Welcome AAIP Members

1. Welcome AAIP Members Sheraton Airport Tempe, AZ March 16, 2013

2. Agenda • 11:00 – 12:00 - Current Federal Estate Tax Law and Estate Planning post ATRA • 12:00 – 12:15 - Questions • 12:15 – 12:30 - Other Trusts • 12:30 – 12:45 - Document Automation • 12:45 – 1:00 - Questions

3. Current Federal Estate Tax Law and Estate Planning

4. On January 1, 2013, President Obama signed into law The American Taxpayer Relief Act of 2012 (“ATRA”), bringing closure to the main tax aspects of the so-called “fiscal cliff” negotiations that had been ongoing since the November elections.

5. Since January 1, 2013, among its many tax provisions, ATRA makes permanent the $5.0 million gift, estate, and GST tax exemption amount that was put in place temporarily for 2011 and 2012, plus inflation adjustments going forward [the current adjustment for 2013 is $250,000 per person.

6. For married couples in 2013, the aggregate exemption will be twice this amount (i.e., $10.5 million)]. Future years can also have similar inflation adjustments.

7. The gift tax is still unified with the estate tax; a unified estate and gift tax exemption means the $5.25M threshold is applied to total transfers, whether by gift during lifetime or by inheritance on death.

8. There is also an inflation adjustment to increase the annual gift tax exclusion from $13,000 to $14,000 per donee (again, for married couples, the annual gift exclusion is now double this amount - $28,000 for 2013).

9. The 2012 Act also provides for a flat 40% tax rate for any transfers in 2013 and future years that exceed the exemption amount.

10. ATRA makes the new laws “permanent” because there is no sunset provision in the law that would cause the current rules to expire. The 2002 law was scheduled to sunset at the end of 2010. Similarly, the 2010 extension was scheduled to sunset at the end of 2012.

11. But a “permanent” change does not mean the law will never change.

12. The word “permanent” really means “until they change it next time!”

13. Notably, ATRA also makes permanent the “portability” concept introduced in the Tax Relief Act of 2010.

14. “Portability”

15. “Portability” Generally, “portability” allows a surviving spouse to elect to take advantage of the unused portion of the estate tax exclusion of his or her predeceased spouse, thereby providing the surviving spouse with a larger exclusion amount.

16. “Portability” NOTE: The “deceased spousal exclusion amount” is available to the surviving spouse only if an election is made on a timely filed estate tax return for the deceased spouse (even if an estate tax return would otherwise not be required).

17. Example Assume that Husband dies in 2013, leaving $1M to his daughter and the balance of his estate of $3M to Wife (no tax is due). An election is made on Husband’s estate tax return to permit Wife to use Husband’s unused exemption. Thereafter, Wife’s exemption is now $9.5M (her $5.25M basic exemption plus the $4.25M of Husband’s unused exemption), which she may use for lifetime gifts or for transfers at death.

18. The biggest argument in support of portability is that it will prevent married couples from having to create "costly" estate plans that contain "complex" trusts.

19. But not so fast! There are still plenty of reasons why married couples should consider Trust planning and why unwed couples may need it too; portability is really a “get out of jail card” for those who don't do anything or if the totally unexpected should occur. There are a number of reasons for married clients to still create an estate plan which creates a trust or trusts after the first death:

20. PLANNING

21. Planning to “lock-in” the full exemption

22. Planning to “lock-in” the full exemption Having an exemption trust will protect the full $5M amount if one spouse dies and the Democrats are later successful in "rolling-back" the exemption to $3.5. Portability may also be lost if the surviving spouse remarries and is later widowed again.

23. Planning to “lock-in” the full exemption • Planning for appreciation

24. Planning for appreciation Funding an “exemption trust” also protects appreciating assets from estate tax at the survivor’s death.

25. Planning to “lock-in” the full exemption • Planning for appreciation • Planning for blended families and/or “control”

26. Planning for blended families and/or “control” For a second/third marriage (or even for a first marriage), if one or both of the clients is concerned with the survivor being able to change the beneficiaries (e.g., remarriage, separate children, etc.), the irrevocable trust is still necessary (even when there are no estate tax issues).

27. Planning to “lock-in” the full exemption • Planning for appreciation • Planning for blended families and/or “control” • Providing creditor protection for the surviving spouse

28. Providing creditor protection for the surviving spouse Creating an irrevocable trust at the first death provides asset protection from creditors, lawsuits and/or Medicaid “spend-down”. In addition, any assets owned by an irrevocable trust will be protected from a divorce settlement if the surviving spouse remarries and then later divorces.

29. Planning to “lock-in” the full exemption • Planning for appreciation • Planning for blended families and/or “control” • Providing creditor protection for the surviving spouse • Planning for state estate taxes

30. Planning for state estate taxes Currently, there are 16 states (plus the DC) which impose a separate state estate tax, so trust planning may be necessary in order to “double” the state exemption and defer payment of state estate taxes until the death of the surviving spouse (so far, no state with an estate tax has adopted the concept of “portability” for the unused exemption of the first to die). Even if the client resides in a state currently without a separate estate tax, that state may subsequently elect to impose a tax or the survivor could later move to a state which does have a separate state estate tax (e.g., move to be closer to children/grandchildren).

31. Planning to “lock-in” the full exemption • Planning for appreciation • Planning for blended families and/or “control” • Providing creditor protection for the surviving spouse • Planning for state estate taxes • Planning for the “generation-skipping tax”

32. Planning for the “generation-skipping tax” Portability does not apply to the GST tax, so in order to fully leverage the GST exemptions of both spouses for GST trust planning, it will still be necessary to create a trust at the first spouse’s death. The so-called “Dynasty Trusts” are becoming increasingly popular.

33. Planning to “lock-in” the full exemption • Planning for appreciation • Planning for blended families and/or “control” • Providing creditor protection for the surviving spouse • Planning for state estate taxes • Planning for the “generation-skipping tax” • Planning for same sex or unwed couples

34. Planning for same sex or unwed couples Until same sex marriage is recognized by the federal government, same sex couples will need to use trust planning in order to be able to take full advantage of the exemption (state and federal) at both deaths (and the same goes for unwed couples).

35. Problems with “Portability” • No planning to “lock-in” the full exemption • No planning for appreciation • No planning for blended families and/or “control” • No creditor protection for the surviving spouse • No planning for state estate taxes • No planning for the “generation-skipping tax” • No planning for same sex or unwed couples

36. WHAT DOES THIS ALL MEAN?

37. As most of you know, there are many “types” of trusts for married couples. The correct type of trust can depend on a number of circumstances.

38. We have prepared a “matrix” of the different client scenarios with our recommendations for the appropriate type of estate planning trusts which may be appropriate for each scenario. Of course, this matrix also takes into account the existence of a separate state tax (when appropriate).

39. This “matrix” is one of the referenced documents in the list of on-line PDF files which you can download.

40. However, for today, let’s assume that your clients reside in Arizona (which has no separate estate tax) and neither spouse has an estate over $3.5M.

41. WHAT IS THE BEST FORM OF TRUST?

42. THE ANSWER: A “Disclaimer Trust” OR an “Intentionally Defective Marital Deduction Trust”

43. THE ANSWER: It depends mostly on the amount of control the surviving spouse should have over the deceased spouse’s estate

44. What type of trust should be used if “control” is NOT an issue?

45. Why not a simple “probate avoidance trust”?

46. With the Probate Avoidance Trust, there is no flexibility – everything stays under the survivor’s control and power of revocation.

47. The “Disclaimer Trust”:

48. The “Disclaimer Trust”: Again, use IF there are no issues of “control” (e.g., no separate children, etc.).

49. The “Disclaimer Trust”: Everything goes to the survivor but the survivor can, within 9 months, disclaim any or all of the deceased spouse’s interest into an irrevocable trust.

50. The “Disclaimer Trust”: There may be factors at the time of the first death which makes the irrevocable trust worthwhile: