By: John P. Dedon 1775 Wiehle Avenue, Suite 400 Reston, Virginia 20190 (703) 218-2131

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

2. Virginia Business MagazineJanuary 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. 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. 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 Estate Tax : Exemption Amount Year Permanent?

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

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

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

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

9. Income Tax Planning Post-ATRA • 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 • Trusts to protect and manage inheritance • Income tax planning may be more important than transfer tax planning • Portability v. Traditional Credit Shelter Trust

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

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

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

14. 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 Attorney’s fees 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

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

17. Assets Retirement Liquid Insurance Closely Held Business Total

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

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

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

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

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

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

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

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

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

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

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

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

34. 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? • 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?

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? • 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?