Estate Planning Basics

1. Estate Planning Basics An Overview of the Estate Planning Process PLC.1991 (11.09)

2. A word about this presentation. • This presentation contains statements regarding the tax treatment of certain financial assets and transactions. These statements represent only our current understanding of the law in general and are not to be relied upon by Purchasers. Income, estate, gift, and generation skipping tax rules are subject to change at any time. Neither Protective Life nor its representatives offer legal or tax advice. Purchasers should consult with their legal or tax adviser regarding their individual situations before making any tax-related decisions. • Following the workshop, sales representatives will be on site to discuss specific products and services you might consider in planning for your future. • Variable products are issued by Protective Life Insurance Company (PLICO), and securities are offered by Investment Distributors, Inc. (IDI). Both PLICO and IDI are located at 2801 Highway 280 South, Birmingham, AL 35223 (Attn: LAD 3-1) and are subsidiaries of Protective Life Corporation. Protective Life Corporation is a separate company and is not responsible for the financial condition or contractual obligations of PLICO or IDI.

3. Estate Tax Uncertainties There are four areas of uncertainty about Federal estate taxes: • Currently (2010) the Federal Estate Tax is zero • In 2011, the Federal Estate Tax will return with $1 million exemption amount and top tax rates approaching 55% (and 60% for very large estates) • Congress might consider new tax laws that will change the exemption amount, the tax rates, and other features of the estate tax law • We don’t know if or when Congress will act

4. What Is an Estate Plan? • An estate plan is a map • This map reflects the way you want your personal and financial affairs to be handled in case of incapacity or death

5. Chances are, you do: Not just for the wealthy Without an estate plan, you can’t control what happens to your property if you die or become incapacitated An estate plan makes your wishes clear, and helps avoid family disputes Proper estate planning can preserve assets andprovide for loved ones Especially needed if: Your spouse isn’t comfortable with financial matters You have minor children Your net worth exceeds federal estate tax exemption ($1 million after 2010*) You own property in more than one state Financial privacy is a concern You own a business Who Needs an Estate Plan? *Based on current law. The $1 million figure may change if Congress passes new tax legislation during 2010 or later.

6. Basic Estate Planning Concepts Health Care Planning for Incapacity Property Management Estate Planning Tax Basics Life Insurance Trusts Wills and Probate Lifetime Gifting Planning for Death

7. Planning for Incapacity • Incapacity is an important consideration in estate planning • Without a plan for possible incapacity, a court would have to appoint a guardian • Lack of planning increases the burden on a guardian • A guardian’s decisions might not be what the incapacitated person would want

8. Planning for Incapacity – Health-Care Directives* Living Will Durable Power of Attorney for Health Care (Health-Care Proxy) Do Not Resuscitate (DNR) Order Puts your instructions in writing Lets you designate an agent to make decisions on your behalf Directs that resuscitative measures be withheld or withdrawn *Health-care directive requirements vary by state.

9. Planning for Incapacity – Property Management Tools Joint Ownership Durable Power of Attorney (DPOA) Living Trust Joint owner has the same access to property as you do Lets you designate an agent to make decisions on your behalf Lets a successor trustee take over management of trust property

10. What Happens If You Die Without an Estate Plan? • Some property passes automatically to a joint owner or to a designated beneficiary (e.g., IRAs, retirement plans, life insurance, trusts) • All other property generally passes according to state intestacy laws

11. Husband / Father ½ ¼ ¼ Wife Child Child What Happens If You Die Without an Estate Plan – Intestacy • Intestacy laws vary from state to state • Typical pattern of distribution divides property between surviving spouse and children • Your actual wishes are irrelevant • Many potential problems A typical intestate distribution pattern looks like this:

12. Wills & Probate • A will is the cornerstone of an estate plan • Directs how your property will be distributed • Names executor and guardian for minor children • Can accomplish other estate planning goals (e.g., help reduce taxes) • Written, signed by you, and witnessed

13. Wills & Probate – The Probate Process • Most wills must be probated • Will is filed with probate court • Executor collects assets, pays debts, files tax returns, and distributes property to heirs • Typically, process lasts several months to a year

14. Pros Time and costs are typically modest Court supervision Offers some possible protection against creditors Cons Can be time consuming for complex estates Title transfer delays Fees Ancillary probate Public record Wills & Probate – Pros & Cons

15. Can you avoid probate? Yes, an estate plan can be designed to control which assets pass through probate, or to avoid probate altogether. Own property jointly with rights of survivorship Complete beneficiary designation forms for property such as IRAs, retirement plans, and life insurance Use trusts Make lifetime gifts Wills & Probate – Avoiding Probate

16. Tax Basics Transfer taxes include: • Federal gift tax - lifetime gifts • Federal estate tax - property transferred at death • Federal generation-skipping transfer taxes (GSTT) - transfers to individuals more than one generation below you

17. Tax Basics – Federal Gift Tax • Gift tax applies to lifetime transfers • Certain gifts are excluded - $13,000 annual gift tax exclusion in 2010* • $1 million dollar gift tax exemption in 2010* The donor files the return and pays the gift tax. Lifetime Transfer You (Donor) Person Receiving Gift (Donee) Gift tax may apply *The National Underwriter Company, “Tax Facts 2010”

18. Tax Basics – Federal Estate Tax • Estate tax applies to transfers made at death • Property transferred to a spouse or to a charity is generally not subject to tax (fully deductible) • $1 million estate tax exemption* The executor files the return and pays the estate tax. Transfer at Death Your Estate Beneficiary Estate tax may apply *Based on current law for persons dying in 2011, unless changed by new rules enacted by Congress during 2010.

19. Tax Basics – Federal GSTT Transfer During Life or at Death • The generation - skipping transfer tax (GSTT) may apply to transfers made to someone more than one generation below you • $1 million GSTT exemption* You / Your Estate Child (Donee / Beneficiary) Grandchild (Skip Donee / Beneficiary) GSTT may apply *The exemption amount for generation-skipping transfer tax purposes is equivalent to the estate tax exemption amount, i.e., if we return to a $1 million estate tax exemption amount, that same amount will be used for purposes of the generation-skipping transfer tax exemption.

20. Tax Basics – Changing Landscape Tax Rates Estate Tax and GSTT repealed

21. Tax Basics – Changing Landscape Exemption Amounts Estate Tax and GSTT repealed

22. Lifetime Gifting • Lets you see the recipient enjoying your gift • Lets you help reduce transfer taxes by taking advantage of the $13,000* annual gift tax exclusion and other tax deductions • Removes future appreciation of property from your taxable estate • But, no “step-up” in basis – your basis in the property carries over instead *The National Underwriter Company, “Tax Facts 2010”

23. If you’re contributing to a Section 529 plan, you can give $65,000 ($130,000 with spouse) gift tax free No gift tax on amounts paid directly to a school for an individual’s tuition No gift tax on amounts paid directly to a medical care provider for an individual’s medical care Lifetime Gifting – Transfers Excluded from Gift Tax You can give $13,000* each year to as many individuals as you want federal gift tax free ($26,000* if you and your spouse make the gift together) *The National Underwriter Company, “Tax Facts 2010”

24. Trusts • Versatile estate planning tool • Can protect against incapacity, avoid probate, helps reduce taxes • Allows professional management of assets • Provide safeguards for minor children, elderly parents, other beneficiaries • Certain trusts can help protect assets from future creditors • Control over property

25. Trusts – What Is a Trust? Grantor • Legal entity that holds property • Parties to a trust: grantor, trustee, beneficiary • Living trusts vs. testamentary trusts • Revocable trusts vs. irrevocable trusts Trust Agreement Trust Property Trustee Manages trust property according to trust agreement Beneficiaries Have rights to trust property under terms of trust agreement

26. Trusts – Marital and Bypass Trusts First Spouse to Die • Used by married couples • Bypass trust receives maximum amount that can pass free of estate tax under exemption – no estate tax • Marital trust receives balance of estate – no estate tax (marital deduction) • Surviving spouse receives income during life, principal passes to beneficiaries at death – estate tax imposed on remaining marital trust assets only, but may be offset by surviving spouse’s exemption Trust A Marital Trust (Balance of Estate) Trust B Bypass Trust (Exemption Amount) Surviving Spouse Receives income from trusts Beneficiaries(Children) Receive principal upon death of surviving spouse

27. Life Insurance • Can provide instant estate • Can provide needed estate liquidity • Life insurance proceeds are included in your estate for federal estate tax purposes unless your estate plan addresses this issue • Key issue is ownership of policy

28. Life Insurance – Irrevocable Life Insurance Trust (ILIT) During Your Life Insurance Company Insured Irrevocable Trust 2. Trustee purchases life insurance policy on your life – policy owned by trust 1. You (the insured) create an irrevocable trust and name a trustee and beneficiaries Beneficiaries 4. Beneficiaries technically can withdraw cash gifts during limited window of time 5. Trustee uses cash gifts to pay premiums 3. You make regular cash gifts to trust

29. Life Insurance – Irrevocable Life Insurance Trust (ILIT) At Death Insurance Company Irrevocable Trust Beneficiaries • ILIT receives proceeds of life insurance policy • Proceeds not subject to estate tax • Proceeds distributed according to terms of trust 4. Beneficiaries receivefull proceeds, free of estate tax

30. Have you implemented a plan for incapacity (health and property)? Do you have a valid will? Is estate tax a planning concern for you? Does your overall estate plan reflect your current wishes and circumstances? Conclusion