Business Owner Presentation

Minimizing Taxes and Maximizing Legacies:

Pre-Sale/Pre-Appreciation Event Planning

Deborah Pechet Quinan, Esq.Lisa Weinstein Burns, Esq.

Ruberto, Israel & Weiner PCBoston, Massachusetts

617-742-4200www.riw.comThis summary is presented for informational and educational purposes only, does not constitute legal

advice, and can not be used for the purpose of avoiding tax penalties. Use of this summary does not create an attorney-client relationship and is not a substitute for legal counsel.

Table of Contents

Introduction: Estate Tax Framework 1

Estate Plan Flowchart 8

Pre-Sale or Pre-Appreciation Event Planning 9

Valuation Discounts 12

Grantor Retained Annuity Trust 14

Generation-Skipping Trust 16

Charitable Remainder Trust 18

Appendix: Biographies 21

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Minimizing Taxes and Maximizing Legacies:Pre-Sale/Pre-Appreciation Event Planning

IRS Circular 230 Required Disclosure: The information contained in this presentation is to be used for educational purposes only, does not constitute legal advice, and can not be used for the purpose of avoiding tax penalties. Use of this summary does not create an attorney-client relationship and is not a substitute for legal counsel.

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1

“How do I cut Uncle Sam out of my Will (or at least leave

him the minimum possible)?”

Introduction: Estate Tax Framework

2

Introduction: Estate Tax Framework

TRA 2010 effective January 1, 2010 to December 31, 2012 Key provisions 2011 & 2012:

Unified $5M exemption for estate, gift and GST tax (indexed for inflation in 2012)

Top tax rate 35% (equals the top individual income tax rate) Unused exemption of a deceased spouse is portable to the

surviving spouse’s estate TRA 2010 “sunsets” in 2013 – pre-2001 law, including all pre-

2001 transfer tax provisions, will be reinstated on January 1, 2013 if Congress does not act to reauthorize TRA 2010 (or to enact new legislation) by December 31, 2012 Pre-2001 law:

Estate and gift tax exemption is $1M per person; top rate is 55% GST exemption is approximately $1.35m; top rate is 55% No portability

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The Federal Estate Tax Under Current Law

Taxable assets at death include the date of death value of the home, life insurance death benefit, retirement plan balance, and other assets.

Everyone can transfer up to their remaining estate tax exemption amount to their loved ones, outright or in trust, free of estate tax at death. (The exemption amount is reduced by certain gifts made during life.)

With proper planning the federal and state exemption amounts can be fully utilized in the estate of both spouses. For example, a $7M Massachusetts taxable estate under 2011 law can save about $600,000 in federal and state estate taxes at death if all assets are left in trust via a properly drafted estate plan.

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Estate Planning Goals

A well-crafted estate plan remains critical to accomplishing intergenerational wealth transfer goals while preserving family harmony. Determining how to treat children fairly in light of their known

(present) and unknown (future) goals, capabilities and circumstances Determining how to transfer wealth to younger generations without

encouraging a sense of entitlement Determining when and how children should have some access to

funds Determining how to accomplish charitable goals in a manner that

involves the children and is integrated with the client’s non-charitable wealth transfer goals

And, most importantly, choosing appropriate fiduciaries to ensure the execution of a well-coordinated plan that does not disrupt family harmony

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Unlimited Federal Marital Deduction

Married couples can transfer assets to each other free and clear of federal estate and gift tax during life and at death, as long as the receiving spouse is a U.S. citizen.

Trusts are generally used to minimize federal estate taxes and to utilize the marital deduction

Unlimited Massachusetts Marital Deduction

Married couples can transfer assets to each other free and clear of Massachusetts estate tax during life and at death as long as the receiving spouse is a U.S. citizen.

Use of trusts to accomplish this is critical to minimizing Massachusetts estate taxes.

$5,000,000 Gift Tax Exemption

Allows each person to transfer $5M free of gift tax during his or her lifetime

$13,000 Annual Exclusion

Allows each person to give up to $13,000 annually to anyone free of gift tax, before utilizing the $5M exemption amount described above. This is scheduled to increase for inflation from time to time.

Estate & Gift Tax Facts

The Separate Massachusetts Estate Tax

YearYear MassachusettsMassachusetts FederalFederal2004:2004: $$850,000850,000 $ 1,500,000$ 1,500,0002005:2005: $$950,000950,000 $ 1,500,000$ 1,500,0002006–2008:2006–2008: $$1,000,0001,000,000 $ 2,000,000$ 2,000,0002009:2009: $$1,000,0001,000,000 $ 3,500,000$ 3,500,0002010-2012:2010-2012: $1,000,000$1,000,000 $5,000,000*$5,000,000*2013:2013: $1,000,000$1,000,000 unkown** unkown**

Massachusetts exempt amounts differ from federal amounts and if estate exceeds exempt amount, tax is assessed on entire Massachusetts estate:

Massachusetts estate tax due at first spouse’s death if no separateMassachusetts QTIP election is made and if full federal exemption is used:

2003:2003: $$ 33,20033,200

2004–2005:2004–2005: $$ 64,40064,400

2006–2008:2006–2008: $$ 99,60099,600

2009:2009: $$ 229,200229,200

2010-2012:2010-2012: $ 391,600$ 391,600

* Indexed beginning in 2012** TRA 2010 “sunsets” at end of 2012; law reverts to pre-2001 status unless Congress acts

The Separate Massachusetts Estate Tax

The Massachusetts legislature adopted a new estate tax by “decoupling” the Massachusetts estate tax from the federal estate tax.

Prior to January 1, 2003 (the effective date of the new law), the exemptions from federal and Massachusetts estate taxes were the same. Massachusetts only received a portion of the federal estate tax, rather than imposing a tax in addition to the federal estate tax.

As of January 1, 2003, the Massachusetts estate tax was no longer tied to the current federal exemption. Rather, the threshold for filing a Massachusetts estate tax return is now based on federal law in effect in December 2000. See the chart on the previous slide for the Massachusetts threshold amounts for filing Massachusetts estate tax returns.

From a practical standpoint, estates above the Massachusetts threshold for filing a Massachusetts estate tax, but below the federal threshold, will need to file a Massachusetts estate tax return and may owe Massachusetts estate tax. For example, in 2011, a $5,000,000 estate that will not owe any federal estate tax may owe as much as $391,600 in Massachusetts estate tax.

Estates above the federal threshold will need to file both Massachusetts and federal estate tax returns and may owe both Massachusetts and federal estate taxes. In addition, married couples will be able to avoid federal and Massachusetts estate taxes on the death of the first spouse by implementing a properly drafted estate plan.

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Draft Estate Plan For June CleaverAssumes June dies first

Note: Ward’s plan mirrors June’s plan in all major respects.

Theodore’s Share Income and principal to Theodore and his descendants in trustee’s discretion. At Theodore’s death, trust terminates and property is distributed to his descendants.

Each child has a limited power of appointment exercisable via their will

Descendant’s FundPot for children until youngest is age 25

Income in the trustee’s discretion. Principal is payable for the children’s health, support and education.

At Ward’s death he has a limited power of appointment to change June’s trust via his will. He can redistribute the trust property

among June’s descendants and their spouses (spouses are limited to an income interest) and charities. If he does not do so:

Family Trust

Income and principal for Ward and children in the

independent trustee’s discretion

Marital Trust

All income to Ward for life; principal as the independent trustee considers advisable

June is Alive• During life, June has full

control• If June becomes unable

to manage her financial affairs, the independent trustee may apply property for family’s benefit

WillExecutors:

Ward

Successor to Ward:Fred Smith

The June Cleaver 2003 TrustTrustees:

June and Ward

Successor to June:Independent Trustee and Ward

then Fred Smith

Ward

Joint Property & Qualified Plans

Probate

Propert

y

June

Wally’s Share Income and principal to Wally and

his descendants in trustee’s discretion. At Wally’s death, trust

terminates and property is distributed to his descendants.

June has died

June and Ward have both died

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“How do I preserve the value of my business, ensure that my children are treated equally, and minimize estate taxes on

this valuable, but illiquid, asset?”

Special Issues for Business Owners

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Minimizing Taxes and Maximizing Legacies:Pre-Sale or Pre-Appreciation Event Planning

Estate Planning Issues Common to Business Owners Lack of an Estate Plan

What happens in Massachusetts if the business owner dies without a Will?

Lack of a Funded Buy-Sell Agreement How will the family be provided for? Will the surviving owners wish to have the surviving spouse,

children or trustee as co-owners? How will estate taxes on the value of the business be paid?

Buy-Sell Agreement is not Coordinated with Estate Plan Will the buyout terms provide adequate liquidity by the time

the estate tax must be paid? Are lifetime transfer restrictions adequate to allow pre-

appreciation event estate tax minimization planning? Lack of Time to Address Above Issues

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An individual who is planning on selling a business interest in the near term and is interested in estate, gift and income tax planning opportunities

Pre-Sale/Appreciation Event Planning – Individual Profile

Pre-Sale/Appreciation Event Planning – Benefits

Minimizing Taxes and Maximizing Legacies:Pre-Sale or Pre-Appreciation Event Planning

Income taxes can be deferred through the use of a Charitable Remainder Trust for owners of C corporations or partnership interests

The business owner’s retirement planning needs can be addressed simultaneously

Estate taxes can be minimized by making gifts to children at discounted values, thereby increasing overall family wealth

Family wealth can be transferred to children during life to save estate taxes, without jeopardizing non-tax family goals

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An individual who is in the highest marginal (35%) estate tax bracket, and who owns stock, a partnership interest, or real estate that is expected to appreciate substantially in the near term, and who is interested in minimizing estate, gift and income taxes

Valuation Discounts – Individual Profile

Valuation Discounts – Benefits

Valuation Discounts

Discounts allow partial interests in property to be gifted to the next generation at a value that is 20% to 40% less than the interest’s proportionate share of the enterprise’s fair market value

Discounts create pre-sale and pre-I.P.O. estate planning opportunities Discounts can accelerate a gifting program designed to implement a business

succession plan

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Discounts Available For:

Valuation Discounts

Lack of Marketability: Takes into account that the interest is in a closely-held business and that there is no ready market for the stock

Minority Interest: Takes into account that the interest being transferred by gift is a non-controlling interest. The IRS does not currently aggregate family interests for this purpose

Built-In Capital Gains Tax: Takes into account the unrealized appreciation in value that tax would have to be paid on if the business were sold

Blockage: For publicly traded stock, takes into account that the per share value of the stock might decline if a significant shareholder sold a large block of stock

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An individual who owns stock or other property that either is expected to appreciate at a rate in excess of the Section 7520 rate (changes monthly – historically, the rate has been around 5% – 8%; in the past two years it has been much lower), has strong cash flow, or is pre-IPO

GRAT – Individual Profile

GRAT – Benefits

Grantor Retained Annuity Trust (GRAT)

Allows the appreciation in the property’s value that is projected to exceed the Section 7520 rate to be transferred to children at a minimal gift tax cost

Annuity is retained for a term of years Children receive property remaining in trust at the end of the trust term free of

additional gift or estate tax payments

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Company stock proportionately valued at $5 Million; discounted for minorityinterest and lack of marketability by 40% to $3Million

for gift tax purposes

Remainderafter 3 Years***

*Assumes Sec. 7520 rate is 2.8% (July 2010 rate)

Taxable GiftTaxable Gift

Property TransferredProperty Transferred$3,000,000$3,000,000

Retained AnnuityRetained Annuity ($2,999,999)($2,999,999)

Taxable Gift*Taxable Gift* $ 0**$ 0**

$1,118,193 Annual Annuity*

(Estimated total payments received over term oftrust: $3,180,149)

***Assumes 20% rate of return over 3 year trust term

Grantor Retained Annuity Trust (GRAT)

Projected Estate Tax Savings at 35%: $1,564,393

Children orTrust for Children

$4,469,694(undiscounted)

Grantor Grantor Retained Retained

Annuity TrustAnnuity Trust3 Year Term3 Year Term

Parent Age 50

**Current law allows gift to be zeroed-out resulting in no taxable gift.

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Generation-Skipping Transfer Trust

An individual who has substantial assets that are expected to appreciate and wishes to make gifts or bequests to grandchildren and subsequent generations

Generation Skipping Trust – Individual Profile

Generation Skipping Trust – Benefits

Vehicle allows for the transfer of appreciation to future generations at virtually no gift, estate or generation- skipping transfer tax cost

Donor avoids paying estate tax on transferred assets Donor’s children may receive income and principal from the trust at

the trustee’s discretion, but undistributed trust funds are kept out of reach of children’s creditors and out of the children’s estates

Grandchildren and subsequent generations receive property remaining in trust at the end of the trust term

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Discretionary Incomeand Principal

Gift or bequest of $2 Million

(Cash or Property)

Great-grandchildren(90 years of growth; 7% After-Tax

Return;3.5% Inflation)

Present Value: $56.5 Million

Parents GSTGSTTrustTrust

ChildrenGrandchildrenGreat-grandchildren

Generation-Skipping Transfer Trust

Value at end of joint life expectancies (year 32)*: $17.4 MillionApproximate estate tax savings: $6 Million

*Donor age 60 and Spouse age 57; Joint life expectancy = 32 years

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An individual who owns highly appreciated assets* and who wishes to diversify without incurring an immediate capital gains tax, while increasing cash flow and satisfying charitable intentions

*S Corporation stock not an eligible asset for contribution

CRT – Individual Profile

CRT – Benefits

Charitable Remainder Trust (CRT)

Increase lifetime income Cost-effective way to satisfy charitable intentions Avoid paying current capital gains tax on sale of assets Receive current income tax deduction Avoid paying estate tax on transferred assets Can use life insurance to replace wealth

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OutrightOutrightSaleSale

Diversification without CRUT

After-tax proceeds without a CRUT: $800,000 First year income yield of 2% without CRUT: $16,000

To generate more liquidity stock will be sold and additional capital gains tax paid

*7% Annual Total Return is 2% income and 5% capital appreciation; Donor age 60 and Spouse age 57; Joint life expectancy = 32 years

Donor and Spouse

Sell $1M low basis stock

IRSIRS$200,000 $200,000 Capital Capital

Gains TaxGains Tax

Sale of $1M Low Basis Stock Without a Charitable Remainder Unitrust (CRUT)

Invest after-tax proceeds and receive 7% annual return for joint lives* (lifetime cashflow projection: $1.2 M)

$1,000,000 Sale Proceeds ( $0) Basis $1,000,000 Taxable Gain($ 200,000) 20% Tax$ 800,000 Net Proceeds

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CRUTTrustee Sells

$1M Low Basis Stock (Zero Tax

Due)

Diversification with a CRUT

After-tax proceeds with CRUT: $1,000,000 First year cash flow at 6% with CRUT: $60,000

Cash flow will increase annually if trust return > 6% Trust payments are taxable income to donorIncome tax savings from gift: $33,066

Projected Trust Assets Remaining at Death

Tax Deduction: $100,200***

* Assumes 6% Unitrust Payout; 7% Return in Trust; 33 % Tax bracket; Donor age 60 and Spouse age 57; joint life expectancy = 32 years** S Corporation stock not an eligible asset for contribution*** Assumes Section 7520 Rate = 3.6% (must use highest of current month or previous two months)

$1M Low Basis Stock**

6% of Trust Assets Paid Annually For Joint Lives (Lifetime Cash Flow Projection: $1.97M)

$463,000 $463,000 toto

Family’s Family’s FavoriteFavoriteCharitiesCharities

Donor and Spouse**

Sale of $1Million Low Basis Stock With aCharitable Remainder Unitrust (CRUT)

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Biographies

Appendix

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Biographies:Deborah Pechet Quinan, Esq.

Deborah Pechet Quinan is a shareholder of Ruberto, Israel & Weiner PC and a co-chair of the firm’s Trust & Estates Group. Her practice is concentrated in the areas of estate planning, tax planning, and the administration of trusts and estates, with an emphasis on estate and business succession planning for individuals, closely-held business owners, entrepreneurs and corporate executives. Her practice includes estate planning for retirement assets, international estate planning and charitable giving. Deborah also coordinates closely with other advisors in assisting clients with their financial planning needs.

Previously, Deborah was a director in the Trusts & Estates department at Rackemann, Sawyer & Brewster, a Boston law firm.

Before that Deborah was the National Director of Estate & Financial Planning Services at State Street Corporation in State Street Global Advisors’ Private Asset Management division. In her role, Deborah was responsible for a department that provided integrated financial, estate and investment planning strategies to SSgA’s individual investment management clients. She also advised clients with respect to sophisticated estate and charitable planning strategies.

Prior to joining SSgA in 1997, Deborah was the New England Area Director of Estate and Business Succession Planning for Ernst & Young and an Associate Director of the Ernst & Young Center for Family Wealth Planning. Prior to Ernst & Young, Deborah practiced law in the Estate Planning and Probate Department of the law firm Mirick, O'Connell, DeMallie & Lougee in Worcester, Massachusetts.

Deborah is a member of the American, Massachusetts, and Boston Bar Associations and the Boston Estate Planning Council. Deborah is a past Co-Chair of the Boston Bar Association’s (BBA) Trusts & Estates Section and is also a past Co-Chair of the BBA’s Estate Planning Committee. Deborah served on the Board of Trustees of The Essex County Community Foundation for several years. In addition, Deborah serves on the Board of Trustees of Temple Ner Tamid, in Peabody, Massachusetts, and is active on several of the Temple’s Committees, including serving as Chair of the Temple’s Planned Giving Committee. In addition, she was elected one of the top 100 lawyers in the country by Worth magazine in 2006 and 2008, one of the top ten lawyers in the Women’s Business Journal 2005 Readers’ Poll, and has been elected a Massachusetts Super Lawyer for the last five years.

Deborah is a frequent speaker on estate planning topics for both lay and professional audiences. For many years she has spoken for Massachusetts Continuing Legal Education panels, and she currently serves on MCLE's Estate Planning Curriculum Committee. Deborah has been quoted in Bloomberg Wealth Manager magazine, The Wall Street Journal, Bloomberg Personal Finance magazine, Money magazine, American Banker, and The Boston Business Journal.

Deborah graduated from Hamilton College with honors in Comparative Literature. She received her JD, cum laude, from Suffolk University Law School and her LLM, in Taxation, from Boston University Law School. Deborah lives in Topsfield, Massachusetts, with her husband Kevin, and their daughter Dana.Phone: 617-570-3521 E-mail: dq@riw.com

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Biographies:Lisa Weinstein Burns, Esq.

Lisa Weinstein Burns is a shareholder of Ruberto, Israel & Weiner. As co-chair of the firm’s Trusts & Estates Group, she focuses her practice in the areas of tax planning, multi-generational wealth transfers business succession planning, estate planning and estate administration. Such planning often include charitable components such as the creation of private foundations and charitable trusts.

Her work with clients includes drafting a variety of estate planning documents including wills, revocable trusts, irrevocable insurance and generation-skipping trusts, qualified personal residence trusts, charitable trusts, durable powers of attorney and healthcare proxies. Ms. Burns also assists executors and fiduciaries with estate and trust administration matters.

In the April 2008 issue of Women's Business Boston, Ms. Burns was named one of The Top 10 Lawyers by readers.  She has also been recognized by Boston Magazine and Law & Politics magazine as a "Super Lawyer Rising Star" in the area of Trusts and Estates.

In addition to her work with clients, Ms. Burns was a member of the Nominating Committee for Shir Tikvah synagogue in Winchester, Massachusetts. Ms. Burns is currently serving on the Board of Governors for the University of Massachusetts Club and as the Chair of the Women’s Initiative Committee of the Boston Estate Planning Council. She is also a lecturer for Massachusetts Continuing Legal Education (MCLE) and has published several articles on various legal topics. Such publications include Charitable Remainder Trusts, A Win-Win Tax Planning Technique, The Washington Lawyer, Nov./Dec. 1995; Just Say No Thanks, The Legal Times, May 20, 1996 (an article regarding disclaimers); The Golden Egg? Variable Universal Life Insurance, The Washington Lawyer, Nov./Dec. 1996; and Gifting the House to Save the Home: Qualified Personal Residence Trusts, The Washington Lawyer, Nov./Dec. 1997.

Most notably, Ms. Burns has been recognized as a leader in Tax Law by being selected as an author in the recently released book, Tax Law Client Strategies: Leading Lawyers on Understanding and Allocating Risks, Assessing Settlements and Negotiations, and Developing Deal Strategies, published by Aspatore Books in 2007 as part of its “Inside the Minds” series. Tax Law Client Strategies is an authoritative, insider’s perspective on best practices for successfully representing a client to resolve tax disputes.

Ms. Burns received her undergraduate degree from the University of North Carolina – Chapel Hill (B.A., 1992), her law degree from the American University (J.D., cum laude, 1995) and her masters in taxation law from Georgetown University (LL.M, with distinction, 1998). While in law school, Ms. Burns was a member of the American University Law Review where she served as a Note and Comment Editor. Ms. Burns' most recent association was as a Director with Rackemann, Sawyer, & Brewster, Boston, Massachusetts.

Phone: 617-742-4200 ext. 251 E-mail: lwb@riw.com

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Business Owner Presentation