1. 1 Best Planning Opportunities in Today’s Low Interest Rate Environment © 2009 Robert S. Keebler, CPA, MST, DEP Virchow, Krause & Company, LLP All rights reserved

2. 2 Presented By: Robert S. Keebler, CPA MST, DEP Virchow, Krause and Company, LLP Phone: (920) 739–3345 E-Mail: rkeebler@virchowkrause.com

3. 3 Impending Change in U.S. Tax Policy We expect changes given Democratic party control of the Presidency, the House, and the Senate. Affluent taxpayers will most likely be affected to a greater extent under President-Elect Obama tax changes. –Expressed intention to maintain President Bush’s tax cuts except for taxpayers earning over $250,000 per year.

4. 4 Impending Change in U.S. Tax Policy Likely effect of tax policy change – especially since President-Elect Obama will be in office: –Increases in the Income Tax –Increases in the Capital Gains Tax –Near certainty that the Estate Tax will not be repealed in 2010

5. 5 Low Interest Rate Planning Due to low interest rates and a weak economy, today’s financial environment is advantageous for the transfer of property into a trust for one’s family. –Married couples with assets in excess of $7 million and/or any individual with assets in excess of $3.5 million should take aggressive steps to take advantage of the low interest rate environment.

6. 6 Lowest AFRs in recorded history NO BETTER TIME THAN NOW This may be a once in a lifetime opportunity for your clients, so do not let it pass them by. Talk to your local FEPG personnel to get a plan on how to present this information to your clients. Again, there is no better time than now, so do the right thing! © 2009 Virchow, Krause & Company, LLP. All rights reserved.

7. 7 CURRENT INTEREST RATES January 2009 Short-Term AFR0.81% Mid-Term AFR2.06% Long-Term AFR3.57% IRC Sec. 7520 Rate2.40%

8. 8 Low Interest Rate Planning Determine a client’s living expense needs and isolate “excess capital.” Transfer out excess capital utilizing unified credit, GRATs and sales to entities for the benefit of children, grandchildren and great grandchildren. –Also removes asset growth from estate –The most prevailing techniques that exist today are dynasty trusts, defective trusts sales, and grantor retained annuity trusts. –These strategies can be used in conjunction with the valuation adjustment strategy for an even more effective end result.

9. 9 GENERAL RECOMMENDATIONS Make full use of the Unified Credit during lifetime Transfer highly-appreciating assets to a Grantor Retained Annuity Trust (GRAT) Sell highly-appreciating assets to an Intentionally Defective Grantor Trust (IDGT)  Installment Note  Self-Canceling Installment Note (SCIN)

10. 10 DYNASTY TRUST DISTRIBUTION UPON GRANTOR’S DEATH Dynasty Trust Discretionary Distributions to Children for Life Discretionary Distributions to Children for Life Discretionary Distributions to Grandchildren for Life Discretionary Distributions to Grandchildren for Life Discretionary Distributions to Great-Grandchildren for Life Discretionary Distributions to Great-Grandchildren for Life Future Generations No transfer tax paid. Grantor / Parent Gift* Advantages Creditor protection Divorce protection Estate tax protection Direct descendent protection Spendthrift protection Consolidation of capital * Gift should take advantage of any remaining Unified Credit / GST exclusion remaining.

11. 11 DYNASTY TRUST ADVANTAGES OF AVOIDING GST TAX* * For sake of simplicity, it is assumed that the marginal estate tax rate at each generation’s death is 45%.

12. 12 DYNASTY TRUST ADVANTAGES  Takes maximum advantage of the applicable exclusion amount  Currently at $1,000,000  Takes maximum advantage of the one-time application of the $2,000,000 GSTT exemption  Appreciation of assets will be estate tax-free  Provides a layer of asset protection from the beneficiaries’ creditors  No transfer tax will be paid at the death of the grantor’s descendants  Provides flexibility  Future trustees can be given the discretion to make distributions as appropriate, given the circumstances that exist at the time the distributions are made  Grantor can use the trust to positively affect future behavior

13. 13 GRANTOR RETAINED ANNUITY TRUST (GRAT)

14. 14 Grantor / Parent GRAT Gift of Assets For gift tax purposes, the initial gift is based upon a calculation of the present value of the annuity stream. All growth in excess of the IRC §7520 rate inures to the beneficiaries, effectively freezing growth of assets to the IRC §7520 rate. The IRC Section 7520 rate for January 2009 is 2.4%. GRANTOR RETAINED ANNUITY TRUST STEP ONE: GIFT OF ASSETS

15. 15 Grantor / Parent IRS Gift Tax Payment The amount of the taxable gift is the value of the property transferred to the trust minus the present value of the annuity interest that the grantor retains. In valuing the lead interest, the IRS assumes that the trust assets produce a return equal to the IRC §7520 rate, effectively freezing growth of assets to the IRC §7520 rate. GRANTOR RETAINED ANNUITY TRUST STEP TWO: PAYMENT OF GIFT TAX Most likely will equal zero

16. 16 Grantor / Parent GRAT Annuity Payments GRANTOR RETAINED ANNUITY TRUST STEP THREE: ANNUITY PAYMENTS The GRAT must provide for payment of an annuity to the grantor not less frequently than annually. As cash flow may be insufficient to satisfy the GRAT annuity payments, in-kind distributions may have to be made to the grantor to satisfy the annuity payments. However, these in-kind distributions could be contributed to new GRATs to avoid estate inclusion of the in-kind distributions.

17. 17 Children GRAT At conclusion of GRAT term, remaining assets are transferred to children. At this point, no further tax is imposed. GRANTOR RETAINED ANNUITY TRUST STEP FOUR: PAYMENT TO BENEFICIARIES

18. 18 GRANTOR RETAINED ANNUITY TRUST EXAMPLE* TEN-YEAR TERM – 10% GROWTH Benefit: $11,065,678 Transferred to Beneficiaries Tax-Free * Assuming a $7,000,000 (after valuation adjustments) initial contribution

19. 19 GRANTOR RETAINED ANNUITY TRUST WHY GRAT WORKS – Difference Between Rates of Return Benefit: $4,692,065 Additional Wealth Transferred to Beneficiaries Tax-Free (of which $536,867 is due to taxes paid to grantor)

20. 20 GRANTOR RETAINED ANNUITY TRUST WHY GRAT WORKS – Valuation Adjustments Benefit: $6,373,605 Additional Wealth Transferred to Beneficiaries Tax-Free

21. 21 GRANTOR RETAINED ANNUITY TRUST WHY GRAT WORKS – Payment of Taxes by Grantor Benefit: $536,867 Additional Wealth Transferred to Beneficiaries Tax-Free

22. 22 GRANTOR RETAINED ANNUITY TRUST WHY GRAT WORKS – Summary

23. 23 GRANTOR RETAINED ANNUITY TRUST WHY GRAT WORKS Difference between actual rate of return and IRC §7520 rate Payment of trust income taxes by the grantor Valuation adjustments on assets transferred

24. 24 GRANTOR RETAINED ANNUITY TRUST ADDITIONAL GRAT FEATURE – 20% Increasing Payment Benefit: $872,333 Additional Wealth Transferred to Beneficiaries Tax-Free Under Treas. Reg. §25.2702-3(b)(1)(ii)(B), the annual GRAT payment may increase by up to 20% over the annuity payment from the previous year. Accordingly, by “back-end loading” the GRAT payments, more wealth is left to future generations.

25. 25 GRANTOR RETAINED ANNUITY TRUST ADVANTAGES  Annuity payments provide income stream to the grantor  Ability to make gifts of substantial amounts of property tax-free  Grantor pays income tax on trust income, leaving more assets in the GRAT for remainder beneficiaries  Reduces the taxable estate of the grantor  Valuation adjustments increase effectiveness of sale for estate tax purposes

26. 26 GRANTOR RETAINED ANNUITY TRUST DISADVANTAGES  If the grantor dies before the end of the GRAT term, the assets in the GRAT are included in the grantor’s estate  The remainder beneficiaries will have the same basis in the property transferred to the GRAT as the grantor had at the time the property was transferred (no step-up in basis)  Risk that rate of return will not exceed interest rate resulting in no assets being transferred to remainder beneficiaries

27. 27 SALE TO AN INTENTIONALLY DEFECTIVE GRANTOR TRUST (IDGT)

28. 28 Gift approximately 10% of total value that needs to be transferred to trust. This transfer will be a taxable gift that may require gift tax to be paid. The assets transferred, and the earnings on the assets transferred, will pay for future installment payments. Grantor / Parent IDGT Gift SALE TO AN IDGT STEP ONE: GIFT OF ASSETS

29. 29 SALE TO AN IDGT STEP TWO: SALE OF ASSETS The remaining assets are transferred to the IDGT in exchange for an installment note payable. Note Payable Grantor / Parent IDGT Sale

30. 30 Annual installment payments are made from the IDGT to the seller/grantor. These may include interest and principal or just interest with a balloon payment due at the end of the term. SALE TO AN IDGT STEP THREE: INSTALLMENT PAYMENTS Installment Payment(s) Grantor / Parent IDGT

31. 31 SALE TO AN IDGT EXAMPLE* TEN-YEAR TERM – 10% GROWTH Benefit: $13,515,513 Transferred to Beneficiaries Tax-Free * Assuming a $7,000,000 (after valuation adjustments) interest only, balloon payment feature installment note with a 4.86% annual interest rate (long-term AFR)

32. 32 SALE TO AN IDGT WHY SALE TO AN IDGT WORKS – Difference Between Rates of Return Benefit: $8,191,836 Additional Wealth Transferred to Beneficiaries Tax-Free (of which $5,297,500 is due to taxes paid to grantor)

33. 33 Benefit: $5,323,677 Additional Wealth Transferred to Beneficiaries Tax-Free SALE TO AN IDGT WHY SALE TO AN IDGT WORKS – Valuation Adjustments

34. 34 Benefit: $5,297,500 Additional Wealth Transferred to Beneficiaries Tax-Free SALE TO AN IDGT WHY SALE TO AN IDGT WORKS – Payment of Taxes by Grantor

35. 35 SALE TO AN IDGT WHY SALE TO AN IDGT WORKS – Summary

36. 36 SALE TO AN IDGT WHY A SALE TO AN IDGT WORKS Difference between actual rate of return and AFR Payment of trust income taxes by the grantor Valuation adjustments on assets sold Back end-loading of installment payments

37. 37 Trust income is taxed to the seller/grantor Trust assets sold are not in seller/grantor’s estate for estate tax purposes Payments of income tax on behalf of the trust should not be an additional gift to the trust SALE TO AN IDGT INTENTIONALLY DEFECTIVE GRANTOR TRUST

38. 38 Freezes value of appreciation on assets sold in the seller/grantor’s taxable estate at the low interest rate on the installment note payable No capital gains tax due on installment sale Interest income on installment note is not taxable to the seller/grantor Grantor pays income tax on trust income, leaving more assets in the IDGT for remainder beneficiaries Valuation adjustments increase effectiveness of sale for estate tax purposes SALE TO AN IDGT ADVANTAGES

39. 39 SALE TO AN IDGT DISADVANTAGES Estate inclusion of note if seller/grantor dies during term of installment note No step-up in basis at seller/grantor’s death Trust income taxable to seller/grantor during his/her life could cause a cash flow problem if there is not sufficient income earned by the seller/grantor Possible gift and estate tax exposure if insufficient assets are used to fund the trust Possible taxable gift for amount of loan Possible taxable estate inclusion under Karmazin (retained life estate)

40. 40 SALE TO AN IDGT USING A SELF-CANCELING INSTALLMENT NOTE (SCIN)

41. 41 Transaction similar to an ordinary installment sale to an IDGT Cancellation-at-death feature added to note Premium must be paid, either in the form of additional principal or increased interest rate to compensate for the cancellation-at- death feature OBJECTIVE: Reduction of estate tax if premature death occurs SALE TO AN IDGT USING A SCIN

42. 42 Hedge SCIN – A SCIN designed to hedge against the possibility of death during a bet- to-live strategy (taxable gifts, GRAT, etc…) Bridge SCIN SM – A SCIN designed to take advantage of the increases in the Unified Credit Mortality SCIN – A SCIN designed for those who have a high likelihood of dying within a short period of time SALE TO AN IDGT USING A SCIN THREE TYPES OF SCINs

43. 43 SALE TO AN IDGT USING A SCIN SAMPLE OF SCIN RISK PREMIUMS*

44. 44 Benefit: $4,759,014 Transferred to Beneficiaries Tax-Free SALE TO AN IDGT USING A SCIN EXAMPLE* TEN-YEAR TERM – 10% GROWTH / 78 YEAR-OLD SELLER * Assuming a $7,000,000 (after valuation adjustments) interest only, balloon payment feature installment note with a 12.709% annual interest rate (4.86% long-term AFR + 7.849% risk premium )

45. 45 Future appreciation above the note interest rate, including the risk premium, is removed from the seller/grantor’s estate Asset not included in seller/grantor’s estate in case of premature death during SCIN term Value of assets transferred out greatly exceeds value of payments coming back into the estate of the seller/grantor if he/she passes away prematurely No gain or loss on sale Trust income taxable to seller/grantor allows for greater appreciation to inure to future generations, thereby creating an additional tax-free gift Valuation adjustments increase effectiveness of sale for estate tax purposes SALE TO AN IDGT USING A SCIN ADVANTAGES

46. 46 Complex calculation of risk premium Possible gift tax exposure if SCIN risk premium is inadequate Possible gift tax exposure if insufficient assets areused to fund the trust Possible taxable estate inclusion under Karmazin (retained life estate) No step-up in basis at seller/grantor’s death Possible acceleration of capital gain at seller/grantor’s death Trust income taxable to seller/grantor during his/her life could cause a cash flow problem if there is not sufficient income earned by the seller/grantor Possible upstream transfer to seller/grantor if he/she survives term of note (or lives a significant portion of the term and/or is relatively old) SALE TO AN IDGT USING A SCIN DISADVANTAGES

47. 47 SALE TO AN IDGT USING A SCIN WHY A SALE TO AN IDGT USING A SCIN WORKS Difference between actual rate of return and risk-adjusted AFR Payment of trust income taxes by the grantor Valuation adjustments on assets sold Back end-loading of installment payments Cancellation-at-death feature

48. 48 Planning Tools Which May Be Eliminated Under a New Administration Dynasty Trusts Valuation Adjustment Planning –Utilizing GRATs and IDGTs Low Interest Rate Planning –Utilizing Gifting, Unified Credit, GRATs and IDGTs

49. 49 Dynasty Trusts Tax law currently allows a taxpayer to create a trust that will exist in perpetuity. –One of the most powerful estate planning strategies available today  may be disallowed under a new administration. –Taxpayer can transfer up to $7 million into a trust in the current year and the assets of the trust will never be subject to federal estate tax at any point in the future. The income from the trust could be distributed to children, grandchildren, and future generations on an estate tax-free basis. –Wisconsin, South Dakota, Delaware and a few other states currently have no rule against perpetuities, thus allowing the establishment of dynasty trusts.

50. 50 Dynasty Trusts 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). –This is known as the generation-skipping transfer (GST) tax. –Notwithstanding, a grantor is allowed a lifetime GST exemption on the first $2,000,000 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.

51. 51 Dynasty Trust Discretionary Distributions to Children for Life Discretionary Distributions to Children for Life Discretionary Distributions to Grandchildren for Life Discretionary Distributions to Grandchildren for Life Discretionary Distributions to Great-Grandchildren for Life Discretionary Distributions to Great-Grandchildren for Life Future Generations No transfer tax paid. Joe Smith Gift* Advantages Creditor protection Divorce protection Estate tax protection Direct descendent protection Spendthrift protection Consolidation of capital * Gift should take advantage of any remaining lifetime gift exclusion and lifetime GST exclusion Dynasty Trust - Overview

52. 52 Dynasty Trust - Example

53. 53 Valuation Adjustment Planning Discounts for minority interests and marketability are provided for in the Code. Not uncommon to see 25-40% combined discounts when the correct conditions are present. These discounts could be on the “chopping block” for a new administration.

54. 54 Valuation Adjustment Planning - Example Mike and Molly are husband and wife. They own MM Co., which is valued at $150 million. MM Co. is controlled 50% by Mike and 50% by Molly. –For estate tax purposes, when applicable discount are used, MM Co. would have a value of only $100 million (i.e., $150,000,000 * 33.33% discount = $50,000,000). $50,000,000 effectively removed from Mike and Molly’s taxable estates Note - this is a simplified example

55. 55 Valuation Adjustment Planning A client with an estate in excess of $7 million should be “locking in” discounts today. Sell and/or gift property to trusts including: –Grantor Retained Annuity Trusts (GRATs) and –Intentionally Defective Grantor Trusts (IDGTs)

56. 56 This written communication, if it contains tax advice, is not intended to be issued as a “reliance opinion”, as defined under Section 10.35 of Circular 230, so as to avoid any of the penalties that could be assessed under the Internal Revenue Code or its applicable Treasury Regulations. Accordingly, any information contained herein cannot be relied upon for purposes of avoiding any of the penalties imposed by the Internal Revenue Code or its applicable Treasury Regulations. In addition to the above, it is understood by all recipients that this written communication cannot be used to promote and/or market any tax arrangement, plan and/or strategy that may exist in this document. To the extent that this written communication does present any tax arrangement, plan and/or strategy, it is further understood by all recipients that the confidentiality of the tax aspects of this written communication cannot be limited or restricted by the preparer with regard to the distribution of this document by the recipient. However, it should be noted that this confidentiality restriction in no way releases Virchow, Krause & Company, LLP or its preparer from its duty of confidentiality imposed by the AICPA Code of Professional Conduct or state codes of professional conduct. Finally, it is understood by all recipients that neither Virchow, Krause & Company, LLP nor its preparer have agreed to any refund of fees and /or contingent fee arrangement associated with the tax results of any arrangement, plan and/or strategy that my be contained within this written communication. Disclaimer

57. 57 THANK YOU To be added to our IRA update newsletter, please email rkeebler@virchowkrause.com