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October 26, 2013

Agenda

• 10:15 – 11:15 - Current Federal Estate Tax Law and Estate Planning post ATRA and Windsor

• 11:15 – 11:30 - Document Automation• 11:30 – 11:45 - Questions

Current Federal Estate Tax Law and

Estate Planning

• On January 1, 2013, President Obama signed into law The American Taxpayer Relief Act of 2012 (“ATRA”), bringing closure to the main tax aspects of the so-called “fiscal cliff” negotiations that had been ongoing since the November elections.

Since January 1, 2013, among its many tax provisions, ATRA makes permanent the $5.0 million gift, estate, and GST tax exemption amount that was put in place temporarily for 2011 and 2012, plus inflation adjustments going forward [the current adjustment for 2013 is $250,000 per person.

For married couples in 2013, the aggregate exemption will be twice this amount (i.e., $10.5 million)]. Future years can also have similar inflation adjustments.

The gift tax is still unified with the estate tax; a unified estate and gift tax exemption means the $5.25M threshold is applied to total transfers, whether by gift during lifetime or by inheritance on death.

There is also an inflation adjustment to increase the annual gift tax exclusion from $13,000 to $14,000 per donee (again, for married couples, the annual gift exclusion is now double this amount - $28,000 for 2013).

The 2012 Act also provides for a flat 40% tax rate for any transfers in 2013 and future years that exceed the exemption amount.

ATRA makes the new laws “permanent” because there is no sunset provision in the law that would cause the current rules to expire. The 2002 law was scheduled to sunset at the end of 2010. Similarly, the 2010 extension was scheduled to sunset at the end of 2012.

But a “permanent” change does not mean the law will never change.

The word “permanent” really means “until they change it next time!”

Notably, ATRA also makes permanent the “portability” concept introduced in the Tax Relief Act of 2010.

“Portability”

Generally, “portability” allows a surviving spouse to

elect to take advantage of the unused portion of

the estate tax exclusion of his or her predeceased

spouse, thereby providing the surviving spouse with

a larger exclusion amount.

“Portability”

NOTE: The “deceased spousal exclusion amount” is

available to the surviving spouse only if an election

is made on a timely filed estate tax return for the

deceased spouse (even if an estate tax return would

otherwise not be required).

Example

Assume that Husband dies in 2013, leaving $1M to his daughter and the balance of his estate of $3M to Wife (no tax is due). An election is made on Husband’s estate tax return to permit Wife to use Husband’s unused exemption. Thereafter, Wife’s exemption is now $9.5M (her $5.25M basic exemption plus the $4.25M of Husband’s unused exemption), which she may use for lifetime gifts or for transfers at her death.

The biggest argument in support of portability

is that it will prevent married couples from

having to create "costly" estate plans that

contain "complex" trusts.

But not so fast! There are still plenty of reasons why married couples should consider Trust planning and why unwed couples may need it too; portability is really a “get out of jail card” for those who don't do anything or if the totally unexpected should occur. There are a number of reasons for married clients to still create an estate plan which creates a trust or trusts after the first death:

PLANNING

• Planning to “lock-in” the full exemption

Planning to “lock-in” the full exemption

Having an exemption trust will protect the full $5M amount if one spouse dies and the Democrats are later successful in "rolling-back" the exemption to $3.5. Portability may also be lost if the surviving spouse remarries and is later widowed again.

• Planning to “lock-in” the full exemption• Planning for appreciation

Planning for appreciation

Funding an “exemption trust” also protects appreciating assets from estate tax at the survivor’s death.

• Planning to “lock-in” the full exemption• Planning for appreciation• Planning for blended families and/or

“control”

Planning for blended families and/or “control”

For a second/third marriage (or even for a first marriage), if one or both of the clients is concerned with the survivor being able to change the beneficiaries (e.g., remarriage, separate children, etc.), the irrevocable trust is still necessary (even when there are no estate tax issues).

“control”• Providing creditor protection for the

surviving spouse

Providing creditor protection for the surviving spouse

Creating an irrevocable trust at the first death provides asset protection from creditors, lawsuits and/or Medicaid “spend-down”. In addition, any assets owned by an irrevocable trust will be protected from a divorce settlement if the surviving spouse remarries and then later divorces.

surviving spouse• Planning for state estate taxes

Planning for state estate taxes

Currently, there are 16 states (plus the DC) which impose a separate state estate tax, so trust planning may be necessary in order to “double” the state exemption and defer payment of state estate taxes until the death of the surviving spouse (so far, no state with an estate tax has adopted the concept of “portability” for the unused exemption of the first to die). Even if the client resides in a state currently without a separate estate tax, that state may subsequently elect to impose a tax or the survivor could later move to a state which does have a separate state estate tax (e.g., move to be closer to children/grandchildren).

surviving spouse• Planning for state estate taxes• Planning for the “generation-skipping tax”

Planning for the “generation-skipping tax”

Portability does not apply to the GST tax, so in order to fully leverage the GST exemptions of both spouses for GST trust planning, it will still be necessary to create a trust at the first spouse’s death. The so-called “Dynasty Trusts” are becoming increasingly popular.

surviving spouse• Planning for state estate taxes• Planning for the “generation-skipping tax”• Planning for same sex or unwed couples

Planning for unwed couples

Although same sex marriages are now recognized by the federal government, many same sex couples will need to use trust planning in order to be able to take full advantage of the exemption (state and federal) at both deaths (and the same goes for unwed man and woman couples).

Problems with “Portability”• No planning to “lock-in” the full exemption• No planning for appreciation• No planning for blended families and/or “control”• No creditor protection for the surviving spouse• No planning for state estate taxes• No planning for the “generation-skipping tax”• No planning for unwed couples

US vs. WINDSOR

United States vs. Windsor is a landmark case in which the US Supreme Court held that restricting federal interpretation of “marriage” and “spouse” to apply only to heterosexual unions under Section 3 of the Defense of Marriage Act (“DOMA”) is unconstitutional under the Due Process Clause of the Fifth Amendment.

US vs. WINDSOR

Edith Windsor and Thea Spyer, a same-sex couple residing in New York, were lawfully married in Ontario, Canada in 2007. Spyer died in 2009, leaving her entire estate to Windsor.

US vs. WINDSOR

Windsor sought to claim the federal estate tax exemption for surviving spouses. She was barred from doing so by DOMA which provided that the term “spouse” only applies to a marriage between a man and woman. The IRS found that the exemption did not apply to same-sex marriages, denied Windsor’s claim, and compelled her to pay over $350,000 in estate taxes.

US vs. WINDSOR

If federal law had recognized the validity of their marriage, Windsor would have qualified for an unlimited spousal deduction and paid no federal estate taxes.

US vs. WINDSOR

In 2010, a lawsuit was filed against the federal government, where Windsor sought a refund because DOMA singled out legally married same-sex couples for “differential treatment compared to other similarly situated couples without justification.” The lower courts agreed with Windsor and the decision was appealed to the U.S. Supreme Court.

US vs. WINDSOR

On June 26, 2013, that court issued a 5–4 decision declaring Section 3 of DOMA to be unconstitutional “as a deprivation of the liberty of the person protected by the Fifth Amendment.”

US vs. WINDSOR

• On the same day, the court also issued a separate 5–4 decision in Hollingsworth v. Perry — a case related to California’s constitutional amendment initiative barring same-sex marriage. The decision effectively allowed same-sex marriages in California to resume after the court ruled that the proponents of the initiative lacked standing to appeal in federal court.

WHAT DOES THIS ALL MEAN?

Firstly, all same-sex couples should have proper estate planning.

Secondly, the proper “type” of trust or Will for married couples, whether same-sex or “traditional”, has dramatically changed.

As most of you know, there are many “types” of trusts for married couples. The correct type of trust can depend on a number of circumstances.

We have prepared a “matrix” of the different client scenarios with our recommendations for the appropriate type of estate planning trusts which may be appropriate for each scenario. Of course, this matrix also takes into account the existence of a separate state tax (when appropriate).

This “matrix” is one of the referenced documents in the list of on-line PDF files which you can download.

However, for today, let’s assume that your clients reside in California (which has no separate estate tax) and neither spouse has an estate over $3.5M.

WHAT IS THE BEST FORM OF TRUST?

THE ANSWER:

A “Disclaimer Trust” OR an “Intentionally Defective Marital Deduction Trust”

THE ANSWER:

It now depends mostly on the amount of control the surviving spouse should have

over the deceased spouse’s estate

What type of trust should be used if “control” is NOT an issue?

Why not a simple “probate avoidance trust”?

With the Probate Avoidance Trust, there is no flexibility – everything stays under the survivor’s control and power of revocation.

The “Disclaimer Trust”:

Again, use IF there are no issues of “control” (e.g., no separate children, etc.).

Everything goes to the survivor but the survivor can, within 9 months, disclaim any or all of the deceased spouse’s interest into an irrevocable trust.

There may be factors at the time of the first death which makes the irrevocable trust worthwhile:

“Hit the Lottery”Creditor IssuesPossible Medi-Cal needs for the survivor

What type of trust should be used if “control” is an issue?

What about an “A/B Trust”?

The “A/B Trust”:

•“A” Trust is the survivor’s portion of the trust which remains revocable

•“A” Trust is the survivor’s revocable trust•“B” Trust is an irrevocable trust

•“A” Trust is the survivor’s revocable trust•“B” Trust is the irrevocable trust

Must be funded with decedent’s estate up to the exemption amount

•“A” Trust is the survivor’s revocable trust•“B” Trust is the irrevocable trust

Funded with decedent’s estate up to the exemption amount

Purpose is to keep “B” Trust out of the survivor’s taxable estate

Problems with the “A/B Trust”:

•“B” Trust is the irrevocable trust Funded with decedent’s estate up to

the exemption amount

•“B” Trust is the irrevocable trust Funded with decedent’s estate up to

the exemption amount If control is an issue and the

decedent’s estate exceeds the exemption, the balance goes to the survivor

•“B” Trust is the irrevocable trust Purpose is to keep “B” Trust out of the

survivor’s taxable estate

survivor’s taxable estate This will lose the “stepped-up basis”

on the assets in the “B” Trust at the survivor’s death

The “step-up” means that inherited property receives a new cost basis equal to the property's fair market value on the date of the decedent's death. In other words, the heirs can sell the inherited assets and pay no capital gains tax.

survivor’s taxable estateONLY ASSETS INCLUDED IN THE

TAXABLE ESTATE ARE ELIGIBLE FOR THE STEP-UP

The “Intentionally Defective Marital Deduction Trust”:

•Creates an irrevocable trust for all of the decedent spouse’s assets

SOLVES THE CONTROL ISSUE

•Creates an irrevocable trust for all of the decedent’s assets•“Intentionally” designed to be included in the survivor’s taxable estate

•“Intentionally” designed to be included in the survivor’s taxable estateSOLVES THE STEPPED-UP BASIS ISSUE --NOW THE ENTIRE ESTATE RECEIVES A

STEP-UP AT THE SECOND DEATH

•Creates an irrevocable trust for all of the decedent’s assets•“Intentionally” designed to be included in the survivor’s taxable estate•Has “disclaimer” option to fund “Exemption Trust” if needed.

•Has “disclaimer” option to fund “Exemption Trust” if needed.

PROTECTS IF THE CLIENTS HIT THE LOTTERY!

As mentioned, besides “control”, there are other advantages to creating an Irrevocable Trust at the first death:

Other advantages to creating an Irrevocable Trust at the first death:

•Creditor Protection

•Medi-Cal Planning

•Protects assets from a divorce if the survivor remarries

Document Automation

A document automation system is used to automate all conditional text, variable text, and data contained within a set of documents

Document Automation

• “Cut and Paste”

Document Automation• “Cut and Paste”

In its simplest approach, “Cut and Paste” as document automation uses a blank document as the starting point for the project. The user then opens other word processing documents that are already in storage, locating sections or segments that are relevant to the purpose of the new document; the user copies the desired text from the older documents and pastes that same text onto the new document.

Document Automation

• “Cut and Paste”• “Document Assembly Software”

Document Automation

Document Assembly Software:The basic function is to replace the manual filling in of repetitive documents with template-based systems where the user answers software-driven interview questions or data entry screens. The information collected then populates the document to form a good first draft.

Problems with Document Automation• Cut and Paste:

“Cookie cutter” approach Potential incorrect genders and missing sections Requires extensive proof reading You are responsible to maintain current status of documents for

changes in the law Requires extensive knowledge of subject matter Revisions of multiple documents for changes

Document Assembly Software: Cost “Learning Curve” Time to “automate” existing forms and documents Still requires extensive knowledge of subject matter Still necessary to make revisions to templates

Published Template Sets Advantages:

“Plug and Play” “Help” screens and the interview process make it easier for a

user with less experience in the subject matter Logic and options should provide total customization for client

(“square peg in round hole”) Multiple documents can be generated from a single input

(“interview”) Finished document is fully formatted and ready to go Minimal proofing needed Updates should be immediate for changes in laws Text and concepts designed by specialists in field

Disadvantages: Cost Formatting and text is not your own

Current Technology

• Stand-alone Software:Installed on workstations or networkProblems with syncing files when working

remotelyRemote access software (“VPN”) can make things

easier (GoToMyPC or LogMeIn)Back-upOften is limited to a particular Operating System

(e.g. works on a PC but not a Mac)

Current Technology

Virtual:Web based applicationNo installationResults are stored on a remote serverClient does the inputReview can be from any locationDelivery of finished documents can be in person

or electronic

New Technology

Cloud:Web based application (i.e., works with any OS)No installationRevisions are immediateResults are stored on a remote serverCan be accessed from any computer without the

need for “syncing”.Can be accessed through a mobile device

Fore! Trust Software Stand-alone:

Trusts & WillsIrrevocable TrustsComing:

• Trust Administration• Business Entities (“LLC’s)

Fore! Trust SoftwareTrusts & Wills

• Complete estate planning package for normal practice; all versions of revocable living trusts (“RLT’s”) and stand-alone Wills

• Options for individuals (whether married or single), married couples preparing a joint package or a “non-traditional” couple

• All supporting documents as appropriate; e.g., “pour-over Wills, P of A’s, healthcare powers, HIPAA waivers, burial instructions, Certification of Trust, transfer documents (including deeds)

• Miscellaneous trusts such as an “IRA Beneficiary Trust”, a “NFA Gun Trust” and a “Realty Trust”

• Package also includes correspondence, “finishing documents” and miscellaneous documents (e.g., amendments, codicils, resignations, affidavits of death, etc.)

• Option to designate in the User Set-up that this set-up is for a Document Preparer which then automatically modifies the language in the correspondence to avoid any UPL issues

• Completely state specific depending on client’s state of residence (except for state of signing which controls the notary language)

• The one package supports all 49 states plus the District of Columbia (we don’t consider Louisiana to be a real state!)

• Updated constantly through-out the year; new features and options plus any law changes

Fore! Trust Software Virtual Estate Planning System:

Trusts & Wills Only

Accessed off of your website; client never know he/she has left your site

Client inputs all the information using an interview designed for the end-user with complete “help screens”

Avoids problems with UPL

Client can re-access the interview as many times as necessary

Same “attorney quality” documents as in the stand-alone product with most of the same options

You download completely formatted package for delivery to client (in office or virtual)

Fore! Trust Software

Stand-alone:Trusts & Wills

• One-time cost of $995• Unlike competition, the software does not “lock-up” at

the end of each year• Annual subscription available at the end of first year for

$250 per year

Stand-alone:Irrevocable Trusts

• Retail cost of $700• Purchased with Trusts & Will set or by an existing

Trusts & Wills user, cost is discounted to $550• Annual subscription available at the end of first year for

$150 per year

Virtual Estate Planning System:One-time set-up cost of $299Monthly maintenance fee of $50“Pay-as-you-go”

• $95 per download (discount for volume)• Only one charge per client• Only charged when client has finished interview

CALDA DISCOUNT

• $50 discount off normal purchase price of the “stand-alone” software

CALDA DISCOUNT

• $50 discount off normal purchase price of the “stand-alone” software

Enter “CALDA Discount” in the“Special Code” box on the Check-out page

or contact us directly

Fore! Trust SoftwareAnnouncing our new Platform

• Cloud Based

• Cloud Based:Accessible from any computer including Mac’s

• Cloud Based:Accessible from any computerAccessible from mobile devices including tablets

• Cloud Based:Accessible from any computerAccessible from mobile devices including an iPad

AppAll updates and revisions happen instantaneously

and in “real time”

• Cloud Based• Built-in Client Management capabilities

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features:

Including Web Forms and automated email follow-up (“drip system”)

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features• Client Portal

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features• Client Portal:

“Dropbox” for review but with security options preventing download and/or printing

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features• Client Portal:

“Dropbox” for review but with security options preventing download and/or printing

Client questionnaire or “interview” (e.g.,VEPS)

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features• Client Portal• Document Assembly

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features• Client Portal• Document Assembly• “eDoc Store”

• Cloud Based• Built-in Client Management capabilities• Built-in Internet Marketing features• Client Portal• Document Assembly• “eDoc Store”:

Complete “suite” of templates and template sets all configured to work from one platform

• Seamless merge with our existing products

• Seamless merge with our existing products• Coming 2014

Thank You!

www.ForeTrustSoftware.comor email me at

dennis@4trustsoftware.com

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