1. ESTATE PLANNING

2. Three questions you probably want answered: How much tax will I owe? When do I pay the tax? How do I pay the tax?

3. HOW MUCH TAX WILL I OWE?

4. How Much Tax Will I Owe? How much estate tax you will owe depends on:  the value of your estate,  the use of exemptions from federal estate and TN inheritance taxes,  the use of gifting and charitable techniques,  the use of other techniques  your tax rate

5. The Value of Your Estate

6. The estate tax is applied to the value of property you own at your death What is property? ANYTHING YOU OWN AT YOUR DEATH Tangible vs intangible property Jointly owned property Beneficiary Designation: 401ks, IRAs, Annuities Life insurance Trust property: Revocable vs irrevocable

7. Estate Tax Exemptions

9. Federal Estate Tax Exemption:  Federal Estate Tax Exemption for 2008: Each individual has the equivalent of a $2,000,000 exemption from federal estate taxes; $1,000,000 begins 2011 “Use it or lose it” Unlimited Marital Deduction: You can leave any amount to a spouse at your death and there will be no tax: however, surviving spouse pays tax at his / her death

10. Tennessee Inheritance Tax $1,000,000 (use it or lose it) Unlimited marital deduction Remember there is a difference in the Federal and TN exemption amounts:  $2,000,000 in 2008, 3,500,000 in 2009,  Zero in 2010 then back to $1,000,000 in 2011  Difference in 2008-2010 necessitates planning so that no taxes are paid on the first death

11. How to Fund The Exemption You must have assets in your name Jointly owned assets Beneficiary designated assets

12. How Much Tax Will I Owe? Value estate Use the exemptions Apply the tax rates

13. Federal Estate Tax Rates Notice rate goes to 45% in 2009, no tax in 2010, then back to 55% in 2011

14. A look at how much estate tax a family might owe:  Mr. and Mrs. Smith are worth $5 million  Sweetheart wills  Three children, and five grandchildren.  The Smith’s own $2,000,000 business, $2,000,000 land and $1 million IRA.  Mr. Smith also has a $1 million life insurance policy  Mr. Smith dies in 2015 and Mrs. Smith dies in 2016

15. Federal Estate Planning Diagram $5 Million Estate Plus $1 Million Life Insurance Mr. Smith had a $1 million exemption in 2015 but did not use the exemption because he left everything to his wife When Mrs. Smith dies in December 2011, she has a $1 million exemption IRS’s portion - about $2,700,000 Heirs portion- about $3,300,000 These numbers are approximations only, and are used to illustrate how the estate tax works. $5,000,000 $1,000,000 life $6,000,000 $1,000,000 exemption $5,000,000 tax rate X $2,700,000 Tax Liability

16. What Can The Smiths Do?  Use both of the Smith’s exemptions  Give it away:  To Family Members  To Charitable Organization(s)  Life Insurance Trust

17. Use Both of the Exemptions Each had a $ 1 million exemption but only one was used. Use the exemption by:  Bequeath amount equal to exemption: The first to die leaves the children and/or grandchildren, $ 1 million in some type of asset.  Trust amount equal to exemption: The first to die leaving an amount equal to the exemption in trust for the surviving spouse and children.

18. Exemption Amount in Trust  Trust benefits: Protect against divorce, Protect against creditors, Protect and provide for financially inexperienced, Provide for disabled, handicapped, Many trusts are for the lifetime of a beneficiary

19. Trust Example: Exemption in Trust Trust Husband Dies First $1,000,000 Wife Wife still has her exemption to use at her death

20. Estate Planning Using Exemptions $5,000,000 Estate plus life insurance These numbers are approximations only, and are used to illustrate how the estate tax works. New PlanOld Plan$6,000,000 $2,000,000$1,000,000 $4,000,000$5,000,000 $2,330,000$2,700,000 $1,670,000$2,250,000 Heirs receive $3,670,000 $3,300,000 IRS receives$2,330,000$2,700,000 Exemptions Tax

21. WHAT ELSE CAN WE DO?

22. Use of Gifting Techniques  Giving to Family Members  Giving to Charity  Giving to a Life Insurance Trust

23. Federal Gift Tax Annual Exclusion: Each individual can give up to $12,000 per person each year ( husband and wife can give $24,000 per person each year: for example, gift by married couple to daughter and son-in-law = $48,000 ) Lifetime Exemption: $1,000,000 lifetime exemption  once lifetime exemption used gift tax applies of up to 45% Unlimited Marital Deduction

24. Tennessee Gift Tax Each individual can give up to $12,000 to any direct relative per year or 5,000 to the first person and 3,000 to any other person per year

25. Giving To Family Members You can give $12,000 annually to children and grandchildren free of gift taxes each year (Federal and TN)  spouse can also give away $12,000  Smiths have 3 children and 5 grandchildren  could transfer $192,000 tax free each year  In the seven years prior to their deaths, the Smiths could have given away $1,344,000  Advantage: Giving away asset plus appreciation

26. How Can I Leverage More Into The Gift Amounts? Transfer the real estate (except home) and investments to a Family Limited Partnership or LLC, Receive back both control and noncontrol interests for example, 1% control and 99% noncontrol interests, Give children and grandchildren noncontrol interests, Value the partnership or LLC and receive discounts

27. How Can I Leverage More into the Gifts: Con’t After assets are transferred to Family Limited Partnership receive discounts on value for:  Lack of marketability  Lack of control Typical discount might be 30% Example: If the Smiths put their 2 million dollar business and 2 million of land in a limited partnership, transferred the noncontrolling interest to their children and grandchildren, and received a 30% discount, the value for estate tax purposes would now be 2,800,000 rather than 4,000,000. ( 4,000,000 x 30% = 1,200,000 discount) Biggest mistake: Failure to actually give the partnership interests away.

28. Gift of Limited Partnership Interests $5,000,000 Estate plus life insurance These numbers are approximations only, and are used to illustrate how the estate tax works. New PlanOld Plan$6,000,000 $2,000,000$1,000,000 $4,000,000$5,000,000 $1,200,000 $2,800,000 $1,600,000$2,700,000 $1,200,000 Heirs receive $4,400,000 $3,200,000 IRS receives$1,600,000$2,700,000 Exemptions Partnership Discount Tax

29. Giving To Charities

30. 100% deduction from estate taxes Retirement plan assets have not been taxed and will be subject to income tax as well as estate tax No income or estate taxes on IRA or 401k if given to charity at your death

31. Twist on Gift to Charity Bequest to Private Foundation Family members may be on board and receive reasonable compensation Teach younger generation decisionmaking, finances (budget and investing) Leave a legacy of values

32. Life Insurance Trusts

33. Life Insurance Trust Life premiums Insured gives amount of premiums to trust; this amount is considered a gift to the beneficiaries Trust buys life insurance Life insurance is not inside estate

34. Gift Life Insurance To Trust $5,000,000 Estate plus life insurance These numbers are approximations only, and are used to illustrate how the estate tax works. New PlanOld Plan$6,000,000 $2,000,000$1,000,000 $4,000,000$5,000,000 $1,200,000 $2,800,000 $1,000,000 $1,260,000 $1,000,000 $ 260,000 Heirs receive $4, 450,000 $3,300,000 IRS receives$ 550,000$2,700,000 Exemptions Partnership Discount Gift to University, Church Life Insurance Trust

35. When Do I Pay The Taxes? If taxes are due, they must be paid 9 months following date of death Estate tax returns are due at that time. Extensions may be filed but tax is still due.

36. How Do I Pay the Estate Taxes? Use cash  use up all estate liquidity  use 100 cent dollars Sell assets at death  may be bad market  use 100 to 150 cent dollars Borrow  lender may not be willing  use 200 cent dollars Insured approach  pennies on the dollar

37. Financial Planning Steps Estate planning is one step in the financial planning process that encompasses almost every aspect of your financial picture Focus should be on an integrated approach to planning for transfer of wealth and/or the support of your family in the case of untimely death Use the checklist to identify and record completed items Identify gaps in your plan Prioritize and take action

38. Identify Advisory Team Members Family CrossBridgeAttorneyCPA

39. Thank you for your time. It was a pleasure to speak with you today. Marguerite Self Elkins, CFP®, J.D., LL.M Securities and Investment Advisory Services offered through Woodbury Financial Services, In. Member FINRA, SIPC and Registered Investment Advisor. P.O. Box 64284, St. Paul, MN 55164 800-800-2000. CrossBridge Capital Advisors and Woodbury Financial Services, Inc. are not affiliated entities.