Estate Planning Charitable Lead Trusts: An Underappreciated and Underutilized Estate Planning Tool July 2012 At Hawthorn, we believe the tax efficient growth of capital can best be achieved through an integrated portfolio constructed through a valuation-based, risk-aware, diversified investment approach. Operation Twist, originally created in the early 1960s during the Kennedy administration, is a monetary policy tool used by the Fed to sell or reduce its short-term Treasury holdings in favor of buying longer-term Treasuries. The goal is to reduce longer-term interest rates to e Martyn S. Babitz Senior Wealth Strategist 215.585.5666 martyn.babitz@hawthorn.pnc.com Being charitably inclined is commendable, but it is also important to keep in mind the impact on your family s financial objectives. If you donate $1 million to charity, it not only reduces your taxable estate by $1 million 1 but also reduces assets for your family by the same amount. Instead, what if you could contribute that same $1 million to a trust paying a fixed annuity of $57,680.00 annually to charity for 20 years, with the remaining balance passing to your children (or a trust for them) at the end of that period? As long as the net investment return exceeds 1.4%, 2 there Table 1 Value of Remainder Interest of Zeroed Out $1 Million Charitable Lead Annuity Trust (CLAT) 20-year term, $57,680 annual fixed annuity, created May 2012 Investment Rate of Return Remainder Interest 1.4% $0 3.0% $256,228 4.0% $473,523 5.0% $746,053 5.768% $1,000,000 7.0% $1,505,064 8.0% $2,021,407 10.0% $3,423,878 This table illustrates the amount of the remainder left for noncharitable beneficiaries in a CLAT with the above-specified terms at the close of the charitable annuity period, assuming various annual net investment rates of return on assets held in the CLAT, based on a hurdle rate of 1.4%, the applicable rate under Section 7520 of the Internal Revenue Code for May 2012. Source: Hawthorn will be some remainder amount to pass on to your children, which may be quite significant (Table 1). This contribution reduces your taxable estate by the same $1 million as an outright transfer to charity, with the remaining assets at the end of the charitable annuity term passing without gift or estate taxes to your children. This alternative to an outright transfer to charity is known as a zeroed out Charitable Lead Annuity Trust (CLAT). It allows charitably inclined individuals to balance charitable and family objectives without sacrificing the estatereduction benefits of an outright charitable contribution. 1 Section 2522(c)(2)(B) and Section 2055(e)(2)(B) of the Internal Revenue Code of 1986, as amended (hereafter IRC ). 2 As of May 2012; this is known as the hurdle rate and is described further below. hawthorn.pnc.com
The ABCs of CLATs It is helpful to understand some basic information about CLATs: A CLAT can be established during the lifetime of the transferor or as a testamentary trust. A CLAT pays a fixed amount, based on a percentage of the initial value of the trust assets, to a qualifying charity or charities for a fixed period of years or for the life or lives of one or more individuals. 3 A qualifying charity could include the transferor s private family foundation. 4 Any trust assets remaining at the close of the term of annuity payments to charity either revert to the transferor or pass to other noncharitable beneficiaries or a trust for them. This trust would be designated by the transferor in the CLAT document. The present value of the payments to charity at the time the CLAT is created is determined by the Internal Revenue Code and the interest rate at the time the CLAT is established. The present value provides a charitable deduction for gift tax (if the CLAT is created during the transferor s lifetime) or estate tax (if the CLAT is created at the transferor s death) purposes. 5 If the present value of the charitable annuity equals or exceeds the value of the assets initially transferred to the CLAT, then no gift or estate tax will apply to any balance of assets, passing to the noncharitable remainder beneficiaries at the end of the term of required payments to charity. This type of CLAT is often referred to as a zeroed out CLAT. If the net investment return of CLAT assets exceeds the applicable interest rate used to value the charitable lead annuity, then there will be at least some assets remaining at the close of the charitable lead term to pass without federal transfer tax to the remainder beneficiaries. 6 Consequently, the applicable interest rate is often referred to as the hurdle rate. Determining an Applicable Interest Rate Each month, pursuant to Section 7520 of the Internal Revenue Code, the Internal Revenue Service (IRS) publishes an applicable interest rate for purposes of valuing a CLAT annuity. The transferor can use the applicable interest rate for the month the CLAT is established or the rate for either of the two preceding months, whichever is lowest. 7 The optimum available applicable interest rate for a CLAT created in May 2012 is 1.4%. 8 Any combination of annuity amount and term high enough or long enough to equal 100% of the initial value of the CLAT s assets on a present value basis will zero out that CLAT. For example, for a CLAT established in May 2012, a fixed charitable annuity of 5.768% of the initial value of the contributed assets paid annually to charity for 20 years, or 10.787% of the initial value of the contributed assets for 10 years, would zero out any gift or estate tax consequences to the transferor. 3 Treasury Regulation Section 1.170A-6(c). 4 IRC Section 170(b)(1)(A)(vii) and (F). 5 IRC Sections 7520(a), 2522(c)(2)(B) and 2055(e)(2)(B). 6 As used in this Paper, transfer tax refers to federal estate tax, federal gift tax and federal Generation Skipping Transfer tax. 7 IRC Section 7520(a). 8 The Section 7520 rate for May is actually 1.6%, but under the aforementioned rule which allows utilization of the rate for the current month or either of the preceding two months, the April 2012 rate of 1.4% would be the best available rate. Revenue Ruling 2012-11, I.R.B. 2012-14 (March 16, 2012), Table 5 2
These applicable interest rates fluctuate with yields of midterm federal debt obligations. As with other annuities, the lower that applicable interest rate, the higher the corresponding value of the annuity. Accordingly, in the current historic low interest rate environment, the present value of a CLAT annuity (which provides the deduction for gift tax or estate tax purposes) will be higher than when the same CLAT, with the same annuity terms, is established under a less favorable interest rate setting (Table 2). Table 2 Value of Lead Interest of $1 Million CLAT 20-year term, $57,680 annual fixed annuity Date Created Section 7520 Rate Value of Lead Interest April 2012 1.4% $1,000,000 April 2011 3.0% $858,134 April 2007 5.6% $683,617 April 2000 8.0% $566,308 April 1990 10.6% $471,603 This table illustrates the value of a charitable lead annuity interest, deductible for federal gift tax or estate tax purposes, for a CLAT with the above-specified terms, based on different applicable rates under Section 7520 of the Internal Revenue Code in effect at various points over the past 22 years. Source: Hawthorn Chart 1 7520 Rates Since February 1989 14.0% 12.0% 10.0% Rates 8.0% 6.0% 4.0% 2.0% 0.0% Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Months Source: Leimberg Information Services, Inc.Source: Leimberg Information Services, Inc. Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Chart 1 illustrates the applicable Section 7520 interest rate in effect in February of each year since 1989. Other Types of Charitable Lead Trusts A zeroed out CLAT is attainable when using a fixed term of years as the measure of the CLAT s annuity payments to charity. However, a full zeroing out, or elimination of gift tax or estate tax liability, is not possible when one or more lives are used as the measuring term for the annuity payments. 9 9 A CLAT based on one or more lives as the measuring term cannot be zeroed out because the lead interest is based on the actuarial life expectancy of the individual(s) and takes into account the possibility that he, she, or they might not live to life expectancy. 3
Similarly, a Charitable Lead Unitrust (CLUT), which pays a fixed percentage of the value of the trust as revalued each year rather than a fixed percentage of the initial value of the trust assets annually, 10 cannot be completely zeroed out. Nevertheless, a CLAT based on one or more lives may be desirable compared with a CLAT for a fixed term. For example, as the transferor, you may want to provide that, at the end of your life or upon the death of you and your spouse, the remainder will pass to your children. This approach is consistent with a typical objective of leaving assets to children at the death of an individual or his or her spouse. You may benefit from a transfer tax reduction, albeit not 100%, by distributing an annuity to charity during the remainder of your lifetime, or that of you and your spouse. For example, let us assume a married couple, each age 65, establishes a $1 million CLAT in May 2012 for their joint lifetimes, paying 5.768% of the initial value of the CLAT assets (the same annuity amount necessary to zero out a 20-year term CLAT). The value of the annuity for charitable deduction purposes under Section 7520 would be $919,552.69, or about 92% of the initial amount contributed to the CLAT. The value of the remaining $80,447.31 (the amount transferred to the CLAT less the value of the charitable lead annuity) constitutes a taxable gift. This taxable gift could be covered by a small portion of the couple s lifetime gift tax exemptions, avoiding any out-of-pocket gift tax liability. There are, however, two limitations: A terminally ill individual, generally defined as someone with at least a 50% probability of dying from a debilitating health condition within one year, cannot be used as a measuring life for a CLAT or CLUT. 11 Only the transferor, transferor s spouse, lineal ancestors and their spouses, and certain lineal descendants and their spouses may be used as measuring lives for a CLAT or a CLUT. 12 Charitable Lead Annuity Trust vs. Charitable Lead Unitrust A CLUT may be preferable to a CLAT in certain situations. Because the annuity is based on a fixed percentage of the value of the assets as determined each year, the charity would both benefit from appreciation of the assets during the annuity term by receiving increasing annual payments as a percentage of the annual value of the trust assets and by sharing in the detriment of the decline in asset value throughout this period. If the value of the CLAT assets decreases, the charity s payments decrease and the remainder beneficiaries chances of receiving a remainder are subject to less risk. 10 A CLUT cannot be zeroed out because the valuation of the lead interest is based on the reality that only a percentage of the assets are paid each year to charity, thereby making complete exhaustion of trust principal, and thus a 100% lead interest deduction, impossible. 11 Treasury Regulation Section 20.7520-3(b)(3). This Regulation prevents Charitable Lead Trusts in which the value of the annuity is based on the full life expectancy of the individual used as the measuring life but his or her premature death vests the remainder much sooner than in the case of a healthy individual. 12 Treasury Regulation Section 25.2522(c)-3(c)(2)(vi). This Regulation was intended to restrict ghoul or vulture Charitable Lead Trusts in which an individual who is ill, but not terminally ill under Treasury Regulation Section 20.7520-3(b)(3), is utilized in order to create a larger remainder value relative to the actual expected shorter life expectancy of an unhealthy individual. Of course, such an approach remains possible with qualifying family members under Treasury Regulation Section 25.2522(c)-3(c)(1)(i). 4
With a CLAT, all asset appreciation inures to the remainder beneficiaries (family) benefit, but all declines in asset value are borne entirely by the family remainder beneficiaries. Thus, if the CLAT assets dramatically decrease in value, the remainder interest could be completely wiped out by the fixed annual payments to charity. In other words, whereas a CLUT apportions investment risk proportionately among the charitable and noncharitable beneficiaries, a CLAT allocates such risk almost entirely to the noncharitable remainder beneficiaries. 13 Although CLATs based on a measuring life (or lives) or any CLUT cannot zero out gift tax or estate tax liability on the transferred assets, the actuarial remainder constituting a taxable gift or bequest can be protected by the transferor s lifetime gift tax exemption 14 or by his or her federal estate tax exemption in the case of a testamentary CLAT or CLUT. (In addition, in the case of a CLUT the transferor can protect the remainder interest from Generation Skipping Transfer tax by applying a portion of his exemption(s) from the Generation Skipping Transfer tax to the actuarial remainder interest at the outset of the CLUT.) The current lifetime gift tax exemption and federal estate tax exemption is $5.12 million for an individual and $10.24 million for a married couple. 15 Accordingly, an individual could establish a CLAT based on a measuring life or lives, any CLUT, or a nonzeroed out CLAT without any out-of-pocket gift tax or estate tax liability by using all or a portion of these exemptions. At the same time, charitably inclined individuals and their families would be taking advantage of this leveraged tool for wealth transfer. Income Tax Issues A Charitable Lead Trust is not income-tax exempt. It is treated as either a complex trust or grantor trust for federal income tax purposes, depending upon how it is drafted. 16 As a complex trust, the tax items attributable to the trust would be the trust s responsibility, although a charitable distribution deduction would offset the trust s taxable income in part or whole. 17 For example, if a CLAT earns $100,000 in interest income during the year and must distribute a $120,000 fixed annuity amount to charity in that year, there would be no taxable income subject to tax in the trust for that year. As a grantor trust, all tax items of the trust would pass through to the transferor during the charitable lead term and be reportable on the personal income tax return. 18 In addition, the transferor would obtain an immediate income tax deduction upon creation of the Charitable 13 A CLAT does allocate a modicum of risk to the charitable lead beneficiary in that poor investment performance could cause the CLAT to deplete its assets entirely prior to the charitable annuity obligation being completely distributed. 14 Note that the actuarial remainder interest in a CLAT or CLUT cannot be covered by the transferor s annual gift tax exclusion because the remainder is a gift of a future interest. IRC Section 2503(b)(1). 15 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. 16 The Trust can be created as a grantor trust for federal income tax purposes in a number of ways. Perhaps the most commonly utilized power is to allow the grantor the power to acquire assets from the Trust for other assets of equivalent value. IRC Section 675(4)(C). Note that a Charitable Lead Trust can only be established as a grantor trust for income tax purposes if created during the transferor s lifetime and only remains a grantor trust while the transferor is still living. 17 IRC Section 642(c)(1). 18 IRC Section 671. 5
Lead Trust equal to the same value of the charitable lead interest as determined under Section 7520 of the Internal Revenue Code for transfer tax purposes. 19 Keep in mind, however, that this deduction is subject to limitations based on the transferor s level of income and whether the charitable lead beneficiary is a public charity or private foundation. 20 Any amount not allowed as a deduction in the year the Charitable Lead Trust is created could be carried forward and deducted, subject to these same limitations, in the succeeding five years. 21 In our opinion, establishing a Charitable Lead Trust as a grantor trust for income tax purposes may be problematic. Although the transferor obtains an income tax deduction equal to the value of the charitable lead interest at the outset, this deduction may be partially or totally wiped out by the reported income during the lead term; in fact, the income items flowing to the transferor during the lead term could exceed the amount of the initial deduction. 22 Further, depending upon the transferor s income level and the value of the charitable lead interest, a significant portion of the deductible amount may be eliminated by the aforementioned charitable deduction limitations, even when taking into account the additional five-year carry forward period. Choosing Estate Tax Liability With a testamentary zeroed out CLAT, an individual can entirely control federal estate tax exposure without permanently removing assets from potential family control and enjoyment. For example, let s assume a married couple with a remaining taxable estate of $20 million after using their entire lifetime gift tax exemptions (currently $10.24 million but scheduled to return to $1 million per person, at the end of 2012). 23 With the current federal estate tax rate of 35%, they would be subject to federal estate tax of $7 million, typically imposed at the death of the survivor through marital deduction planning. That couple could choose to reduce their federal estate tax exposure by 25%, 50%, 75%, or 100% by transferring $5 million, $10 million, $15 million, or $20 million, respectively, into a zeroed out CLAT upon the survivor s death. While the same federal estate tax reduction could be obtained by leaving similar amounts directly to charity upon the survivor s death, we believe the amount of their taxable estate ultimately enjoyed by this couple s family could be substantially higher and closer to the amount they would otherwise receive without charitable planning than if direct charitable bequests were used. In Table 3, page 7, we demonstrate that along the range of estate tax reduction through charitable transfers, adding the present value of a zeroed out CLAT remainder interest to an inheritance can approximate what the heirs might otherwise have received if all assets were left directly to them after payment of federal estate tax. 19 Treasury Regulation Section 1.170A-6(a)(2). 20 IRC Section 170(b)(1). 21 IRC Section 170(d)(1). 22 IRC Section 170(f)(2)(B). 23 Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. 6
When other estate tax-free assets, such as properly owned life insurance, are available at death, we think testamentary zeroed out CLATs can be particularly effective estate tax reduction tools. This is because the waiting period for family members to enjoy the remainder may be more acceptable in light of such other assets vesting immediately upon the transferor s (or, in the case of a married couple, the transferors ) death. Table 3 Comparison of Outright Charitable Bequest to 20-Year Zeroed Out CLAT $20 Million taxable estate after exemptions, death in May 2012 6% investment rate of return on CLAT, 3% present value discount rate Leave Assets to Charity or Zeroed Out CLAT to Reduce Federal Estate Tax by: 0% 25% 50% 75% 100% Estate Tax $7,000000 $5,250,000 $3,500,000 $1,750,000 $0 Charity $0 $5,000000 $10,000000 $15,000,000 $20,000,000 Heirs* $13,000,000 $9,750,000 $6,500,000 $3,250,000 $0 Heirs** $13,000,000 $12,754,639 $12,509,279 $12,263,918 $12,018,557 *Charitable Assets Pass Outright to Charity **Charitable Assets Pass to Zeroed Out CLAT; PV of Remainder to Heirs plus Noncharitable Assets This table compares the amounts passing to heirs at a given percentage of estate tax reduction through utilization of either an outright charitable bequest or a Zeroed Out CLAT. The third row shows the amount passing to heirs at each level of estate tax reduction where an outright transfer to charity is used, whereas the fourth row shows the present value of the CLAT remainder interest added to the after-tax assets not passing to the CLAT. Source: Hawthorn Multi-Generational Planning With Charitable Lead Trusts Given the relatively longer charitable lead terms required to zero out a CLAT, it may seem desirable in some circumstances to have the remainder interest in a zeroed out CLAT pass for the benefit of grandchildren or more remote descendants. 24 This may be particularly so when a CLAT is established at the death of the transferor, when his or her children may already be an advanced age prior to the start of the charitable lead annuity term. Consider, however, preventing adverse transfer tax consequences in the form of Generation Skipping Transfer (GST) tax 25 on assets, such as a Charitable Lead Trust remainder interest, passing to or for the benefit, or ultimate benefit of grandchildren or subsequent generations. In order to prevent such consequences, the transfer must be considered GST tax-exempt. A transfer of assets and their subsequent appreciation can be exempt from GST tax if an available GST exemption is allocated to the transfer. 26 The amount of the GST exemption applied to a CLAT remainder (and the corresponding GST tax inclusion ratio) is not finally determined until the end 24 Such transfer could be outright to grandchildren, although it is often preferable for the transfer to be in trust for the grandchildren, particularly depending upon their age, possibly for their lifetimes and the lifetimes of subsequent generations of descendants. Known sometimes as a dynasty trust, the assets, and their appreciation, ideally could be protected from federal transfer taxation, as discussed further below, as well as divorce and creditors with respect to many generations of descendants of the transferor. 25 IRC Sections 2601 and 2611. 26 IRC Sections 2631 and 2632. 7
of the charitable lead term. 27 If, at the end of the term, the total investment return on the trust s assets, net of the required charitable lead payments, is more than the increase in the GST exemption initially applied, then the trust will be subject to GST tax. Hence, the cost of a successful CLAT that has significantly appreciated in value during the lead term may be GST tax liability, or more GST tax than anticipated, at the end of the lead Correspondingly, the transferor may end up over allocating and wasting a GST exemption if the CLAT assets underperform during the charitable lead term. We believe this approach creates uncertainty because the value of the remainder is unknown at the start of the lead term. Thus, it is unknown whether: the remainder will exceed the allocated GST exemption and thereby cause an inclusion ratio greater than zero, and a corresponding GST tax, or the remainder will be less than the allocated GST exemption and thereby result in wasted GST exemption. Either way, making an exact allocation in advance at the start of the charitable lead term is impossible absent a crystal ball. There are several possible solutions to the generation skipping dilemma presented by the GST exemption allocation rules applicable to CLATs. Opting for a Charitable Lead Unitrust A CLUT could be used rather than a CLAT. With a CLUT, the GST exemption and inclusion ratio can be determined at the start of the charitable lead term, based on the projected actuarial value of the remainder interest determined under Section 7520 of the Internal Revenue Code. 28 Again, however, with a CLUT it is not possible to entirely zero out the remainder interest. Of course, both the lifetime or estate tax exemption and GST exemption can be allocated, if available, to cover this remainder interest in a precise manner to avoid actual transfer tax liability. Late Allocation of GST Exemption A late allocation of GST exemption could be made with a CLAT. 29 In such case, the adjusted GST exemption equals the amount allocated, increased by the Section 7520 rate for the remaining period of the lead term. By waiting until the end of the lead term to make a late allocation of GST exemption, the adjusted GST exemption would equal the actual amount of the GST exemption allocated at that time. In concert with a late allocation of GST exemption, the CLAT document could be drafted to provide that the remainder interest be split into GST tax-exempt and nontax-exempt shares for the transferor s lineal descendants. Those shares would be determined by the amount, if any, of available GST exemption allocated at the end of the lead term. 27 The inclusion ratio of a CLAT remainder for GST tax purposes is determined by using a numerator equal to the adjusted GST exemption and a denominator equal to the value of the trust assets at the end of the lead term (thus ensuring that GST tax consequences cannot be known upon the CLAT s creation). The adjusted GST exemption is the amount of GST exemption allocated to the CLAT, increased by a rate of return equal to the Section 7520 rate applicable to the CLAT for its lead term. IRC Section 2642(e). 28 IRC Section 2642(e) does not apply to CLUTs. 29 IRC Section 2642(b)(3). Such allocation or late allocation of GST exemption is made on IRS Form 709. 8
Under this approach, at the close of the CLAT lead term, late allocation of the transferor s remaining GST exemption could be made to permanently exempt a portion of the CLAT remainder from estate taxation in a multigenerational, or dynasty, trust. The non-gst tax-exempt balance could pass outright to the grantor s children or in a trust or trusts includible in their taxable estates by providing them a general power of appointment during their lifetime or at their deaths, thereby avoiding any GST tax liability. The children could potentially exercise that power of appointment to transfer all or a portion of the remainder passing to these non-gst tax-exempt trusts into newly created zeroed out CLATs. By doing so, the children push these assets down a further generation and eliminate transfer tax through allocation of the children s gift or estate tax exemption, and GST exemption, in a similar manner. Through such a generation-by-generation approach, assets can be removed from estate tax or GST tax for many decades while benefiting family charities, such as the family s private foundation, and descendants through layered remainder interests over time. These assets would remain under family control (passing to trusts for descendants or the family s private foundation, controlled by family members as directors or trustees) while avoiding any transfer taxation thereon. Children as Remainder Beneficiaries The transferor s children could become the remainder beneficiaries of a CLAT, avoiding GST tax exposure. Thereafter, the children could gift or sell their remainder interest to a GST tax-exempt trust, reporting it as a gift at, or selling it for, its actuarial fair market value at that time. Typically, this would occur during the early part of the CLAT s lead term when the remainder interest has a relatively low value. 31 Care must be taken in transferring a CLAT remainder interest because the private foundation rules proscribing certain transactions between a CLAT and a disqualified person (which would likely include the GST tax-exempt trust to which the remainder interest is transferred) apply and must be carefully navigated to avoid substantial penalties. 32 30 A general power of appointment includes an individual s power to appoint assets to himself or herself, his or her estate, his or her creditors, or the creditors of his or her estate. IRC Sections 2514 and 2041. 31 IRS Regulations are unclear on this issue. See, for example, Treasury Regulation Section 26.2652-1(a)(5), Example 4. For support, see Russell Fishkind and Robert Katz, Estate and Business Succession Planning, pp. 220-221 (Wiley 2002). But see Private Letter Ruling 200107015 (November 14, 2000), suggesting that the IRS might view such an approach as circumventing the purpose of IRC Section 2642(e). 32 IRC Sections 4947(a)(2), 4941, 4946; Treas. Reg. Section 53.4941(d)-1(b)(3). Keep in mind that the CLAT is not a direct party to such a sale by the CLAT s remainder beneficiaries to the Family Opportunity Trust, thereby mitigating this risk. Court approval may nevertheless be required to accomplish a sale of a CLAT remainder to the Trust without violating the self-dealing rules of IRC Section 4941. 9
Conclusion In our opinion, CLATs are underutilized vehicles for combining a balance of charitable intentions and family objectives with transfer tax reduction strategies. A zeroed out CLAT offers an opportunity to obtain a 100% gift tax or estate tax deduction for assets transferred into such a trust, which is identical to the same favorable tax consequence as an outright transfer to charity. The key distinction between a zeroed out CLAT and an outright contribution to charity is that substantial assets may pass to family members in the form of the remainder interest at the end of the CLAT s charitable lead term. There are many planning techniques that can be implemented to grow, preserve, and protect wealth. We understand that each circumstance is different. We recommend that you consult your Hawthorn team to address your family s specific needs. 10
11
Hawthorn PNC Family Wealth SM ( Hawthorn ) is a service mark of The PNC Financial Services Group, Inc. ( PNC ). Hawthorn provides investment consulting, wealth management and fiduciary services, certain FDIC-insured banking products and services and lending of funds through the PNC subsidiary, PNC Bank, National Association, which is a Member FDIC, and provides certain fiduciary and agency services through the PNC subsidiary, PNC Delaware Trust Company. Insurance products and advice may be provided by PNC Insurance Services, LLC, a licensed insurance agency affiliate of PNC, or by licensed insurance agencies that are not affiliated with PNC; in either case a licensed insurance affiliate will receive compensation if you choose to purchase insurance through these programs. A decision to purchase insurance will not affect the cost or availability of other products or services from PNC or its affiliates. Hawthorn and PNC do not provide legal or accounting advice and neither provides tax advice in the absence of a specific written engagement for Hawthorn to do so. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value. Insurance: Not FDIC Insured. No Bank or Federal Government Guarantee. May Lose Value. 2012 The PNC Financial Services Group, Inc. All rights reserved.