Post on 29-Jul-2018
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: soshins@oshins.com Email: ewalny@walnylegal.com
Thank You For Attending Today’s Seminar
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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
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• Receive 100% credit to apply toward future CPA/PFS dues by
referring a CPA to become a PFS or sit for the PFS exam
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• Register now for Winter window
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