Federal Estate and Income Tax Legislative Developments Affecting Wealthy Clients Dennis I. Belcher March 18, 2009

– Significant Year in Estate and Financial Planning Increase in Estate and GST Tax Exemptions AFRs – all time low Extreme investment volatility Federal transfer tax legislation Federal income tax legislation

3 Increase in Estate Tax Exemption 75 % increase in Estate Tax Exemption Removes many taxpayers from system Opportunity to notify clients DJIA – 7,000 – May 1997 – Estate Tax Exemption – $600,000 $3.5 million equal to $6.7 million at high of DJIA

4 Impact on Estate Planning IRS 2007 Form 706 Return Statistics 706s filed in 2001 – 120, s filed in 2007 – 38, s filed in 2007 with assets of $3.5 million and above – 14, s filed in 2007 with assets in excess of $5.0 million – 8,338

5 Increase in GST Exemption 75 % increase in GST Exemption Consider late allocation of increased GST exemption to existing dynasty trusts with mixed inclusion ratio Review estate plans with bequest of GST exemption

6 April AFRs Historically Low Short-term rate.83 % Mid-term rate 2.15 % Long-term rate 3.67 % Section 7520 rate 2.60 %

7 Planning Opportunities Low April AFRs Intra-family loans Leveraged Non-Taxable Transfers –GRATs (small gift, downside protection, but no GST planning and annual valuations) –Installment Sales to Grantor Trusts (seed money gift, downside risk, but GST planning and fewer valuations) Charitable Lead Annuity Trusts

8 Extreme Investment Volatility Dow Jones Industrial Average –May 1, 2008 – 13,010 –November 1, 2008 – 9,320 –March 17, 2009 – 7,275 Investment volatility creates opportunities to transfer wealth

9 Planning Opportunities Investment Volatility GRATs (small gift, downside protection, but no GST planning and annual valuations) Installment sales to grantor trusts (seed money gift, downside risk, but GST planning and fewer valuations) Charitable Lead Trusts (zeroed out)

10 Federal Transfer Tax Legislation Exemptions and rates Loophole closers (revenue raisers) Portability of estate tax exemption Retroactivity of legislation Timing of legislation

11 H.R. 436 Certain Estate Tax Relief of 2009 Representative Earl Pomeroy (D-ND) introduced January 9, 2009 Member of House Ways and Means Committee No cosponsors Effective date is date of enactment

12 H.R. 436 Exemptions and Rates Estate tax exemption - $3.5 million GST tax exemption - $3.5 million Estate and GST tax rate – 45 % Estate tax 5 % surcharge (50 % estate tax rate) on estates above $10 million to $41.5 million

13 H.R. 436 Valuation Rules No valuation discounts applicable to “non- business assets” Nonbusiness asset is defined as any asset not used in the active conduct of a trade or business Exceptions for material participation in real property and working capital

14 President’s Proposed Budget Estate Tax Provisions Table S – 5, footnote 1 (page 121) “In continuing the 2001 and 2003 tax cuts, the estate tax is maintained at its 2009 parameters.”

15 President’s Proposed Budget Estate Tax Provisions Estate tax exemption – $3.5 million GST tax exemption – $3.5 million Estate tax rate – 45 % GST tax rate – 45 % No other provisions

16 President’s Proposed Budget What’s Not Included GST and conservation easement provisions that expire in 2010 Portability Section 2032A increase Section 6166 clean-up Issue: How to pay for additions to budget?

17 Expiring 2001 Tax Act GST Tax Fix-Up Provisions Application of automatic allocation rules to indirect skips Retroactive allocation of GST exemption when beneficiaries predecease transferor Qualified severances under section 2642(a)(3) 9100 relief for missed allocations and elections

18 Possible Loophole Closers (Revenue Raisers) Valuation discounts –Passive assets –Aggregation of prior gifts GRATs (10 % remainder interest) QPRTs Retroactivity?

19 Planning with Possible Retroactive Changes U. S. Supreme Court has upheld validity of retroactive tax legislation If concerned about retroactive legislation, consider –Disclaimers –Defined value clauses –Rescission –Contingent gift

20 Other Possible Reforms Portability of Exemptions Recoupling of Gift and Estate Tax Exemptions Section 2032A increase Section 6166 clean-up No state death tax deduction

21 Portability of Transfer Tax Exemptions Senate Hearing – April 3, 2008 Transfer of spouse’s unused estate tax exemption to surviving spouse Multiple marriages issue (limitation on amount of transferred exemption) GST exemption?

22 President’ Proposed Budget Over $250K Income Tax Changes Increase in top two tax brackets (33 % and 36 % to 36 % and 39.6 %) Increase to 20 % dividend/capital gains tax Reinstate personal exemption phaseout and limitations on itemized deductions Further limit itemized deductions by capping tax benefit at 28 % tax rate

23 Charitable Contributions 28 % Cap on Itemized Deductions Under the President’s proposed budget, charitable contributions will be subject to additional 5 to 7 % income tax. After the 2001 Tax Act expires in 2010 (36 % and 39.5 % brackets), a $100,000 charitable gift will incur $11,500 additional federal income tax.

24 Federal Transfer Tax Legislation Prediction – Exemptions and Rates Estate tax exemption - $3.5 million GST tax exemption - $3.5 million Rates – 45 % (possible surcharge) Section 2032A increase Watch Senate Budget Committee and whether any “Add-Ons”

25 How to Pay for “Add-Ons” Add-ons – GST provisions, conservation easements, portability, section 2032A, section 6166, etc. Pay with loophole closers, phase-ins, surcharge, increased rates, decreased exemptions

26 Planning in Light of Tax Reform Leveraged Non-Taxable Transfers –GRATs (small gift, downside protection, but no GST planning and annual valuations) –Installment Sales to Grantor Trusts (seed money gift, downside risk, but GST planning and fewer valuations) Accelerate dividend and capital gain income into early 2009

27 QUESTIONS