The recent market downturn, a prolonged recession, and the near certainty of a harsher tax climate have caused a growing level of anxiety for many Americans. Some are scaling back long-term financial goals, while others are rethinking and adjusting those plans. Maintaining current lifestyles and managing retirement cash flow have become unexpected concerns for some high-net-worth taxpayers.

A comprehensive analysis of future income and expenditures, properly adjusted for federal and state tax burdens, can shed some light on these issues. Armed with this information, taxpayers can make informed decisions on the timing and resources to meet their personal financial goals.

Uncertainty Leads to InactionWhile long-term financial goals are distinct for every individual, there are some common themes. First and foremost is the ability to maintain a comfortable lifestyle during retirement, free from cash flow concerns. Beyond this, financial objectives may include some of the following:

• Gifts to family members• Estate planning, GRATs, etc.• Finance college for grandchildren• Club memberships• Business/hobby — winery, horse farm• Purchase of vacation home• Purchase of boat/plane• Charitable support

• College endowment• Private foundation

As a result of the economic crisis and the changing tax landscape, many people are waiting for firmer financial footing to enact a plan to accomplish their objectives. Others have proceeded to invest at a slower rate, deferring payments and/or reducing the level of capital commitments. At Bessemer, we believe in “running the numbers.” Since many of the goals noted above have income tax implications, a comprehensive, tax-affected cash flow analysis may be the first step in making the right decision for you.

Changing Tax LandscapeIt is difficult to find any silver lining in higher income tax rates. In the past, we were able to take solace knowing that, at the very least, higher tax rates would make itemized deductions more valuable and produce larger tax benefits. Recent proposals from the White House to cap itemized deduction benefits would remove even this small consolation.

As a baseline, Congress seems poised to let the 2001 and 2003 tax cuts expire for higher-income taxpayers, moving the top marginal rate up to 39.6%, beginning in 2011. Moreover, there is an ongoing debate over how to pay for the healthcare overhaul proposed by the Obama administration. All signs point to an increased federal tax burden for higher-income taxpayers, either through a surcharge or by limiting the benefit of itemized deductions. A third alternative, included in the Senate Finance Committee’s bill, would impose a 35% excise tax on insurance companies for high-value health insurance plans. It is likely that some portion of this levy would be passed on to insured workers. And this is only the federal tax burden. A growing number of states are imposing some version of a “millionaire’s tax” to help address their burgeoning budget crises.

Perspectives on Wealth Management

is Your Financial Plan on track? comprehensive tax-affected cash Flow analysis

Fall 2009

Stephen A. Baxley Director of tax and Financial Planning

Mr. Baxley oversees the delivery of tax consulting, financial planning, and compliance services for individual and fiduciary clients and their related entities.

2

Exhibit 1: Top State Marginal Tax Rates

Hawaii 11.00%

Oregon 11.00%

New Jersey 10.75%

California 10.55%

Rhode Island 9.90%

Vermont 9.40%

Maryland* 9.25%

Iowa 8.98%

New York** 8.97%

* Maryland has a top state rate of 6.25%, but county income taxes average more than 3.00%.

**New York City residents face a combined top tax rate of 12.62%.

What to Do?A comprehensive tax-affected cash flow analysis can provide a helpful framework for making decisions. The analysis shows the projected after-tax cash flows from all sources, including retirement accounts, as well as a detailed input module for expected expenses — both ongoing and periodic. It reflects the tax benefits attached to certain cash outflows, such as planned charitable contributions, real-estate taxes, and mortgage payments. A proprietary Monte Carlo-styled analysis is utilized to account for market volatility and asset class correlations in modeling managed investment accounts.

Inventory and Analysis of Retirement Income: Where to Begin?The first step is to identify and analyze all sources of retirement cash flow. For most taxpayers, this will include an investment portfolio that produces dividends and interest, and may also generate capital gains when investors

liquidate their positions. The tax treatment of each type of income may vary widely. Based on the latest proposals from Congress and the White House, taxable interest will be taxed at the highest marginal rate, while qualified dividends and long-term capital gains will likely be taxed at a more favorable rate, perhaps 20% or less.

Most Americans have accumulated retirement funds through their participation in qualified plans, including pensions, profit-sharing, Keogh accounts, traditional IRAs, Roth IRAs, and other savings vehicles, such as tax-deferred annuities and universal life insurance policies. The timing and tax treatment of distributions from these plans must be analyzed carefully. For example, qualified plans generally require minimum annual distributions beginning the calendar year after the taxpayer reaches age 70½. With few exceptions, these distributions are fully subject to tax at the highest marginal rate. Conversely, annual distributions from a Roth IRA are not required and qualified distributions are never subject to tax.

Additional cash flows may include payments from a Grantor Retained Annuity Trust or Charitable Remainder Trust, as well as annuity payments, proceeds from real-estate sales, or expected bequests.

Retirement Living Expenses and Financial GoalsThe next step in the analysis is to project the timing and amount of retirement cash flow needs, along with additional desired expenditures to meet personal financial goals. All income and expenses should reflect potential tax costs and benefits. As seen in Exhibit 2, it might be necessary to run several potential scenarios to produce a positive result.

PeRSPecTiveS on WealTh ManageMenT

Exhibit 2: Sample analysis

Assumptions

John and Mary Perkins, ages 62 and 60, New York State residents

Retirement Income Sources Retirement Expenses and Financial Goals

• $30 million balanced portfolio

• $8 million IRA*

• 10-year GRAT payments

• Sale of principal residence in 2013 for $4 million

* Required distributions begin in 2017— subject to tax at highest marginal rate.

• $1 million after-tax annual living expenses —adjusted for inflation

• Maintain minimum $15 million portfolio

• Fund $10 million GRAT in 2009 as part of estate plan

• $200,000 annual gifts to children and grandchildren

• Establish $10 million private foundation in 2013**

• Purchase of smaller home in 2015 for $1.5 million

• Endow a chair at alma mater in 2018 — $2 million**

**Cash flow adjusted to reflect tax benefit.

Fall 2009 3

Exhibit 2 Continued: Wealth accumulation Projection current analysis

10th Percentile 50th Percentile 90th Percentile

$79.2

$35.8

$6.3

$0

$10

$20

$30

$40

$50

$60

$70

$80

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

Acco

unt B

alan

ce (

in M

illio

ns)

$34.7

$24.8

$17.3

$43.5

$27.8

$16.5

$30.2

$53.0

$14.1

$64.6

$33.2

$10.6

$25.3

$19.2

$14.2

Account Balanced

Initial Investment Amount $30,000,000

Annual Withdrawal 0.0%

Inflation Estimate 3.0%

Time Frame 30 Years

Ending Balance*

90% Case $79,174,787

Median Case $35,835,836

10% Case $6,295,992

*There is an 80% probability that the ending balance will be between $6.30 million and $79.17 million.*There is a 10% probability that the ending balance will fall below $6.30 million.

Source: Bessemer Trust

Based on this initial set of goals, the plan will likely require some revision to assure long-term liquidity. The center line represents the median projected results while the top and bottom lines reflect the 90th and 10th percentiles, respectively. Put another way, there is an 80% likelihood the result will fall between the top and bottom line on the graph. When the bottom line intersects with the baseline there is a heightened risk of capital shortfall. In this example, we see the bottom line dropping below $15 million, which was identified as a key retirement comfort level.

If we adjust our assumptions to reduce the lifetime funding of the private foundation to $5 million, there is a more favorable result, as shown in Exhibit 3. This reflects a 90% likelihood the portfolio balance will remain above the required $15 million level throughout the analysis.

In reviewing the analysis, it is important to remember that it is only a projection of future cash flows based on certain assumptions. The analysis should be updated regularly to reflect actual investment results, along with changes to everything from tax laws to residency to lifestyle expenses and financial goals. Financial planning decisions should be coordinated with your overall estate plan as well.

4 PersPectives on Wealth ManageMent

SummaryIn today’s uncertain economic times, a comprehensive tax-affected cash flow analysis can be a very useful tool in setting and meeting long-term financial planning goals. It can also be helpful in evaluating various tax planning strategies (see related article in this issue, “Preparing for a Harsher Tax Climate”). Bessemer’s Tax and Financial Planning Consultants are happy to discuss this analysis with you in further detail.

Exhibit 3: Wealth accumulation Projection Proposed analysis

Account Balanced

Initial Investment Amount $30,000,000

Annual Withdrawal 0.0%

Inflation Estimate 3.0%

Time Frame 30 Years

Ending Balance*

90% Case $101,877,745

Median Case $50,963,264

10% Case $16,278,361

10th Percentile

Acco

unt B

alan

ce (

in M

illio

ns)

50th Percentile 90th Percentile

$0

$20

$40

$60

$80

$100

$120

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

$101.9

$51.0

$16.3$18.6

$44.7

$79.9

$63.5

$38.5

$19.8

$51.2

$33.4

$20.9

$39.7

$29.3$21.2

$30.3

$19.2

$24.2

*There is an 80% probability that the ending balance will be between $16.28 million and $101.88 million.*There is a 10% probability that the ending balance will fall below $16.28 million.

Source: Bessemer Trust

the Bessemer trust implications Model is a proprietary tool designed to assist investors in key decisions involving portfolio asset allocation, the understanding of risk, and the development of an enduring investment plan. Bessemer believes that this model can help clients make better informed decisions regarding the tradeoffs inherent in various investment plans.

the model makes use of a technology commonly known as “Monte-carlo analysis.” this technique is based upon an underlying assumption that asset class returns are log-normally distributed around a “Mean” or average expected return. this distribution or statistical variability is described by a measure commonly known as “standard Deviation.” Further, the relationships between asset classes within the model are modeled using a statistical measure known as “covariance.” Using these statistical measures of an asset class’s likely performance pattern, a series of “random” trials are generated — each falling probabilistically within the statistical measures described above. the underlying assumptions for asset class mean returns, standard deviations, and covariance figures are developed by Bessemer trust from a combination of historical market behavior and forward-looking projections. other important inputs to the model are tax rates and turnover, which Bessemer trust estimates based on available information.

the final inputs to the model are driven by a discussion with our client. these include tax domicile, spending levels, and any periodic additions or withdrawals to the portfolio.

this analysis is based entirely on the assumptions and calculations noted herein. it is, therefore, based on a combination of projected asset class returns, current market conditions, and input from a client regarding specific circumstances. it is not intended as a forecast of future market conditions or returns or as a statement or guarantee of the results to be obtained by investing according to the asset allocation shown herein. Further, the purpose of this analysis is an attempt to project a range of potential outcomes and the level of uncertainty in future portfolio values, rather than any specific future value. the projected portfolio value range represents the range of results that fall within a statistical confidence band, but there is no guarantee that the values will not fall outside of this range of results.

5Fall 2009

ready to get out there? tips and advice from career Management Pros

Many client families are helping younger family members enter a tight job market for the first time. We asked two career development professionals for their insights and advice to recent college graduates on finding opportunities, networking, and interviewing.

Q: What are the greatest myths about today’s job market? Sarah Burley: “There are no jobs.” In reality, no matter the state of the market, there are jobs for hardworking and talented people. If you stay focused on your real strengths and sincere interests, you will navigate to opportunities. By networking persistently in the right places, you could find yourself in the “right place at the right time” when something opens up, or perhaps a job may be created for you.

Marianne Ruggiero: Another myth is, “Take what you can get and don’t worry about landing the right job.” Yes, we’re in a highly competitive market. Recruiters receive more than 500 resumes daily. But if you put in the time, mental energy, and footwork that it takes to get a job, you deserve to get the right job for you! Rather than being grateful for the job that finds you, be grateful for the courage and opportunity to pursue what you really want. Persistence and focus are key.

Q: What factor should social networks and technology play in a job search? Sarah Burley: Social networks and technological tools are handy ways to gather information, stay in touch, and broaden your network. However, online methods of self-promotion may potentially “cheapen” your approach. Think carefully about how others may perceive your personal information, and edit it accordingly.

Marianne Ruggiero: Social networks can help you find and connect to people with whom you have something in common. You can leverage this community of “references” to find information or arrange introductions. The downside to social networks is that staying connected online can distract you from connecting with individuals in a warmer way, such as telephone or in person.

Q: Do you have any advice for taking advantage of college networks? Marianne Ruggiero: Use them! They are particularly useful for recent college graduates. By its nature, an alumni network is “personal” because it is based on a common life experience. An even stronger network is one made up of people in your industry and area of expertise, so start with the people you know and move on to people you want to know.

Sarah Burley: No matter where you are in your career, college networks can be extremely effective and helpful. Fellow alumni are often eager to help out and can sometimes make useful introductions or share advice. Search your college alumni database for appropriate contacts and attend gatherings — including your reunions! Remember that the golden rules apply: Don’t automatically expect that people can help you, but if they do, be sure to express your gratitude.

Q: What’s the best way to work with recruiting firms? Sarah Burley: Recruiting firms can be helpful in the job search process, but you should not rely on them. They can complement your job search. If you do make contact with a recruiting firm or a recruiter, make sure to provide your background (in an organized and concise format) and be direct about your interests and capabilities. Try not to be vague or generalize in sharing your goals or career history. Be as specific as possible while being open-minded about your next step. Always be gracious about any help provided and be efficient in following up.

Sarah E. Burley Principal, spencer stuart

Marianne Ruggiero President, optima careers

6 PersPectives on Wealth ManageMent

Exhibit 4: Job interview Do’s and Don’ts

Do Don’t

• Display positive energy and enthusiasm for the position

• Learn everything you can about market trends, company news and the interviewer

• Mock interviews for practice

• Listen carefully in an interview and answer questions thoroughly and efficiently

• Prepare thoughtful questions and comments about the industry

• Go in without an excellent response to, “What is your biggest weakness?” This question gauges your maturity and self-awareness

• Stray dramatically from the topic at hand — let yourself be interviewed

• Display an oversized ego

• Be negative about your previous employment situations

Marianne Ruggiero: There are two kinds of recruiting firms: contingency, where they are paid if they fill the job, and retained, where the consultant is paid up-front to find top-quality candidates. In both situations, the employer pays the recruiter. Generally, companies do not want to pay a recruiter to find a recent graduate. However, you may get lucky if they have an immediate opening that is a good match with your background. Your time is better spent networking directly into the organization you’re interested in joining.

Q: In difficult times, many people consider heading back to school. How should someone decide if graduate school is the best option? Marianne Ruggiero: Know your long-term goal, and then work backwards. If you have a strong sense of inner direction and know why you are going to graduate school, then by all means go. But don’t go just because you don’t know what else to do or because you want to avoid the challenge of learning how to find a job.

Think about other experiences you can explore to determine your career direction. One of my favorites is volunteering. More and more young people are joining the Peace Corps, Teach For America, and other programs as a way to figure out their next steps while they’re benefiting from a life-enriching experience. Use any of these opportunities wisely — they’re not a break. They should be considered the early part of your career.

Sarah Burley: In some fields, graduate school is clearly a prerequisite. In others, it holds less weight. Remember: School is the right thing to do if it gets you closer to your long-term goal. Not if there is nothing else to do, or people tell you it’s the best option, or people tell you that you just need it. It should not be a default option, but rather a chosen pathway.

7fall 2009

Preparing for a Harsher Tax ClimateThe Importance of Knowing Your Tax Profile

The only certainty regarding federal tax policy is that it will change. Taxpayers should take inventory of their tax profile, which will ultimately determine the appropriate tax planning measures for a new environment.

Tax Profile: Where Do You Stand?To determine your tax profile with respect to income taxes, you need to examine your tax return and balance sheet data, as well as your financial objectives.

Exhibit 5 lists many common elements that help determine your tax profile. It is important to consider how each of these and others could potentially affect your tax planning strategies. In addition, the decisions you make regarding some of these items extend beyond tax planning, making it essential to consider your overall financial situation. An understanding of how these elements affect your profile may lead to new opportunities to minimize your tax obligations.

Eric Rodriguez Senior Tax Consultant

Mr. Rodriguez specializes in tax planning and compliance for high-net-worth individuals.

Tax Elements Definition Planning Consideration

Marginal Tax Rate The tax rate imposed on the next dollar of earned income.

Marginal rates are likely to increase in 2011 for high-income taxpayers.

Alternative Minimum Tax (AMT)

A parallel tax calculated by applying a flat rate to a higher income base that results from reducing certain deductions or other benefits allowed under the regular tax system. AMT applies to the extent it exceeds your regular tax liability.

Because certain items are not deductible for AMT purposes, planning is required to maximize the potential tax benefit received for such items in years when you are not subject to AMT.

Resident State Most states have their own distinct income tax systems with varying tax rate structures. Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming have no income tax.

Careful tax planning is critical if a move to another state is being considered.

Capital Loss Carryovers Net capital losses in excess of $3,000 may be carried forward indefinitely.

Capital losses may be useful in offsetting gains from concentrated positions in low-basis stock.

Passive Loss Carryovers Losses from passive activities can only be used to offset passive income; they cannot offset earned income or portfolio income. Excess passive losses are suspended.

By disposing of a passive activity, you can free up suspended losses that can offset ordinary income.

Charitable Contribution Carryovers

Charitable deductions are subject to a percentage limitation applied against your annual contribution base, which is your adjusted gross income. Amounts in excess of these limitations can be carried forward for five years.

Keep careful track of expiring contributions. It may be prudent to recognize income early to increase your contribution base and to take advantage of these deductions. A charitable contribution carryover will significantly reduce your marginal tax rate.

Traditional IRA Accounts/IRA Rollover Accounts/401(k) Plans

Retirement plans offer opportunities for taxpayers to lower their taxes and help ensure security upon retirement by providing tax-deferred growth on earnings.

Distributions from such accounts are taxable as ordinary income in the year received. You must begin to take minimum distributions by April 1 of the year following the year in which you turn 70½.

Continued on page 8

Exhibit 5: Tax Planning Checklist

PersPectives on Wealth ManageMent8

this material reflects the views of Bessemer trust and is for your general information. it does not constitute legal or tax advice, and it does not take into account the particular investment objectives, financial situation or needs of individual clients. this material is based upon information obtained from various sources that Bessemer believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. views expressed herein are current opinions only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions and inflation.

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copyright 2009 © Bessemer trust company, n.a. all rights reserved.

Tax Elements Definition Planning Consideration

Roth IRAs Contributions to a Roth IRA are made with after-tax dollars, and then the earnings grow tax free. Distributions from Roth IRAs are tax free.

To date, high-income taxpayers have been precluded from making Roth IRA contributions or converting traditional IRAs into Roth IRAs, but in 2010 the income ceiling on Roth conversions will be removed.

Investment Portfolio Your investment portfolio may include a concentrated position in a low-basis stock with significant unrealized capital gains.

Carefully track investments in qualified small business stocks, which receive special tax treatment.

Debt Position You may have a mortgage on your home or rental properties. You may also have margin accounts or loans used to invest in a business. Interest on these types of debt is subject to different tax treatment.

Consider tax treatment of interest expense when either incurring debt or deciding which debt to pay down.

Stock Options If you are an executive, you may hold compensatory stock options, which upon exercise are includible in income (the income component being the fair market value of the stock minus the exercise price).

Exercising these under current tax rates might be prudent given the possibility of higher income tax rates in the future, as well as possible changes to payroll taxes.

Charitable Goals You may have significant commitments/planned contributions to charitable organizations — either in the current year or future.

Consider using appreciated securities to make charitable contributions — you don’t recognize the gain and you receive a deduction for the full fair market value.

It will be important to work closely with your tax advisor over the next few months to summarize the key elements of your tax profile. Our tax consultants are also available to provide you with a Tax Physical, which summarizes many of these elements. Once your tax profile is determined, you will be better prepared to make the right tax planning choices.