ESTATE PLANNING SERVICES Wealth Transfer Planning Impact of the 2010 Tax Act on planning considerations and strategies Robert A. Luther, Jr. ChFC ®, CLU ®, CRPC ® Senior Financial Advisor

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3 The Impact of the 2010 Tax Act 3  The 2010 Tax Act 1 made dramatic changes to gift and estate taxes  Creates new gifting opportunities  Increases the importance of having a well thought out wealth transfer plan 1 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of

4 Topics for discussion Current transfer tax landscape Implications of the 2010 Tax Act How Merrill Lynch can help

55 How is transfer of wealth taxed? Federal tax system imposes three types of taxes Gift Taxes Estate Taxes Generation Skipping Transfer (GST) Tax On assets transferred upon death On assets transferred during your lifetime On assets transferred to grandchildren or future generations

6 Estate tax  Marital deduction exempts assets left to a spouse (must be a U.S. citizen)  Exclusion amount eliminates tax on a specified amount  2010 Tax Act ­ Postponed the increase in the maximum tax rate and the drop in the exclusion amount ­ Allows transfer of any unused exemption to a spouse with a proper election (“portability”) Gift Taxes Estate Taxes Generation Skipping Transfer Tax Exclusion Amount Maximum Tax Rate 2009$3.5 million45% 2010 $5.0 million 1 35% 2011/12 $5.0 million 2 35% 2013$1.0 million55% 1 May elect out and pay capital gain 2 Will be indexed for inflation in 2012

7 Case study: Using portability to reduce estate tax Spouse 1 $3 million Children Spouse 2 $7 million  A couple has $10 million in assets that they want to leave to their children  The first spouse to pass away holds $3 million in assets; the surviving spouse holds $7 million Client situation Tax Consequences $3 million free of estate tax $5 million estate tax-free with exemption $2 million estate tax-free with portability $2 million of exemption unused  At the death of the first spouse, the entire $3 million passes to the children estate tax-free  That leaves $2 million of unused exemption  At the death of the second spouse, $5 million passes estate tax-free using the second spouse’s exemption  The remaining $2 million can pass estate-tax free using the first spouse’s unused exemption amount  Portability is not automatic  May not be available after 2012 Note

8 What is included in your estate?  Investments  Bank accounts  IRAs and other qualified plan balances  Life insurance proceeds from policies you own  Ownership in a private company  Partnership interests  Real estate investments  Farm, ranch, timber property  Your home and vacation property  Vehicles, boats, plane  Art, antiques, collections  Personal belongings Other PropertyBusiness InterestsFinancial Assets

99 Reducing your taxable estate through gifting Spouse Marital Deduction Unlimited tax-free transfers to spouses who are U.S. citizens Charitable Entities Charitable Deduction Unlimited transfers to qualified charities* free of gift and estate taxes Income tax deduction may be limited in certain situations Education and Healthcare Payments made directly to the provider for qualified tuition or healthcare expenses are not considered taxable gifts Beneficiaries Annual Exclusion $13,000 per recipient per year Lifetime Exclusion Reduces your available estate tax exclusion Taxable Transfers At gift tax rates *This applies to private foundations as well as public charities.

10 Gift tax opportunities  2010 Tax Act increases the lifetime exemption - Creates an opportunity to gift up to $5 million without triggering gift taxes - Provisions “sunset’” in Opportunity may be temporary Gift Taxes Estate Taxes Generation Skipping Transfer Tax Exclusion Amount Maximum Tax Rate 2009$1 million45% 2010$1 million35% 2011/12 $5 million 1 35% 2013$1 million55% 1 Will be indexed for inflation in 2012

11 Generation Skipping Transfer Tax  Tax on assets given to grandchildren or future generations  In addition to gift and estate taxes  Flat rate equal to top estate tax rate  Exclusion eliminates tax on a specified amount  2010 Tax Act ­ Changed the tax rate and exclusion amount, but only temporarily ­ Unlike estate tax, exemption is not portable Gift Taxes Estate Taxes Generation Skipping Transfer Tax Exclusion Amount Maximum Tax Rate 2009$3.5 million45% 2010$5.0 million0% 2011/12 $5.0 million 1 35% 2013 $1.4 million 2 55% 1 Will be indexed for inflation in Estimate of indexed amount in 2013

12 Current transfer tax landscape Planning implications How Merrill Lynch can help Topics for discussion

13 Opportunities created by the 2010 Tax Act The 2010 Tax Act creates opportunities for  Individuals who anticipate transferring more than $1 million to heirs  Couples who anticipate transferring more than $2 million  Those who want to leave assets to grandchildren or future generations Gifting now  May reduce gift and estate taxes  Removes future appreciation from your taxable estate

14 Issues to consider Considerations  Impact of a large gift on your future financial flexibility  Impact of large gifts on recipients and their ability to handle the assets responsibly  The need for safeguards to see that assets are ­ Managed properly ­ Protected from creditors and effects of divorce ­ Distributed as you had planned ­ Used in the manner that you intend

15 Ensuring assets are used as you intend  Inheriting substantial wealth can make it more difficult to maintain financial discipline  Placing assets in a trust enables you to ­ Stipulate how the funds are to be used ­ Appoint an independent trustee to control distributions

16 Additional benefits of a trust Trusts  May include incentives/conditions for next-generation beneficiaries: –May be structured to encourage education –May require gainful employment before distributions begin  Protect assets from creditors including the effects of divorce  Selection of trustee can ensure professional asset management A trust can help you achieve additional goals

17 Need to review existing plans The 2010 Tax Act may have unintended impact on existing estate plans Estate planning documents often contain “formula clauses”  Designed to minimize estate taxes  Eliminate the need to update documents as exemption amounts change Higher estate exemption may leave certain beneficiaries with less than you intend Estate Tax Exemption ($ millions)

18 Case study Client situation  John’s Will was drafted in 2005 when his net worth was $5 million  His children are beneficiaries of a bypass trust to be funded with his “remaining exemption amount”  His second wife will receive the balance  Had John died in 2005, $1.5 would have gone to his children and $3.5 million would have gone to his wife Current impact  John’s net worth is now $6 million  If he passes away before the end of 2012, the bypass trust will receive $5 million, leaving his wife with just $1.0 million Distribution of Assets ($ millions)

19 Impact of gifting now ConsiderationsAdvantages  Ability to remove up to $5 million from your taxable estate free of gift taxes—a potentially limited opportunity  Appreciation on transferred assets is removed from your taxable estate  Reduces estate taxes, even if the estate tax exemption is ultimately lowered (“claw back”)  Reduces the need to rely on formula clauses  Transfers are subject to the 3-year rule to avoid deathbed transfers  You are transferring assets, which creates a need to understand the impact on your future financial flexibility

20 Current transfer tax landscape Planning implications How Merrill Lynch can help Topics for discussion

21 What matters to you matters to us 21  Providing for your needs as well as those of family members  Passing on your wealth and values  Establishing deep connections with the next generation  Achieving long-held family goals and aspirations  Supporting philanthropic causes that are important to you We are committed to helping you at every step along the way 21

22 Wealth Structuring An integrated, personalized approach to the full range of financial and investing needs We can help you build and pass on a unique personal legacy  Simplifying, consolidating and coordinating wealth transfer and investment planning through a single resource  Comprehensive solutions based on deep insight into your needs  A solid foundation for a complete, customized financial strategy Insurance Trusts Philanthropy Financial Advisor Client

23  We can help you with trusts that ­ Direct who will receive assets and under what circumstances ­ Encourage responsible use of funds by heirs ­ Provide for professional management Transfer Structure  We can help you consider strategies that ­ Complement or update your existing plan ­ Take advantage of the higher gift tax exemption and provide financial flexibility Gifting Strategies Merrill Lynch can assist with wealth transfer planning:  With the higher gift tax exemption, we can help you ­ As you assess how much you are comfortable giving ­ Implement strategies to contain the cost of long term care Gift Amount How Merrill Lynch can help

24 Addressing long-term care and wealth transfer goals Flexible long-term care options can provide cost-effective coverage that can help you contain future costs Example is for illustrative purposes only. All policy guarantees are backed by the claims paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims paying ability of the issuing insurance company. With MoneyGuard ® Reserve, Lincoln provides three guaranteed benefits  A long-term care benefit to cover qualified LTC expenses  Money-back guarantee for return of initial premium  Income tax-free death benefit for beneficiaries

25 Using a CST to take advantage of 2010 Tax Act opportunities Additional advantages  Your spouse’s ability to withdraw income and take discretionary distributions can provide financial flexibility  Can help reduce taxes in states that impose estate taxes  Protects assets from creditors including the effects of a child’s divorce  May be structured to encourage education or gainful employment  Selection of trustee can provide professional asset management Establishing a Credit Shelter Trust (CST) now can help you take advantage of the higher gift tax exemption Client Spouse Transfer up to $5 million gift tax-free Discretionary distributions Income Children Remainder Credit Shelter Trust

26 Life insurance trusts: Leveraging your gift Gifts to an irrevocable life insurance trust enable you to take advantage of the unique estate and income tax provisions that apply to insurance Can also be structured with a single life policy Irrevocable Life Insurance Trust $3,510,800 Life Insurance Policy Assumptions:  Married couple: 50 year old female and 58 year old male, both in good health  Policy is held until death with no withdrawals of any kind  Second death expected in 39 years IRR on Death Benefit at Second Death: 5.39% All policy guarantees are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claim-paying ability of the issuing insurance company. FOR ILLUSTRATIVE PURPOSES ONLY, NOT AN ACTUAL CASE. $3,000,000 $3,000,000 Insurance Premium Death Benefit Estate and income tax-free payment $23,212,262 Life Insurance Policy on both Husband and Wife

27 Preserving assets for future generations with a Dynasty Trust  Dynasty Trusts are helpful in minimizing estate and GST taxes ­ Important if you are taking advantage of the new higher gift tax exemption ­ Appreciation escape future transfer taxes  Choice of state for trust administration may enable you to extend the term (consult with your legal counsel) ­ Delaware, for example, imposes no limit on the term  May protects assets from creditors, spendthrifts and the effects of divorce  Can be particularly effective when assets are used to purchase second-to-die life insurance policy

28  Andrew and Eileen own a profitable business worth an estimated $7 million  They eventually want to sell the business and anticipate its value will increase over time  Although they want to gift interests to their children now to take advantage of the new, higher gift tax exemption, they want to maintain control of business decisions For Illustrative Purposes Only Client situation Case Study: Transferring ownership in a family business

29 Delaware Administrative Trust $5,000,000 company stock Directed distributions Dividends Company Maintaining control with a Delaware Administrative Trust Control of the company Andrew and Eileen contribute $5 million of company stock to a Delaware Administrative Trust, removing it from their taxable estate By serving as Investment Advisors to the trust, they are able to maintain control of  The company  The payment of dividends  The decision to sell ChildrenClient

30 Control features of a Trust  Control asset distribution  Help minimize estate taxes  Fiduciary asset management Tax benefits of an IRA  Tax-free accumulation of Roth IRA earnings*  Tax-deferred accumulation of traditional IRA earnings Traditional IRA Trusteed IRA: Integrating your retirement assets into your estate plan Trusteed IRA Roth IRA Qualified plan assets With careful planning, the unique tax attributes of retirement assets can be preserved for heirs *Certain conditions must be met for the earnings on a Roth IRA to accumulate free of income taxes

31 The multigenerational benefits of a Trusteed IRA Stretching IRA benefits for children and grandchildren Assumptions: Client: Age 70 IRA balance: $1,000,000 Rate of return: 6% Child 1Age 45 Child 2Age 40 Child 3Age 35 Client lives to full life expectancy (age 85) and takes only required minimum distributions during life Each child lives to full life expectancy and only receives required minimum distributions Example is for illustrative purposes only. Does not represent an actual investment. $ ______ Child 2 $ ______ Child 1 $______ Child 3 $______ * Assumes no after-tax reinvestment.

32 How Merrill Lynch can help We assist clients with a full range of wealth transfer planning strategies We focus on providing customized services that address your unique situation and needs We can help you identify, evaluate and implement the strategies that are best suited to your needs

33 Current transfer tax landscape Planning implications How Merrill Lynch can help 2010 Tax Act creates gifting opportunities Higher gift exemption increases the need for planning Identify, evaluate and execute strategies to achieve your goals Our discussion today

34 The next step 34 Discuss your goals  Review any existing plans and documents  Discuss strategies that may be useful in achieving your goals  Discuss how Merrill Lynch Trust Company* can help - Planning and execution - On-going management as Trustee, Co-trustee or Executor Meet with your Financial Advisor to: * Merrill Lynch Trust Company is a division of Bank of America, N.A.

35 The next step 35 Discuss your goals  Review any existing plans and documents  Discuss strategies that may be useful in achieving your goals  Discuss how Merrill Lynch Trust Company* can help - Planning and execution - On-going management as Trustee, Co-trustee or Executor Meet with your Financial Advisor to: * Merrill Lynch Trust Company is a division of Bank of America, N.A. 35

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37 Potential clawback Method of Calculating Gift Tax Credit No Prior Gifts Date of GiftDate of Death Tentative Taxable Estate:$1,000,000 $6,000,000 Taxable Gifts$5,000,000 $0 Total Taxable Estate$6,000,000 Tentative Tax on Total Estate$2,940,800 Less: Total Gift Tax Paid or Payable$660,000$2,045,000$0 Tentative Tax Before Unified Credit$2,280,800$895,800$2,940,800 Less: Maximum Unified Credit$345,800 Estate Taxes Owed$1,935,000$550,000$2,595,000