The sun is potentially setting on the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. If the law expires as expected January 1, 2013, some estate planning and gifting opportunities will no longer exist. The options still available prior to the New Year will be the focus of a complimentary seminar presented by Chambliss attorneys Mark Addison, Ryan Barry, Dana Perry, and Greg Willett. Federal and Tennessee Gifting Opportunities An overview of the current lifetime gifting options provided by the 2010 Tax Act and the changes if Congress does not extend the 2010 Tax Act by the end of 2012. Spousal Lifetime Access Trusts ("SLATs") An overview of the use of Spousal Lifetime Access Trusts and other common techniques for capturing the current $5.12 million federal unified credit prior to its potential expiration on January 1, 2013. The New Landscape of Gift and Inheritance Taxes in Tennessee A discussion on the new laws affecting the Tennessee gift and inheritance taxes along with a discussion of potential pitfalls Tennessee residents may face when dealing with these issues. Differences in Federal and Tennessee Gift Tax Structure Practical examples illustrating how the two tax structures differ and what it means for you.

1. Estate Planning Seminar
The Year of the Gift
September 12, 2012
What's So Special About 2012?
Chambliss, Bahner & Stophel, P.C.
1000 Tallan Building, Two Union Square
Chattanooga, TN 37402
(423) 756-3000
www.cbslawfirm.com
© 2011 Chambliss, Bahner & Stophel, P.C.
All Rights Reserved
© 2012 Chambliss, Bahner &
Stophel, P.C. All Rights Reserved

2. Today's Speakers
2

3. Dana Perry
• Dana focuses her practice on estate planning, elder law and
special needs trust planning
– Certified as an Elder Law Specialist (CELA) by the Tennessee
Commission on Continuing Legal Education and Specialization
– Accredited Attorney, Department of Veterans Affairs
– Listed in 2011 Mid South Super Lawyers for Estate Planning and
Probate and Top 50 Women Lawyers
– Listed in The Best Lawyers in America for elder law and trusts and
estates
– Martindale-Hubbell AV® Peer Review Rated
– Licensed to practice in Tennessee and Georgia
• Dana received her BA from the University of the South
(Sewanee), and her law degree from Vanderbilt University
3

4. Greg Willett
• Greg focuses his practice on estate planning, probate and estate
administration, and taxation
– Chattanooga Estate Planning Council, Member and former Director
– Chattanooga Tax Practitioners, Member and former Director
– Listed in The Best Lawyers in America for trusts and estates
– Martindale-Hubbell AV® Peer Review Rated
– Southern Adventist University, past member Board of Trustees
– Southern Adventist University School of Business and
Management, former Adjunct Faculty
– Licensed to practice in Tennessee
• Greg received his law degree from Washington & Lee
University, and graduated, cum laude, from Southern Adventist
University with a BBA in accounting and business management.
4

5. Mark Addison
• Mark works in the areas of estate planning, estate and trust
administration, taxation, elder law, special needs and
conservatorships
– Academy of Special Needs Planners, Member
– Accredited Attorney, Department of Veterans Affairs
– Chattanooga Estate Planning Council, Member
– Chattanooga Tax Practitioners, Member
– National Academy of Elder Law Attorneys, Member
– Licensed to practice in Georgia, Tennessee, North Carolina &
South Carolina
• Mark received his law degree from Wake Forest University
and his undergraduate degree, cum laude, from Southern
Adventist University
5

6. Ryan Barry
• Ryan focuses his practice on estate planning and elder law
– Knoxville Estate Planning Council Scholar
– Chancellors Award, Top Collegiate Scholar, 2011
– Order of the Coif
– Phi Beta Kappa
– Judge Louis K. Matherne Scholar
– W. Hugh Overcash Tax Law Scholar
– William J. Brennan Legal Research Scholar
– Licensed to practice in Tennessee and Georgia
• Ryan was the valedictorian of his undergraduate class at the
University of the South (Sewanee) where he received his BS and
BA and he was also valedictorian of his law school class at the
University of Tennessee College of Law 6

7. Today's Topics
• Principles of estate and gift taxation
• Recent changes to the Federal estate
and gift tax structure
• Tennessee inheritance and gift tax
structure
• Pending changes for 2013
• Planning opportunities and pitfalls
7

8. Principles of Estate &
Gift Taxation
© 2012 Chambliss, Bahner &
Stophel, P.C. All Rights Reserved

9. Transfer Principles
• "Transfers" (gifts during life or at
death) above certain exemption
amounts are subject to tax
– This tax is a transfer tax - not an
income tax
9

10. Transfer Principles
– Generally transfers are not taxed as
income to the recipient
• Exceptions:
– Individual retirement accounts
– Qualified retirement plans
– Other assets treated as "income in respect
of decedent"
10

11. Transfers Exempt from Tax due to
the Value of the Transfer
• Lifetime Transfers:
– Annual Exclusion: When value transferred to a
beneficiary during a calendar year is less than the annual
gift tax exclusion amount (Federal annual gift exclusion
amount is currently $13,000)
– Use of Unified Credit during Life
• Transfers at Death: When value transferred is less than the
decedents remaining Unified Credit amount (Federal Unified
Credit amount is currently $5.12 million)
NOTE: Prior to 2012, the Tennessee annual gift exclusion
amount could differ from the Federal annual exclusion
amount. The Tennessee inheritance tax exclusion is
currently only $1 million but will increase over the next
several years.
11

12. Transfers Exempt from Tax due to
Recipient of Transfer
• Transfers to spouse (outright and
marital trust)
• Transfers to charity
• Transfers directly to medical care
provider for another
• Transfers to educational institution for
another
12

13. Federal Estate & Gift Tax:
An Integrated System
• Utilizes a Unified Credit approach (for 2012
the Unified Credit = $5.12 million/per
donor/decedent)
• Annual gift tax exclusion amount for 2012
is $13,000/per donor/per donee
• For lifetime gifts, only amounts in excess of
annual exclusion will trigger use of Unified
Credit amount
• Generation Skipping Credit of $5.12 million
for 2012 (no portability) 13

14. Federal Estate & Gift Tax:
An Integrated System
• All of Unified Credit must be used
before tax is required to be paid
• Tax rate for estates, gifts and GST
Transfers for 2012 = 35% (down
from a maximum 55% in 2006)
14

15. Recent Changes to the Federal
Estate & Gift Tax Structure
© 2012 Chambliss, Bahner &
Stophel, P.C. All Rights Reserved

16. Federal Estate, Gift & GST
Tax Exemption History
6,000,000
5,000,000
4,000,000
Estate
3,000,000
Gift
2,000,000 GST
1,000,000
0
1997 2000 2003 2006 2009 2012
16

17. Number of Federal Estate
Returns Filed - 2001 to 2010
Source: http://www.irs.gov/pub/irs-soi/10esesttaxsnap.pdf
17

18. Federal Estate & Gift Tax
Exemption
• 2011: A $5.0 million Unified Credit
amount that can be used during
life, at death, or in combination
• 2012: Inflation adjustment
increased the Unified Credit
increased to $5.12 million
• 2013 and beyond: Unless Congress
passes new legislation – Reverts
back to 2003 level of $1 million
18

19. Portability of Unused
Unified Credit
• For deaths occurring in 2010 -
2012, Unified Credit is "portable" between
spouses – a decedent's unused Unified
Credit can pass to his or her surviving
spouse
• 2012 exemption levels enable surviving
spouse to have up to $10.24 million Unified
Credit
• Portability will not be available starting in
2013 unless new legislation is passed
19

20. Portability of Unified Credit
Example:
Husband has assets of $4 million and
wife has assets of $8 million. At
husband's death in 2012, husband's
estate applies $4 million of his $5.12
million exemption to his assets and the
remaining $1.12 million exemption
passes to wife. At wife's death, her
exemption will total $6.24 million (her
$5.12 million plus husband's unused
$1.12 million).
20

21. Portability of Unified Credit
• Caveats: Can not accumulate
Unified Credit amounts from
multiple deceased spouses
• Does not apply to generation-
skipping transfer (GST) tax
exemption
• Portability will not be available in
2013 and after unless tax law
changes
21

22. Tennessee Inheritance &
Gift Tax Structure
© 2012 Chambliss, Bahner &
Stophel, P.C. All Rights Reserved

23. TN Gift Tax
2012 and Forward
• Tennessee repealed its gift
tax, retroactive to January 1, 2012
23

24. TN Inheritance Tax Exemption
2012 and Forward
• Tennessee is phasing out its inheritance
tax:
– 2012 - $1 million
– 2013 - $1.25 million
– 2014 - $2 million
– 2015 - $5 million
– 2016 and after – complete repeal of
Tennessee inheritance tax
24

25. TN Inheritance Tax Rates
• Assets over the applicable exemption
amount for the year of death are
taxed at the following rates:
• 5.5% for the first $40,000;
• 6.5% for the next $200,000;
• 7.5% for the next $200,000; and
• 9.5% for all amounts thereafter.
25

26. TN Inheritance Tax Exemption
Tax Trap for 2012 - 2015
• Tennessee Inheritance Tax Exemption
– For 2012 to 2015, overfunding a "Credit Shelter Trust"
under a Last Will by using Federal exemption can trigger
unexpected Tennessee Inheritance Tax on death of the
first spouse
– Overfunding can be solved with a formula clause in
creating a trust - and through the use of a Tennessee
Gap Trust
• $1 million (2012) - Credit Shelter Trust (for family)
• $4.12 million (2012) - TN Gap Trust (for spouse)
• >$5.12 million (2012) – Outright or in trust to spouse
– For 2013 and beyond – formula may need to be revised
or reversed if Tennessee Inheritance Tax Exemption
becomes more than the Federal Unified Credit
26

27. Pending Changes for 2013
27

28. If No Change in Tax Law
• 2013 and beyond: If Congress fails to
act by year end, Federal Unified
Credit reverts back to $1 million
effective January 1, 2013
• Result: Potential loss of $4.12
million in Unified Credit per person
if proper estate planning is not
completed prior to year-end.
28

29. Obama Administration Proposal
• 2013 and beyond:
– Reinstate a $3.5 million Unified Credit of which
$1 million can be applied to lifetime gifts
– Make portability of Unified Credit permanent
– Top estate and gift tax rate increased to 45%
• Result: $1.62 million reduction in total
Unified Credit per individual. $4.12 million
reduction in amount that can be applied to
lifetime gifts. 10% increase in estate and
gift tax rate.
29

30. Romney Campaign Proposal
• 2013 and beyond:
– Eliminate estate tax altogether
– Details on implementation forthcoming
• Result: No transfer tax.
30

31. Why 2012 Is An Opportunity
• Under either the current tax law effective
January 1, 2013 or the Obama
administration proposal, the estate and
gift tax Unified Credit will be reduced and
the tax rate increased
• Now is the time to consider gifting to
lock-in the use of the current $5.12
million Unified Credit
31

32. Evaluating the 2012 Opportunity –
Estate Tax versus Capital Gains Tax
• Estate Tax (Death in 2013):
Assets ($500K basis) $5,000,000
less: Unified Credit ($1,000,000)
Net Taxable Estate $4,000,000
Estate Tax (55%) ($2,200,000)
Net Assets to Heirs $2,800,000
32

33. Evaluating the 2012 Opportunity –
Estate Tax versus Capital Gains Tax
• Capital Gains Tax (Gifted in 2012 and Sold
in 2013):
Assets $5,000,000
less: Carryover Basis ($500,000)
Net Capital Gain $4,500,000
Capital Gain Tax (20%) ($900,000)
Net Assets $4,100,000
33

34. Evaluating the 2012 Opportunity –
Estate Tax versus Capital Gains Tax
• Net Tax Savings for Gift:
Estate Tax Avoided $2,200,000
less:
Capital Gains Tax Paid ($900,000)
Net Tax Savings $1,300,000
Caveat: For smaller estates which will be covered
by the Unified Credit, delaying gifts till death may
reduce or eliminate capital gains tax as assets
receive a step-up in basis to date of death value.
34

35. Who Should Consider Gifts in
2012?
• Couple with total assets of :
– Less than $1 million: Probably not,
since it is unlikely that the survivor's
estate will pay any Federal or TN estate
or inheritance tax;
– Less then $3.5 million but more than $1
million: Maybe, depending on life
expectancy (will surviving spouse live to
2016 and beyond and remain in
Tennessee) and lifestyle needs
35

36. Who Should Consider Gifts in
2012?
• Couple with total assets of :
– Less than $7 million but more than $3.5
million: Probably, depending on life
expectancy (will surviving spouse live to
2016 and beyond and remain in
Tennessee) and lifestyle needs
– More than $7 million: Yes
36

37. Who Should Consider Gifts in
2012?
• Note: Use of Unified Credit in 2012 for lifetime
gifts will reduce amount available at death.
• Example: Husband makes a $5 million dollar gift
to an irrevocable trust for wife and children in
2012. Husband then dies in 2013 after the
Unified Credit has decreased to $1 million.
Husband fully utilized his $1 million Unified
Credit through the $5 million gift made in 2012.
Hence, all of the husband's remaining assets
(not passing to charity) will be subject to estate
tax.
37

38. Planning Opportunities and Pitfalls
© 2012 Chambliss, Bahner &
Stophel, P.C. All Rights Reserved

39. Outright Gifts to Descendants
• Make large outright gifts to children
and grandchildren
– Use the Federal Unified Credit while
available, including a deceased
spouse's exemption, if available
– Move future appreciation on gifted
assets out of your taxable estate
– Tennessee gift tax no longer an issue
39

40. Irrevocable Dynasty Trusts
• Create multi-generational "dynasty"
trusts to avoid future estate and
inheritance tax on those assets
40

41. Irrevocable Dynasty Trusts – Up to 360 Years in Tennessee
Grantor with Three Children
(Gift of $5,120,000)
Separate Trusts for each Child (3)
- Income and Principal: Trustee has discretion to distribute
income and principal for heath
care, education, maintenance and support ("HEMS") of
the child
- At child's death:
– Limited power of appointment that allows child to
direct assets to their descendants or to a trust for
their spouse
– If limited power not exercised by child, then assets
pass into separate trusts for child's descendants
Separate Trusts for each Grandchild
- Terms: Same as trust for children.
- Grandchild's death: Assets pass into separate trusts
for grandchild's descendants
- At Grandchild's Death: Continues in trust for grandchild's
descendants under the same terms.

42. Life Insurance Trusts
• Leverage gifts by using gifted funds to
purchase life insurance in irrevocable
trusts
• Fully fund existing insurance trust to
cover future premium payments
• If grantor funds premium payment
split-dollar loans, consider forgiving
indebtedness
42

43. Life Insurance Trust
Grantor
Large gift to Trust
(Ex: $5,120,000)
Life Insurance Trust Terms
Insurance: Trust owns and is the beneficiary of a large life insurance policy on
the life of the grantor.
Income and principal: Income and principal from the trust may also be used
for spouse and descendants' benefit. However, no such distributions are
anticipated; rather $5,120,000 is used to pay annual premiums (or a one-
time premium) on the life insurance policy.
Grantor's Death - $0 Estate Tax
Policy death benefit pays out to the trust
Gift to Children Outright or in Separate Trusts
Death benefit paid out to children outright or in separate trusts for their
benefit. Proceeds pass tax free so long as unified credit and GST exemption
was used to shelter the initial $5,120,000 gift to the trust.

44. Spousal Lifetime Access Trusts
("SLATs")
• Irrevocable Trust for the Benefit of Spouse
• Details …
– Trustee: During spouse's lifetime, an independent
party may serve as trustee or the spouse may serve as
trustee (alone or with a co-trustee)
– Distributions: Income and principal to spouse under an
ascertainable standard
(health, education, maintenance and support)
– Spouse's death: At spouse's death, the assets
remaining in the trust may pass to the children and/or
grandchildren without incurring any tax (assuming GST
tax exemption was properly allocated to trust
contributions). Spouse may also have a limited power
of appointment.
44

45. Spousal Lifetime Access Trusts
("SLATs")
• Caveat 1: Control and Benefit
Issues
– Minimal control/benefit during life
– Loss of control/benefit at death or
divorce
45

46. Spousal Lifetime Access Trusts
("SLATs")
• Caveat 2: Reciprocal Trust Doctrine
– If both spouses wish to execute SLATs
for each other, beware of the reciprocal
trust doctrine
– Avoid this issue by incorporating
differences into the documents –
beneficiaries, income and principal
distribution terms, powers of
appointment, etc.
46

47. Spousal Lifetime Access Trusts
Grantor with Two Children
Large gift to SLAT
(Ex: $5,120,000)
Terms of SLAT
• Trustee: Spouse or an independent party may serve as trustee
• Income and Principal: Trustee has discretion to distribute
income and principal for heath care, maintenance, support and
education of the spouse for the spouse's lifetime
• Grantor's powers: NONE. The trust is irrevocable and grantor
retains no control over or benefit from the trust assets.
Spouse's Death - $0 Estate Tax
Separate Trusts for each Child
• Income and Principal: May distribute for HEMS of child
• At child's death: Assets pass to separate trusts for child's
descendants

48. Trust Funding Options - Timing
• Nominally Funded Trust – Fund Some
Now – Add More Later
– Nominally fund an irrevocable trust designed
as a Dynasty Trust or SLAT
– Establish brokerage account, etc. for trust
– If 2013 exemption will not be increased by
year-end, transfer additional assets to trust
before year-end
48

49. Trust Funding Options - Timing
• Revocable Trust That Can Be Made
Irrevocable
– Fully fund a revocable trust designed as
a Dynasty Trust or SLAT with $5.12
million
– If 2013 exemption is not increased by
December 31, 2012, release power to
revoke trust and convert it to an
irrevocable trust
49

50. Trust Funding Options - Assets
Valuation Discounts
• Take advantage of valuation
discounts on closely-held businesses
- lack of marketability and
transferability discounts
• Take advantage of depressed real
estate values to gift such assets now
• Use of discounted assets leverages
use of Unified Credit
50

51. Leverage Low Interest Rates
• Leverage currently low interest rates
• Options to remove appreciation (but
not underlying assets) from grantor's
estate
– Grantor retained annuity trust
– Charitable lead annuity trust
51

52. Creation of a Grantor Retained Annuity Trust ("GRAT")
Grantor
$1 million of assets to GRAT. Value for Two years annuity payment of
gift tax purposes = $0.13 $507,511 per year = $1,015,022
Terms of Trust
1) During Annuity Term (2 years): During the annuity term, the annuity payments to the grantor are the
only payments made from the trust.
2) If Grantor dies before end of Annuity Term: The annuity will be paid to a marital trust for Grantor's
spouse, if living. If spouse is not living, the annuity will be paid to Grantor's children (see below).
3) Distribution at end of Annuity Term:
- Division into Separate Shares for Grantor's Children
- Income and Principal: To Grantor's children for HEMS. Principal may also be distributed for
emergencies or nonrecurring needs.
- Termination of Trust at Child's Death: Child has a GPOA under which he may distribute his
remaining funds as he determines.

53. Assumptions
2 Year Flat Annuity
Pre-discounted FMV: $1,000,000
Discounted FMV: $1,000,000
Section 7520 Rate (Sept.'12): 1.0%
Income Earned by Trust: 4.0%
Annual Growth of Principal: 8.0%
Term: 2 years
Percentage Payout/Yr: 50.75111 % of initial contribution
Taxable Gift Value: $0.13
4.00% 8.00%
Beginning Annual Annual Annual
Year Principal Income Growth Payment Remainder
1 $1,000,000.00 $41,600.00 $80,000.00 $507,511.10 $614,088.90
2 $614,088.90 $25,546.10 $49,127.11 $507,511.10 $181,251.01
Summary $1,000,000.00 $67,146.10 $129,127.11 $1,015,022.20 $181,251.01
53

54. Pitfalls
54

55. Funding Family Trust with
Federal Exemption
• Using funding formulas in a Will tied
to the Federal exemption
– Larger gift than anticipated due to
increase in exemption - put a cap on
the amount - dollar amount or
percentage of estate
– Trigger Tennessee inheritance tax
– Should not be an issue after 2015
55

56. Relying on Portability
• Relying on Federal "portability" of exemption
amount is dangerous
– Estate remains open for audit purposes
– Portability could expire in the future
– May waste Tennessee inheritance tax exemption if die
prior to 2016
– Use of portability does not remove appreciation on
assets from survivor's estate
– Unused Unified Credit is not indexed for inflation
– No creditor protection attaches to unused Unified Credit
as is available for the creation of a testamentary trust
56

57. New 3.8% Tax under Affordable
Care Act
• Estates and trusts are subject to Medicare contribution tax
for each tax year equal to 3.8% of the lesser of:
• The estate's or trust's undistributed net investment
income for the tax year, or
• The excess of the estate's or trust's AGI over the
dollar amount at which the highest tax bracket for
trusts begins (currently $11,300)
– In addition to all other taxes normally imposed
• To Avoid: Distribute all or most of the income from the
trust or estate annually
• New law may also apply to individuals with AGI of $200,000
(individuals) or $250,000 (filing jointly)
Source: http://www.schwabe.com/showarticle.aspx?Show=12149 57

58. Timing Your Planning
• Each of the techniques mentioned
herein involve multiple moving parts.
As such, individuals interested in
pursuing these planning options
should try to get in contact with their
attorney as soon as possible to start
the planning process.
58

59. Questions?
Robert M. "Mark" Addison
maddison@cbslawfirm.com
(423) 757-0266
Dana B. Perry
dperry@cbslawfirm.com
(423) 757-0228
Gregory D. Willett
gwillett@cbslawfirm.com
(423) 757-0224
Ryan Barry
rbarry@cbslawfirm.com
(423) 757-0247
59

60. Disclaimer
This presentation is provided with the understanding that the
presenters are not rendering legal advice or services. Laws
are constantly changing, and each federal law, state law, and
regulation should be checked by legal counsel for the most
current version. We make no claims, promises, or guarantees
about the accuracy, completeness, or adequacy of the
information contained in this presentation. Do not act upon
this information without seeking the advice of an attorney.
This outline is intended to be informational. It does not
provide legal advice. Neither your attendance nor the
presenters answering a specific audience member question
creates an attorney-client relationship.
60