Sunrise Sunset The Federal Estate Tax is Back

Sunrise, Sunset: The Federal Estate Tax is Back Victor S. Elgort, Esq. Kenneth D. Meskin, Esq. Jill Lebowitz, Esq. The material provided herein is for informational purposes only and is not intended as legal advice or counsel.

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Sunrise, Sunset: The Federal Estate Tax is Back Victor S. Elgort, Esq. Kenneth D. Meskin, Esq. Jill Lebowitz, Esq.

Summary of the New Estate, Gift and GST Tax Laws Presented by: Jill Lebowitz, Esq.

What’s all the Excitement About? • The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 enacted on December 17, 2010 (the “ 2010 Tax Act”) • Federal estate tax is reinstated • Increased exemption amounts for federal estate, gift and generation-skipping transfer ("GST") taxes • Historic legislation creates major estate planning opportunities 5

Historical Perspective • 2001 legislation - The Economic Growth and Tax Relief Reconciliation Act of 2001 - reduced federal estate taxes over the past ten years • The federal estate tax exemption amount increased from $675, 000 in 2001 to $3. 5 million in 2009 • The federal estate tax rate was reduced from 55% in 2001 to 45% in 2009 • Estate, gift and GST tax exemption amounts were no longer “unified” 6

Historical Perspective (Continued) • From 2001 to 2009 estate assets received a “step-up” in basis for income tax purposes • Before the new legislation, the federal estate tax was repealed in 2010 and instead a modified carryover basis treatment applied • If no legislation had been passed in 2010, then beginning in 2011, the federal estate tax would have been reinstated with a $1 million exemption and the estate tax rate was scheduled to increase to 55% 7

2010 Tax Act is Good News for Taxpayers (at least for two years) • The 2010 Tax Act extends and improves federal estate, gift and GST tax benefits for 2010 through 2012 • Federal estate tax exemption amount increases and federal estate tax rate decreases • Effective retroactively from January 1, 2010 through December 31, 2012 8

Federal Estate Tax in 2011 and 2012 • 2011 and 2012 federal estate tax exemption of $5. 0 million (indexed beginning in 2012) • 2011 and 2012 federal estate tax rate is 35% • Basis step-up continues for estates of decedents dying during 2011 and 2012 9

Federal Gift Tax in 2011 and 2012 • 2011 and 2012 unified federal estate and gift tax exemption amounts • 2011 and 2012 federal gift tax exemption is $5 million (or $10 million for a married couple electing “gift splitting” or using “Portability”) • 2011 and 2012 gift tax rate is 35% • 2011 and 2012 provide incredible opportunities for lifetime transfers 10

GST Tax in 2011 and 2012 • GST tax applies to transfers to grandchildren and more remote descendants • 2011 and 2012 GST tax exemption amount is $5 million (indexed beginning in 2012) • 2011 and 2012 GST tax rate is 35% • 2011 and 2012 provide incredible opportunities for generational planning 11

Summary of 2011 and 2012 Federal Estate, Gift and GST Tax Laws • Estate, Gift and GST tax exemption amount is $5 million • Estate, Gift and GST tax rate of 35% • Exemption amounts indexed for inflation beginning in 2012 in $10, 000 increments • Portability applies 12

Portability • Surviving spouse can use unused portion of federal estate tax exemption amount of “last deceased spouse” • Not as simple as it seems 13

Summary of 2010 Federal Estate, Gift and GST Tax Laws • Gift tax exemption amount $1 million • Estate tax reinstated - exemption amount $5 million • Option to elect out of estate tax and instead elect modified carryover basis • GST tax reinstated - exemption amount $5 million • Gift and Estate tax rate of 35% • GST tax rate of 0% 14

2010 Estates • General Rule for 2010 estates - $5 million federal estate tax exemption amount, income tax basis step-up treatment and 35% federal estate tax rate • Optional Election for 2010 estates - The executor of a 2010 estate may opt out of the federal estate tax and instead elect to have a modified carryover basis apply • There a number of factors that should be considered before making this election • Extension of time to file 2010 federal estate tax returns and pay estate tax until September 19, 2011 for 2010 decedents dying before December 17, 2010 • No extension of time to file state estate tax returns 15

State Estate Tax Laws Remain Unchanged for 2010 through 2012 • New Jersey estate tax remains unchanged at $675, 000 exemption • New York estate tax remains unchanged at $1 million exemption • Pennsylvania estate tax remains at zero for 2011 and 2012 but imposition of Pennsylvania inheritance tax remains unchanged 16

Chasing the Sunset • All of the 2010 Tax Act changes will “sunset” and expire at the end of 2012 unless additional legislation is passed. 2013 sunset: Gift tax exemption amount $1. 0 million Estate tax exemption amount $1. 0 million GST tax exemption amount $1. 36 million (indexed from 2011) Estate, Gift and GST tax rate of 55% 17

Chasing the Sunset (Continued) • If no further legislation is passed before 2013, the federal estate tax exemption amount is scheduled to decrease to $1 million and the estate tax rate is scheduled to increase to 55%. • Take advantage of the opportunities presented by the increased exemption amounts of the 2010 Tax Act while you can! 18

Certain Lifetime Wealth Transfer Techniques Still Available • Irrevocable Life Insurance Trusts (“ILITs”) • Grantor Retained Annuity Trusts (“GRATs”) • Qualified Personal Residence Trusts (“QPRTs”) • Sales to Intentionally Defective Grantor Trusts (“IDGTs”) • Valuation Discounts 19

Portability: What You Need to Know Presented by: Victor S. Elgort, Esq.

Reunification of gift and estate tax exemptions • $5 Million Exemption for Both Gift and Estate Tax Purposes Prior outcome without Advance Planning • Simple will leaving all to a surviving spouse “wastes” exemption • Surviving spouse receives all assets free of tax under the unlimited marital deduction • But on subsequent death of surviving spouse, only one exemption will be available 21

“Deceased Spousal Unused Exclusion Amount” • The question is not how big predeceased spouse’s estate is, but how big the taxable estate is, after application of marital deduction • That is why you get the same portability effect whether first deceased spouse has a $50 million estate and leaves it all to surviving spouse, or first spouse dies penniless • In either case, the estate uses none of the $5 million basic exclusion amount, and it is converted into a Deceased Spousal Unused Exclusion Amount (“DSUEA”) for the surviving spouse 22

Portability Planning Pointers • Executor of first deceased spouse must file estate tax return on timely basis, even if no tax was due • Executor must make an affirmative election to allow the surviving spouse to use the unused exemption • Statute of limitations will remain open indefinitely, but presumably only to determine the proper amount of unused exemption – Thus, continued exposure to valuation and inclusion issues 23

Portability Planning Pointers • No Portability of unused GST exemption • DSUEA can be used by surviving spouse for subsequent gifting purposes, not just at death • Surviving spouse uses up her inherited DSUEA before using up her own basic exclusion amount – hedging bets against subsequent possible loss of the DSUEA 24

Portability Planning Pointers & Questions • Complexity and uncertainty abounds • Only applies to “Last Deceased Spouse” • Example: H 1 dies (with W as sole beneficiary) and thus W’s applicable exclusion amount becomes $10 million. If W remarries, and H 2 then dies (with no unused exemption of his own), W’s applicable exclusion amount decreases back to $5 million 25

Portability Planning Pointers & Questions • “Privity” Requirement • Surviving spouse who remarries can only pass on his or her own unused exemption – Not the DSEUA from spouse number 1 • Mere remarriage does not remove right to unused exemption Example: H 1 dies and W’s applicable exclusion amount is now $10 million. If W remarries, and W dies, then her applicable exclusion amount is still $10 million but H 2’s applicable exclusion amount is likely only $10 million, not $15 million 26

Portability Planning Pointers & Questions • Incentive to join in opposite-sex civil union to preserve portability? • Will DSUEA become an issue for prenuptial agreements? • Perhaps useful if retirement benefits are major asset of the estate 27

Portability Planning Pointers & Questions • Is New Jersey State Slayer Statute Applicable? • Surviving Spousal Murderer Cannot Inherit Property of Slain Spouse • So is the DSUEA considered property within the scope of the statute? 28

Portability Planning Pointers & Questions • Sunsets in two years • Applies only when predeceased spouse dies in 2011 or 2012 29

Portability Planning Pointers & Questions • Credit Shelter Trusts (or Disclaimer Trusts) still recommended and beneficial • Provides professional investment management and asset protection for surviving spouse • Shelters intervening growth in asset value and accumulated income from estate tax on second death • Permits use of predeceased spouse’s GST exemption • Protects expectancy of children from diversion by surviving spouse • Avoids uncertainties and risks associated with remarriage or divorce scenarios under new rules 30

Lifetime Wealth Transfer Opportunities Presented by: Victor S. Elgort, Esq.

Immediate Gift Planning Opportunities in 2011 • Annual exclusion gifts – still $13, 000 per donee • Taxable gifts: 2010: $1 million lifetime gift exemption in 2010 35% gift tax rate on taxable gifts over $1 million 2011: $5 million lifetime gift exemption in 2011 35% gift tax rate on taxable gifts over $5 million • Doubled with gift splitting 32

Immediate Gift Planning Opportunities in 2011 • Utilize the additional $4 million of gift tax exemption to shelter future growth from estate tax – Identify assets with highest likelihood for appreciation • Use high-basis assets for these gifts if possible • Consider incurring a gift tax at the 35% rate for lowbasis assets • Gift tax paid on the gift will increase cost basis in the hands of the donee (up to FMV of the asset gifted) 33

Lifetime Gifting Tax Exclusive Nature of Gifts • Gift tax imposed on the donor is calculated based on the value of the gift passing to the donee (after the imposition of gift tax) • Estate tax, on the other hand, is calculated based on the total value of the taxable estate, regardless of the net amount passing to the beneficiaries of the estate

Lifetime Gifting Tax Exclusive Nature of Gifts Net Asset Value • Effective Tax Rate • Total Tax • Savings At Death By Gift $1, 000, 000 35. 00% 25. 93%* $(350, 000) $(259, 300) $ 90, 700 *Effective Gift Tax Rate = 35%/135% 35

Dynasty Trust Summary of Technique • A type of trust which benefits multiple generations where none of the assets held by the trust are included in either the grantor’s taxable estate or any of the beneficiaries’ taxable estates • However, under the tax law, whenever a transfer is made by the grantor to a “skip person” (e. g. grandchild, great‐grandchild, etc. ) or a trust for their benefit (e. g. dynasty trust), a second level of tax is imposed on the transfer (in addition to gift tax) • Notwithstanding, a grantor is allowed a lifetime GST exemption on the first $5 million of taxable transfers to “skip persons” • Thus, if the grantor allocates all or a portion of his/her GST exemption to the entire transfer, none of the transfer will be subject to GST tax either in the current year or future years 36

Dynasty Trust Overview of Technique Dynasty Trust Grantor No transfer tax paid. Discretionary Distributions to Children for Life Advantages • Creditor protection • Divorce protection • Estate Tax protection • Dispositive plan protection • Spendthrift protection • Consolidation of capital *Gift should take advantage of any remaining lifetime gift exclusion and lifetime GST exclusion No transfer tax paid. Discretionary Distributions to Grandchildren for Life No transfer tax paid. Discretionary Distributions to Great-Grandchildren for Life No transfer tax paid. Future Generations 37

Dynasty Trust Example – Erosion of Estate at Each Generation Level Wealth of Parents $1, 000, 000 $1, 000 35% 35% Estate Tax $ 350, 000 Wealth of Children $ 650, 000 $ $ Estate Tax Rate 35% 35% Estate Tax $ 227, 500 $ - Wealth of Grandchildren $ 422, 500 $ 650, 000 $ - 35% Estate Tax $ 147, 875 $ 227, 500 $ Wealth of Great-Grandchildren $ 274, 625 $ 422, 500 $ 650, 000 % of Original Wealth Passing to Great-Grandchildren 27. 4625% 42. 2500% 65. 000% Estate Tax Rate 35% - 38

Dynasty Trust of $5 million Example – Summary of Estate Tax Savings 5% Growth 7% Growth 9% Growth Value of Trust in 20 years $ 13, 266, 489 $ 19, 348, 422 $ 28, 022, 054 Estate Tax Savings @ 45% $ 5, 969, 920 $ 8, 706, 790 $ 12, 609, 924 Value of Trust in 40 years $ 35, 199, 944 $ 74, 872, 289 Estate Tax Savings @ 45% $ 15, 839, 975 $ 33, 692, 530 Value of Trust in 60 years $ 93, 395, 929 $ 289, 732, 134 $ 880, 156, 460 Estate Tax Savings @ 45% $ 42, 028, 168 $ 130, 379, 460 $ 396, 070, 407 Value of Trust in 80 years $ 247, 807, 205 $ 1, 121, 171, 938 $ 4, 932, 758, 341 Estate Tax Savings @ 45% $ 111, 513, 242 $ $ 2, 219, 741, 253 504, 527, 372 39

Generation-Skipping Transfer Tax After the 2010 Tax Act Presented by: Jill Lebowitz, Esq.

GST Tax After the 2010 Act • Reinstatement of the GST Tax • GST tax exemption amounts and rates: -2010 GST tax exemption amount was $5. 0 million -2010 GST tax rate was 0% -2011 and 2012 GST tax exemption amount is $5. 0 million (indexed beginning in 2012) -2011 and 2012 GST tax rate is 35% 41

GST Tax Exemption Allocation • GST protected dynasty trusts • Automatic allocation of GST tax exemption • Insurance trusts – GST tax exemption allocation issues 42

GST Tax Allocation Reporting • U. S. Gift (and Generation-Skipping Transfer) Tax Return Issues Report allocation of your GST exemption to a GST trust or a direct skip gift - protected One time election to opt out of the automatic allocation of your GST exemption to transfers to an insurance trust for that year and all future years 2010 direct skip gifts - elect out of the automatic allocation your GST exemption to the transfer - of Form 709 Filing Deadlines and Extensions 43

GST Tax Planning Opportunities • Increased GST and gift tax exemption amounts during 2011 and 2012 provide historic opportunities for generational estate planning 44

Formula Clauses: Does Your Will Say What You Think It Does? Presented by: Kenneth D. Meskin, Esq.

Use of Formula Bequests After the 2010 Tax Act • Impact of the 2010 Tax Act on pre-existing formula bequests • Need to understand impact of formula on the plan for distributing assets • State law issues of interpretation 46

Use of Formula Bequests After the 2010 Tax Act • Bequest of federal estate tax exemption amount to “bypass” trust • Use of a dollar amount or percentage limitation in appropriate situation 47

Use of Formula Bequests After the 2010 Tax Act • Bequest of state estate tax exemption amount to “bypass” trust 48

Use of Formula Bequests After the 2010 Tax Act • Use of “disclaimer” trust • Maximum flexibility • Practical issues in implementing 49

Existing Opportunities Survive: ILITs, GRATs, QPRTs and Intrafamily Loans Presented by: Kenneth D. Meskin, Esq.

Existing Estate Planning Tools Survive the 2010 Tax Act • Life Insurance trusts remain a key planning tool • Increased exemptions provide additional opportunities 51

Existing Estate Planning Tools Survive the 2010 Tax Act • Reports of the death of zeroed out Grantor Retained Annuity Trusts (GRATs) are significantly overstated • Technique for removing from taxable estate income/appreciation on investment assets in excess of IRS assumed rate • February 2011 applicable federal rate is 2. 8% 52

Existing Estate Planning Tools Survive the 2010 Tax Act • Qualified Personal Residence Trusts (QPRTs) • Increased availability in light of enhanced gift tax exemption and reduced fair market value of residential real estate 53

Existing Estate Planning Tools Survive the 2010 Tax Act • Intrafamily Loans – taking advantage of low interest rate environment • February 2011 mid term rate is 2. 33% 54

Existing Opportunities Survive: Sales to Grantor Trusts and Valuation Discounts Presented by: Victor S. Elgort, Esq.

Installment Sale to an IDGT Current Interest Rates – February 2011 Short-Term AFR (3 years or less) . 51% Mid-Term AFR (over 3 years, up to 9 years) 2. 33% Long-Term AFR (over 9 years) 4. 15% 56

Intentionally Defective Grantor Trust (IDGT) An IDGT is a type of trust where all income earned by the trust is taxed to the grantor because the trust is considered incomplete (“defective”) for income tax purposes, but completed for estate and gift tax purposes Defective nature of trust also allows for a “tax-free” gift to the trust’s beneficiaries when grantor pays income taxes otherwise attributable to the trust or its beneficiaries 57

Installment Sales to an IDGT Summary of Technique • A type of transaction whereby a grantor sells a highly-appreciating asset to an IDGT in exchange for an installment note – Note, however, that the grantor should generally make an initial gift (at least 10% of the total transfer value) to the trust so that it has sufficient capital to make its payments to the grantor • To the extent that the growth rate on the assets sold to the IDGT is greater than the interest rate on the installment note taken back by the grantor, the “excess” is passed on to the trust beneficiaries free of any gift, estate and/or GST tax • No capital gains tax is due on the installment sale to the trust because the trust is “defective” for income tax purposes • Interest income on installment note is not taxable to the grantor because the trust is “defective” for income tax purposes 58

Installment Sales to an IDGT Overview of Technique Gift & sale of highlyappreciating assets IDGT Grantor Installment note(s) Discretionary distributions of income and principal during the lifetime of the trust’s beneficiaries Assets outside of the taxable estates of beneficiaries Children, Grandchildren, Great Grandchildren & Future Generations 59

Installment Sale to an IDGT Example Assumptions FMV of Assets Sold to IDGT $ 1, 111, 100 $111, 100 Gift to Trust Interest Rate (Mid-Term AFR) 2. 33% Terms (Years) 9 Payment Structure $111, 100 Down Payment with Gift, Balance Interest-Only w/Balloon Payment Period Annually Timing of Payments Year End of Period Beginning Balance Income 10. 00% Installment Payment Ending Balance 1 $1, 000 $100, 000 $ (23, 300) $1, 076, 700 2 $1, 076, 700 $107, 670 $ (23, 300) $1, 161, 070 3 $1, 161, 070 $116, 107 $ (23, 300) $1, 253, 877 4 $1, 253, 877 $125, 388 $ (23, 300) $1, 355, 965 5 $1, 355, 965 $135, 596 $ (23, 300) $1, 468, 261 6 $1, 468, 261 $146, 826 $ (23, 300) $1, 591, 787 7 $1, 591, 787 $159, 179 $ (23, 300) $1, 727, 666 8 $1, 727, 666 $172, 767 $ (23, 300) $1, 877, 133 9 $1, 877, 133 $187, 713 $ (1, 023, 300) $1, 041, 546 Amount passing to beneficiaries free of estate and gift tax And income tax on trust income is paid by grantor as additional “gift” without gift tax 60

Leveraging Transfers Through Valuation Discounts • If the value of the transferred assets can be discounted by application of well-established factors, the amount of assets that can be transferred via the increased exemption amount is substantially expanded • Common discount factors include lack of marketability, lack of control, restrictions on subsequent transfers, and estimated income tax liability on “built-in gains” • Despite repeated threats of “loophole closing, ” discounts withstand the siege 61

Common Vehicles to Qualify for a Discounted Transfer • Transfers of undivided partial interests in real estate • Transfers of a partial interest in a family business • Transfers of a partial interest in a family holding company, such as an LLC holding investment assets or a co-owned family asset, such as a vacation home 62

Illustration of the Power of Valuation Discounts • In the recent case of Estate of Stewart, decided in 2010 by the US Federal Court of Appeals (Second Circuit), the IRS and the taxpayer both agreed to accept a total valuation discount of 42. 5% both for the lifetime gift of a 49% partial interest as well as the remaining 51% interest retained by the donor at her death • Commonly, all or nothing? • Need for sound factual support and appraisal of fractional interest, as well as underlying asset 63

Question & Answer Session Thank you for coming!

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