Introducing the Power of Appointment Support Trust An Innovative Approach to Tax Planning Bryan D. Austin | Director, Wealth Planning © 2016 Wells Fargo Bank, N.A. All rights reserved. For public use.

Agenda The “Sandwich” (Wealth Creator) Generation Estate Exclusion and Tax Rates Impact of Tax Legislation Benefits of the POAST Downstream Planning: The Traditional Approach The POAST: Structure and Implementation Illustrations Expanded Applications Additional Resources

The “Sandwich” (Wealth Creator) Generation The Family Players G1 = Senior Generation Family Member Low wealth Very little gifting, high remaining exclusion G2 = Current Generation “Wealth Creator” Significant wealth Desire to provide for G1 and future generations G3/G4 = Children/Future Generations

The “Sandwich” (Wealth Creator) Generation (cont.) Concerns Desire to support G1 Desire to transfer wealth to G3/G4 Minimize total transfer tax (estate/gift/GST) and income tax Strategy The Power of Appointment Support Trust (POAST) Provide Support for G1, when needed Capitalize on unused transfer exclusions of G1 Date-of-Death basis adjustment for appreciated assets

Estate Exclusion and Tax Rates

Impact of Tax Legislation The estate tax is potentially all but eliminated for most individuals 99.8% of individuals* will have some or all of their estate tax exclusion amounts (and GST Exemption) expire worthless at their death. The estate tax savings of the $5.45 million estate exclusion is $2,125,800 GST exemption is worth considerably more Increased importance of income tax minimization Decreased differential between federal income (+ surtax) and estate tax rates * Source: Joint Committee on Taxation 2015

Benefits of the POAST Capture Otherwise Wasted Exclusions/Exemptions Increased exclusion has significant wealth transfer value Applying GST Exemption can enable wealth transfer to multiple generations Mitigate/Eliminate Income Tax on Appreciated Assets Date-of-death basis adjustment eliminates capital gains tax at the death of G1 25+ years earlier than traditional lineal planning Relative Simplicity POAST compliments existing planning – no changes to current structure Additional exempt assets are added to existing planning structure Expanded Opportunities Can be used with Aunts, Uncles, Grandparents, Cousins, In-laws, etc. Can leverage other planning strategies (discussed later)

Downstream Planning: The Traditional Approach Emphasis is on transferring assets in flexible trusts for downstream beneficiaries Power of Appointment (POA) – Most common method of providing flexibility to meet changes in circumstances Limited Power of Appointment (LPOA) Excludes the “forbidden four”: (1) the power holder, (2) his/her estate, (3) his/her creditors, or (4) the creditors of his/her estate Minimal or no transfer or income tax consequences General Power of Appointment (GPOA) Must include at least one of the “forbidden four” GPOAs trigger transfer tax inclusion (estate and GST purposes) Assets subject to a GPOA will receive a date-of-death cost basis adjustment

The POAST: Structure and Implementation The G1 beneficiary is granted a testamentary GPOA, equal to G1’s remaining estate exclusion at death Query – Should the GPOA exercise be contingent on third party approval? Caution – State, Commonwealth and D.C. creditor rights Assets subject to GPOA, if unappointed, fund trusts for G3/G4 (or are added to existing trusts). Assets not subject to GPOA remain in non-exempt trusts for G3 with typical contingent GPOA language. Language should be included to split the trust for G3/G4 to preserve the GST inclusion ratio The trust can remain a grantor trust with respect to G2 (further leverage) If the GPOA is unexercised If GPOA is exercised, the trust becomes a non-grantor trust

The POAST: Structure and Implementation (cont.) Wealthy individual (G2) wishes to provide support for an aging family member (G1) with very modest wealth 1 2 G2 transfers assets to a POAST for G1 Talking point for step 2: Gift tax may be incurred, but benefits will generally outweigh the gift tax cost. (see White Paper entitled “Gifting in a Changing Tax Landscape, Do Taxable Gifts Still Make Financial Sense?”) Talking point for step 5: To the extent that G1’s GST exemption differs from estate exemption, the trust for G3/G4 can be split into GST-Exempt and GST-Nonexempt shares G1’s unused GST Exemption can be applied to included assets, allowing these assets to benefit multiple generations without additional transfer tax (trading gift tax for GST Exemption) Distributions are made to G1 for his/her support, when needed 3 5 4 At G1’s death, assets subject to GPOA are included in G1’s estate and receive a date of death basis adjustment, eliminating income tax on appreciated assets

Illustration – traditional planning Estate Assets Senior Generation’s Estate All assets Exclusion in excess of estate assets will expire worthless GST exemption Donor’s Estate Estate Assets Remaining Estate Taxes GST Exempt Assets GST Nonexempt Assets Assets for Children

Illustration – with poast All assets Estate Assets Maximize Use of Exclusion Senior Generation’s Estate Support POAST TRUST Unused exclusion of senior generation GPOA Remaining assets Initial gift* GST exemption Donor’s Estate Estate Assets Remaining Estate Taxes GST Exempt Assets GST Nonexempt Assets Assets for Children *Gifts in excess of available exclusion amount will incur gift tax.

Expanded Applications The POAST structure can be expanded to implement additional planning strategies including: Assets with significant appreciation potential Life Insurance on the Donor Asset Sales for a Promissory Note in IDGT Grantor Retained Annuity Trust (GRAT) Residual

Additional Resources White Paper Power of Appointment Support Trust (POAST): An Innovative Approach to Transfer Greater Wealth and Reduce Income Taxes Trust and Estates Magazine article reprint Introducing the Power of Appointment Support Trust Bryan Austin Director, Wealth Planning 720-947-6771 Bryan.austin@abbotdowning.com

Q&A

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