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

2. Please help yourself to food and drinks
Please let us know if the room temperature is too hot or cold
Bathrooms are located past the reception desk on the right
Please turn OFF your cell phones
Please complete and return surveys at the end of the seminar

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

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

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

6. Historical Perspective
2001 legislation - The Economic Growth and Tax Relief Reconciliation Act of reduced federal estate taxes over the past ten years
The federal estate tax exemption amount increased from $675,000 in 2001 to $3.5 million in 2009
The federal estate tax rate was reduced from 55% in 2001 to 45% in 2009
Estate, gift and GST tax exemption amounts were no longer “unified”

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Before the new legislation, the federal estate tax was repealed in 2010 and instead a modified carryover basis treatment applied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

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

9. Federal Estate Tax in 2011 and 2012
2011 and 2012 federal estate tax exemption of $5.0 million (indexed beginning in 2012)
2011 and 2012 federal estate tax rate is 35%
Basis step-up continues for estates of decedents dying during 2011 and 2012

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

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

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

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

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

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

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

17. Chasing the Sunset
All of the 2010 Tax Act changes will “sunset” and expire at the end of 2012 unless additional legislation is passed.
2013 sunset:
Gift tax exemption amount $1.0 million
Estate tax exemption amount $1.0 million
GST tax exemption amount $1.36 million (indexed from 2011)
Estate, Gift and GST tax rate of 55%

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

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

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

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

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

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

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

25. Portability Planning Pointers & Questions
Complexity and uncertainty abounds
Only applies to “Last Deceased Spouse”
Example: H1 dies (with W as sole beneficiary) and thus W’s applicable exclusion amount becomes $10 million. If W remarries, and H2 then dies (with no unused exemption of his own), W’s applicable exclusion amount decreases back to $5 million

26. Portability Planning Pointers & Questions
“Privity” Requirement
Surviving spouse who remarries can only pass on his or her own unused exemption
Not the DSEUA from spouse number 1
Mere remarriage does not remove right to unused exemption
Example: H1 dies and W’s applicable exclusion amount is now $10 million. If W remarries, and W dies, then her applicable exclusion amount is still $10 million but H2’s applicable exclusion amount is likely only $10 million, not $15 million

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

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

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

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

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

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

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

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

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

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

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

38. Dynasty Trust Example – Erosion of Estate at Each Generation Level
Wealth of Parents
$1,000,000
Estate Tax Rate
35%
Estate Tax
$ 350,000
Wealth of Children
$ 650,000 $ $
$ 227,500
Wealth of Grandchildren
$ 422,500
$ 147,875
Wealth of Great-Grandchildren
$ 274,625
% of Original Wealth Passing to Great-Grandchildren % %
65.000%

39. Dynasty Trust of $5 million Example – Summary of Estate Tax Savings
5% Growth
7% Growth
9% Growth
Value of Trust in 20 years
$ ,266,489
$ ,348,422
$ ,022,054
Estate Tax 45%
$ ,969,920
$ ,706,790
$ ,609,924
Value of Trust in 40 years
$ ,199,944
$ ,872,289
$ ,839,975
$ ,692,530
Value of Trust in 60 years
$ ,395,929
$ ,732,134
$ ,156,460
$ ,028,168
$ ,379,460
$ ,070,407
Value of Trust in 80 years
$ ,807,205
$ 1,121,171,938
$ 4,932,758,341
$ ,513,242
$ ,527,372
$ 2,219,741,253

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

41. GST Tax After the 2010 Act Reinstatement of the GST Tax
GST tax exemption amounts and rates:
-2010 GST tax exemption amount was $5.0 million
-2010 GST tax rate was 0%
-2011 and 2012 GST tax exemption amount is $5.0 million (indexed beginning in 2012)
-2011 and 2012 GST tax rate is 35%

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

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

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

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

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

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

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

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

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

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

52. Existing Estate Planning Tools Survive the 2010 Tax Act
Reports of the death of zeroed out Grantor Retained Annuity Trusts (GRATs) are significantly overstated
Technique for removing from taxable estate income/appreciation on investment assets in excess of IRS assumed rate
February 2011 applicable federal rate is 2.8%

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

54. Existing Estate Planning Tools Survive the 2010 Tax Act
Intrafamily Loans – taking advantage of low interest rate environment
February 2011 mid term rate is 2.33%

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

56. Installment Sale to an IDGT Current Interest Rates – February 2011
Short-Term AFR (3 years or less)
.51%
Mid-Term AFR (over 3 years, up to 9 years)
2.33%
Long-Term AFR (over 9 years)
4.15%

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

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

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

60. Installment Sale to an IDGT Example
Assumptions
FMV of Assets Sold to IDGT
$ 1,111,100
Gift to Trust
$111,100
Interest Rate (Mid-Term AFR)
2.33%
Terms (Years) 9
Payment Structure
$111,100 Down Payment with Gift, Balance Interest-Only w/Balloon Payment
Payment Period
Annually
Timing of Payments
End of Period
Year
Beginning Balance
Income
10.00%
Installment
Payment
Ending Balance 1
$1,000,000
$100,000
$ (23,300)
$1,076,700 2
$107,670
$1,161,070 3
$116,107
$1,253,877 4
$125,388
$1,355,965 5
$135,596
$1,468,261 6
$146,826
$1,591,787 7
$159,179
$1,727,666 8
$172,767
$1,877,133
$187,713
$ (1,023,300)
$1,041,546
Amount passing to beneficiaries free of estate and gift tax
And income tax on trust income is paid by grantor as additional “gift” without gift tax

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

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

63. Illustration of the Power of Valuation Discounts
In the recent case of Estate of Stewart, decided in 2010 by the US Federal Court of Appeals (Second Circuit), the IRS and the taxpayer both agreed to accept a total valuation discount of 42.5% both for the lifetime gift of a 49% partial interest as well as the remaining 51% interest retained by the donor at her death
Commonly, all or nothing?
Need for sound factual support and appraisal of fractional interest, as well as underlying asset

64. Question & Answer Session
Thank you for coming!

65. IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that unless specifically provided otherwise in this communication (including any attachments), any U.S. federal tax advice contained in this communication (including any attachments) does not constitute a ”reliance opinion” as defined in IRS Circular 230 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 transaction or tax-related matter addressed herein.