Bob Keebler Sample Presentation - Income & Estate Tax Strategies For THe New Year

Estate & Tax Planning Opportunities in 2012 Robert S. Keebler, CPA, MST, AEP Keebler & Associates, LLP 420 S. Washington St. Green Bay, WI 54301 Phone: (920) 593-1701 E-mail: Robert.Keebler@keeblerandassociates.com 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.©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved

Course Outline • 2012 Income Tax Overview • Income Tax Planning Opportunities in 2012 • 2012 Estate/Gift Tax Overview • Wealth Transfer Planning Opportunities in 2012©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 2

2012 Income Tax Overview • 2012 income tax brackets • Comparison of 2012 vs. 2013 tax rates • 3.8% Medicare “surtax” • 2012 payroll tax cut provisions • Other 2012 tax provisions • Impact of “Super Committee” failure©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 4

2012 Income Tax Overview 2012 Income Tax Brackets Married Qualified Married Filing Head of Single Widow(er) Filing Jointly Separately Household 10% Tax Rate $8,700 $17,400 $17,400 $8,700 $12,400 15% Tax Rate $35,350 $70,700 $70,700 $35,350 $47,350 25% Tax Rate $85,650 $142,700 $142,700 $71,350 $122,300 28% Tax Rate $178,650 $217,450 $217,450 $108,725 $198,050 33% Tax Rate $388,350 $388,350 $388,350 $194,175 $388,350 35% Tax Rate > $388,350 > $388,350 > $388,350 > $194,175 > $388,350 • Capital Gain – 0% rate if you are in the 10% or 15% bracket – 15% rate if you are in the 25%, 28%, 33% or 35% bracket©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 5

2012 Income Tax Overview Comparison of 2012 vs. 2013 Tax Rates Long-Term Ordinary Income Capital Gains 2013 & 2013& 2012 Beyond 2012 Beyond* 10% 15% 0% 10% / 8% 15% 15% 15% 20% / 18% 25% 28% *NOTE: In general, the 8% and 18% 28% 31% capital gains rates only apply to long- term capital gains on property that has 33% 36% been held more than five years at the time of sale. 35% 39.6% For the 18% rate, the property must be purchased after December 31, 2000.©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 6

2012 Income Tax Overview 3.8% Medicare “Surtax” • Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” on net investment income will apply to all taxpayers whose income exceeds a certain “threshold amount”. This new “surtax” will, in essence, raise the marginal income tax rate for affected taxpayers. • Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) would have a federal marginal rate of 43.4%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 7

2012 Income Tax Overview 3.8% Medicare “Surtax” Tax Rate in Tax Rate in Tax Rate in 2013+ 2012 2013 (w/surtax) 10% 15% 15% 15% 15% 15% 25% 28% 28% 28% 31% 34.8% 33% 36% 39.8% 35% 39.6% 43.4% NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However, there are times, though unlikely, when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 8

2012 Income Tax Overview 2012 Payroll Tax Cut Provisions • The FICA Old-Age, Survivors, and Disability Insurance (OASDI) wage base for 2012 is $110,100 • Starting on January 1, 2012 and going through February 29, 2012, the FICA-OASDI withholding tax rate will be decreased from 6.2% to 4.2%. ̶ The 4.2% tax rate only affects the employee’s portion of FICA-OASDI (not the employer’s portion) • There is a phase-out of the reduced 4.2% FICA-OASDI tax rate for taxpayers whose earned income is in excess of $18,350 wage base for the first two months of 2012 ̶ In this case, there will be a 2% tax on earned income in excess of the $18,350 threshold©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 9

2012 Income Tax Overview Other Specific Provisions for 2012 • IRC Section 179 deduction ̶ $125,000 maximum deduction for 2012 ̶ Deduction phased out after qualified property placed in service during 2012 exceeds $500,000 • Bonus depreciation ̶ Limited to 50% of the cost of property put into service during 2012 tax year (after figuring the IRC Section 179 deduction) ̶ Must be new property placed into service ̶ 50% bonus depreciation in addition to IRC Section 179 deduction ̶ Other limitations • AMT exemption ̶ Not “patched” yet for 2012 ̶ Single/Head of household = $33,750; Married filing jointly = $45,000©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 10

2012 Income Tax Overview Other Specific Provisions for 2012 • Making Work Pay Credit ̶ Expired as of 12/31/2011 • Child tax credit ̶ $1,000 per qualifying child (through the end of 2012) ̶ Phased out after AGI goes over a specific amount • Nonbusiness Energy Property Credit ̶ Expired as of 12/31/2011 • AMT refundable credit ̶ Can claim even if subject to AMT ̶ 2012 last year to claim credit • American Opportunity Tax Credit ̶ $2,500 credit for first four years of college (through the end of 2012) ̶ Phased out after modified AGI goes over a specific amount©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 11

2012 Income Tax Overview Impact of “Super Committee” Failure on Income Taxes • Sunset of current tax law to pre-2001 tax law ̶ Increase in ordinary income tax rates & capital gains tax rates ̶ Increase in Social Security taxes ̶ Conversion of qualified dividends from long-term capital gains to ordinary income ̶ Decrease in deductible business expenditures (e.g. bonus depreciation, IRC Section 179 deduction) ̶ Decrease in popular middle-class tax credits (e.g. education credits, child tax credit) ̶ Phase-outs of itemized deductions and personal/dependency exemptions reinstated©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 12

Income Tax Planning Opportunities in 2012 Planning Opportunities • Loss harvesting • Income shifting to junior generations • Roth IRA conversions • Other income tax planning ideas©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 14

Income Tax Planning Opportunities in 2012 Loss Harvesting – Key Issues • “Wash sale” rule (IRC §1091) • Diminishing value of capital losses • Inefficiency of capital loss offsetting©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 15

Income Tax Planning Opportunities in 2012 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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 16

Income Tax Planning Opportunities in 2012 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). Capital Loss Capital Loss Recognized In Recognized Over 10 Current Year Years Present value of tax benefit $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.©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 17

Income Tax Planning Opportunities in 2012 Loss Harvesting – Inefficiency of Capital Loss Harvesting • 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 Short-Term Gain Long-Term Gain Short-Term Loss NEUTRAL INEFFECTIVE Long-Term Loss EFFECTIVE NEUTRAL©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 18

Income Tax Planning Opportunities in 2012 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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 19

Income Tax Planning Opportunities in 2012 Loss Harvesting Strategies – 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”©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 20

Income Tax Planning Opportunities in 2012 Loss Harvesting Strategies – 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”©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 21

Income Tax Planning Opportunities in 2012 Loss Harvesting Strategies – “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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 22

Income Tax Planning Opportunities in 2012 Income Shifting to Junior Generations • Shift income to younger family members to reduce income taxes • Considerations ̶ Asset protection ̶ Kiddie tax ̶ Potential taxable gift ̶ Children use income to invest or purchase insurance©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 23

Income Tax Planning Opportunities in 2012 Income Shifting to Junior Generations – Example • Husband and wife gift $10,000,000 of non-voting S- Corporation stock to their four children (15% each) in 2012 ̶ $10,000,000 gift will utilize husband’s and wife’s $5,000,000 lifetime gift tax exemption in 2012 • Thus, no gift tax will be incurred on the gift ̶ Income generated by S-Corporation will pass through to each child (i.e. income shifting)©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 24

Income Tax Planning Opportunities in 2012 Income Shifting to Junior Generations – Example • Assumptions ̶ Parents’ filing status = Married filing jointly ̶ Parents’ exemptions = 2 ̶ Parents’ itemized deductions = $80,000 ̶ Children’s filing status (each child) = Single ̶ Children’s exemptions (each child) = 1 ̶ Children’s standard deduction (each child) = $5,800 ̶ S-Corporation income = $2,000,000©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 25

Income Tax Planning Opportunities in 2012 Income Shifting to Junior Generations – Example PARENT CHILD #1 CHILD #2 OPTION 1 OPTION 2 OPTION 1 OPTION 2 OPTION 1 OPTION 2 Gross Income $ 2,000,000 $ 800,000 $ 25,000 $ 325,000 $ 25,000 $ 325,000 Itemized Deductions/Standard Deduction (80,000) (80,000) (5,800) (5,800) (5,800) (5,800) Personal Exemptions (7,400) (7,400) (3,700) (3,700) (3,700) (3,700) Net Taxable Income $ 1,912,600 $ 712,600 $ 15,500 $ 315,500 $ 15,500 $ 315,500 Income Tax $ 639,282 $ 219,282 $ 1,900 $ 89,012 $ 1,900 $ 89,012 Scenarios Option 1 – No Planning Option 2 – Transfer 15% interest to each child©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 26

Income Tax Planning Opportunities in 2012 Income Shifting to Junior Generations – Example CHILD #3 CHILD #4 TOTAL OPTION 1 OPTION 2 OPTION 1 OPTION 2 OPTION 1 OPTION 2 Gross Income $ 25,000 $ 325,000 $ 25,000 $ 325,000 $ 2,100,000 $ 2,100,000 Itemized Deductions/Standard Deduction (5,800) (5,800) (5,800) (5,800) (103,200) (103,200) Personal Exemptions (3,700) (3,700) (3,700) (3,700) (22,200) (22,200) Net Taxable Income $ 15,500 $ 315,500 $ 15,500 $ 315,500 $ 1,974,600 $ 1,974,600 Income Tax $ 1,900 $ 89,012 $ 1,900 $ 89,012 $ 646,882 $ 575,330 ANNUAL INCOME TAX SAVINGS $ 71,552 Scenarios Option 1 – No Planning Option 2 – Transfer 15% interest to each child©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 27

Income Tax Planning Opportunities in 2012 Roth IRA Conversions – Roth IRA Conversion Benefits • 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”©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 28

Income Tax Planning Opportunities in 2012 Roth IRA Conversions – Roth IRA Conversion Types • Strategic conversions – Take advantage of a client’s long-term wealth transfer objectives • Tactical conversions – Take advantage of short-term client- specific income tax attributes that are set to expire (e.g., low tax rates, tax credits, charitable contribution carryovers, NOL carryovers, etc.) • Opportunistic conversions – Take advantage of short-term stock market volatility, sector rotation and rotation in asset classes • Hedging conversions – Take advantage of projected future events that will result in the client being subject to higher tax rates within the near future©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 29

Income Tax Planning Opportunities in 2012 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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 30

Income Tax Planning Opportunities in 2012 Roth IRA Conversions – Understanding the Mathematics Traditional IRA Roth IRA Current Account Balance $ 100,000 $ 100,000 Less: Income Taxes @ 40% - (40,000) Net Balance $ 100,000 $ 60,000 Growth Until Death 200.00% 200.00% Account Balance @ Death $ 300,000 $ 180,000 Less: Income Taxes @ 40% (120,000) - Net Account Balance to Family $ 180,000 $ 180,000©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 31

Income Tax Planning Opportunities in 2012 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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 32

Income Tax Planning Opportunities in 2012 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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 33

Income Tax Planning Opportunities in 2012 Roth IRA Conversions – Understanding the Mathematics “Optimum” Roth IRA conversion amount 35% tax Target Roth IRA conversion amount bracket 33% tax Current bracket taxable income 28% tax bracket 25% tax bracket 15% tax bracket 10% tax bracket©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 34

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas • Acceleration of income into 2011 & 2012 ̶ Sale of bonds with accrued interest ̶ Sale/repurchase of bonds trading at a premium • Alternative investments ̶ Oil & gas investments ̶ Gold investments ̶ Foreign currency investments ̶ Index options©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 35

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Acceleration of Income • Beginning 1/1/2013, ordinary income tax rates will increase to their pre-2001 levels ̶ Consequently, taxpayers should consider accelerating certain types of ordinary income (e.g. bond interest, annuity income, traditional IRA income, compensation income) into 2011 and 2012 to the extent that they expect to be in the same tax bracket or higher in future tax years©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 36

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Acceleration of Income • Example – Sale of bonds with accrued interest ̶ As of 12/21/2012, Mark has $100,000 of accrued bond interest that will be paid on 1/3/2013. At the advice of his accountant, Mark is considering selling his bonds (at par) before the end of the 2012 tax year to take advantage of the lower income tax rates. ̶ Assuming that Mark is currently in the 35% tax bracket for 2012 (39.6% in 2013), below is a summary of the tax savings Mark would realize by selling his bonds in 2012 and recognizing the accrued interest income. Collect Sell Bonds Interest in in 2012 2013 Total Income Tax $ 35,000 $ 39,600 SAVINGS $ 4,600©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 37

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Acceleration of Income • Example – Sale/repurchase of bonds trading at a premium ̶ In 1993, John purchased $1,000,000 worth of ABC Corp. 11% bonds at par value (which mature on December 31, 2013). On December 31, 2012, John sold his ABC Corp. bonds at 1.05 (i.e. $1,050,000). ̶ On the next trading day (January 2, 2013) 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 2012 and repurchasing them in 2013: Income Tax Savings on Bond Premium $ 19,800 Less: Capital Gains Tax on Sale of Bonds (7,500) Net Income Tax Savings $ 12,300©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 38

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Alternative Investments • 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©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 39

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Alternative Investments • 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”, 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 does not apply to “collectibles” losses©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 40

Income Tax Planning Opportunities in 2012 Other Income Tax Planning Ideas – Alternative Investments • Foreign currency transactions ̶ Recognize ordinary income in 2010 and push ordinary losses to 2011 and later years • Avoids Section 1256 treatment • Choose currencies that do not have futures contracts • 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%])©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 41

2012 Estate/Gift Tax Overview Summary of 2010 Tax Relief Act • On December 17, 2010, the President signed Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“2010 Tax Relief Act”) into law • Key estate/gift tax law provisions ̶ Reinstatement of estate and GST tax ̶ Higher exemption amounts ̶ Lower tax rates ̶ Portability of estate tax exemption©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 43

2012 Estate/Gift Tax Overview 2009 2010 2010 2011 2012 (Prior Law) (New Law) Top Estate Tax Rate 45% 0% 35% 35% 35% Exemption $3,500,000 N/A $5,000,000 $5,000,000 $5,120,000 Date-of-Death YES YES NO (unless estate tax YES YES Basis Increase is not elected) NO Carryover Basis NO YES (unless estate tax NO NO is not elected) Note: Under the current law in 2013 the exemption reverts to $1,000,000©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 44

2012 Estate/Gift Tax Overview Estate Tax • 2011 ̶ Exemption = $5,000,000 ̶ Top marginal tax rate = 35% • 2012 – Exemption = $5,120,000 – Top marginal tax rate = 35% • 2013 (assuming no Congressional action) – Exemption = $1,000,000 – Top marginal tax rate = 55%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 45

2012 Estate/Gift Tax Overview Gift Tax • 2011 – Exemption = $5,000,000 – Top marginal tax rate = 35% • 2012 – Exemption = $5,120,000 – Top marginal tax rate = 35% • 2013 (assuming no Congressional action) – Exemption = $1,000,000 – Top marginal tax rate = 55%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 46

2012 Estate/Gift Tax Overview Generation-Skipping Transfer (GST) Tax • 2011 – Exemption = $5,000,000 – Top marginal tax rate = 35% • 2012 – Exemption = $5,120,000 – Top marginal tax rate = 35% • 2013 (assuming no Congressional action) – Exemption = $1,000,000 (indexed for inflation) – Top marginal tax rate = 55%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 47

2012 Estate/Gift Tax Overview Portability of Estate Tax Exemption • Allows the executor to either utilize the decedent’s $5,000,000 estate tax exclusion amount or to transfer it to the decedent’s surviving spouse – However, the new law does not allow the decedent to transfer his/her unused GST tax exemption to the surviving spouse©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 48

2012 Income Tax Overview Impact of “Super Committee” Failure on Estate Planning • Sunset of current tax law to pre-2001 tax law ̶ Increase in gift/estate/GST tax rates ̶ Decrease in estate, gift and GST exemption amounts ̶ Repeal of portability ̶ Reinstatement of state death tax credit ̶ Reinstatement of other specific provisions ̶ Impact on credit for prior gift taxes paid (IRC Section 2012 credit) ̶ Impact on credit for prior estate tax paid (IRC Section 2013 credit)©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 49

Wealth Transfer Planning Opportunities in 2012 • Lifetime gifting • Grantor Retained Annuity Trust (GRAT) • Dynasty trust ̶ Intentionally Defective Grantor Trust (IDGT) • Installment sales©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 51

Wealth Transfer Planning Opportunities in 2012 Lifetime Gifting – Annual Exclusion Gifts • Each year a taxpayer may gift up to a specified amount ($13,000 in 2012) to another person (a.k.a. “donee”) without the gift being subject to gift tax ̶ This transfer is referred to as an “annual exclusion gift” • For married taxpayers, the annual exclusion gift per each donee is basically doubled (i.e. $26,000 per donee in 2012) • Neither the gift, nor the future appreciation on the gift is included in the taxpayer’s gross estate©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 52

Wealth Transfer Planning Opportunities in 2012 Lifetime Gifting – Annual Exclusion Gift Example A married couple makes annual exclusion gifts to their three children. The table below illustrates the total amount that is removed from their combined gross estate over a period of time: Total Wealth Removed From Gross Estate* 0% Growth 4% Growth 8% Growth Rate Rate Rate Year 5 $ 390,000 $ 422,473 $ 457,595 Year 10 $ 780,000 $ 936,476 $ 1,129,952 Year 20 $ 1,560,000 $ 2,322,690 $ 3,569,433 *NOTE: Assumes the annual exclusion gift amount of $13,000 does not change©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 53

Wealth Transfer Planning Opportunities in 2012 Lifetime Gifting – Lifetime Gift Exemption Gifts • During a taxpayer’s lifetime, he/she may make “taxable gifts” (i.e. gifts that exceed the annual exclusion gift amount) up to a specified amount ($5,120,000 in 2012) without having to pay gift tax • This transfer is referred to as an “lifetime gift exemption gift” • For married taxpayers, the aggregate lifetime gift tax exemption is basically doubled (i.e. $10,240,000 in 2012)©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 54

Wealth Transfer Planning Opportunities in 2012 Lifetime Gifting – Lifetime Gift Exemption Gift Example A single taxpayer makes a $5,000,000 taxable gift to a trust for the benefit of his children. The table below illustrates the total amount that is removed from the taxpayer’s gross estate over a period of time: Total Wealth Removed From Gross Estate 0% Growth 4% Growth 8% Growth Rate Rate Rate Year 5 $ 5,000,000 $ 6,083,265 $ 7,346,640 Year 10 $ 5,000,000 $ 7,401,221 $ 10,794,625 Year 20 $ 5,000,000 $ 10,955,616 $ 23,304,786©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 55

Wealth Transfer Planning Opportunities in 2012 Lifetime Gifting – Tax-Exclusive Nature of Gift Tax • To the extent that a taxpayer makes a gift in excess of his/her annual exclusion gift amount and his/her lifetime gift tax exemption amount, he/she will incur a gift tax ̶ The gift tax due on the taxable gift (in excess of the lifetime gift tax exemption amount) is calculated on a “tax-exclusive” basis ̶ In this case, the gift tax is calculated only on the value of the amount transferred (i.e. the gift) • For estate tax purposes, the estate tax is calculated not only on the value of the amount transferred, but also the tax that is paid n the transfer (i.e. “tax inclusive”) • The post-gift future appreciation is not included in the taxpayer’s gross estate©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 56

Wealth Transfer Planning Opportunities in 2012 Lifetime Gifting – Tax-Exclusive Nature of Gift Tax Example Estate Tax Gift Tax Total Taxable Estate / Gift $ 10,000,000 $ 10,000,000 Effective Tax Rate* 35.00% 25.93% Total Tax $ (3,500,000) $ (2,592,593) Savings $ - $ 907,407 * Effective Gift Tax Rate = 35%/135%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 57

Wealth Transfer Planning Opportunities in 2012 Grantor Retained Annuity Trust (GRAT) • A Grantor Retained Annuity Trust (GRAT) is a type of trust that benefits the grantor’s future generations (i.e. children) without the imposition of estate or gift tax • To the extent that the actual rate of return on the trust’s assets exceeds the IRS’s rate (a.k.a. IRC 7520 rate), the “excess” is transferred to the trust’s beneficiaries free of any estate and/or gift tax • All income earned by the trust is taxed to grantor because the trust is “defective” for income tax purposes, thus allowing for a “tax-free” gift to the trust’s beneficiaries NOTE: The IRC 7520 rate for December 2011 is 1.6%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 58

Wealth Transfer Planning Opportunities in 2012 Grantor Retained Annuity Trust (GRAT) – Overview Transfer of assets Grantor (Lead Beneficiary) Annuity payments over a GRAT fixed term Payment of gift tax on present At end of term, any residual value of remainder interest assets remaining in the trust transferred to children pass to the children free of any (should be at or near $0) gift tax IRS Children* (Remainder Beneficiaries) * Instead of naming the children as outright remainder beneficiaries of the GRAT, a grantor trust could be used (thus producing a greater estate tax benefit)©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 59

Wealth Transfer Planning Opportunities in 2012 Grantor Retained Annuity Trust (GRAT) – Example Assumptions FMV of assets transferred $10,000,000 IRC §7520 rate 1.60% Term (years) 10 Annual % increase in periodic payment 0% Payment period Annually Payment timing End of period Beginning Taxable Ending Year Balance Income Annual Balance 10.00% Payment 1 $ 10,000,000 $ 1,000,000 $ (1,090,096) $ 9,909,904 2 $ 9,909,904 $ 990,990 $ (1,090,096) $ 9,810,798 3 $ 9,810,798 $ 981,080 $ (1,090,096) $ 9,701,782 4 $ 9,701,782 $ 970,178 $ (1,090,096) $ 9,581,864 5 $ 9,581,864 $ 958,186 $ (1,090,096) $ 9,449,955 6 $ 9,449,955 $ 944,995 $ (1,090,096) $ 9,304,854 7 $ 9,304,854 $ 930,485 $ (1,090,096) $ 9,145,244 8 $ 9,145,244 $ 914,524 $ (1,090,096) $ 8,969,672 9 $ 8,969,672 $ 896,967 $ (1,090,096) $ 8,776,543 10 $ 8,776,543 $ 877,654 $ (1,090,096) $ 8,564,102 BENEFIT: $8,564,102 transferred to beneficiaries estate/gift tax-free©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 60

Wealth Transfer Planning Opportunities in 2012 Dynasty Trust • A dynasty trust is 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 $5,120,000 of taxable transfers to “skip persons”©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 61

Wealth Transfer Planning Opportunities in 2012 Dynasty Trust – Overview Gift* Grantor Dynasty Trust No transfer tax paid. Discretionary Distributions to Children for Life Advantages No transfer tax paid. • Creditor protection • Divorce protection Discretionary Distributions • Estate tax protection to Grandchildren for Life • Direct decedent protection • Spendthrift protection No transfer tax paid. • Consolidation of capital Discretionary Distributions to Great-Grandchildren* Gift should take advantage of for Lifeany remaining lifetime giftexclusion and lifetime GST No transfer tax paid.exclusion Future Generations©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 62

Wealth Transfer Planning Opportunities in 2012 Dynasty Trust – Estate Erosion Example W ealth of Parents $ 1,000,000 $ 1,000,000 $ 1,000,000 Estate Tax Rate 35% 35% 35% Estate Tax $ 350,000 $ 350,000 $ 350,000 W ealth of Children $ 650,000 $ - $ - Estate Tax Rate 35% 35% 35% Estate Tax $ 227,500 $ - $ - W ealth of Grandchildren $ 422,500 $ 650,000 $ - Estate Tax Rate 35% 35% 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% 65.0000%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 63

Wealth Transfer Planning Opportunities in 2012 Intentionally Defective Grantor Trust (IDGT) An Intentionally Defective Grantor Trust (IDGT) is a type of dynasty trust where all income earned by the trust is taxed to the grantor because the trust is “defective” for income tax purposes, thus allowing for a “tax-free” gift to the trust’s beneficiaries.©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 64

Wealth Transfer Planning Opportunities in 2012 Installment Sale to IDGT • A type of transaction whereby a grantor sells a highly- appreciating asset to an IDGT in exchange for an installment note • 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 and no income tax is due on the interest paid because the trust is “defective” for income tax purposes©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 65

Wealth Transfer Planning Opportunities in 2012 Installment Sale to IDGT – Overview Gift & sale of highly- appreciating assets Grantor Installment note(s) IDGT Discretionary distributions of Assets outside of the taxable income and principal during the estates of beneficiaries lifetime of the trust’s beneficiaries Children, Grandchildren, Great-Grandchildren & Future Generations©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 66

Wealth Transfer Planning Opportunities in 2012 Installment Sale to IDGT – December 2011 AFRs Short-Term AFR (3 years or less) .20% Mid-Term AFR (over 3 years, up to 9 Years) 1.27% Long-Term AFR (over 9 years) 2.80%©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 67

Wealth Transfer Planning Opportunities in 2012 Installment Sale to IDGT – Example Assumptions FMV of assets transferred $10,000,000 Interest rate (AFR) 2.80% Term (years) 10 Payment structure Interest-only w/balloon payment Payment period Annually Payment timing End of period Beginning Taxable Ending Year Balance Income Annual Balance 10.00% Payment 1 $ 10,000,000 $ 1,000,000 $ (280,000) $ 10,720,000 2 $ 10,720,000 $ 1,072,000 $ (280,000) $ 11,512,000 3 $ 11,512,000 $ 1,151,200 $ (280,000) $ 12,383,200 4 $ 12,383,200 $ 1,238,320 $ (280,000) $ 13,341,520 5 $ 13,341,520 $ 1,334,152 $ (280,000) $ 14,395,672 6 $ 14,395,672 $ 1,439,567 $ (280,000) $ 15,555,239 7 $ 15,555,239 $ 1,555,524 $ (280,000) $ 16,830,763 8 $ 16,830,763 $ 1,683,076 $ (280,000) $ 18,233,839 9 $ 18,233,839 $ 1,823,384 $ (280,000) $ 19,777,223 10 $ 19,777,223 $ 1,977,722 $ (10,280,000) $ 11,474,946 BENEFIT: $11,474,946 transferred to beneficiaries estate/gift tax-free©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 68

Circular 230 Disclosure Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.©2012 Keebler Tax and Wealth Education, Inc.All Rights Reserved 70

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Bob Keebler Sample Presentation - Income & Estate Tax Strategies For THe New Year

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