1. ESTATE AND GIFT TAX – SELECTED OVERVIEW – PLUS – REFORM? OR REPEAL? PENNSYLVANIA’S NEW UNIFORM TRUST ACT Presented by John F. Meck, Esq. J1011041

2. ESTATE/GIFT/GST TAX OVERVIEW Current LawGiftEstate/GST 20061,000,0002,000,000 20091,000,0002,500,000 20101,000,000Repeal 20111,000,000 Exemption

3. OVERVIEW Tax Rates on Amounts Over Exemption GiftEstate/GST 200641 to 46%46% 200741 to 45%45%

4. Tax Calculation Cumulative – Lifetime and then Death Unified Credit not optional

5. Pennsylvania Gift Tax? None 1 year Rule – Pennsylvania Inheritance Tax - $3,000 exemption/calendar year

6. PENNSYLVANIA INHERITANCE TAX No Exemption Assets Not subject to tax Assets owned jointly with spouse Bequests to charity Life insurance IRAs and plan benefits if under 59 ½ Some plan benefits if over 59 ½ (monthly payments – no ability to take a lump sum)

7. Pennsylvania Inheritance Tax Rates 0% - Spouses (outright & “sole use trusts”) 0% - Under age 21 (assets to parents) 4.5% - Descendants, step-descendants, ancestors and spouses of children 12% - Siblings 15% - All others

8. Annual Exclusion Gifts $12,000/donee/year – indexed Not optional Present interest – out right or life estate present value Applied chronologically Crummey Coordination

9. Annual Exclusion Gifts § 2503(c) Trusts- Age 21 Custodial Accounts – Age 21 Medical and Tuition/GST Also Direct payment Don’t report

10. Section 529 Election Up to $60,000/$120,000 Pro-rate use – can’t “frontload” Report 1/5 each year Recapture if die early/GST Exemption?

11. Split Gifts – Spousal Consent on Gift Tax Return Pre-death gifts only Both U.S. citizens/residents Not Spousal Gifts – Unlimited marital But GST annual exclusion applies to spousal gifts Non U.S. Citizens spouse

12. Disadvantage of Splitting All gifts Agent under POA – How broad is POA? Joint/Several liability 2036 Potential – QPRT, GRAT etc. – don’t split Second marriage – use of Unified Credit

13. TIP FOR SPLITTING Spouses each write a check to avoid filing a Gift Tax Return; if no other Gifts during year

14. Delivery – Relinquish Custody/Control Timing re calendar year or date of death Charity - relates back Individuals – no relation back – Cashiers check/ wire transfer

15. Delivery – Relinquish Custody/Control To Spouse’s Trust – use two steps Stock – donee’s broker - donor’s broker/ transfer agent Joint Bank Account – withdrawal Real Estate – survivorship rights

16. Estate & Gift Tax – Reform? Repeal? Current Law 2010 Repeal Estate Tax Keep Gift Tax $1 million unified credit (protects against asset shifting to reduce income tax) 2011 Estate Tax comes back at $1 million unified credit

17. Estate & Gift Tax – Reform? Repeal House Bill adopted June 22, 2006 and modified July 29, 2006 (and probably later) Senate – 60 votes to have a vote 60 votes to enact

18. House Bill Provisions Effective 2010 Reunify – Estate, Gift & GST Unified Credit $5 million Phased in $250,000 increments starts 2010 ($3,750,000) to 2015 ($5 million) Indexed for inflation starting 2016 Maintain “Stepped up basis” rules

19. House Bill Provisions Tax Rate First $25 million 15% in 2010; 20% thereafter based on capital gains rates which could change Excess over $25 million – 40% rate Not tied to capital gains rate Phased down 2% year to 30% in 2015

20. House Bill Provisions State Death Taxes Repeal deduction In 2005 deduction had replaced the phase out of credit

21. House Bill Provisions New Provision Portability of Unified Credit between Spouses Simplify planning Asset transfers Plan benefits/life insurance Second marriage

22. PA Uniform Trust Act (UTA) Enacted July 7, 2006 Effective November 4, 2006 – generally Even existing trusts January 1, 2007 – Repeal of Rule Against Perpetuities Only new trusts

23. UTA – Overall Purpose Organized, comprehensive codification of PA trust law Facilitate finding the law Better compliance by trustees acting in multiple states Enable beneficiaries to understand and enforce their rights

24. UTA Revocable Trust vs. Wills Goal – level playing field Capacity to create Time to contest – one year (Pew Estate) Notice to beneficiaries at death Like Supreme Court Rule 5.6 Same rules of construction Road map for creditor’s claims

25. UTA – Trustee Notice to Beneficiaries Controversial - can‘t “draft around” Compromise – changes from Uniform Act Client – desire for privacy (“my money”) vs. Beneficiary – need information to enforce rights to have a valid trust Transition Rules – 2 year delay for existing trusts

26. Contents of Notice Trusts existence Identify Settlor Trustees contact information Beneficiary has right to receive copy of trust Beneficiary has right to receive “Report” annually

27. Contents of Report Trust assets – market value Trust liabilities Trust receipts/disbursements

28. Revocable Notice Trust (=Will) No Notice to Beneficiaries required, unless Settler incapacitated – notify guardian Death – to spouse, executor, guardian, adult children and “Current” Beneficiaries Current Beneficiaries Age 18 if entitled to mandatory distribution Age 25 if only entitled to discretionary distribution

29. Notice Irrevocable Trusts Must respond to beneficiaries reasonable requests for information (Copy of trust, Report etc.) Incapacity/Death of Settlor/Change of Trustees – Notice to Current Beneficiaries (Age 18/25) Two year transition rule does not apply to change of Trustees

30. Trustee – Cut off Claim of Beneficiaries Current law – Account/Audit - Receipt/Release New Possibility – 5 years Passage of Time - Laches Trustee must provide Reports for 5 years notify beneficiary of time period to challenge Claim as to transaction disclosed in year #1 barred 6 months after beneficiaries receive 5 annual reports unless written claim presented to Trustee

31. Unitrusts PA has since 2002 had “power to adjust” and “power to convert to a unitrust” New – Power to draft as a unitrust without needing to convert Qualifies for favorable IRS tax treatment – primarily unitrust amount of 3% to 5% equals “all income” for marital deduction

32. UTA – Selected Provisions Oral trust will no longer be recognized – insurance agents Future trusts presumed revocable Reverses current PA law - presumed irrevocable Good drafting – always state revocable or irrevocable