By: John P. Dedon 1775 Wiehle Avenue, Suite 400 Reston, Virginia (703) VADA Family Convention Greenbrier MONUMENT WEALTH APRIL 27, 2016

1 Financial Objectives Build family wealth during life Control, enjoy and protect it during life Preserve it upon death

Income taxes Income taxes Estate Taxes Estate Taxes Probate Costs Probate Costs Predators (Asset Protection) Predators (Asset Protection) 2 Obstacles

3 Assets At Risk (4 Areas of Risk) Potential Creditors 3-6% Probate & Legal Expenses Estate Tax (40% > $5 Million) 40% Income Tax IRS

4 Current Estate Tax Law Federal Estate Tax Exemption $5 Million Federal Estate Tax Exemption $5 Million Indexed for inflation Indexed for inflation $5,450,000 $5,450,000 Portability Portability 40% Federal Estate Tax Rate 40% Federal Estate Tax Rate

What is the Future? President Obama’s Budget Proposal: $3.5 Million Exemption? $3.5 Million Exemption? Limit GRATs, dynasty trusts, sales to grantor trusts Limit GRATs, dynasty trusts, sales to grantor trusts 5

Interplay of Estate and Income Tax Planning in the Modern Era  Decision between gifts and bequests more complex -Income tax basis of property received by gift versus bequest:  Gifts – “carry-over” basis  Bequests – “step-up” in basis to fair market value at death -Effect of large, inflation adjusted federal estate tax exemption  Can shelter more property from federal estate taxes  Heirs receive basis step-up  Benefit magnified in states with income taxes but not estate taxes -Must compare total income/capital gains taxes on later sale of gifted property vs. estate taxes on inherited property 6

Income Tax Planning 7  Individuals now face much higher income tax exposure: -Maximum federal individual tax rates  39.6% income ($400,000 (single) / $450,000 (married))  20% capital gain ($400,000 / $450,000)  40% estate and gift tax rate -“Pease limitation” on itemized deductions for adjusted gross income (AGI) over $250,000 / $300,000  Effectively raises federal income tax rates by 1.2% -State income and/or estate tax exposure can increase rate to 50%

Planning for the Couple with Assets under $10.9 Million Focus on asset management Focus on asset management Trusts to protect and manage inheritance Trusts to protect and manage inheritance No gifting for estate tax reasons No gifting for estate tax reasons Income tax planning may be more important than estate tax planning Income tax planning may be more important than estate tax planning 8

Planning for the Couple with Assets in Excess of $10.9 Million Continue to use transfer tax planning techniques Continue to use transfer tax planning techniques -Gifts to GST trusts -Sales to grantor trusts -GRATs -Charitable lead trusts -SLATs Watch basis of gifted assets Watch basis of gifted assets 9

Non-Tax and Non-Administrative Objectives and Concerns Children from a previous marriage and second spouse Children with creditor, financial, or marital problems Children with special needs 10

11 Probate Obstacles Cost Time Delays Publicity Property In Multiple States Hassle Avoid Probate With Revocable Living Trust

12 What is a Revocable Living Trust? Will Substitute Grantor is Beneficiary and is Trustee No Income Tax Consequence Uses Social Security Number No Trust Return

13 How do Assets Pass Upon Death? Title Beneficiary Designation Will Revocable Living Trust

14 BASIC PLANNING SHOULD INCLUDE n Wills n Revocable Living Trusts n Advanced Medical Directives (Living Wills) n Powers of Attorney

15 ASSET PROTECTION 1. Titling of Assets 2. Retirement Plans 3. Life Insurance 4. Homestead 5. Family Partnership and LLCs

16 TITLING OF ASSETS 1. Joint with Right of Survivorship versus Tenants by the Entirety 2. Tenants In Common 3. Community Property

17 An “LLC” will allow you to:  Control Transferred Assets  Discounting  Asset Protection  Income Shifting (or Retention)  Use with Other Tools

18 Using LLC to Limit Estate Tax + Asset Protection Value of Partnership Interest Transferred To Children is Removed from Parent’s Estate Parents Are General Partners Family Limited Partnership Parents & Children Are Limited Partners 1% IRS Protected from Creditors