2010 Year-End Tax Planning Practical Considerations During Unprecedented Times

1. 2010 Year-End Tax Planning Practical Considerations During Unprecedented Times Presented by: Robert S. Keebler, CPA, MST, AEP (Distinguished) Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.  If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.

2. Acknowledgements • Robert S. Keebler would like to specially thank the following individuals for their contributions to this presentation: • Robert N. Gordon, CEO – Twenty-First Securities Corporation • Mark Fichtenbaum – Twenty-First Securities Corporation 2

3. Outline • Income Tax Overview • Loss Harvesting • Roth IRA Conversions • Charitable Planning • Estate Planning • Insurance Planning • 3.8% Medicare Surtax

4. Income Tax Overview

5. Income Tax Overview Current and Future Tax Rates Ordinary Income Capital Gains *NOTE: In general, the 8% and 18% capital gains rates only apply to long-term capital gains on property that has been held more than five years at the time of sale.

6. Income Tax Overview Plan Limitations for 2010

7. Income Tax Overview Hot Income Tax Planning Ideas for 2010 • Distribution of C-Corp dividends • Sale of appreciated property • Acceleration of gains on installment sales • Sale of bonds with accrued interest • Sale/repurchase of bonds trading at a premium • Liquidation of underperforming non-qualified annuities • Exercise of compensatory stock options • Roth IRA conversions

8. Income Tax Overview Taxation of “Qualified Dividends” • Beginning 1/1/2011, “qualified dividends” will be subject to ordinary income tax rates (as dividends were taxed prior to the 2003 tax year) • Accordingly, C-Corps with “excess” earnings and profits should consider making larger dividends in 2010

9. Income Tax Overview Distribution of C-Corp Dividends Example During the 2010 tax year, the sole shareholder of XYZ Corp. (a domestic C-Corp eligible for “qualified dividend” treatment) was contemplating making a $1,000,000 dividend to himself payable either: (a) in one lump-sum in 2010 or (b) in $200,000 increments over the next five years. The sole shareholder expects to be in the highest marginal income tax bracket for 2010 and all future tax years. NOTE: Assumes a 15% capital gains tax rate on dividends in 2010 and a 39.6% ordinary income tax rate on dividends for 2011 and beyond.

10. Income Tax Overview Taxation of Long-Term Capital Gains • Beginning 1/1/2011, long-term capital gains will be taxed at 10% and/or 20% (depending on amount of taxable income) • As such, taxpayers should consider selling (or otherwise disposing) appreciated property and recognizing the taxable gain in 2010 • Additionally, taxpayers who have realized capital gains deferred on an installment note may want to consider accelerating the unrecognized gain in 2010

11. Income Tax Overview Accelerating Deferred Gains Example In 2010, Janice sold her business for $1,000,000 in exchange for a nine-year installment note with level payments of principal over the term of the note. At the time of sale, Janice realized a $900,000 gain. Below is a summary of the tax savings Janice would realize by electing out of installment treatment:

12. Income Tax Overview Taxation of Ordinary Income • Beginning 1/1/2011, ordinary income tax rates will increase to their pre-2001 levels (see table on Slide 4) • Consequently, taxpayers should consider accelerating certain types of ordinary income (e.g. bond interest, annuity income, traditional IRA income, compensation income) into 2010 to the extent that they expect to be in the same tax bracket or higher in future tax years

13. Income Tax Overview Accelerating Bond Interest Example As of December 21, 2010, Mark has $100,000 of accrued bond interest that will be paid on January 3, 2011. At the advice of his accountant, Mark is considering selling his bonds (at par) before the end of the 2010 tax year to take advantage of the lower income tax rates. Assuming that Mark is currently in the 35% tax bracket for 2010 (39.6% in 2011), below is a summary of the tax savings Mark would realize by selling his bonds in 2010 and recognizing the accrued interest income.

14. Income Tax Overview Sale/Repurchase of Bond Example In 1991, John purchased $1,000,000 worth of ABC Corp. 11% bonds at par value (which mature on December 31, 2011). On December 31, 2010, John sold his ABC Corp. bonds at 1.05 (i.e. $1,050,000). On the next trading day (January 3, 2011) John repurchased the same ABC Corp. bonds for $1,050,000. Under tax law, this $50,000 premium can be used to offset John’s interest income over the remaining life of the bond (i.e. one year). Below is the net income tax savings by selling the bonds in 2010 and repurchasing them in 2011:

15. Income Tax Overview Additional Income Tax Planning Ideas • Oil & gas investments • Intangible drilling costs (IDCs) provide a large immediate income tax deduction (up to 85% of the initial investment) • Losses, if any, created as a result of IDCs will be ordinary (thus lowering a taxpayer’s AGI) • Must be a general partner in the first year • Possible AMT add-back issues if IDCs exceed 40% of AMTI • Depletion and other depreciation (including Section 179 expensing) provide for additional deductions during the term of the investment • Additional tax credits may be available for certain oil & gas ventures

16. Income Tax Overview Additional Income Tax Planning Ideas • Gold investments • Generally when gold is held as coins or bullion, long-term gains are treated as “collectibles” and taxed at a 28% capital gains tax rate • However, this rule does not generally apply to gold held in mutual funds • Also, this rule does not generally apply to non-exchange-traded (i.e. OTC) options on gold • Short-term gains are treated as ordinary income • Thus, if a taxpayer is in a lower tax bracket (i.e. 10%, 15%, 25%), he/she would be better off triggering short-term gain (instead of long-term gain) • Gold futures are treated as “Section 1256 contracts” and not as “collectibles” • Accordingly, gold futures must be “marked-to-market” (i.e. the unrealized gains/loss must be recognized each tax year) • However, gains are subject to special tax treatment (i.e. 60% long-term capital gain / 40% short-term capital gain) • “Wash sale” rule (see discussion on Slide 19) does not apply to “collectibles” losses

17. Income Tax Overview Additional Income Tax Planning Ideas • Foreign currency transactions • Recognize ordinary income in 2010 and push ordinary losses to 2011 and later years • Index options • Special gains treatment on certain broad-based listed options (i.e. 60% long-term / 40% short-term) • Thus, for taxpayers in the highest marginal income tax bracket in 2011 this would result in a blended capital gains tax rate of 27.84% ([20% x 60%] + [39.6% x 40%])

18. Loss Harvesting

19. Loss Harvesting Loss Harvesting Considerations • Losses relating to individual taxpayers • Losses relating to trusts/estates • Losses relating to charitable remainder trusts (CRTs) • Loss charitable lead trusts (CLTs)

20. Loss Harvesting Loss Harvesting Issues • “Wash sale” rule (IRC §1091) • Diminishing value of capital losses • Inefficiency of capital loss offsetting

21. Loss Harvesting Wash Sale Rule (IRC §1091) • Capital losses are denied to the extent that a taxpayer has acquired (or has entered into a contract or option to acquire) a “substantially identical” stock or securities within a period beginning 30 days before the sale and ending 30 days after the sale of a stock which was sold at a loss (i.e. “loss stock”) • This rule also applies to ETFs and index funds • Disallowed loss on “loss stock” is added to the cost basis of the new stock • The holding period of the “loss stock” is carried over to the new stock CAUTION: The wash sale rules apply to both IRAs and taxable investment accounts. Thus, if there is a loss incurred on a stock in a taxable investment account and a “substantially identical” stock is purchased within an IRA during the 61-day period, then the wash sale rules will apply (see Rev. Rul. 2008-5).

22. Loss Harvesting Diminishing Value of Capital Losses • Over time capital losses lose their value as a result of a taxpayer’s cost of capital • Example • Taxpayer has a $100,000 capital loss in the current tax year. Assuming a 5% discount rate, the following chart illustrates the diminished value of the capital loss carryover if the loss is recognized ratably over a ten-year period (vs. recognizing the loss all in the current year). • Loss Used in Loss Used • Current YearOver 10 Years • Present value $20,000 $15,443 • NOTE: The above comparison assumes that the $100,000 capital loss is offset by long-term capital gain taxed at a 20% capital gains tax rate.

23. Loss Harvesting Inefficiency of Capital Loss Offsetting • In general, capital losses are more tax effective if they can be used to offset income taxed at higher tax rates (e.g. short-term capital gains and ordinary income) • Thus, long-term losses used against short-term gains are more tax-efficient than short-term losses being used against long-term capital gains

24. Loss Harvesting Loss Harvesting Strategies • Buy stock of similar company • Double-up “loss stock” – wait 31 days • Double-up “loss stock” – enter into “cashless collar” • Buy call option at-the-money

25. Loss Harvesting Similar Stock Strategy • Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e. “loss stock”) • Taxpayer purchases a similar stock (e.g. Pepsi) at any time prior to (or after) the sale of the “loss stock” • NOTE: The sale and purchase can occur on the same day in that the two stocks are not “substantially identical” OBJECTIVES: Recognizing the loss on the “loss stock” in the current year, while maintaining the same economic interest in a similar stock.

26. Loss Harvesting “Double-Up” Strategy • Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e. “loss stock”) • Taxpayer purchases the same stock (i.e. Coke) at least 31 days before the anticipated sale date of the “loss stock” OBJECTIVES: (1) Recognizing the loss on the “loss stock” in the current year, (2) maintaining the same economic interest in the stock, (3) avoiding application of the wash sale rule.

27. Loss Harvesting “Cashless Collar” Strategy • Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e. “loss stock”) • Taxpayer purchases the same stock (i.e. Coke) 31 days or more before the anticipated sale date of the “loss stock” • Taxpayer simultaneously purchases a put option and sells a call option (to finance the cost of the put option) on the new stock (i.e. a “cashless collar”) with an exercise date 31 days or more from the date of the cashless collar was entered into • At the expiration date, taxpayer tenders the “loss stock” to the respective counterparty • Conversely, if the stock price stays inside of the cashless collar’s price range, taxpayer would sell the stock OBJECTIVES: Same as the “double-up” strategy with protection against short-term single-stock risk.

28. Loss Harvesting Call Option Strategy • Taxpayer has a stock (e.g. Coke) with an unrealized loss (i.e. “loss stock”) • Taxpayer purchases a call option (with a strike price at-the- money) on the same stock (e.g. Coke) 31 days or more before the anticipated sale date of the “loss stock” • NOTE: The exercise date will need to be more than 30 days after the date of the sale of the “loss stock” • At the call option expiration date, taxpayer exercises his/her option to purchase the same stock that was sold at a loss (i.e. Coke) • Conversely, if the stock price at the exercise date is below the strike price, taxpayer would not exercise the option and instead pay the current price for the stock OBJECTIVES: Same as the “double-up” strategy with protection against short-term single-stock risk.

29. Roth IRA Conversions

30. Roth IRA Conversions Benefits of Converting to a Roth IRA • Lowers overall taxable income long-term • Tax-free compounding • No RMDs at age 70½ • Tax-free withdrawals for beneficiaries • More effective funding of the “bypass trust” 30

31. Roth IRA Conversions Understanding the Mathematics • In simplest terms, a traditional IRA will produce the same after-tax result as a Roth IRA provided that: • The annual growth rates are the same • The tax rate in the conversion year is the same as the tax rate during the withdrawal years 31

32. Roth IRA Conversions Understanding the Mathematics 32

33. Roth IRA Conversions Understanding the Mathematics • Critical Decision Factors • Tax rate differential (i.e. tax rate in year of conversion vs. tax rate in years of withdrawals) • Ability to use “outside assets” (i.e. non-qualified funds) to pay the income tax on the conversion • Time horizon / need for IRA to meet annual living expenses

34. Roth IRA Conversions Understanding the Mathematics • The key to a successful Roth IRA conversion is to keep as much of the conversion income as possible in the current marginal income tax bracket • However, there are times when it may make sense to convert more and go into higher tax brackets

35. “Optimum” Roth IRA conversion amount 35% tax bracket Target Roth IRA conversion amount 33% tax bracket Current taxable income 28% tax bracket 25% tax bracket 15% tax bracket 10% tax bracket Roth IRA Conversions Understanding the Mathematics

36. Roth IRA Conversions Understanding the Mathematics – Ex #1

37. Roth IRA Conversions Understanding the Mathematics – Ex #2

38. Roth IRA Conversions Understanding the Mathematics – Ex #3

39. Roth IRA Conversions Understanding the Mathematics – Ex #4

40. Roth IRA Conversions Understanding the Mathematics – Ex #5

41. Roth IRA Conversions Understanding the Mathematics – Ex #6

42. Charitable Planning

43. Charitable Planning Direct Contributions – Typical Donations • Cash • Marketable securities • Other property • Real estate • Vehicles • Tools & equipment • Books

44. Charitable Planning Direct Contributions – Example Cash vs. Non-Cash Gift In 2007, Joe and Mary were considering giving $30,000 to their favorite public charity. In determining how to make the gift, Joe and Mary were considering either: (a) selling $30,000 of stock ($0 basis) and gifting the cash proceeds to the charity or (b) gifting the stock outright to the charity. In addition to the above, Joe any Mary had the following sources of income and deductions during the 2007 tax year: Income Interest $10,000 Qualified dividends 15,000 Pension distributions 75,000 Deductions State income taxes $2,000 Property taxes $3,000

45. Charitable Planning Direct Contributions – Example (cont.)

46. Charitable Planning Charitable Remainder Trust (CRT) A Charitable Remainder Trust (CRT) is a split interest trust consisting of an income interest and a remainder interest. During the term of the trust, the income interest is usually paid out to the donor (or some other non-charitable beneficiary). At the end of the trust term, the remainder (whatever is left in the trust) is paid to the charity or charities that have been designated in the trust document.

47. Charitable Planning Charitable Remainder Trust (CRT) Transfer of highly-appreciated assets Donor (Income Beneficiary) CRT Annual (or more frequent) payments for life (or a term of years) At the donor’s death (or at the end of the trust term), the charity receives the residual assets held in the trust Donor receives an immediate income tax deduction for present value of the remainder interest (must be at least 10% of the value of the assets originally contributed) Charity (Remainder Beneficiary)

48. Charitable Planning Charitable Remainder Trust (CRT) Two Main Types of CRTs • Charitable Remainder Annuity Trust (CRAT) • The beneficiaries receive a stated percentage of the initial value of the trust assets each year • The amount received is established at the beginning of the trust and will not change during the term of the trust regardless of investment performance (unless inadequate investment performance causes the trust to run out of assets) • Charitable Remainder Unitrust (CRUT) • Income beneficiaries receive a stated percentage of the trust’s assets each year, recalculated annually • The distribution will vary from year to year depending on the investment performance of the trust assets and the amount withdrawn

49. Charitable Planning CRT Tax Aspects – Distributions • The character of income received by the recipient is subject to and controlled by the tier rules of IRC §664(b). • First, distributions are taxed as ordinary income. • Second, distributions are taxed as capital gains. • Third, distributions are taxed as tax-exempt income (e.g. municipal bond income). • Finally, distributions are assumed to be the non-taxable return of principal.

50. Charitable Planning CRT Tax Aspects – Distributions STEP 2: Accumulated Ordinary Income STEP 5: Current Tax-Exempt Income STEP 6: Accumulated Tax-Exempt Income STEP 1: Current Ordinary Income STEP 4: Accumulated Capital Gains STEP 3: Current Capital Gains STEP 7: Return of Capital Tier 4 Tier 1 Tier 2 Tier 3