© 2008 Northern Trust Corporation northerntrust.com

The Northern Trust ExperienceThe Northern Trust ExperienceA C C E S S . E X P E R T I S E . S E R V I C E .

R. Hugh MagillExecutive Vice President and Chief Fiduciary Officer

Trends in Trust Law: Implications for Estate Planning and Fiduciary Administration

The Northern Trust Experience

Demographic Trends

Death & Taxes 2001 Tax Act (EGTRRA) Continued evolution of Estate Planning Strategies

Changes in Capital Markets

Prudent Investor RuleUniform Prudent Management

of Institutional Funds Act

Evolution of Securities Markets and Asset Management Practices

Decline in Yields Unitrusts and Principal / Income Adjustments

Changes in Asset Allocation and Distribution Practices

Client Mobility Uniform Trust Laws Non-Uniform State Tax Laws

Changes in Estate Planning & Trust Administration

Wealth Formation Tax Rate Environment Asset Diversification

Deal Flow, Liquidity, Philanthropy

New Generation of Clients

Legacy Planning, Family Governance, Modification of Trustee Duties, Situs Shopping

Inter-generational Wealth Transfer, Trust Friendly Jurisdictions, Consumerism

The Northern Trust Experience

Asset Concentrations and the Duty of Diversification

Maximizing Opportunities

Minimizing Risks

The Northern Trust Experience

Concentrations and Trust Documents

Retained AssetsRetention is permissible

Retention is strongly suggested

Retention is mandatory

Fiduciary AuthoritySole trustee

Co-trustees

Advisors

Advisory Committees

Modification of Fiduciary ResponsibilityHold Harmless / Indemnification Agreements

Virtual Representation

Court-Ordered Reformation

The Northern Trust Experience

Concerns About Diversification

Adverse Income Tax Consequences

Unfamiliarity with other Asset Classes

Loss of Control

Performance Expectations

Impact on Portfolio Yield

Fees

The Northern Trust Experience

Reasons for Non-Diversification

Purpose of Trust

Legacy Holdings

Termination Date of Trust Interests of Beneficiaries

Step-Up in Basis

Illiquidity

Loss of Controlling Interest

Related Trusts

Beneficiaries’ Assets

Adverse Income Tax Consequences

The Northern Trust Experience

Retention Language

Identify the Asset

Waive the Duty to Diversify

Articulate the Reasons for Retention

Address Asset “Conversion” IssuesEquities: Mergers, Acquisitions, Spin-offs

Real Estate: Sale, Reinvestment

Identify the Circumstances under which, and by Whom, Sale Should be Considered

The Northern Trust Experience

Concentration Risk Management Process

Definition and Identification

Evaluation of Fiduciary Responsibility

Review Process

Evaluation of Strategies

Implementation and Periodic Review

Documentation

The Northern Trust Experience

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Unitrust Conversions

When Should a Fraction Trump a Yield?

The Northern Trust Experience

Unitrust Conversions – Interest Rates

0

2

4

6

8

10

12

14

2/28/1985 2/28/1990 2/28/1995 2/29/2000 2/28/2005

10 Year Government Yields

Percent

The Northern Trust Experience

Unitrust Conversions – Stock Dividends

'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

1

1.5

2

2.5

3

3.5

4

4.5

©FactSet Research SystemsData Source: Compustat

S&P 500 Dividend Yield28-Feb-1985 to 31-Jan-2007 (Monthly)

Dividend Yield

S&P 500 Dividend Yield

The Northern Trust Experience

Reviewing Trusts for Potential Conversion

Income only (mandatory or discretionary)

Income with narrow power to discrete principal

Income with moderate power to discrete principal

Income with broad power to discrete principal

The Northern Trust Experience

Unitrust Conversions – Issues to be Analyzed

Governing law

Nature, purpose, duration of trust

Settlor’s intent

Duty of impartiality vs. permissible partiality

Beneficiary expectations

Discretionary authority over principal distributions

The Northern Trust Experience

Unitrust Conversions – Portfolio Issues

Asset composition

Asset allocation

Portfolio size

Reinvestment alternatives

Re-allocation impact

Investment management limitations

Fixed income; taxable vs. tax-exempt

The Northern Trust Experience

Conversion Analysis – Critical Assumptions

Time horizon

Inflation rate

Capital market assumptions

Tax impact of portfolio re-allocation

Rebalancing frequency

Management costs

Payout ratio

Liquidity needs

Return methodology

The Northern Trust Experience

50 / 50 Asset Allocation

Large Value Stocks50%

Corporate Bonds50%

$2.5 MM

$5 Million Portfolio

$2.5 MM

The Northern Trust Experience

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

$5 Million Portfolio

0%

Conservative

Moderate

Aggressive

5% 10% 15%

50 / 50 Asset AllocationEfficient Frontier

Standard Deviation

Return

50 / 50 Asset Allocation

20% 25%

The Northern Trust Experience

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$5 Million Portfolio

50 / 50 Asset Allocation

Monte Carlo Simulation Analysis – 3% Payout

Payout 3%

Asset Range ($MM)

1 Year 5 Years 10 Years 15 Years 20 Years

$150,000 $161,112 $176,106 $194,360 $213,415

$5

$6.15

$4.33

$12.60

$4.42

$7.46

$9.02

$10.65

$4.10

$4.10 $4.16

Inflation: 2.5%

The Northern Trust Experience

$0

$2

$4

$6

$8

$10

$12

$14

$16

$5 Million Portfolio

50 / 50 Asset Allocation

Monte Carlo Simulation Analysis – 4% Payout

Payout 4%

Asset Range ($MM)

1 Year 5 Years 10 Years 15 Years 20 Years

$200,000 $206,488 $214,787 $225,620 $235,748

$5.70

$4.40

$9.93

$3.55

$5

$6.73

$7.88

$8.88

$3.90

$3.69

$3.57

Inflation: 2.5%

The Northern Trust Experience

$0

$2

$4

$6

$8

$10

$12

$14

$5 Million Portfolio

50 / 50 Asset Allocation

Monte Carlo Simulation Analysis – 5% Payout

Payout 5%

Asset Range ($MM)

1 Year 5 Years 10 Years 15 Years 20 Years

$250,000 $247,988 $245,565 $245,177 $243,597

$5.65

$4.34

$8.16

$2.89

$5

$6.42

$7.15

$7.67

$3.70 $3.3

2$3.0

6

Inflation: 2.5%

The Northern Trust Experience

Large Cap Stocks37%

International Stocks18%

Emerging Markets2%

Corporate Bonds16%

Mid Cap Stocks4%

Small Cap Stocks2%

Global Real Estate5%

High Yield Bonds7%

Commodities3%

Cash6%

Diversified Portfolio

$4,714,249 Million Portfolio

The Northern Trust Experience

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

$4,714,249 Million Portfolio

0%

Conservative

Moderate

Aggressive

5% 10% 15%

Diversified Portfolio Efficient Frontier

Standard Deviation

Return

Diversified Portfolio

20% 25%

The Northern Trust Experience

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Diversified Portfolio

Monte Carlo Simulation Analysis – 3% Payout

Payout 3%

Asset Range ($MM)

1 Year 5 Years 10 Years 15 Years 20 Years

$141,427 $156,954 $177,897 $201,886 $231,170

$4.71

$5.05

$4.19

$13.94

$4.48

$4,714,249 Million Portfolio

$7.16

$9.28

$11.44

$3.93

$4.01

$4.19

Inflation: 2.5%

The Northern Trust Experience

$0

$2

$4

$6

$8

$10

$12

$14

$16

Diversified Portfolio

Monte Carlo Simulation Analysis – 4% Payout

Payout 4%

Asset Range ($MM)

1 Year 5 Years 10 Years 15 Years 20 Years

$188,570 $201,218 $217,233 $234,549 $255,658

$5.48

$4.16

$11.50

$3.67

$4,714,249 Million Portfolio

$4.71

$6.84

$8.44

$9.91

$3.73

$3.62

$3.59

Inflation: 2.5%

The Northern Trust Experience

$0

$2

$4

$6

$8

$10

$12

$14

Diversified Portfolio

Monte Carlo Simulation Analysis – 5% Payout

Payout 5%

Asset Range ($MM)

1 Year 5 Years 10 Years 15 Years 20 Years

$235,712 $241,748 $248,247 $255,022 $264,519

$5.41

$4.10

$9.47

$2.99

$4,714,249 Million Portfolio

$4.71

$6.53

$7.67

$8.57

$3.54

$3.27

$3.09

Inflation: 2.5%

© 2008 Northern Trust Corporation northerntrust.com

Thank You

Trends in Trust Law: Implications for Estate Planning and Fiduciary Administration