October 19, 2012

The Tax Relief, Unemployment InsuranceReauthorization, and Job Creation Act of 2010 (the2010 Tax Act) included new gift, estate, andgeneration-skipping transfer (GST) tax provisions.The 2010 Tax Act provides that in 2011 and 2012, thegift and estate tax exemption is $5 million (indexed forinflation in 2012, and thus is $5,120,000), the GST taxexemption is also $5 million (indexed for inflation in2012, and thus is $5,120,000), and the maximum ratefor both taxes is 35%. New to estate tax law is giftand estate tax exemption portability: generally, anygift and estate tax exemption left unused by adeceased spouse can be transferred to the survivingspouse. The GST tax exemption, however, is notportable. These major changes are temporary: absentfurther legislation, in 2013, the exemptions aregenerally scheduled to drop to $1 million, themaximum rate will jump to 55%, and portability will berepealed. You should understand how these new andtemporary rules may affect your estate plan.

Exemption portabilityUnder prior law, the gift and estate tax exemption waseffectively "use it or lose it." In order to fully utilizetheir respective exemptions, married couples oftenimplemented a bypass plan: they divided assetsbetween a marital trust and a credit shelter, orbypass, trust (this is often referred to as an A/B trustplan). Under the 2010 Tax Act, the estate of adeceased spouse can transfer to the surviving spouseany portion of the exemption it does not use (thisportion is referred to as the deceased spousal unusedexclusion amount, or DSUEA). The survivingspouse's exemption, then, is increased by theDSUEA, which the surviving spouse can use forlifetime gifts or transfers at death.

Example: At the time of Henry's death in 2011, hehad made $1 million in taxable gifts and had an estateof $2 million. The DSUEA available to his survivingspouse, Linda, is $2 million ($5 million - ($1 million +$2 million)). This $2 million can be added to Linda'sown exemption for a total of $7,120,000 ($5,120,000+ $2 million), assuming Linda dies in 2012.

The portability of the exemption coupled with anincrease in the exemption amount to $5,120,000 pertaxpayer allows a married couple to pass on up to$10,240,000 gift and estate tax free in 2012. Thoughthis seems to negate the usefulness of A/B trustplanning, there are still many reasons to considerusing A/B trusts.

• The assets of the surviving spouse, includingthose inherited from the deceased spouse, mayappreciate in value at a rate greater than the rateat which the exemption amount increases. Thismay cause assets in the surviving spouse's estateto exceed that spouse's available exemption. Onthe other hand, appreciation of assets placed in acredit shelter trust will avoid estate tax at the deathof the surviving spouse.

• The distribution of assets placed in the creditshelter trust can be controlled. Since the trust isirrevocable, your plan of distribution to particularbeneficiaries cannot be altered by your survivingspouse. Leaving your entire estate directly to yoursurviving spouse would leave the ultimatedistribution of those assets to his or her discretion.

• A credit shelter trust may also protect trust assetsfrom the claims of any creditors of your survivingspouse and the trust beneficiaries. You can alsoinclude a spendthrift provision to limit yoursurviving spouse's access to trust assets, thuspreserving their value for the trust beneficiaries.

• The portability feature is in effect for two yearsonly, and is scheduled to expire in 2013, unlessCongress enacts further legislation.

A/B trust plans with formula clausesIf you currently have an A/B trust plan, it may nolonger carry out your intended wishes because of theincreased exemption amount. Many of these plansuse a formula clause that transfers to the creditshelter trust an amount equal to the most that canpass free from estate tax, with the remainder passingto the marital trust for the benefit of the spouse. Forexample, say a spouse died in 2002 with an estate

Looking ahead

Without further legislation inthe interim, the provisionsof the Tax Relief,Unemployment InsuranceReauthorization, and JobCreation Act of 2010 arescheduled to sunset, orexpire, on January 1, 2013,at which time tax rates andexemption amounts returnto their 2001 levels (subjectto increases for inflation insome cases).

Page 1 of 2, see disclaimer on final page

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice.

worth $5,120,000 and an estate tax exemption of $1million. The full exemption amount, or $1 million,would have been transferred to the credit shelter trustand $4,120,000 would have passed to the maritaltrust. Under the same facts in 2012, since theexemption has increased, the entire $5,120,000estate will transfer to the credit shelter trust, to whichthe surviving spouse may have little or no access.Review your estate plan carefully with an estateplanning professional to be sure your intentions willbe carried out under the new laws.

Wealth transfer strategies throughgiftingBecause of the larger exemptions and lower tax rates,2012 provides an unprecedented opportunity forgifting.

By making gifts up to the exemption amount, you cansignificantly reduce the value of your estate withoutincurring gift tax. In addition, any future appreciationon the gifted assets will escape taxation. Assets withthe most potential to increase in value, such as realestate (e.g., a vacation home), expensive art,furniture, jewelry, and closely held business interests,offer the best tax savings opportunity.

Gifting may be done in several different forms. Theseinclude direct gifts to individuals, gifts made in trust(e.g., grantor retained annuity trusts and qualifiedpersonal residence trusts), and intra-family loans.Currently, you can also employ techniques thatleverage the temporarily high exemptions topotentially provide an even greater tax benefit (forexample, creating a family limited partnership mayalso provide valuation discounts for tax purposes).

For high-net-worth married couples, gifting to anirrevocable life insurance trust (ILIT) designed as adynasty trust can reduce estate size while providing asubstantial gift for multiple generations (depending onhow long a trust can last under the laws of yourparticular state). The value of the gift may beincreased (leveraged) by the purchase ofsecond-to-die life insurance within the trust. Further,the larger exemptions enable you to increase, gift taxfree, the premiums paid for life insurance policies thatare owned by the ILIT or other family members.Premium payments on such policies are taxable gifts,so these premium payments are often limited to avoidincurring gift tax. This in turn restricts the amount oflife insurance that can be purchased. But theincreased exemption in 2012 provides the opportunity

to make significantly greater gifts of premiumpayments, which can be used to buy a larger lifeinsurance policy.

The increased exemption may also prove beneficialfor same-sex couples whose estate planning is limiteddue to a lack of gift or estate tax marital deduction. Atleast for 2012, assets of significant worth can betransferred between partners without gift taxconsequences.

Before implementing a gifting plan, however, thereare a few issues you should consider.

• Can you afford to make the gift in the first place(you may need those assets and the related cashflow in the future)?

• Do you anticipate that your estate will be subject toestate taxes at your death?

• Is minimizing estate taxes more important to youthan retaining control over the asset?

• Do you have concerns about gifting large amountsto your heirs (i.e., is the recipient competent tomanage the asset)?

• Does the transfer tax savings outweigh thepotential capital gains tax the recipient may incur ifthe asset is later sold? The recipient of the gift getsa carryover basis (i.e., your tax basis) for incometax purposes. On the other hand, property left toan individual as a result of death will generallyreceive a step-up in cost basis to fair market valueat date of death, resulting in potentially lessincome tax to pay when such an asset is ultimatelysold.

Caution: The amount of gift tax exemption you usedprior to 2012 will reduce the $5,120,000 available toyou under the 2010 Tax Act. For example, a personwho used $1 million of his or her exemption prior toJanuary 1, 2012, will be able to make additional giftstotaling $4,120,000 during 2012 free from gift tax.

Tip: In addition to this limited opportunity to transfer asignificant amount of wealth tax free, it's important toremember that you can still take advantage of the$13,000 per person per year annual gift tax exclusionfor 2012. Also, gifts of tuition payments and paymentof medical expenses (if paid directly to theinstitutions) are still tax free and can be made at anytime.

Beware of the"clawback"

Say you make a gift in theamount of the exemption in2012 ($5,120,000), thenyou die in 2013 when theexemption reverts to $1million, which it is currentlyscheduled to do. Will yourestate be taxed on thedifference? This problem isreferred to as the"clawback" and while mostpractitioners believe itultimately won't apply, thereis no legal documentation todefinitively refute thatpossibility.

Page 2 of 2