Understanding Estate Taxes

Welcome to our presentation entitled, "Understanding Estate
Taxes." We're delighted you could join us.

Today you will find out if your estate will have to pay estate taxes
after you die and, if so, how you can reduce or, in some cases,
even eliminate them.

The information in this presentation will be explained in plain
English -- no legalese -- and the entire presentation will take
about 40 minutes.

Now, let's get started.

Estate taxes are different from, and in addition to, probate expenses
which can be avoided with a living trust,* and final income taxes,
which must be paid on income you receive in the year you die.

Federal estate taxes are expensive -- historically, the tax rate has
been 45-55%. They must be paid in cash, usually within nine
months after you die. Because few estates have the cash it has
often been necessary to liquidate assets to pay these taxes.

The estate tax is, in effect, a "double tax." You've already paid income
taxes on the money and assets that make up your
estate. Now your estate may have to pay taxes on these assets again.

*NOTE: Probate is a court-controlled process through which your will
is verified, your debts are paid and your assets are distributed.
Probate costs are usually estimated at 3-8% of an estate's gross value.

Your estate will have to pay federal estate taxes if its net value when
you die is more than the exempt amount set by Congress at that
time. How much of your estate will be exempt depends upon
when you die.

For example, in 2011 and 2012, the federal estate tax exemption is
$5 million and the tax rate is 35%. (This amount is adjusted for
inflation in 2012.) If Congress does not act again before the end of
2012, the exemption in 2013 will be $1 million and the top tax rate
will be 55%.

Some states also have their own death or inheritance tax, so your
estate could be exempt from federal tax and still have to pay
state tax.*

*Contact us for more information.

Now, remember that estate taxes are on the net value of your
estate when you die. To determine the current net value of your
estate, add your assets then subtract your debts. Include your
home, business interests, bank accounts, investments, personal
property, IRAs, retirement plans -- and death benefits from your
life insurance policies. You must include policies for which you
have any "incidents of ownership." These include policies you
can borrow against, assign or cancel, or for which you can revoke
an assignment, or can name or change the beneficiary.

If the net value of your estate is less than the exempt amount, you'll
pay no estate taxes. But if it's more, every dollar over the exempt
amount will be taxed.

Here's a comparison of how much estate taxes are on various size
estates in 2011 and 2012 and what we can expect in 2013. Find the
estate size that is closest to yours and see how much the tax would be
on your estate. You can see by this chart that most people who die
in 2011 or 2012 will pay little or no estate taxes. But, you can
also see that, unless Congress acts again by the end of 2012, many
more families will be paying more in estate taxes in 2013.

Of course, with the exemption at $5 million, you may not need the
estate tax savings right now. But it's important to understand how
this works, because the exemption may be reduced as soon as 2013
and the value of your net estate may increase substantially by the
time you die. And the good news is, if you plan ahead and use some
of the tax-reducing strategies you will learn about in this presentation,
you will be able to reduce or even completely eliminate estate taxes!

There are basically three ways to reduce estate taxes. First, if you
are married, make sure both you and your spouse use your estate
tax exemptions. In just a moment, you'll see why this is so important
and how you can easily do it. Next, is to reduce the size of your estate
now. If you reduce the size of your taxable estate before you die
-- by spending or giving away some assets -- you will reduce your
estate taxes. But you have to make gifts correctly or you'll end up
paying too much in taxes. We'll look at several ways to do this.

And, finally, you can buy life insurance to pay any remaining estate
taxes at just pennies on the dollar. We'll see the wrong way and the
right way to do that. We'll start with how, if you are married, you
can make sure you use both exemptions. But first, there is a very
common and costly mistake many married couples make.
Let's look at that first so you can be sure to avoid it.

Some people think they can avoid estate taxes by leaving everything
to their spouse when they die through their will, joint ownership,
beneficiary designations and even a living trust. And, in fact, as long
as your spouse is a U.S. citizen, you can leave your entire estate
to your spouse using the unlimited marital deduction and there will
be no estate taxes at your death.

But be careful. Using the unlimited marital deduction to avoid
estate taxes can be a tax trap, because it often results in a larger
tax bill when the surviving spouse dies. Here's why.

Let's say Bob and Sue together have a net estate of $10 million and
they both die when the estate tax exemption is $5 million. Bob dies
first. By using the marital deduction, Bob leaves everything to
Sue estate tax-free. It's a great deal until Sue dies.

Sue's estate of $10 million will be entitled to claim her $5 million
exemption. But the federal estate tax on the remaining $5 million
will be $1,750,000!

The problem with leaving everything to your spouse is that you
waste the estate tax exemption of the spouse who dies first.

You see, everyone is entitled to an estate tax exemption. But when
Bob left everything to Sue, he wasted his.

Congress tried to fix this. If one spouse dies in 2011 or 2012, the
executor of the estate may transfer any unused federal estate tax
exemption to the surviving spouse. But there are still problems.
For example, let's say Sue remarries after Bob dies. If Sue outlives
her new husband, she will lose all of Bob's unused exemption. In
addition, by leaving everything to Sue, Bob has no control over his
share of their estate; Sue can do whatever she wants with the assets,
including disinheriting any children Bob may have had from a previous
marriage.

And when Sue dies, the entire estate, including any growth on the
assets, will be taxed at rates in effect at that time. Remember, if
Congress does not act again, in 2013 the estate tax exemption will
be $1 million with a 55% top tax rate. If they had planned ahead,
they could have used both their exemptions, solved these problems,
and saved $1,750,000 in federal estate taxes.

All they had to do was include a tax-planning provision in their
living trust(s). This splits their $10 million estate into two trusts
of $5 million each. When Bob dies, his trust, shown on the right,
uses his $5 million exemption. And when Sue dies, her trust, shown
on the left, uses her $5 million exemption. The result is that their
taxable estates are both reduced to $0, so the full $10 million can go
to their loved ones.

Now, let me explain a few more things about how this works. Sue has
complete control over everything in her trust and she can do
anything she wants with its assets -- it's her trust.

But she cannot have complete control over the assets in Bob's trust.
If she did, they would have to be included in her taxable estate when
she dies.

However, as shown here, Sue can receive income from Bob's trust,
and she can withdraw principal from it if needed for her health,
education, maintenance and support. So, although she cannot have
complete control over Bob's trust, the assets can provide for Sue
for as long as she lives. There is another benefit you may be interested
in, even if your estate isn't large enough to worry about estate taxes --
and that's control. As soon as Bob dies, his trust becomes irrevocable.
This means his instructions cannot be changed by anyone. So, even
though he dies first, he keeps control over how his share of the estate
is managed and distributed.

This could be important to Bob if he has children from a previous
marriage. Or, he may want to make sure that, if Sue later remarries, his
part of the estate doesn't end up with Sue's new husband. Also, the
assets in his trust are valued and taxed at his death; any appreciation will
not be included in Sue's estate. This same kind of planning can also be
done in a will, but you would not avoid probate or enjoy the other benefits
of a revocable living trust. Note: We used a $10 million estate for Bob
and Sue because that is currently the amount of two exemptions. This planning works just as well if you have less than $10 million. If you are married,
and you and your spouse both die in 2011 or 2012, this planning will allow you to leave up to $10 million estate tax-free to your loved ones, saving up to
$1,750,000 in federal estate taxes.

What if the net value of your assets is more than two exemptions?
One thing you can do is add another provision to your plan. For
example, let's say Bob and Sue's net estate is $11 million. Again, Bob
dies first when the estate tax exemption is $5 million, and the estate
is split in half. This time, only $5 million of Bob's half stays in Bob's
trust, because that's the amount of the estate tax exemption when he
dies. The rest of his half -- $500,000 -- goes into another trust, shown
on the far right. This trust is called a QTIP. QTIP stands for "qualified
terminable interest property."

Estate taxes on the assets in the QTIP
are delayed until the second spouse dies. So, now, both of Bob's trusts
can provide income and, if needed, principal for Sue's health,
education, maintenance and welfare. (This is Sue's "qualified interest
in Bob's property.") When Sue dies, the assets in both of Bob's trusts
will go to the beneficiaries he has named. So Sue's interest in Bob's
property "terminates" when she dies.

Depending on how much longer Sue lives, adding a QTIP may also save estate taxes. Estate taxes will only be due when Sue dies if the
combined value of Sue's trust and Bob's QTIP are more than the estate tax exemption in effect at that time. Your attorney will know
the best way to do this for your individual situation.

If some or all of your estate "skips" the living parent and goes
directly to a grandchild, there could be another tax called the
Generation Skipping Transfer Tax. This is a VERY expensive tax.
It is in addition to the estate tax and is equal to the highest federal
estate tax rate in effect at the time. In 2011 and 2012, the GST tax is
35% because that is the estate tax rate. Everyone also has an
exemption equal to $5 million per person. So, if you are married,
you and your spouse together could leave up to $10 million directly
to your grandchildren without having to pay the GST tax. But in 2013,
if Congress does not act, the exemption will be $1 million per person.
So you and your spouse will only be able to leave $2 million directly to
your grandchildren without having to pay the GST tax...which will be
55%.

Dividing the estate in half -- as you just saw with the QTIP and the trust
with tax planning -- is a good way to preserve both GSTT exemptions.

If your spouse is not a U.S. citizen, you cannot do the same kind
of tax planning we just discussed. That's because Uncle Sam is
afraid your spouse will leave the country after you die and not
pay any estate taxes. This means that, when you die, if you don't plan
ahead, everything in your estate over the amount of the estate tax
exemption at that time will be taxed -- unless you have a Qualified
Domestic Trust, QDOT for short. Let's say that Bob's estate is
$6 million and Sue is not a U.S. citizen. If the estate tax exemption
when Bob dies is $5 million, that amount would typically stay in Bob's
trust and the remaining $1 million would go into the QDOT. The
assets in the QDOT will not be taxed until Sue dies, so the entire
estate will be available to provide for her for as long as she lives.

Keep in mind that the QDOT, not Sue, owns the assets. But Sue can
receive income from it and, with the trustee's approval, may also
receive principal. To make sure estate taxes are paid when Sue dies,
at least one trustee of the QDOT must be a U.S. citizen or a U.S.
corporation.

Let's move on now to some other tax-reducing strategies that
everyone can use, whether you are married or single. One of the best
ways to reduce estate taxes is to reduce the size of your estate.
For example, currently you can give up to $13,000* ($26,000
if married) to as many recipients as you wish each year. So if you give
$13,000 to each of your two children and five grandchildren, you
will reduce your estate by $91,000 a year (7 x $13,000) - $182,000
if your spouse joins you. You can give more, but then it will start using
up your $5 million gift and estate tax exemption. If you use it while
you are living, it is a gift tax exemption; if you use it after you die,
it is an estate tax exemption. If your estate is substantial, you may
want to make larger gifts in 2011 and 2012 to take advantage of
the $5 million exemption and 35% tax rate while we have them.
Your attorney will be able to advise you on the best ways to do this.

You can also give an unlimited amount for tuition and medical expenses if you give directly to the institution or health care provider.
*NOTE: The amount of these tax-free gifts is tied to inflation and may increase every few years.

Appreciating assets are usually the best ones to give because both
the asset and any future appreciation will then be out of your
taxable estate forever.

But don't think you'll cut out Uncle Sam altogether. When you give
away an appreciated asset, it keeps your original cost basis (what
you paid for the asset when you purchased it). This means the
recipient may have to pay capital gains tax when he or she sells
the asset later.

However, the top capital gains rate is still just 15% (on assets held
at least 12 months). That's a lot less than estate taxes which, remember,
have been 35-55%.

Giving assets to a charity is another way to remove assets from your
estate and save estate taxes. When you make gifts to qualified
charities while you are living, you receive charitable income tax
deductions that reduce your income taxes. These gifts will not use
up any of your federal gift/estate tax exemption. And assets you
leave to a charity after you die through your will or trust will not be
included in your estate - they completely escape estate taxes.

There are many worthy causes out there that depend on gifts in order
to continue their work. When you pay estate taxes, you have no voice
in how Uncle Sam will use your money. But when you give directly to a
charity, you decide whom your money will help.

Here's something else you can do to remove assets from your estate.
What if you didn't have to include the death benefits from your life
insurance policies in your taxable estate? Think how much that would
cut your estate taxes!

Well, you can transfer your existing life insurance policies right
out of your taxable estate and into an irrevocable life insurance trust.
That's a separate trust that is NOT included in your taxable estate.

Here's how it works.

You transfer an existing insurance policy to the trust, making the trust
the owner and beneficiary of the policy. After you die, the insurance
proceeds will be paid to the trust. The trustee you have named will
then use the funds to provide for the beneficiaries of the trust
(usually your spouse, children or other loved ones) according to the
instructions you put in the trust when you set it up. There is one catch
- if you die within three years of transferring an existing policy to
the trust, the insurance will be included in your estate. But that's what
would happen anyway, without the trust. However, if the trust buys
a new policy, the three-year limitation does not apply. Also, this is
an irrevocable trust, which generally means you cannot make changes
to it after you set it up.* So you will want to read the trust document
carefully before you sign it.

Buying life insurance - through an insurance trust - can be a great way
to pay estate taxes at a dramatically reduced cost. Let's look at an example.

*NOTE: Under the Uniform Trust Code (UTC) and decanting provisions in
some states, you may be able to make some changes. You can also appoint someone
else to make changes to the trust, but the tax implications are not clear and you
have no guarantee the person will make the changes you want.

Frank and Betty have a $3 million estate. They both die when the
federal estate tax exemption is $1 million and the top estate tax
rate is 55%. If they leave everything to each other when they die,
there would be no estate taxes at the first death. But this would
waste one estate tax exemption, and $945,000 of their $3 million
estate (31%) would be consumed by estate taxes. If they included
a tax-planning provision in their trust or will, they would use both
of their estate tax exemptions. This would protect $2 million
from estate taxes. But their children would still have to write a check
to the IRS for $435,000 -- 14% of the estate. A definite improvement, but
they can do better.

In addition to the tax-planning provision in their trust or will, Frank
and Betty could set up a life insurance trust. Now, the cost of the estate
taxes would only be $94,584* -- 3% of their estate's value. That's all it
would cost them to purchase enough life insurance to pay the $435,000
in estate taxes.

*NOTE: Estimated costs for a male age 65 and a female age 63 using a
second-to-die policy of universal life, at standard non-tobacco underwriting class.
These costs are believed to be representative of those available from various life
insurance companies offering second-to-die policies. Actual costs will vary.

As you can see, life insurance can be an inexpensive way to pay estate taxes.
Based on their ages and health, it would only cost $94,584 in insurance
premium for Frank and Betty to purchase $435,000 in life insurance-enough
to pay all the estate taxes. In this example, every dollar spent in insurance
premium will pay $4.59 in estate taxes. That's excellent leverage! And
insurance proceeds are available immediately to provide the cash necessary
to pay estate taxes and other expenses, which prevents other assets from having
to be liquidated. Remember, if you purchase the life insurance policy yourself, that
would just increase the value of your estate and the amount of estate taxes you
would have to pay. But if you set up an irrevocable life insurance trust and have
it purchase the insurance policy for you, the insurance will not be included in
your taxable estate when you die.

Now, let's look briefly at some other ways to reduce your taxable estate --
and your estate taxes. We may not have these for much longer because we know
the IRS and many in Congress will be looking for more ways to increase tax
revenues. But we do have them now, and we can use them.

A personal residence trust lets you save estate taxes by removing your home
and any future appreciation on it from your taxable estate - yet you can keep
living there. When you set up a personal residence trust, you transfer your
home to an irrevocable trust. For a specified period of time (often 10 to 15 years),
you continue to live in the house just as you do now. After that time, it transfers
to your beneficiaries-usually your children.

In effect, you are giving your home to your children today. But because they will
not receive it until sometime in the future, the value of this gift is reduced.
This uses much less of your federal estate tax exemption than if you had
kept the home and any future appreciation in your estate.

If you die before the term of the trust is over, your home will be included in your
taxable estate, just as it is now. If you live longer than the term of the trust, you
will need to pay rent (at fair market value) if you wish to keep living there.

If you own income-producing assets-like stocks, a business, or real estate-that
you would like to remove from your estate, but you need the income, a GRAT
may be the answer. A GRAT is similar to a personal residence trust. But a GRAT
lets you remove any asset, not just your home, from your estate. And, for a set
number of years, you receive an income from the assets in the trust.*
When the trust ends, the asset will be owned by the beneficiaries of the trust
(usually your children), so it will not be included in your estate when you die.
However, depending on the duration of the trust, if you die before the trust ends,
some or all of the asset may be included in your taxable estate.

Like the personal residence trust, the beneficiaries will not receive the asset until
sometime in the future - when the trust ends. So the value of the "gift" you are
making to the trust is reduced. Again, this uses less of your estate tax exemption
than if you keep the asset and any future appreciation in your estate until you die.

*If the income is a set amount, the trust is called a GRAT (Grantor Retained
Annuity Trust). If the income fluctuates, it is called a GRUT (Grantor Retained
Unitrust).

Both a limited liability company (LLC) and a family
limited partnership (FLP) let you reduce estate taxes by transferring
assets like a family-owned business, farm, real estate or stocks to your
children now -- yet you keep control. They can also protect the assets
from future lawsuits and creditors.

Here's how they work. You can set up a limited liability company
or a family limited partnership, and transfer your assets to it. In
exchange, you receive ownership interests. Though you have a
fiduciary obligation to the other owners, you control the limited
liability company or the family limited partnership as manager
(for the LLC) or as general partner (for the FLP).

You can give ownership interests to your children, which removes
value from your taxable estate. The ownership interests cannot be sold
or transferred without your approval and, because there is no market
for these interests, their value is discounted. So you can transfer the
underlying assets to your children at a reduced value --
without losing control.

A charitable remainder trust lets you convert an appreciated asset
(like stocks or investment real estate) into a lifetime income. It reduces your
income taxes now and estate taxes when you die, and you pay no capital
gains tax when the asset is sold. Plus, it lets you benefit one or more charities
that have special meaning to you.

When you set up a charitable remainder trust, you transfer the asset into an
irrevocable trust. You receive an immediate charitable income tax deduction
which reduces your current income taxes. Transferring the asset to the trust
removes it from your taxable estate, which will reduce estate taxes when you
die. The trustee then sells the asset at full market value, paying no capital
gains tax, and re-invests in income-producing assets. For the rest of your life,
the trust pays you an income. And since the principal has not been reduced
by capital gains tax, you receive more income over your lifetime than if you
had sold the asset yourself. After you die, the remaining trust assets go to
the charity(ies) you have chosen. That's why it's called a charitable
remainder trust.

NOTE: You can use the income tax savings and part of the income you receive from
the trust to fund an irrevocable life insurance trust. The trustee of the insurance trust
can then purchase enough life insurance to replace the full value of the gifted asset.

A charitable lead trust, included by Jacqueline Kennedy Onassis in
her estate planning, is just about the opposite of a charitable remainder
trust.

You transfer an appreciated asset to the trust. This removes it from
your estate so you save estate taxes. But instead of paying the income
to you, the trust pays the income to a charity for a certain number of
years or until you die. Then, when the trust ends, your spouse, children,
grandchildren or other beneficiaries receive the assets in the trust.

You don't have to wait until you die to establish the trust, as
Mrs. Onassis did. If you set up the trust now, you remove future
appreciation from your estate and you can see the charity benefit
from your gift.

You can also set up your own charitable foundation, donate your assets to it
and keep some control over how the money is spent. To qualify, a small
percentage of the foundation's assets must be distributed to charity each year.
But you can name whomever you wish to run the foundation-including your
grown children-and the foundation can pay them a reasonable salary. You
can be very specific about which charities you want to support or you can leave
that up to the trustees of the foundation to decide (within IRS guidelines, of
course.)

The tax benefits can be substantial. You save estate taxes because the assets you
donate to the foundation are removed from your estate. There will be no capital
gains tax when the assets are sold by the foundation, so it's great for appreciated
assets. And, you reduce your current income taxes with a charitable income tax
deduction.

If you donate publicly traded securities, the charitable income tax deduction will
be for the full market value (up to 30% of your adjusted gross income).

We've covered a lot of information in this presentation. Let's
quickly review the three ways you can reduce or even eliminate
estate taxes. First, if you are married, make sure you and your spouse
use both your estate tax exemptions. You can do this easily by
having a tax-planning provision in your revocable living trust.

Next, reduce your taxable estate (and your estate taxes) by
removing some of your assets now -- by making gifts, transferring
your life insurance to an irrevocable life insurance trust, or using
some of the other strategies we discussed for your home, business
and other appreciating assets. And finally, you can buy life insurance
-- through an irrevocable life insurance trust -- to replace assets given
to charity and/or pay any remaining estate taxes at just pennies
on the dollar.

If you're wondering where to begin, follow our six-step action plan:
1. Inventory your assets and debts. Find out the current net value of
your estate and see how much your estate would have to pay in estate taxes, if any.

2. Write down your objectives. These would include reducing estate taxes
and whom you want to have your assets after you die.

3. Select a qualified professional to help. Find someone with whom you will
be comfortable sharing this information, who can answer your questions
and can help you decide which strategies will be best for you.

4. Have the legal documents prepared.

5. Put your plan into action. Some assets will go into your living trust and
others may go directly into a separate irrevocable trust. You may also decide
to make annual tax-free gifts to your children.

6. Review your plan every year or so and make changes when necessary.
Remember, the plan you put into place today is based on your current situation
and tax laws. These things change, and so your plan will need to change, too. This year is a perfect example of when you need to have your plan reviewed.

We hope we've been able to convince you of the importance of
estate planning to save estate taxes.

Once your plan is in place, you'll be able to relax with your family
and friends, knowing your good planning will have a happy ending.

Please don't hesitate to contact us for more information regarding your
specific situation.