WithumSmith+Brown, PC Certified Public Accountants and ConsultantsNew Jersey. New York. Pennsylvania. Maryland. Florida. Coloradow i t h u m . c o m

PRESENTED BY EDWARD MENDLOWITZ, CPA, WS+B PARTNER • OCTOBER 30, 2012

ACCOUNTING TODAY’SGROWTH & PROFITABILITY SUMMITBOCA RATON, FL

57 Ways to Assist Clients in Estate Planning October 30, 2012 Presented by Edward Mendlowitz, CPA Partner WithumSmith+Brown, PC, CPAs emendlowitz@withum.com www.withum.com www.edwardmendlowitz.com Tel: 732 964-9329 Contents Page

• 3 Reasons for Estate Planning - chart 1

• True/False questions 2

• 57 Methods a CPA can Assist in a Client’s Estate Planning 4

• Long form engagement letter 8

• Short form engagement letter 15

• Document request 17

• Helping a Business Client in their Estate Planning 19

• Gift Tax Compared to Estate Tax 22

• Portability vs. Credit Shelter Trust Illustration 23

• Valuation Discount Illustration 24

• Strategy Using Discounts: Installment Sale to Grantor Trust 25

• George Washington’s Estate Plan 26

• Contact info 27

• Reprint of October 2012 Blogs

• Chart showing 2012 and currently legislated 2013 tax rates

Edward Mendlowitz - CPA/ABV/CFF/PFS, CGMA, CITP Partner, WithumSmith+Brown Ed is a partner in WithumSmith+Brown and is a member of the AICPA, NYSSCPA and NJCSPA and is accredited by the AICPA in business valuation, is certified in financial forensics and as a personal financial specialist. Ed is also admitted to practice before the United States Tax Court and has testified as an expert witness in federal and state court regarding business valuations.

Ed serves on the NYSSCPA Estate Planning Committee, and was chairman of the committee that planned the NYSSCPA’s 100th Anniversary. The author of 19 books, Ed has also written hundreds of articles for business and professional journals and newsletters. He is the contributing editor to the Practitioners Publishing Company’s 1998/1999 706/709 Deskbook, the AICPA 2004and 2009 editions of the Management of an Accounting Practice Handbook, various editions including the first (1982) and most recent (2009) edition of the Corporate Controllers’ Handbook, 2012 edition of Wiley’s Handbook of Budgeting, and is on the editorial board of Bottom Line/Personal newsletter and is an editorial adviser on business valuation and litigation support for the Journal of Accountancy. He is the recipient of the Lawler Award for the best article published during 2001 in the Journal of Accountancy. Ed also has taught courses for 11 years in the MBA program at Fairleigh Dickinson University. Ed can be reached at emendlowitz@withum.com or 732 964-9329. His personal website is www.edwardmendlowitz.com. Blog site: www.partners-network.com

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3 Reasons for Estate Planning - chart I show this chart at the start of my estate planning consultations. I ask the client if there have any other reasons and I will add it to the list.

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True/False questions _____ The Lawyer is the primary person that does estate planning

_____ The CPA is used only when numbers need to be crunched

_____ CPAs should be the first person a client uses for estate planning

_____ The CPA’s fee is always too high _____ Clients that see their CPA all the time should have estate planning done

as part of the work they do

Suggested answers You can supply your own responses. These are mine. Question 1 False. The lawyer is an essential part of the estate planning process, as is the CPA. An attorney is necessary to draw up the documents and make sure everything that needs to be accomplished is provided for and that there are no weaknesses in the agreements, wills and trusts. However, estate planning is a process that involves more than the agreements. It requires meetings, financial calculations, projections for future cash flow, discussions about the financial security of the client and in many cases for their families, making sure that the plan permits everything the client wants without unintended consequences, and developing methods of fulfilling the clients’ desires. Estate planning doesn’t just deal with taxes or money, but with the entire goals and plans for the client’s family. In many situations the CPA should be the primary person that not only does the estate planning, but also assists the client in assembling the team which definitely includes an attorney, but also might include financial planners, investment advisors, insurance agents, valuation experts and psychologists and family counselors. In some cases it could also include relatives or key people working in the client’s business or managing their assets. Question 2 False. A CPA should be used when numbers need to be run. However, a CPA should be involved in the beginning stages when the planning starts or the client conceives of their ideas of how they want their affairs settled. The first numbers that need to be calculated is how much funds the client needs to provide the proper degree of security for them and their spouses for the rest of their lives. Consideration needs to be given to the amount of assistance necessary to be provided to client’s children or grandchildren and the varying degrees for each one; and the cash flow and asset

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reduction consequences of gifts made to either reduce estate taxes or provide current cash flow to those requiring assistance. Other things the CPA will do is assist the client in assembling their information; examine all designation of beneficiary forms, help determine which assets are necessary to be retained, valuations of business and real estate interests and suggested ways of leaving funds to beneficiaries in shaky marriages, deep in personal debt, or those that are disabled or require special care. An important role of the CPA is to help determine the basis of assets that might be chosen for gift giving and the flow of funds to beneficiaries based on the totality of assets they will inherit. Also, the selection of assets that can be left to charities and methods of assuring such gifts, and advice regarding concentrations of assets by the client, and the potential for income taxation on assets left to individual beneficiaries. Models can also be drawn up illustrating the ways to provide funds to minor children’s guardians. Plans can be formulated to reconfigure assets in different types of entities and how cash would flow into and from these entities. Finally, but not the least, the CPA can present models of various ways gifts can be made what elements of control, tax challenge exposure and valuation adjustments can ensue. Question 3 True. Someone needs to be first. Usually the CPA would be the initiator of the need, or the recipient of the client’s first call. CPAs have ongoing relationships with their clients. This is so even if it is once a year – it can be once a year, plus a few occasional phone calls over a dozen or score of years. Question 4 False. Very few CPAs retire young with insanely amounts of money. CPAs work hard, are dearly concerned about their clients, and focus intensely on their clients’ issues, problems and concerns. Being a CPA requires 24/7 concern, if not telephone and email availability. If the fees were that high, they would not be working so hard. Further, the fees are dwarfed when measured against the potential family, financial, tax and security providing benefits. Fees are also a one time payment while the benefits can last long beyond the client’s lifetime. Question 5 False. Estate and family wealth planning is a separate function and is not usually part of any other service or project. Estate planning requires concentrated thought, intense deliberation and extended time and research that can only be done as a separate engagement. It is also not an ongoing project, but is done once or possibly twice for a client over a long period of time. Once done in a comprehensive manner, annual or biannual reviews might be in order, but that too is a separate engagement with its own fee arrangement.

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57 Methods a CPA Can Assist in a Client’s Estate Planning

1. Prepares models and calculations of potential estate taxes including State taxes

2. Prepares models of the financial consequences of not having affairs in order and not having the proper documents such as a will

3. Explains the importance of choosing an executor, trustees and guardians and their respective roles, responsibilities and fees, and who will administer over various asset groupings

4. Consider what-if scenarios including effect of disclaimers and gifting through powers of attorney

5. Considers in the calculations of how the estate taxes will be paid, and by whom

6. Examines state of residency where there is non commercial real estate owned in more than one state; and makes suggestions as to the more appropriate state to be domiciled in for estate and income tax purposes; and if a domicile is to be changed, will construct a plan on how to proceed

7. If real estate is owned in a state other than the state of residency, the CPA will suggest ways to intangibilize that property so it will not be subject to probate in the state the property is located in

8. CPA usually takes a full client - holistic approach - including business considerations and succession and valuation planning, family wealth security, financial planning, estate planning, liquidity planning, asset protection planning, cash flow from remaining assets and reducing the potential for family disputes flowing from certain distribution choices

9. Prepares personal financial statement. Suggests ways to apportion assets between spouses and why it should be done, and offers alternative actions

10. Assists in assembling client information

11. Examines all designation of beneficiary forms client has previously filled out and coordinates with entire estate plan, distributions to beneficiaries and tax payments

12. Examines all trusts client has previously executed and determines present viability and implementation and funding, and how they are integrated into estate plan

13. Considers potential for client establishing trusts to protect family assets, shield beneficiaries from creditors, facilitate probate, pass residences, transfer selected assets to reduce eventual estate taxes

14. Discusses the operation of trusts including their flexibility, rigidity and complexity; the proper jurisdiction to establish them in; how funds are accumulated in them; the methods distributions can be made from them; and how they are taxed

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15. Offers suggestions to assist client in financial planning for their possible future incapacity

16. Assists in the preparation of a detailed listing of potential beneficiaries

17. Offers guidance for bequests to provide for beneficiaries that are disabled or handicapped, or otherwise unable to fully care for themselves and the potential for supplemental needs trusts

18. Suggests ways to leave funds to children who are in a “shaky” marriage

19. Suggests ways to leave funds to beneficiaries that have substantial liabilities or who might become subject to such liabilities

20. Suggests planning methods for funds to be used for a beneficiary’s tuition or who has high uncovered by insurance medical costs

21. Offers guidance on beneficiaries who are not U.S. citizens including spouses

22. Advises on ways to avoid or reduce possible family conflicts

23. Calculates flow of bequests based on existing wills, designations of beneficiaries and other documents

24. Considers the advantages and viability of life time gifts and transfers

25. Calculates the tax effect and basis to the donees of the assets transferred by gift and offers suggestions, based upon a review of all of the client’s assets, of optimal ways to make gifts

26. Calculates cash flow to clients during their lives from their assets – both before and after gifting

27. Assesses need to reduce exposure to large concentrated investments and offers income tax planning, cash flow and lower risk suggestions and alternatives

28. Assesses the need for life insurance; and if needed how it should be owned and funded, its costs, and the types of or combinations of policies that will most appropriately suit the client’s needs

29. Offers an overview whether asset protection planning should be a consideration, and if so, offers initial comments

30. Considers estate tax effect for foreign nationals investing in U.S. businesses and real estate – and can offer income tax saving suggestions and reporting and withholding considerations

31. Offers methods of making charitable bequests, or even life time contributions, and which assets would be more appropriate to donate and the timing of such contributions

32. Calculates the potential income taxes and cash flow to beneficiaries from tax deferred accounts and assets such as IRAs, pensions, annuities, U.S. Savings Bonds and any installment notes receivable

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33. Calculates the taxes on earned income that might not be paid until after death and the resulting net cash flow to beneficiary

34. Calculates the eventual Itemized deduction for individuals inheriting “income in respect of a decedent” assets and offers suggestions of effect on various classes of beneficiaries

35. Suggests methods of distributions of assets to heirs and which assets would be better for which heirs

36. Highlights methods to leave a business to children that work in the business and suggests appropriate offsets to children that are not involved in the business

37. Makes sure valuations and valuation clauses and provisions in business buy-sell agreements are reasonable and will meet IRS requirements and scrutiny. If no buy-sell agreement, suggests why and how to create and fund it

38. Makes sure the business buy-sell agreements are done in the best income tax manner, e.g. buy-sell or cross purchase

39. If life insurance is used to fund a buy-sell agreement, suggests ways it should be owned to achieve greatest income tax benefit for survivor.

40. Helps in identifying ways to realize greatest value of a business upon death or incapacity of the client.

41. Assists in identifying and preparing business successors

42. Offers alternative transfer plans where there is a need for succession planning including tax considerations

43. Presents plans for forming entities and titling new ventures to minimize possible future estate taxes

44. Can perform needed business valuations if requested by the client

45. Follow up to make sure plans are implemented after all the documents are signed

46. Makes sure that accounts are properly titled and that funds are where they should be based on estate plan

47. Reviews implementation on a regular basis

48. Prepares tax returns based on the estate planning such as partnership, trust and gift tax returns

49. Tax compliance including calendars and returns that do not need to be filed, issuance of federal tax identification numbers, estimated tax payments, possible issuance and receipt of Crummey letters and preparation of annual gift tax returns

50. Can monitor and bring to client’s attention changes in tax laws that affect client

51. Brings to clients attention the current tax laws and the juxtaposition with probable changes as of January 1, 2013

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52. Discusses and illustrates the need for credit shelter trust planning, disclaimer planning and portability potential and whether or not portability should be relied on

53. Suggests ways to configure asset ownership between spouses and why it should be done in an era of portability

54. Is alert and sensitive to client’s changing circumstances

55. Is available post mortem to advise about disclaimers, choice of assets to be distributed to various beneficiaries, ability for making elections and preservation of rights to all available elections

56. Makes suggestions of other professionals that are needed to be added to the team such as an attorney, financial planner, investment manager, trust company, appraiser, life insurance agent, bankers, investment bankers, and realtors

57. The CPA can become the manager of the entire estate planning process.

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Long Form Engagement Letter Date Dear This letter sets forth a proposal of the terms and objectives of our being engaged to provide estate planning services to you. The scope and nature of the services to be provided are as follows:

Introduction • Most people don’t like to confront their mortality so they put off, delay or ignore

estate planning. • People who plan and provide for their death feel more comfortable and secure. • Families of someone that died who planned properly and thoughtfully have fewer

problems than families of someone who did not.

• Planning enables having your affairs settled the way you want without unplanned or unintended consequences.

Purposes of estate planning Estate planning, also referred to as family wealth transfer planning, is a process that calls for a person arranging their affairs in an orderly concerted manner and includes the following:

• To devise a plan that will provide for the financial security and comfort of the testator for the balance of their life. This is not solely a plan of what is to occur after a death.

• To have the testator retain as much control and enjoyment as possible over their

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assets until their death.

• Keeps the family assets in the family; and out of the hands of creditors of family members and divorced spouses of family members if it applies. Figuring out what the estate taxes and administration costs will be and trying to minimize them and determine how they will be paid.

• Estimating the time probate takes; and to try to minimize unnecessary delays of

probate, administration of the assets and costs.

• Projecting the cash flow to the beneficiaries during the estate administration period and after the estate is settled.

• Helping the testator make the proper choices of bequests to their various

beneficiaries including charities, if so desired.

• Helping the testator arrange their affairs so that it would be clear what state they are residents of, if there is a chance that more than one state might make a claim.

• Arranging a plan of contingency for the operation, and sale of any businesses,

and other non-liquid assets.

• Determining the applicability of trusts and arranging for their creation and funding.

• Determining the scope, if any, of liabilities the estate will have including notes

signed and guaranteed, previous divorce settlements, prenuptial agreements, support commitments for children born out of wedlock, buy sell arrangements and outstanding tax audits and liabilities.

• Determining the effect of income taxes on some of the distributions and

bequests, if applicable.

• Helping put order into a person’s affairs

Services we will perform Review and Evaluation

1. We will find out from you what your goals are and if necessary, will help you clearly articulate those goals.

2. We will determine the amount of your projected estate assets, the estimated tax on your estate, and what your current cash flow income and expenses are

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expected to be. 3. We will also make the same projections for a period some time in the future. A

major concern will be your comfort and the “security” of your future cash flow needs.

4. We will also calculate the probable estate asset distribution to your intended

heirs.

5. We will determine if there are sufficient assets in the appropriate form and accounts to accomplish what you say you would like to accomplish.

6. We will review all your assets to determine if they are properly titled to facilitate

transfers after you pass away while you maintain proper control. If they aren’t we will make suggestions on how to change them to meet your goals.

7. We will review your current documents – your will, any trusts and life insurance

policies, and separately beneficiary designated assets – and flow chart the coordinated [with your will] dispositions enumerated in them.

8. We will review and discuss with you the assets that should be left to different types of beneficiaries. Different decisions should be made for individuals in your generation or one lower, those that are in a second or more generation younger than you and charities. We will also suggest the manner in which the assets should be left.

9. We will review with you basic estate disposition and estate tax reduction

techniques and make suggestions on how they can apply to you and can be interfaced your goals.

10. We will also indicate ways to use any “excess” cash flow to save estate taxes.

Estate Planning Recommendations

11. We will suggest specific estate tax savings alternatives and plans and discuss their application to you, and your desires.

12. We will develop ideas that we think you would be comfortable with and determine

which estate tax reduction ideas we think you would want to proceed with.

13. We will then work those out with numbers regarding the estate tax savings and cash flow implications.

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Written Estate Plan

14. If applicable, we will put everything discussed and decided upon by you in a written report expressing the ways and means of achieving what you decided you would like to do.

15. We will prepare a road map for you, your attorney, accountant and other

advisors, if any to follow in their discussions, analysis, recommendations and document drafting.

16. This written report will be reviewed thoroughly with you to make sure it expresses

your views and wishes. Only when you are completely satisfied will we give you final copies to distribute.

Review of Documents and Attorney Recommendations

17. We will review any recommendations made by your attorney or others you consult.

18. We will also review the legal documents drafted to see that they meet with the

objectives you said you wanted to achieve. We will, of course, be available to discuss any thoughts or questions you may have.

Implementation

19. We will assist you in implementing the plan in any way you want. We will be available by telephone or in person, to answer questions, to assist you or your other advisers to take necessary actions, and to make recommendations regarding these matters.

Fee

20. Our fees are based upon the time expended at the appropriate rates for the people involved. I will probably spend the most time, with an assistant working on a lot of the financial modeling. Our rates for this project will range from $______ per hour for the assistant to $______ for me. We will also have review people and others working on different aspects of the projection. At this point we cannot provide you with an estimate of the time, which can be done after an initial consultation to determine the scope of the work needed by you.

21. We suggest an initial consultation which will consist of two meetings of about an hour and a half each. To for these meetings to be effective, we would need to review copies of all your relevant information including your current will, any

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trusts, copies of all designations of beneficiaries, your tax returns for the last three years, your most recent bank and brokerage statements, details of annuities and life insurance and anything else you think we should see. The fee for these two meetings and our review will be $_______ payable $_______ when we are engaged and the balance after the second meeting.

22. At the conclusion of the second meeting we will suggest a course of action and estimate the fees.

Post-Completion Follow-ups

23. We recommend that you have biannual reviews or a revisiting of your situation to see if there should be any changes in your plan as measured by your then present situation. We should review how any changes in the tax laws would affect you. We should look to see if there have been any changes in your or your family’s situation, thinking, needs or desires, or how any changes in the economy might interface with your previous planning. There would be additional fees for these services which will be discussed at that time.

Limitation on Scope of Services

24. These services are not designed, and should not be relied upon, as a substitute for your own judgment nor are they meant to mitigate the necessity of an ongoing review. These are not investment advisory services. These services are designed to supplement your own planning and analysis and aid you in fulfilling your estate and financial planning objectives. In addition, these services are not designed to discover fraud, irregularities, or misrepresentations made in materials provided to us.

Additional Professionals Needed

25. Please note that after we are completed with our work, you will need to obtain the services of an attorney to review our findings, add their comments and input, discuss the legal ramifications of the estate plan, and to draft all legal documents such as your will, possible trusts, and any other agreements and contracts.

26. Depending on the plan, you may need to engage the services of appraisers to

value real estate and/or other assets and such other entities that might be established as part of the plan. Note that we also perform valuation services and will quote our fees for such services if they are needed, but you are under no obligation to use us for the valuations to implement this part of your plan.

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27. Please note that these services will result in additional costs to you for those professionals.

Executive Summary of the Initial Stage of the Estate Planning Process as Covered in this Letter The initial two meetings will determine if your affairs are organized in a manner that will enable your wishes to be accomplished. If they are, then the next stage will be to determine if you want to proceed with planning that will increase the inheritances by decreasing the eventual estate taxes. If you do not want to proceed, then there will be no further work and you can have the comfort that your affairs are in order. If your wishes will not be able to be accomplished by the way your affairs are organized, we will show you why and offer suggestions of changes that will enable your wishes to be achieved. Before the first meeting we will review the information you provided in order to have a meaningful discussion. Before the second meeting we will review further information we might have requested and will prepare some projections in order to illustrate the points we want to discuss and further develop. At the end of the second meeting we will discuss additional ways that estate taxes can be saved and indicate a course to follow and our fees. Considering the size of your assets and the eventual bequests to your heirs there will be significant value to our services, either to reassure you that your affairs are in order; or to present a manner to put them in order. Further benefits can be accomplished with estate tax reduction plans we will suggest and illustrate with models.

Conclusion If this letter correctly sets forth your understanding of the terms and objectives of the engagement, please so indicate by signing in the space provided below and returning a copy to us.

Cordially, ___________________________

The above letter sets forth my understanding of the terms and objectives of the engagement to provide estate planning services.

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Signed_________________________________

Date___________________________________

I decline to engage you for such services. Signed_________________________________

Date___________________________________

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Short Form Engagement Letter Date Dear We are proposing that you have an estate planning consultation with us. The consultation will consist of two meetings of about 1½ hours each. In order for us to prepare for each meeting, we will need to see certain documents you have that will be reviewed before the meetings. At the meetings we will discuss:

• your financial situation; • what you expect to accomplish by the planning; • what you would like achieved with your assets after your demise; • the approximate amount of your eventual estate taxes and what can be done to

reduce the taxes so that a greater portion of your wealth would pass to your heirs;

• an integration of your plan with the current estate tax law; • charity bequest planning (if you so desire); • a plan to liquidate your assets; • a coordination of your estate plan with any existing obligations; • a method to distribute your assets to your heirs; • a review of your current will and trusts and other documents; • an analysis to determine if you have your affairs arranged in a manner that would

facilitate what you want done; • and that your affairs are in order. • We will also discuss the approximate costs to your estate, the probate process,

and the time it will take to make distributions to your beneficiaries. The meetings will take place at your convenience and we will make many suggestions, some which can be done easily and immediately by you and some that would need a lot more work and that can be quite involved. For the latter, we will provide you with a proposal of the time and cost to you of the additional work if you want to proceed further. Note that when we are finished with our meetings you will possibly need to meet with an attorney to draft new documents based on our planning.

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Our fee for the consultation including the meetings, our advance review of your information and the financial modeling, projections and illustrations that arise out of our review will be $ payable $ when we are engaged and the balance after the second meeting. If it is determined that you do not need, or want, a second meeting, then our consultation will end and you will have no further cost or obligation to continue. If want to proceed please initial below in the space provided and return a copy to us along with a check for $ . We will then send you a list of what information we would like to receive before our first meeting. Cordially, Edward Mendlowitz, CPA I would like to proceed as discussed in this letter._________(initial)_______(date) I decline these services____________________(signature) _______(date)

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Document request Client’s name_________________________ Date_______________ This is a general all inclusive list – provide what you think is applicable. Items like policies or multi page documents don’t need to be copied - I will look at them when I am with client. I do not want any original documents. The most applicable items are: ___ ___ ___ ___ ___ ___

Item

1. Bring copies of your tax returns for last two years for me to look at – I don’t need to keep copies. Also bring copies of W-2 forms, if any

2. If you have any mortgage or equity loans on your residence bring details such as term and interest rate. If you have a home equity line of credit available (whether or not you drew against it) and what are the terms.

3. Details of any other debts including credit cards. Please bring the last statement for each account.

4. Ages of your children and grandchildren, and their general financial situation.

5. Information regarding anyone you are supporting, outside of those living in your house.

6. Complete details of the any annuities you have – including what you make annually from it – what the investments inside the annuity are– what you are guaranteed – the penalty for terminating the annuity – and how long you had it – and the title of the account – is it within an IRA or other tax sheltered retirement account.

7. Need designation of beneficiary forms that have been provided to the insurance companies for any of these accounts

8. Bring the last bank and brokerage statements of each account you have, including dividend reinvestment plans. The statements should all be with the same closing date. For example if the last statements you have from most of your accounts are May 31, and one account is dated March 31 – then bring all the March 31 statements. Bring subsequent statements if major changes have occurred.

9. Details of any pension income you are receiving or will receive. What the survivor benefits are.

10. Bring the last bank or brokerage statement of each retirement plan, IRA, Pension, 401k, and 403b account you have, also with the same closing date.

11. Need designation of beneficiary forms that have been provided to the custodians, bank, brokerage firms or insurance companies

12. If you have any other cash, or stocks or bonds, please bring a listing, or the last bank or brokerage account statement for them

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13. If you have a concentrated stock position, i.e. more than 15% of your total financial assets in one company, please bring a schedule of the cost of those shares by number of shares, date purchased and amount.

14. Bring a copy of your current will for me peruse.

15. Please identify each beneficiary named in the will and their age

16. Bring copies of any trusts you established, or are a beneficiary of, or are a trustee.

17. Bring copies of any documents relating to estates you are a beneficiary of.

18. Details of any life insurance you or your spouse has – including face, premiums, ownership and beneficiaries

19. Copies of any financial agreements such as a divorce or marital separation agreement, prenuptial agreement, or employment contracts.

20. Your annual personal household and cash expenditures – a round ball park number is all I need.

21. Details or any real estate you own – original cost, approximate additions, major repairs and renovations, and present value.

22. If you own a business, please bring the latest three years financial statements and tax returns; and any stockholders, partners, members’ agreements including buy-sell. Also bring a copy of any business appraisals during last ten years.

23. Also bring details of any business owned life insurance on you or partners, members or fellow stockholders.

24. Details of any other assets of value you have such as jewelry and art. If the items are covered by insurance, please bring the policies.

25. Details of any accounts that are in joint name or “in trust for” or any other format other than just your name.

26. Any designation of beneficiary forms for any accounts not mentioned above.

27. Would like to see copies of any power of attorney forms you executed

28. Anything else you deem important or would like to discuss

29. If you have a personal financial statement, bring a copy.

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Helping a Business Client in their Estate Planning

Buy sell agreements What if’s - e.g. client dropping dead Family security Heading off family fights Rewarding and retaining loyal employees Keeping key employees that client doesn’t want to have to replace Increasing value of business Purposes of owning a business

Buy sell agreement consulting

Any client with at least two owners must have a buy/sell agreement A buy/sell agreement is a will for a business Get started by asking them what they think will happen if one of them dies,

becomes temporarily or permanently disabled, wants to leave the business, gets divorced…

Tell them what to expect, especially how their heirs will react to advice from their lawyers and accountants to “protect” their interests

What if the client drops dead or becomes incapacitated

For one owner businesses, the client should have a “will” for the business The business ownership should be put into a living trust – explain the probate

process How every person involved in the business will be affected – employees,

customers, vendors and consultants, family members working in business, and spouse and dependents

How and when will value be captured or realized

Family security

How your client’s family will be affected by the loss of the business The dependency of the family on the business The different interests of family members in the business – would fighting erupt? Wealth outside the business

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Heading off family fights

Recurring theme where business has family members working in business Also an issue if no one works in business And major issue where some work and some don’t work in business How much to leave to family How to provide for spouse and kids What could be done to reduce fighting to a minimum and possibly eliminate it

altogether Rewarding and retaining loyal employees

Does the client feel any responsibility to loyal long-term employees? Should there be any responsibility? Ways to provide for employees What happens to employees if business is liquidated? What happens to an employee who spent entire career with client who retires,

dies or is disabled. What should happen?

Keeping key employees that client doesn’t want to lose

If the business is totally dependent on any employee, suitable retention plans should be formulated

Determine an “inconvenience” factor for a key employee that leaves Things the client can do to keep them Are key or long term employees adding value to the business or are they

“dependents” Can client view the key employee objectively?

Increasing value of business

Does the client realize that the business has a value? Show the client what the value is Show the client how the value can change Show the client how the value is illusory Value is a big picture discussion Is the value more or less important than the cash flow from the business

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Purposes of owning a business

Why business is owned and managed by client How important is independence Does the entrepreneurship and creativity that led to establishing business still

exist Is the cash flow being maintained, declining or growing How important is the business’ asset value What significance is the legacy of the business

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Gift Tax Compared to Estate Tax

Gift tax Estate taxGross marginal amount of gift or amount in estate 1,000,000$ 1,000,000$ Tax rate 35% 35%Amount that tax rate is applied to 740,741$ 1,000,000$ Amount of tax 259,259$ 350,000$ Percent of tax to gift or bequest 35% 35%Percent of tax to gross marginal amount 26% 35%

"Proof:" Percent of tax savings to gross marginal amount ($350,000 - $259,259 = $90,741 = 9% of $1,000,000 9%

Formula to determine taxable gift:Gross Marginal Amount / (1 + Tax Rate)

$1,000,000 / 1.35$740,741

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Portability vs. Credit Shelter Trust Illustration

Assumptions based on today’s estate tax laws: • In first illustration, all assets are is husband’s name. • When wife died, total assets of husband was $10,000,000 • When husband eventually died his $10,000,000 grew to $15,000,000 • Wife’s estate claimed portability exemption which was $5,000,000 when she died

• In second, husband and wife both have $5,000,000 in assets • Wife dies first and her $5,000,000 is placed in Credit Shelter Trust • Husband dies 10 years later and his $5,000,000 assets grew to $7,500,000 • Husband’s estate tax exemption grew to $6,000,000 because of inflation

Portability exemption claimed when wife died

Total assets of husband at his death 15,000,000$ Less wife's portability exemption (5,000,000)$ Less husband's exemption (6,000,000)$

Taxable estate 4,000,000$ Federal estate tax at 35% 1,400,000$

Wife's assets placed in credit shelter trust when she died

Total assets of husband at his death 7,500,000$ Less husband's exemption (6,000,000)$

Taxable estate 1,500,000$ Federal estate tax at 35% 525,000$

Difference 875,000$

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Valuation Discount Illustration

Comment: Value of gift if made a day before death $3,200,000 Value in Estate if no gift was made $5,000,000

Gift value Estate value

Value of non control or minority interest shares 5,000,000$ 5,000,000$ Minority interest discount 20% (1,000,000)$

Adjusted value 4,000,000$ Marketability discount 20% (800,000)$

Value of non control or minority shares 3,200,000$ 5,000,000$ Percent of prediscounted shares 64% 100%

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Strategy Using Discounts: Installment Sale to Grantor Trust Transaction details:

Comment: Grantor Trusts are sometimes referred to a Defective Trusts Property is sold to trust for children (or grandchildren or life partner) in exchange

for a note for a term of years Prior to sale, trust must be funded with an amount equal to 10% of sales price Because it is a sale to a Grantor Trust it is not a taxable event;

• no capital gain is recognized; • interest on note is not taxable to parent nor deductible by trust; • basis to trust is the parent’s basis – there is no step-up

Grantor trusts are irrevocable and assets transferred to the trust are subject to gift tax and assets in the trust are not subject to estate taxes

Net result of transaction: At end of 5 years, the $5,000,000 business interest is owned outright by the trust with no gift or estate tax.

WithumSmith+Brown, PC | Certified Public Accountants and Consultants | BE IN A POSITION OF STRENGTH 57

INSTALLMENT SALE TO GRANTOR TRUST

(1) $320,000 Cash Gift to Trust(2) Stock/Partnership Interest Originally Valued at $5,000,000 and discounted to $3,200,000 sold to Trust

Parent Trust$3,200,000 Self‐liq. 5 yr Note

$687,601 Annual Payment

To ChildrenStock/Partnership Interest with a current value (and which is expected to grow) of $5,000,000 and a corresponding cash flow that is likely to be equal to or greater than the annual payout to the parent.

AFR interest rate = 2.44%

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George Washington’s Estate Plan

George Washington was not only a great man, patriot and leader but he was extremely organized and concerned about every aspect of his life. In preparing for his inevitable death, according to Peter R. Henriques in Realistic Visionary, Washington’s greatest anxiety was to leave all his own affairs and those of others for whom he was responsible “in such a clear and distinct form…that no reproach may attach itself to me, when I have taken my departure for the land of Spirits.” Washington thought his do-it-yourself estate plan was clear, unequivocal, detailed, well conceived and planned.

However, there was a major unintended consequence that perhaps would have been avoided had he had a consultation with someone else. Washington provided for his slaves to be freed upon Martha’s death. The slaves knew this and Martha started to worry for her life, so she released them two years after her husband died. CPAs provide the “second look” consultation.

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If any questions…you are welcome to contact me: Edward Mendlowitz, CPA.ABV.CFF.PFS Partner WithumSmith+Brown, PC, CPAs emendlowitz@withum.com Tel: 732 964-9329

Thank you for attending!

Reprinted from

Edward Mendlowitz, CPA, Partner, WithumSmith+Brown Blogs posted twice a week at www.partners-network.com Contact Ed at emendlowitz@withum.com or 732 964-9329

What the Pending Expiration of the $5,120,000 Gift and GST Tax Exemption Means October 9, 2012

On January 1, 2013, the gift and generation skipping transfer (“GST”) tax exemptions drop to $1,000,000 from $5,120,000. What does this mean? Probably nothing for those with less than about $8 million in assets. If you have more than $30 million…probably something. In between, you will need to figure it out for yourself. The gift and GST exemption allows the largest

amount ever to be transferred tax-free, but in the long run this will not save any eventual estate tax on that amount assuming the estate tax exemption is not lower when the donor dies. However, if the gift was not made, the income and appreciation on that amount will continue to be received by the donor, will be included in their estate and will be subject to estate tax when they die. Making the gift enables the income accumulation and appreciation to pass the estate tax-free to your heirs. It also can allow your beneficiaries to receive current income from this money without it counting as a gift from you. Note: In the balance of this blog I will be referring to the exemption amount as $5 million. I am also not including the $13,000 annual exclusion amount. Further, these amounts are double if a spouse consents to the gift. The benefit of making the gift can be illustrated by assuming that the donor makes a $5 million gift to a trust that invests in an S&P 500 index fund and it accumulates for 20 years. Also, assume the fund will pay a 2% annual dividend, the principal will grow at 4% per year and there will be a combined federal and state tax rate on the dividends of 25%. The gift will grow to

about $14 million after allowing for some tax capital gains tax on index changes in the fund. If the gift was not made, this $9 million increment would be included in the donor’s taxable estate. Now, assume the gift is invested more aggressively, grows at a higher rate or that the funds are invested in a family business, real estate or newly started business or property development that will also grow at a higher rate. By using valuation discounts on these items you can push the $5,000,000 up to about $7,500,000 increasing the tax-free wealth transfer by $2,500,000. Want more? With proper planning, the $5,000,000 can be leveraged to $70,000,000 of assets transferred using an installment sale to a defective grantor irrevocable trust, or $140 million with a consenting spouse. If dynasty trust provisions are applied, this fund can escape transfer taxes for generations. This is not for the meek or for those without sufficient wealth. You have until December 31, 2012 to get it done. My advice: Check it out!

Gift and Estate Tax Planning Part 2 October 11, 2012 I received some calls with comments about my previous blog on the pending expiration of the $5,120,000 exemption. I indicated that those with assets less than $8,000,000 should not be too concerned about it. These calls made reference to some things that should be considered and some additional strategies and are included here. Note that many of these ideas are not restricted to pre-2012 year end but with estate planning, the sooner, the better, especially with the threat of imminent changes. Many of these ideas are not limited to the ultra-wealthy.

• If you are a resident of a state with state estate taxes, such as NJ and NY, then utilizing the gift exemption will save future state estate taxes as long as the estate is distributed to lineal descendants.

• Gifts exceeding the exemption amount will be subject to gift tax that will be paid. The gift tax payment will be lower than the estate tax on that same amount and will be cash that will be removed from your estate providing a double benefit. Note that if the donor dies within three years of paying the gift tax, that tax payment will be added back to your taxable estate and will be subject to estate tax. This benefit works if you live three years; however, the income earned on the gift tax payment will still be removed from your estate.

• Life insurance purchased directly by an irrevocable life insurance trust will not be included in the estate when the insured dies. For policies transferred into the trust, the proceeds will be included in the taxable estate if the insured dies within three years of the policy transfer.

• An alternative using the life insurance trust is to make a gift of high cash flow producing S corporation stock or LLC interests and then have the trust use such cash flow to make life insurance premium payments. In this manner, annual exclusions could be used for other gifts including support of grown children. If the trust is a grantor trust, the donor is taxed on the income from the S corporation or LLC which will represent a tax free gift to the trust.

• People with large IRAs at advanced ages should consider paying the income taxes on a Roth IRA conversion. This will remove the tax money from your estate and allow your beneficiaries to receive tax free Roth IRA distributions. Note that the Roth IRA will be included in your taxable estate.

• An alternative to converting your IRA to a Roth IRA is to name some charities as beneficiaries when you die. This will allow the funds to pass income and estate tax free to your favorite charities.

• Another alternative to naming charities is setting up a family charitable foundation or donor advised fund and making that the recipient of the IRA permitting your heirs to distribute the money to charities they support. There are other variations on this theme that also should be explored if you are interested.

• If you typically make annual gifts to family members, consider gifting cash, bonds or high basis stocks. This is because the recipient will assume your basis. If you make a gift of low basis stocks, they will be liable for the capital gains tax when they sell the securities. An alternative is to make gifts of low basis stocks to those in a zero income tax bracket who will immediately sell the stock in 2012 only. This will not work for kiddie tax children.

• Gifts to trusts allow the time, manner and purposes of distributions to be controlled based upon terms in the trust. It also provides asset protection for your beneficiaries.

• Succession planning with family members can take advantage of this year’s larger exemptions, and you should consider an acceleration if this is something you are thinking of doing in the near future.

• Low interest intra family loans and mortgages offer many ways of transferring wealth gift or GST tax free.

• Testamentary or intervivos Charity Lead Unitrusts can work wonders in providing a steady cash flow to charities and the ultimate transfer of the assets to your family beneficiaries at a discount for gift tax purposes.

These are some ideas of what can be done to reduce estate taxes. It is not a complete list, but provides a range of strategies that can, hopefully, get you thinking…and acting.

Current and Projected 2013 Federal Income, Estate, Gift and GST Top Tax Rates October 2, 2012 Under Current law as of October 1, 2012: Type of Income 2012 2013 Earned income (1) 35.0% 39.6% Traditional IRA withdrawals 35.0% 39.6% Pension and qualified plan distributions 35.0% 39.6% Tax exempt bond interest 0.0% 0.0% Interest income 35.0% 43.4% Qualified dividend income 15.0% 43.4% Short term capital gains 35.0% 43.4% Long term capital gains 15.0% 23.8% Trade or business income(1) 35.0% 39.6% S corporation distributions to active participants 35.0% 39.6% S corporation distributions to inactive shareholders 35.0% 43.8% Capital gains on property used in a business 15.0% 20.0% (1) This income is subject to FICA, Medicare or self-employment taxes Gift, Estate and GST Taxes 2012 2013 Gift, estate and GST rates 35.0% 55.0% Estate tax exemption phase out rate (2) 35.0% 60.0% Gift tax exemption $5,120,000 $1,000,000 Estate tax exemption $5,120,000 $1,000,000 GST tax exemption $5,120,000 $1,430,000 Annual exclusion $13,000 $14,000 (2) The phase out is for taxable estates over $10,000,000 so that entire estate tax is 55% Prepared by Edward Mendlowitz, CPA, Partner, WithumSmith+Brown based on information believed to be correct. Readers are cautioned that the 2013 rates are expected to change and they should check with their tax advisor before entering into any transaction. This comparison has been prepared for informational purposes only.