Copyright © Cannon Financial Institute, Inc. All Rights Reserved Mastering Portability

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Married Under $5,000,000 2 Will No Estate Tax Unlimited Marital Deduction Joint Tenant with rights of survivorship avoids probate No Estate Tax Under $5,000,000 (See Single)

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Maximum Marital Deduction  U.S. citizens and residents may transfer up to $5,000,000 free of estate tax, cumulative of gifts  Many married couples fail to take advantage of this exemption, using instead the unlimited marital deduction.  If no estate tax return is filed, portability of the exemption is not permitted. 3 S1S2 $5,000,000 Transfer all assets to survivor at first spouse’s death S2 $10,000,000 =

Copyright © Cannon Financial Institute, Inc. All Rights Reserved The Result WITHOUT Portability  At first death there is no tax liability  However, at second death a federal estate tax of $1,750,000 (in 2011) would be due on a taxable estate of $10,000,000 if no estate tax return was filed at the first death to establish portability of the exemption 4 S1S2 $5,000,000 Tax of $1,750,000 upon survivor’s death Death of 2 nd Spouse $10,000,000 = Beneficiaries

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Portability of exemption  Portability of exemption. Each partner of a married couple has always been allowed a full individual estate-tax exemption, but under earlier law married couples often lost the value of one exemption unless they got good legal advice.  The loss occurred if the first-to-die spouse left everything to the other without the proper trusts in place.  The law has a “portable” exemption that allows for easier post- death planning.  After the death of the first spouse, any unused portion of the spouse’s $5 million exemption may go to the surviving spouse’s future estate. 5

Copyright © Cannon Financial Institute, Inc. All Rights Reserved The Result WITH Portability  At first death there is no tax liability  Also, at second death there is no tax liability if an estate tax return was filed at the first death to establish portability of the exemption 6 S1S2 $5,000,000 No Estate Tax upon survivor’s death Death of 2 nd Spouse $10,000,000 = Beneficiaries

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Married Over $5,000,000 7 Revocable Living Trust Revocable Living Trust Bypass Trust Revocable Living Trust Revocable Living Trust Unlimited Marital Deduction Estate Tax On $ Over App Exclusion Marital Trust Support, As Needed All Income & Support, As Needed Up to Credit Available

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Why Create a Bypass When Portability Exists?1  To lock in the exemption, protecting against negative future changes in the law (no downside, all upside)  To allow the Bypass portion to grow beyond the $5MM estate tax free  To protect against dramatic rise in value of even a modest estate where estate tax does not appear to be an issue  To lock in Generation Skipping Transfer Tax Exemption which is NOT portable 8

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Strategies 9 Revocable Living Trust Revocable Living Trust Bypass Trust Revocable Living Trust Revocable Living Trust Unlimited Marital Deduction Estate Tax On $ Over App Exclusion Marital Trust Support, As Needed All Income & Support, As Needed Up to Credit Available

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Why Create a Bypass When Portability Exists?2  To establish creditor protection for the surviving spouse  To ensure controls against excessive expenditure  To control against being taken advantage of suitors or family  If the spouse later expatriates, the assets are not theirs for the exit tax  For state estate tax purposes 10

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Strategies2 11 Revocable Living Trust Revocable Living Trust Bypass Trust Revocable Living Trust Revocable Living Trust Unlimited Marital Deduction Estate Tax On $ Over App Exclusion Marital Trust Support, As Needed All Income & Support, As Needed Up to Credit Available

Copyright © Cannon Financial Institute, Inc. All Rights Reserved IRS Issued Temporary Regs  Election Required on “timely filed” Form 706  Deemed Election by filing return  Not filing is an affirmative statement not to make the election  Executor makes election (or the return filer if no executor)  Unused applicable exclusion amount of the last deceased spouse  DSUEA can be used for gifts or estate  Multiple DSUEAs can be used by gifting 12

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 1 Doris makes taxable gifts of $300,000 during life and dies with $6,000,000 in 2011 ($5MM). Her husband survives her. 1.How much goes into her credit shelter trust? A.$6,000,000 B.$5,000,000 C.$4,700,000 D.$4,000,000 13

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 1 Doris makes taxable gifts of $300,000 during life and dies with $6,000,000 in 2011 ($5MM). Her husband survives her. 2.How much exemption equivalent is “portable” to her husband? A.$5,000,000 B.$4,700,000 C.$1,000,000 D.None 14

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 2 Marcello dies and leaves an estate of $8,000,000 with an A-B trust for his surviving spouse, first making a specific bequest of $100,000 to a friend and $200,000 to his favorite charity. 1.How much goes into his bypass trust? A.$8,000,000 B.$5,000,000 C.$4,900,000 D.$4,700,000 15

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 2 Marcello dies and leaves an estate of $8,000,000 with an A-B trust for his surviving spouse, first making a specific bequest of $100,000 to a friend and $200,000 to his favorite charity. 2.How much is portable? A.None B.$5,000,000 C.$4,900,000 D.$4,700,000 16

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 3 Marc dies in 2011 with $6,500,000. He is married to Sophia to whom he leaves everything outright. An estate Tax return is filed, but all qualifies for the Marital deduction. 1.When Sophia dies (Assume a static $5MM), how much can she leave estate tax free? A.$10,000,000 B.$6,500,000 C.$5,000,000 D.Unlimited 17

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 4 Prudence dies with an estate of $3,000,000.  Are you required to file a estate tax return? 1.Yes 2.No You do not file return. Her assets all pass to her husband Paul. Paul dies (Assume a static $5MM) with an estate of $7,000,000.  How much is estate tax free? A.$10,000,000 B.$7,000,000 C.$5,000,000 D.None 18

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Quiz 5 Gerard dies in 2011 with $1,200,000 and leaves it all to his wife, Nicole. You file an Estate Tax Return. Nicole remarries to Rich. Rich dies in 2012 and leaves his $12,000,000 estate 1/3 to the children of his first marriage and 2/3 to Nicole. Nicole dies in  How much of Nicole’s $15,000,000 estate is tax free (Assume a static $5MM)? A.$11,000,000 B.$10,000,000 C.$6,000,000 D.$5,000,000 19

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Fiduciary Liability for Failure to elect DSUEA  Unlike most tax elections, there appears to be very little downside to a fiduciary’s preservation of the DSUEA  But, if a fiduciary fails to make an election to preserve the DSUEA, that fiduciary has created the potential for significant fiduciary liability 20

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Example  Husband died in 2011 with a $4 million estate, $3 million of which would have been eligible for DSUEA portability.  Surviving spouse has a $4 million estate of her own, but she does not want the executor to incur the expense of filing a 706.  The executor follows the wife’s desires and does not file a 706.  The DSUEA rules get extended permanently, and the wife dies in 2019 with an estate of $4 million with a $3.5 million tax free amount. 21

Copyright © Cannon Financial Institute, Inc. All Rights Reserved Example (cont’d)  Assuming Congress makes desired changes to the estate tax laws, the unified credit equivalent in 2019 will be $3.5 million with a top estate tax rate of 45%.  Because the executor failed to make the DSUEA election at the husband’s death, the wife’s estate now faces the possibility of paying several hundred thousand dollars in estate tax that could have been avoided completely through application of the husband’s DSUEA.  The husband’s executor will certainly face criticism and potential liability for failing to preserve the DSUEA at the husband’s death. 22

Copyright © Cannon Financial Institute, Inc. All Rights Reserved 23 Revocable Living Trust Revocable Living Trust Bypass Trust Revocable Living Trust Revocable Living Trust Un-Married Couples – No portability-No Marital