HOW TO ADVISE YOUR CLIENTS UNDER THE NEW ESTATE TAX LAW

1. HOW TO ADVISE YOUR CLIENTS UNDER THE NEW ESTATE TAX LAW A Presentation by: Alan S. Gassman, J.D., LL.M. agassman@gassmanpa.com Monday, February 7, 2011 Powerpoint presentation and other materials prepared by: Alan S. Gassman, J.D., LL.M., Jerome M. Hesch, J.D., MBA, Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M.

2. New Estate Tax Law Summary *Although the default is a $5,000,000 exemption, with a 35% tax rate, an election can be made to have no estate tax apply with respect to decedents dying in 2010, but the income tax “stepped-up” basis is limited for larger estates. **In addition to the above, the amount that passes estate tax free ($10,000,000 per couple) will increase with the cost of living beginning in 2012 in $10,000 increments.

3. Introduction • Applies January 1, 2010 to December 31, 2012. • Allows up to $5 million per person to pass estate tax free. • Lifetime gifting exemption raised to $5 million for 2011 and 2012. • The above items are to be adjusted for inflation beginning in 2012! • Estate tax scheduled to go back to 2001 $1 million gifting and death exemptions and rates on January 1, 2013! • Estate tax rates cut to 35%. • Retroactivity for 2010 estates, with the option to elect out of the estate tax and instead be under the limited carryover basis regime. • Portability of the $5,000,000 Estate Tax Exemption on the first dying spouse, if such spouse dies in 2011 or 2012. • Elimination of carryover basis regime (unless an election is made to have no estate tax and for the carryover basis regime apply with respect to a 2010 estate) . • The State Death Tax Deduction continues to apply to estates of decedents dying in 2010, 2011 or 2012, instead of the State Death Tax Credit. • Taxation of nonresident non-citizens (NRNCs) and Qualified Domestic Trusts (QDOT’S) is unchanged – only a $60,000 exemption for NRNCs, and QDOTs are still subject to estate tax as if the assets thereof were included in the estate of the first dying spouse with allowance for all applicable credits of the first dying spouse (unless the surviving spouse becomes a U.S. citizen before his or her subsequent death).

4. According to Forbes Magazine, the number of Americans and their net worth as of January 2009 was as follows: $1 Billion 357 $5 Million 840,000 $1 Million 6,700,000 $500,000 11,300,000 This doesn’t take into account the value of principal residences, life insurance, or increases of approximately 26% in 2009 and approximately 13% in 2010 in the S&P 500.

5. PROTECTIVE TRUST LOGISTICAL CHART First Dying Spouse’s Revocable Trust Surviving Spouse’s Revocable Trust During both spouse’s lifetimes: Upon first death in 2011: $5,000,000* (Adjusted upward for inflation after 1/1/2011) Remaining Assets During surviving spouse’s remaining lifetime: Family (By-Pass) Generation Skipping Trust (Not taxed in surviving spouse’s estate) QTIP Non-GST Trust (Marital Deduction Trust that is not generation skipping) Surviving Spouse’s Revocable Trust (Will include assets owned jointly on first death) $5,000,000* (Adjusted upward after 1/1/2011) Remaining Assets Surviving spouse can have the right to redirect how assets as distributed on second death. Upon second death: Generation Skipping Trusts for Children Children’s Trust (or distributions) Generation Skipping Trusts for Children (Will merge with first dying spouse’s Generation Skipping Trusts shown on left) Children’s Trust (or distributions) After deaths of both spouses: Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. *Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000. *The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.

6. Gifting Allowances Gifting of up to $13,000 per person per year still does not need to be reported or cause use of the lifetime gifting exemption. Discounts with respect to use of limited partnerships, LLCs, and other vehicles were not changed. In addition there continues to be an unlimited gifting allowance for medical and educational expenses paid directly to medical providers, facilities and for tuition education institutions under Internal Revenue Code Section 2503(e).

7. Lifetime Reportable Gifting Exemption Since 2001, each person has had the ability to gift up to $1,000,000 during his or her lifetime, above and beyond the $13,000 per year per person allowance described above. Use of the $1,000,000 exemption causes a reduction in the amount that can pass estate tax free on a dollar for dollar basis. The gifting exemption for 2011 and 2012 has been increased to $5,000,000! This will allow many clients to shift income-producing assets to their children so that the children will be subject to income tax at lower rates than the parents would have. This may permit the children to gift the assets back to the parents if and when ever mutually agreed. The parents may retain constructive control of the gifted assets by using limited partnerships, irrevocable trusts, and interrelated structures. It may be possible to establish asset protection trusts which are outside of the estate of the donor, yet may be used for the benefit of the donor if there are hard times ahead. These will become popular and are not difficult to establish.

8. The Clawback Question • Assume that a taxpayer utilizes his entire $5,000,000 lifetime gifting exemption to make a $5,000,000 gift in 2011 free of gift tax. • Further assume that the taxpayer later dies in 2013 when the estate tax exemption has decreased to $1,000,000, and the estate tax rate has increased to 55%. • Will the taxpayer have to pay estate tax based upon $4,000,000 of the $5,000,000 gift that he made in 2011? • Although many commentators have expressed concern about a risk of this “exemption clawback,” the language of the Internal Revenue Code (and the relevant legislative history) indicates that any taxable gifts made by a taxpayer during his lifetime should not be subject to estate tax in the year of the taxpayer’s death. • See Section 2001 (g), as enacted by the new law, and Section 2001(b)(2) as it existed immediately prior to the enactment of EGTRRA in 2001. • See also Joint Committee on Taxation, General Explanation of the Tax Reform Act of 1976, pages 527-528 (December 29, 1976).

9. The $5,000,000 Per Person Death Passage Exemption Will Now Be “Portable” If Both Spouses Die After 12/31/2010, or Thereafter If Extended Under prior estate tax law, the first dying spouse had to establish a trust or pass the $3,500,000 worth of assets directly to non spouse beneficiaries (and/or in non spousal trusts) in order to preserve use of the first dying spouse’s allowance. Under the new law, a surviving spouse will be able to use whatever portion of the allowance was not used by the first dying spouse. For example, if the first dying spouse leaves $1,000,000 outright to the children and the rest to the surviving spouse, then depending upon circumstances the surviving spouse may be able to leave $9,000,000 without estate tax on the second death, assuming that this law continues after 2012.

10. CPI ADJUSTMENT STARTS IN 2012 BASED UPON THE JANUARY 1, 2011 CPI INCREASE THE $5,000,000 LIFETIME GIFT AND ESTATE TAX ALLOWANCES WILL BE ADJUSTED FOR CHANGES IN THE CONSUMER PRICE INDEX BEGINNING 2012 BASED UPON ALL CHANGES IN THE INDEX OCCURING AFTER 1/1/2011. THE PORTABILITY EXEMPTION (DSUEA) WILL NOT INCREASE WITH CPI AFTER THE DEATH OF THE FIRST DYING SPOUSE. THE GOVERNMENT USES THE CPI FOR ALL URBAN CUSTOMERS, AS PUBLISHED BY THE UNITED STATES DEPARTMENT OF LABOR.

11. For Individuals Who Die or Died in 2010 A. Unless elect out as described below, subject to federal estate tax based upon a $5,000,000 death exemption and a 35% estate tax rate. Must file estate tax return if gross assets exceed $5,000,000. The $5,000,000 exemption reduced for prior use of $1,000,000 lifetime gifting exemption. B. Can elect to instead be subject to original 2010 carryover basis rules. File election later of: (i) 9 months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday, September 17, 2011, and allocate up to $1,300,000 ($4,300,000 if married) for date of death basis increases, and pay no estate tax. C. Example – John Smith dies unmarried with a $6,000,000 net estate. The estate can pay $350,000 in estate tax and receive a full step-up, or may alternatively elect to limit basis step-up to $1,300,000, and pay no estate tax. NOTE – Disclaimers of assets that were transferred on the death of a decedent that are normally limited to 9 months will be permitted through September 17, 2011 where the decedent died 2010 but before December 18, 2010.

12. Professor Hesch’s Example- Carryover Basis for an Individual Who Died in 2010? Senior died in 2010 owning a commercial office building, the only asset includible in his estate. Value: $14,000,000 Land $40,000,000 Building $54,000,000 Mortgage: ($44,000,000) Equity: $10,000,000 _______________________________________________________________________________ History - Acquired in 1984 for $20,000,000 Allocated $4,000,000 to Land Allocated $16,000,000 to Building Depreciated $16,000,000 Current Adjusted Tax Basis $4,000,000 _______________________________________________________________________________ If the property is sold for $54,000,000, $16,000,000 of the gain will be ordinary income, and $34,000,000 of the gain will be capital gain. _______________________________________________________________________________ From a tax savings standpoint, is it better for Senior’s estate to be subject to the estate tax and receive a stepped-up basis on the building, or to elect to have no estate tax apply and receive a carryover basis?

13. TO DIE OR NOT TO DIE IN 2010 – THAT WAS THE QUESTION Is it better to have an unlimited exemption in 2010 or is it better to afford the surviving spouse the opportunity to “port” the deceased spouse’s unused estate tax exemption if the decedent dies in 2011? The tax law will sometimes make people do things that they normally would not have done, including timing of death. Several commentators have expressed warnings that large discontinuities between estate tax laws provide incentive to change the timing of death, which causes a phenomenon that is termed “death elasticity.” United States Representative Cynthia Lummis (R-WY) has said that some of her Wyoming constituents were so worried about the reinstatement of federal estate taxes that they planned to discontinue dialysis and other life extending medical treatments so that they could die before December 31, 2010.

14. The 2010 GST Transfer Opportunity for December 2010[News Item – Discussion of Allocation of GST Exemption Where A Zero Percent GST Gift Was Made In 2010 To A GST Exempt Trust] The following was drafted in December to explain this opportunity: There is a lot of confusion on the GST opportunity for 2010. It allows use of what remains of the client’s $1,000,000 unified credit without using GST exemption for “full skip” transactions. Past the $1,000,000 a gift tax is incurred, which many people do not understand, and most people will not want to pay. It does not have to be to a “grandchildren only” trust. It can be to a 529 Plan or UGMA account for a grandchild or grandchildren, but the brokerage world has a hard time filling out forms and having these completed by 12/31. The following is a memo that goes into some detail on this, a sample Letter of Agreement to facilitate 2010 gifting is attached. We welcome any questions on this. ----------------------------------------------------------------------------------------------------------------------------------------------------------------- The Memo: Congress has recently passed legislation that raises the estate tax exemption to $5,000,000 per person on January 1, 2011. In addition, the lifetime gift tax exemption and the generation skipping transfer (“GST”) exemption will also be $5,000,000 per person on January 1, 2011.

15. The 2010 GST Transfer Opportunity Continued GST tax generally applies to gifts to grandchildren and more remote descendants. When a donor makes a gift to grandchildren, the donor normally allocates some of his or her GST exemption to the gift so that the gift is not subject to GST tax. This allocation uses some of the donor’s lifetime GST exemption. This allocation is similar to the allocation of a donor’s lifetime gift tax exemption to “taxable gifts” to avoid the actual payment of gift tax on the gifts. A planning opportunity exists prior to January 1, 2011 for donors who would like to make gifts to or for grandchildren. Until the end of 2010, the GST tax rate is 0% instead of 35%. If a donor makes a gift to grandchildren before the end of the year, the gift may utilize some of the donor’s lifetime gift tax exemption. In 2010, the donor may elect to have the gift be subject to GST tax and no GST tax will actually be due because the tax rate is 0%. This will save the $5,000,000 GST exemption for later use by the donor. For example, if a donor makes a gift of $500,000 to a trust or a 529 Plan for grandchildren and has already used his annual exclusion for the grandchildren, the gift would use $500,000 of the donor’s lifetime gift tax exemption, but none of the donor’s GST exemption if the gift is made before the end of 2010. An example 529 Plan transaction document is attached. If the gift is made during 2010, the donor does not need to use any of his or her GST exemption because no GST tax is due on the transfer ($500,000 x 0% = $0). This allows the donor to keep the $500,000 of unallocated GST exemption for future use, without having to pay $175,000 ($500,000 x 35% = $175,000) in GST tax if the gift was made in 2011 and no GST exemption was allocated. Therefore, this donor would be able to transfer $500,000 more on death to a trust that could benefit his child or children and not be subject to estate tax at the level of the child or children. This is the advantage of preserving GST exemption while making gifts to grandchildren that might otherwise have become subject to a tax at the level of the child. If the gift was made on or after January 1, 2011, $500,000 of the donor’s GST exemption would be allocated to the gift to avoid the imposition of GST tax. This allocation would reduce the remaining GST exemption of the donor to $4,500,000 ($5,000,000 - $500,000 = $4,500,000) assuming that none of the donor’s GST exemption had been used on prior gifts. If the donor did not want to allocate GST exemption, the gift would be subject to GST tax at a 35% rate and the donor would need to pay $175,000 ($500,000 x 35% = $175,000).

16. Single Person with $15,000,000 Estate Tax and Lifetime Gifting Allowance Without 2010 $500,000 Grandchild Gift With 2010 $500,000 Grandchild Gift $15,000,000 $15,000,000 $9,500,000 $5,000,000 $10,000,000 $500,000 $5,000,000 Taxed in Children’s Estate When They Die Not Taxed in Children’s Estate When They Die Taxed in Children’s Estate When They Die Not Taxed in Children’s Estate When They Die Not Taxed in Children’s Estate When They Die CHILDREN AND GRANDCHILDREN GRANDCHILDREN CHILDREN AND GRANDCHILDREN Taxed in Children's Estate: $9,500,000 Not Taxed in Children's Estate: $5,000,000 Passing to Grandchildren: $500,000 Taxed in Children's Estate: $10,000,000 Not Taxed in Children's Estate: $5,000,000 Net result – less assets passing that would become subject to federal estate tax on the death of children. Net result – More value passing to grandchildren without being subject to generation skipping tax or tax at the children’s level.

17. WHAT IF THE CLIENT ADDED TO A GST EXEMPT TRUST IN 2010 TO TRY TO TAKE ADVANTAGE OF THE ZERO GST TAX RULE? If a client made a GST transfer to a GST-exempt irrevocable trust that only benefits grandchildren and more remote descendants, and the client did not allocate GST exemption to the trust, then the client may have unintentionally caused the trust to not be 100% GST exempt.

18. DISCUSSION OF ASSETS ADDED TO GST EXEMPT TRUSTS DURING THE YEAR 2010 2009 2010 Grantor establishes and funds Trust with $100,000 gift. Grantor gifts assets to Trust to take advantage of 0% GST tax rate. Grantor $100,000 Gift Grantor $200,000 Gift IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) Grantor allocates $100,000 of GST exemption with respect to this gift. After the gift, the Trust is 100% GST exempt ($100,000 of GST exemption allocated; $100,000 of assets at time of 2009 gift). Grantor does not allocate any GST exemption with respect to this gift. No GST tax results because the GST tax rate is 0% in 2010. However, the Trust is now only 1/3 GST exempt ($100,000 GST exemption allocated, $300,000 total assets in the Trust at time of 2010 gift), assuming no growth in $100,000 gift to the Trust in 2009.

19. DISCUSSION OF ASSETS ADDED TO GST EXEMPT TRUSTS DURING THE YEAR 2010 – PAGE 2 2011 Trust makes distributions to Grandchild and Great-Grandchild. $10,000 Distribution to Grandchild Trust distributes $10,000 each to Grandchild and to Great-Grandchild. The entire $10,000 distribution to Grandchild is GST tax-free despite Grantor's 2010 Gift to the Trust because of the "move down" rule under IRC Section 2653(a). All future distributions to Grandchild will also be free of GST tax. Of the $10,000 distribution to Great-Grandchild, $6,667 will be subject to GST tax, and $3,333 will be GST tax-free. This is because the Grantor did not allocate GST exemption with respect to his 2010 transfer to the Trust. IRREVOCABLE TRUST FOR GRANDCHILDREN AND THEIR DESCENDANTS ONLY (a "Skip Person" Trust) $10,000 Distribution to Grandchild SOLUTION: Allocate GST exemption to 2010 Gift to Trust, which would cause the Grantor have wasted the 2010 GST tax planning opportunity but would spare the incurrence of GST tax. Another option to consider is a qualified severance under IRC Section 2642 and the Regulations thereunder.

20. New Vocabulary • Basic Exclusion Amount • The $5,000,000 exclusion for estate tax, as increased with the CPI beginning in 2012. • DSUEA • The Deceased Spousal Unused Exclusion Amount – the amount of the taxpayer’s most recently deceased spouse’s Basic Exclusion Amount not used by him or her, assuming that he or she dies after December 31, 2010. • Applicable Exclusion Amount • The sum of (1) the Basic Exclusion Amount plus (2) the Deceased Spousal Unused Exclusion Amount. NOTE- Before the new estate tax law, the Applicable Exclusion Amount was not specifically defined, but was listed for the applicable years, and was described in relation to the unified credit which operated to shield an estate from tax. • Porting and Ported • “Porting” means the act of transferring a portability allowance to a surviving spouse by estate tax return election. • When the porting is completed the exclusion has been “ported”.

21. Selected Deadlines Tax Filing Deadlines: 1. For estates of decedents dying after December 31, 2009 but before January 1, 2011: Unless an estate elects out of the Estate Tax System to have no estate tax apply, the estate tax return must be filed by the later of: (i) 9 months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday, September 17, 2011. The Monday thereafter is September 19, 2011. 2. Disclaimers: Qualified Disclaimers with respect to property received by reason of the death of a decedent in 2010 must be may be filed by the later of : (i) 9 months after the date of death; or (ii) 9 months after December 17, 2010, which is Saturday, September 17, 2011. The disclaimer will be “qualified “for tax purposes assuming that state law permits a disclaimer later than 9 months from the date of death. 3. GST Allocations: Generation Skipping Tax allocation returns for transfers in trust or otherwise made after December 31, 2009 and before December 17, 2010 can be made within 9 months after December 17, 2010, which is Saturday, September 17, 2011. We now know that transfers made to GST exempt trusts in 2010 can be GST exempt if sufficient GST exemption is allocated to the transfer. 4. Portability Estate Tax Return and Election The estate of a first dying spouse must file an estate tax return and affirmatively elect to have portability apply, notwithstanding whether the first dying spouse would have had a taxable estate.

22. Some Major Estate Planning Implications • Clients can make significant gifts under the new $5,000,000 lifetime allowance, even if the gifting allowance goes down to $1,000,000 in 2013. • These gifts can be to trusts that benefit the spouse and descendants (“dynasty trusts”). Many clients already have these types of trusts in place. • Clients can transfer income-producing assets to children who have a lower income tax rates. • Review current planning with advisers to maximize the advantages of this legislation.

23. MRS. $7,000,000 NET WORTH Before Planning After Planning Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Mrs. $7,000,000 Net Worth Revocable Trust Mrs. $7,000,000 Net Worth Revocable Trust Gifting Trust 97.5% 2.5% Expected tax: $2,000,000 x 35% = $700,000 FLP $7,000,000 x 97.5% x .65 = $4,436,250 $7,000,000 x 2.5% x .65 = $113,750 Expected tax $0.

24. MRS. $7,000,000 FROZEN Mrs. $7,000,000 Net Worth $4,413,000Note Mrs. $7,000,000 Net Worth Revocable Trust Gifting Trust Forget everything to the left and simply marry someone who will predecease her and not leave her assets? :) 96.5% LP .5% GP $7,000,000 worth of assets 2% LP .5% GP $200,000 Seed Capital FLP $7,000,000 x 97.5% x .65 = $4,436,250 $7,000,000 x 2.5% x .65 = $113,750 Gift trust purchased 97% LP interest for 97% x $7,000,000 x .65 = $4,413,500. 9 year $4,413,500 interest-only Note payable at 1.53% interest = $67,526.55 per year. Note guaranteed by children.

25. GRAT/PROMISSORY NOTE/SCIN/PRIVATE ANNUITY ALTERNATIVESFEBRUARY 2011CLIENT AGE 70

26. The “Estate Tax Proof” $15,000,000 Family Husband Wife Wife's Revocable Trust Children's Trust Husband's Revocable Trust 49% 2% 49% FAMILY LIMITED PARTNERSHIP On first death 49% x $15,000,000 x .65 = $4,777,500. All fits into Credit Shelter Trust

27. More About Portability 1. Spouse must be a U.S. citizen or resident. 2. No minimum term of marriage or anti-manipulation provisions. 3. Usable by the surviving spouse upon death, and probably for lifetime, but does not provide a GST exemption increase. Interestingly, the new Code provision does not directly address whether the surviving spouse may use the DSUEA to make lifetime gifts free of gift tax. However, the applicable Joint Committee on Taxation Report specifically provides that a surviving spouse may use his or her DSUEA “for lifetime gifts or for transfers at death.” So, if the surviving spouse dies with a $10,000,000 Applicable Exclusion Amount and wants to maximize benefits without the children being taxed, he or she can only leave $5,000,000 to a GST Trust for children and grandchildren, and the remaining $5,000,000 would have to be used on a Non-GST basis, and will thus be expected to be taxed at the children’s levels. 4. Unlike the surviving spouse’s own estate tax exemption, the DSUEA is NOT adjusted for inflationafter the first death. 5. If surviving spouse (“Client”) remarries then a. If new spouse dies before Client, Client will have the DSUEA only of the new spouse. b. If Client dies before new spouse, new spouse can only receive up to $5,000,000 of the first dying spouse’s DSUEA but may use the rest in a Credit Shelter Trust. 6. The first dying spouse must file an estate tax return, even if not up to the taxable exclusion amount ($5,000,000) and the statute of limitations on the ability of the IRS to challenge the DSUEA amount begins to run only after the surviving spouse has filed an estate tax return. IMPORTANT – Provide in the Will or Trust that the fiduciaries are required to file an estate tax return for the first dying spouse, if requested by the surviving spouse, and have the surviving spouse be responsible for the costs thereof. Agree upon a personal representative or special administrator for this. 7. These rules sunset after 2012.

28. Credit Shelter Trusts vs. Relying on Exemption Portability A married couple might provide for all assets to go to the surviving spouse, or to “lock up” up to $5 million on the first death to facilitate a “credit shelter trust.” SURVIVING SPOUSE INHERITS ALL ASSETS – USE PORTABILITY OF HIS OR HER $5 MILLION EXEMPTION CREDIT SHELTER TRUST

29. Demonstrating the Fact that the $5,000,000 Generation Skipping Tax Exemption is Not Portable. Use of Credit Shelter Trust to avoid estate tax and GST tax. Portability Explanation All Assets First Deceased Spouse Second Dying Spouse First Deceased Spouse Second Dying Spouse $5,000,000 Credit Shelter GST Exempt Trust $5,000,000 Estate Tax Exempt but not GST Exempt GST and Estate Tax Exempt On Second death: Total GST and Estate Tax Protected Amount $10,000,000 Non GST – Non Estate Tax Protected Share $5,000,000 GST Estate Tax Proof Share $5,000,000 Share from Portability (will have to be subject to estate tax at level of children or will be subject to GST tax). Non GST – Non Estate Tax Protected Share The above assumes no growth – the $5,000,000 exemption, but not the portability allowance, is to increase with the CPI index increases after January 1, 2011, beginning January 1, 2012.

30. Potential Effects of Inflation on the Estate Tax Exemption (Assuming 2.56% Annual Inflation and 5% Investment Performance)

31. Potential Effects of Inflation on the Estate Tax Exemption (Assuming 5% Annual Inflation and 7% Investment Performance) **Note the above chart assumes annual increase in the applicable CPI of 5% per year and that the current estate tax law is extended indefinitely for 2013 and beyond.

32. Credit Shelter Trusts vs. Asset Portability

33. Even More About Portability!! Example: Mabel dies before her husband John and leaves him a $4,500,000 DSUEA because she gifted $500,000 during her lifetime. John has never gifted and therefore now has a $9,500,000 Applicable Exclusion Amount. John remarries Greta who has used $2,000,000 of her gifting exemption. If John dies first he can leave up to $4,500,000 in a Credit Shelter Trust for Greta and/or for his descendants, and Greta can still have his entire $5,000,000 DSUEA. If Greta dies first John will be limited to a $7,000,000 applicable exclusion amount on death, unless he remarries and the new spouse dies first, in which event the new spouse’s DSUEA will apply. Key question on first date “How large is your applicable exclusion amount?”

34. POEMS ABOUT PORTABILITY Aunt Portabello had real agility And married old Fungus for his portability After his funeral she gifted $5 mill To her lovely children And then married Bill And survived him to leave her children another $5 million still If she had had $25 million She would have also then married and survived both Clyde and William She also liked Mel Who had a large NOL But under Code Section 382 It did not transfer well. Poor Uncle Clyde After Aunt Mildred died He lost her $5 million portability By marrying Matilda Who had other bountiful utility Because Matilda’s predeceased husband Phil Provided financial fertility Matilda had a QTIP to absorb her portability And wanted that of Clyde, but then she accidentally died So Uncle Clyde was limited to $5 million And although an active octogenarian Did not want to support a woman So resisted remarryin’ Until along came Lolita Nard Who really needed a Green Card So he married sweet Lolita But then died, so that her QDOT was even sweetah But despite all elation Portability will not index with inflation. And after 2012 may not even be in our nation. Marriage and mortality is complicated enough Without Congress giving us all this new stuff.

35. Methods of Providing a Stepped-Up Basis on the Surviving Spouse’s Death for Assets That Would Typically Be Held Under a Credit Shelter Trust to Avoid Estate Tax

36. Potential Codicil Language To Permit Decedent’s Heirs to Require and Pay for Portability Election and Form 706 Filing • To preserve flexibility to opt for portability after the death of the first dying spouse, suggest a Codicil to the client’s Will providing the surviving spouse with the right to require return preparation to facilitate portability (the filing of an estate tax return) and to possibly appoint a special administrator to serve for the purpose of signing the return, and to be compensated by the surviving spouse. • Treasury Regulation Section 20.6018-2 allows a special administrator be appointed under local law to file and sign a federal estate tax return. In a situation where spouses have separate children, the children or advisors of the first dying spouse may prefer to serve as personal representatives and to control all aspects of estate administration, but the surviving spouse can be significantly benefitted by having the first spouse’s estate file an estate tax return and make a portability election. • Potential language is as follows: I authorize my surviving spouse, _________, to appoint a board-certified estate planning lawyer, or a CPA who has done work for my family for at least 10 years, to serve as Special Administrator of this Last Will and Testament for the purpose of filing a federal estate tax return in order to assure that the DSUEA (Deceased Spouse Unused Exemption Amount) becomes available to my said spouse, with the Administrator to be compensated solely by my said spouse, and with any other expenses reasonably incurred by my personal representatives to accommodate such filing to be reimbursed to my estate. Said appointment and cooperation need only to apply if my spouse survives me and executes a confirmation that such expenses will be paid by my said spouse. Any dispute between the Administrator and my personal representative or representatives shall be resolved by _________________, CPA.”

37. Potential Language to Amend Clients’ Revocable Trust to Allow for Credit Shelter Trust to Instead be a Clayton QTIP with Outright Disposition Rights in Case Family Prefers to Use Portability POTENTIAL LANGUAGE FOR AMENDMENT TO TRUST AGREEMENT I hereby appoint ___________________, __________________ and _______________ as Independent Fiduciaries for the purpose of determining whether, upon the event of my death, all Trust assets may be payable outright to my spouse, in view of the new estate tax law. In order to facilitate this, I understand that the Smith Family Trust that would be established under Section 4.02 ___ of this Trust Agreement shall be amended such that the Trustee of such Trust, with the consent of a majority of the Independent Fiduciaries, may pay all assets under such Trust and/or under the QTIP Trust that would be established under Article ____ of this Trust Agreement to my spouse, at any time and for any reason. Further, such Smith Family Trust (a) shall pay all income to my spouse, (b) shall be used solely for my spouse during said spouse’s lifetime, with any and all distributions to be made solely to said spouse, and that (c) the Trustee shall be required to keep the Trust assets under such Trust productive, provided that such requirements shall not apply except to the extent that my Personal Representative, upon the instructions from the majority of the Independent Fiduciaries, elects for such Trust to qualify for the federal estate tax marital deduction by making a “Clayton QTIP Election” pursuant to Internal Revenue Code Section 2056 and Treasury Regulation 20.2056(b)-7(d)(3)(i). The above shall apply so that if a “Clayton QTIP Election” is not made, then the Family Trust and QTIP Trust described above shall operate as if this Trust Amendment had not been implemented.

38. REVISED PROTECTIVE TRUST LOGISTICAL CHART SHOWING CLAYTON Q-TIPS First Dying Spouse’s Revocable Trust Surviving Spouse’s Revocable Trust During both spouse’s lifetimes: Upon first death in 2011: $5,000,000* (Adjusted upward for inflation after 1/1/2011) Remaining Assets During surviving spouse’s remaining lifetime: Family (By-Pass) Generation Skipping Trust (Not taxed in surviving spouse’s estate) Possible Clayton QTIP which would qualify for the estate tax marital deduction. QTIP Non-GST Trust (Marital Deduction Trust that is not generation skipping) Surviving Spouse’s Revocable Trust (Will include assets owned jointly on first death) The assets in the Clayton QTIP would be includable in the surviving spouse’s gross estate, but the surviving spouse can use some of his or her DSUEA, and could make a “reverse QTIP election” to utilize any portion of the first dying spouse’s unused GST exemption. $5,000,000* (Adjusted upward after 1/1/2011) Remaining Assets Surviving spouse can have the right to redirect how assets as distributed on second death. Upon second death: Generation Skipping Trusts for Children Children’s Trust (or distributions) Generation Skipping Trusts for Children (Will merge with first dying spouse’s Generation Skipping Trusts shown on left) Children’s Trust (or distributions) After deaths of both spouses: Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. Benefits children and grandchildren. Not estate taxable in their estates. Benefits children. Taxable in their estates. *Assumes first spouse dies in 2011 and that the surviving spouse dies in a later year when the estate tax exemption is still $5,000,000. *The Unified Credit Exemption is $5,000,000 in 2011 and 2012, and is scheduled to go back to $1,000,000 in 2013.

39. Dynasty Wealth Protection Trust • Grantor can replace the Trustee at any time and for any reason. • Protected from creditors of Grantor and family members. • Can benefit spouse and descendants as needed for health, education and maintenance. • Per Private Letter Ruling 200944002 the Grantor may be a discretionary beneficiary of the trust and not have it subject to estate tax in his or her estate. But be very careful on this! The Trust would need to be formed in an asset protection jurisdiction and there is no revenue procedure on this. • Should be grandfathered from future legislative restrictions. • May loan money to Grantor. • May own limited partnership or LLC interests that are managed at arms length by the Grantor. • May be subject to income tax at its own bracket, or the Grantor may be subject to income tax on the income of the trust, allowing it to grow income-tax free unless or until desired otherwise. If the Grantor is a beneficiary it must remain a disregarded Grantor Trust. Trustee DYNASTY WEALTH PROTECTION TRUST Assets gifted to trust and growth thereon.

40. Multiple Grantor Trust System Illustrations Multiple Grantor Trusts allow for significant flexibility. Each Irrevocable Grantor Trust is “Defective” for income tax purposes but may be “toggled off” separately from the others Wife as Trustee Wife as Trustee Child as Trustee Child as Trustee CLIENT Age 55 Irrevocable Grantor Trust #1 Irrevocable Grantor Trust #2 Irrevocable Grantor Trust #3 Irrevocable Grantor Trust #4 Married with $15,000,000 net worth in 2011 (before planning). Earns $500,000 a year more than family is spending. In second marriage – 2 children by prior marriage. 1 child in present marriage. For spouse (age 56) and common new child and future descendants. Spouse can receive benefits only when authorized by an “adverse party” beneficiary (a common descendant) to allow for toggling off. Same as defective grantor trust #1, but formed in asset protection trust jurisdiction with Grantor is discretionary beneficiary – wife loses beneficial interest upon divorce. For children of prior marriage. Divisible into separate Trusts for each separate child of the first marriage at the discretion of replaceable Trustee. Grantor is discretionary beneficiary For children of prior marriage. Divisible into separate Trusts for each separate child of the first marriage at the discretion of replaceable Trustee. **Each Trust receives $1,000,000 gift in 2011.

41. Example of a Husband/Wife Dynasty Trust Arrangement

42. Dynasty Trust Planning Example- Page 1

43. Dynasty TrustPlanning Example- Page 2

44. TYPICAL YEAR-END 2010 ESTATE TAX PLANNING UPDATE FOR “OVER $10,000,000” MARRIED COUPLE OWED $11,500,000 IN NOTES HUSBAND WIFE 529 PLANS Homestead $650,000 HUSBAND’S REVOCABLE TRUST WIFE’S REVOCABLE TRUST IRREVOCABLE TRUSTS FOR DESCENDANTS .5% GP 1.1% LP .5% GP 97.90% (96.8% LP in 2011) .5% GP - 2011 1.1% LP – 2011 1% + 2.7% = 3.8% total in 2011 QTIP pays all of its income to Wife, plus amounts as she needs for health, education and maintenance. LIFETIME Q-TIP TRUST Other assets - $20,000,000 May owe parents $11,500,000 in notes shown on the right (Will the transfer of a note to a limited partnership and/or a QTIP Trust trigger income tax when the note is a defective grantor trust installment sale note?) PROMISSORY NOTES LIMITED PARTNERSHIP $5,000,000 Promissory Note (Fair market value of Note may be worth less than $5,000,000.) $6,500,000 Promissory Note $6,500,000 x .984 x 65% = $4,157,400 Homestead $650,000 $4,807,400

45. Age of Client 68 Initial Value of Home $860,000 Fractional Discount Assumed 15.00% Discounted Value of ½ of Home $365,500 QPRT Trust Planning Demonstration Probability of Death Before Certain Age Current Age 68 2 years (70) 4.18% 6 years (74) 14.31% 10 years (78) 27.33% 20 years (88) 68.53% 4 years (72) 8.92% 8 years (76) 20.45% 15 years (83) 47.24%

47. Child’s Homestead Irrevocable Trust

48. Anatomy of a Lifetime Bypass GRAT

49. Mechanics of an Installment Sale to Gifting Trust- Page 1

50. Mechanics of an Installment Sale to Gifting Trust- Page 2