Unified Federal Estate and Gift Taxation Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

What Is Unified Federal Estate and Gift Taxation? The federal estate tax is a transfer tax imposed on the privilege of transferring property at death, while the federal gift tax is imposed on the transfer of property during the property owner's lifetime. Both taxes are levied on the right to transfer property, and not on the property itself. The amount of tax payable, however, is measured by the value of the transferred property. Elements of Unified Federal Estate and Gift Taxation Unlimited Marital Deduction

The estate and gift tax marital deduction is unlimited, meaning that any amount can be transferred from one spouse to the other spouse, either during lifetime or at death, without being subject to federal gift or estate tax, so long as certain conditions are met. In addition, the 2010 Tax Relief Act provides for "portability" of the maximum exclusion between spouses. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax exclusion of his or her predeceased spouse. As a result, with this election and careful estate planning, married couples can effectively shield at least $10 million from the federal estate and gift tax.

Federal Estate and Gift Tax Rates

The federal estate and gift tax rates consist of a single unified table that is progressive and applied to the cumulative value of all taxable lifetime gifts and to transfers at death. In 2012, the unified rates begin at 18% of a taxable gift or estate that does not exceed $10,000 and increase to 35% of a taxable gift or estate that exceeds $500,000.

Note:

Due to a "sunset" provision in the 2010 Tax Relief Act, the current marital deduction and estate and gift tax rules terminate at the end of 2012, at which time, without future Congressional action, the federal estate and gift tax rules revert to those in effect in 2001.

VSA 2C2.01 ed. 01-12 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Unified Federal Estate and Gift Taxation Prepared for: Presented by:

Unified Credit

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

Once the tentative federal estate or gift tax is determined, it is then reduced by an estate and gift tax unified credit. This means that taxable estates with a value equal to or less than the unified credit equivalent will not be liable for federal estate tax. The same is true of cumulative lifetime taxable gifts which, however, will be brought back into the owner's estate for federal estate tax calculation purposes. This has the effect of allowing each individual to transfer property valued at an amount up to the unified credit equivalent, whether during life and/or at death, without incurring a tax liability.

For Decedents Dying and Gifts Made During:

Federal Estate and Gift Tax* Top Tax Rate

Unified Credit

Exemption Equivalent

2012

35%

1,730,800

5,000,000

2013 and later

55%

345,800

1,000,000

* The unified credit and exemption equivalent were adjusted for inflation in 2012. In 2013, without future Congressional action, the 2001 federal estate and gift tax rules will be reinstated.

VSA 2C2.01 ed. 01-12 Page 2

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Unified Federal Estate and Gift Tax Table (2012) Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

2012 Unified Federal Estate and Gift Tax Table

FOR A TAXABLE ESTATE OR GIFT FROM TO $

0

$

THE FEDERAL TAX IS

10,000

10,000

20,000

20,000

18% $

OF THE AMOUNT OVER $

0

1,800 + 20%

10,000

40,000

3,800 + 22%

20,000

40,000

60,000

8,200 + 24%

40,000

60,000

80,000

13,000 + 26%

60,000

80,000

100,000

18,200 + 28%

80,000

100,000

150,000

23,800 + 30%

100,000

150,000

250,000

38,800 + 32%

150,000

250,000

500,000

70,800 + 34%

250,000

500,000

Infinity

155,800 + 35%

500,000

FOR DECEDENTS DYING OR GIFTS MADE DURING

TOP TAX RATE

APPLICABLE UNIFIED CREDIT

EXEMPTION EQUIVALENT

2012

35%

1,772,800

5,120,000

2013

55%

345,800

1,000,000

IMPORTANT NOTE: The unified credit and exemption equivalent were adjusted for inflation in 2012. Without future Congressional action, the 2001 federal estate and gift tax rules will be reinstated in 2013.

VSA 2C2.02 ed. 01-12 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Calculating the Federal Estate Tax: Unmarried Person Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

A 2012 Example...

Steps in the Calculation...

Your Situation...

Gross Estate (your net worth plus the face amount of life insurance you own on your life)

$

10,000,000

$

Administration Expenses and Debts

-

500,000

-

EQUALS

Adjusted Gross Estate

$

9,500,000

$

LESS

Charitable Deductions

-

1,000,000

-

EQUALS

Taxable Estate

$

8,500,000

$

PLUS

Adjusted Taxable Gifts (past taxable gifts that exceeded the annual gift tax exclusion)

+

800,000

+

EQUALS

Tentative Estate Tax Base

$

9,300,000

$

APPLIED TO

Federal Estate Tax Table (Based on Year of Death) *

EQUALS

Tentative Estate Tax

LESS LESS

LESS

$155,800 plus 35% of the amount over $500,000 $

3,235,800

$

Any Gift Taxes Paid

-

0

-

Unified Credit (Based on Year of Death) *

-

1,772,800

-

$

1,463,000

$

2012 = $1,772,800 2013 and later = $345,800

EQUALS

*

VSA 2C2.03 ed. 01-12 Page 1

Federal Estate Tax Payable

Due to a "sunset" provision in the 2010 Tax Relief Act, the current federal estate and gift tax rules terminate at the end of 2012, at which time, without future Congressional action, the federal estate and gift tax rules revert to those in effect in 2001.

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Calculating the Federal Estate Tax: Married Couple Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

At First Spouse's Death Today...

Steps in the Calculation... Gross Estate (your net worth plus the face amount of life insurance you own on your life plus the value of any survivor benefits; surviving spouse's gross estate should reflect estimated estate growth)

At Surviving Spouse's Death in ____ Years...

$

$

LESS

Administration Expenses and Debts

-

-

EQUALS

Adjusted Gross Estate

$

$

LESS

Charitable Deductions

-

-

LESS

Marital Deduction (property passing to surviving spouse)

-

-

EQUALS

Taxable Estate

$

$

PLUS

Adjusted Taxable Gifts (past taxable gifts that exceeded the annual gift tax exclusion)

+

+

EQUALS

Tentative Estate Tax Base

$

$

APPLIED TO

Federal Estate Tax Table (Based on Year of Death) *

EQUALS

Tentative Estate Tax

$

$

LESS

Gift Taxes Paid on Post-1976 Gifts

-

-

LESS

Unified Credit (Based on Year of Death) *

-

-

$

$

0

2012 = $1,772,800 2013 and later = $345,800

EQUALS *

VSA 2C2.04 ed. 01-12 Page 1

Federal Estate Tax Payable

Due to a "sunset" provision in the 2010 Tax Relief Act, the current federal estate and gift tax rules terminate at the end of 2012, at which time, without future Congressional action, the federal estate and gift tax rules revert to those in effect in 2001.

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Estate Tax Flow Chart Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

What Is the Estate Tax Impact of Using Various Estate Planning Tools? Here's how the estate tax flows from the estate of the first spouse to die to the second spouse's estate and, ultimately, to the heirs, using a variety of estate pl anni ngt ool s… FIRST ESTATE All Separate Property + 1/2 Community Property

No Tax (Marital Deduction)

Spouse's Property

To Spouse

All Separate Property + 1/2 Community Property

Balance of Estate (Optional)

No Tax (Executor Election)

No Tax (Up to Equivalent Amount)

Qualified Terminable Interest Trust

Credit Trust

 Up to full marital deduction  All income to spouse for life

SPOUSE'S ESTATE

Less Administration Expenses

SPOUSE'S NET ESTATE

VSA 2C2.06 ed. 01-12 Page 1

 Principal distributed according to trust provisions

Taxed No Probate

Probated Taxed less Unified Credit

 Maximum amount unified credit equivalent ($5,120,000 in 2012)  Income and principal distributed according to trust provisions

No Tax No Probate

No Tax (No Probate)

Irrevocable Life Insurance Trust  Policy transferred during lifetime  Estate liquidity powers  Income and principal distributed according to trust provisions No Tax No Probate

TO THE HEIRS

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Paying the Estate Tax Bill Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

How Can the Estate Tax Bill Be Paid? The federal government will not accept a percentage of your estate as payment for your estate tax bill. Instead, your estate tax bill must be paid in cash, and it must be paid within nine months after your death. There are FOUR ways to provide your estate with the cash needed to pay your estate tax bill: 1.

100% Method You could accumulate enough cash outright. Rarely, however, does a sums of cash. Instead, the reason investment of cash in appreciating bank.

2.

in your estate to pay your estate tax bill successful person accumulate such large for financial success is usually due to the assets, rather than accumulating it in a

100% Plus Method Your estate could borrow the cash needed to pay your estate tax bill. This, however, only defers the problem, since the money will then have to be repaid with interest.

3.

Asset Liquidation Method Your estate could liquidate sufficient assets to pay your estate tax bill. This choice may make sense if your estate owns considerable assets that can be readily sold for a gain following your death. Keep in mind, however, that if a forced liquidation is necessary, it may bring only a small fraction of the true value of your assets. In addition, sales expenses are bound to be incurred.

4.

Discount Method Assuming you qualify, you can arrange now to pay your estate tax bill with life insurance dollars. For every dollar your estate needs, you can give an insurance company from approximately one to seven cents a year, depending on your age and health. No matter how long you live, it is unlikely you will ever give the insurance company more than 100 cents on the dollar. In addition, the life insurance policy can frequently be structured to accommodate your unique premium payment requirements.

VSA 2C2.07 ed. 01-10 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

The Marital Deduction Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

What Is the Marital Deduction? The marital deduction (I.R.C. Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between a husband and wife, in effect treating them as one economic unit. The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer. However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse. The 2010 Tax Relief Act, however, provides for "portability" of the maximum estate tax unified credit between spouses. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a spouse who dies in 2011 or 2012 (the equivalent of $5,000,000 as adjusted for inflation; $5,120,000 in 2012). As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million from the federal estate and gift tax without use of marital deduction planning techniques, but only if one of the spouses dies in 2011 or 2012. Property transferred in excess of the combined unified credit equivalent will be subject to estate tax in the estate of the surviving spouse. If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million ($5,120,000 in 2012 as adjusted for inflation) or the unused exclusion of the last deceased spouse. IMPORTANT NOTE: Since the 2010 Tax Relief Act "sunsets" at the end of 2012, "portability" of the unified credit exemption between spouses will not be available beginning in 2013 unless Congress takes action in the future.

What Requirements Apply to the Marital Deduction? To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of the U.S. at the time of death. In addition, the property interest (1) must be included in the decedent's gross estate, (2) must pass from the decedent to his or her surviving spouse and (3) cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time).

VSA 2C2.08 ed. 01-12 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Marital Deduction Property Requirements Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

What Estate Planning Techniques Qualify Property for Marital Deduction Treatment? To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of the U.S. at the time of death. In addition, the property interest (1) must be included in the decedent's gross estate, (2) must pass from the decedent to his or her surviving spouse and (3) cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time). In order to meet these requirements, property can be transferred in the following ways: Outright Transfer of Property to the Surviving Spouse; or Transfer of Property to the Surviving Spouse in Trust: Power of Appointment Trust

Surviving spouse has a right to all trust income for life and the right to dispose of trust principal during life and/or at death.

QTIP Trust

In a qualified terminable interest trust, the surviving spouse has a right to all trust income for life; trust principal is distributed as directed by the decedent at the surviving spouse's later death.

Estate Trust

Trust income is accumulated during the surviving spouse's lifetime and trust principal and accumulated income are distributed according to the terms of the surviving spouse's will.

Revocable Trust

In addition to the right to all trust income, the surviving spouse has the right to amend or revoke the trust at any time.

Qualified Domestic Trust

If the surviving spouse is not a U.S. citizen, property must pass to a qualified domestic trust which meets specific requirements in order for the property to receive unlimited marital deduction treatment.

IMPORTANT NOTE: The 2010 Tax Relief Act provides for "portability" between spouses of the maximum estate tax unified credit, meaning that with this election and careful planning, married couples can effectively shield up to at least $10 million from federal estate and gift taxation, but only if one of the spouses dies in 2011 or 2012. Due to a "sunset" provision in the 2010 Tax Relief Act, portability of the unified credit exemption between spouses terminates at the end of 2012 and, without future Congressional action, will no longer be available beginning in 2013.

VSA 2C2.29 ed. 01-12 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Misconceptions About the Marital Deduction Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

Will Use of the Marital Deduction Eliminate Estate Settlement Costs? Use of the unlimited marital deduction will NOT eliminate estate settlement costs. Consider the following: 

At best, the unlimited marital deduction will POSTPONE payment of the federal estate tax on large estates, not ELIMINATE it. If the estate of the surviving spouse exceeds the unified credit equivalent*, federal estate tax will be payable at the second death. In fact, postponing payment of the tax may even result in a higher federal estate tax, if estate assets continue to grow.



The unlimited marital deduction does not eliminate the need for estate liquidity to pay administrative costs, such as funeral expenses, probate costs, legal fees and final expenses.



The unlimited marital deduction is NOT available to:   Surviving spouses;   Single or divorced people; or   A married person who wants/needs to leave property to someone other than the spouse. *

The 2010 Tax Relief Act provides for "portability" of the maximum estate tax unified credit between spouses. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a spouse who dies in 2011 or 2012 ($5 million as adjusted for inflation; $5,120,000 in 2012). As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million from the federal estate and gift tax without use of marital deduction planning techniques, but only if one of the spouses dies in 2011 or 2012. Since the 2010 Tax Relief Act "sunsets" at the end of 2012, "portability" between spouses will not be available beginning in 2013 unless Congress takes action in the future. As a result, the benefits of continued use of marital deduction planning techniques should be evaluated in developing an estate plan.

VSA 2C2.09 ed. 01-12 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Step-Up in Basis at Death Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

What Is the Significance of the Step-Up in Basis at Death? For deaths occurring on or after January 1, 2011, property received from a decedent generally receives a "step-up" in cost basis to its fair market value on the date of death (or the alternate valuation date). For example, if property that was purchased for $100,000 has a fair market value at death of $1,000,000, the recipient of that property from the decedent has a cost basi sof$1, 000, 000…t he basi si s" st epped-up" by $900,000 to its fair market value at death. This step-up in basis can provide significant capital gains tax relief to a recipient who later sells the property. In 2010… The Economic Growth and Tax Relief Reconciliation Act of 2001 repealed the estate tax in 2010. Together with estate tax repeal, the Act replaced the step-up in basis with a modified "carryover" basis: Step-up in basis is retained for up to $1,300,000 of property acquired from a decedent. For certain transfers to a spouse, step-up in basis will be available for an additional $3,000,000 of property acquired from a decedent ($60,000 in the case of a decedent nonresident who is not a U.S. citizen). For all other property, the cost basis of the person acquiring the property from a decedent will be equal to the lesser of (1) the adjusted cost basis of the decedent (carryover basis) or (2) the fair market value of the property at the date of the decedent's death. Information returns dealing with the value of carryover basis property will be required. Potential Carryover Basis Problems if Death Occurred in 2010… Taxpayers may have to provide documentation proving the cost basis of assets (in some cases assets that may have been in the family for decades). Executors may be forced to decide which beneficiaries get the step-up in basis property and the income tax benefits that go with it. Significant capital gains tax liability may be created on inherited assets. Another option, however, became available…

VSA 2C2.26 ed. 01-12 Page 1

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.

Step-Up in Basis at Death Prepared for: Presented by:

Mr Sample Kenneth J. Bojarski, CLU, LUTCF Innovative Concepts

New Option Available if Death Occurred i n 2010… The 2010 Tax Relief Act allows the estates of decedents who died after December 31, 2009 and before January 1, 2011 to elect to be taxed under one of two options: 1.

No estate tax/modified carryover cost basis rules, meaning that while there would be no estate tax levied against the estate, the estate and its beneficiaries would be subject to the modified carryover basis rules described on page 1; or

2.

Estate tax based on new 35% top rate and $5 million exemption equivalent/stepped-up cost basis rules, meaning that the estate would be subject to the taxes shown in the table below, but the estate and its beneficiaries would benefit from the step-up in cost basis, also described on page 1. FOR A TAXABLE ESTATE FROM TO $

0 10,000 20,000 40,000 60,000 80,000 100,000 150,000 250,000 500,000

FOR DECEDENTS DYING IN 2010

VSA 2C2.26 ed. 01-12 Page 2

$

10,000 20,000 40,000 60,000 80,000 100,000 150,000 250,000 500,000 Infinity TOP RATE 35%

TAX

THE FEDERAL ESTATE TAX IS $

1,800 3,800 8,200 13,000 18,200 23,800 38,800 70,800 155,800

+ + + + + + + + +

18% 20% 22% 24% 26% 28% 30% 32% 34% 35%

APPLICABLE UNIFIED CREDIT 1,730,800

OF THE AMOUNT OVER $

0 10,000 20,000 40,000 60,000 80,000 100,000 150,000 250,000 500,000

EXEMPTION EQUIVALENT 5,000,000

 VSA, LP The information, general principles and conclusions presented in this report are subject to local, state and federal laws and regulations, court cases and any revisions of same. While every care has been taken in the preparation of this report, neither VSA, L.P. nor The National Underwriter Company is engaged in providing legal, accounting, financial or other professional services. This report should not be used as a substitute for the professional advice of an attorney, accountant, or other qualified professional.