THE SETTLEMENT ASSISTANCE

TOOL KIT

CLA USA Home Office:

2595 Dallas Parkway, Suite 300 Frisco, Texas 75034

1 (888) 404-6848

The information provided in this training manual is solely

for educational and general discussion purposes. This information includes general rules regarding estate planning and related tax issues; however, each individual’s estate must be evaluated on a case-by-case basis on their specific circumstances. CLA and its agents are not attorneys, certified public accountants, or investment brokers and information provided is not a substitute for legal, tax, or investment advice. The agent is instructed to advise the client to seek the advice of a licensed professional; i.e., a CPA or an attorney, for specific information regarding a client’s estate planning needs.

This training manual is the proprietary property of CLA.

Any use, including reproduction, modification, dissemination, transmission distribution, or display of the information provided without the prior written consent of CLA is strictly prohibited.

A Mission Statement

When an individual or couple becomes a client, they are given a number of assurances regarding what they can expect from CLA. Those being:

» An estate plan of quality prepared by a competent, independent attorney

» Document delivery that provides notarization of all documents, with full assistance in asset funding

SETTLEMENT ASSISTANCE

truly make a difference by our reaction, concern, nd level of service.

» Financial services that will protect assets from undue risk

» Annual review of the estate plan

» The availability of CLA’s Customer Services Representatives to provide services and support

» Settlement assistance is the most sensitive and critical service we can provide a client and their family. It is at the time of death and emotional upset where CLA cana The Settlement Assistance Tool Kit is designed to facilitate a consistent, complete, and professional response to the death of a client (Trustor). While it is impossible to script all the scenarios that might occur following a death, the Tool Kit does endeavor to prepare you to

onfront most settlement assistance issues and challenges.

rvices are usiness hours (9am – 5pm CST) by calling

-888-404-6848.

c Always remember you have the full support of CLA whenever you provide settlement assistance. Settlement Assistance Seavailable during b1

i

Settlement Assistance Workflow

4

2

5 8, 9

10 3 6

Settlement Notification

Settlement Assistance

Services

Attorney Office

Settlement Assistance

Agent

Client Contact

Future Meetings

1

Meeting With CPA

7

Meeting With Family

1. CLA receives settlement assistance notification

2. Settlement Assistance Services (SAS) takes following actions: o Completes Initial Notification Form o Notifies Settlement Agent o Updates Client Profile Form o Sends Settlement Assistance Letter o Imanager client file made available o Monitors & Sends Post Settlement Letter

3. Family immediately contacted by Settlement Assistance Agent (SAA). SAA will receive and review Initial Notification, Client Profile, last review and asset worksheet, and delivery specifications

4. If changes to trust are noted on Client Profile, attorney office will be contacted by SAA to ensure all requested changes have been completed

5. If CLA USA provided insurance, policy information will be noted on the Client Profile form. SAA at family meeting will call insurance company to update and file claim

6. Client answers questions on Agent Appointment Organizer Form and a meeting is scheduled with CPA. If client declines CPA meeting, then meeting is with Family

7. CPA meeting to focus on Tax issues and completion of CPA Settlement Form

8/9. Meeting with Family will be to complete Family Settlement Form

10. Future meetings will focus on financial matters. CPA may or may not be involved.

InsuranceCompany

ii

Table of Contents

TOPIC: PAGE(s):

Statement of Mission i Settlement Assistance Workflow ii Table of Contents iii – iv Settlement Notification (1) 1

INITIAL SETTLEMENT NOTIFICATION form 2 Settlement Assistance Services (2) 3

CLIENT PROFILE form 4 - 5 SETTLEMENT ASSISTANCE letter 6 POST SETTLEMENT letter 7 Settlement Assistance Agent (3) 8

AGENT APPOINTMENT ORGANIZER form 9 – 10 Attorney Office (4) 11 Insurance Company (5) 12 Client Contact (6) 13 Meeting with CPA (7) 14

CPA SETTLEMENT form 15 – 16 Meeting with Family (8/9) 17

FAMILY SETTLEMENT form 18 – 19 Future Meetings (10) 20 Step-up in Basis

Understanding a Step-up in Cost Basis 21 – 22

iii

The Bypass (B) and QTIP (C) Trusts

Estate Tax and B / C Trust Fundamentals 23 – 25 What is Community Property versus Separate Property 26 The B & C Trusts in a Separate Property State 27 – 28 The B & C Trusts in a Community Property State 29 Life Insurance in the Bypass Trust 30 – 31 Annuities in the Bypass Trust 32 – 33 Traditional IRA versus Roth IRA in Bypass Trust 34 – 35 Second Death Settlement Separate and Community Property 36 APPENDIX

Asset Repositioning Audit Trial A1 Ledger Worksheet for Separate Property State A2

Ledger Worksheet for Community Property State A3 Funding Declaration of B & C Trusts A4 Questions to Ask the Attorney A5 Generic Funding Document A6 Form SS-4 A7 Form 706 A8 Federal Estate or Gift Tax Tables A9 Generic Notification to Institutions of Death A10 Budget Worksheet for Survivor A11 S

TATE INHERITANCE TAX GUIDELINES:

Indiana A12 – A13 Kansas A14 Kentucky A15 – A16 Minnesota A17 North Carolina A18 Ohio A19 – A21 Oklahoma A22 – A23 Pennsylvania A24 – A25 Tennessee A26 Doe Family Case Study A27 – A42

iv

Settlement Notification (1)

Notification of a client’s death can be received a number of different ways:

√ The surviving spouse calls in to CLA √ A family member calls in to CLA √ An agent calls in to CLA √ Discovery by Customer Service when phone or mail contact fails

No matter how we discover the settlement situation, our response should be consistent. All settlement notification phone calls should be routed to the Settlement Assistance Services area to begin the settlement assistance process. Should a representative of Settlement Assistance Services be unavailable, backup will be designated to receive the incoming call. On the next page is the INITIAL SETTLEMENT NOTIFICATION form, which will be completed on the initial communication with family member or surviving trustor.

1

INITIAL SETTLEMENT NOTIFICATION

Caller: ____________________ Call Received on: ____________ at _______ AM / PM Deceased: _______________________ Caller Relationship: _____________________ Address of Deceased: ______________________________________________________ Date of Death: _______________ Address of Caller: _________________________________________________________ Phone #’s of Caller: _____________________ _____________________ Best Time to Reach: _________________ AM / PM AT THIS POINT LET THE CALLER KNOW THAT THIS INFORMATION WILL BE PROVIDED TO THE CLA SETTLEMENT ASSISTANCE REPRESENTATIVE IN THEIR IMMEDIATE AREA. LET THE CALLER KNOW THAT THEY WILL BE CONTACTED WITHIN THE NEXT 24 HOURS TO SET A TIME FOR A PERSONAL VISIT.

2

Settlement Assistance Services (2)

Settlement Assistance Services is the focal point in CLA providing a timely and effective response to the surviving members of the deceased’s family. The function of this area will be to initiate, monitor, and assist in the overall effort to provide closure to the settlement process. Upon completion of the INITIAL SETTLEMENT NOTIFICATION form, Settlement Assistance Services will take the following actions:

1. Call the Settlement Assistance Agent in that area and update them on the situation. 2. Immediately, make the INITIAL SETTLEMENT NOTIFICATION form available on Imanager. 3. Update the CLIENT PROFILE form on Imanager with information from the client’s file. 4. Ensure that the CLIENT’S PROFILE form, the delivery specifications, the last periodic review, and the last asset worksheet are available to the Settlement Assistance Agent on Imanager. 5. Send out the SETTLEMENT ASSISTANCE letter to family. 6. If no word from the Settlement Assistance Agent within 24-hours of their notification, call the family representative to touch base. 7. Call Settlement Assistance Agent and monitor the case as necessary. 8. When settlement assistance is complete, as reported by the Settlement Assistance Agent, mail the POST SETTLEMENT letter.

3

Client Profile

1. Does the client’s file reflect any modification or change to the client’s estate plan since delivery?

There have not been any changes made to Trust or ancillaries.

There have been changes made to estate plan or ancillaries.

If you checked that changes have occurred since delivery, please briefly describe those changes and note the attorney involved: 1) _______________________________________________________________ _______

______________________________________________________________________

__________________________________________ _________________________

Attorney Involved

2) _______________________________________________________________________ ________________________________________________________________________

____________________________________________ ________________________

Attorney Involved 3) ________________________________________________________________________ ________________________________________________________________________

____________________________________________ ________________________

Attorney Involved

2. An ESTATE ORGANIZER was provided?

Yes

No

4

. Policy information on CLA provided insurance3 :

_ Insurance Company Product Initial Premium

Policy Date Policy Number Providing Agent

_____ Owner Co-Owner

_ Insurance Company Product Initial Premium

Policy Date Policy Number Providing Agent

_____ Owner Co-Owner

_ Insurance Company Product Initial Premium

Policy Date Policy Number Providing Agent

_____ Owner Co-Owner

_ Insurance Company Product Initial Premium

Policy Date Policy Number Providing Agent

_____ Owner Co-Owner

________________________ _____________________ __________________ ________________________ _____________________ ___________________ ________________________ _______________

________________________ _____________________ __________________ ________________________ _____________________ ___________________ ________________________ _______________

________________________ _____________________ __________________ ________________________ _____________________ ___________________ ________________________ _______________

________________________ _____________________ __________________ ________________________ _____________________ ___________________ ________________________ _______________

5

Settlement Assistance Letter

t

d ready to provide the settlement assistance you

ice of a CPA or attorney, for

tive greatly enhances th ffe

Returns t agreements

Savings Account Statements Notes Payable

ettlement Assistance representative will be pleased to help.

incerely,

CLA USA Representative

Today’s Date

Name of Contactreet Address S

City, State Zip Dear Mr. /Mrs. /Ms. Contact:

LA is pleased anChave requested. CLA and its agents are not attorneys, certified public accountants, or investment brokers. The representative selected to assist you

as been instructed to seek the advhspecific estate planning information. It is our experience that having the following documents available

t your first meeting with the CLA representaae e ctiveness of your upcoming meeting:

The estate plan documents (including Estate Organizer if provided) Most recent Federal and State Income & Gift Tax Relevant business and employmen Pre- and post-marital agreements Divorce decrees and agreements Investment and

Please don’t hesitate to call 1-888-404-6848 at any time. A S S

6

Post Settlement Letter

oday’s Date

t

ely,

t

contact CLA Settlement Assistance Services at -888-404-6848.

incerely,

LA USA Representative

7

T Name of Contac

treet Address SCity, State Zip Dear Mr. /Mrs. /Ms. Contact:

t CLA Estate Services and CLA USA, we strive to provide timAconsistent and caring service to our clients and their family. It is our understanding that all concerns have been addressed

nd completed to your satisfaction in the estate settlemenaassistance following the death of _____________________________.

any further concerns or any issues arise, please Should you have o not hesitate tod

1 S C

Settlement Assistance Agent (3)

ttlement Assistance Services does not ear from you within 24-hours of your notification, they will assume the

the most recent Asset Worksheet. The CLIENT ROFILE form will be available as soon as Settlement Assistance Services

the importance. If they continue to decline, form them they will be asked to acknowledge that decision in writing on

ies have been initiated prior to our appointment. In addition, it prompts you to ask the client to have

mail out the APPOINTMENT CONFIRMATION tter. This letter serves as a reminder, as well as a listing of necessary

ast note, at the end of every week, you should fax to CLA any notes or forms you’ve completed in the settlement assistance process.

8

Settlement Assistance Services will reach you by phone or pager within the same hour of receiving a request for settlement assistance. Upon receiving the name of deceased, date of death, person to contact, and contact phone number(s), you should make a concerted effort to reach the client. It is important to inform Settlement Assistance Services once contact has been made and an appointment set. If Sehresponsibility of reaching the client. The INITIAL SETTLEMENT NOTIFICATION form will be immediately available to you on Imanager, as well as delivery specifications, the most recent Periodic Review, andPreviews the client file. It is CLA’s position that the initial meeting with the family representative should be in the presence of a CPA. Do your best to convince the client that it is worth the time and expense to get the CPA involved due to the issues of taxation, investment appreciation, and other potential tax-related issues. If the client sees the value of CPA involvement and is willing to incur that expense, but doesn’t have a CPA, CLA will locate one. Should the client not wish to involve a CPA, reiterate inthe FAMILY SETTLEMENT form. In your initial phone call with the family representative, you will be completing the AGENT APPOINTMENT ORGANIZER form. It will provide an indication of what (if any) settlement activitynecessary documents available for review. Upon completing the AGENT APPOINTMENT ORGANIZER, give Settlement Assistance Services a call toledocuments to have available. L

Agent Appointment Organizer

Settlement for who deceased on ____________________

______________________________________ _______________________

________________________________________________________________________

treet Address City State Zip

cate one

______________________________________ _______________________

________________________________________________________________________

S

These individuals will be attending the SETTLEMENT ASSISTANCE

__________________ _____________________ _____________________

__________________ _____________________ _____________________

ate of Meeting: ___________ Time: _______ Where: _____________________

rust Date: _________ Attorney: ______________ Del. Agent: _______________

Date of Last Review: _____________ Reviewed By: ______________________

Clients’ CPA will be attending initial meeting: ____ Yes ___ No _ Name of CPA Telephone Number

_S

Client does not have a CPA, but wishes CLA to lo

Provide CPA information below when available:

_ Name of CPA Telephone Number

_treet Address City State Zip

Client has indicated they do not wish to have a CPA attend the meeting

MEETING: _ _ D T

9

I have received the below information from _________________________: of Family Member)

No

(Name Has Social Security been notified? __ Yes __ No Has Medicaid been notified? __ Yes __ No Have Life Insurance Companies been notified? __ Yes __Have IRA Custodians been notified? __ Yes __ No LTC & Health Insurance Carriers notified? __ Yes __ No Auto & Homeowners Insurance Companies notified? __ Yes __ No

__ Yes __ No Yes __ No

as creditor notice been filed in local newspaper? __ Yes __ No as a checking account been set up for settlement? __ Yes __ No

provided) Gift Tax Returns

agreements

Savings Account Statements

Sure to Bring the Following to the Settlement Assistance

set worksheet

Has Veteran’s Administration been notified? Have all burial arrangements been completed? __Safety Deposit Box reviewed? __ Yes __ No Individual credit cards destroyed? __ Yes __ No Minimum of 12 death certificates ordered? __ Yes __ No HH I have asked ____________________________ to have the following available:

(Name of Family Member)

The estate plan documents (and Estate Organizer if Most recent Federal/State Income &

t Relevant business and employmen Pre- and post-marital agreements Divorce decrees and agreements

Investment and Notes Payable

ill Be I WMeeting:

Estate plan specifications, last review & last as CLIENT PROFILE form The AGENT APPOINTMENT ORGANIZER form The Settlement Assistance Tool Kit Business phone number of attorney (plus after hours # if available) The FAMILY SETTLEMENT and CPA SETTLEMENT forms A copier/fax

10

Attorney Office (4)

form, It is

e responsibility of the Settlement Assistance Agent to call the attorney’s ffice to ensure that all requested changes have been completed.

sistance Agent is encouraged to call the attorney drafting the state plan for an update, even when there are no requested changes in the lient’s file.

orney’s office might desire to protect e privacy of their client relationship. The attorney is not obligated to share

nything in his or her file on the client.

he settlement assistance process. It is important to leave the ttorney feeling involved and comfortable with our role in settlement

ortant to ask the questions rovided in Appendix A5. Answers received are important in proceeding rward with the settlement assistance process.

11

If estate related changes have been noted on the CLIENT PROFILEtho Since a client can receive legal services without home office awareness, the Settlement Asec The attorney will want to know of the client’s demise for their own records. However, it is very possible that the atttha Let the attorney know that a CLA representative will keep them informed throughout taassistance. Finally, in speaking with the attorney, it is imppfo

Insurance Company (5)

e deceased individual had insurance coverage through CLA USA, that

inform available on Imanager. Financial services will primarily be:

Life Insurance Long-Term Care

instances from the CPA’s office. The LIENT PROFILE form will provide the information necessary to receive urrent information on the policy.

uthorized to disclose to the policy owner (who’s now deceased). If that ccurs, CLA as the agency/agent of record can get that information for you.

and death surrender values. Have the insurance company epresentative send all necessary policy change and death claim forms to

e family.

d excess refunded. Seek any paperwork ecessary to stop further premiums or receive a disbursement. Have aperwork sent to the family.

12

If th

ation will be

√ Annuities √

√

The Settlement Assistance Agent will be calling the insurance company from the home of the family, or in someCc When calling the insurance company, have a family member there to provide your authorization to discuss the policy. Sometimes the insurance company representative won’t provide that information because they are onlyao When talking with the company about the policy, you will need to status both the current rth On LTC, it is important to let the insurance company know of the death so premiums can be stopped annp

Client Contact (6)

ce Services representative. It is rther enhanced when the Settlement Assistance Agent calls the client ithin 24-hours of CLA’s notification.

om the agent, Settlement Assistance Services will mail out the PPOINTMENT CONFIRMATION and POST SETTLEMENT letters.

rtainly deviate from he form as you create “chemistry” with the client, but the completion of his form will pay huge dividends at your first meeting.

is important to always keep the client in the communication loop. ettlement assistance can take a prolonged period of time.

13

The key to successful settlement assistance is communication. That communication begins with the first conversation between the family member and the Settlement Assistanfuw Once the Settlement Assistance Agent has established contact, Settlement Assistance Services will be in a standby mode. Upon receiving instruction frA The previously discussed, AGENT APPOINTMENT ORGANIZER form will be utilized in the initial contact with the family representative. It sets the groundwork for all the meetings to follow. You can cett ItS

CPA Settlement Meeting (7)

to he office first, discussions may occur that may impact the overall meeting nd it will be difficult to complete the CPA SETTLEMENT form properly.

pecific issue. There will be time later for additional eetings (if necessary) and telephone and email are always available to

omplete the process.

determination of hat should be funded to the Bypass, such issues as IRAs and investments ith significant step-up in basis will come under review.

14

It is most likely that the meeting will occur in the CPA’s office. It is a good idea to be early and precede the arrival of the family. If the client getsta Since CPAs generally charge by the hour, you should plan on spending an hour in this meeting. It is strongly suggested that you let the CPA SETTLEMENT form be the framework of the meeting. In that way, major issues will be highlighted and time will not be wasted on a prolonged discussion of any one smc The primary reason for meeting with the CPA is to get a handle on completing the tax return for the surviving spouse or family. Beyond the tax return, the next significant issue will be the funding of the Bypass Trust if we are dealing with the death of a spouse. In making aww

CPA Settlement

Settlement for

, who deceased on ________________

____________________________ ___________________________________

________________________ _______________________ ______________________

_________________________________________________________________________

__________________ ______________________ _____________________

. In completing the Tax Return for the current Reporting Period and Year,

________________________________________________________________________

_________________________________________________________________________

15

_ Name of CPA Name of Firm _ Phone Number Fax Number email address _ Street Address City State Zip In attendance at meeting: ______________________ _____________________ _ 1 it is the determination of the CPA that the current status is as follows:

_________________________________________________________________________

_________________________________________________________________________

_________________________________________________________________________

_________________________________________________________________________

_________________________________________________________________________

_ The following needs to be provided/completed to file the Tax Return:

_________________________________________________________________________

_________________________________________________________________________

_________________________________________________________________________

_________________________________________________________________________

2. The Bypass Trust will be funded? ___ Yes ___ No

The Form SS-4 for Trust EIN will be submitted by CPA? ___ Yes ___ No

If YES to above, a tentative course of action is described below:

_______________________________________________________________________

_______________________________________________________________________

_______________________________________________________________________

______________________

have been in attendance at this Settlement Assistance Meeting of _____________________

_________________________ ___________________________ ______________________

__________________________ ___________________________ ______________________

_________________________ __________________________ CPA Signature CLA USA Representative Signature

16

3. Regarding assets having a step-up in basis, the following is recommended:

__________________________________________________________________________

__________________________________________________________________________

____________________________________________________

4. In addition, the following was discussed:

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________

5. Activity that will require further CPA participation:

__________________________________________________________________________

__________________________________________________________________________

__________________________________________________________________________ I and find the information presented above to be accurate. __ Attendee Signature Attendee Signature Attendee Signature

_ Attendee Signature Attendee Signature Attendee Signature

Meeting with

The Family (8 / 9)

esentative. Let them know you are there to help them in their me of need.

ings iscussed with the CPA will be further discussed in this family setting.

essful meeting the following will be ne

e items noted on the AGENT APPOINTMENT ORGANIZER form

iding a tremendous service to the client on

17

Per CLA policy, during introductions, present yourself as an insurance agent nd CLA repra

ti Hopefully there has already been a meeting with the CPA and the tax issue

as been addressed. If that meeting took place, some of the thhd If there was not a CPA meeting, then the FAMILY SETTLEMENT form will be

enda focus. To have a succthe agcessary:

1. You will need to maintain control of r quested documents and financial statements 2. Availability e

3. The absence of any other family advisor, with the possible exception of the CPA 4. Make sure you bring all th

In most cases, this will be the first of several meetings, or at a minimum, you will have further contact by telephone or email. Future meetings will be more specific and most likely have less family members in attendance. Do not be in a rush to put closure on the settlement assistance process. The family will let you know when they feel comfortable going forward. Until

en, remember that you are provthbehalf of CLA.

Family

Settlement

__

. The estate planning documents were reviewed for accuracy and content with the

__________________

performed by family:

1_

. This meeting is in regard to the demise of ____________________________________, who

deceased on ____________________________. 2. Attending this meeting were the following individuals: _________________________ ________________________ __________________________ _________________________ ________________________ ________________________

3 following results: _________________________________________________________________________________ _______________________________________________________________

been 4. The following activities have already

Social Security been notified? __ Yes __ No Medicaid been notified? __ Yes __ No Life Insurance Companies notified? __ Yes __ No Have IRA Custodians been notified? __ Yes __No LTC & Health Insurance Carriers notified? __ Yes __ No

ed? __ Yes __ No s __ No

Yes __ No itor notice filed in local newspaper? __ Yes __ No

___________________

tate assets, the following have not been titled to the estate plan, nor do they have beneficiary or Payment On Death

___________________ __________________ ____________________ ____________________

18

Auto & Homeowners Insurance Companies notifiVeteran’s Administration been notified? __ YeBurial arrangements completed? __ Yes __ No Safety Deposit Box reviewed? __ Yes __ No Individual credit cards destroyed? __ Yes __ No Minimum of 12 death certificates ordered? __ CredTrust checking account setup? __ Yes __ No On those items marked “NO,” the status is as follows:

________________________________________________________________________________ _____________________________________________________________

5. After reviewing the es (POD) designations:

___________________ __________________ ____________________ ____________________

6. Is the family ready to take action (if necessary) in regard to the following?

s proceeds eturn

_ Yes __ No __ N/A - - Distribute Trust Asset to Beneficiaries

If NO, the successor trustee(s) acknowledges by these initials that they have

. The family has been asked to have the following completed or initiated prior

have been in attendance at this Settlement Assistance Meeting of _________________, nd find the information presented above to be accurate.

_______________________ _________________________ ________________________

________________________ _________________________ ________________________ Attendee Signature Attendee Signature Attendee Signature

______________________________________ CLA USA Representative Signature

19

__ Yes __ No __ N/A - - Pay Expenses and Notes Payable __ Yes __ No __ N/A - - Liquidate Appropriate Investments __ Yes __ No __ N/A - - Disburse Life Insurance/Annuitie __ Yes __ No __ N/A - - Provide Information to Generate a Tax R __ Yes __ No __ N/A - - Fund the Bypass Trust (B Trust) _ __ Yes __ No __ N/A - - Divest Real Estate or Business Ownership

There was a prior meeting with the CPA on these issues? ___ Yes ___ No

declined to have an initial meeting with a CPA. ___________________ __________________ ___________________

7 to our next scheduled meeting: a. ___________________________________________________________________________ b. ___________________________________________________________________________ c. ___________________________________________________________________________ d. ___________________________________________________________________________ e. ___________________________________________________________________________ 8. Our next meeting is scheduled for ________________________ and it is anticipated that the following individuals will attend: ______________________ _______________________ _______________________ ______________________ _______________________ _______________________ I a __ Attendee Signature Attendee Signature Attendee Signature

_

Future Meetings (10)

reset forms. While forms are not equired, it will still be important to take good notes and fax them to CLA on a eekly basis for inclusion in the client file.

F r

ce or Annuity Proceeds Step-up in Basis

Bypass Funding Distribution of Assets to Heirs in an Efficient Manner

roposed CLA product suggestion fits into the overall settlement concerns nd planning process endorsed at the prior meeting(s) with family and CPA.

. This an be a tremendous opportunity for the client to take advantage of market ains over the last 15 – 30 years on company stock and mutual funds.

en the CPA on the merits of funding such things as life surance or the Roth IRA to the Bypass, but let the CPA and family make the

nal determination.

e for the spouse and eirs can be critical. Not only can you stretch an IRA, but a non–qualified

annuity can be stretched at most insurance companies.

20

Future meetings will not require any CLA prw

utu e meetings will most likely focus on:

Life Insuran Investments with IRA issues

Life insurance and annuity proceeds are highly liquid funds. The insurance company is ready to issue a passbook or write a check, and most good annuities surrender accumulated value at death. Make sure whatever yourpa It may take a bit of education and CPA assistance to determine the cost basis of investments, and the advantages of an immediate step-up in basiscg The issues of disclaiming and the Bypass often become involved in larger estates. Bypass funding is going to require the CPA’s involvement. You certainly can enlightinfi Being tax efficient and providing a continuation of incomh

Understanding a

Step-up in Cost Basis

Any reference to funding the Bypass Trust, or repositioning assets will automatically require an understanding of “cost basis” and a “step-up in

e, the son's cost basis would lso be $50,000. If the son likewise sold the property in 2004 for $150,000,

rket value. If the son subsequently sold e property he inherited from his father for its fair market value of $150,000,

to children during their life to avoid the delays and expenses of probate upon their death. In doing so, they lose adv age of the step-up in basis rule.

21

Going forward, we will be discussing more advanced settlement assistance issues.

basis.”

“Cost basis," is used to determine the taxable gain on the sale of that asset. For instance, if you purchased a parcel of vacant real estate in 1950 for $50,000, your cost basis in the property is $50,000. If you sell the unimproved parcel of land for $150,000 (its fair market value in 2004), your taxable gain would be $100,000; the sale price less the cost basis ($150,000 - $50,000 = $100,000). You would therefore be subject to capital gains tax on $100,000. In situations where property is used for business purposes, the cost basis must be reduced by the depreciation taken against the property during the period of business use. When you give an asset away during life, the recipient of the gift assumes your original cost basis. For example, if a father gave his son the real estate we discussed abovahe, too, would have a taxable gain of $100,000. When you leave an asset to someone upon your death, the recipient receives what is referred to as a STEP-UP IN BASIS. The step-up in basis is the fair market value of the asset on the date of the decedent's death (or on the date 6 months after death if the alternative valuation date is used). Using the previous example, if the father died in 2004 and left the property to his son upon his death, the son would receive a step-up in basis in the property, which would be the $150,000 fair maththe son would have no taxable gain. Although it makes sense at times to give away assets during life, one must consider the possible income tax ramifications to the recipient of the gift on the subsequent sale of that asset. In many cases it is preferable to leave an asset upon your death rather than to give it away during life to take advantage of the step-up in basis rule. Many people give away assets

ant

An important consideration when discussing step-up in basis is whether an individual lives in a Community Property State or a Separate Property State.

ed spouse's date of death. It is important to remember that separate property of the surviving spouse will

ed-up basis when the first partner dies. The surviving partner will be faced with full capital gains tax liability on his or

ss of who dies first. In addition, assets brought into the marriage and inheritance will not get community property

. For this reason, some estate planners will put assets in the name of one spouse if they are significantly older or in poor health and likely to die

s, step-up is not important given that qualified funds have a zero basis and annuities only have a basis

d “step-up in basis” can get complicated when looking at convoluted assets and situations. Again, final determination always resides with the CPA.

22

The impact of cost basis can be significant.

In community property states, the entire basis in all community property assets receives a "double step-up" in basis when the first spouse dies, i.e., it is not just the basis in the one-half interest actually transferred that is stepped up. Thus, when a married person resident in a community property jurisdiction dies, the surviving spouse will have to pay capital gains tax only on appreciation that occurs after the deceas

not receive a step-up in basis.

Unmarried couples cannot hold assets as community property since they are not legally married. If they own any property as joint tenants, only one-half the property will receive the stepp

her half of the property if it is sold.

BE AWARE, that property and assets brought by the couple from a Separate Property State into a Community Property State will not, unless you “recast” the property (A Living Trust does recast), get community property treatment; i.e., a step-up on both halves regardle

treatment unless properly “recast.”

Step-up in basis for a Separate Property State is simple in comparison to the Community Property State. Whatever the deceased spouse held separately will get a full step-up, and what is held jointly will get a step-up on half of the asset

first.

The step-up offers a tremendous potential to relieve the surviving spouse of significant capital gains on real estate and money invested in stocks and mutual funds. On annuities and qualified fund

on initial principal no matter where you reside.

Finally, “cost basis” an

Trust Fundamentals

ing due. Congress has increased the exemption equivalent amount

gift or estate tax at all. If

one’s surviving spouse, the $1,500,000 exemption equivalent is wasted. This is usually described as the “Second Step” problem, as it gives rise to taxes in

ed to, in the Bypass

an

tate. This enables the survivor to decide how much to keep outright (and to be taxed in the second estate), and the amount to continue in trust shielded from any further estate ax.

23

Estate Tax and B / C

Current 2004 and 2005 tax laws concerning estate taxes provide an exemption equivalent of $1,500,000 per person. Any amount above this exemption is taxed at a rate beginning at 45%. You can give away during life or at death a combined total of $1,500,000, without any gift or estate taxes befrom $1,500,000 to $3,500,000 by 2009, to have it lapse in 2010, and be reinstated at $1,000,000 in 2011.

Additionally, current tax laws also provide for an unlimited marital deduction for property inherited by a United States citizen spouse. This means that one may transfer an unlimited amount of property to one’s spouse without incurring any federalat the death of the first spouse all property goes to the surviving spouse, there is no estate tax in the first estate because of the unlimited marital deduction.

However, the tax problem occurs in the second estate. When the surviving spouse dies owning all of the family assets, he or she has only the one $1,500,000 exemption. Anything in this second estate over $1,500,000 will be taxed at a rate that BEGINS at 45%. If one gives everything to

the survivor’s estate.

Good estate tax planning involves utilizing as fully as possible each spouse’s $1,500,000 exemption equivalent so as to pass up to $3,000,000 estate tax free to one’s children, rather than just $1,500,000 from the surviving spouse. To accomplish this, when the first spouse dies, rather than giving everything to one’s surviving spouse outright, one puts up to $1,500,000 in trust (usually called a Bypass Trust, Credit Shelter Trust, or B Trust). The surviving spouse can serve as trustee of this trust and receive all of the trust income. Additionally, the surviving spouse can receive 5% of the principal if necessary for his or her support and medical care. When the surviving spouse dies, however, the trust assets are not part of his/her estate. In this way one can pass up to $3,000,000 estate tax free to their children ($1,500,000 through the estate of the second spouse to die because of his/her exemption, and the $1,500,000 or whatever it has appreciattrust created by the first spouse to die). It is important to shield up to $1,500,000 in the first estate by not allowing it to pass to the surviving spouse outright.

This can be done by simply creating a Bypass Trust upon the first estate, and funding it with the maximum amount left of the credit equivalent amount (currently up to $1,500,000). This allows for no discretion and just places the amount in the Bypass. It is important to be aware that: 1. Once funded, the Bypass can have unlimited growth without incurringestate tax; and 2. The Bypass is a trust and income is taxed at the highest tax bracket. Therefore highly appreciating assets and non-taxed investments will be advantageous.

The second choice is to give the option to the surviving spouse to fund the Bypass Trust. The Bypass Trust is to be funded by the surviving spouse disclaiming, or rejecting, part of the es

t

The third option is allow the surviving spouse to disclaim some or all of her inheritance. There is a 9-month period after the first death in which the survivor may disclaim or reject all or part of this inheritance. Most assets can be disclaimed, including life insurance, but there are strict rules. The survivor can not accept, collect or exert control over an asset and then disclaim it – further, joint accounts with the right of survivorship between spouses, and some other types of joint property cannot be disclaimed. While this type of “Disclaimer Trust” provides discretion, if the survivor fails to disclaim there will be no estate tax savings. One must consider this, as there may be a great reluctance on the part of the spouse to “give up” anything such a short time after an emotional loss. One must think this over carefully, and decide as to whether they wish the disclaimer, or to just use

Living Trust into the Bypass Trust (B Trust). The key to the tax savings is to force a taxable estate when the first

The following list will cover important p some changes that must e mad

the mandatory funding of the Bypass Trust.

In order to take full advantage of the estate tax planning provisions of the Bypass Trust and ensure maximum utilization of your $1,500,000 exemptions, one should split one’s assets, so that each of you will have property worth approximately one half the total, in their names alone so it can pass pursuant to the Revocable

spouse dies, and then use the $1,500,000 exempt amount.

oints of awareness regardingb e:

Bank Accounts, Credit Unions, Certificates of Deposit

If the Surviving spouse disclaims, then the CD and other savings pass

under the Trust to the Bypass Trust.

Beneficiary Designations

In the case of IRAs and retirement plans, the Spouse, if living, should be the beneficiary. Only the surviving spouse can elect to postpone distribution (and taxation) for a longer period of time by “rolling-over” into their own Plan or IRA. In the case of life insurance, whether SGLI or commercial, all or part of the proceeds can be disclaimed, and therefore diverted to the Bypass Trust. This will most likely require a change of beneficiary. The contingent beneficiary

Trustee of the Doe Family Bypass Trust of a Trust Agreement

should be: “dated 1/1/1”

Stocks, Mutual Funds, etc.

If you own stocks, mutual funds, etc., they should be in the name of the Trust ill facilitate easy funding to the Bypass Trust. and then it w

Real Estate

It may not be advantageous to transfer your residence to the Bypass Trust mber, not all the assets must be

ubject to the disclaimer, just enough to make up the $1,500,000, or achieve the tax savings that you wish.

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due to State tax and creditor laws. Remesto

Business and Certain Investment interests

Sole Proprietorships will be available to the disclaimer as they are all in one name. Certificates of Limited Partnership should be examined to make sure they are not joint with the right of survivorship. General Partnership interests can be disclaimed. If there is a Buy-Sell Agreement, it must be reviewed for

ny prohibition against this type of transfer. Closely held Corporation Stock

ur lifetime.

a sale of the property, hereas if the recipient inherited the asset, the basis would be the value at date of

is more

oins in due which may reduce the $1,500,000 exemption. If they

erty State. With that in mind, the CPA and attorney should always provide the final word and “go ahead” when it comes to which assets are funded to the Bypass Trust.

25

amust not be joint with the right of survivorship.

This is only a general discussion of some aspects of enabling the funding of the Bypass Trust, and as one can see, if one’s investments and assets are complex, the funding or transfer process can be involved, time-consuming and costly. The funding requirement does not cease after initially re-titling the assets, but continues during yoEvery time one sells an asset, purchases a new asset, or changes brokers, it will result in funding considerations and maintaining a balance between both spouses.

The alternative to the division of assets and the use of Bypass Trusts would be to attempt to keep one’s combined estates under $1,500,000 by establishing a vigorous gifting program. One would continue to gift away all sums over $1,500,000, but not exceed the annual exempt gift amount. One may give $11,000 ($22,000 in the case of a married couple) annually to anyone without incurring any gift tax. For example, if someone has 2 children and 4 grandchildren, then they could conceivably give $22,000 to each every year (or $132,000) without a gift tax. A significant tax benefit of such a lifetime gift is that appreciation in value following the date of the gift is not subject to transfer taxes. By giving property likely to appreciate in value, you remove from the estate the increase in value, thereby avoiding any transfer tax on that appreciation. However, bear in mind that the recipient takes cost or basis in the gifted property, and will have to pay any capital gains tax using that cost upon wdeath, eliminating any gain from one’s purchase to their death. A quick word regarding the Qualified Terminal Interest Property (QTIP) Trust, or more commonly known as the C Trust. It is used for those assets that exceed $1,500,000. Income producing assets such as annuities and IRAs are appropriate funding vehicles; given assets in the C Trust have potential estate tax consequences. An exception to this rule may be the IRA. Some planners advocate under funding the B Trust, with the remaining exclusion allowance placed in the C Trust for greater control and possibly less IRS second-guessing. Other planners say that a properly drafted AB Trust than sufficient regarding the IRA, and that the technique of funding the IRA into the C Trust is unnecessary. When in doubt, the final decision is the CPA’s and family. If one makes taxable gifts during your lifetime (e.g., gifts of more than $11,000 to any individual in any one year or more than $22,000 to one individual if one’s spouse jthe gift), there will be a gift taxhave a lower exemption equivalent, then the estate tax will apply at a lower level.

This information is only meant to be a general discussion of the Bypass Trust and taxation of the Estate. The decision to fund and what to fund to the Bypass is impacted by such issues as size of estate, type of assets, need for income, and even whether you live in a Community or Separate Prop

What is Community

Separate Property

eeds from each sale to each purchase to prove that the property is separate property.

.

erty

er spouse before the marriage.

Gifts and inheritances received by either spouse during the marriage.

Please remember that we are not talking about Community Property tates versus Separate Property States.

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Property versus

All property (including cash) is classified as community or separate based on when and how it was acquired. Converting assets into cash and back again does not affect the classification. For example, if a separate property asset is sold during the marriage, the proceeds of that sale and anything purchased with them will remain separate property. However, you must be able to "trace" the proc

Unless you keep excellent records, this can be difficult.

Community property consists of the following:

• Earned income from the work of either spouse during the marriage.

• Dividends, interest, and capital gains earned on community property

• Dividends and interest earned on either spouse's separate prop

Separate property consists of the following:

• Earned income from the work of eith

• Capital gains on separate property.

• Gifts and inheritances received by either spouse before the marriage.

•

S

The Bypass and QTIP Trusts

(Separate Property State)

A on , New Mexico, Texas, Wisconsin, and Washington are Community Property States. All of the

parate property. However, the surviving pouse receives no step-up on her share of trust assets or on any separate

n. Thus, if the individuals have moved from a Community Property tate to a Separate Property state, they will be using Separate Property state

v

other issue be aware is the non-qualified annuity: cost basis will always be original

and QTIP Trusts:

. Ledger method used to allocate assets of decedent to B & C Trusts

27

riz a, California, Idaho, Louisiana, Nevada

remaining 41 states are Separate Property States. The concept of separate property comes from English common law. The concept presupposes that the husband owns all of the marital assets and the wife owns none of the marital assets. When the assets are funded to the Revocable Living Trust, the decedent’s half of those assets do receive a Step-up in Basis, as well as any sesproperty owned outside the trust. The state of primary residence (and more specifically where the individuals are expected to die) usually defines whether they are to use the Separate Property state step-up or Community Property state step-up method of valuatios

alue.

In a valuation of an estate in a Separate Property state, the method of itemization is typically used. The marital assets are divided right down the middle, with one-half going to the decedent’s half of the ledger and one-half to the survivor. Separate property of the decedent flows directly to the decedent’s side of the ledger, and separate property of the survivor flows likewise to their ledger. Assets on the decedent’s side receive a full step-up in basis, and those on the survivor side retain their original cost basis. A major exception is the IRA: it is treated as separate property, but retains a zero cost basis regardless of which side of the ledger it flows. Antoprincipal, and any growth will constitute taxable interest income. Here is the formal process of funding the Bypass

1. Value the assets per the previous discussion

2. Use the NET VALUE of the assets (market value less liability)

3

4. Assets must be allocated by ITEM rather than value (can’t split asset)

net value, date of valuation,

, as ng as it is done on a dollar-for-dollar basis, but the CPA should be con-

unding will be comprised of sending the institution having the ent to re-title the asset from the Family Trust to the indicated

Example of A to B Trust: t #123 from the Smith

Family Trust Dated 1/15/98 to the Smith Family Bypass Trust

Example of

ss Trust under a Trust Agreement of 1/15/98 to the Smith Family QTIP Trust under a Trust Agreement of

r both the Bypass and Qualified Terminal terest Property Trusts. In addition, notification of the utilization of the QTIP

with the Spousal Trust, Bypass rust, and Qualified Terminal Interest Property Trust. Obviously things can

belong in the rovince of the CPA. If a CPA is not available, it is imperative you call

how confident you feel regarding this rocess, Settlement Assistance Services is a requisite before you can fund a

sub-trust without CPA involvement.

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5. Written documentation required to justify valuation

6. The ledger should note asset description,source of valuation, percentage of value, and each sheet signed and dated by the surviving spouse and CPA (accountant)

7. Assets can be transferred from one sub-trust to another (A - B - C)losulted since re-categorization may trigger tax impact (Capital gains, etc) 8. Actual fasset a documsub-trust.

XYZ Mutual Fund, transfer accoun under a Trust Agreement of 1/15/98 B to C Trust: XYZ Mutual Fund, transfer account #456 from the Smith Family Bypa 1/15/98 9. Last but not least, the IRS will require Form SS-4 to issue an Employee Identification Number (EIN) foInmust be provided on Form 706. Those are the basic ground rules in workingTbecome very complicated and convoluted. It is CLA’s contention that you should understand the basics of funding the Bypass and QTIP, but the actual funding and valuations reallypSettlement Assistance Services for consultation and approval. The APPENDIX section contains a Ledger Worksheet for preliminary sub-trust funding. Again, no matter p

The Bypass and QTIP Trusts (Community Property State)

the Community Property tate, since much of the salient information was by necessity discussed

only speaking of nine Community Property States: Arizona, alifornia, Idaho, Louisiana, Nevada, New Mexico, Texas, Wisconsin, and

als move from he Community Property state to a Separate Property state, they will fall

ti eparate

I feel we can be much briefer in our overview of Sduring our dissection of separate property issues.

Again, we areCWashington.

Basically at the first death, everything receives a step-up in basis, except property held as separate by the surviving spouse. IRA’s and annuities still remain an exception in the valuation process. If the individutunder the valuation guidelines of the Separate Property state.

Valuation and sub-trust treatment is the same in both a separate and community state in regards to separate property of the surviving spouse. At he separate state level the treatment is intuitive, but in a community state it s an exception to the general rule. It is important to remember, the s

property of the surviving spouse does not receive stepped-up valuation and is allocated to the survivor’s A sub-trust at the original cost basis.

The only significant difference between community states versus separate states in regard to assigning assets to a sub-trust is that the Community

roperty state utilizes the value method and the Separate Property State

cial. It allows a pecific asset to be split between multiple trusts. This more easily allows

ly two major differences:

. The different treatment of cost basis

munity Property state sub-trust funding, this brief explanation hould suffice. Again, a call to Settlement Assistance Services is always

encouraged.

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Pemploys the item method.

In a nutshell, value assigning to sub-trusts is highly benefisboth federal estate tax exemptions receive full utilization.

When doing the ledger worksheet there are on

12. The ability to split the asset between trusts

While there are other more subtle distinctions between Separate Property state and Coms

Life Insurance

In the Bypass Trust

understand that when we refer to life insurance in the ypass, we are referring to the purchase of a life insurance policy on the

s

about the transfer of existing life insurance on the sting cash value life

1. Trigger a three year look back on the transaction

be a very special situation. Make sure you discuss the pecific issues with the family CPA or Settlement Assistance Services prior

t

factor that would have a material and unpredictable effect on the extent of the growth of a bypass

ust funded with a traditional securities portfolio.

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It is important to B

urviving trustor.

We are not talking surviving trustor to the Bypass. Transferring exiinsurance policy will: 2. Reduce the survivor’s exclusion by the cash value in the policy

If we are looking at a Term insurance policy, we will not have the issue of cash value, but would still initiate a three-year look back. A case can possibly be made for the transfer of an existing life policy into the Bypass, but given the look back and reduction of the exclusion (for cash value insurance), it needs toso any such transfer.

Back to the purchase of life insurance on the surviving trustor . . .

Life insurance has always been regarded as a highly effective vehicle for the leveraging of transfer tax exemptions. The irrevocable inter vivos life insurance trust has long been recognized as a useful planning device that uses this leveraging concept, yet little attention has been given by planners to the utilization of life insurance in a Bypass Trust. The use of trust assets for the purchase of an insurance policy on the life of the surviving spouse can be a means of assuring significant leverage (i.e., tax-free growth of the trust corpus as of the date of the surviving spouse's death) without regard to the ultimate longevity of the surviving spouse, a

tr

A preliminary question is whether the purchase of a life insurance policy would be a legally proper investment by a Bypass Trust. In general, state law governs the types of investments into which a trustee may place trust assets. These rules are generally broad, intended primarily to limit excessive exposure to risk, and do not limit powers otherwise specifically granted in the trust instrument. A well-drafted trust instrument will delineate the investment powers of the trustee. If the purchase of insurance by the Bypass Trust is contemplated at the planning stage, the trust instrument might contain a clause specifically granting authority to acquire a life insurance policy. Even if life insurance is not specifically mentioned, the trustee is often given virtually unlimited discretionary authority, either by the trust instrument itself or under state law. Most states have abandoned so-called "legal list" statutes, which delineated specific types of permissible trust investments, in favor of a broad standard of prudent judgment on the part of the trustee exercised in the context of the known objectives of the trust. Thus, in most instances, the purchase of an insurance policy would be permissible, as a matter of trustee discretion. However, it is imperative that you consult with the drafting attorney to determine if the trustee has such

wnership through modification of the insured's position or powers as trustee and/or full or partial release of his or her limited power of

ble (at best), the insurance company will often recommend a legal route that removes the surviving trustor as the trustee over the life insurance.

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power.

Care must be taken to avoid the insured's possessing incidents of ownership in the policy, which would cause the death benefit to be included in the insured's gross estate. Incidents of ownership may be present if the insured is either a trustee of the Bypass Trust or holds a power of appointment over trust property. If the possibility that life insurance might be acquired by the Bypass trust is contemplated in the estate planning stage, the factors potentially giving rise to incidents of ownership can, in most instances, be avoided with careful drafting. In the case of an existing credit shelter trust desiring to acquire such insurance, steps can be taken to eliminate potential incidents of o

appointment.

If the client makes the decision to purchase life insurance on the surviving trustor, it is a good practice to submit the Trust Agreement to the legal department of the life insurance company issuing the policy for their review. If the surviving trustor is the trustee of the Bypass Trust, he or she may need to relinquish that position to avoid Incidents of Ownership. The life insurance company and its’ legal team should be left to make that determination. Since the IRS is unpredicta

Annuities in the

Bypass Trust

and doesn't need or want any income from the Bypass trust. A fixed annuity provides income tax deferral, and simplified asset man gement.

annuities held "by a trust . . . as an agent for a natural person". Therefore, the issue is whether the typical Bypass trust falls under that exception.

s trust, it mirrored the typical Bypass trust wherein the surviving spouse is the income beneficiary and the children are the remainder benefi-c aries.

able event. Therefore, each beneficiary could continue to own their annuity contract and enjoy the advantages of such ownership described above.

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Funding a Bypass Trust with a fixed annuity permits the trustee to grow trust assets without producing current income. This can be particularly beneficial when the surviving spouse has more than enough income from other sources

a

However, IRC Section 72(u) provides that if an annuity contract is held by a "non-natural person", then the growth inside the annuity contract is currently taxed as ordinary income to the owner. IRC Section 72(u)(l) provides an exception for

Private Letter Ruling (PLR) 199905015 dealt with an irrevocable trust where there were two nominal income beneficiaries, and three primary remainder beneficiaries. The trustee proposed to purchase (as owner and beneficiary) three single premium deferred annuity contracts, with each of the three primary beneficiaries named as the annuitant on one of the contracts. Upon termination of the trust, each of the primary beneficiaries was to receive his/her annuity contract. While the trust involved in PLR 199905015 was not a Bypas

i

The IRS ruled in PLR 19905015 that: (1) the annuities were deemed to be owned by a natural person for purposes of IRC Section 72(u), and (2) upon distribution of the annuity contracts out to the primary beneficiaries, there would not be a tax

Ideally, a separate annuity contract should be purchased for each of the Bypass Trust remainder beneficiaries (i.e., the grantor's children). Each

eneficiary, respectively, should be named as the annuitant on their con-act.

similar rulings) will not send a orm 1099; and other carriers will not send a Form 1099, but only if the ustee signs a hold harmless agreement.

ypass nnuity, but by the time you contemplate purchase of annuity by the Bypass ust, we’ll have definitive information from all of our current carriers.

nnuity, and the irrevocable s of the Bypass is important for asset protection, a case can be made

in the Bypass trust.

33

btr Finally, the trust should be named as the owner and beneficiary of each annuity contract. Before purchasing a fixed annuity inside a Bypass trust it is important to ask the issuer of the annuity contract whether or not it will issue the trust a Form 1099 for the earnings within the contract. Some carriers will send a Form 1099 regardless of PLR 199905015 since private letter rulings are only binding on the taxpayer seeking the ruling; those carriers who follow PLR 199905015 (andFtr Before trying to purchase an annuity for the Bypass, it will be important to know how that specific insurance company will treat the interest earnings and whether the annuity should be funded into the Bypass as a separate policy for each of the named beneficiaries. At the time of this writing, we have not queried our various annuity carriers to their treatment of a Batr Typically, existing annuities are not transferred to the Bypass Trust since the trust represents a change of ownership. Change of ownership would trigger taxation on interest growth as earned income (at the highest tax rate). In addition, since the trust is a “non-natural person,” the Bypass is not eligible for tax deferral. While not an attorney or CPA, it is understood that existing annuities transferred to the Bypass are not addressed by PLR 199905015. In the rare instance where there isn’t much interest growth, the surviving spouse will claim all income from the astatufor the annuities placement

Traditional IRA versus

Roth IRA in Bypass Trust

There are significant income tax disadvantages to using retirement benefits to fund a Bypass trust of which the surviving spouse ("Spouse") is a beneficiary. These income tax disadvantages being:

1) Reduction or elimination of the estate tax savings that is supposed to be obtained by using a Bypass trust and/or

2) Reduction of the amount of money Spouse has available to live on as compared with leaving the benefits outright to Spouse.

The clients having this problem are married, old enough and rich enough to care about estate taxes, but whose assets outside of retirement plans are less than the optimal Bypass Trust amount. For example, assume it is 2004 and the estate tax exemption is $1.5 million. The couple's assets exceed $2 million. The optimal credit shelter amount is therefore $1.5 million.

The spouses have enough non-retirement plan assets to fund the optimal credit shelter amount for one spouse, but not both. The spouses have no assets or only insignificant assets outside retirement plans, so neither spouse can fund a Bypass trust unless retirement benefits are used for that purpose. (If all of the retirement benefits are in one spouse's name, there is an additional problem; namely, how to fund the credit shelter trust of the non-participant spouse.)

Unless there are no other assets that can be allocated to the bypass trust, designating the bypass trust as the primary beneficiary of an IRA account is not usually the best tax planning. Ideally, the assets allocated to a Bypass trust will be left untouched by the surviving spouse so that they can appreciate and grow, but that is not possible with an IRA. The mandatory distributions from an IRA will eventually deplete the IRA account, reducing what would otherwise be "bypassed" from estate taxation. As you know, IRAs are eventually subjected to income taxation on the full amount (not just post-death earnings), and the income tax itself will also serve to diminish the effectiveness of the bypass trust.

34

When a family fits into the scenario described above, where an inordinate portion of their estate is comprised of Qualified Funds, the Roth IRA makes tremendous sense. It earns tax free during the life of the owner with no Required Minimum Distribution (RMD). At the owner’s death, the surviving spouse can inherit or adopt and continue tax free growth without any RMD.

Taking this planning to the Bypass trust, we have a much different result than the Traditional IRA. Before discussing the implications and advantages of the Roth IRA in the Bypass, the client must actually be able to disclaim the Roth to the Bypass trust. If you are visiting with the family prior to the demise of a very sick spouse, that individual can make a “death bed” decision to convert a traditional IRA into a Roth IRA.

The positives of the Roth in the Bypass would be :

1. RMD’s based on greater life expectancies

2. No taxation on the non-distributed growth

3. The value of the asset will/can continue to grow

The negatives on the Roth in the Bypass are :

1. RMD’s for the beneficiaries, whereas the spouse had no such requirement

2. The taxation on the conversion of traditional to Roth status

If the need arises to fund the Bypass trust with qualified funds, the Roth IRA should be strongly considered. CLA has software that will help you illustrate the advantages of that strategy, as well as having several articles by such publications as The CPA Journal that endorse the Roth.

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Second Death Settlement in Community

and Separate Property State

Separate Property State: With the death of the second spouse, the rules change in regard to valuation of the assets. The assets of the second spouse finally receive stepped-up valuation to the current market value. The original cost basis is no longer the concern. The first spouse’s assets in the Bypass trust do not again receive a step-up in valuation upon the death of the second spouse. When the second spouse dies and the estate must be settled, you must be aware of several potential tax impacts:

1. When the heir eventually sells estate assets, any capital gain is subject to capital gains taxation;

2. Depending on the size of the estate when the second spouse dies, federal estate taxes may be due;

3. If you are unlucky enough to reside in one of the states that imposes an inheritance tax, such a tax may be due when the second spouse dies.

Community Property State: When the second spouse dies, the pre-first death separate property assets of that spouse receive their first step-up in valuation, while the pre-first death joint/trust assets in the A Trust receive their second step-up. The assets of the first spouse received a full step-up prior to placement in the Bypass trust, and will not receive an additional step-up on the death of the second spouse. In summary, the Separate Property and Community Property States handle second death the same. The Bypass trust does not get an additional step-up, and the A Trust receives a full step-up.

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APPENDIX

ASSET REPOSITIONING AUDIT TRAIL

BEFORE REPOSITIONING As of __________ As of __________ Pre-Fund Post-Fund Asset Balance Balance Balance

Checking

Savings

CD

Stock

Bonds

Brokerage

Home

Other Prop.

Personal

IRA

Life

Annuity

Business

TOTAL

A1

Ledger Worksheet

SEPARATE PROPERTY STATE _______________________________________

SEPARATE PROPERTY MARITAL SHARE TRUSTS Deceased Survivor Deceased Survivor C B A

Assets Net Step-up Net Cost Base Net Step-up Net Cost Base Net Step-

up Net Step-up Net Cost Base

Checking $ $ $ $ $ $ $ Savings CD Bonds Broker/MF IRA Life Annuity Home Other Prop. Personal TOTAL

A2

Ledger Worksheet

COMMUNITY PROPERTY STATE _______________________________________

SEPARATE PROPERTY MARITAL SHARE TRUSTS Deceased Survivor Deceased Survivor C B A

Assets Net Step-up Net Cost Base Net Step-up Net Step-up Net Step-up Net Step-up Net Step-up

Checking $ $ $ $ $ $ $ Savings CD Bonds Broker/MF IRA Life Annuity Home Other Prop. Personal TOTAL

A3

Funding of Bypass (B)

and QTIP (C) Trusts

ASSET: AMOUNT: FROM: TO: FUND DATE: SIGNATURE: ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________ ________________ __________ _________ _________ ____________ ____________________

A4

Questions to Ask

the Attorney

1) Who are the current beneficiaries and Trustees?

2) Can the trust allow for split to A,B,C?

3) What are the trustee powers and are there any limitations?

4) Can Trustee reallocate trust assets?

5) Can the trustee buy Life insurance products with trust assets?

6) Are their any other special considerations in the trust for the trustee?

A5

INSTRUCTIONS TO TRANSFER FUNDS

TO: ________________________________________________________________ FROM: ________________________________________________________________ As part of our estate plan, we established a Revocable Living Trust dated ______________________, ______ . The co-trustor of the Revocable Living

Trust, ______________________ was deceased on ______________ Let this notification serve as instruction to transfer our __________________ account,

identified as Account # _________________ currently titled to the Revocable Living Trust .

Please transfer the title of this asset to read as follows: You are hereby given the power to accept orders and other instructions relative to the Trust from the Trustee(s). They may execute any documents on behalf of the Trust which you may require. The Trustee(s) is (are) empowered to act on behalf of the Trust. This investment is suitable for the Trust. ____________________________________ TRUSTEE ____________________________________ TRUSTEE I(We) certify that I(we) have the power, under the Trust and applicable law, to enter into transactions for the benefit of the Trust. I(We), the Trustee(s), jointly and severally indemnify you, and hold you harmless from any liability for effecting transactions of the type specified above, should you act pursuant to instructions given herein.

I(We) agree to inform you, in writing, of any amendments, change of Trustee(s) or other event which could alter the above certifications. Thank you for your assistance. Signed this ________ day of _____________________, ________. TRANSFEROR(S): TRANSFEREE(S): ____________________________ ____________________________ ____________________________ ____________________________

A6

A7

A8

Federal Gift or

Estate Tax Table

By using the tax chart, you can estimate what your estate taxes will be. For instance, suppose you have an estate worth $2.1 million. With the above chart, you would fit between the

$2,000,000 and $2,500,000 category.

Taxable Gift or Estate Tax

FROM TO Tax on Col.

1 Tax Rate on

Excess

$0 $11,000 $0 18%

11,000 20,000 1,800 20%

20,000 40,000 3,800 22%

40,000 60,000 8,200 24%

60,000 80,000 13,000 26%

80,000 100,000 18,200 28%

100,000 150,000 23,800 30%

150,000 250,000 38,800 32%

250,000 500,000 70,800 34%

500,000 750,000 155,800 37%

750,000 1,000,000 248,300 39%

1,000,000 1,250,000 345,800 41%

1,250,000 1,500,000 448,300 43%

1,500,000 2,000,000 555,800 45%

2,000,000 + 780,800 48%

1,500,000 2,000,000 555,800 45%

2,000,000 + 780,800 48%

Your estate tax equals $780,800 for the first $2 million, plus 48% tax on the leftover:

Estate Taxes = $780,800 + $100,000(0.48) = $828,800

A9

Notification of Death Date:

To:

Gentlemen and/or Ladies:

On ____________________, 200__ , your client ____________________________

died.

Mr. / Mrs. / Ms. ______________________, had a policy / account / investment

with your institution that was (were) identified as follows:

_______________ ________________ _______________ ________________

Please send me whatever forms I should fill out if filing a request for

benefits on behalf of either the estate of ________________________________

or his/her survivors.

Sincerely,

Name:

Signature:

Street Address:

City, State Zip:

Telephone Number:

A10

Name _____________________________ Date ___________________

Budget

Category Budget Amount Actual Amount Difference INCOME: Wages/Income Interest Income INCOME SUBTOTAL EXPENSES: Taxes Rent/Mortgage Utilities Groceries/Food Clothing Shopping Entertainment Transportation Long-Term Savings Emergency Savings Donations Miscellaneous/Other EXPENSES SUBTOTAL

NET INCOME (Income - Expenses)

A11

Indiana

Indiana has a layered inheritance tax system. The amount of tax imposed depends on who gets what after you are gone, according to the following classes of beneficiaries:

• Surviving spouse: Transfers to a surviving spouse are totally exempt from tax. • Class A: This class may include a lineal descendant, legally adopted child, parent of a legally

adopted child, and the descendant of an adopted child. When somebody acts in the place of a parent (referred to in Latin as in loco parentis) for 10 years or more, a child is considered adopted if the relationship began before the child's 15th birthday. After a $100,000 per transferee exemption, members of this class are taxed according to the rates in the table below.

• Class B: The members of this class of beneficiaries may include a brother, sister, descendant of brother or sister, a son's wife or widow, and a daughter's husband or widower. Each beneficiary in this class gets a $500 exemption from tax. Transfers above this amount are taxed per the table below.

• Class C: All others not specifically mentioned above are lumped in under this class. Beneficiaries in this category get a maximum exemption of only $100, with the rest being taxed as indicated in the table that follows.

Indiana Inheritance Tax Rates

Value of Property Passing to Class

Class A Tax on Col. (1)

Class A Rate on Excess

Class B Tax on Col. (1)

Class B Rate on Excess

Class C Tax on Col. (1)

Class C Rate on Excess

(1) (2) (3) (4) (5) (6) (7) (8) $0 $25,000 $0 1% $0 7% $0 10% $25,000 $50,000 $250 2% $1,750 7% $2,500 10% $50,000 $100,000 $750 3% $3,500 7% $5,000 10% $100,000 $200,000 $2,250 3% $7,000 10% $10,000 15% $200,000 $300,000 $5,250 4% $17,000 10% $25,000 15% $300,000 $500,000 $9,250 5% $27,000 10% $40,000 15% $500,000 $700,000 $19,250 6% $47,000 12% $70,000 15% $700,000 $1,000,000 $31,250 7% $71,000 12% $100,000 15% $1,000,000 $1,500,000 $52,250 8% $107,000 15% $145,000 20% $1,500,000 and above $92,250 10% $182,000 15% $245,000 20%

Indiana also has an estate tax that is intended to absorb the maximum credit against the federal estate tax. The amount of the tax is equal to the excess (if any) of the amount of the maximum credit above the aggregate of all inheritance and estate taxes paid to all states or territories.

A12

Deductions for resident decedents. The following items can be deducted from a resident decedent's estate when calculating Indiana estate tax liability:

• decedent's debts claimed against the estate • taxes on realty within the state which are subject to Indiana inheritance taxes and which were

liens at the date of death • taxes on personal property located within the state and subject to Indiana inheritance taxes

which were personal obligations or were liens at the time of death • income taxes on income to date of death • funeral expenses • memorial costs (not to exceed $1,000) • commissions of executors, administrators and trustees • administration expenses, including reasonable attorneys' fees (excludes expenses of

administering property not subject to Indiana inheritance taxes • inheritance or estate taxes paid to other states on intangible personal property which is subject

to Indiana inheritance taxes (but not the federal estate tax) • family allowance (currently $15,000) • mortgages and special assessments on real property located within the state and subject to

inheritance taxes (deductible from value of property) • bequests to or for the use of a municipally owned cemetery, a church-owned cemetery, or a

nonprofit cemetery corporation or association (generally exempt from tax)

Deductions for nonresident decedents. If the decedent was a nonresident of Indiana, the only deductions allowed from the estate are taxes (other than the federal estate tax), any other liens against the property to which the transfer relates, and the expenses of administering the property subject to Indiana inheritance taxes. However, if the assets in the decedent's home state estate are insufficient to discharge the decedent's general debts, any unpaid debts allowed by the probate court are deductible for Indiana inheritance tax purposes.

Returns. For estates involving a resident decedent, the Indiana probate court having jurisdiction over the estate also determines the amount of inheritance taxes owed. An Indiana inheritance tax return, together with an itemized schedule of debts owed and all deductions claimed, must be filed with the court within nine months of the decedent's death.

Any resident inheritance tax owed is paid to the county treasurer of the decedent's county of residence. A five percent discount is available for payments made within nine months of the decedent's death.

For nonresident decedents, the Inheritance Tax Division of the Indiana Department of State Revenue has exclusive jurisdiction over these matters. This department receives the tax return and computes and determines the amount of taxes owed upon any taxable transfers. In either case, though, any estate taxes owed must be paid within 12 months of the decedent's death.

Generation-skipping transfer tax. Indiana imposes a generation-skipping transfer tax equal to the federal credit.

A13

Kansas

Kansas imposes an estate tax on the estates of persons who die on or after July 1, 1998. The Kansas estate tax is equal to the federal estate tax credit for state death taxes computed on the basis of 1997 federal law.

Under 1997 federal law, the Kansas filing threshold is $700,000 for deaths occurring in 2003 ($850,000 in 2004; $950,000 in 2005; and $1 million in 2006 and thereafter) and the Kansas tax is equal to 100 percent of the amount of the related federal credit for state death taxes. Generally, no Kansas tax is due unless the gross value of the estate exceeds $700,000.

Since it adopted the 1997 version of the Internal Revenue Code, none of the many federal estate tax changes enacted in 2001 apply to Kansas. This means Kansas' state estate taxes will remain in place even though the federal credit for state death taxes and the federal estate tax are gradually eliminated.

Returns. When the value of the federal gross estate is more than the amount protected by the unified credit, an estate's personal representative must make an inventory of the estate's assets within 30 days after appointment and file a Kansas estate tax return (Form K-706). The state return must be filed at the same time the federal return must be filed (usually within nine months of death unless an extension is granted). Copies of all federal returns must also be filed with the Kansas Department of Revenue. Any taxes owed must be paid by the due date for the return (generally within nine months of death).

All estates of decedents dying on or after May 22, 2003, must complete the April 1997 version of federal Form 706 and file it with Kansas Form K-706. The 1997 Form 706 is required by Kansas in addition to any current Form 706 that must be filed with the IRS.

Generation-skipping transfer tax. Kansas imposes a generation-skipping transfer tax that is equal to the federal credit.

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Kentucky

Kentucky has two types of death taxes: an inheritance tax and an estate tax. The Kentucky inheritance tax is imposed on a beneficiary's right to receive property from a deceased person. The amount of tax imposed depends on who gets what after you are gone, according to the following classes of beneficiaries:

• Class A: Any portion of the net taxable estate passing to a surviving spouse (including the entire value of any trust or life estate); an infant child by blood or adoption; a child by blood or a child adopted during infancy or adulthood (if raised by the decedent during infancy); a stepchild; a grandchild of any of the above; a parent; or a brother or sister (full- or half-blooded) is completely exempt from tax.

• Class B: Transfers to the deceased's nephew, niece, nephew or niece of the half-blood, son-in-law, daughter-in-law, aunt, and uncle are taxed (according to the table below) after the first $1,000 transferred to each such person.

• Class C: This category includes any person not included in Class A or Class B above. The first $500 transferred to a member of this class is exempt from tax. Any amount above that is taxed per the rates in the table below.

Kentucky Inheritance Tax Rates Value of Property Passing to Class

Class B Tax on Col. (1)

Class B Rate on Excess

Class C Tax on Col. (1)

Class C Rate on Excess

(1) (2) (3) (4) (5) (6) $0 $500 $0 4% $0 6% $500 $1,000 $0 4% $0 6% $1,000 $5,000 $0 4% $30 6% $5,000 $10,000 $160 4% $270 6% $10,000 $20,000 $360 5% $570 8% $20,000 $30,000 $860 6% $1,370 10% $30,000 $40,000 $1,460 8% $2,370 12% $40,000 $50,000 $2,660 10% $4,170 14% $50,000 $60,000 $3,160 10% $4,870 14% $60,000 $100,000 $4,160 12% $6,270 16% $100,000 $200,000 $8,960 14% $12,670 16% $200,000 $500,000 $22,960 16% $28,670 16% $500,000 and above $70,960 16% $76,670 16%

Kentucky also has an estate tax that is intended to absorb the maximum credit against the federal estate tax. If a federal estate tax return must be filed and Kentucky's portion of the credit for state death taxes exceeds the state inheritance tax, the difference between the credit and the inheritance tax must be paid to Kentucky as an estate tax.

A15

Deductions. The following items can be deducted from a resident decedent's estate when calculating Kentucky estate tax liability:

• decedent's debts (except those secured by property not taxable in Kentucky and debts barred by the statute of limitations)

• taxes accrued prior to death (except those on property not taxable in Kentucky) • federal estate taxes in proportion to the amount of the net estate in Kentucky • special assessments due and unpaid which are a lien on the property • funeral expenses (up to $5,000) • commissions of executors and administrators (up to amounts actually allowed and paid) • administration costs, including attorney's fees (up to amounts actually allowed and paid) • mortgages

For estates involving a nonresident decedent, similar deductions apply except that deductions will probably be apportioned. A deduction will generally apply to the proportion that the property assessed in Kentucky bears to the total taxable property of the estate. An exception to this general rule applies to administration and funeral expenses, which are not apportioned.

Returns. If a federal estate tax return is not required to be filed, there is no need to file a Kentucky estate tax return. However, a Kentucky inheritance tax may still be due.

If any taxes are due, the return must be filed with the Kentucky Revenue Cabinet within 18 months of the decedent's death. Any taxes owed must be paid within the same 18-month period, otherwise interest will accrue on any unpaid balance. A five percent discount incentive is provided to entice estates to pay any taxes owed within the first nine months of death.

Generation-skipping transfer tax. Kentucky does not impose this type of tax.

A16

Minnesota

The Minnesota estate tax is designed to absorb the federal estate tax credit for state death taxes paid under the federal estate tax law, as amended through December 31, 2000. This means that the phase out of the state death tax credit under federal law and its replacement by a deduction in 2005 does not apply to the Minnesota tax.

No additional estate tax is imposed.

Deductions. The following deductions are allowed from a decedent's estate when calculating Minnesota estate tax liability:

• marital deduction based on the federal unlimited marital deduction • expenses of last illness unpaid at death • funeral expenses

Returns. A Minnesota estate tax return (Form M706) must be filed if the federal gross estate exceeds $700,000 for estates of decedents dying in 2002 or 2003 ($850,000 in 2004; $950,000 in 2005; $1 million after 2005). The estate's personal representative must file a Minnesota estate tax return and a copy of the federal return within nine months of the decedent's death. Any Minnesota estate taxes due must be paid within the nine-month period for filing the return.

Generation-skipping transfer tax. Minnesota does not impose this type of tax

A17

North Carolina

The North Carolina estate tax is designed to absorb the federal estate tax credit for state death taxes. However, North Carolina did not adopt the state tax credit phase-out under federal law (25 percent in 2002; 50 percent in 2003; and 75 percent in 2004). Instead, effective for estates of decedents dying before July 1, 2005, the North Carolina estate tax is equal to the state death tax credit for federal purposes before applying the percentage reduction for the federal credit.

No additional estate tax is imposed.

Deductions. The following items can be deducted from a decedent's estate when calculating North Carolina estate tax liability:

• decedent's debts and claims against the estate • reasonable funeral expenses • administration expenses • attorney's fees • the federal unified credit • amount of state death taxes imposed on a charitable transfer • transfers for public, charitable, and religious uses • losses incurred during settlement of the estate not compensated by insurance or otherwise • unpaid mortgages (to show actual equity of mortgaged property)

Returns. If a federal return must be filed, a North Carolina estate tax return (Form A-101) must also be filed with the North Carolina Department of Revenue within nine months of the decedent's death. Any North Carolina estate taxes owed must be paid within nine months of the decedent's death.

Generation-skipping transfer tax. North Carolina imposes a generation-skipping transfer tax equal to the federal credit.

A18

Ohio

A19

A20

A21

Oklahoma

Oklahoma has its own estate tax that is independent of the federal estate tax. Oklahoma also imposes an additional estate tax that is essentially designed to absorb any available federal estate tax credit for state death taxes.

The amount of Oklahoma estate tax imposed depends on who gets what after you are gone, according to the following categories:

• Surviving spouse: Any portion of the net taxable estate passing to the surviving spouse is completely exempt from tax.

• Class 1: This class of beneficiaries includes the decedent's father, mother, child, child of a husband or wife, adopted child or lineal descendant of decedent or of such adopted child. For estates of decedents dying in 2003, the first $700,000 of the estate is exempt from tax for members of this class ($850,000 in 2004; $950,000 in 2005; $1million in 2006 and beyond). For the tax rates imposed, see columns (3) and (4) in the table below.

• Class 2: This class includes all beneficiaries not specified above. There is no exemption amount for members of this class. For the tax rates imposed, see columns (5) and (6) in the table below.

Oklahoma Estate Tax Rates

Taxable Estate Equal to or More Than

Taxable Estate Less Than

Class 1 Tax on Col. (1)

Plus Rate on Excess Over Col. (1) Amount

Class 2 Tax on Col. (1)

Plus Rate on Excess Over Col. (1) Amount

(1) (2) (3) (4) (5) (6) $0 $10,000 $0 0.5% $0 1% $10,000 $20,000 $50 1% $100 2% $20,000 $40,000 $150 1.5% $300 3% $40,000 $60,000 $450 2% $900 4% $60,000 $100,000 $850 2.5% $1,700 5% $100,000 $250,000 $1,850 3% $3,700 6% $250,000 $500,000 $6,350 6.5% $12,700 13% $500,000 $750,000 $22,600 7% $45,200 14% $750,000 $1,000,000 $40,100 7.5% $80,200 14% $1,000,000 $3,000,000 $58,850 8% $115,200 15% $3,000,000 $5,000,000 $218,850 8.5% $415,200 15% $5,000,000 $10,000,000 $388,850 9% $715,200 15% $10,000,000 ------------ $838,850 10% $1,465,200 15%

A22

• Deductions. The following items can be deducted from a resident decedent's estate when calculating Oklahoma estate tax liability:

o a marital deduction of all property interests except nondeductible terminable interests passing to the surviving spouse

o joint tenancy property or property held in tenancy by the entirety of a decedent and a surviving spouse

o decedent's debts o funeral expenses and expenses of last illness to the extent actually expended o up to $1,000 for a burial lot, crypt or mausoleum o up to $500 for a tombstone, monument or marker o administration expenses (including attorney's fees) o unpaid taxes owed at the time of death o executor's commissions (up to the statutory fee allowed by the court) o unpaid mortgages o credit for estate taxes paid on property previously taxed within 10 years of decedent's

death or within two years after decedent's death

Returns. An Oklahoma estate tax return (Form 454) must be filed with the Oklahoma Tax Commission within nine months of the decedent's death. The filing deadline may be extended up to six months. Any Oklahoma estate taxes owed must be paid within nine months of the decedent's death.

If a federal estate tax return (Form 706) must be filed, a copy of the federal return must be attached to the Oklahoma estate tax return. Also attach a copy of the will (whether probated or not) or trust instrument (if any).

Generation-skipping transfer tax. Oklahoma does not impose this type of tax.

A23

Pennsylvania

Pennsylvania has an inheritance tax and an estate tax that is intended to absorb the difference between the inheritance tax and the maximum credit against the federal estate tax. The amount of inheritance tax imposed depends on who gets what after you are gone, according to the following classes of beneficiaries:

• Surviving spouse: Transfers of property to or for the use of a decedent’s surviving spouse are completely exempt from Pennsylvania inheritance tax.

• Class A: After a $3,500 family exemption, transfers to the following beneficiaries are taxed at the rate of 4.5 percent: grandparents; parents (except that transfers from a child 21 years of age or younger are tax-exempt); lineal descendants (includes biological children, adopted children, and step-children, as well as their descendants); and the wife or widow and husband or widower of a child.

• Class A1: Transfers to siblings, related to the decedent by blood or adoption, are taxed at the rate of 14 percent.

• Class B: A transfer to anyone not listed above is taxed at a rate of 15 percent. However, transfers for public, government, charitable, and religious use are exempt from inheritance tax.

As far as estate taxes go, Pennsylvania once required estates to file a state return if a federal estate tax return (Form 706) had to be filed. Reacting to changes made to federal estate tax laws, however, Pennsylvania “de-coupled” the calculation of its estate taxes from current federal law. Instead, the state estate tax must be computed based on the federal tax code as it existed on June 1, 2001. The net result is that the state filing threshold is $675,000 for estates of decedents dying on or after July, 1, 2002.

A24

Deductions. The following items can be deducted from a decedent's estate when calculating Pennsylvania estate tax liability:

• decedent's debts and liabilities • reasonable and customary funeral expenses, including bequests or devises for

religious services, for the care of burial lots, and the erection of monuments • administration expenses • executors' and administrators' commissions • attorneys' fees • family exemption • taxes for which the decedent is personally liable or which are imposed against

property constituting part of the decedent's estate • state and foreign death taxes required to be paid in order to bring assets into

Pennsylvania or to transfer them to the new owner

Returns. If the decedent was a resident of Pennsylvania at the time of death, the Pennsylvania Inheritance Tax Return (Form REV-1500) must be filed in duplicate with the Register of Wills in the county where the decedent was a resident. If the decedent was a non-resident of Pennsylvania, the return should be filed in duplicate with the Register of Wills that issues Letters Testamentary or Letters of Administration, if any. Otherwise, the inheritance tax return is filed with the Department of Revenue, Bureau of Individual Taxes, Inheritance Tax Division, Dept. 280601, Harrisburg, PA 17128-0601.

The Pennsylvania Department of Revenue is in the process of developing a new estate tax return to implement changes in the law. Until a new form is available, taxpayers should submit the federal estate tax return along with the state inheritance tax return to the appropriate Register of Wills. The returns and any tax payments are due within nine months of the decedent's death.

Generation-skipping transfer tax. Pennsylvania does not impose this type of tax.

A25

Tennessee Tennessee imposes an inheritance tax and an estate tax that is intended to absorb the difference between the inheritance tax and the maximum credit against the federal estate tax. The inheritance tax rates on transfers are as follows:

Tennessee Inheritance Tax Rates Value of Transferred Property After Exemption Tax on Col. 1 Rate on Excess (1) (2) (3) (4) $0 $40,000 $0 5.5% $40,000 $240,000 $2,200 6.5% $240,000 $440,000 $15,200 7.5% $440,000 and above $30,200 9.5%

Transfers to spouses are fully exempt from tax. So are transfers to a U.S. government entity (federal, state, or local) or organizations formed for charitable, educational, or religious purposes. In addition, a single exemption amount of up to $700,000 is deducted from the estate of a decedent dying in 2003 ($850,000 in 2004; $950,000 in 2005; $1 million in 2006 and thereafter).

Deductions. The following items can be deducted from a decedent's estate when calculating Tennessee estate tax liability:

• decedent's debts which constitute lawful claims at death (to the extent they are not secured by property outside the state)

• actual funeral expenses • reasonable administration expenses, including executor's and attorney's fees actually allowed

and paid (not in excess of lawful rates) • the federal marital deduction • property taxes which are a lien at the date of death • federal income taxes accrued at the date of death • death duties paid or payable to other states on intangible personal property • special assessments which, at the time of death, were a lien on real property within the state • year's support allowance for surviving spouse or minor unmarried children • appraisal fees • mortgages

Returns. The personal representative or other person in possession of a decedent's property must file a copy of the will (if any), an inventory of decedent's assets, and a Tennessee estate tax return with the Commissioner of Revenue within nine months of the decedent's death. The filing obligation is not required, however, if the gross estate is less than the maximum single exemption amount (e.g., $700,000 in 2003).

Any Tennessee estate taxes owed must be paid to the Commissioner of Revenue within nine months of the decedent's death or at the end of any additional time granted for filing the inventory and return. The Commissioner, however, may allow the taxes owed to be paid in installments.

Generation-skipping transfer tax. Tennessee imposes a generation-skipping transfer tax that is equal to the federal credit.

A26

Doe Family Case Study

Basic Information:

John Doe Born 9/4/1929 Died 8/25/2004 Mary Doe Born 3/12/1932

Address: 123 Main St, Dallas, TX 75231 Phone: 214/234-4555 John’s SSN: 321-44-1234 Mary’s SSN: 321-32-1854

1st Successor Trustee: Bill Doe Phone: 972/334-1321 Address: 453 Lincoln Ln, Plano, TX 75034

2nd Successor Trustee: Martha Doe Phone: 903/454-8767 Address: 1833 Shady St, Hawkins, TX 75765

3rd Successor Trustee: Mark Doe Phone: 608/274-8766 Address: 3433 Meritt Dr, Madison, WI 53711

CHILDREN: Bill Doe 5/12/1954 Martha Doe 1/18/1957 Mark Doe 6/3/1964

Ancillary Documents: * John will be agent for Mary and Mary for John * Bill is alternate agent and Martha 2nd alternate Trust Distribution: Bill, Martha and Mark will each receive a 1/3rd share, with per stirpes provision. Distribution on 2nd death TRUST: Attorney – B. Wollard Delivery Agent - M. Williams on 4/18/2000 Assets as of Last Periodic Review of January 11, 2004 by J. Hirsch Asset John Mary Joint Total Home $240,000 $240,000 Other Property 175,000 175,000 Cars 33,000 33,000 CD’s $100,000 100,000 Savings 112,000 112,000 Stock $124,000 124,000 IRA’s 685,000 345,000 1,030,000 Brokerage 418,000 418,000 Life Insurance 250,000 75,000 325,000 Annuities 125,000 125,000 250,000 Personal Prop. 175,000 175,000 Business Int. 365,000 365,000 TOTAL ESTATE ESTIMATED VALUE: $3,347,000

A27

INITIAL SETTLEMENT

NOTIFICATION

Caller: Bill Doe Call Received on: 9/10/2004 at 12:45 AM / PM Deceased: John Doe Caller Relationship: Son Address of Deceased: 123 Main Street, Dallas, TX 75231 Date of Death: 8 / 25 / 2004 Address of Caller: 453 Lincoln Lane, Plano, TX 75034 Phone #’s of Caller: (H) 972 – 334-1321 (W) 972-766-4356 Best Time to Reach: 1- 4:30 @ Work AM / PM AT THIS POINT LET THE CALLER KNOW THAT THIS INFORMATION WILL BE PROVIDED TO THE CLA SETTLEMENT ASSSISTANCE REPRESENTATIVE IN THEIR IMMEDIATE AREA. LET THE CALLER KNOW THAT THEY WILL BE CONTACTED WITHIN THE NEXT 24 HOURS TO SET A TIME FOR A PERSONAL VISIT.

A28

Client Profile

1. Does the client’s Legal file reflect any modification or change to the client’s estate plan since delivery?

There have not been any changes made to estate plan or ancillaries.

There have been changes made to estate plan or ancillaries.

If you checked that changes have occurred since delivery, please briefly describe those changes and note the attorney involved: 1) A Schedule A has been done to give bequests, amendment to make Martha first alternate agent on health documents, and Bill becomes 2nd agent.

_____________________________________________ Wollard

Attorney Involved

2) The per stirpes provision was removed on Trust Agreement distribution. ________________________________________________________________________

_____________________________________________ Vermillion Attorney Involved 3) ________________________________________________________________________ ________________________________________________________________________

_____________________________________________ ________________________

Attorney Involved 2. An ESTATE ORGANIZER was provided?

Yes

No

A29

3. Policy information on CLA provided insurance: F&G Life Bonus 555 $107,000 Insurance Company Product Initial Premium 6/12/2000 L0032215 J. Hirsch Policy Date Policy Number Providing Agent

John Doe ____________________ Owner Co-Owner F&G Life Bonus 555 $107,000 Insurance Company Product Initial Premium 6/12/2000 L0032216 J. Hirsch Policy Date Policy Number Providing Agent

Mary Doe ____________________ Owner Co-Owner Shenandoah Life Universal Life 115,000 Insurance Company Product Initial Premium 8/11/2002 S34555634 M. Williams Policy Date Policy Number Providing Agent John Doe ____________________ Owner Co-Owner

________________________ _____________________ ___________________ Insurance Company Product Initial Premium ________________________ _____________________ ____________________ Policy Date Policy Number Providing Agent ________________________ ____________________ Owner Co-Owner

A30

Settlement Assistance

November 11, 2004

Bill Doe 453 Lincoln Lane Plano, Texas 75034

Dear Mr. Doe:

CLA is pleased and ready to provide the settlement assistance you have requested. CLA and its’ agents are not attorneys, certified public accountants, or investment brokers. The representative selected to assist you has been instructed to seek the advice of a CPA or attorney, for specific estate planning information. It is our experience that having the following documents available at your first meeting with the CLA representative greatly enhances the effectiveness of your upcoming meeting:

The estate plan documents (including Estate Organizer if provided) Most recent Federal and State Income & Gift Tax Returns Relevant business and employment agreements Pre- and post-marital agreements Divorce decrees and agreements Investment and Savings Account Statements Notes Payable

Please don’t hesitate to call 1-888-404-6848 at any time. A Settlement Assistance representative will be pleased to help. Sincerely, CLA USA Representative

A31

Post Settlement Letter

December 15, 2004 Bill Doe 453 Lincoln Lane Plano, Texas 75034 Dear Mr. Doe: At CLA Estate Services and CLA USA, we strive to provide timely, consistent and caring service to our clients and their family. It is our understanding that all concerns have been addressed and completed to your satisfaction in the estate settlement assistance following the death of your father, John Doe. Should you have any further concerns or any issues arise, please do not hesitate to contact CLA Settlement Assistance Services at 1-888-404-6848. Sincerely, Sarah Johnson CLA USA Representative

A32

Agent Appointment

Organizer

Settlement for John Doe , who deceased on 8 / 25 / 2004

Clients’ CPA will be attending initial meeting: X Yes ___ No Gary Lesko 972-233-5532 Name of CPA Telephone Number

_1516 Plano Parkway Plano TX 75093

Street Address City State Zip

Client does not have a CPA, but wishes CLA to locate one

Provide CPA information below when available:

_______________________________________ _______________________ Name of CPA Telephone Number

__________________________________________________________________________

Street Address City State Zip

Client has indicated they do not wish to have a CPA attend the meeting These individuals will be attending the SETTLEMENT ASSISTANCE MEETING: Mary Doe Bill Doe Gary Lesko Ron Smith _____________________ ______________________ Date of Meeting: September 18 Time: 2:30 PM Where: CPA’s OFFICE Trust Date: 4 / 18 / 2000 Attorney: B. Wollard Del. Agent: M. Williams Date of Last Review: 1 / 11 / 2004 Reviewed By: J. Hirsch

A33

I have received the below information from Bill Doe Son , : (Name of Family Member) Has Social Security been notified? X Yes __ No Has Medicaid been notified? X Yes __ No Have Life Insurance Companies been notified? __ Yes X No Have IRA Custodians been notified? __ Yes X No LTC & Health Insurance Carriers notified? __ Yes X No Auto & Homeowners Insurance Companies notified? X Yes __ No Has Veteran’s Administration been notified? __ Yes X No Have all burial arrangements been completed? X Yes __ No Safety Deposit Box reviewed? X Yes __ No Individual credit cards destroyed? __ Yes X No Minimum of 12 death certificates ordered? X Yes __ No Has creditor notice been filed in local newspaper? __ Yes X No Has a checking account been set up for settlement? __ Yes X No I have asked Bill Doe (Son) to have the following available: (Name of Family Member)

The estate plan documents (and Estate Organizer if provided) Most recent Federal/State Income & Gift Tax Returns Relevant business and employment agreements Pre- and post-marital agreements Divorce decrees and agreements Investment and Savings Account Statements Notes Payable

I Will Be Sure to Bring the Following to the Settlement Assistance Meeting:

Estate plan specifications, last review & last asset worksheet CLIENT PROFILE form The AGENT APPOINTMENT ORGANIZER form The Settlement Assistance Tool Kit Business phone number of attorney (plus after hours # if available) The FAMILY SETTLEMENT and CPA SETTLEMENT forms A copier/fax

A34

CPA

Settlement

Settlement for John Doe_____, who deceased on ___8 / 25 / 2004____

Gary Lesko Lesko & Furness LLC Name of CPA Name of Firm

972-233-5532 972-233-5533 glesko@lfmail.com Phone Number Fax Number email Address

1516 Plano Parkway Plano TX 75093____

Street Address City State Zip

In attendance at meeting: Gary Lesko Bill Doe Mary Doe Ron Smith

1. In completing the Tax Return for the current Reporting Period and Year, it is the determination of the CPA that the current status is as follows: to file the Tax Return:

Should any existing assets be liquidated or repositioned in the current tax year, it is Nothing needs to change over previous years since Mary is a Trustor/Trustee over all reportable assets and investmen s. On those assets listed separately on the ASSET WORKSHEET, they are in the Family Trust as separate assets of John, with Mary as the Trustee. In order to report on the upcoming January 15, 2005 quarterly, Bill and Mary

t

ihave been asked to ensure that all financ al statements and pertinent tax data are available for review by December 27, 2004. Both Bill and Mary indicate there is no problem in having that info available. The following needs to be provided/completed to file the Tax Return: Should any existing assets be liquidated or repositioned in the current tax year, it is important to keep an audit trail of those transactions. Any money received from insurance companies, annuities, or assets outside the trust should pass through a new checking account for auditing purposes.

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2. The Bypass Trust will be funded? X__ Yes ___ No The Form SS-4 for Trust EIN will be submitted by CPA? _X__ Yes ___ No

If YES, a tentative course of action is described below:

Application will be made to IRS for SS-4. Beyond that, it will require further discussion as to which investmen s and assets will go to the B Trust. Right now it looks like the business will be purchased for $365,000 from partner’s business continuation life insurance. An additional $250,000 will be received from a personal life policy. At this point the B Trust looks like it will use a combination of cash from life insurance proceeds, other property, and possibly disclaimed IRA funds.

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3. Regarding assets having a step-up in basis, the following is recommended:

Given a huge appreciation in value regarding the joint securities and John’s company stock, it would be appropriate to redirect those funds to a less risky investment(s). The farmland (other property) will receive a step-up on funding to the B Trust.

4. In addition, the following was discussed:

Need to see if this would be a good time to look at converting some of the IRA’s to Roth - - - If B Trust needs to be funded with IRA, that will impact decision. Also whether annuities should be adopted or discontinued.

5. Activity that will require further CPA participation:

Form SS-4 submission. Funding of Bypass. Roth decision. I have been in attendance at this Settlement Assistance Meeting of September 18, 2004 , and find the information presented above to be accurate. ___________________________ ___________________________ ______________________ Attendee Signature Attendee Signature Attendee Signature

___________________________ ___________________________ ______________________ Attendee Signature Attendee Signature Attendee Signature

______________________ ________________________ CPA Signature CLA USA Representative Signature

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Family Settlement

1. This meeting is in regard to the demise of John Doe_________, who

deceased on _____8 / 25 / 2004____. 2. Attending this meeting were the following individuals: Mary Doe Bill Doe Martha Doe Ron Smith ____________________ ______________________

3. The estate planning documents were reviewed for accuracy and content with the following results: All documents properly notarized & witnessed and all assets funded to trust.

4. The following activities have already been performed by family:

Has Social Security been notified? X Yes __ No Has Medicaid been notified? X Yes __ No Have Life Insurance Companies been notified? __ Yes X No Have IRA Custodians been notified? __ Yes X No LTC & Health Insurance Carriers notified? __ Yes X No Auto & Homeowners Insurance Companies notified? X Yes __ No Has Veteran’s Administration been notified? __ Yes X No Have all burial arrangements been completed? X Yes __ No Safety Deposit Box reviewed? X Yes __ No Individual credit cards destroyed? __ Yes X No Minimum of 12 death certificates ordered? X Yes __ No Has creditor notice been filed in local newspaper? __ Yes X No Has a checking account been setup for settlement? __ Yes X No

On those items marked “NO,” the status is as follows: Family would like assistance in notifying the VA and life, Health carriers. Procedure explained to set up a new trust checking account. They will call the local newspaper to run the standard creditor notice. Credit cards were destroyed during the meeting. Family will call IRA custodians for paperwork

5. After reviewing the estate assets, the following have not been titled to the estate plan, nor do they have beneficiary or Payment On Death (POD) designations:

Every thing has been titled to the trust, with the stock certificates of the family business endorsed to the trust.

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6. Is the family ready to take action (if necessary) in regard to the following? X Yes __ No __ N/A - - Pay Expenses and Notes Payable X Yes __ No __ N/A - - Liquidate Appropriate Investments X Yes __ No __ N/A - - Disburse Life Insurance/Annuities proceeds X Yes __ No __ N/A - - Provide Information to Generate a Tax Return X Yes __ No __ N/A - - Fund the Bypass Trust (B Trust) _ Yes __ No X N/A - - Distribute Trust Asset to Beneficiaries X Yes __ No __ N/A - - Divest Real Estate or Business Ownership

There was a prior meeting with the CPA on these issues? _X_ Yes ___ No

If NO, the successor trustee(s) acknowledges by these initials that they have declined to have an initial meeting with a CPA. _________________________ ______________________________ ___________________________

7. The family has been asked to have the following completed or initiated prior to our next scheduled meeting: a. ___Checking account setup ____________________________________ b. ___Balance sheet of Estate Value at time of John’s death_____________ c. ___ Determine the Value of the Farmland (will Step-up)_______________ d. ___Provide status on the Business Continuation Life Insurance_______ e. ___Request paperwork from custodian’s on IRA’s ___________________ 8. Our next meeting is scheduled for _October 12, 2004_ and it is anticipated that the following individuals will attend: Mary Doe Bill Doe Ron Smith _____________________ ____________________ ______________________ I have been in attendance at this Settlement Assistance Meeting of September 27, 2004, and find the information presented above to be accurate. _________________________ _________________________ ____________________ Attendee Signature Attendee Signature Attendee Signature

_________________________ _________________________ ____________________ Attendee Signature Attendee Signature Attendee Signature ____________________________________ CLA USA Representative Signature

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ASSET REPOSITIONING AUDIT TRAIL

BEFORE REPOSITIONING As of

11/15/2004 As of 8/25/2004 Pre-Fund Post-Fund Asset Balance Balance Balance

Checking 1,182,000 279,000

Savings 114,000 118,000 500,000

CD 100,000 100,000

Stock 134,000

Bonds

Brokerage 484,000 204,000 825,000

Home 250,000 250,000 250,000

Other Prop. 175,000 175,000 175,000

Personal 200,000 200,000 200,000

IRA 1,073,000 1,103,000 1,103,000

Life 325,000 75,000 75,000

Annuity 256,000 128,000 128,000

Business 365,000

TOTAL 3,476,000 3,535,000 3,535,000

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COMMUNITY PROPERTY STATE Funding Doe B and C Trust on Nov. 28, 2004

SEPARATE PROPERTY MARITAL SHARE TRUSTS Deceased Survivor Deceased Survivor C B A

Assets Net Step-up Net Cost Base Net Step-up Net Step-up Net Step-up Net Step-up Net Step-up

Checking $ $ $139,500 $139,500 $ $ $ 279,000 Savings 250,000 250,000 500,000 CD Bonds & Stock Broker/Mutual Fund 412,500 412,500 825,000 IRA 724,000 379,000 267,500 835,500 Life 75,000 75,000 Annuity 128,000 128,000 Home 125,000 125,000 250,000 Other Prop. 87,500 87,500 175,000 Personal 100,000 100,000 200,000 TOTAL $724,000 $582,000 $1,114,500 $1,114,500 $267,500 $1,500,000 $1,767,500

Funding of Bypass (B)

and QTIP (C) Trusts

ASSET: AMOUNT: FROM: TO: FUND DATE: SIGNATURE:

Savings_______ $500,000 Marital B Trust 12/03/04_ _______________ Brokerage ____ $825,000 Marital B Trust__ 12/07/04 __________________ Other Property $175,000 Marital B Trust__ 12/14/04 __________________

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INSTRUCTIONS TO TRANSFER FUNDS

TO: Dallas Federal Credit Union FROM: Mary Doe, Trustor/Trustee of the Doe Family Trust dated 4/18/2000_ As part of our estate plan, we established a Revocable Living Trust dated April 18, 2000. The co-trustor of the Revocable Living Trust, John Doe, was deceased on August 25, 2004 Let this notification serve as instruction to transfer our savings account,

identified as Account # 344456007 currently titled to the Revocable Living Trust .

Please transfer the title of this asset to read as follows: Doe Family Bypass Trust under a Trust Agreement of April 18, 2000 You are hereby given the power to accept orders and other instructions relative to the Trust from the Trustee(s). They may execute any documents on behalf of the Trust which you may require. The Trustee(s) is (are) empowered to act on behalf of the Trust. This investment is suitable for the Trust. ____________________________________ TRUSTEE ____________________________________ TRUSTEE I(We) certify that I(we) have the power, under the Trust and applicable law, to enter into transactions for the benefit of the Trust. I(We), the Trustee(s), jointly and severally indemnify you, and hold you harmless from any liability for effecting transactions of the type specified above, should you act pursuant to instructions given herein.

I(We) agree to inform you, in writing, of any amendments, change of Trustee(s) or other event which could alter the above certifications. Thank you for your assistance. Signed this ________ day of _____________________, ________. TRANSFEROR(S): TRANSFEREE(S): ____________________________ ____________________________ ____________________________ ____________________________

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