Monday, December 20, 2010 A Webinar by: Alan S. Gassman, J.D., LL.M. Prepared by Alan S. Gassman, J.D., LL.M., Kenneth J. Crotty, J.D., LL.M. and Christopher J. Denicolo, J.D., LL.M. Copyright © 2010

 Applies January 1, 2011 to December 31,  Allows up to $5 million per person to pass estate tax free.  Lifetime gifting exemption raised to $5 million.  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 January 1, 2013!  Estate tax rates cut to 35%.  Optional retroactivity for 2010 estates. Copyright © 2010 Gassman, Bates & Associates, P.A. 2

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The below terms of extension expire on December 31, 2012, at which time the exemption for death goes down to $1,000,000 and the estate tax rate goes back up to 55%, being the same terms as would have applied for January 1, 2011 had the new law not been enacted. It will take agreement between the House, the Senate and the President to override this. Copyright © 2010 Gassman, Bates & Associates, P.A. 4

People who die in 2011 and 2012 can pass up to $5,000,000 estate tax free. The $5,000,000 is reduced by any lifetime gifting (above the $13,000 per year per person level) from prior years. This goes back to $1,000,000 on January 1, The estate tax rate has been reduced from 45% (in 2009) to 35% for people who die in 2011 and It goes back up to 55% for people who die in Copyright © 2010 Gassman, Bates & Associates, P.A. 5

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. Copyright © 2010 Gassman, Bates & Associates, P.A. 6

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 is a remarkable change. 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. Copyright © 2010 Gassman, Bates & Associates, P.A. 7

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 children in order to preserve use of the first dying spouse’s allowance. Under the new law, a surviving spouse will apparently be able to use whatever portion of the allowance that 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 Copyright © 2010 Gassman, Bates & Associates, P.A. 8

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People who died in 2010 can decide whether to be treated as if: (a)There was a $5,000,000 exemption level, or (b)There was no estate tax but they can only “step-up” the income tax basis of inherited assets by $1,300,000 (and possibly by another $3,000,000 as to assets passing to or in trust for a surviving spouse). All taxpayers who died in 2010 are presumed to have selected the $5,000,000 estate tax system, unless they make an affirmative election otherwise under forms to be provided in the future by the IRS. Clients who died in 2010 with estates below $5,000,000 need not do anything, and receive a “stepped-up income tax basis” on all assets that pass by death. Copyright © 2010 Gassman, Bates & Associates, P.A. 10

and thereafter Gifts that don’t count at all. $13,000 $13,000 (unless adjusted to $14,000) Educational and Medical Unlimited Other Lifetime Gifts $1,000,000 $5,000,000$1,000,000 Estate Tax Exemption $3,500,000 (less what is used of $1,000,000 exemption above) Unlimited (but income tax stepped-up basis is limited for large estates) $5,000,000 (less portion of used lifetime gifting exemption) $1,000,000 (less portion of used gifting exemption?) Estate Tax Rate45%0%35%55% Discounts and Installment Sales/GRAT’s, etc. Available Available initially (at least, not sure about rest of ) ???? *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. 11

 Clients can make significant gifts under the new $5 million lifetime allowance, even if the gifting allowance goes down to $1 million in  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. Copyright © 2010 Gassman, Bates & Associates, P.A. 12

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PROTECTIVE TRUST LOGISTICAL CHART WITH LIFE INSURANCE 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 Copyright © 2010 Gassman, Bates & Associates, P.A. $5,000, $5,000,000*

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