1. By: John P. Dedon 1775 Wiehle Avenue, Suite 400 Reston, Virginia 20190 (703) 218-2131 John.Dedon@ofplaw.com 2013 VADA Family Convention Greenbrier FINANCIAL PLANNING ASSOCIATION – NATIONAL CAPITAL Year End Tax Planning Update

2. 1 Virginia Business Magazine January 4, 2013 Congress Provides Business Owners A Grappling Hook By: John P. Dedon Yes Virginia, there is a Santa Claus, and yes Virginia business owners, Congress did provide estate tax relief by enacting the American Taxpayer Relief Act of 2012. The relief is not a first class ticket off the cliff, as that would have been estate tax elimination, but considering the alternatives, it is a soft descent down the cliff.

3. 2 2012 Law Highlights $5 million exemption indexed for inflation 40% estate tax rate Gift opportunities remain…for now Discounting Dynasty Trusts GRATs and Intentionally Defective Trusts

4. 3 Estate Tax : 2013 Forward: $5 Million gift and estate exemption: 40% tax rate President’s Proposal Reversion to 2009: 45% rate & $3.5 M exemption beginning in 2018 Exemption Amount Year Permanent?

5. President Obama’s Budget Proposal: Continued Limit GRATs: 10 year minimum term and remainder have some value. Limit GRATs: 10 year minimum term and remainder have some value. Limit dynasty trusts to 90 years protection from GST tax Limit dynasty trusts to 90 years protection from GST tax Eliminate stretch IRAs for non-spouse beneficiaries. 5 year requirement. Eliminate stretch IRAs for non-spouse beneficiaries. 5 year requirement. Limit sales to grantor trusts (estate tax inclusion on assets sold to grantor trusts) Limit sales to grantor trusts (estate tax inclusion on assets sold to grantor trusts) 4

6. Annual Exclusion 1)Make $14,000 annual exclusion gifts (Outright; Crummey Trusts) 2)Pay Tuition for education 3)Pay Medical Expenses 5

7. Power of the Annual Exclusion $14,000 per year, “use it or lose it” Example: Mom and Dad have three kids and 5 grandchildren $14,000 x Two x Eight x 20 years = $4,480,000 Potential estimated estate tax savings $1,792,000 6

8. Interplay of Estate and Income Tax Planning Post-ATRA  Decision between gifts and bequests more complex -Income tax basis of property received by gift versus bequest:  Gifts – “carry-over” basis  Bequests – “step-up” in basis to fair market value at death -Effect of large, inflation adjusted federal estate tax exemption  Can shelter more property from federal estate taxes  Heirs receive basis step-up  Benefit magnified in states with income taxes but not estate taxes -Must compare total income/capital gains taxes on later sale of gifted property vs. estate taxes on inherited property 7

9. Income Tax Planning Post- ATRA 8  Individuals now face much higher income tax exposure: -Maximum federal individual tax rates  39.6% income ($400,000 (single) / $450,000 (married))  20% capital gain ($400,000 / $450,000)  40% estate and gift tax rate ($5.25MM exemption in 2013) -“Pease limitation” on itemized deductions for adjusted gross income (AGI) over $250,000 / $300,000  Effectively raises federal income tax rates by 1.2% -State income and/or estate tax exposure can increase rate to 50%:  E.g., VA – 5.75% income & no estate / MD – 5.5% income & 16% estate / DC 8.95% income & 16% estate / CA – 13.3% income & no estate / NY – 9% income & 16% estate

10. Planning for the Couple with Assets under $10.5 Million Focus on asset management and income tax planning Focus on asset management and income tax planning Trusts to protect and manage inheritance Trusts to protect and manage inheritance Income tax planning may be more important than transfer tax planning Income tax planning may be more important than transfer tax planning Portability v. Traditional Credit Shelter Trust Portability v. Traditional Credit Shelter Trust 9

11. Planning for the Couple with Assets in Excess of $10.5 Million Continue to use transfer tax planning techniques Continue to use transfer tax planning techniques -Gifts to GST trusts -Sales to grantor trusts -GRATs -Charitable lead trusts Watch basis of gifted assets Watch basis of gifted assets 10

12. 11 Remaining Threats To Family Assets Potential Creditors 3-6% Probate & Legal Expenses 40% 39.6% Income Tax IRS

13. 12 TAKE CARE OF BASICS n Wills n Revocable Living Trusts n Advanced Medical Directives (Living Wills) n Powers of Attorney

14. 13 Proper Planning Will Allow You to... Give what you have, To whom you want, When you want, and In the way you want And Pay Less for: Court Costs Court Costs Attorney’s fees Attorney’s fees Estate Taxes Estate Taxes

15. Other Fundamental Planning Issues Children with creditor, financial, or marital problems Children from a previous marriage and second spouse Children with special needs (parents) Spouse who would need help managing and investing funds – now or later 14

16. 15 Probate Cost Time Delays Publicity Property In Multiple States Hassle Avoid Probate With Revocable Trust

17. Closely Held Business 16 Assets Retirement Liquid Insurance Total

18. 17 Two Case Studies Mom Dad 2 Children Mr. and Mrs. Rich E. Couples

19. 18 Profile Married $10 Million + Real estate, retirement plans, other liquid assets, life insurance

20. 19 Assets $ 450,000$100,000 $ 2,500,000 Retirement $ 4,000,000 Liquid Insurance $15,000,000 $ 2,000,000$250,000 Total$ 2,450,000$350,000$21,500,000 Grand Total = $24,300,000

21. 20 Objectives Provide for surviving spouse Provide for children at second death Eliminate probate Eliminate or avoid estate tax Eliminate or avoid estate tax in perpetuity Asset protection to protect children from divorce, creditors

22. 21 Solutions – Case Study I Step I Wills, Revocable Trusts with credit trust and marital trust for surviving spouse, Powers of Attorney and Medical Directives.

23. 22 Solutions Step II Focus on $4 million Property Husband creates LLC and transfers house to LLC Use $5,250,000 exemption amount

24. 23 Trust $3,960,000 Before Discount Grantor Beneficiaries = Wife and Children Trustee $4 Million 1% Equity 100% Voting = 100% Control 99% of Equity

25. Why Estate and GST Exemption Applied - $5,250,000 + Appreciation Estate Tax Free Asset Protection Spouse Children Access Husband has control through LLC voting interest and access through Trust during marriage Wife is Trust beneficiary Keep it in Family 24

26. Problems (and Solutions) 25 Divorce Death Life Insurance (for protection and as an investment) Section 2036 Pay Rent

27. Same Plan – Different Assets Corporation or LLC Corporation or LLC Gift/Sale Gift/Sale Private Annuity Private Annuity 26

28. 27 Solutions – Case Study II Step I Wills, Revocable Trusts with credit trust and marital trust for surviving spouse, Powers of Attorney and Medical Directives.

29. 28 Solutions Step II Focus on $10 million of marketable securities Spousal access Trusts Each spouse transfers his and her own assets to the other’s Trust Use exemption amount and file gift tax return

30. 29 Husband’s Trust $5 Million Grantor Beneficiaries = Wife and Children Trustee

31. 30 Wife’s Trust $5 Million Grantor Beneficiaries = Husband and Children Trustee

32. Why 31 Estate and GST Exemption Applied - $10 Million + Appreciation Estate Tax Free Asset Protection Each Other Children Access

33. Problems (and Solutions) 32 Legal Issues Support Reciprocal Trust Divorce Death Life Insurance (for protection and as an investment)

34. 33 Why Not a GRAT?

35. Rethinking Life Insurance after ATRA What are the reasons for buying the existing amounts and types of life insurance? Are they still valid? What are the reasons for buying the existing amounts and types of life insurance? Are they still valid? If to create estate liquidity, does it still make sense with a $10+ million exemption between spouses? If to create estate liquidity, does it still make sense with a $10+ million exemption between spouses? If in a trust, how best to deal with policies that exceed current needs? If in a trust, how best to deal with policies that exceed current needs? 34

36. Rethinking Life Insurance after ATRA Should high net worth clients use some or all of their transfer tax exemption to purchase a single pay policy? Should high net worth clients use some or all of their transfer tax exemption to purchase a single pay policy? Consider the income tax advantages of life insurance for those in the 39.6% bracket and subject to the 3.8% Medicare surtax. Consider the income tax advantages of life insurance for those in the 39.6% bracket and subject to the 3.8% Medicare surtax. If held individually, should whole life policies be retained to provide tax-free borrowing or to supplement retirement funding? If held individually, should whole life policies be retained to provide tax-free borrowing or to supplement retirement funding? 35