Family Wealth Management: IRS, Estate Tax, and Asset Protection Strategies

1. 2013 VADA Family Convention Greenbrier MONUMENT WEALTH APRIL 27, 2016 By: John P. Dedon 1775 Wiehle Avenue, Suite 400 Reston, Virginia 20190 (703) 218-2131 John.Dedon@ofplaw.com

2. Build family wealth during life Control, enjoy and protect it during life Preserve it upon death Financial Objectives

3. Obstacles • Income taxes • Estate Taxes • Probate Costs • Predators (Asset Protection)

4. Assets At Risk (4 Areas of Risk) Potential Creditors 40% Income Tax IRS Estate Tax (40% > $5 Million) 3-6% Probate & Legal Expenses

5. Current Estate Tax Law • Federal Estate Tax Exemption $5 Million • Indexed for inflation • $5,450,000 • Portability • 40% Federal Estate Tax Rate

6. What is the Future?President Obama’s Budget Proposal: • $3.5 Million Exemption? • Limit GRATs, dynasty trusts, sales to grantor trusts

7. Interplay of Estate and Income Tax Planning in the Modern Era • 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

8. Income Tax Planning • 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 • “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%

9. Planning for the Couple with Assets under $10.9 Million • Focus on asset management • Trusts to protect and manage inheritance • No gifting for estate tax reasons • Income tax planning may be more important than estate tax planning

10. Planning for the Couple with Assets in Excess of $10.9 Million • Continue to use transfer tax planning techniques • Gifts to GST trusts • Sales to grantor trusts • GRATs • Charitable lead trusts • SLATs • Watch basis of gifted assets

11. Non-Tax and Non-AdministrativeObjectives and Concerns • Children from a previous marriage and second spouse • Children with creditor, financial, or marital problems • Children with special needs

12. Probate Obstacles • Cost • Time Delays • Publicity • Property In Multiple States • Hassle • Avoid Probate With Revocable Living Trust

13. What is a Revocable Living Trust? • Will Substitute • Grantor is Beneficiary and is Trustee • No Income Tax Consequence • Uses Social Security Number • No Trust Return

14. How do Assets Pass Upon Death? • Title • Beneficiary Designation • Will • Revocable Living Trust

15. BASIC PLANNINGSHOULD INCLUDE • Wills • Revocable Living Trusts • Advanced Medical Directives (Living Wills) • Powers of Attorney

16. ASSET PROTECTION • Titling of Assets • Retirement Plans • Life Insurance • Homestead • Family Partnership and LLCs

17. TITLING OF ASSETS • Joint with Right of Survivorship versus Tenants by the Entirety • Tenants In Common • Community Property

18. An “LLC” will allow you to: • Control Transferred Assets • Discounting • Asset Protection • Income Shifting (or Retention) • Use with Other Tools

19. Using LLC to Limit Estate Tax + Asset Protection 1% Parents Are General Partners 1% IRS Family Limited Partnership Parents & Children Are Limited Partners Value of Partnership Interest Transferred To Children is Removed from Parent’s Estate Protected from Creditors