June 2013
Paradigm Shift: The ATRA-Math
(Planning after the American Tax Relief Act of 2012)
Paul S. Lee, J.D., LL.M.
National Managing Director
Blair Cannon
Vice President
Global Research Effort Drives Both Investments and Planning
Bernstein.com
Paradigm Shift: The ATRA-Math
1
Environment for Retirement Planning is Now More Challenging…
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Paradigm Shift: The ATRA-Math
2
…Especially as Future Investment Returns will Likely be Muted…
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Paradigm Shift: The ATRA-Math
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…Thanks to the End of the 30-Year Golden Age in Bond Returns
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Paradigm Shift: The ATRA-Math
4
Sustainable Lifetime Spending, Even in Hostile Markets
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Paradigm Shift: The ATRA-Math
5
What’s My #?
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6
Bernstein does not provide tax, legal or accounting advice. In considering
this material, you should discuss your individual circumstances with
professionals in those areas before making any decisions.
Bernstein.com
Paradigm Shift: The ATRA-Math
7
The Old Paradigm: When in Doubt, Transfer Out
2001: NYC RESIDENT
Federal Estate & Gift Tax Exclusion:
GST Tax Exemption:
Effective Rate
55%
$ 675,000
$1,060,000
ESTATE PLANNING RECOMMENDATIONS
16.00%
27% Gap
3.59%
6.85%
55.00%
Effective Rate
28%
3.59%
6.85%
Bernstein.com
Federal
 Avoid estate tax inclusion at every generation
 Step-up in basis at death is less important because
of the relatively low capital gain tax rates
20.00%
LTCG/
Qualified
Dividends
Rates
 During life, use the estate & gift tax exclusion
 Transfer wealth as quickly as possible
39.10%
Wealth
Transfer
Rates
Local
State
STCG/
Ordinary
Income
Rates
 Income tax consequences are secondary
 State of residence will not significantly affect the plan
Paradigm Shift: The ATRA-Math
8
The “Permanent” Fix to the Wealth Transfer Tax System
“American Tax Relief Act of 2012*”
Reunification of Gift, Estate and Generation-Skipping Transfer Tax
$5.25 million Applicable Exclusion Amount for 2013 (indexed from 2011)
40% maximum rate
Portability of “Deceased Spousal Unused Exclusion Amount”
No Sunset Provision
Don’t forget about the income tax rates…
*P.L. 112-240, enacted January 2, 2013
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Paradigm Shift: The ATRA-Math
9
Tale of Two City/States: The Gap Has Narrowed
CALIFORNIA RESIDENT
Effective Rate
52.6% (Regular)
45.1% (AMT)
13.30%
Effective Rate
40%
Effective Rate
33.0% (Regular)
37.1% (AMT)
NEW YORK CITY RESIDENT
Effective Rate
52.3% (Regular)
Top Tax Rate
44.5% (AMT)
Effective Rate
50%
16.00%
3.80%
Effective Rate
32.7% (Regular)
36.5% (AMT)
3.88%
Local
8.82%
State
3.80%
Medicare
39.60%
Federal
3.88%
13.30%
40.00%
3.80%
8.82%
39.60%
40.00%
20.00%
Transfer
Taxes
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LTCG/
Qualified
Dividends
3.80%
20.00%
STCG/
Ordinary
Income
Transfer
Taxes
LTCG/
Qualified
Dividends
STCG/
Ordinary
Income
Paradigm Shift: The ATRA-Math
10
The New Landscape: Dispersion Across the States
California
High Income Tax,
No Death Tax
New York City
High Income Tax,
State Death Tax
Hawaii
High Income Tax,
State Death Tax
Florida
No Income Tax,
No Death Tax
3%
13%
15%
16%
Gap:
51.4%
40.0%
37.1%
28%
49.6%
49.6%
Blended Rate*
Washington
No Income Tax,
State Death Tax
40.0%
36.5%
34.8%
State/Local
23.8%
23.8%
Medicare
Federal
Capital Estate
Gain Tax Tax
Capital Estate
Gain Tax Tax
Capital Estate
Gain Tax Tax
Capital Estate
Gain Tax Tax
Capital Estate
Gain Tax Tax
*Based on Health Care and Education Reconciliation Act of 2010 and the American Taxpayer Relief Act of 2012. Rates represent Bernstein’s estimate of the top marginal tax, federal and state
income, capital gains and estate tax brackets. Blended rates assume the taxpayers in New York City ,California and Hawaii are in AMT. Bernstein is not a legal, tax or estate advisor. Investors
should consult these professionals as appropriate before making any decisions.
Source: IRS and AllianceBernstein
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Paradigm Shift: The ATRA-Math
11
The Gap Map: Estate and Income Tax Rate Differentials By State
Alaska
Washington
Montana
Maine
North Dakota
Vt.
Minnesota
Oregon
Idaho
South Dakota
N.H.
Wisconsin
Wyoming
New York
Michigan
Pennsylvania
Iowa
Nebraska
Ohio
Nevada
Illinois
Utah
Md.
Indiana
New Jersey
Delaware
West
Virginia
Colorado
California
Mass.
Conn. R.I.
Virginia
Kansas
Missouri
Kentucky
North Carolina
Tennessee
Oklahoma
Arizona
Arkansas
South
Carolina
New Mexico
Alabama
Georgia
Mississippi
Texas
Louisiana
Small Gap (<10%)
Average Gap (10%-15%)
Florida
Hawaii
Large Gap (>15%)
State Estate Tax and/or Inheritance Tax
See notes on state income taxes and state death taxes in the appendix. Bernstein does not provide tax, legal or accounting advice. In considering this material, you should discuss your individual
circumstances with professionals in those areas before making any decisions.
Bernstein.com
Paradigm Shift: The ATRA-Math
12
What Kind of State Are You In?
MORE
PASSIVE
ESTATE PLANNING
CA
Community Property State
No State Estate or Inheritance Tax
High State Income Tax
State Gift Tax (only CT and MN)
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MORE
PROACTIVE
ESTATE PLANNING
OR
FL PA NY HI
WA
Separate Property State
High State Estate or Inheritance Tax
Low or No State Income Tax
No State Gift Tax
Paradigm Shift: The ATRA-Math
13
Step Right Up And Eliminate Your Income Taxes…
Forecasted
Applicable Exclusion Amount*
Low Inflation
Average Inflation
High Inflation
$14.60 Mil.
$8.95 Mil.
$6.37 Mil.
$5.66 Mil.
$5.29 Mil.
$5.35 Mil.
$5.42 Mil.
$6.58 Mil.
$8.18 Mil.
2033
2023
2014
*Based on increases in inflation, rounded to the nearest $10,000. Low, average and high inflation are defined as the 90th, 50th and 10th percentile of inflation over the relevant time period.
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future
results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
14
The New Paradigm
 Estate Planning
 Infinitely more complicated
 Applicable Exclusion Amount
 Should be used as little as possible
 Taxpayers should consider keeping as much as possible for the “step-up” in basis
 “Zeroed-out” transfers should be utilized instead
 Income Tax Considerations
 Can be more important than the transfer tax consequences
 Should be considered in tandem with potential transfer taxes
 Estate Tax Inclusion
 Can save more in income taxes
 Should be forced if the income tax savings are greater than the transfer tax cost
 State of Residence
 Will give rise to very different types of estate planning
Bernstein.com
Paradigm Shift: The ATRA-Math
15
Some Assets Benefit From “Step-Up”—Some Assets Do Not
“Step-Up” Important
Asset Type
Tax Characteristic
Creator-Owned Copyrights, Trademarks, Patents & Artwork
Ordinary
Long-Term
“Negative Basis” Commercial Real Property LPs
Ordinary & Long-Term
Artwork, Gold & Other “Collectibles”
28% Long-Term
Low Basis Stock
20% Long-Term
Roth IRA Assets
Tax Free & No Surcharge
High Basis Stock
Minimal Gain
Fixed Income
Typically Minimal Gain
Cash
Basis = Face Value
Stock at Loss
Capital Loss Erased
Variable Annuities
Partially IRD
Traditional IRA & Qualified Plan Assets
100% IRD
“Step-Up” Not Important
Source: AllianceBernstein
Bernstein.com
Paradigm Shift: The ATRA-Math
16
Estate Planning Today Is a Multi-Variable Problem
Time Horizon
Spending
Size of Estate
Return and Income Tax Character of Assets
Expected Income Tax Realization on Assets
Investment and Non-Investment Income
State of Residence of Grantor and Beneficiary
Inflation
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Paradigm Shift: The ATRA-Math
17
Applicable Exclusion and Assets Over Time…
Applicable Exclusion Amount vs. Portfolio Value (After Spending)
Nominal ($ Millions)
35
30
25
Asset Allocation?
Spending?
Market Returns?
Type of Assets?
Tax Rates?
Asset Values**
20
15
Applicable Exclusion*
10
5
Free Step-Up in Basis
0
5
10
15
20
25
Year
*Based on increases in inflation, rounded to the nearest $10,000. Applicable exclusion amount shown (green) is for an individual, based upon 10th and 90th percentile outcomes
for the inflation-adjusted exclusion.
**Based upon 10th and 90th percentile outcomes. Assumptions: $10 million portfolio allocated to 60% global equities and 40% int-term municipals; $300,000 annual spending
(inflation-adjusted); single-filer federal tax rates; 6.5% state tax rates.
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual results or a
range of future results. See Appendix, Notes on Wealth Forecasting System, for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
18
Measuring the Trade-Off
Growth of the Applicable Exclusion Over Time
$20 Mil. Estate (Median Values)
High
Inflation
$30.0
50% Stocks
&
50% Bonds
$25.0
3% Spending
Effective
Transfer
Tax Rate?
4% Spending
$20.0
Average
Inflation
Diminishing Estate Tax Cost
$15.0
Low
Inflation
$10.0
“Free” Step-Up in Basis
$5.0
State Death Tax?
Exemption?
$-
2013
2017
2021
2025
2029
2033
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range
of future results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
19
Example: Couple with $20 Mil. Estate Today
Probability of Federal Estate Tax Liability
100%
“Effective” Rate
16%
50% Stocks
&
50% Bonds
“Effective” Rate
13%
75%
“Effective” Rate
8%
“Effective” Rate
11%
3% Spending
4% Spending
“Effective” Rate
7%
50%
25%
5% Spending
“Effective” Rate
3%
0%
0
10
20
30
Years
“Effective” Rate represents effective federal estate taxes due, Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past
performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
20
Example (State Estate Tax--Hawaii): Couple with $20 Mil. Estate Today
Probability of Federal Estate Tax Liability
100%
“Effective” Rate
19%
50% Stocks
&
50% Bonds
“Effective” Rate
16%
75%
“Effective” Rate
10%
“Effective” Rate
14%
3% Spending
4% Spending
50%
5% Spending
“Effective” Rate
9%
25%
“Effective” Rate
4%
0%
0
10
20
30
Years
“Effective” Rate represents effective federal and NY state estate taxes due. Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent
past performance and are not a promise of actual future results or a range of future results. See Notes on Wealth Forecasting System for details.
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Paradigm Shift: The ATRA-Math
21
What Is the Nature of the Assets in the Estate?
“Effective” Income Tax Savings vs. “Effective” Transfer Tax Cost
45%
43%
Potential income tax
savings from a
step-up in basis
39%
37%
19%
19%
16%
9%
Zero Basis
Ordinary
Asset
“Negative Basis”
Real Property
LP Interests
Zero Basis
Real Property
With Recapture
Zero Basis
Long-Term
Capital Asset
50% Basis
Long-Term
Capital Asset
75% Basis
Long-Term
Capital Asset
“Effective”
Transfer Tax
Rate
(Federal Only)
“Effective”
Transfer Tax
Rate
(Federal & State)
Rates represent Bernstein’s estimate of the top marginal tax, federal and state income, capital gains and estate tax brackets in relation to the fair market value of the assets. Rates assume a taxpayer in
California is in AMT. In the “negative basis” scenario, assumes 20% of gain is Section 1250 recapture and 10% of additional gain due to reduction in non-recourse debt. In the zero basis real property
scenario, assumes 20% of the gain is Section 1250 recapture.
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Paradigm Shift: The ATRA-Math
22
Portability: Game Changer? Useless?
Deceased Spouse’s Unused Exemption Amount (DSUEA)
 “Ported” to surviving spouse
 Avoids traditional bypass/credit shelter/AB trust planning
 May be used to shelter surviving spouse’s gifts and testamentary transfers
ADVANTAGES
DISADVANTAGES
 “Free” double “step-up” in basis
 No GST Tax exemption portability
 Simplicity
 No cost-of-living increase on DSUEA
 All income tax reported by surviving spouse
 No state estate/inheritance tax portability
 Appreciation above DSUEA subject to estate tax
 Estate tax return required even if no tax payable
 Limited applicability if children from prior marriage exist
 Spouse may not retain benefit of subsequent DSUEA gift
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Paradigm Shift: The ATRA-Math
23
Growth of the Applicable Exclusion for Spouses
Growth of the Applicable Exclusion Over Time
High
Inflation
$30.0
$25.0
$20.0
Average
Inflation
$15.0
Low
Inflation
$10.0
$5.0
$-
2013
2017
2021
2025
2029
2033
*Based on increases in inflation, rounded to the nearest $10,000. Low, average and high inflation are defined as the 90th, 50th and 10th percentile of inflation over the relevant time period.
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future
results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
24
Relying on Portability: Worst Case Scenario
Portability in 2013 + Growth of Surviving Spouse’s Applicable Exclusion
$30.0
$25.0
$20.0
High
Inflation
$15.0
Average
Inflation
Low
Inflation
$10.0
$5.0
$2013
2017
2021
2025
2029
2033
*Based on increases in inflation, rounded to the nearest $10,000. Low, average and high inflation are defined as the 90th, 50th and 10th percentile of inflation over the relevant time period.
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future
results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
25
When Portability Might Make Sense
 Combined assets of:
$3.0 Mil. to $7.0 Mil.
 Assets are primarily:
Traditional IRA & qualified plan assets (Rollover & RMD)
Frozen DSUEA +
Growth of Surviving Spouse’s Applicable Exclusion
$30.0
High
$20.0
Average
Low
$10.0
Asset Values
Primary residence (§ 121 Exclusion & Homestead)
$2013
2017
2021
2025
2029
2033
 Assets that are depreciable or depletable:
Commercial real property
Oil & gas and other mineral interests
Timber interests
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Paradigm Shift: The ATRA-Math
26
When Portability Might Make Sense
 Surviving spouse and estate are willing to:
Bypass
GST
Trust
QTIP
Trust
Establish 100% QTIP
“Reverse” QTIP election
Fund an “intentionally defective grantor trust” (IDGT) with DSUEA
(DSUEA)
IDGT
GST
Trust
Apply surviving spouse’s GST exemption to the transfer
 State Estate/Inheritance Tax States But No State Gift Tax
“Reverse”
QTIP
GST
Trust
QTIP
Trust
“swap”
Bypass trust funded with state exemption amount
Surviving
Spouse
Elect portability on the remainder above state exemption
(DSUEA)
IDGT
GST
Trust
Gift of DSUEA to IDGT
 Surviving spouse
Has significantly appreciated assets (separate property)
Will proactively transfer stepped-up assets in “zeroed-out” techniques
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QTIP
Trust
“Reverse”
QTIP
GST
Trust
“swap”
Bypass
GST
Trust
Surviving
Spouse
Paradigm Shift: The ATRA-Math
27
The Sacrosanct Applicable Exclusion Amount
 Option 1:
 Use as little Applicable Exclusion as Possible to Preserve “Step-Up” in Basis
 Rely on “Zeroed-Out” gifts to transfer wealth. Consider some of the following:
 Private Annuity Sales or Very Long Term GRATs
 Back-Loaded Annuity CLATs
 Option 2:
 Use some but not all of Applicable Exclusion to hedge legislative risk
 Perhaps use the annual cost-of-living increase like annual exclusion gifts
($ Mil.)
$10.0
Applicable Exclusion Amount
$8.0
Cost-of-Living
Increase
$6.0
$4.0
Applicable
Exclusion
Amount
$2.0
$2013
Bernstein.com
2017
2021
2025
2029
2033
Paradigm Shift: The ATRA-Math
28
Still Extremely Low AFR and Section 7520 Rates
Applicable Federal Rates*
Jan. 1998–May 2013
6.77%
6.80%
6.60%
Max.
May 2013
4.80%
3.84%
2.18%
1.00%
0.84%
0.20%
0.16%
Min.
(Annual)
2.60%
2.54%
Short-Term
Mid-Term
Installment Sales to IDGTs
&
Intra-Family Loans
Long-Term
Section 7520 Rate (%)**
12
10
8
Average: 6.0%
6
May 2013 (1.2%)
4
GRATs
&
CLATs
2
0
89
91
93
95
97
99
01
03
05
07
09
11
13
*Section 1274(d) of the Internal Revenue Code of 1986, as amended (Code), compounded annually.
**Code Section 7520. As of May 2013.
Source: Internal Revenue Service (IRS) and AllianceBernstein
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Paradigm Shift: The ATRA-Math
29
Forcing Estate Tax Inclusion & Multiplying the Applicable Exclusion
 In-Kind Trust Distributions
 Testamentary General Powers of Appointment
 Formula clause: specific to beneficiary’s Applicable Exclusion Amount (estate and GST tax), specific to
asset that would most benefit from “step-up” in basis, and exercised further in trust.
 Independent trustee/protector giving testamentary general power of appointment to beneficiary.
 Modification of existing trusts or decanting. GST tax risks?
GST Tax Exempt
(Dynasty Trust)
Grantor
(G1)
3 Children (+ Spouses?)
(G2)
10 Grandchildren (+ Spouses?)
(G3)
[#] Great Grandchildren
(G4)
3 x Applicable Exclusion
10 x Applicable Exclusion
[#] x Applicable Exclusion
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Paradigm Shift: The ATRA-Math
30
“Reverse” Estate Planning?
Older Generation
“Zeroed-Out”
Transfers
State
Income
or Local
Tax?
Available
Applicable
Exclusion
Amount?
State
Inheritance
or Estate
Tax?
GST
Tax
Exempt
Trust
f/b/o
Younger
Generations
Younger Generation
Bernstein.com
Paradigm Shift: The ATRA-Math
31
The Roth IRA Conversions Are More Important to Consider
Pension/Qualified Plan/Traditional IRA
Series of Conversions
Lower Income Tax Bracket
No Required Minimum Distributions
Traditional
IRA
Roth
IRA
Tax Free Growth
Spending
&
Taxes
Tax Free Distributions
Bernstein.com
Charitable
Deduction
Applicable Exclusion
Charity
Children & Grandchildren
No Medicare Surcharge
Paradigm Shift: The ATRA-Math
32
Splitting Income: Direct Gift, Simple, Complex, Non-Grantor, Grantor Trusts
Running the Brackets
$42,236 tax savings
$52,354 tax savings
STCG/Ordinary Rate
Single
Joint
10%
$0-$8,925
$0-$17,850
15%
$8,926-$36,250
$17,851-$72,500
25%
$36,251-$87,850
$72,501-$146,400
31.8% with surcharge
28%
$87,851-$183,250
$146,401-$223,050
36.8% with surcharge
33%
$183,251-$398,350
$223,051-$398,350
38.8% with surcharge
35%
$398,351-$400,000
$398,351-$450,000
43.4% with surcharge
39.6%
$400,001+
$450,001+
LTCG/QD Rate
Single
Non-Grantor Trusts
hit highest tax bracket
@ $11,950 taxable income
Joint
0%
$0-36,250
$0-$72,500
15%
$36,251-$200,000 AGI
$72,501-$250,000 AGI
18.8%
$200,001 AGI-$400,000
$250,001 AGI -$450,000
23.8%
$400,001+
$450,001+
Fiduciaries: Principal & Income Act may require higher distributions to beneficiaries
Split the income, not necessarily the cash flow: S corporation, LLC and LP shares
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Paradigm Shift: The ATRA-Math
33
What Are You Swapping with Your Grantor Trust?
“Step-Up” Important
Creator-Owned Copyrights, Trademarks, Patents & Artwork
“Negative Basis” Commercial Real Property LPs
Artwork, Gold & Other “Collectibles”
Low Basis Stock
High Basis Stock
Fixed Income
Cash
Variable Annuities
“Step-Up” Not Important
Source: AllianceBernstein
Bernstein.com
Paradigm Shift: The ATRA-Math
34
Valuation Discount: To Be or Not to Be?
 Community Property States
 Maximize value until the first spouse’s death
 Maximize value to the extent of the Applicable Exclusion Amount in surviving spouse’s estate
 Minimize value on any excess
 Separate Property States
 Equalization of assets
 Maximize value until the first spouse’s death
 Maximize value to the extent of the Applicable Exclusion Amount in surviving spouse’s estate
 Minimize value on any excess
Bernstein.com
Paradigm Shift: The ATRA-Math
35
Bernstein’s Wealth Management Group Research
 Solving Multi-Variable Problems
 Wealth Forecasting System has been updated to include the provisions of ATRA
 Customized analyses
 Upcoming Research:
State-Specific Estate Planning Matrices
 Probability of a transfer tax
 Transfer tax cost vs. savings from “step-up”
 Segmenting clients vis-à-vis planning options
Testamentary Planning Structures
 Bypass trust vs. portability
 State bypass trust & portability
 State bypass & QTIP
 GST tax implications
Income Tax Planning
 Splitting income to “run the brackets”
 Tax deferral in the post-ATRA world
 Swapping assets in grantor trusts
 Maximizing the “step-up” in basis
 Use of partnerships to maximize tax benefits
Estate Planning Strategies
 “Zeroed-out” transfers in a post-ATRA world
 Life Insurance in a post-ATRA world
 Multiplying the applicable exclusion amount
Bernstein.com
Paradigm Shift: The ATRA-Math
36
Appendix
Bernstein.com
Paradigm Shift: The ATRA-Math
37
Notes on State Income and State Death Taxes (As of May 31, 2013)
State
Alabama
Alaska
Arizona
Arkansas 3
California
Colorado
Connecticut
(Estate & Gift Tax)
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
(Inheritance Tax)
Iowa
(Inheritance Tax)
Kansas
Kentucky
(Inheritance Tax)
Louisiana
Maine
Maryland
(Estate & Inheritance Tax)
Massachusetts
Michigan
Minnesota
(Estate & Gift Tax)
Mississippi
Missouri
Montana4
Nebraska
(County Inheritance Tax)
Nevada
New Hampshire8
State Income Tax1
5.00%
0.00%
4.54%
4.90%
13.30%
4.63%
Top State Death Tax Rate 2
No state death tax
No state death tax
No state death tax
No state death tax
No state death tax
No state death tax
6.70%
12% (Estate & Gift Tax)
6.75%
8.95%
0.00%
6.00%
11.00%
7.40%
5.00%
16.00%
16.00%
No state death tax
No state death tax
16.00%
No state death tax
15.70%
No state death tax
6.00%
7.95%
Inheritance Tax - No tax on
lineal heirs
No state death tax
Inheritance Tax - No tax on
lineal heirs
No state death tax
12.00%
5.75%
16.00%
5.25%
4.25%
5.00%
6.00%
4.90%
16.00%
No state death tax
16% (Estate Tax);
10% (Gift Tax)
No state death tax
No state death tax
No state death tax
6.84%
1.00%
0.00%
0.00%
No state death tax
No state death tax
8.98%
4.90%
6.00%
9.85%
2013 State Death Tax Threshold2
State
New Jersey
(Estate & Inheritance Tax)
New Mexico5
New York
New York City
North Carolina
$2,000,000 (Estate & Gift Tax)
North Dakota3
Ohio
$5,250,000 (Indexed for Inflation)
$1,000,000
Oklahoma
Oregon
Pennsylvania
$5,250,000 (indexed for inflation)
(Inheritance Tax)
Rhode Island
$4,000,000
South
Carolina6
Repealed on 5/8/13. Retroactive
South Dakota
to 1/1/13
$2,000,000
$1,000,000; Inheritance Tax - No
tax on lineal heirs
$1,000,000
$1,000,000 (Estate Tax);
$1,000,000 (Gift Tax)
County inheritance tax
State Income Tax1
Top State Death Tax Rate 2
8.97%
16.00%
2.45%
8.82%
12.70%
7.75%
2.79%
5.93%
5.25%
9.90%
No state death tax
16.00%
16.00%
16.00%
No state death tax
No state death tax
No state death tax
16.00%
3.07%
4.50%
5.99%
3.92%
0.00%
16.00%
No state death tax
No state death tax
Tennessee7
(Inheritance Tax)
0.00%
9.50%
Texas
Utah
Vermont9
Virginia
Washington
West Virginia
Wisconsin3
Wyoming
0.00%
5.00%
8.95%
5.75%
0.00%
6.50%
5.43%
0.00%
0.00%
0.00%
16.00%
0.00%
19.00%
0.00%
0.00%
0.00%
2013 State Death Tax Threshold2
$675,000; Inheritance Tax - No tax
on lineal heirs
$1,000,000
$1,000,000
$5,250,000 (indexed for inflation)
$1,000,000
$3,500 (family exemption amount,
may not apply in all circumstances)
$910,725
Inheritance Tax - Top rate for lineal
heirs is 9.5% with an exemption of
$1.25 million (for 2013 deaths);
Exemption increases to $2 million
for 2014 deaths, and $5 million for
2015 deaths, and the tax is
eliminated beginning for 2016
deaths. Tenn. Code Ann. § 67-8316 (b) (2011), as amended by
Tenn. Pub. Act ch. 1057.
No state death tax
No state death tax
$2,750,000
No state death tax
$2,000,000
No state death tax
No state death tax
No state death tax
Bernstein does not provide tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals in those areas before making any decisions. Blended state and federal
capital gains rate, assumes client is in AMT and state income tax deduction is not available.
1Source: TaxFoundation.org and Bernstein.
2Source: Survey of State Estate, Inheritance, and Gift Taxes (Updated: December 2012); Research Department Minnesota House of Representatives (Joel Michael, Legislative Analyst) and Bernstein.
3Tax payers may exclude 30% of net long-term capital gain for state taxes, tax rate displayed is 70% of the state income tax rate.
4Taxpayers can claim a capital gains tax credit against their Montana income tax up to 2% of their net capital gain; tax rate displayed is net of credit.
5Taxpayers may deduct $1,000, or 50% of your net capital gains, whichever is greater; tax rate displayed is net of 50% deduction.
6Net capital gains which have been held for a period of more than one year and have been included in South Carolina taxable income are reduced by 44% for South Carolina income tax purposes.
76% of state income tax on dividends & interest only.
85% tax on interest and dividends only.
9A flat exclusion is allowed for capital gains held longer than 3 years equal to the lesser of $5,000 or 40% of Federal taxable income.
Bernstein.com
Paradigm Shift: The ATRA-Math
38
Some Assets Benefit from a “Step-Up,” Some Do Not
Asset Type
Comments
Creator-Owned
Copyrights,
Trademarks, Patents
and Artwork
During the life of the creator of intellectual property and artwork, the creator has a zero basis in the asset, and all payments, whether from a sale of the asset or
from the licensing of the property are considered ordinary income. On the death of the creator, the property is included in the estate and receives a step-up in
basis to fair market value. The beneficiaries receive the asset immediately as a long-term capital gain asset. The foregoing does not apply to patents that qualify
for and are sold under Section 1235 of the Internal Revenue of 1986, as amended, which qualify for long-term capital gain tax treatment.
“Negative Basis”
Commercial Real
Property LP or
LLC Interests
Owners of partnership interests with “negative basis” would recognize long-term capital gain and ordinary income upon a taxable transaction due to accelerated
depreciation and a reduction of the partner’s share of debt. Upon death, the “negative basis” is eliminated because the partnership interests and the underlying
property receive a step-up in basis (with a partnership election).
Artwork, Gold and Other
“Collectibles”
Artwork and gold (including Gold ETF investments) are considered “collectibles” under the Code, and they are subject to a 28% long-term capital gain tax rate.
Gains are also subject to the Medicare surcharge.
Low-Basis Stock
Capital asset subject to a 20% long-term capital gain tax rate and the Medicare surcharge. The step-up in basis eliminates the gain.
Roth IRA Assets
With a Roth IRA, the ordinary income tax of a traditional IRA has essentially been prepaid. Because the assets in a Roth IRA will grow income tax free, will be
distributed tax free to the beneficiaries, and will not be subject to the Medicare surcharge, this is one of the better things to pass through the estate. Like other
IRA and qualified plan assets, during life the owner is unable to gift the assets to non-charitable beneficiaries. As such, these assets are often includable in the
estate of the decedent owner.
High-Basis Stock
Capital asset subject to a 20% long-term capital gain tax rate and the Medicare surcharge. Because the tax basis is high, very little gain is eliminated by the
step-up in basis.
Fixed Income
Most fixed income investments are purchased at or near par and have very little appreciation potential above its basis. As such, very little gain is eliminated by
the step-up in basis. A couple of exceptions to this rule include bonds purchased at a deep discount (e.g., ABRA-S) and long-duration bonds in a falling interest
rate environment.
Cash
Basis of cash is always equal to its fair market value (face value).
Stocks at a Loss
Death constitutes a “step-down” in basis. The capital loss that the decedent could have recognized prior to death is eliminated and does not pass
to the beneficiaries.
Variable Annuities
Payments are taxable as ordinary income and return of basis. The ordinary income portion is considered income-in-respect of a decedent (IRD).
As such, on death, the beneficiaries continue to recognize the ordinary income portion of the payments, and there is no benefit to the step-up in basis.
Traditional IRA and
Qualified Plan Assets
All assets in traditional IRAs and in qualified plans are considered 100% IRD (other than non-deductible contributions to IRAs). As such, there is no benefit to the
step-up in basis at the death of the owner, and the beneficiaries continue to be subject to ordinary income (but not the Medicare surcharge) on any distributions.
Because these assets cannot be gifted during life to non-charitable beneficiaries, these assets are problematic in that they often use up the decedent’s
applicable exclusion amount for estate tax purposes (unless passed to a spouse or charity). Any benefit from the IRD income tax deduction has been reduced
because the transfer tax rate is lower (40%).
Bernstein does not provide tax, legal or accounting advice.
Please consult professionals in those areas before making any decisions.
Bernstein.com
Paradigm Shift: The ATRA-Math
39
2013 Tax Law: Key Income Tax Changes for Individuals
PROVISION
2012
2013
Top Ordinary Income Tax Rates
35% unearned income
36.45% earned income
43.4% unearned income (39.6% + 3.8%)
41.95% earned income (39.6% + 2.35%)
Top Capital Gains Rates
15% long-term
35% short-term
20% long-term (23.8% with Medicare surtax)
39.6% short-term (43.4% with Medicare surtax)
Top Qualified Dividend Rates
15%
20% (23.8% with Medicare surtax)
15% (18.8% with Medicare surtax)
3.8%
Medicare Surtax on Net Investment Income
Itemized Deduction Limitation
N/A
No limitations on
itemized deductions
Includes capital gains, dividends, interest, royalties and rents
Deductions limited include mortgage interest, investment interest,
investment management fees, state and local taxes, charitable
contributions, medical expenses and business expenses
Lesser of: (i) 3% of amount in excess of the AGI
threshold or (ii) 80% of deductions
$51,900/$80,800
(indexed for inflation)
Charitable IRA Rollover
See Comments
Up to $100,000 for individuals 70½ or older
Social Security Tax
4.2%
(Wages up to $110,100)
6.2%
(Wages up to $113,700)
Roth Conversions for Retirement Plans
N/A
Employer plans can be directly converted
Bernstein.com
20%: Above $400,000/$450,000 (taxable income)
15%: At or above $36,250/$72,500
Deductions limited with AGI above $250,000/$300,000
(indexed for inflation)
No phaseout
$50,600/$78,750
20% long-term: Above $400,000/$450,000 (taxable income)
15% long-term: Above $36,250/$72,500 up to $400,000/$450,000
Does NOT include income from municipal bonds, IRAs, qualified
plans, sale of homes (up to the exclusion amount), and
active/operating companies
Exemptions reduced by 2% of the amount in excess of
the AGI threshold
AMT Exemption
39.6%: Taxable income of $400,000/$450,000 (single/joint)
Medicare NII and HI tax: AGI above $200,000/$250,000
Lesser of: (i) “Net Investment Income” or
(ii) amount that AGI exceeds $200,000/$250,000
Phaseout with AGI above $250,000/$300,000
(indexed for inflation)
Personal Exemption Phaseout
COMMENTS
Under previous law, phaseout would have started at approximately
$175,000 AGI
Under previous law, phaseout would have started at approximately
$175,000 AGI
Personal exemptions completely phased out at $372,501/$422,501
Permanent fix to the AMT “patches” adopted each year:
$33,750/ $45,000
Due to expire 12/31/2013. Retroactively extended for 2012 to
include: (i) all direct transfers to charity during December 2012, (ii)
all direct transfers to charity made by 1/31/2013, and (iii) IRA
distributions taken in December 2012 that are then transferred in
cash to charity by 1/31/2013
Payroll tax cut expired
Employer plan must include this option and a sponsored Roth plan.
Paradigm Shift: The ATRA-Math
40
2013 Tax Law: Key Estate, Gift and GST Tax Changes
PROVISION
2012
2013
COMMENTS
“Permanent” provisions that are not due to expire
Permanent “reunification” of all three of the wealth transfer taxes
(estate, gift and GST)
Under previous law, the estate tax exemption was higher ($3.5 mil.
in 2009) than the gift tax exemption ($1.0 mil. in 2009)
Estate, Gift and GST Tax
Applicable Exclusion Amounts
$5.12 million
(indexed for inflation)
$5.25 million
(indexed for inflation)
Absent new tax law, exemption amounts would have fallen to $1.0
mil. (estate tax), $1.0 mil. (gift tax) and approx. $1.35 mil. (GST tax)
Many states impose a death tax, but the exemptions are far less
than the federal exclusion. Thus, estate planning to avoid the state
death tax will continue to be a planning option
Only CT imposes a gift tax currently. CT provides for a $2.0 mil.
exclusion per person
Absent new tax law, rate would have risen to 55%
Top Transfer Tax Rate
35%
40%
Administration had proposed 45% in 2012
Annual Gift Tax Exclusion
$13,000
(indexed for inflation)
$14,000
(indexed for inflation)
No change in law. Increase due to inflation
No change from 2012 except for a technical correction that could
have limited portability from previously deceased spouses
Portability of
Deceased Spouse’s Unused Exclusion
Portability allowed
Portability made permanent
Limits on GRATs
Proposed
NOT enacted
Would have limited ability to “zero-out” and imposed minimum and
maximum terms. Could be part of future legislation
Limits on Grantor Trusts
Proposed
NOT enacted
Would have eliminated transfer tax benefits of “intentionally
defective” grantor trusts. Could be part of future legislation
Limits on Valuation Discounts
Proposed
NOT enacted
Would have limited valuation discounts on family owned entities.
Could be part of future legislation
Bernstein.com
Many states have not adopted “portability” for state death tax
purposes. Thus, equalizing assets among spouses will continue to
be important for state death tax purposes
Paradigm Shift: The ATRA-Math
41
Still Extremely Low AFR and Section 7520 Rates
Applicable Federal Rates*
Jan. 1998–May 2013
6.77%
6.80%
6.60%
Max.
May 2013
4.80%
3.84%
2.18%
1.00%
0.84%
0.20%
0.16%
Min.
(Annual)
2.60%
2.54%
Short-Term
Mid-Term
Installment Sales to IDGTs
&
Intra-Family Loans
Long-Term
Section 7520 Rate (%)**
12
10
8
Average: 6.0%
6
May 2013 (1.2%)
4
GRATs
&
CLATs
2
0
89
91
93
95
97
99
01
03
05
07
09
11
13
*Section 1274(d) of the Internal Revenue Code of 1986, as amended (Code), compounded annually.
**Code Section 7520. As of May 2013.
Source: Internal Revenue Service (IRS) and AllianceBernstein
Bernstein.com
Paradigm Shift: The ATRA-Math
42
Private Annuity Sale: A Better Use of the Applicable Exclusion Gift?
$5.0 Mil.
$3.5 Mil.
Private Annuity
• Section 7520
• Mortality Tables
• Valuation Factors in § 20.2031-7(d)
2009
• IRS Publication 1457
• 110 Year Exhaustion Test
• Grantor Trust
$5.12 Mil.
$1.0 Mil.
2010
2011
2012
$5.0 Mil.
$5.12 Mil.
$1.0 Mil.
Lifetime
of
2009
2013
$1.0 Mil.
2010
Grantor
2011
2012
$5.0 Mil.
$5.12 Mil.
2013
$3.5 Mil.Trust
Grantor
$1.35 Mil.
Applicable 2010
2009
2011
2012
2013
55%
Exclusion
45%
35%
Gift
2009
Bernstein.com
2010
2011
2012
2013
Paradigm Shift: The ATRA-Math
43
Lifetime Terms under Section 7520 Tables
 110 Year Exhaustion Test
 “A standard section 7520 annuity factor may not be used to determine the present value of an annuity for…
the life of one or more individuals unless the effect of the trust, will, or other governing instrument is to
ensure that the annuity will be paid for the entire defined period. In the case of an annuity payable from a
trust or other limited fund, the annuity is not considered payable for the entire defined period if, considering
the applicable section 7520 interest rate at the valuation date of the transfer, the annuity is expected to
exhaust the fund before the last possible annuity payment is made in full. For this purpose, it must be
assumed that it is possible for each measuring life to survive until age 110.”**
 Problem
 Test assumes the assets will grow at the Section 7520 Rate.
 Limits on “unproductive property.”
 Solving the 110 Year Exhaustion Test
 Limit to:
 A term of years (determined by when the fund will be exhausted), or
 The prior death of the measuring life.
 “Over-Fund” the Private Annuity Trust
 Make a taxable gift
**Treas. Regs. §§ 1.7520-3(b)(2)(i), 20.7520-3(b)(2)(i), and 25.7520-3(b)(2)(i).
Bernstein.com
Paradigm Shift: The ATRA-Math
44
Private Annuity vs. IDGT Sale
65-Year-Old Couple
 Outright Gift
 $10.1 Mil. Taxable Gift to IDGT
$40 Mil. Assets
 IDGT Sale
Spending $500,000
 $10.1 Mil. Taxable Gift to IDGT
 $12.7 Mil. Installment Sale to IDGT (20-Year-“Balloon” Note)
60% Stocks/40% Bonds
 Fixed Private Annuity Sale**
 $10.1 Mil. Taxable Gift to IDGT
 $12.7 Mil. Private Annuity Sale to IDGT ($647,602 Fixed Annuity)
 3% Increasing Private Annuity Sale**
 $10.1 Mil. Taxable Gift to IDGT
 $12.7 Mil. Private Annuity Sale to IDGT ($451,036 + 3% Each Year)
*All strategies are assumed to be funded with $10 million and all assets invested in 60% global equities and 40% municipal bonds. All strategies are assumed to be funded at the May 2013 7520
rate and long-term AFR.
**Fixed private annuity sale assumes annuity factor of 19.6108, requiring $10.1 mil. gift to satisfy 110 year exhaustion test. Increasing private annuity assumes 28.1574 annuity factor.
Bernstein.com
Paradigm Shift: The ATRA-Math
45
Private Annuity vs. IDGT Sale
Value
($ Mil.)
Gross Estate (Median Nominal Values)
80
60
Outright
Gift
Fixed
Private
Annuity
IDGT
Sale
40
20
3%+
Private
Annuity
-
65
70
75
80
85
90
95
100
Years of Age
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future
results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
46
IDGT Sale: High Probabilities of Running Out of Money
Value
($ Mil.)
Gross Estate (Median Nominal Values)
80
Probability of Running Out of Money
IDGT
Sale
0%
7%
23%
46%
90
95
100
60
40
20
-
65
70
75
80
85
Years of Age
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future
results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
47
Private Annuities: Better Option
Value
($ Mil.)
Gross Estate (Median Nominal Values)
80
Probability of Running Out of Money
Private
Annuities
0%
3-8%
11-26%
27-45%
60
40
20
-
65
70
75
80
85
90
95
100
Years of Age
Based on Bernstein’s estimates of the range of returns for the applicable capital markets. Data do not represent past performance and are not a promise of actual future results or a range of future
results. See Notes on Wealth Forecasting System for details.
Bernstein.com
Paradigm Shift: The ATRA-Math
48
What about a 100 Year GRAT? … 360 Year GRAT?
Mortality Risk*
100%
 80 Yr. Old
 70 Yr. Old
50%
0%
Today
 60 Yr. Old
 50 Yr. Old
10 Yrs.
20 Yrs.
30 Yrs.
40 Yrs.
50 Yrs
Projected 7520 Rate**
16%
10th Percentile
14%
12%
10%
8%
Median
Historical
Average
6%
4%
90th Percentile
2%
0%
Today
2023
2033
2043
2053
2063
*Based on 2000-RP mortality tables, single life, male.
**”Today” is 7/1/12. Based on Bernstein estimates of the range of returns for the applicable capital markets over the periods analyzed. Source: AllianceBernstein
Bernstein.com
Paradigm Shift: The ATRA-Math
49
What about a 100 Year GRAT? … 360 Year GRAT?
§ 20.2036-1(c)(2): Maximum Amount Includible*
7520
100 Year GRAT
360 Year GRAT
Rate
($172,254 Annuity)
($121,660 Annuity)
1.2%
$
14,354,479 $
10,138,351
2.0%
$
8,612,687 $
6,083,011
3.0%
$
5,741,792 $
4,055,340
4.0%
$
4,306,344 $
3,041,505
5.0%
$
3,445,075 $
2,433,204
6.0%
$
2,870,896 $
2,027,670
7.0%
$
2,460,768 $
1,738,003
$10 Mil. Contribution
“Zeroed-Out” GRAT
Year 20: Projected 7520 Rate & Annualized Returns
Probability
5%
10%
12.0%
50%
10.4%
6.2%
6.7%
2.0%
2.5%
1.72%
90%
95%
96.1% Probability
7520 Rate is ≥ 1.2%
1.2%
Section 7520 Rate
Return Needed for
$172,254 Annuity
Global Equity Return
*See § 20.2036-1(c)(2)(iii), examples 1 and 2. **Based on Bernstein’s estimates of the range of returns for the applicable capital markets over the periods analyzed. Source: AllianceBernstein
Bernstein.com
Paradigm Shift: The ATRA-Math
50
GRAT Does Not Need to Be 100 Years
50 Year GRAT
Annuity
Interest Rate
Years
PV of Grantor's Retained Interest
Annuity Factor
Life Factor
Remainder Factor
60 Year GRAT
Annuity
Interest Rate
Years
PV of Grantor's Retained Interest
Annuity Factor
Life Factor
Remainder Factor
70 Year GRAT
Annuity
Interest Rate
Years
PV of Grantor's Retained Interest
Annuity Factor
Life Factor
Remainder Factor
$
$
$
$
$
$
267,126.84
1.2%
50
10,000,000
37.43540022
0.449224803
0.550775197
7520 Rate at Death
1.2%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
§ 20.2036-1(c)(2): Amt. Incl.
$
22,260,569.64
$
13,356,341.78
$
8,904,227.85
$
6,678,170.89
$
5,342,536.71
$
4,452,113.93
$
3,816,097.65
234,761.45
1.2%
60
10,000,000
42.59643082
0.51115717
0.48884283
7520 Rate at Death
1.2%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
§ 20.2036-1(c)(2): Amt. Incl.
$
19,563,454.43
$
11,738,072.66
$
7,825,381.77
$
5,869,036.33
$
4,695,229.06
$
3,912,690.89
$
3,353,735.05
211,967.13
1.2%
70
10,000,000
47.17712512
0.566125501
0.433874499
7520 Rate at Death
1.2%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
§ 20.2036-1(c)(2): Amt. Incl.
$
17,663,927.83
$
10,598,356.70
$
7,065,571.13
$
5,299,178.35
$
4,239,342.68
$
3,532,785.57
$
3,028,101.91
Source: AllianceBernstein
Bernstein.com
Paradigm Shift: The ATRA-Math
51
Notes on Wealth Forecasting System
1. Purpose and Description of Wealth Forecasting Analysis
Bernstein’s Wealth Forecasting Analysis SM is designed to assist investors in making long-term investment decisions regarding their allocation of investments among
categories of financial assets. Our new planning tool consists of a four-step process: (1) Client Profile Input: the client’s asset allocation, income, expenses, cash withdrawals,
tax rate, risk-tolerance level, goals and other factors; (2) Client Scenarios: in effect, questions the client would like our guidance on, which may touch on issues such as when
to retire, what his/her cash-flow stream is likely to be, whether his/her portfolio can beat inflation long term and how different asset allocations might impact his/her long-term
security; (3) The Capital Markets Engine: Our proprietary model, which uses our research and historical data to create a vast range of market returns, takes into account the
linkages within and among the capital markets, as well as their unpredictability; and finally (4) A Probability Distribution of Outcomes: Based on the assets invested pursuant
to the stated asset allocation, 90% of the estimated ranges of returns and asset values the client could expect to experience are represented within the range established by
the 5th and 95th percentiles on “box and whiskers” graphs. However, outcomes outside this range are expected to occur 10% of the time; thus, the range does not establish
the boundaries for all outcomes. Expected market returns on bonds are derived by taking into account yield and other criteria. An important assumption is that stocks will,
over time, outperform long bonds by a reasonable amount, although this is in no way a certainty. Moreover, actual future results may not meet Bernstein’s estimates of the
range of market returns, as these results are subject to a variety of economic, market and other variables. Accordingly, the analysis should not be construed as a promise of
actual future results, the actual range of future results or the actual probability that these results will be realized.
2. Rebalancing
Another important planning assumption is how the asset allocation varies over time. We attempt to model how the portfolio would actually be managed. Cash flows and cash
generated from portfolio turnover are used to maintain the selected asset allocation between cash, bonds, stocks, REITs and hedge funds over the period of the analysis.
Where this is not sufficient, an optimization program is run to trade off the mismatch between the actual allocation and targets against the cost of trading to rebalance. In
general, the portfolio allocation will be maintained reasonably close to its target. In addition, in later years, there may be contention between the total relationship’s allocation
and those of the separate portfolios. For example, suppose an investor (in the top marginal federal tax bracket) begins with an asset mix consisting entirely of municipal
bonds in his/her personal portfolio and entirely of stocks in his/her retirement portfolio. If personal assets are spent, the mix between stocks and bonds will be pulled away
from targets. We put primary weight on maintaining the overall allocation near target, which may result in an allocation to taxable bonds in the retirement portfolio as the
personal assets decrease in value relative to the retirement portfolio’s value.
3. Expenses and Spending Plans (Withdrawals)
All results are generally shown after applicable taxes and after anticipated withdrawals and/or additions, unless otherwise noted. Liquidations may result in realized gains or
losses that will have capital gains tax implications.
Bernstein.com
Paradigm Shift: The ATRA-Math
52
Notes on Wealth Forecasting System
4. Modeled Asset Classes
The following assets or indexes were used in this analysis to represent the various model classes:
Asset Class
Modeled As…
Intermediate-Term Diversified Municipal Bonds
AA-rated diversified municipal bonds with seven-year maturity
30%
US Diversified
S&P 500 Index
15%
US Value Stocks
S&P/Barra Value Index
15%
US Growth Stocks
S&P/Barra Growth Index
15%
Developed International Stocks
MSCI EAFE Unhedged
15%
Emerging Markets Stocks
MSCI Emerging Markets Index
20%
US SMID
Russell 2000
15%
Annual Turnover Rate
5. Volatility
Volatility is a measure of dispersion of expected returns around the average. The greater the volatility, the more likely it is that returns in any one period will be substantially
above or below the expected result. The volatility for each asset class used in this analysis is listed on the Capital Markets Projections page at the end of these Notes.
In general, two-thirds of the returns will be within one standard deviation. For example, assuming that stocks are expected to return 8.0% on a compounded basis and the
volatility of returns on stocks is 17.0%, in any one year it is likely that two-thirds of the projected returns will be between (8.9)% and 28.0%. With intermediate government
bonds, if the expected compound return is assumed to be 5.0% and the volatility is assumed to be 6.0%, two-thirds of the outcomes will typically be between (1.1)% and
11.5%. Bernstein’s forecast of volatility is based on historical data and incorporates Bernstein’s judgment that the volatility of fixed income assets is different for different
time periods.
6. Technical Assumptions
Bernstein’s Wealth Forecasting System is based on a number of technical assumptions regarding the future behavior of financial markets. Bernstein’s Capital Markets Engine
is the module responsible for creating simulations of returns in the capital markets. Except as otherwise noted, these simulations are based on inputs that summarize the
current condition of the capital markets as of December 31, 2012. Therefore, the first 12-month period of simulated returns represents the period from December 31, 2012
through December 31, 2013, and not necessarily the calendar year of 2013. A description of these technical assumptions is available upon request.
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Notes on Wealth Forecasting System
7. Tax Implications
Before making any asset allocation decisions, an investor should review with his/her tax advisor the tax liabilities incurred by the different investment alternatives presented
herein, including any capital gains that would be incurred as a result of liquidating all or part of his/her portfolio, retirement-plan distributions, investments in municipal or
taxable bonds, etc. Bernstein does not provide tax, legal or accounting advice. In considering this material, you should discuss your individual circumstances with professionals
in those areas before making any decisions.
8. Income Tax Rates
Bernstein’s Wealth Forecasting Analysis has used various assumptions for the income tax rates of investors in the case studies that constitute this analysis. See the
assumptions in each case study (including footnotes) for details. Contact Bernstein for additional information.
The Federal Income Tax Rate is Bernstein’s estimate of either the top marginal federal income tax rate or an “average” rate calculated based upon the marginal-rate schedule.
The Federal Capital Gains Tax Rate is the lesser of the top marginal federal income tax rate or the current cap on capital gains for an individual or corporation, as applicable.
Federal tax rates are blended with applicable state tax rates by including, among other things, federal deductions for state income and capital gains taxes. The State Tax Rate
generally is Bernstein’s estimate of the top marginal state income tax rate, if applicable.
The Wealth Forecasting System uses the following top marginal federal tax rates unless otherwise stated: For 2013 and beyond, the maximum federal ordinary income tax rate
is 43.4% and the maximum federal capital gain tax rate is 23.8%.
9. Estate Transfer and Taxation
The Wealth Forecasting System models the transfer of assets to children, more remote descendants, and charities, taking into account applicable wealth transfer taxes. If the
analysis concerns a grantor and his or her spouse, the System assumes that only the first to die owns assets in his or her individual name and that no assets are owned jointly.
It is further assumed that the couple’s estate plan provides that an amount equal to the largest amount that can pass free of Federal estate tax by reason of the Federal unified
credit against estate taxes (or, if desired, the largest amount that can pass without state death tax, if less) passes to a trust for the benefit of the surviving spouse and/or
descendants of the first-to-die, or directly to one or more of those descendants. It is further assumed that the balance of the first-to-die’s individually owned assets passes
outright to the surviving spouse and that such transfer qualifies for the Federal estate tax marital deduction. Any state death taxes payable at the death of the first-to-die after
2010 are assumed to be paid from the assets otherwise passing to the surviving spouse. To the extent that this assumption results in an increase in state death taxes under
any state’s law, this increase is ignored. In addition, it is assumed that the surviving spouse “rolls over” into an IRA in his or her own name any assets in any retirement
accounts (e.g., an IRA) owned by the first to die, and that the surviving spouse withdraws each year at least the minimum required distribution (“MRD”), if any, from that IRA.
At the survivor’s death, all applicable wealth transfer taxes are paid, taking into account any deductions to which the survivor’s estate may be entitled for gifts to charity and/or
(after 2010) the payment of state death taxes. The balance of the survivor’s individually-owned assets passes to descendants and/or charities and/or trusts for their benefit.
The survivor’s retirement accounts (if any) pass to descendants and/or charities. To the extent that a retirement account passes to more than one individual beneficiary, it is
assumed that separate accounts are established for each beneficiary and that each takes at least the MRD each year from the account. In all cases, it is assumed that all
expenses are paid from an individual’s taxable accounts rather than his or her retirement accounts to the maximum extent possible.
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Notes on Wealth Forecasting System
10. Capital Markets Projections
Median 25-Year
Growth Rate
Mean
Annual Return
Mean
Annual Income
One-Year
Volatility
25-Year Annual
Equivalent Volatility
Cash Equivalents
2.7%
3.1%
3.1%
0.3%
8.2%
Int.-Term Diversified Municipal Bonds
2.8
3.0
3.2
3.7
6.0
US Diversified
7.8
9.4
3.2
16.3
17.2
US Value
8.1
9.6
3.8
15.8
17.0
US Growth
7.6
9.5
2.6
18.2
18.5
Developed International
8.5
10.4
3.8
17.9
18.0
Emerging Markets
6.6
10.5
3.9
26.6
26.6
US SMID
8.0
10.0
2.7
18.5
19.7
Inflation
2.8
3.1
n/a
1.0
8.7
Single Stock
3.8
9.4
2.2
34.8
34.0
Based on 10,000 simulated trials each consisting of 21-year periods. Contact Bernstein for additional information.
Reflects Bernstein’s estimates and the capital market conditions of December 31, 2012.
Data do not represent any past performance and are not a guarantee of any future specific risk levels or returns, or any specific range of risk levels or returns.
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