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Wilson Family Wealth Goal Achiever - InKnowVision Advanced Estate Planning

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Each month we looked at a specific situation taken from the InKnowVision case files. We review the facts and circumstances, the Family Wealth Goal Achiever Process, and the solutions used in the …

Each month we looked at a specific situation taken from the InKnowVision case files. We review the facts and circumstances, the Family Wealth Goal Achiever Process, and the solutions used in the case.

Learn more at www.inknowvision.com

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  • 1. InKnowVision’s Monthly HNW Webinar Series Case Study Webinar ©2012. InKnowVision LLC. All rights reserved. www.inknowvision.com
  • 2. FAMILY WEALTH GOAL ACHIEVER™ - INITIAL PREPARED FOR: ALLEN AND NANCY WILSON November 1, 2011 DRAFT FOR DISCUSSION PURPOSES ONLY Planned Presented by: Scott Hamilton InKnowVision, LLC 715 Enterprise Drive Oak Brook, IL 60523 Scott@ikvllc.com Phone: (630) 596-5090 Draft for Discussion Purposes OnlyCopyright 2011 InKnowVision, LLC
  • 3. YOUR GOALS AND OBJECTIVES ALLEN AND NANCY WILSONMaintain our customary lifestyle. This should take about $750,000 annually after taxes and gifts.Maintain adequate liquidity for emergencies and investment opportunities. We prefer to keep at least$2,000,000 in cash and readily marketable securities.Assure we have sufficient liquid assets available at our deaths to eliminate the forced sale of ABC or the realestate assets we desire to keep in the family.Provide a significant inheritance for our children.Reduce income taxes today and on the sale of ABC if possible.Eliminate or reduce estate taxes. Page 2
  • 4. ALLEN AND NANCY WILSONLIFETIME SPENDING AND LIQUIDITY Page 3
  • 5. YOUR LIQUID ASSETS - PROPOSED PLAN ALLEN AND NANCY WILSON$180,000,000$160,000,000$140,000,000$120,000,000$100,000,000 - Sale of ABC in 2015 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $- 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Liquid Assets Proposed GDOTs Value Liquid Assets Current Page 4
  • 6. ALLEN AND NANCY WILSONINCOME TAX PLANNING Page 5
  • 7. PHASED PLANNING - INCOME TAXES ALLEN AND NANCY WILSON Phase 1 Phase 2 Wilson, M.D. establishes Establish Donor Advised a Charitable Remainder Fund (DAF) Unitrust (CRT) Wilson, M.D. transfers Gift ABC interests to DAF ABC interests to CRT **** To occur prior to sale of ABC Page 6
  • 8. GIFT ABC INTERESTS TO DONOR ADVISED FUND ALLEN AND NANCY WILSON Gift ABC interests To Donor Advised Fund WILSON, M.D. (S Corp) DONOR ADVISED FUND Owns interests in ABCDeduction flows through to owners of Wilson, M.D.Advantages Income Tax Deduction 1,000,000Pre-fund charitable giving Value of deduction (approx.) 400,000Create a tax deduction todayReduce future income tax on ABC taxable incomeOngoing taxes on the active income associated with ABC interests owned by the DAF will be paid by the DAF.Taxes on the dividends generated by ABC investments should not be subject to income tax. Page 7
  • 9. CREATE A CHARITABLE REMAINDER UNITRUST ALLEN AND NANCY WILSON Wilson, M.D. (S Corp) creates a charitable remainder unitrust (CRT). WILSON, M.D. (S Corp) CRT CRT AssumptionsTotal Return Rate 6.00%CRT payout rate 11.12%7520 rate 2.28%Term of trust (years) 20Income Tax Deduction - 2015 $ 2,000,400 Page 8
  • 10. FUND A CHARITABLE REMAINDER UNITRUST ALLEN AND NANCY WILSON Prior to the sale of ABC, Wilson, M.D. transfers $20,000,000 of ABC interests to the CRT. WILSON, M.D. (S Corp) CRT $20,000,000 Detail of Assets Transferred to CRT ABC Business Interests 20,000,000 Total 20,000,000Note: There will be no capital gains taxes due at the time of the sale on the interests that are owned by the CRT.Note: Consideration will have to be given for handling UBTI and avoiding tax penalties. Page 9
  • 11. INCOME FROM THE CRT ALLEN AND NANCY WILSON Wilson, M.D. receives annual payments beginning in 2016 for a term of 20 years. The S Corp can distribute the CRT payments it receives to Allen & Nancy. WILSON, M.D. (S Corp) CRT Receive annual incomeAllen & Nancy receive distributions from the S Corp Estimated Annual CRT Distributions to S Corp (Years 1-10) 2016 2,200,000 2017 2,100,000 2018 2,000,000 2019 1,900,000 2020 1,800,000 2021 1,700,000 2022 1,600,000 2023 1,500,000 2024 1,500,000 2025 1,400,000 Total (10 years) 17,700,000 Note: payment schedule assumes consistent 6% growth on CRT assets. Page 10
  • 12. DISTRIBUTION AT THE END OF THE CRT ALLEN AND NANCY WILSONAt the termination of the CRT, the assets of the CRT will be distributed to the charity or charities of your choice. CRT FAMILY CHARITIES Page 11
  • 13. ALLEN AND NANCY WILSONINCREASE INHERITANCEAND REDUCE ESTATE TAX Page 12
  • 14. ASSETS PASSING TO YOUR FAMILY - CURRENT VS. PROPOSED ALLEN AND NANCY WILSON $200,000,000 $175,000,000 $150,000,000 $125,000,000 - $100,000,000 $75,000,000 $50,000,000 $25,000,000 nt 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 re 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ur C Current Plan Proposed Plan Proposed Plan w/ Guar. Death Benefit Proposed Plan w/ Non-Guar Death BenefitThis chart compares the amount of your assets that will pass to heirs after estate taxes and costs of implementation in the current plan as against theproposed plan. Two proposed plan options illustrate the benefit to heirs including the death benefit of the new Life Insurance policy. Page 13
  • 15. ESTATE TAX - CURRENT VS. PROPOSED ALLEN AND NANCY WILSON$120,000,000$100,000,000 $80,000,000 - $60,000,000 $40,000,000 $20,000,000 $- nt 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 re 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ur C Current Plan Proposed PlanThis chart compares the amount of your estate taxes in the current plan as against the proposed plan. Page 14
  • 16. ESTATE TAX vs. LIQUIDITY - PROPOSED PLAN ALLEN AND NANCY WILSON $45,000,000 $40,000,000 $35,000,000 $30,000,000 $25,000,000 - $20,000,000 $15,000,000 $10,000,000 $5,000,000 $- 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Liquid Assets Proposed Available for Taxes Estate Tax Due Liquid Assets w/ Guar. Death Benefit Liquid Assets w/ Non-Guar Death BenefitThis review illustrates the estate taxes due as against the liquid assets available to pay the taxes under the proposed plan. Liquid assets include cash,securities, retirement funds and life insurance. Two proposed plan options illustrate the liquid assets available to pay taxes from the death benefit of thenew Life Insurance policy. Page 15
  • 17. COMPARISON OF PLAN RESULTS - PLAN YEAR 2011 ALLEN AND NANCY WILSON Existing Plan Proposed Plan Advantage Estate Value $ 64,116,470 $ 53,352,776 Heirs Receive Immediately $ 50,245,677 $ 54,029,419 $ 3,783,742 Total Benefits to Family $ 50,245,677 $ 54,029,419 $ 3,783,742 Estate and Income Tax $ 23,699,897 $ 20,049,154 $ 3,650,743This chart assumes that you both die this year and compares the results of the current plan with the proposed plan. Page 16
  • 18. COMPARISON OF PLAN RESULTS - PLAN YEAR 2015 ALLEN AND NANCY WILSON Existing Plan Proposed Plan Advantage Estate Value $ 70,731,265 $ 43,012,160 Income Taxes $ 13,821,640 $ 9,329,634 $ 4,492,005 Heirs Receive Immediately $ 40,190,253 $ 59,365,530 $ 19,175,276 Total Benefits to Family $ 40,190,253 $ 59,365,530 $ 19,175,276 Family Charity $ - $ 2,178,370 $ 2,178,370 Estate and Income Tax $ 41,093,909 $ 24,623,674 $ 16,470,235This chart illustrates the plan results in the year of assumed sale of ABC interests. Page 17
  • 19. COMPARISON OF PLAN RESULTS - PLAN YEAR 2043 ALLEN AND NANCY WILSON Existing Plan Proposed Plan Advantage Estate Value $ 200,612,646 $ 57,277,519 Heirs Receive Immediately $ 106,195,674 $ 173,432,825 $ 67,237,152 Total Benefits to Family $ 106,195,674 $ 173,432,825 $ 67,237,152 Family Charity $ - $ 6,986,326 $ 6,986,326 Estate and Income Tax $ 111,633,831 $ 32,371,216 $ 79,262,616 Present Value of total to Heirs $41,239,713 $67,350,389 Discount rate for PV calculation 3.00%This chart assumes that you both die at life expectancy and compares the results of the current plan with the proposed plan.The present value of the total passing to heirs is our attempt to put inheritance into todays dollars to provide perspective.We are using an inflation rate of 3% to calculate the present value numbers. Page 18
  • 20. ALLEN AND NANCY WILSON FAMILY WEALTHTRANSFER PLANNING Page 19
  • 21. PHASED PLANNING - WEALTH TRANSFER ALLEN AND NANCY WILSON Phase 1 Phase 2 Transfer existing termEstablish Grantor Deemed policy to Irrevocable Life Owner Trusts (GDOTs) Insurance Trust (ILIT) Qualified PersonalGift Wilson, M.D. interests Residence Trust (QPRT) to GDOTs for Vacation HomeSell Wilson, M.D. interests to GDOTs Page 20
  • 22. CREATE GRANTOR DEEMED OWNER TRUSTS ALLEN AND NANCY WILSON Allen and Nancy create individual grantor deemed owner trusts (GDOT). The Trusts can be drafted to provide asset protection and long term estate tax savings through the use of dynasty trust provisions. ALLEN ALLENs GDOT NANCY NANCYs GDOT HEIRS Nancy may be a discretionary beneficiary of Allens GDOTNote: Allen may also be a discretionary beneficiary of Nancys trust. Attention should be paid to avoid reciprocal trust doctrine. Page 21
  • 23. GIFT TO GRANTOR DEEMED OWNER TRUST ALLEN AND NANCY WILSONAllen and Nancy each make a gift of Wilson, M.D. stock worth $3,500,000 to their individual GDOTs. This gift is designed to giveeach trust economic substance. ALLEN Wilson, M.D. stock worth ALLENs GDOT $3,500,000 Wilson, M.D. stock worth NANCY NANCYs GDOT $3,500,000 Page 22
  • 24. SELL WILSON, M.D. INTERESTS TO EACH GDOT ALLEN AND NANCY WILSON Allen and Nancy sell their Wilson, M.D. stock to their individual GDOTs for an installment note. Sell their combined Wilson, ALLEN & NANCY M.D. stock worth $43,000,000 GDOTsAllen and Nancy own an installment note The GDOTs own Wilson, M.D. stock worth after the sale Installment note with a value $43,000,000 after the sale of $43,000,000 that provides annual interest and principal paymentsThe sale price is based on the assumed value of the assetssold. HEIRSTransaction Notes:- Installment Note makes annual interest payments. Interest calculated Receive assets in the future according toon the Nov. 2011 Mid Term AFR at 1.20% terms of the trust- At the end of year 4, Wilson, M.D. interests are used to pay off theinstallment note.- Beginning in year 5, the grantor status of the trusts is revoked and thetrusts become responsible for paying its own income taxes. Page 23
  • 25. TRANSFER EXISTING INSURANCE TO ILIT ALLEN AND NANCY WILSON Give existing term policy to ILIT. Gift annually to the ILIT ALLEN & NANCY to pay continued premiums. ILITYou own life insurance personally with Owns life insurance with a death benefit of death benefit of $3,000,000 $3,000,000 Policy proceeds will be included in the taxable estate if death occurs within three years of the date of the gift. HEIRS $3,000,000 in assets are distributed according to the terms of the ILIT. Page 24
  • 26. CREATE AND FUND A QUALIFIED PERSONAL RESIDENCE TRUST ALLEN AND NANCY WILSON Nancy creates a qualified personal residence trust (QPRT) with a term of 32 years. She transfers her interest in the home listed below to the trust. NANCY Deed NANCYs QPRTNancy gifts her 1/2 undivided interest in property QPRT Nancy gifts a 1/2 undivided interest in property to each QPRTVacation Home 1 1,000,000 Vacation Home 1 500,000 Sub Total 1,000,000 Sub Total 500,000Note: If Nancy dies before the QPRT term ends, the property is back in her estate. Page 25
  • 27. QPRT APPRAISAL - GIFT OF REAL ESTATE ALLEN AND NANCY WILSON Nancy hires an appraiser to value the real estate and the appropriate adjustment for the fractional interest gift to the QPRT. This fractional interest adjustment will take into consideration: ▪ Lack of liquidity ▪ Limited transferabilityNANCY Appraisal of Gift NANCYs QPRT The value of Nancys QPRT gift is expected to be $191,544 QPRT ASSUMPTIONS Term (years) 32 7520 Rate 1.40% Nancys age 53 Page 26
  • 28. AFTER THE QPRT TERM ENDS (I) ALLEN AND NANCY WILSON Additional estate and gift tax advantages that can be obtained with QPRT after the term of the QPRT expires include: ▪ Increases in the value of the real estate are out of your estate ▪ Fair market rent can be paid to the trust to pass additional assets to your heirs without gift, estate or income tax. ▪ The QPRT should be structured as a grantor trust to neutralize income taxes and kept in place as a grantor trust after the QPRT term.NANCY Rental of the Property NANCYs QPRT Page 27
  • 29. AFTER THE QPRT TERM ENDS (II) ALLEN AND NANCY WILSON At death, the real estate and any accumulated rental income, passes to your heirs without estate tax. The trust can be structured for distributions according to your particular goals and objectives.NANCYs QPRT HEIRS The value of the real estate is assumed to be $2,587,625 as of 2043 Note: This illustration assumes no rent is paid; however, under certain circumstances fair market rent may need to be paid. For example, once the QPRT term is over, if Allen is not living at the time, Nancy will need to pay fair market rent. The advantage to this is that rent is a very effective way to move additional assets outside of the taxable estate. Page 28
  • 30. FURTHER PLANNING NOTES ALLEN AND NANCY WILSONDiscuss the possibility of a Captive Insurance Company at the ABC level.Ensure notification of pending ABC sale prior to binding documents. Page 29
  • 31. DETAILED FINANCIAL ANALYSIS ALLEN AND NANCY WILSON INTRODUCTIONThe following section of the plan contains all of the financial analysis used to show you where youstand with your current plan and what is possible with the proposed plan.All of the numbers are based on information provided by you or gleaned from statements and taxreturns. If numbers do not look correct, please let us know so that we can make appropriatechanges.Assumed growth and yield numbers are all listed on the Net Worth pages contained in these sections. Page 30
  • 32. DETAILED FINANCIAL ANALYSIS ALLEN AND NANCY WILSON CURRENT PLAN FINANCIALSIn the Current Plan Section you will find a Net Worth Statement and a detailed cash flow and assetvalue projection analysis. Page 31
  • 33. CURRENT NET WORTH STATEMENT ALLEN AND NANCY WILSON ALLEN NANCY JOINT TOTAL YIELD GROWTHCASH AND EQUIVALENTS Cash/Checking 42,500 42,500 - 85,000 1.0% 0.0% Cash Value of Life Insurance 280,000 - 280,000 0.0% 0.0% Total of Cash and Equivalents 322,500 42,500 - 365,000 0.2% 0.0%MARKETABLE SECURITIES - EQUITIES Account 1 1,500,000 1,500,000 - 3,000,000 2.0% 4.0% Account 2 11,500 11,500 - 23,000 2.0% 5.0% Total of Equities 1,511,500 1,511,500 - 3,023,000 2.0% 4.0% Page 32
  • 34. CURRENT NET WORTH STATEMENT (Page 2) ALLEN AND NANCY WILSON ALLEN NANCY JOINT TOTAL YIELD GROWTHOTHER INVESTMENTS LP 1 75,000 75,000 - 150,000 0.0% 5.0% LP 2 15,000 15,000 - 30,000 0.0% 5.0% LP 3 22,500 22,500 - 45,000 0.0% 5.0% LP 4 10,000 10,000 - 20,000 0.0% 5.0% Loans to Life Insurance Trusts** 177,000 177,000 - 354,000 0.0% 2.0% Total of Other Investments 299,500 299,500 - 599,000 0.0% 3.2% ** Growth rate of 2% attached to account for any accrued interest on the promissory notes for insurance premiums.CLOSELY HELD BUSINESS Wilson, M.D. (S Corp) - ABC ** 25,000,000 25,000,000 - 50,000,000 11.0% 10.0% Total Closely Held Business 25,000,000 25,000,000 - 50,000,000 11.0% 10.0% ** Value is based on discussions and not a formal valuation. We also assume that $10M has been given to trusts using exemption. ** S Corp holds interests in ABC Practice.RETIREMENT PLANS/IRAs IRA 845,000 - 845,000 0.0% 6.0% IRA 123,000 - 123,000 0.0% 6.0% IRA 115,000 - 115,000 0.0% 6.0% IRA - 55,000 55,000 0.0% 6.0% Total Retirement Plans 1,083,000 55,000 1,138,000 0.0% 6.0%INVESTMENT REAL ESTATE Rental Home Property 1 750,000 750,000 - 1,500,000 -2.1% 3.0% Rental Home Property 2 750,000 750,000 - 1,500,000 -2.1% 3.0% Total of Real Estate Holdings 1,500,000 1,500,000 - 3,000,000 -2.1% 3.0% Page 33
  • 35. CURRENT NET WORTH STATEMENT (Page 3) ALLEN AND NANCY WILSON ALLEN NANCY JOINT TOTAL YIELD GROWTHRESIDENTIAL REAL ESTATE 123 Main St. 3,000,000 3,000,000 - 6,000,000 0.0% 3.0% Vacation Home 1 1,000,000 1,000,000 - 2,000,000 0.0% 3.0% Vacation Home 2 750,000 750,000 - 1,500,000 0.0% 3.0% Vacant Land 175,000 175,000 - 350,000 0.0% 3.0% Vacation Home 3 157,500 157,500 - 315,000 0.0% 3.0% Total of Personal Residences 5,082,500 5,082,500 - 10,165,000 0.0% 3.0%PERSONAL PROPERTY Autos 100,000 100,000 - 200,000 0.0% 0.0% Total of Personal Property 100,000 100,000 - 200,000 0.0% 0.0%TOTAL ASSETS 34,899,000 33,591,000 - 68,490,000LIABILITIES 123 Main St. 1,750,000 1,750,000 - 3,500,000 Total Liabilities 1,750,000 1,750,000 - 3,500,000COMMERCIAL LIABILITIES Rental Home Property 1 550,000 550,000 - 1,100,000 Rental Home Property 2 600,000 600,000 - 1,200,000 Total Commercial Liabilities 1,150,000 1,150,000 - 2,300,000TOTAL LIABILITIES 2,900,000 2,900,000 - 5,800,000NET WORTH 31,999,000 30,691,000 - 62,690,000 Page 34
  • 36. SCHEDULE OF LIFE INSURANCE BENEFITS - CURRENT PLAN ALLEN AND NANCY WILSON COMPANY INSURED POLICY # BENEFICIARY PREMIUM CASH VALUE DEATH BENEFITPolicies owned by AllenPolicy 1 (term to age 95) Allen # Nancy 5,630 - 3,000,000Policy 2 (variable) Allen # Nancy 10,000 100,000 800,000Policy 3 (419 plan) Allen # Nancy - 180,000 1,200,000 Totals 15,630 280,000 5,000,000Policies owned by ILITILIT Policy 1 Nancy # Trust 34,000 20,000 2,000,000ILIT Policy 2 Allen # Trust 84,000 500,000 2,000,000 Totals 118,000 520,000 4,000,000 Page 35
  • 37. FINANCIAL ANALYSIS - EXISTING PLAN ASSET VALUE PROJECTIONS - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Asset ValuesCash and cash equivalents 365,000 365,000 365,000 365,000 365,000 365,000 365,000 365,000 365,000Marketable securities - Equities 3,023,000 3,423,718 3,932,677 4,454,239 4,988,564 58,087,727 68,834,983 98,939,647 163,315,633Other investments 1 599,000 720,136 861,375 1,007,172 1,157,673 1,313,032 2,168,343 3,716,588 5,616,423Closely held business 2 50,000,000 50,789,540 55,868,494 61,455,344 67,600,878 - - - -Retirement plans/IRAs 1,138,000 1,188,953 1,300,290 1,418,307 1,543,406 1,676,010 2,242,879 3,051,445 2,849,500Investment real estate 3,000,000 3,014,612 3,105,051 3,198,202 3,294,148 3,392,973 3,933,385 5,286,141 7,762,876Personal residences 10,165,000 10,214,512 10,520,947 10,836,575 11,161,673 11,496,523 13,327,621 17,911,208 26,303,213Personal property 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Total assets in estate 68,490,000 69,916,470 76,153,833 82,934,839 90,311,342 76,531,265 91,072,212 129,470,029 206,412,646Less estimated liabilities (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000)Combined net worth $ 62,690,000 $ 64,116,470 $ 70,353,833 $ 77,134,839 $ 84,511,342 $ 70,731,265 $ 85,272,212 $ 123,670,029 $ 200,612,6461 Increased by new promissory notes for annual premiums currently being paid on the ILIT policies.2 We assume a sale of ABC in 2015.In the event that there is a cash flow surplus, the surplus is added to the marketable securities row by default.If there is a cash flow shortage (because of spending or gifting capital) then the shortage is treated as a reduction in marketable securities. Page 36
  • 38. TAXABLE INCOME PROJECTIONS - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Sources of taxable incomeCash and cash equivalents 850 850 850 850 850 850 850 850Marketable securities - Equities 60,460 68,474 78,654 89,085 99,771 1,330,405 1,905,461 3,140,757Closely held business 5,500,000 5,586,849 6,145,534 6,760,088 - - - -Retirement plans/IRAs - - - - - - 140,816 253,270Investment real estate (64,000) (64,000) (64,000) (64,000) (64,000) (64,000) (64,000) (64,000)Sale of ABC - - - - 49,030,948 - - -Client earned income 210,000 210,000 214,200 218,484 222,854 - - - -Spouse earned income 81,600 81,600 83,232 84,897 86,595 88,326 - - -Social security income - - - - - - 27,613 31,426Gross income $ 5,788,910 $ 5,889,606 $ 6,464,419 $ 7,095,471 $ 49,155,896 $ 1,267,255 $ 2,010,740 $ 3,362,303 Page 37
  • 39. INCOME TAX PROJECTIONS - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Income tax EstimationAdjusted gross income:Dividend income (marketable sec.) 60,460 68,474 78,654 89,085 99,771 1,330,405 1,905,461 3,140,757Capital Gains income - - - - 49,030,948 - - -Earned and other income 5,728,450 5,821,131 6,385,765 7,006,386 25,176 (63,150) 105,279 221,546 Adjusted gross income 5,788,910 5,889,606 6,464,419 7,095,471 49,155,896 1,267,255 2,010,740 3,362,303DeductionsReal estate tax 34,624 34,624 35,663 36,733 37,835 38,970 45,176 60,713 89,160State income taxes 549,946 559,513 614,120 674,070 4,669,810 120,389 191,020 319,419Interest 90,321 90,321 93,031 95,822 98,696 101,657 117,848 158,378 232,584Charitable gifts 24,152 24,152 24,877 25,623 26,392 27,183 31,513 42,351 62,193Charitable Deduction available 24,152 24,877 25,623 26,392 27,183 31,513 42,351 62,193Charitable Deduction allowed 24,152 24,877 25,623 26,392 27,183 31,513 42,351 62,193Total deductions 699,043 713,082 772,297 836,992 4,837,620 314,927 452,463 703,356Reductions - - (188,929) (207,860) (1,469,673) (33,014) (55,318) (95,865)Deductions allowed 699,043 713,082 583,368 629,132 3,367,947 281,913 397,145 607,491Taxable income 5,089,867 5,176,523 5,881,050 6,466,339 45,787,948 985,341 1,613,595 2,754,812Federal and State income tax $ 2,289,179 $ 2,327,472 $ 2,907,083 $ 3,198,807 $ 13,821,640 $ 474,651 $ 794,071 $ 1,374,391 Page 38
  • 40. CASH FLOW PROJECTIONS - EXISTING PLANABC Basis 9,300,000 11,510,821 13,770,198 16,008,649 18,569,930 3,289,179 3,327,472 3,907,083 4,198,807YEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Sources of income for LifestyleDistribution from Marketable Securities - - - - - 351,120 151,569 15,678Return of basis from ABC Sale - - - - 18,569,930 - - -Undistributed Consumable Income ** (2,210,821) (2,259,377) (2,238,452) (2,561,281) - - - -Non-taxable Social Security Income - - - - - - 4,873 5,546Consumable income (taxable) 5,788,910 5,889,606 6,464,419 7,095,471 49,155,896 1,267,255 2,010,740 3,362,303Total income available for lifestyle 3,578,089 3,630,229 4,225,967 4,534,190 67,725,826 1,618,374 2,167,181 3,383,527Uses of CashLiving expenses 750,000 772,500 795,675 819,545 844,132 978,580 1,315,130 1,931,312Income tax 2,289,179 2,327,472 2,907,083 3,198,807 13,821,640 474,651 794,071 1,374,391Personally held insurance premiums 15,630 15,630 15,630 15,630 15,630 15,630 15,630 15,630Cash loans to ILIT 1 118,000 118,000 118,000 118,000 118,000 118,000 - -Cash gifts to charity 24,152 24,877 25,623 26,392 27,183 31,513 42,351 62,193Total uses of cash 3,196,961 3,258,479 3,862,011 4,178,374 14,826,585 1,618,374 2,167,181 3,383,527Surplus $ 381,128 $ 371,750 $ 363,956 $ 355,816 $ 52,899,241 $ - $ - $ -1 We assume that loans are made annually to pay premiums on ILIT policices, we also assume that enough premiums are paid by 2025 to keep the policies in-force and premiums cease.** Assumes that ABC distributes an amount sufficient to pay income tax plus an additional $1M of excess cash.In the event that there is a cash flow surplus, the surplus is added to the marketable securities row on the "Asset Value Projections" 3 pages earlier.If there is a cash flow shortage (spending or gifting capital) then the shortage is treated as a reduction inmarketable securities row on the "Asset Value Projections" 3 pages earlier. Page 39
  • 41. FIRST ESTATE TAX ESTIMATION AND DISTRIBUTION - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Tax calculation on Allens deathCombined net worth 62,690,000 64,116,470 70,353,833 77,134,839 84,511,342 70,731,265 85,272,212 123,670,029 200,612,646Allens estimated estate 31,999,000 32,727,116 35,910,868 39,372,112 43,137,318 36,103,521 43,525,690 63,125,176 102,399,172Death benefit exceeding CV 4,720,000 4,720,000 4,720,000 4,720,000 4,720,000 4,720,000 4,720,000 4,720,000 4,720,000Total gross estate 36,719,000 37,447,116 40,630,868 44,092,112 47,857,318 40,823,521 48,245,690 67,845,176 107,119,172Settlement expenses (208,595) (212,236) (228,154) (245,461) (264,287) (229,118) (266,228) (364,226) (560,596)Joint, personal and IRA to Nancy (1,183,000) (1,231,490) (1,337,446) (1,449,760) (1,568,812) (1,695,008) (2,234,480) (3,003,968) (2,811,783)Insurance passing to Nancy (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000) (5,000,000)Outright or in trust to Nancy (30,227,405) (30,903,391) (33,965,267) (37,396,892) (41,024,219) (33,899,396) (40,744,982) (59,476,982) (98,746,793)Taxable estate 100,000 100,000 100,000 - - - - - -Plus Allens lifetime taxable gifts 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000Tax base 5,000,000 5,000,000 5,000,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000Federal Estate Tax - - - - - - - - -Distribution of Allens estateSettlement expenses 208,595 212,236 228,154 245,461 264,287 229,118 266,228 364,226 560,596To family trust 100,000 100,000 100,000 - - - - - -Joint, personal and IRA to Nancy 1,183,000 1,231,490 1,337,446 1,449,760 1,568,812 1,695,008 2,234,480 3,003,968 2,811,783Insurance passing to Nancy 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000 5,000,000Outright or in trust to Nancy 30,227,405 30,903,391 33,965,267 37,396,892 41,024,219 33,899,396 40,744,982 59,476,982 98,746,793Total $ 36,719,000 $ 37,447,116 $ 40,630,868 $ 44,092,112 $ 47,857,318 $ 40,823,521 $ 48,245,690 $ 67,845,176 $ 107,119,172AssumptionsWe assume that Allen dies first, followed immediately by Nancy.Taxes under "Distribution of First Estate" include estate and income taxes. Page 40
  • 42. SECOND ESTATE TAX ESTIMATION AND DISTRIBUTION - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Tax Calculation on Nancys deathNancys assets 30,691,000 31,389,354 34,442,965 37,762,727 41,374,025 34,627,744 41,746,522 60,544,854 98,213,475Plus assets from Allens estate 36,410,405 37,134,881 40,302,714 43,846,652 47,593,031 40,594,404 47,979,462 67,480,950 106,558,576Nancys estimated estate 67,101,405 68,524,235 74,745,679 81,609,379 88,967,055 75,222,147 89,725,984 128,025,803 204,772,050Settlement expenses (696,014) (710,242) (772,457) (841,094) (914,671) (777,221) (922,260) (1,305,258) (2,072,721)Nancys taxable estate 66,405,391 67,813,992 73,973,222 80,768,285 88,052,385 74,444,926 88,803,724 126,720,545 202,699,330Plus Nancys lifetime taxable gifts 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000 4,900,000Tax base 71,305,391 72,713,992 78,873,222 85,668,285 92,952,385 79,344,926 93,703,724 131,620,545 207,599,330Federal Estate Tax 23,206,887 23,699,897 25,855,628 44,571,757 48,578,012 41,093,909 48,991,248 69,845,500 111,633,831Total Estate Tax Due 23,206,887 23,699,897 25,855,628 44,571,757 48,578,012 41,093,909 48,991,248 69,845,500 111,633,831Distribution of Nancys estateSettlement expenses 696,014 710,242 772,457 841,094 914,671 777,221 922,260 1,305,258 2,072,721Taxes 23,206,887 23,699,897 25,855,628 44,571,757 48,578,012 41,093,909 48,991,248 69,845,500 111,633,831Qualified plan to heirs 1,138,000 1,188,953 1,300,290 1,418,307 1,543,406 1,676,010 2,242,879 3,051,445 2,849,500Residual estate to heirs 42,060,504 42,925,142 46,817,304 34,778,221 37,930,968 31,675,007 37,569,596 53,823,600 88,215,998Total $ 67,101,405 $ 68,524,235 $ 74,745,679 $ 81,609,379 $ 88,967,055 $ 75,222,147 $ 89,725,984 $ 128,025,803 $ 204,772,050AssumptionsWe assume that Allen dies first, followed immediately by Nancy.Taxes under "Distribution of Second Estate" include estate and income taxes. Page 41
  • 43. SUMMARY OF BENEFITS TO FAMILY - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Benefits to FamilyFamily trust 100,000 100,000 100,000 - - - - - -Residual estate 42,060,504 42,925,142 46,817,304 34,778,221 37,930,968 31,675,007 37,569,596 53,823,600 88,215,998Qualified plan assets 1,138,000 1,188,953 1,300,290 1,418,307 1,543,406 1,676,010 2,242,879 3,051,445 2,849,500ABC Gifted to Kids - Nevada Trusts 2,000,000 2,031,582 2,234,740 2,458,214 2,704,035 2,839,237 3,623,666 5,902,570 11,130,175Proceeds from ILIT 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000Total assets to heirs $ 49,298,504 $ 50,245,677 $ 54,452,334 $ 42,654,742 $ 46,178,408 $ 40,190,253 $ 47,436,141 $ 66,777,615 $ 106,195,674Total Taxes 23,206,887 23,699,897 25,855,628 44,571,757 48,578,012 41,093,909 48,991,248 69,845,500 $ 111,633,831Total Liquid Assets to Pay Taxes ** 13,526,000 13,977,670 14,597,966 15,237,546 15,896,969 69,128,737 80,442,863 111,356,092 $ 175,530,133Liquidity Surplus/Shortfall (9,680,887) (9,722,227) (11,257,661) (29,334,210) (32,681,042) 28,034,828 31,451,615 41,510,592 $ 63,896,302** Includes cash, securities, retirement plan funds and life insurance proceeds (ILIT and persoanlly owned policies) Page 42
  • 44. DETAILS OF ALLENS QUALIFIED PLAN - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Allens Qualified PlansAllens Age 58 59 60 61 62 67 77 90Nancys Age 53 54 55 56 57 62 72 85Minimum distribution factor 38.7 37.8 36.8 35.8 34.9 30.2 21.2 11.4Plan contributions 40,000 40,000 40,000 40,000 40,000 - - -Plan balance 1,083,000 1,133,423 1,241,429 1,355,914 1,477,269 1,605,905 2,149,064 2,895,388 2,677,276Minimum distribution - - - - - - 134,845 241,544Preferred distribution - - - - - - - -Actual distribution - - - - - - 134,845 241,544 Page 43
  • 45. DETAILS OF NANCYS QUALIFIED PLAN - EXISTING PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Nancys Qualified PlansNancys Age 53 54 55 56 57 62 72 85Allens Age 58 59 60 61 62 67 77 90Minimum distribution factor 43.6 42.6 41.6 40.7 39.7 34.9 25.6 14.8Plan contributions - - - - - - - -Plan balance 55,000 55,529 58,861 62,393 66,136 70,105 93,816 156,057 172,225Minimum distribution - - - - - - 5,971 11,726Preferred distribution - - - - - - - -Actual distribution - - - - - - 5,971 11,726 Page 44
  • 46. DETAILED FINANCIAL ANALYSIS ALLEN AND NANCY WILSON PROPOSED PLAN FINANCIALSIn the Proposed Plan Section you will find a balance sheet which reflects the repositioning of assetsas set out in the step by step roadmap in the proceeding section. You will also find detailed cashflow and asset projection information on each of the proposed planning strategies. Page 45
  • 47. NET WORTH STATEMENT AFTER PLAN IMPLEMENTATION ALLEN AND NANCY WILSON ALLEN NANCY JOINT TOTAL YIELD GROWTHCASH AND EQUIVALENTS Cash/Checking 42,500 42,500 - 85,000 1.0% 0.0% Cash Value of Life Insurance 280,000 - - 280,000 0.0% 0.0% Total of Cash and Equivalents 322,500 42,500 - 365,000 0.2% 0.0%MARKETABLE SECURITIES - EQUITIES Account 1 1,500,000 1,500,000 - 3,000,000 2.0% 4.0% Account 2 11,500 11,500 - 23,000 2.0% 5.0% Total of Equities 1,511,500 1,511,500 - 3,023,000 2.0% 4.0% Page 46
  • 48. REVISED NET WORTH STATEMENT (Page 2) ALLEN AND NANCY WILSON ALLEN NANCY JOINT TOTAL YIELD GROWTHOTHER INVESTMENTS LP 1 75,000 75,000 - 150,000 0.0% 5.0% LP 2 15,000 15,000 - 30,000 0.0% 5.0% LP 3 22,500 22,500 - 45,000 0.0% 5.0% LP 4 10,000 10,000 - 20,000 0.0% 5.0% Loans to Life Insurance Trusts** 177,000 177,000 - 354,000 0.0% 2.0% Total of Other Investments 299,500 299,500 - 599,000 0.0% 3.2% ** Growth rate of 2% attached to account for any accrued interest on the promissory notes for insurance premiums.RETIREMENT PLANS/IRAs IRA 845,000 - 845,000 0.0% 6.0% IRA 123,000 - 123,000 0.0% 6.0% IRA 115,000 - 115,000 0.0% 6.0% IRA - 55,000 55,000 0.0% 6.0% Total Retirement Plans 1,083,000 55,000 1,138,000 0.0% 6.0%INVESTMENT REAL ESTATE Rental Home Property 1 750,000 750,000 - 1,500,000 -2.1% 3.0% Rental Home Property 2 750,000 750,000 - 1,500,000 -2.1% 3.0% Total of Real Estate Holdings 1,500,000 1,500,000 - 3,000,000 -2.1% 3.0% Page 47
  • 49. REVISED NET WORTH STATEMENT (Page 3) ALLEN AND NANCY WILSON ALLEN NANCY JOINT TOTAL YIELD GROWTHRESIDENTIAL REAL ESTATE 123 Main St. 3,000,000 3,000,000 - 6,000,000 0.0% 3.0% Vacation Home 1 1,000,000 - - 1,000,000 0.0% 3.0% Vacation Home 2 750,000 750,000 - 1,500,000 0.0% 3.0% Vacant Land 175,000 175,000 - 350,000 0.0% 3.0% Vacation Home 3 157,500 157,500 - 315,000 0.0% 3.0% Total of Personal Residences 5,082,500 4,082,500 - 9,165,000 0.0% 3.0%PERSONAL PROPERTY Autos 100,000 100,000 - 200,000 0.0% 0.0% Total of Personal Property 100,000 100,000 - 200,000 0.0% 0.0%OTHER STRATEGY ASSETS GDOT Note 21,500,000 21,500,000 - 43,000,000 1.20% QPRT Property - 800,000 - 800,000 Total of Other Strategy Assets 21,500,000 22,300,000 - 43,800,000 1.20%TOTAL ASSETS 31,399,000 29,891,000 - 61,290,000LIABILITIES 123 Main St. 1,750,000 1,750,000 - 3,500,000 Total Liabilities 1,750,000 1,750,000 - 3,500,000COMMERCIAL LIABILITIES Rental Home Property 1 550,000 550,000 - 1,100,000 Rental Home Property 2 600,000 600,000 - 1,200,000 Total Commercial Liabilities 1,150,000 1,150,000 - 2,300,000TOTAL LIABILITIES 2,900,000 2,900,000 - 5,800,000NET WORTH 28,499,000 26,991,000 - 55,490,000 Page 48
  • 50. FINANCIAL ANALYSIS - PROPOSED PLA ASSET VALUE PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Asset ValuesCash and cash equivalents 365,000 365,000 365,000 365,000 365,000 365,000 365,000 365,000 365,000Marketable securities - Equities 3,023,000 3,423,718 3,932,677 4,454,239 4,988,564 12,773,190 16,761,650 22,905,872 22,568,131Other investments 1 599,000 720,136 861,375 1,007,172 1,157,673 1,313,032 2,168,343 3,716,588 5,616,423Closely held business 2 - - - - 10,131,848 - - - -PV of future CRT Distributions in S Corp - - - - 18,500,000 17,821,630 12,460,544 3,866,905 -Retirement plans/IRAs 1,138,000 1,188,953 1,300,290 1,418,307 1,543,406 1,676,010 2,242,879 3,051,445 2,849,500Investment real estate 3,000,000 3,014,612 3,105,051 3,198,202 3,294,148 3,392,973 3,933,385 5,286,141 7,762,876Personal residences 9,165,000 9,209,641 9,485,930 9,770,508 10,063,623 10,365,532 12,016,493 16,149,161 23,715,588Residences in QPRTs 3 800,000 803,897 828,014 852,854 878,440 904,793 1,048,903 1,409,638 -Personal property 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000 200,000Note from childrens GDOT 43,000,000 40,226,821 37,382,070 33,923,572 - - - - -Total assets in estate 61,290,000 59,152,776 57,460,406 55,189,855 51,122,702 48,812,160 51,197,197 56,950,750 63,077,519Less estimated liabilities (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000) (5,800,000)Combined net worth $ 55,490,000 $ 53,352,776 $ 51,660,406 $ 49,389,855 $ 45,322,702 $ 43,012,160 $ 45,397,197 $ 51,150,750 $ 57,277,5191 Increased by new promissory notes for annual premiums currently being paid on the ILIT policies.2 GDOT note is paid off in 2014 with ABC interests. It is then assumed that $20M of those interests are contributed to a Charitable Remainder Trust.3 Residence in QPRTs are outside of the taxable estate at the end of the trust term in 2043.In the event that there is a cash flow surplus, the surplus is added to the marketable securities row by default.If there is a cash flow shortage (because of spending or gifting capital) then the shortage is treated as a reduction in marketable securities. Page 49
  • 51. TAXABLE INCOME PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Sources of Taxable IncomeCash and cash equivalents 850 850 850 850 850 850 850 850Marketable securities - Equities 60,460 68,474 78,654 89,085 99,771 320,913 447,418 461,907Capital Gains from sale of ABC 1 - - - - 7,348,634 - - -Retirement plans/IRAs - - - - - - 140,816 253,270Investment real estate (64,000) (64,000) (64,000) (64,000) (64,000) (64,000) (64,000) (64,000)Other taxable earnings - GDOT 2 5,500,000 5,586,849 6,145,534 6,760,088 - - - - 3CRT Income distributed from S Corp - - - - - 1,802,585 1,065,381 -Client earned income 210,000 210,000 214,200 218,484 222,854 - - - -Spouse earned income 81,600 83,232 84,897 86,595 88,326 - - -Social security income - - - - - - 27,613 31,426Gross income $ 5,788,910 $ 5,889,606 $ 6,464,419 $ 7,095,471 $ 7,473,582 $ 2,060,347 $ 1,618,078 $ 683,4531 Assumes the sale of all ABC interests in 2015. The capital gains taxes reflected are on the remaining interests owned personally by Allen & Nancy.2 GDOT note is paid off in 2014 with ABC interests and grantor status is revoked. Trust begins paying income taxes in 2015.3 CRT is funded prior to ABC sale with business interests. CRT begins making annual payments for 20 years in 2016. Page 50
  • 52. INCOME TAX PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Income Tax EstimationAdjusted gross income:Dividend income (Marketable Sec.) 60,460 68,474 78,654 89,085 99,771 320,913 447,418 461,907Capital Gains income - - - - 7,348,634 - - -Earned and other income 5,728,450 5,821,131 6,385,765 7,006,386 25,176 1,739,435 1,170,660 221,546Adjusted gross income 5,788,910 5,889,606 6,464,419 7,095,471 7,473,582 2,060,347 1,618,078 683,453DeductionsReal Estate Tax 34,624 35,663 36,733 37,835 38,970 45,176 60,713 89,160State income taxes 549,946 559,513 614,120 674,070 709,990 195,733 153,717 64,928Interest 90,321 93,031 95,822 98,696 101,657 117,848 158,378 232,584Cash charitable gifts 24,152 24,877 25,623 26,392 27,183 31,513 42,351 62,193Charitable Remainder Trust 1 - - - - 2,000,400 - - -Charitable Deduction available 24,152 24,877 25,623 26,392 2,027,583 31,513 42,351 62,193Charitable Deduction allowed 24,152 24,877 25,623 26,392 2,027,583 31,513 42,351 62,193Deduction carried over - - - - - - - -Total deductions 699,043 713,082 772,297 836,992 2,878,200 390,271 415,160 448,865Reductions - - (188,929) (207,860) (219,203) (56,806) (43,538) (15,500)Deductions allowed 699,043 713,082 583,368 629,132 2,658,997 333,464 371,622 433,366Taxable income 5,089,867 5,176,523 5,881,050 6,466,339 4,814,585 1,726,883 1,246,456 250,088Federal and State income tax $ 2,289,179 $ 2,327,472 $ 2,907,083 $ 3,198,807 $ 1,667,147 $ 843,646 $ 611,381 $ 132,6761 One time deduction in 2015 for contribution of $20M in ABC interests to the Charitable Remainder Trust. Page 51
  • 53. CASH FLOW PROJECTIONS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Sources of Income for LifestyleConsumable income (taxable) 288,910 302,756 318,884 335,383 7,473,582 2,060,347 1,618,078 683,453 1Return of basis from ABC Sale - - - - 2,783,214 - - -Non-taxable Social Security Income - - - - - - 4,873 5,546Distribution from Marketable Securities - - - - - - 361,541 1,452,813 2Note Payment from GDOT 3,289,179 3,327,472 3,907,083 4,198,807 - - - -Total income available for lifestyle 3,578,089 3,630,229 4,225,967 4,534,190 10,256,796 2,060,347 1,984,491 2,141,812Uses of CashLiving expenses 750,000 772,500 795,675 819,545 844,132 978,580 1,315,130 1,931,312Income tax 2,289,179 2,327,472 2,907,083 3,198,807 1,667,147 843,646 611,381 132,676Personally held insurance premiums 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000Cash gifts/loans to ILIT 3 123,630 123,630 123,630 123,630 123,630 123,630 5,630 5,630Cash gifts to charity 24,152 24,877 25,623 26,392 27,183 31,513 42,351 62,193Total uses of cash 3,196,961 3,258,479 3,862,011 4,178,374 2,672,092 1,987,369 1,984,491 2,141,812Surplus $ 381,128 $ 371,750 $ 363,956 $ 355,816 $ 7,584,704 $ 72,979 $ - $ -1 Reflects only the return of basis on the ABC interests still held by Allen & Nancy personally.2 Total payment reflects an assumption that ABC distributes an amount sufficient to pay income tax plus an additional $1M of excess cash.3 We assume that loans are made annually to pay premiums on ILIT policices, we also assume that enough premiums are paid by 2025 to keep the policies in-force and premiums cease.In the event that there is a cash flow surplus, the surplus is added to the marketable securities row on the "Asset Value Projections" 3 pages earlier. Page 52
  • 54. FIRST ESTATE TAX ESTIMATION AND DISTRIBUTION - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Tax calculation on Allens deathCombined Net Worth 55,490,000 53,352,776 51,660,406 49,389,855 45,322,702 43,012,160 45,397,197 51,150,750 57,277,519Allens estimated estate 28,499,000 27,401,348 26,532,166 25,366,038 23,277,198 22,090,531 23,315,457 26,270,413 29,417,048Death benefit exceeding CV 4,720,000 4,720,000 4,720,000 4,720,000 1,720,000 1,720,000 1,720,000 1,720,000 1,720,000Total gross estate 33,219,000 32,121,348 31,252,166 30,086,038 24,997,198 23,810,531 25,035,457 27,990,413 31,137,048Settlement expenses (191,095) (185,607) (181,261) (175,430) (149,986) (144,053) (150,177) (164,952) (180,685)Joint, personal and IRA to Nancy (1,183,000) (1,231,490) (1,337,446) (1,449,760) (1,568,812) (1,695,008) (2,234,480) (3,003,968) (2,811,783)Insurance passing to Nancy (5,000,000) (5,000,000) (5,000,000) (5,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000)Outright or in trust to Nancy (26,844,905) (25,704,251) (24,733,459) (23,460,848) (21,278,399) (19,971,470) (20,650,800) (22,821,494) (26,144,580)Plus Allens lifetime taxable gifts 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772Tax base 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772Tentative Federal Estate Tax - - - - - - - - -Distribution of First EstateSettlement expenses 191,095 185,607 181,261 175,430 149,986 144,053 150,177 164,952 180,685Joint, personal and IRA to Nancy 1,183,000 1,231,490 1,337,446 1,449,760 1,568,812 1,695,008 2,234,480 3,003,968 2,811,783Insurance passing to Nancy 5,000,000 5,000,000 5,000,000 5,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000Outright or in trust to Nancy 26,844,905 25,704,251 24,733,459 23,460,848 21,278,399 19,971,470 20,650,800 22,821,494 26,144,580Total $ 33,219,000 $ 32,121,348 $ 31,252,166 $ 30,086,038 $ 24,997,198 $ 23,810,531 $ 25,035,457 $ 27,990,413 $ 31,137,048AssumptionsWe assume that Allen dies first, followed immediately by Nancy.Taxes under "Distribution of First Estate" include estate and income taxes, if any. Page 53
  • 55. SECOND ESTATE TAX ESTIMATION AND DISTRIBUTION - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Tax Calculation on Nancys deathNancys assets 26,991,000 25,951,429 25,128,240 24,023,816 22,045,505 20,921,629 22,081,740 24,880,337 27,860,470Plus assets from Allens estate 33,027,905 31,935,741 31,070,905 29,910,608 24,847,212 23,666,478 24,885,280 27,825,461 30,956,363Nancys estimated estate 60,018,905 57,887,170 56,199,145 53,934,424 46,892,716 44,588,107 46,967,019 52,705,798 58,816,833Settlement expenses (625,189) (603,872) (586,991) (564,344) (493,927) (470,881) (494,670) (552,058) (613,168)Taxable estate 59,393,716 57,283,298 55,612,153 53,370,080 46,398,789 44,117,226 46,472,349 52,153,740 58,203,665Plus Nancys lifetime taxable gifts 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772 8,495,772Tax base 67,889,488 65,779,070 64,107,925 61,865,852 54,894,561 52,612,998 54,968,121 60,649,512 66,699,437Federal Estate Tax 20,787,801 20,049,154 19,464,254 31,097,744 25,878,534 24,623,674 25,918,992 29,043,757 32,371,216Distribution of Second EstateSettlement expenses 625,189 603,872 586,991 564,344 493,927 470,881 494,670 552,058 613,168Taxes 20,787,801 20,049,154 19,464,254 31,097,744 25,878,534 24,623,674 25,918,992 29,043,757 32,371,216Qualified plan to heirs 1,138,000 1,188,953 1,300,290 1,418,307 1,543,406 1,676,010 2,242,879 3,051,445 2,849,500Residual estate to heirs 37,467,915 36,045,191 34,847,610 20,854,029 18,976,849 17,817,542 18,310,478 20,058,538 22,982,949Total $ 60,018,905 $ 57,887,170 $ 56,199,145 $ 53,934,424 $ 46,892,716 $ 44,588,107 $ 46,967,019 $ 52,705,798 $ 58,816,833AssumptionsWe assume that Allen dies first, followed immediately by Nancy.Taxes under "Distribution of Second Estate" include estate and income taxes, if any. Page 54
  • 56. SUMMARY OF BENEFITS TO FAMILY - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Benefits to FamilyResidual estate 37,467,915 36,045,191 34,847,610 20,854,029 18,976,849 17,817,542 18,310,478 20,058,538 22,982,949Qualified plan assets 1,138,000 1,188,953 1,300,290 1,418,307 1,543,406 1,676,010 2,242,879 3,051,445 2,849,500Value of GDOT 7,000,000 10,562,719 18,486,424 27,531,771 37,469,030 29,806,543 38,607,806 64,768,109 126,882,575ABC Gifted to Kids - Nevada Trusts 2,000,000 2,031,582 2,234,740 2,458,214 2,704,035 2,839,237 3,623,666 5,902,570 11,130,175Proceeds from ILIT 4,000,000 4,000,000 4,000,000 4,000,000 7,000,000 7,000,000 7,000,000 7,000,000 7,000,000Value of QPRTs 200,000 200,974 207,003 213,213 219,610 226,198 262,226 352,409 2,587,625Total assets to heirs $ 51,805,915 $ 54,029,419 $ 61,076,067 $ 56,475,535 $ 67,912,930 $ 59,365,530 $ 70,047,054 $ 101,133,071 $ 173,432,825 Page 55
  • 57. GRANTOR DEEMED OWNER TRUST DETAILS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043GDOT Balance SheetReinvested excess cash flow - - - - - 29,806,543 38,607,806 64,768,109 126,882,575Re-capitalized closely held business 50,000,000 50,789,540 55,868,494 61,455,344 37,469,030 - - - -Note payable to Allen and Nancy (43,000,000) (40,226,821) (37,382,070) (33,923,572) - - - - -Net equity $ 7,000,000 $ 10,562,719 $ 18,486,424 $ 27,531,771 $ 37,469,030 $ 29,806,543 $ 38,607,806 $ 64,768,109 $ 126,882,575GDOT Income Tax EstimationRe-capitalized closely held business 5,500,000 5,586,849 6,145,534 6,760,088 - - - -Capital Gains from sale of ABC 1 - - - - 27,176,305 - - -Earnings from reinvestment acct./Seed Gift - - - - - 733,219 1,230,055 2,409,732Total earnings 5,500,000 5,586,849 6,145,534 6,760,088 27,176,305 733,219 1,230,055 2,409,732GDOT Cash FlowCapital Gains from sale of ABC 1 - - - - 27,176,305 - - - 1Return of Basis from sale of ABC - - - - 10,292,725 - - -Re-capitalized closely held business 5,500,000 5,586,849 6,145,534 6,760,088 - - - -Undistributed ABC Business Income (2,210,821) (2,259,377) (2,238,452) (2,561,281) - - - -Cash flow from reinvestment acct./Seed Gift - - - - - 733,219 1,230,055 2,409,732Annual interest note payments to Allen and Nancy 2 (516,000) (482,722) (448,585) (407,083) - - - -Annual principal note payments to Allen and Nancy 2 (2,773,179) (2,844,750) (3,458,498) (3,791,724) - - - - 3Note payoff to Allen and Nancy - Business Interests - - - (30,131,848) - - - -Trust Income Taxes 3 - - - - (7,662,487) (255,591) (429,484) (842,371)Cash flow to reinvest - - - - 29,806,543 477,628 800,571 1,567,361GDOT NoteOutstanding note balance 43,000,000 40,226,821 37,382,070 33,923,572 30,131,848 - - - -Interest payment 516,000 482,722 448,585 407,083 361,582 - - -1 Assumes the sale of all ABC interests in 2015. The capital gains taxes reflected are on the remaining interests owned personally by Allen & Nancy.2 Interest paid at Nov. 2011 Mid Term rate. Total payment reflects an assumption that ABC distributes an amount sufficient to pay income tax plus an additional $1M of excess cash.3 Prior to sale of ABC interests, GDOT note is paid off with ABC interests and the grantor status is revoked. Trust begins paying income taxes in 2015 (2015 taxes include state income taxes). Page 56
  • 58. IRREVOCABLE LIFE INSURANCE TRUST DETAILS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Cash loan to current ILIT 118,000 118,000 118,000 118,000 118,000 118,000 118,000 - -Cash gift for transferred policy 5,630 5,630 5,630 5,630 5,630 5,630 5,630 5,630 5,630Total outlay to ILITs 123,630 123,630 123,630 123,630 123,630 123,630 123,630 5,630 5,630 -Death benefit from current ILIT 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000 1Death benefit from transferred policy - - - - 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000Total potential death benefit $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 4,000,000 $ 7,000,000 $ 7,000,000 $ 7,000,000 $ 7,000,000 $ 7,000,0001 Term policy that is transferred/gifted to the ILIT. Page 57
  • 59. QUALIFIED PERSONAL RESIDENCE TRUST DETAILS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043QPRT ValuesGross value of residence 1,000,000 1,004,871 1,035,017 1,066,067 1,098,049 1,130,991 1,311,128 1,762,047 2,587,625Discounted value of residence 800,000 803,897 828,014 852,854 878,440 904,793 1,048,903 1,409,638 2,070,100Diff. between gross and discount 200,000 200,974 207,003 213,213 219,610 226,198 262,226 352,409 517,525Reversionary value in estate 800,000 803,897 828,014 852,854 878,440 904,793 1,048,903 1,409,638 -Rent paid to heirs post-QPRT - - - - - - - - -Value of home to heirs - - - - - - - - 2,587,625Cumulative rent paid to QPRT with 4.0% - - - - - - - - -Total Value to Heirs $ - $ - $ - $ - $ - $ - $ - $ - $ 2,587,625 Page 58
  • 60. CHARITABLE REMAINDER TRUST DETAILS - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043New CRUTEOY value - - - - - 20,000,000 15,375,694 9,087,494 -Trust distribution - - - - - 1,802,585 1,065,381 -Charitable income tax deduction 2,000,400PV of future CRT Distributions 17,821,630 12,460,544 3,866,905 -Total of CRT Value to Charity - - - - - 2,178,370 2,915,150 5,220,590 6,986,326Note: CRT is funded prior to ABC sale in 2015 with $20M of ABC interests. Charitable tax deduction is created in 2015 and annual CRT payments to Allen & Nancy begin in 2016 for 20 years.Note: PV inflated at 6% Page 59
  • 61. BENEFITS TO WILSON FAMILY CHARITY - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Charitable remainder trusts - - - - - 2,178,370 2,915,150 5,220,590 6,986,326Total benefits to foundation $ - $ - $ - $ - $ - $ 2,178,370 $ 2,915,150 $ 5,220,590 $ 6,986,326 Page 60
  • 62. DETAILS OF ALLENS QUALIFIED PLAN - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Allens Qualified PlansAllens age 58 59 60 61 62 67 77 90Nancys age 53 54 55 56 57 62 72 85Minimum distribution factor 38.7 37.8 36.8 35.8 34.9 30.2 21.2 11.4Securities in plans 1,083,000 1,093,423 1,201,429 1,315,914 1,437,269 1,565,905 2,149,064 2,895,388 2,677,276Plan contributions 40,000 40,000 40,000 40,000 40,000 - -Plan balance during life 1,083,000 1,133,423 1,241,429 1,355,914 1,477,269 1,605,905 2,149,064 2,895,388 2,677,276Plan balance at death of survivor 1,083,000 1,133,423 1,241,429 1,355,914 1,477,269 1,605,905 2,149,064 2,895,388 2,677,276Minimum distribution - - - - - - 134,845 241,544Actual distribution - - - - - - 134,845 241,544 Page 61
  • 63. DETAILS OF NANCYS QUALIFIED PLAN - PROPOSED PLANYEAR Current 2011 2012 2013 2014 2015 2020 2030 2043Nancys Qualified PlansNancys age 53 54 55 56 57 62 72 85Allens age 58 59 60 61 62 67 77 90Minimum distribution factor 43.6 42.6 41.6 40.7 39.7 34.9 25.6 14.8Securities in plans 55,000 55,529 58,861 62,393 66,136 70,105 93,816 156,057 172,225Plan contributions - - - - - - - -Plan balance during life 55,000 55,529 58,861 62,393 66,136 70,105 93,816 156,057 172,225Plan balance at death of survivor 55,000 55,529 58,861 62,393 66,136 70,105 93,816 156,057 172,225Minimum distribution - - - - - - 5,971 11,726Preferred distribution - - - - - - - -Actual distribution - - - - - - 5,971 11,726 Page 62
  • 64. FAMILY INFORMATION ALLEN AND NANCY WILSON CLIENTS Allen Wilson Date of Birth September 6, 1953 Nancy Wilson Date of Birth July 22, 1958 123 Main St. CHILDRENCHILDS NAME DATE OF BIRTH Dan Wilson October 1, 1988 Jessica Wilson May 5, 1992 Page 63
  • 65. PLAN ASSUMPTIONS ALLEN AND NANCY WILSONThe plan is based on numerous assumptions. Important among these are the yield and growth assumptionscontained on the balance sheet in the Financial Analysis section. Other important assumptions are contained onthis Plan Assumptions page. Tax Rate Assumptions State Income Tax Rate 10% State Inheritance - Estate Tax No state estate tax Tax on IRD Unless a qualified plan is given to charity, we assume the beneficiary designations are changed to provide for a stretch out distribution. 7520 Rates Highest rate 2.3% August, 2011 Current rate 1.5% November, 2011 Lowest rate 1.4% October, 2011 Mid Term AFR Rate 1.2% November, 2011 Annual increase in Allens earned income 2% Number of years Allens income is expected to continue 4 Annual increase in Nancys earned income 0% Number of years Nancys income is expected to continue 5 Lifestyle Need Assumptions Net annual outlay for Allen and Nancys lifestyle needs, not including gifts or income taxes $750,000 Annual cost of living increase used in the plan 3% Settlement and Administrative Expenses Fixed estate settlement costs $25,000 Variable estate settlement costs, 1st death 0.50% (of assets) Variable estate settlement costs, 2nd death 1.00% (of assets) Page 64
  • 66. DISCLAIMER AND DISCLOSURE ALLEN AND NANCY WILSONInKnowVision, LLC does not give tax, accounting or legal advice to its clients. The effectiveness of any of the strategies described willdepend on your individual situation and on a number of complex factors.You should consult with your other advisors on the tax, accounting, and legal implications of these proposed strategies before any strategyis implemented.Any discussion in this presentation relating to tax, accounting, investments, regulatory, or legal matters is based on our understanding as ofthe date of this presentation. Rules in these areas are constantly changing and are open to varying interpretations.Assumption Issues The plan involves numerous assumptions. While we believe that these assumptions are reasonable, it is important tounderstand that it is a virtual certainty that the actual results will differ from those illustrated. Returns on investment and performance offinancial products can cause the results to vary. Changes in tax, trust or property laws can cause plan results to vary. Plan implementationthat differs from that described in the plan will cause the results to vary. Provision of state law may cause the plan results to vary.Tax Opinions The IRS has recently issued new rules for tax practitioners regarding covered opinions, reliance opinions and marketedopinions. While this is an arcane area, suffice it to say that these opinions are often obtained by taxpayers for purposes of avoidingpenalties. These opinions are obtained at substantial cost and after substantial legal analysis. If you believe that such an opinion would behelpful to you prior to entering into any of the transactions outlined in this plan, you should feel free do so.Be advised that nothing in this analysis should be construed by you, your advisors or any one else as a covered opinion, reliance opinion,marketed opinion or any other type of opinion regarding any of the transactions or outcomes outlined in this plan. Page 65
  • 67. APPENDIX ALLEN AND NANCY WILSONMany of our clients like to read about some of the strategies that we have recommended. Both as further education and as areminder of the main points involved in the strategies.The appendix material that follows includes information about the planning strategies recommended. Not all strategies areincluded. Only those that likely require additional explanation.Naturally, we are always happy to answer your questions or review the details of a particular strategy with you at any time. Charitable Remainder Unitrust (CRT) - This trust allows an individual or couple to make a gift, or a series of gifts, normally of appreciated assets, receive a charitable income tax deduction for the present value of the gift and to receive an income stream of a percentage that is based on the value of the trust assets. All types of CRTs have a minimum payout percentage of 5%. The trust is based on the life expectancy of the grantor or a term of years no greater than twenty. When the last income beneficiary dies or at the end of the term, the remainder passes to the charitable beneficiary. TCLAT - A testamentary charitable lead annuity trust is established at the death of the grantor. It pays a fixed annuity percentage to charity for a period of time then the remaining assets are transferred to the grantor’s beneficiaries. Most TCLATs are structured to create a “zero” transfer tax and are often used to eliminate any estate tax that would be due from the grantor’s estate. Charitable Life Estate - Client makes a gift to a charity of his residence and retains all rights and obligations of property ownership for his life. Client receives an immediate charitable income tax deduction for the present value of the gift to charity. At death, the house passes to the designated charity and is removed from the estate of the donor. Private Foundations - A private foundation is a specific type of charity that is established and operated usually by one family. The entity can be a trust or a corporation and the family may have 100% control of the board, make all of the investment decisions and all charitable grants. Private foundations must distribute 5% of its assets annually. There are also strict guidelines as to what type of investments may be owned and there are special limitations as to the amount of charitable income tax deductions are available for contributions. Page 66
  • 68. Family Charity Plan - Client establishes a family limited partnership that is designed to minimize the typical discounting thatis normally associated with partnership planning. Client funds the partnership and then donates the limited partnershipinterests to designated charities. Client receives a significant income tax deduction and maintains investment control overpartnership assets. Often client has a right to borrow from the partnership. Also, client generally makes an annualdistribution to the charities from the partnership, normally 1% of assets.Supporting Organizations (SOs) - SOs are similar to private foundations but are actually public charities that can beestablished by private families. Because they are technically public charities, the higher charitable income tax deductionrules for public charities apply. Unlike private foundations, however, SOs require that a private family may not haveabsolute control of the board. That is, if the board is to have 5 members, the family can only have a maximum of 2 of thosemembers. SOs are not required to pay excise taxes, nor are they required to distribute 5% of their assets annually. Instead,they must distribute 85% of their income.Bargain Sales - A bargain sale occurs when a donor transfers property to a charity for less than the full fair market value ofthe property or when the charity pays some portion of the value for property it receives. The donor only receives a taxdeduction for the contributed portion of the property.Charitable Remainder Annuity Trust (CRAT) - This trust allows an individual or couple to make a single gift, normally ofappreciated assets, receive a charitable income tax deduction for the present value of the gift and to receive an incomestream of a fixed percentage of the original value of the contribution of trust assets. The trust is based on the life expectancyof the grantor or a term of years no greater than twenty. When the last income beneficiary dies or at the end of the term, theremainder passes to the charitable beneficiary.Gift Annuity - A gift annuity is a form of a bargain sale. A donor transfers property to a charity in exchange for a fixedincome stream that will last for the life expectancy of the donor. A charitable income tax deduction for the present value ofthe gifted property is allowed. The charity is liable and responsible for the payment of the annuity income stream.Net Income with Makeup Unitrust (NIMCRUT) - This is a special type of charitable remainder unitrust (see above)wherein the trust distributes the “net income” that the trust assets earn within the trust. If the trust does not earn enoughincome to pay the stated income percentage payout, the trust creates an “IOU” account that it can pay at a later date whenthe assets earn more income. These trusts are often used when a donor has other income currently but would like incomelater such as during their retirement. Trust assets can be managed to produce income or not. Page 67
  • 69. Flip Charitable Remainder Unitrust (Flip CRT) - This type of CRT operates like a NIMCRUT when it is originallyestablished, paying out only the income it earns at a set percentage. At some triggering event in the future, the FLIP CRTchanges character and operates like a standard CRT (SCRUT) whereby it pays out a fixed percentage of its annual valuation.This type of CRT is often used when a gift that produces little current income (such as land) is transferred before it is sold.Upon sale, the proceeds are reinvested and the CRT begins paying its regular percentage.Charitable Lead Unitrust (CLUT) - This trust operates very much like the CLAT. However, while the percentage payoutremains fixed, the trust’s distribution amount varies depending on the value of the trusts assets which are computedannually. Because of this, the CLUT cannot have a “zero” gift amount as there will always be some calculated remainder thatpasses to the heirs. CLUTs are often used for gifts to grandchildren or other “skip generations” because the generationskipping tax amount can be calculated when the trust is first established.Charitable Lead Annuity Trust (CLAT) - This trust distributes income to charity over the life of the donor or for a period ofyears. At the end of the trust term, the trust assets are either distributed back to the grantor or to heirs. These trusts areused to either transfer assets to heirs with little or no gift tax or to create a different way to make gifts if the grantor hasalready used significant charitable income tax deductions. CLATs have no minimum payout percentage.Donor Advised Funds (DAF) - A DAF is a special account established at a Community Foundation. It allows a donor tomake a gift of property without specifying the final charitable purpose for the gift. Donors often are allowed to maintainmoney management responsibility for the DAF and can also direct the Community Foundation as to where the charitablefunds are ultimately distributed. The Community Foundation is not technically bound to direct the funds to the donor’sselection but as a practical matter most follow the donor’s wishes. DAFs have no annual minimum requirement fordistribution and are usually inexpensive to establish.Limited Liability Company/Charitable Remainder Trust (LLC/CRT) - In this strategy a gift of appreciated property is madeto an LLC. The LLC then gifts the property to a CRT in exchange for the income interest. The LLC is then sold to a GrantorDeemed Owned Trust (GDOT) in exchange for a note. Because of the fact that the LLC only owns the income stream duefrom the CRT, and the LLC has restrictions on marketability and liquidity, the “discount” available for the sale to the GDOTshould be substantial.Family Limited Partnership (FLP) - FLPs are a form of business entity that can be utilized to facilitate the transfer of assets.Ownership interests are divided into General Partner (GP) and Limited Partner (LP) shares. GPs maintain control of theentity even though they may own a small percentage of the total FLP. LP interests have ownership but no control. Becausethe LPs have no control over their interests FLPs often receive significant valuation adjustments when valued by appraisers.This allows the LP units to be transferred or sold at less than their full monetary value. FLPs also enjoy strong creditorprotection and are therefore effective for family asset protection purposes. Page 68
  • 70. Long Term Care Insurance (LTC) - This type of insurance is meant to protect families from the catastrophic costs of caredue to a prolonged illness. Coverage is usually provided as a “per day” cost and many policies feature various riders thatprotect against inflation. Coverage applies not only for nursing home and rehabilitation facilities but for home health carecosts as well. Policies can be structured so that they are paid for over a lifetime or for a period of years. Some policiesrefund the premiums that have been paid at the death of the insured. LTC is income tax deductible to C Corporations andowners of those corporations may “discriminate” as to which employees are covered.Walton Grantor Retained Annuity Trust (Walton GRAT) - In a typical GRAT assets are transferred to a trust and thegrantor of the trust receives an income stream for a period of years. What is left in the trust at the end of its term istransferred to beneficiaries, normally the grantor’s heirs. The normal structure of a GRAT is meant to use “leverage” toreduce or eliminate the taxable gift to the heirs form the GRAT. This type of normal GRAT causes all of the GRAT assets tobe included in the grantor’s estate if the grantor dies during the GRAT period. The Walton GRAT provides an exception tothis rule, thereby allowing GRAT payments to continue after death and the GRAT assets not reverting to the grantor.Revocable Living Trust (RLT) - A foundational document of most estate plans, the RLT is a trust that is established by anindividual for the purpose of holding and managing the assets of the individual. The trust is a non-entity for income taxpurposes. That is, the grantor of the trust is still responsible to report and pay the income tax due on any trust assets. RLTsare also effective in the event of a disability or incompetence of the grantor, in that they name a successor trustee who canstep in to the shoes of the grantor without a court proceeding. RLTs are often established in order for the grantor’s estate toavoid probate. Further, a properly drafted RLT can be utilized to take advantage of the estate exemption in order tominimize estate taxes.Preferred Limited Partnership (LP) - This type of LP creates two different classes of limited partner. LP units are allocatedbetween “common” and “preferred” classes. The common interests are generally entitled to receive any of the growthassociated with the underlying assets of the LP. The preferred receive a stated percentage income return, e.g. 5%. Becauseof the possible disparity of return between the two types of units often have different values when appraised. This allowsthe General Partner of the LP to make different decisions as to the ultimate disposition of the two types of interests. Thistype of LP can provide substantial planning leverage for the appropriate estate.Life Insurance - While life insurance has been available for a very long time it is often dismissed. However, properlystructured life insurance can add an element of safety and certainty to most estate plans. Life insurance death benefits aregenerally income tax free and policies that are properly owned outside of the estate can also be estate tax free. Manypolicies have guarantees that will keep the policy in force as long as premiums are paid in a timely fashion, regardless ofinterest rate or company mortality fluctuations. Page 69
  • 71. Rent to Own - This strategy couples a short term Qualified Personal Residence Trust (QPRT) with an Irrevocable LifeInsurance Trust (ILIT). The ILIT is a beneficiary of the QPRT and at the termination of the QPRT term receives premiumpayments in the form of rental income. This allows the client to pay large insurance premiums without annual gifting,Crummey notices or income tax consequences.Life Settlements - This strategy involves the sale of a life insurance policy to an independent third party. There are manyreasons to consider this type of transaction. The client may no longer need the insurance; the policy may be in danger oflapsing while the client is unwilling or unable to make the necessary premium payments; or there may be newer, moreappropriate and cost effective insurance needed for the clients’ current circumstances.529 Plans - 529 Plans represent a special section of the tax code which has been enacted to encourage the funding of posthigh school education. Each state has its own plan but individuals may choose the plan of any state they wish to use. 529plans allow an individual to establish an investment account for themselves or for another person (normally children orgrandchildren). Investment returns grow on a tax free basis and, if utilized for post high school educational purposes,remain tax free. While the funds are generally out of the estate of the grantor of the plan, the grantor may take them back atany time. While they will have to pay income tax as well as a 10% penalty on the earnings, it is often reassuring to have theknowledge that the funds are retrievable in the event of an economic emergency. The law further allows the grantor tomake five years of gifts to the 529 plan in one year. That is, $60,000 can be deposited currently in a plan for the benefit ofanother, and then the grantor must wait until the sixth year to make any additional deposits.Family Limited Liability Company (FLLC) - Much like the FLP, a FLLC is a type of business entity that provides for thecentralized pooling and management of family assets. Owners of FLLC units are considered “members” and there is usually asingle “managing member”. FLLCs are a relatively new for of entity and there is less case law regarding their uses andnuances when compared to FLPs. However, many jurisdictions have passed favorable FLLC statutes and therefore the FLLCshould be carefully considered in the proper jurisdiction.Crummey Powers - Most traditional life insurance trusts contain what are known as “Crummey Powers” which grant thebeneficiaries of the trust the right to withdraw money that has been contributed to the trust (normally to pay insurancepremiums), for a period of time. This allows the contribution to be a gift of a “present interest” and therefore qualify for theapplication of the annual exclusion. The name “Crummey” power derives from the court case that originally challenged andwon on this principle.Jurisdictional Trusts - These trusts are normally established because of the favorable laws of a specific jurisdiction. Thesecould be any type of trust, revocable or irrevocable, grantor or non-grantor. What’s important is that the specific legalfoundation of the jurisdiction is favorable for the application sought. These could be state specific, i. e. Delaware for assetprotection or Dynasty provision, or could even be international such as Cook Islands or Nevis for asset protection. Page 70
  • 72. Succession Planning - This is the process by which the owner of a closely held business determines who will take over thebusiness and how and when the transition will take place. While not necessarily a codified estate planning “technique” abusiness without an organized succession plan will be more likely to fail and have to be sold or liquidated. The economicresult to the family may be different than planned for or anticipated.Grantor Retained Annuity Trust (GRAT) - The GRAT transaction entails the transfer of assets to a trust whereby thegrantor retains an income from the trust for a period of years and the remainder transfers to beneficiaries at the end of thetrust term. The “remainder” is calculated using IRS tables and is considered a gift to the remainder beneficiaries. Therefore,many GRATs are structured to produce a “zero” gift and hope to take advantage of the possible arbitrage of the return of theassets in the GRAT compared to the IRS rates utilized to calculate the trust remainder. The disadvantage of the regular GRATtransaction is that if the grantor dies during the trust period, all of the assets in the GRAT are included back in the grantorsestate.Sale for Installment Note - This transaction is normally coupled with other techniques to improve the results. Often afamily will use an FLP or FLLP and sell interests that have been appraised at a reduced value because of lack of liquidity andmarketability. The buyer is often a trust for the beneficiaries, which purchases the discounted assets for the installmentnote. While the note is in the estate of the seller, it is usually of less value than the assets that have been sold. The note canbe structured to be paid as “interest only” or it may be amortized.Gifting - A simple way to transfer assets to beneficiaries. An individual may currently gift $11,000 of property to any otherindividual, annually ($12,000 beginning in 2006). Further, every individual can currently give away up to $1 million ofassets during their lifetime without incurring gift taxes. Making gifts of property that is discounted in some way can beadvantageous in transferring more than the statutory amount.Annuity Withdrawal - Often families ignore the funds that clients have in commercial annuities. Since funds areaccumulating on a tax-deferred basis, this is often a logical approach. However, since annuities remain in the estate of theowner and are therefore subject to estate tax and income in respect of a decedent tax, it is often advisable to begin asystematic program of annuity withdrawal. Frequently the after-tax proceeds of the withdrawal can be utilized to subsidizelifestyle or to purchase life insurance to replace the dollars that would be lost to the double taxation of the annuity.Dynasty Trust - This type of trust allows assets that are contributed to the trust to remain in the trust for multiplegenerations. Because of this provision, the trust assets will pass outside of the estate tax system and will also be protectedfrom the claims of a trust beneficiary’s creditors. This type of irrevocable trust must be established in a jurisdiction thatallows multi-generational trusts. Page 71
  • 73. Premium Finance - When purchasing life insurance, many families face the possibility of making taxable gifts because theamount of the premium exceeds the amount of annual gifting available to the insured. Using the option of premiumfinancing may alleviate this problem. Funds are provided by a third party lender who pays the premium. The insured usuallypays only the interest on the borrowed funds while the principal of the loan accumulates and is often repaid from theinsurance proceeds at the insured’s death. While complicated, premium financing can be an interesting solution for fundinglarge policies.Buy-Sell Agreements - This type of contract is normally associated with the owners of a closely business to allow for thedisability, abandonment of the business, or untimely death of any of the owners. The agreements describe the provisions bywhich an owner’s share of the business will be redeemed. Buy-sells can be funded with disability and life insurance or theymay be unfunded and, therefore, rely on the cash flow of the business to fund the buy out. Providing liquidity for the estateof the business owner is often the reason for the formation and execution of a buy-sell.Irrevocable Life Insurance Trust (ILIT) - In many estate plans, it is best to own life insurance outside of the taxable estate.The ILIT is the most common and flexible form of trust to accomplish this function. The ILIT will be the owner andbeneficiary of one or more life insurance policies and will obligated to pay the premiums, collect the proceeds at death anddistribute the funds to beneficiaries per the provisions of the trust. This is a good way to engage professional managementin the management and oversight of the trust funds. ILITs may be established as Dynasty Trusts, if so desired.Asset Protection - This is a broad category of planning which may involve one or more different strategies. Each of thetechniques seeks to provide insulate assets from the attack of creditors. Various trusts, FLPs, FLLCs and other entities maybe considered for asset protection. Further, there are choices of jurisdiction both domestic and foreign that may providefavorable environments for asset protection. Those in high risk profession or those with high risk assets generally fit theprofile for implementing asset protection strategies.Intra Family Loans - A simple solution that allows family members to make loans at the current Applicable Federal Rate(AFR), this strategy allows for possible arbitrage gains when the AFR is low relative to long term investment results.Furthermore, it is often possible for discounts to apply to the value of the notes in the event of the death of the lender.Corporate Recapitalization - Many closely held companies only have one class of stock, known as common voting stock.When considering options for estate planning, the closely held company stock often represents a major portion of theestate. In order to facilitate transfer while retaining control of the company, it is possible to “recapitalize” the company byredeeming the outstanding shares and issuing new shares which are divided between “voting” and “non-voting” shares. Thenon-voting shares are then transferred by sale or gift and because of their non-voting status appraisals often reflect a greatlyreduced value for these shares. Recapitalizations are available to S corporations as well as C corporations. Page 72
  • 74. Self Canceling Installment Note (SCIN) - Like other installment notes, the SCIN originates when assets are sold. As thename implies the SCIN obligation is cancelled when the obligation is fully paid or at the death of the seller. Because of theself-canceling feature of the SCIN, the seller receives a “premium” amount that is higher than a normal installmentobligation. The premium is reflected in one of two ways; either more principal is added to the balance or a higher (thancurrent federal tables) interest rate is applied to the obligation. SCINs may be effective in circumstances where the seller isnot expected to live to their IRS computed life expectancy.Grantor Deemed Owned Trust (GDOT) - This type of trust has several unique properties that make it a very powerfulestate planning tool. First, when assets are transferred to the trust either by gift or by sale, they are removed from the estateof the grantor. Second, the assets in the GDOT remain income taxable to the grantor of the trust. While this may not seemlike a positive attribute, the grantor’s recognition and payment of the income taxes essentially allows the assets in theGDOT to grow free of income taxes outside of the estate. This can greatly increase the ultimate value of the assetstransferred to the trust.Offshore Captive Planning - Business owners often have risks that are either under-insured or are too expensive to insure.Those who have excess taxable income may choose to establish their own insurance entity, know as a “Captive.” These aremost done in international jurisdictions since the tax laws favor this type of arrangement. These structures are very complexand require specialized planning but can also provide very favorable income and estate tax benefits.Qualified Personal Residence Trust (QPRT) - This technique involves transferring a residence by gift to a trust for a periodof years. Normally, a gift tax return is filed for the year that the QPRT is funded. At the end of the trust period, the residencebecomes the property of the beneficiaries of the trust. Because the gift is made currently and vests in the beneficiary at alater date, there is a discount on the value of the transfer which is calculated utilizing IRS tables. One risk of the QPRT is ifthe transferor dies during the QPRT term, the house reverts to the estate of the transferor. After the QPRT terminates, thetransferor should pay rent to the transferees as in any other commercial transaction.Leveraged Roth Conversions - Under certain circumstances it is possible to convert a traditional IRA account to a RothIRA. This may be an effective strategy, though it requires the payment of income taxes on the converted amount. Use ofborrowed funds to pay taxes can make this a very strong strategy.Employee Stock Ownership Plans (ESOP) - Closely held businesses often have no clear exit strategy. An ESOP can providea ready market since the ESOP effectively sells a portion of the company stock to a qualified plan which must include theemployees of the company. The owner may receive property which will allow a diversification of his assets that have beenconcentrated in their own company. ESOPs take many forms and are often complex transactions. Page 73
  • 75. 412(i) - This type of defined benefit pension plan is structured to allow the investments in the plan to be either lifeinsurance and/or commercial annuities. Normally these products are designed to produce a low guaranteed rate of returnwhich causes the annual contribution and, therefore, the income tax deduction to the participants in the plan, to berelatively high. 412(i) may be appropriate for an older business owner who has few employees.IRA Maximizer - This strategy is for those individuals who have significant balance in their IRA (or other qualified plan) andwho do not need the funds to live on. Normally, the IRA invests all or some of its assets in a newly formed family limitedpartnership (flp) and the flp invests all or some of its assets in a restricted management account (rma). The result of thetransaction is that there will be a reduction in appraised value of the account because of the illiquid nature of the rma andthe flp. By structuring the transaction properly, the IRA owner may reduce income taxes on required minimum distributionsand estate taxes because of the reduction in apprised value.Limited Partnership Owned Life Insurance - An alternative to owning life insurance in an irrevocable life insurance trust(ILIT), families often use a Limited Partnership. This is normally done as one step in a transaction whereby the limitedpartnership units will be sold or otherwise transferred out of the estate of the insured. Further, there are usually other assetscontributed to the partnership that will fund the insurance premiums. Done properly, the life insurance death benefit canremain outside of the estate of the insured while some degree of control through the control granted by retaining theGeneral Partner interest.Family Bank - a combination of strategies that may include an LLC and/or a multi-generational irrevocable trust. Thepurpose of the family bank is to create an entity that will allow several generations of family members to have access towealth for various purposes but also with a great degree of monitoring and supervision. A family bank may lend money to anheir to purchase a home or to start a business but will first assess the appropriateness of the transaction against a set ofguidelines that have been drafted into the formation documents. Page 74

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