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SCOPE OF PRESENTATION Protecting Assets & Keeping Tax Reporting Simple Implementing a Quality Estate Plan

PRIMARY CREDITOR RISKS Business Malpractice Claims (low risk for orthodontics) Auto Accidents Property Related Claims (home/rentals/farm) Bad Debts Underinsured Medical Claims

SIMPLE FIRST STEP Buy Umbrella Liability Insurance –Auto/Home –Commercial/Business –Requires Base Insurance With Same Company Optimum Coverage: Net Worth – Exemptions Typical Range: $1.0 million - $5.0 million

GROW ASSETS IN THE RIGHT PLACES Maximize exemptions Select optimum entities for business and investments Parent created irrevocable trust (inheritance) Spousal created irrevocable trust (if high net worth) 529 Plans for education assets

CREDITOR EXEMPTIONS UNDER TEXAS LAW 1. Residential Homestead a. Urban (City) Homestead - 10 acres b. Rural Homestead married acres c. Rural Homestead single – 100 acres 2. Life Insurance and Annuities – No $ Limit 3. Retirement Plans and IRAs – No $ Limit 4. Tangible Personal Property · Married $100,000 · Single $50,000

PARTITIONING BY SPOUSES TO MAXIMIZE EXEMPTIONS Partition Texas community property into separate property of each spouse: professional spouse gets exempt assets & other spouse gets non-exempt assets After partitioning, consider conversion back to community property after retirement (to get income tax basis step-up on first death)

PROTECTION AFFORDED BY ENTITIES VARIES Owner Protection from Creditors of Business (Internal) Yes: Corp, PC, PA, LLC, PLLC, LP (If Run as Business) Business Protection from Creditors of Owner (External) Yes: LLC, PLLC, LP (with LLC GP) (Charging Order) No: Corporation, PA, PC

OPTIMUM PRACTICE ENTITY Options for Orthodontists 1. Professional Association (PA) 2. Professional Corporation (PC) 3. Professional Limited Liability Company (PLLC) 1, 2 & 3 protect owner from internal creditors of business PLLC: Better protection of business from external creditors of owner (sole remedy charging order) (Bias for PA obsolete) Consider conversion of PA or PC to PLLC

LLC INCOME TAX FLEXIBILITY “CHECK THE BOX” LLC (or PLLC) can be “income taxed” as: 1. Disregarded Entity (if single owner) 2. Partnership 3. C Corporation 4. S Corporation BEST ENTITY & BEST TAX STATUS? IT DEPENDS! Answer Requires In-Depth Analysis by CPA-Tax Advisor

MULTIPLE ENTITY STRATEGIES Consider separate entities for separate assets Don’t mix low risk and high risk assets Practice: PLLC, PC, PA Office: LLC Rentals: LLC (if mortgaged, only if local lender) Vacation home:LLC Farm:LLC or LP Non-retirement investments: LLC or LP

SINGLE MEMBER LLCS KEEP TAX REPORTING SIMPLE Husband and wife qualify as single taxpayer If Single Member LLC: –Needs separate ID number –Needs segregated bookkeeping –Disregarded for income tax reporting –No annual income tax returns –Income reported on member’s 1040

ESTATE PLANNING Authority Delegations If Incapacitated Alternative Base Document Estate and Gift Tax Overview Options for Gifts to Children Coordination of Non-Probate Assets

DELEGATIONS OF ASSET AUTHORITY Statutory Durable Power of Attorney (Texas) General Durable Power of Attorney (Out of State) Revocable Management Trust (coordinated with limited durable power of attorney) Pre-Designation of Guardians (if family in conflict) 1. Guardian of the Person 2. Guardian of the Estate 3. Disqualified Persons

HEALTH CARE DECISIONS Medical Power of Attorney Directive to Physicians (Living Will) HIPAA Authorization Organ Donation DNR (Do Not Resuscitate) These documents are state specific. If you reside in Texas, use Texas forms.

BASE ESTATE PLAN: WILL OR REVOCABLE TRUST Longstanding Debate “Best Answer” is State Specific & Fact Specific General Guidelines: Choose Revocable Trust if: 1. Real Estate Outside Texas (Not in Entity) 2. Corporate Fiduciary During Disability 3. Contest of Plan Anticipated 4. Desire to Reduce Post-Death Action/Expense

MISCONCEPTIONS ABOUT REVOCABLE TRUSTS Do not provide tax benefits not otherwise available Do not provide lifetime creditor protection Do not avoid post-death legal expense Probate in Texas is not a lot more expensive Probate in Texas need not jeopardize privacy

ESTATE & GIFT TAX OVERVIEW 2013 Legislation drastically changed landscape 2016 Gift & Estate Tax Exemption $5.45 Million (indexed) For married couple, “Portability Election” at first death preserves unused exemption of predeceased spouse Pre-2013 estate plans for married couples may be overly complex and need simplification

GIFT TAX RULES $14,000 annual gift tax exclusion per donee Unlimited exclusion for medical & educational expenses paid directly to provider Unlimited gifts to spouse and charities Annual Gift Tax Return required if gifts in calendar year exceed exclusions, but no gift tax until lifetime $5.45 Million exemption exhausted

PLANNING BASICS FOR MARRIED COUPLE If projected value less than 2 exemptions, choose: 1) Simple will (all to spouse) with portability election option (requires filing 706) 2) By-pass trust for survivor 3) Simple will with disclaimer to trust option If projected value exceeds 2 exemptions, more complex planning needed

OUTRIGHT VS. TRUST FOR SURVIVING SPOUSE Outright: 1. Simple to implement 2. Simple income tax reporting Trust for Survivor: 1. Provides creditor protection 2. Protects trust from remarriage 3. Better insures inheritance for descendants 4. Requires annual trust income tax return 5. More complex

IF ESTATE WILL EXCEED EXEMPTIONS Single person – over $5.45 million Married couple – over $10.9 million Consider: 1) Irrevocable trusts for life insurance 2) Entities to posture for valuation discounts 3) “Freeze” strategies to lock in current values –Gifts or sales to grantor trusts 4) Parent-created “GST Exempt” trust for inheritance 5) Optimum placement of investments

BLENDED MARRIAGE CONSIDERATIONS Do not presume surviving spouse and stepchildren will always get along If some inheritance for children is objective, consider: 1. Gifts to children on death of parent-spouse (could be life insurance or retirement assets) 2. Trust for surviving spouse with remainder to children of first spouse coupled with co-trustee or corporate trustee for spousal trust

OPTIONS FOR GIFTS TO CHILDREN Uniform Transfers to Minors Act (management to 21) 529 Educational Plans (can be reallocated in family) Management Trusts (staggered distributions) Lifetime Trusts

NON-PROBATE ASSETS Life Insurance Retirement Plans Annuities Right of Survivorship Accounts Right of Survivorship for Vehicles Pay on Death Accounts Typically represent high % of net worth Important to coordinate with estate plan!

CHARITABLE GIVING During lifetime, best to give appreciated assets (avoid capital gain), but 96% are cash At death, best to give retirement assets (avoids income tax and models stewardship) Lifetime gifts are good for the giver

HAVE THE RIGHT QUESTIONS BEEN ASKED? Could you be identified by your estate plan? Does your estate plan reflect your highest priorities? What is your most troublesome concern about the future of your family and its assets? How can this concern be addressed in your plan?