Clark J. Allison, EsqCounsel Protect, LLPwww.counselprotect.com

Your Year-End Action Plan

What Should You Do?

• First, do not let the uncertainty stop you from acting. We will always have political uncertainty.

• Second, make sure your basic estate plan is in place.

• Third, consider taking advantage of advanced planning techniques before the end of the year.

Review Your Estate Planning Goals• All state-of-the-art estate planning starts with

an inventory of your goals

Desired distributions Asset protection

Probate avoidance Appreciation removal

Naming decision makers Generation skipping

Tax avoidance Retention of financial benefit

Exemption leveraging Retention of control

Don’t Ignore Basic Estate Planning• Most goals of your family are met with the

documents in the modern estate plan. – Revocable Living Trust– Pour-Over Will – Financial Power of Attorney – Health Care Power of Attorney and Living Will or Advance Health Care Directive

– HIPAA Authorization

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Immediately Consider Other Opportunities

• Revocable trusts help with many of your family goals, but other techniques will allow you to take advantage of the high exemptions and lower tax rates still available

• Consider beneficial techniques that are still available that may go away:– Family Controlled Entities ( Partnerships and Limited Liability

Companies) – Irrevocable Life Insurance Trusts (ILITs) – Family Bank Trusts (FBTs) – Grantor Retained Annuity Trusts (GRATs)– Roth IRA Conversions

• Changes will likely be effective from the date of enactment-there is still some time to act.

Where do we stand?

Making The Next 60 Days CountTax Planning Window Will CloseFavorable Interest Rates (1% for intra-family gifts)

Favorable Estate/Gift Taxes (35% not 55%)

Favorable Charitable Deductions (fully deductible not limited to 28%)

Favorable Capital Gains Rates (15% not 20% or more)

Favorable Dividend Rates (15% not 39.6% or more)

Favorable Available Strategies (not legislated away, yet?)

VS.Unfavorable Federal Deficit and Spending

The Case for New Taxes

U.S. Tax Revenue 2,310,000,000,000

Federal Budget 3,614,000,000,000

New Debt 1,304,000,000,000

National Debt 16,219,000,000,000

Recent Budget Cuts 385,000,000,000

If Spendthrift’s Budget – Serious Cuts?

Annual Income 23,100

Money Spent 36,140

New Credit Card Debt 13,030

Outstanding CC Debt 162,190

Total Budget Cuts 3,850

Just drop (8) zeros

Who Is Paying Taxes?

Capital GAINS Tax Changes in 60 Days

Long Term Gains 2012 2013

State Tax (Say) 7% 7%

Federal Tax –without legislation 15% 20%

Healthcare Surcharge if AGI is greater than $200,000/$250,000 -- 3.8%

TOTAL 22% 30.8%

Dividend Tax Changes in 60 Days

Qualified Dividends 2012 2013

State Tax (Say) 7% 7%

Federal Tax – without legislation 15% 39.6%

Healthcare Surcharge if AGI is greater than $200,000/$250,000 -- 3.8%

TOTAL 22% 50.4%

Income Taxation Changes in 60 Days

Ordinary Income, Rents & Short-term Gains 2012 2013

State Tax (Say) 7% 7%

Federal Tax - without legislation 35% 39.6%

Healthcare Surcharge if AGI is greater than $200,000/$250,000 -- 3.8%

TOTAL 42% 50.4%

Federal Estate Tax and Gift Tax in 60 Days

2012 2013

Estate Tax Exemption $5,120,000 $1,000,000

Rate of Tax on Excess 35% 55%

Gift Tax Exemption $5,120,000 $1,000,000

Rate of Tax on Excess 35% 55%

Generation Skipping Tax $5,120,000 $1,400,000

Exemption 35% 55%

Portability of Unused Federal Exemption Possible No

Here Is The Wealth Transfer Opportunity

John wants to make a gift of $5.12 million to his son. What is the difference between making a gift in 2012 versus a death transfer (estate) in 2013.

Example 2012 2013 (under current law)

Gift/Estate $5,120,000 $5,120,000

Taxable gift $5,120,000 $5,120,000

Tentative tax $1,730,800 2,456,250

Unified credit (1,730,800) (345,800) (Shelters $1M)

Gift tax owed $0 $2,110.450 Tax on John’s estate

How Much is State Estate Tax?

2012 2013

MD/DC State Tax Exemptions $1,000,000 $1,000,000

Rate of Tax Return on Excess 16% 16%

Portability of Unused Exemption NONE NONE

Most State Gift Tax Exemption Unlimited Unlimited

Is State Estate Tax Avoidable?

The Most Favorable Interest Rates for Planning

More Changes Coming?

• Other estate tax proposals:– Making all grantor trusts subject to estate tax,

including intentionally defective grantor trusts, such as Family Bank Trust and irrevocable life insurance trusts.

– Eliminate 2 year rolling GRATs, 10 year minimum GRAT term– 90-year limit on the GST exemption, eliminating

the true effectiveness of Dynasty Trusts– Restrict Family Controlled Entities

Family Controlled EntitiesLimited Partnerships and LLCs

• Strategy to transfer and retain business and investment interests within a family.

• Most effective when combined with trusts• Used to maximize life time exemption.• When capital assets (i.e., rental property, family businesses,

and investment portfolios) are transferred into an entity, appraisals will adjust by 25% - 30% or more. There are minority control and restricted marketability discounts.

• Provides substantial asset protection• Business purpose required.• Entity formalities must be observed

More Reasons for Gifts or Sales Now

• Interest rates are at historical lows, - an ideal time to make intra-family loans thru trusts– Direct loans or sale of appreciating assets

for interest only notes - rates as low as 1% in November 2012.

• Depressed property values = ideal timing

WHAT ARE THE OPTIONS FOR ESTATE TAX PLANNING BEFORE YEAR’S END?

Available Options within 60 days

• Do nothing

• Die before Dec. 31(not optimal)

• Outright Gifts/Sales

• Gifts/Sales into Irrevocable Trusts

Planning Considerations

IF YOU DO NOTHING, DON’T COUNT ON…

EXEMPTION PORTABILITY

• Expires in 60 days

• Insures highest state estate tax will be paid

• Requires timely filed 706

IRREVOCABLE TRUSTS

Typical Estate Tax Planning

Testamentary By-pass Trusts• Tax planning technique for couples• Asset protection • Federal Estate Tax Avoidance• State Estate Tax Avoidance• Multi-generational protection

Innovative Estate Tax Planning

Family Bank Trust• Mimics By-Pass Trust for spouse• Grantor Trust for income tax• Making Income Taxes a “Tax Free” Gift• Completed gift• All growth is out of grantor’s estate• All growth is out of spouse’s estate• State Estate Tax Solution

Irrevocable Trusts – Why?

Irrevocable Trusts can be set up to control the use of the asset and have the availability of the asset to the donor/spouse…

AND PROVIDE:• Asset/divorce protection• Estate Tax Avoidance• Income Tax Neutrality (Advantages)

Family Bank Trusts

• Solves the “I cannot afford making a gift…” argument because it’s an inter-spousal gift

• Becomes a “Family Bank” for loans at favorable interest rates for funding homes or businesses for generations

• Can be used to own and fund Life Insurance on donor/spouse and others

• Permanently grandfathers the state estate tax and federal estate tax avoidance

• Full asset and divorce protection multi-generationally

Estate Tax Capital Gains*

Rate 55% 20%

Due Immediately upon death (9 months)

Only when recognized(Postponable)

What About Step-up In Basis?

* Unrelated third-party may hold a power to grant to beneficiary/spouse a general power of appointment thereby including the asset in the estate of the beneficiary/spouse achieving step-up in basis.

Tax Planning Window Will CloseFavorable Interest Rates (1% for intra-family gifts)

Favorable Estate/Gift Taxes (35% not 55%)

Favorable Charitable Deductions (fully deductible not limited to 28%)

Favorable Capital Gains Rates (15% not 20% or more)

Favorable Dividend Rates (15% not 39.6% or more)

Favorable Available Strategies (not legislated away, yet?)

VS.

Unfavorable Federal Deficit and Spending

What To Do Now

If you could transfer a major part, if not all, of your property without ever owing gift or estate tax on it and still be able to retain many of the benefits of owning the property, would you do it?

Thank you!