Fiduciary & Investment Risk Management Association 2007 National Training Conference Phoenix, Arizona Peter G. Pangis, Director and Northeast Chief Trust Officer Merrill Lynch Trust Company, a Division of Merrill Lynch Bank and Trust, FSB.

The Delaware Dynasty Trust: A Unique Multi-Generational Legacy Strategy What is it? How does it work? What are the Benefits?

The Dynasty Trust Think of it as a “family savings account” Designed to remain in existence for multiple generations without the imposition of an estate tax or generation skipping tax as the property passes from generation to generation Can run as long as state law permits Protected trust assets (i.e., divorces, creditors, fraud and personal injury plaintiffs) No estate tax on assets that remain in the trust

Benefits of a Dynasty Trust Uniquely designed to maximize generation-skipping transfer (GST) tax exemption  The GST tax is a flat tax (46% ) imposed on assets transferred to a beneficiary two or more generations removed from the person making the transfer (e.g., grandparents transferring assets to grandchildren)  The GST tax is in addition to estate taxes  The current GST tax exemption is $2 million 1 1 Effective January 1, 2006.

Benefits of a Dynasty Trust Allows you to take advantage of future tax laws  Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the GST tax was reduced to 50% in 2002, after which it will continue to decline 1% each year until it reaches 45% in  The GST tax will be repealed in Unless extended, however, the repeal provision will expire after Dec. 31, 2010, and the law in effect prior to the effective date of the act will apply.  If the GST tax exemption (currently $2 million and increasing to $3,500,000 in 2009) is properly allocated to contributions, trust assets will not be subject to the GST tax.

Estate Transfer of Assets Assets to be managed for successive generations GST Trust Using GST exemptions

Delaware Dynasty Trusts No state income tax on irrevocable trust’s accumulated earnings and capital gains if trust has no Delaware beneficiaries. Although the trust is still subject to any applicable federal income taxes, the absence of any state levies eliminates a drag on the growth of the assets in trust; State laws facilitate Dynasty Trusts and intergenerational wealth planning. In 1995, DE repealed the “Rule Against Perpetuities” therefore these trusts can protect assets from estate, generation skipping transfer, gift or inheritance taxes in perpetuity; Family interests are easier to align in Delaware. Income and remainder beneficiaries are often at odds when it comes to investing trust assets. But DE law allows grantors to establish a “total return unitrust”, or to convert an existing net income trust into a total return unitrust. This structure which bring together the interests of the income and remainder beneficiaries - pays out fixed percentage of trust assets to current beneficiaries; Premium on confidentiality. No court accountings are required nor is registration for inter vivos personal or charitable trusts

Delaware Dynasty Trusts Flexible rules provide enhanced control over trust investment management – DE supports the establishment of directed trusts, also known as administrative trusts. Directed trusts separate trust administrative responsibilities from trust investment responsibilities enabling the client/family members to retain control over trust investments. And protects a trustee from liability for following investment direction of another. A Delaware dynasty trust must have a substantial relationship to Delaware, which can be satisfied by non-Delaware residents naming a corporate entity with a Delaware situs as the trustee. Sophisticated court system in which Delaware’s trust cases are decided by the Court of Chancery, which also has jurisdiction over Delaware corporations.

Funding a Dynasty Trust Should only be funded with certain types of assets  Assets placed inside a dynasty trust should have tax-free growth potential so as not to incur an annual tax bill  Suitable choices to fund a dynasty trust may include: Non-dividend growth stocks Tax-free municipal bonds Discounted Family Limited Partnership (FLP) or LLC Interests Life insurance  Examples:  A tax-exempt annual gift of up to $12,000 ($24,000 per married couple)1 on behalf of each trust beneficiary can be used to pay for a life insurance policy that would provide a death benefit upon your or your spouse’s death.  A tax-exempt lifetime gift of $1 million per person or $2 million per couple allows your children and grandchildren to benefit without paying estate taxes on gains because appreciation from assets does not count toward your estate. 1 Effective January 1, 2006.

Setting up a Delaware Dynasty Trust Nexus needed connecting you to Delaware  Choosing a Trustee located in Delaware is the most common way to establish nexus Ideal for corporate trustee because of the long-term multiple generational aspects Many corporate trustees can serve as either full-service or administrative trustee, or as agent for an individual trustee providing:  Flexible and sophisticated investment management offerings and complete administration services (managing fiduciary risk and liability  Coordination the estate and trust settlement process  Oversight of beneficiary distributions  Work with special assets such as FLP’s or LLC’s and performing tax preparation and reporting

Example: Bob and Sue Jefferson and have a $5,000,000 estate. They have been making annual exclusion gifts to their child and grandchild. They have not used any of their estate tax credit amounts. Delaware Dynasty Trust

Example: The Jefferson’s decide to create a Dynasty Trust to leave a long-term legacy for their family. They: Transfer $1,000,000 in assets to an irrevocable trust Qualify the transfer for exclusion under GST rules Pay $ 0 in gift taxes under the applicable $1,000,000 exclusion amount (in 2007) Delaware Dynasty Trust

Transfer ToKeeps Asset Dynasty Trust In Estate GRANTOR (At age 65)$ 1,000,000 $ 1,000,000 Growth at 5% until death at age 90$ 3,386,355$ 3,386,355 Less 55% Estate Tax 0 $ 1,312,495* Next Generation (Child at age 60) value when property received $ 3,386,355$ 2,073,860 Growth at 5% until son’s death at age 85$ 11,467,400$ 7,022,826 Less 55% Estate Tax 0$ 3,312,554 Next Generation (Grandchild at age 55) value when property received$ 11,467,400$ 3,710,271 Growth at 5% until grandchild’s death at age 80$ 38,832,687$ 12,564,295 Less 55% Estate Tax 0$ 6,360,362 Next Generation (Great Grandchild at age 55) value when property received$ 38,832,687$ 6,203,933 Growth at 5% until great grandchild dies at age 80$131,501,261$ 21,008,719 Less 55% Estate Tax 0$ 11,004,795 Next Generation (Great Great Grandchild at age 55) value when received$131,501,267$ 10,003,923 Growth at 5% until death at age 80$445,309,945$ 33,876,834 Less 55% Estate Tax 0 $ 18,082,258 $445,309,945 $ 15,794,575 Since death is presumed to occur after 2010, this chart shows the impact of estate taxes in the event Congress does not extend the EGTRRA of 2001 (With top rate of 55% and exemption amount of $1M) Dynasty Trust: Potential Results

Benefits: The Jeffersons leave a very long-term legacy to their family: By the time their great-great grandchild dies, the trust value could be $445 million vs. $16 million if assets pass the “normal” way They will have preserved assets for their heirs for many years to come Spendthrift “Asset Protection” Delaware Dynasty Trust

In Summary Dynasty Trust Strategy  Protects your assets while establishing a clear method for their eventual distribution  Helps establish a line of defense against imprudent spenders, lawsuits, transfer taxes, creditors and the economic consequences of divorce in any generation  Can reduce your estate taxes and ensure that your wishes are carried out after your death  Simplifies the timing and transfer of assets to your named beneficiaries  Can be used to help avoid probate and keep the details of your estate out of the public record

L Total Merrill and Total Merrill design are service marks of Merrill Lynch & Co., Inc. The services that are described are offered by Merrill Lynch Trust Company, FSB, a federal savings bank. © 2005 Merrill Lynch, Pierce, Fenner & Smith Incorporated. Printed in the U.S.A. Member, Securities Investor Protection Corporation (SIPC) Code PM-1205 Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.