Filed Estate Tax Return – Claimed Marital Deduction • IRS Says No – Cites Defense Of Marriage Act • District Court Agreed With Edie DOMA Unconstitutional • Ct Of Appeals Agreed • Supreme Court Rules • The Federal Government Is Prohibited From Placing Any Classification On The Recognition Of Marriages – This Is A State Issue, And Must Be Left To The States

28. Deinlein v. U.S. 114 AFTR 2d 2014-5390(DC KY) 7/23/14 • Taxpayer Owes The IRS • Tax Liens Filed • Mother Dies • Taxpayer Disclaims The Inheritance • Tax Court Holds That The lien Attaches to the interest notwithstanding the Disclaimer • Case Follows Drye 528 US 49 (1999)

29. FAILURE TO TIMELY FILE 706 TO ELECT PORTABILITY • Rev Proc 2014-18 Provides An Extension To Estates To Elect Portability For Decedents Who Died In 2011,1012 And 2013 Who Did Not Timely File A Federal Estate Tax Return • It Applies To Estates Too Small To Require The Filing Of A Return • Requires Filing By December 31, 2014 • PLR 201421002 May Offer Help To Those Who Fail To Meet The 12-31 Deadline

30. ESTATE TAX UPDATE INSURANCE Remember Rev Rul 2009-13 Outlined Income Tax Consequences Of The Sale Or Cancellation of An Insurance Policy Did Anyone Care? The IRS Did! Fujishima Turner Perez Chambers

31. ESTATE TAX UPDATE LIFE INSURANCE • Brown v. Comm’r (7th Cir 9-11-12) • 1982 Brown Purchases NW Mutual Policy • $1,837 Level Premium - $100,000 DB • 1987 CVs Used To Pay Premiums • 2004 Dividends Used to Pay Premiums & Loans • 2005 Loans Equal Cash Values – Policy Terminated By Company • 1099: $29,093 Taxable • Court Agrees!

32. ESTATE TAX UPDATE LIFE INSURANCE • White v. Comm’r, T.C. Summary Opinion 2012-108 (2012) • 1992 White Works for Company • Company Offers Insurance through payroll deductions • White pays $22,000 over years • White changes jobs & stops paying • Policy lapses in 2008 • 1099: $3,000 Taxable • Court Agrees!

33. ANY TECHNIQUES NEW OR HOT? NOT MUCH – BUT….

34. THINGS TO THINK ABOUT • Swap High Basis Assets Held In Grantor Trusts For Low Basis Assets • Get Rid Of Discount Entities – Get More Basis • Give Beneficiaries A General Power Of Appointment • Turn Your Poorer Ancestor Into An Asset • Gift Low Basis Assets Into Trust For Parent • Consider A GRAT For The Poorer Parent • Give The Parent A General Power Of Appointment • Parent Dies, Basis Is Stepped Up, Assets Pass To Grandchildren – Sooner Rather Than Later

35. THE FAMILY GIFT TRUST ALMOST TO GOOD TO BE TRUE DEATH TAX AND ASSET PROTECTION

36. FAMILY GIFT TRUST • Husband Creates Trust For Wife (And Children) For Life Of Wife • Maximum Gift $5.34 Million • Spouse Receives Income/Principal – Support In Accustomed Standard Of Living • Trust Is Protected From Claims Of Creditors, Future Spouses & Death Tax At Death Of Spouse • Trust Can Then Be Held For Children For Life & Pass To Grandchildren • Same Asset and Death Tax Protection • No Gift or Death Tax – Ever – Regardless Of Value! • No Probate - Ever

37. GRANTOR RETAINED ANNUITY TRUSTS MECHANICS OF CREATION/CONCEPT Assets to Trust Annuity to Grantor Remainder for Family Family Grantor

38. GRATS REVISITED • We Obsess Over Short Term GRATS • The Walton’s Moved $XXX Using 2 Year Trusts • IRS Rate For November Is 2.2% • A 15% Jump Each Year For 2 Years On $1 Million • $270,000 Tax Free To Kids • Why Not Go Long? 10 Years • Ten Year GRAT • $1 Million • Assume a 6 % Return over 10 Years • $300,000 At End Of The Term

39. GRATS REVISITED • Assume An IRS 7520 Rate Of 2.2% • Why Not Go REAL Long? • 99 Year Zero GRAT !! • $1 Million - $ 24,886 Per Year – Zero Grat • Ten Years From Now the Grantor Dies • The Trust Still has $1 million In Principal • The 7520 Rate Is Higher – 5% • What Happens? • The value In the estate is $491,555 • 20.2036-1(c)(2)(iv)(ii)

40. GRATS REVISITED • A Grat Is An Annuity • Per Section 20.2036-1(c)(2)(iv)(ii) The Value using the 7520 Rate At Death Is The Amount of Corpus Necessary to yield the annual pay out • Look At the Amount Included! • 2.0% $ 772,000 • 4.0% $ 603,000

41. GRATS REVISITED • The Term Is Important • Even A 50 Year GRAT May Not Work • It Is a “Math” Thing • Obama Proposal Limits to Life expectancy plus 10 Years • 31 Years for a 60 year old • You have To Run The numbers • Must Address Payment Of The Tax – Not From The GRAT • At Death Might The Trustee And The Child Who Inherits Acknowledge A Merger Of The Annuity Interest And The Remainder Interest And Terminate the trust? • If So..”Poof” It Ends • Might The Grantor Buy Out The Annuity Interest During Life And End It Leaving The Balance With The Child?

42. CHARITABLE LEAD TRUST ASSETS THEN TO BENEFICIARY INCOME FOR TERM OF YEARS CHARITY

43. CHARITABLE LEAD TRUST • Grantor Transfers Assets to Trust • Income (Fixed Amount or Percent) Is Paid to Charity for Term of Years • Grantor Receives Charitable Deduction • Gift to Family at End of Charitable Term Is Discounted • Remember – 65% of American households give to charity - $298 Billion in 2011 • 161,000 Donor Advised funds in US

44. CHARITABLE LEAD TRUST • Grantor Gives $50,000 a Year To Charity • Grantor Transfers $1 million to 20 Year Trust • Remainder to Children • Trust Pays $56,530 Per Year To Charity • Zero Gift • Assume a 6% Return Over 20 Years • $1,127,000 Goes To Kids 20 Years From Now • Grantor Receives $ 1 Million Charitable Deduction

45. THE FUTURE OF ESTATE PLANNINGIt Is NOT About Death Taxes! • It Is Not About Taxes! • It Is About Leaving A Positive Legacy For Heirs • It Does Not Start With Things • It Starts With People • Protecting And Preserving Family Wealth Is The New Goal

46. IS ESTATE PLANNING DEAD? • Just The Baby Boomers Will give us enough work for years • Lots of Dead People. Lots of Estates to administer • 2.5 million will die in 2014 • Up from 1.7 million in l960 • 2020: 2.9 • 2030: 3.3 • 2040: 3.8

47. I SPENT A LIFETIME CREATING AN ESTATEHOW DO I PROTECT IT FOR THE CHILDREN & GRANDCHILDREN?

48. HIPAA PRIVACY LAW • Problem: Medical Providers Can Be Reluctant To Release Medical Information On A Child Even To Parents Once The Child Is 18. • Solution: Adult Children Should Sign Medical Power Of Attorney Naming Their Parents. • Problem: Out Of Town Without The Kids?

49. HOW TO BLOW AN INHERITANCE • 35% Wish to protect the heirs from themselves – mismanaging the inheritance • Wealth Counsel Industry survey • Lost inheritances (published 3-7-13 in WSJ) • 70% of inherited wealth of affluent residents gone by end of 2nd generation • 90% by end of 3rd generation

50. MAJOR TRENDS • Estate Planning Is For The Living, Not The Dead • I Kill Off Most Clients In the First 30 Minutes Of The Meeting. Why Are They Uncomfortable? • Primary Goal Of Most Clients • Pass Wealth Free Of Tax – NOPE! • Protect The Wealth Of The Family – Yes!