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Trust Situs for Dynasty Trusts & DAPTs Presented by: Steve Oshins, Esq., AEP (Distinguished) Eido Walny, Esq., AEP, EPLS

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Trust Situs for Dynasty Trusts

& DAPTs

Presented by:

Steve Oshins, Esq., AEP (Distinguished)

Eido Walny, Esq., AEP, EPLS

American Institute of CPAs® Personal Financial Planning Section

Introduction

About the PFP Section & PFS Credential

• The AICPA PFP Section provides information,

resources, advocacy and guidance for CPAs who

specialize in providing estate, tax, retirement, risk

management and investment planning advice to

individuals and their closely held entities

• The CPA/Personal Financial Specialist (PFS)

credential distinguishes CPAs as subject-matter

experts who have demonstrated their financial

planning knowledge through experience, education

and testing

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American Institute of CPAs® Personal Financial Planning Section

Today’s Speakers

Steven J. Oshins, Esq., AEP (Distinguished)

Law Offices of Oshins & Associates, LLC

Eido M. Walny, Esq., AEP, EPLS

Walny Legal Group LLC

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American Institute of CPAs® Personal Financial Planning Section

Dynasty Trust

The Dynasty Trust should be the centerpiece of nearly EVERY

estate plan!

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American Institute of CPAs® Personal Financial Planning Section

Staggered Distribution Trust

Nearly every trust you see from most every law firm

is drafted as a staggered distribution trust

A “staggered distribution trust” is a trust that makes

mandatory distributions to the beneficiary at

staggered ages (i.e., 25/30/35)

This subjects the trust assets to potential estate

taxes, creditors and divorcing spouses

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American Institute of CPAs® Personal Financial Planning Section

Staggered Distribution Trust

Ask yourself: How much are we really helping our

clients by executing trusts this way?

Are we creating maximum benefits?

Are we kicking problems down the road?

Is there a better way? Yes.

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American Institute of CPAs® Personal Financial Planning Section

Beneficiary Controlled Trust

Rather than make mandatory staggered

distributions, why not just pick an age to give the

beneficiary control?

Very few attorneys understand this which is why

nearly every trust has the same drafting error

Once the client understands that the trust can be

drafted as a beneficiary controlled trust, there is no

reason to ever terminate the trust

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American Institute of CPAs® Personal Financial Planning Section

Dynasty Trust

A “Dynasty Trust” is an irrevocable trust that is not

subject to estate taxes for as long as state law

allows

It can also be drafted to be protected from creditors

and divorcing spouses

Rule against perpetuities limitations

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American Institute of CPAs® Personal Financial Planning Section

Pot Trust

for Descendants

Child #1

Child #2

Child #3

Staggered Distribution Trust

Distributes at 25, 30 and 35 Distributions at 25, 30 and 35 Distributions at 25, 30 and 35

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American Institute of CPAs® Personal Financial Planning Section

Pot Trust

for Descendants

Child #1

Child #2

Child #3

Grandchild #1

Grandchild #2

Grandchild #3

Grandchild #4

Grandchild #5

Grandchild #6

Dynasty Trust

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American Institute of CPAs® Personal Financial Planning Section

$1 Million Example: Dynasty Trust vs. 40%

Estate Tax every 30 Years

After-Tax Growth

Value of Dynasty Trust

After 120 Years

Value of Property

if No Trust

3.00% $34,710,987 $4,498,544

4.00% $110,662,561 $14,341,868

5.00% $348,911,561 $45,218,993

6.00% $1,088,187,748 $141,029,132

7.00% $3,357,788,383 $435,169,374

8.00% $10,252,992,943 $1,328,787,885

9.00% $30,987,015,749 $4,015,917,241

10.00% $92,709,068,818 $12,015,095,319

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American Institute of CPAs® Personal Financial Planning Section

$1 Million Example: Two-Generation Trust

vs. 50% Estate Tax in 30 Years

Simple example – Just two generations

Assume 7.2% after-tax growth

• Rule of 72 – Doubles every 10 years

Results…

• With trust = $8M to grandchild

• Outright = $4M to grandchild / $4M to IRS

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States

Characteristics

Term

Taxes

3rd Party Spendthrift Protections

DAPT Status

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States

(in alphabetical order)

Alaska

Delaware

Nevada

New Hampshire

Ohio

South Dakota

Tennessee

Wyoming

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

Perpetuities

The leading Dynasty Trust states either allow

perpetual trusts or allow trusts to last significantly

longer than the traditional rule against perpetuities

will allows

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

Perpetuities

Alaska- Perpetual (1,000 if exercise POA)

Delaware- Perpetual for personal property / 110

years for real estate

Nevada- 365 years

New Hampshire- Perpetual

Ohio- Perpetual

South Dakota- Perpetual

Tennessee- 360 years

Wyoming- 1,000 years

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Option 1: Staggered

Distribution Trust

• Benefits of the trust last

less than 1 generation

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Option 2: Dynastic

Trust

• Benefits of trust to last

dozens of generations - up

to forever

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

State Income Tax

The leading Dynasty Trust states don’t have a

fiduciary income tax (or don’t apply it to trusts set

up by an out-of-state settlor)

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

State Income Tax

Alaska- None

Delaware- None (except residents)

Nevada- None

New Hampshire- None (except dividends, interest on

residents)

Ohio- None (except residents)

South Dakota- None

Tennessee- None (except dividends, interest on

residents)

Wyoming- None

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

Third-Party Spendthrift Trust Protection –

Divorcing Spouse/Child Support

The leading Dynasty Trust states have spendthrift

trust laws protecting third-party trusts from…

• Divorcing spouses

• Child support

Many states make exceptions by statute or by case

law

Discretionary trusts vs. Support trusts

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

Third-Party Spendthrift Trust Protection –

Divorcing Spouse/Child Support

Alaska- Protected

Delaware- Not protected from either (by case law)

Nevada- Protected

New Hampshire- Not protected from either (by

statute)

Ohio- Not protected from child support (by statute)

South Dakota- Protected

Tennessee- Protected

Wyoming- Not protected from child support (by

statute)

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Option 1: Staggered

Distribution Trust

• Spendthrift protections lost

incrementally until age 35,

then no protection.

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Option 2: Dynastic Trust

• Spendthrift protection to last

dozens of generations - up to

forever

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American Institute of CPAs® Personal Financial Planning Section

Key Dynasty Trust States –

DAPT State Ranking

The leading Dynasty Trust states also have

favorable Domestic Asset Protection Trust

legislation

• Many trusts include the settlor as a discretionary beneficiary (or

give a Trust Protector the power to add the settlor in as a

discretionary beneficiary)

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American Institute of CPAs® Personal Financial Planning Section

Overall Dynasty Trust State Rankings

(as of Oct. 2013)

South Dakota- #1

Alaska- #2 (tie)

Nevada- #2 (tie)

Tennessee- #4

Ohio- #5

Wyoming- #6

Delaware- #7

New Hampshire- #8

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American Institute of CPAs® Personal Financial Planning Section

Domestic Asset

Protection Trust

A DAPT is a U.S. asset protection trust in which the trust grantor

is a permissible beneficiary

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American Institute of CPAs® Personal Financial Planning Section

Does a DAPT Work?

A DAPT definitely works for a resident of the DAPT

state

Does it work for a resident of a non-DAPT state who

sets it up under the laws of a DAPT state?

• Very large majority believe it works

• Since first DAPT statute in 1997, only two cases

- Dahl v. Dahl, Fourth Judicial District Court, Utah County, State of

Utah, Civil No. 090402989, November 1, 2011

- In re Huber, 2013 Bankr. LEXIS 2038, May 17, 2013

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American Institute of CPAs® Personal Financial Planning Section

In re Huber

In re Huber, 2013 Bankr. LEXIS 2038, May 17, 2013

• Donald Huber was a real estate investor

• The real estate market was crashing and Huber had numerous

personal guarantees

• He set up an Alaska DAPT and transferred in $10,000, a 99%

LLC interest (holding more than 25 different LLC interests), and

other assets, thereby leaving himself insolvent

Trust assets were not protected

• Blatant fraudulent conveyance

• Filed for bankruptcy: 10-year clawback per Sec. 548(e)

• Choice of law issue: Washington resident (bad WA

statute/Mastro case was WA resident)

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American Institute of CPAs® Personal Financial Planning Section

Dahl v. Dahl

Dahl v. Dahl, Fourth Judicial District Court, Utah

County, State of Utah, Civil No. 090402989,

November 1, 2011

• Charles and Kim Dahl were Utah residents

• Charles set up a Nevada DAPT and transferred his residence

(with Kim jointly transferring the residence) and a 97% LLC

membership interest (holding brokerage assets) to the DAPT

• Charles and Kim divorced

Trust assets were protected

• Charles won on Summary Judgment

• “As noted by the Court in Innerlight v. Matrix Group, LLC, 2009

UT 31, choice of law and choice of forum provisions

contained in contracts and legal documents are

enforceable.” [Emphasis added.]

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American Institute of CPAs® Personal Financial Planning Section

Does a DAPT Work?

If almost all potential creditors have been frustrated to the point where they choose to either settle the dispute or go away altogether, doesn’t this mean that almost EVERY DAPT has worked?

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American Institute of CPAs® Personal Financial Planning Section

Third-Party Irrevocable Trusts

Third-Party Irrevocable Trusts are irrevocable trusts

in which the grantor is not a beneficiary

Grantor retains the power to fire and hire trustees

Use a “floating spouse” provision

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American Institute of CPAs® Personal Financial Planning Section

Third-Party Irrevocable Trusts

If grantor loses his assets,

his spouse can take care

of him

We know for a fact that a

Third-Party Irrevocable

Trust works to protect its

assets from creditors of

the beneficiaries

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Even if you aren’t a beneficiary, from a pure asset protection standpoint, which would you rather?

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Option 1: $10M net worth

• If you’re sued and the judgment

is for more than $10M, you’re

broke

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

Option 2: $10M net worth

• Transfer $2M to irrevocable trust

for spouse and descendants, so

you now have $8M

• If you’re sued and the judgment is

for more than $8M, you’re broke,

but you can indirectly live off of

the $2M irrevocable trust

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

$10M net worth

• Transferred $2M to

discretionary trust for spouse

and descendants

• Still has $8M

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American Institute of CPAs® Personal Financial Planning Section

Which Would You Rather?

What if you get divorced?

• $2M in discretionary trust is not part of marital estate, so only

the $8M is part of the marital estate

• Therefore, the marital division doesn’t include the $2M

• However, you can indirectly access the $2M in the future

through your next spouse (floating spouse) or your children

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American Institute of CPAs® Personal Financial Planning Section

Hybrid DAPT

A “Hybrid DAPT” is a Third-Party Irrevocable Trust

that can be turned into a DAPT

Does the grantor really need to see his name in the

trust agreement as a discretionary beneficiary?

• Assuming a good relationship with spouse, a trust for spouse

and descendants isn’t much different than a DAPT

• Give Trust Protector the power to add the grantor or remove the

grantor as a permissible beneficiary

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American Institute of CPAs® Personal Financial Planning Section

Hybrid DAPT

Avoids the 10-year clawback if the grantor goes

through bankruptcy

• Battley v. Mortensen (Alaska, 2011) —

DAPT assets would have been protected using a Hybrid DAPT

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American Institute of CPAs® Personal Financial Planning Section

Hybrid DAPT

If grantor is sued, Hybrid DAPT avoids the uncertain

outcome of a regular DAPT

• Since first DAPT statute in 1997, only two cases since the

creditors generally either go away or settle

• But let’s stack the odds even more in our client’s favor

If using a Completed Gift DAPT, this avoids the

estate tax issue

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American Institute of CPAs® Personal Financial Planning Section

Getting Cash Flow

Without Being a Beneficiary

Assume grantor sets up

Hybrid DAPT for benefit

of spouse and

descendants

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American Institute of CPAs® Personal Financial Planning Section

Getting Cash Flow

Without Being a Beneficiary

Ways to access cash flow?

• Distribution to spouse who shares it with grantor

• Sell investment portfolio (stocks/bonds, etc.) to Hybrid DAPT for

promissory note

- So Hybrid DAPT can get cash flow to grantor by paying

down promissory note

• Sell other assets to Hybrid DAPT for promissory note

• Have trust loan money to the grantor for promissory note

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American Institute of CPAs® Personal Financial Planning Section

Only after consideration of all of the above options, last resort is to ask Trust Protector to add grantor as a beneficiary

Getting Cash Flow Without Being a Beneficiary

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American Institute of CPAs® Personal Financial Planning Section

Increasing the Odds

Increasing the odds of success

• Since first DAPT statute in 1997, limited case law since the

creditors generally either go away or settle

• Regardless, it is prudent to stack the odds in our clients’ favor as

much as possible

• Therefore, use a Hybrid DAPT rather than a regular DAPT in

almost all cases

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American Institute of CPAs® Personal Financial Planning Section

Down and Dirty

Splitting the Trust

Another option is to have the trustee split the Hybrid

DAPT into two separate trusts

• Trust A = Clean Trust: Still a Hybrid DAPT

• Trust B = Dirty Trust: Grantor is added in as a discretionary

beneficiary and multiple distributions are made to him without

hesitation

We know the Clean Trust still works

The Dirty Trust might not work, but at least we

protected the Clean Trust assets

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States

(in alphabetical order)

Alaska

Delaware

Nevada

New Hampshire

Ohio

South Dakota

Tennessee

Wyoming

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

State Income Tax

The leading DAPT states don’t have a fiduciary

income tax (or don’t apply it to trusts set up by an

out-of-state settlor)

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

State Income Tax

Alaska- None

Delaware- None (except residents)

Nevada- None

New Hampshire- None (except dividends, interest on

residents)

Ohio- None (except residents)

South Dakota- None

Tennessee- None (except dividends, interest on

residents)

Wyoming- None

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Statute of Limitations

The leading DAPT states have a short statute of

limitations period

• Preexisting creditors vs. Non-preexisting creditors

• Fraudulent conveyance issues

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Statute of Limitations

Alaska- 4 years / 1-year discovery

Delaware- 4 years / 1-year discovery

Nevada- 2 years / 6-month discovery

New Hampshire- 4 years / 1-year discovery

Ohio- 1.5 years / 6-month discovery

South Dakota- 2 years / 6-month discovery

Tennessee- 2 years / 6-month discovery

Wyoming- 4 years / 1-year discovery

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Exception Creditors

The leading DAPT states have minimal exception

creditors

What are exception creditors?

Examples

• Divorcing spouse

• Alimony

• Child Support

• Preexisting tort creditors

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Exception Creditors

Alaska- Divorce

Delaware- Divorce, Alimony, Child Support, Preexisting Tort

Creditors

Nevada- None

New Hampshire- Divorce, Alimony, Child Support, Preexisting

Tort Creditors

Ohio- Divorce, Alimony, Child Support

South Dakota- Divorce, Alimony, Child Support --- only if debt

at time of transfer

Tennessee- Divorce, Alimony, Child Support

Wyoming- Child Support, Property listed on application to

obtain credit – but only as to that lender

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Ease of Use

The leading DAPT states do not make it difficult to

take advantage of the DAPT opportunity

It is prudent to have the settlor execute an Affidavit

of Solvency when making a transfer to the DAPT

• Some of the DAPT states require a new Affidavit of Solvency for

every new transfer to the DAPT

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Ease of Use

Alaska- Affidavit required

Delaware- No affidavit required

Nevada- No affidavit required

New Hampshire- No affidavit required

Ohio- Affidavit required

South Dakota- No affidavit required

Tennessee- Affidavit required

Wyoming- Affidavit required

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Clear and Convincing Evidence

The leading DAPT states require the creditor to

prove a fraudulent transfer to the DAPT by “clear

and convincing evidence”

This is a high hurdle

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American Institute of CPAs® Personal Financial Planning Section

Key DAPT States –

Clear and Convincing Evidence

Alaska- Clear and convincing

Delaware- Clear and convincing

Nevada- Clear and convincing

New Hampshire- Limited Clear and convincing

Ohio- Clear and convincing

South Dakota- Clear and convincing

Tennessee- Clear and convincing

Wyoming- Clear and convincing

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American Institute of CPAs® Personal Financial Planning Section

Overall DAPT State Rankings

(as of July 2013)

Nevada- #1

South Dakota- #2

Ohio- #3 (tie)

Tennessee- #3 (tie)

Alaska- #5

Delaware- #6

Wyoming- #7

Rhode Island- #8 [This state not discussed today]

New Hampshire- #9

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American Institute of CPAs® Personal Financial Planning Section

Links to State Annual State Rankings Charts

Annual Dynasty Trust State Rankings Chart can

always be accessed at

http://www.oshins.com/images/Dynasty_Trust_Ranki

ngs.pdf

Annual Domestic Asset Protection Trust State

Rankings Chart can always be accessed at

http://www.oshins.com/images/DAPT_Rankings.pdf

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American Institute of CPAs® Personal Financial Planning Section

Steven J. Oshins, Esq., AEP (Distinguished) Eido M. Walny, Esq., AEP, EPLS

Law Offices of Oshins & Associates, LLC Walny Legal Group LLC

1645 Village Center Cir., Ste. 170 7670 N. Port Washington Road

Las Vegas, NV 89134 Fox Point, WI 53217

Phone: 702-341-6000 Phone: 414-751-7531

Fax: 702-341-6001 Fax: 414-247-9959

Website: www.oshins.com Website: www.walnylegal.com

Email: [email protected] Email: [email protected]

Thank You For Attending Today’s Seminar

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American Institute of CPAs® Personal Financial Planning Section

Questions?

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American Institute of CPAs® Personal Financial Planning Section

PFP Section Resources (aicpa.org/PFP)

The CPA’s Guide to Financial & Estate Planning– Volumes 1-4

Planning After ATRA and the NIIT Toolkit • aicpa.org/pfp/proactiveplanning

• Complimentary PFP Section member/PFS credential holder benefit

• Includes infographic on tax brackets, planning ideas to use in client meetings, client communication

templates, webcast/podcast archives, and more!

Annual Dynasty Trust State Rankings Chart

Annual Domestic Asset Protection Trust State Rankings Chart

Forefield Advisor (aicpa.org/pfp/forefield) • Client education and communication tool

• Written by CPAs, attorneys and other subject matter experts.

• More than 3,000 resources covering personal financial planning, including estate, tax, retirement,

investment and risk management planning.

More resources on estate, tax, retirement, insurance, and investments

(aicpa.org/pfp)

Visit aicpa.org/pfp/join to become a member

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American Institute of CPAs® Personal Financial Planning Section

Upcoming PFP Section Webcasts

Register now for these events:

• Series: The CPA’s Guide to Financial and Estate Planning: Taxation of Divorce (November 21, 1:00-2:45p.m. ET)

• Do the New PFP Standards Apply to You? (December 6, 1:00-2:00p.m. ET)

• Implementation of the 3.8% Net Investment Income Tax Series

- S corporations and their shareholders (January 7, 1-2p.m. ET)

- Partners and partnerships (January 28, 1-2p.m. ET)

- Estates and trusts (January 29, 1-2p.m. ET)

- Individuals (January 30, 1-2p.m. ET)

AICPA Advanced Personal Financial Planning Conference (cpa2biz.com/PFP) –

January 20-22, 2014 in Las Vegas

• 2-day session (Jan 18-19) for those in earlier stages of PFP

o Implementing PFP Services: Step by Step Plans for Success

For the full calendar of upcoming PFP Section events, visit aicpa.org/PFP and

click on CPE & Events.

To access the archives, visit aicpa.org/pfp/webseminars.

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American Institute of CPAs® Personal Financial Planning Section

CPA/PFS News and Events

PFS Referral Program

• Receive 100% credit to apply toward future CPA/PFS dues by

referring a CPA to become a PFS or sit for the PFS exam

PFS Exam

• Register now for Winter window

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Education Opportunities

• Live 2 ½ day review class

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insurance, and PFP process

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Learn more at aicpa.org/pfp/pfs

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