Cushing Dolan PC Affordable Estate Planning with Joint

Cushing & Dolan, PC. Affordable Estate Planning with Joint Trusts for Medium Size Estates and Large Retirement Plans Presentation By Leo J. Cushing, Esq. , CPA, LL. M. Cushing & Dolan, P. C. Attorneys at Law 24 School Street, Suite 300 Boston, MA 02108 -5113 www. cushingdolan. com lcushing@cushingdolan. com Tel: 617 -523 -1555 Fax: 617 -523 -5653 September 28, 2007 Cushing & Dolan - Fall Seminar Series WILMINGTON 187 Ballardvale Street Suite A 180 Wilmington MA 01887 T: 978 -988 -1222 F: 978 -988 -1223 WESTBOROUGH 276 Turnpike Road Westboro MA 01581 T: 508 -836 -9501 F: 508 -366 -7683 NORWOOD 520 Providence Hwy. Route 1 - Suite #10 Norwood MA 02062 T: 781 -278 -9901 F: 781 -278 -9911 CHESTNUT HILL 1330 Boylston Street Chestnut Hill, MA 02467 T: 617 -264 -7999 F: 617 -264 -4445 1

Estate Planning Philosophy l User Friendly – Spouse as Trustee, unless gatekeeper is needed l Flexible l Inexpensive l Understandable 2

Planning in the Twilight Zone Year Mass. Exemption Federal Exemption 2003 2004 2005 2006 2007 2008 2009 2010 2011 $700, 000 $850, 000 $950, 000 $1 million $1 million $1. 5 million $2 million $3. 5 million No Federal Estate Tax $1 million Comment: A portable exemption does not eliminate a need for planning. 3

Estates Between $1, 000 & $4, 000 and Large IRAs l Recommend using a joint trust l Revenue Rulings -- 200101021 -- 200210051 4

Estates Between $1, 000 & $4, 000 and Large IRA’s (con’t) Step-by-Step Analysis l Surviving Spouse is Sole Trustee l Husband & Wife are Donors and Trustees l Children are Trustees Upon Death of Survivor l 5

Estate Tax Treatment All trust assets are includible in estate of first spouse to die Deceased spouse assets includible under § 2038 (revocable) Surviving Spouse Assets includible under IRC§ 2041 General Power of Appointment Trusts break down into 3 shares Federal Marital Mass. Marital (QTIP) By Pass Federal Marital - income and principal to spouse upon request – – – Mass Marital - income to spouse for life. Principal payable to spouse to maintain health and support By Pass - income payable to spouse for life. Principal to Spouse and issue for health, education, maintenance and support. (May include NON support distributions if co. Trustee is named) Death of Surviving Spouse - Trust divides into as may equal shares as there are children living; and children deceased leaving issue. Surviving Spouse interest so does not have retained By Pass assets are not includible. 6

Pre-Death Funding l l l Joint Assets Transferred directly to the Trust Use Social Security Number Real Estate Transferred to the Trust Retirement Plans payable to spouse with trust as contingent Costs $2, 500 - $3, 500 No need to re-allocate based on rising exemptions 7

Not appropriate for estates in excess of $4, 000 For estates in excess of $4, 000 - two trusts - one for the husband one for the wife are recommended. l Assets allocated equally, but always fractionalized ownership interests using Real Estate and LLC's for equities. l Marital share must be QTIP with co-trustee to assure favorable discount planning on the 1 st death and on the 2 nd death. l 8

Example A 10 million dollar estate with a 35% discount will save $1, 750, 000 in estate taxes, with no significant loss of control. 9

Key to Efficiency January 1, 200 X Mr. and Mrs. John Q. Public 65000 Pennsylvania Avenue Anywhere, USA 91101 RE: Estate Planning Information Request Dear Mr. and Mrs. Public: Thank you for selecting Cushing & Dolan, P. C. We have received your signed engagement letter and look forward to completing your estate plan. In order to make this process move efficiently and avoid unusual circumstances, it is important that you provide us with the following documents and information prior to our next meeting: (1) Deeds: Copies of the most recent deed(s) for each property you wish to transfer to your trust(s). Please note that we will not be undertaking a title examination. If you cannot find a copy we can obtain a copy of the most recent deed from a Massachusetts Registry at a cost of $100 per deed. [Optional] Please note we have already received a copy of the deed for {PROPERTY} dated {DATE}. (2) Investment Statements: Copies of most recent statements for investment accounts showing the names on the accounts and account numbers you wish to transfer to your trust(s) as discussed in the engagement letter, as well as the name, address and telephone number of the investment advisor(s). (3) Change of Beneficiary Forms – Retirement Plans: Verification of existing beneficiaries of retirement plans and blank change of beneficiary forms for each retirement plan, including IRAs, 401(k) plans, tax deferred annuities, and the like that you wish to change the beneficiary designation, according to the engagement letter. 10

(4) Change of Beneficiary Forms – Life Insurance: Verification of existing beneficiary designations and blank change of beneficiary and owner forms for each life insurance policy owned and/or controlled by you as well as contact information for the life insurance agent, if any, that you wish to make payable to the trust(s) as specified in the engagement letter. (5) Homeowner’s Hazard Insurance: Provide the name, address, and telephone number of the Homeowner’s or other property insurance carrier, and of the insurance agent, for each property owned. The realty trust will become an “additional insured” on each policy. Also, if possible, please send a copy of the Coverage Selection page for each policy. (6) Title Insurance: If insured, provide the name, address, and telephone number of the insurance agent and the name of the Title Insurance company for each property owned. Also please provide a copy of the title insurance policy. If you have any questions concerning this, please contact us by phone or by e-mail at any time. We will be sending you a draft of your estate planning documents under separate cover. If you do not send this information to us prior to our next meeting, additional costs may be incurred if you wish to fund your trusts with the above assets. A self-addressed envelope has been provided for your convenience. Thank you. Very truly yours, {Name of Paralegal} {Telephone} {e-mail address} cc: Referral Source 11

Using General Power of Appointment Trusts PLR 200403094 (January 16, 2004) PLR 200604028 (January 27, 2006) In each of these rulings, the taxpayer proposed to establish a single revocable trust and fund it with his own assets, but giving his wife a general power of appointment over a portion of the assets in the husband’s trust equal to the value of the wife’s remaining applicable exclusion amount, less the value of the wife’s taxable estate determined as if she did not possess this power. l In PLR 200403094 and PLR 200604028, the wife executed a Will, which exercised the general power of appointment. l Upon wife’s death, who has little or no assets, the husband is required to pay over such amount from his trust to the wife’s estate whereupon such assets will be held in a traditional by-pass share, as though the wife had established the by-pass share for the benefit of her husband. l 12

Using General Power of Appointment Trusts (con’t) l l l The husband was the sole trustee of the wife’s by-pass trust (which was funded with the husband’s assets taken out of his revocable trust). The trust provides that the trustee will pay to the husband’s descendants any amount of income and principal of the wife’s by-pass trust that the trustees deem necessary and advisable for the health, education, support, and maintenance of the husband his descendants. If the trust holds wife’s residence, during his life, husband will have the exclusive use of that residence and the wife’s family trust will pay all costs associated with that use. Husband also will have a testamentary limited power of appointment to appoint the assets of the wife’s by-pass trust among his then living descendants. Any assets not so appointed, will be distributed to the wife’s then living descendants by right of representation. 13

Requests 1) On the death of the wife, if wife exercises the power of appointment granted, husband will be treated as making a gift that qualifies for the federal gift tax marital deduction to wife with respect to that portion of the trust appointed by wife. 2) If wife predeceases husband, the value of trust assets over which wife holds a general power of appointment will be included in wife’s gross estate. 3) Any assets that originated in husband’s trust and that pass to wife’s bypass trust will not constitute a gift from husband to other beneficiaries of wife’s by-pass trust. 4) Any assets that originated in husband’s trust and that pass to wife’s by -pass trust established under her Will would not be included in husband’s gross estate. 14

The IRS answered all questions favorably: l Ruling 1: If wife predeceases husband, the value of trust assets over which wife holds a general power of appointment will be included in wife’s gross estate. l Ruling 2: If wife exercises that power of appointment, husband is treated as relinquishing his dominion and control over the property, subject to that power of appointment. Accordingly, on the death of wife, if wife exercises the power of appointment granted her, husband will have made a completed gift to her under Section 2501 and will be eligible for the federal gift tax marital deduction under Section 2523. l Ruling 3: Any assets that originated in husband’s revocable trust and that pass to the wife’s by-pass trust will not constitute a gift from husband to the other beneficiaries of the wife’s trust since wife, at her death, will be treated as the owner of the trust assets she appoints. 15

l Ruling 4: None of the assets in the wife’s by-pass trust will be includible in the husband’s estate, since in his role as either a beneficiary or a trustee, husband will not have a general power of appointment under Section 2041, because distributions of income and principal from wife’s family trust are subject to an ascertainable standard. Also, any interest husband may have under wife’s by-pass trust in a residence in which he may have had an ownership interest would not cause that residence to be includible in his gross estate under Section 2036. As a result, none of the assets in the wife’s by-pass trust will be includible in the husband’s gross estate. 16

Question: Does the spouse actually have to exercise the power to achieve the same result? l In PLR 200403094 and in PLR 200604028, the facts showed that the wife intended to actually exercise the general power of appointment. In PLR 200101021, the power of appointment was not expressly exercised and the assets passed in default of appointment to a by-pass trust for the benefit of the donor. The IRS ruled that the gift qualified for the gift tax marital deduction. l Treasury Regulations 25. 2523(e)-1(G)(2) provides that the actual exercise of a testamentary general power of appointment is not required in order to qualify for the gift tax marital deduction. The Regulations provide that an income interest coupled with a general power of appointment will qualify for the gift tax marital deduction even though the donee spouse does not exercise the power and takers in default designated by the donor spouse ultimately receive the property. 17

Self-Settled and Third Party Trusts in Divorce Vaughn Affidavits l Self Settled Trusts l Third Party Trusts l Domestic Asset Protection Trusts l – Delaware – Alaska – Rhode Island l The New Bankruptcy Act 18