1FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

David M. Robinson, Vice President Advanced SalesPRESENTATION LOCATION MM/DD/YYYY

Exit StrategiesFor Split-Dollar Agreements,

Third Party Financingand Private Financing

For Producer Use Only—Not for Dissemination to the Public.

2FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

■ Split-Dollar Agreements typically provide for repayment at death or retirement of the insured.

■ The same is also true for life insurance premiums financed from a third party commercial lender or a private lender.

■ Types of exit strategies:

1. Sinking Fund

2. Grantor Retained Annuity Trust (GRAT)

3. Charitable Lead Annuity Trust (CLAT)

4. Grantor Retained Unitrust (GRUT)

5. Asset Sales to Defective Grantor Trust

3FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

■ Important to plan for, manage to and provide planned exit strategies when premiums are financed by an employer, third party lender or private lender.

■ Financing of premiums is typically long term with repayment with or without interest.

■ If interest is not paid, then imputed income will result to the borrower under Section 7872 of the IRC based on the Applicable Federal Rate (AFR).

4FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

Sinking Fund ■ Assets set aside over time and invested. Gross

invested proceeds are used at maturity (i.e. 10, 20 years) to re-pay premium loan.

■ Must have systematic savings plan for sinking fund to work.

■ Income earned on the sinking fund assets is income taxable to the owner of the assets (i.e. the policy owner).

■ Not used that often due to income taxes.

5FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

GRAT (Grantor Retained Annuity Trust)■ Assets are gifted to the trust with the Grantor retaining

a right to income for a specified period of time. ■ The remainder interest is a gift by the Grantor and used

to repay financed premiums when the remainder interest vests in the ILIT.

■ Remainder interest is valued as a gift at the time of the transfer and it vests at the end of the GRAT term (e.g. 10 years).

■ If a generation skipping ILIT is used and GST is being allocated to the ILIT, the value of the GST exemption allocated is determined at the end of the GRAT term.

6FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

GRAT (Grantor Retained Annuity Trust)

1. Assets

Grantor GRAT

ILIT Lender

2. Income for a specified

period of time

Loan

Remainder Assets

Payoff With

Remainder Assets

7FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

CLAT (Charitable Lead Annuity Trust)■ Assets are gifted to the trust. A charity receives income on assets

based on a specified period of years. ■ At the end of the lead term, the remainder interest vests in the

ILIT. When the remainder interest vests, the ILIT can use the assets to pay off the financed premiums.

■ The value of the lead interest is tax deductible as a charitable gift under §170 of the IRC.

■ The value of the remainder interest is a gift to the ILIT at the time of the transfer to the CLAT.

■ If a generation skipping ILIT is used and the GST exemption is being allocated to the ILIT, a CLUT is preferred over a CLAT due to valuation reasons.

8FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

CLAT (Charitable Lead Annuity Trust)

Assets

Grantor CLAT

ILIT Lender

Annuity income

for a period of years

Remainder Assets

Loan Proceeds

Payoff With

Remainder Assets

Charity

9FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

GRUT (Grantor Retained Unitrust)■ Grantor gifts assets to a trust and retains a right to

annual income for life based on a percentage of assets (i.e. 6% of assets).

■ As assets grow, income increases to the Grantor.■ At death of Grantor, assets vest in the remainder which

is an ILIT. ILIT can use the assets to payoff the financed premiums.

■ A gift of the remainder interest is made to the ILIT at the time of the transfer of assets to the trust.

■ If a generation skipping ILIT is used and GST is being allocated to the ILIT, the value of the GST exemption allocated is determined at the end of the GRUT term.

10FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

GRUT (Grantor Retained Unitrust)

1. Assets

Grantor GRUT

ILIT Lender

2. Income

Loan

2. Payoff With

Remainder Assets

3. Remainder Assets

11FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

Asset Sales to Defective Grantor Trust (DGT)/ILIT

■ Any income earned by the DGT/ILIT will be taxed to the Seller.

■ Assets such as real estate, FLP interests, stocks, bonds or other assets may be sold to DGT/ ILIT.

■ Seller will receive an installment note bearing no interest from the DGT/ILIT. Payments received are taxed under IRC Section 453 to Seller.

■ Seller may sell assets at a discounted value depending upon the asset sold (i.e. FLP interest).

■ Any gain on sale is taxed to Seller as payments are received.

12FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

Asset Sales to Defective Grantor Trust (DGT/ILIT) (Cont’d)■ Seller reports short term or long term capital gain.■ No income tax consequences exist to Seller due to failure to

collect interest since DGT is ignored for income tax purposes.

■ Value of any foregone interest income is an imputed gift from the Seller to the DGT/ILIT; the gift is valued under IRC Section§7872 using the Applicable Federal Rate (AFR)

■ Once inside the DGT/ILIT, asset appreciation is removed from Seller’s estate.

13FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

Asset Sales to Defective Grantor Trust (DGT/ILIT) (Cont’d)

■ At the end of the note term, Seller is paid in full (i.e. 10 years) for the asset sales. The DGT/ILIT will have all assets at this time.

■ DGT/ILIT can either sell the assets to a third party or leverage assets to pay off the premium finance loan.

■ If assets are sold, there is an income taxable event to the Seller. If the DGT/ILIT assets are leveraged there is no income taxable event.

■ The DGT/ILIT can also access a portion of the cash value of the life insurance policy to pay off the premium finance loan. This policy loan is also a non-taxable event.

14FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

Asset Sales to Defective Grantor Trust

2. Assets

SellerDefective Grantor

Trust / ILIT

Premium Finance Lender

1. Promissory Noteto the Seller. Payments taxed under IRC Section§453.

6. Release of lien and collateral

5. Loan PayoffBank Loan

3. Loan Proceeds

(after promissory note is paid in full to Seller)

4. Assets pledged as collateral

15FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Exit Strategies

Summary■ Exit strategies are important in order to properly

manage debt as well as the life insurance policy.■ Alternatives do exist which provide the flexibility needed

for estate plans.■ Annuity payments from exit strategies may also be

used to provide an excellent source of income in retirement years for the insured.

■ Discounting of gifts may be accomplished with GRATs and GRUTs depending on the type of assets used.

■ Exit strategies can provide an important tool for any comprehensive estate plan.

16FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Disclaimer

American General Life Company insurers are solely providers of insurance

products. The companies affiliates, their subsidiaries, their employees, agents,

and/or representatives do not provide tax, legal, or financial advice. Additionally,

the company, its affiliates, their subsidiaries, their employees, agents, and/or

representatives do not assume any fiduciary responsibilities in presenting this

information.

This guide is a general summary and is not intended to be a comprehensive

analysis of the topic. Individuals should consult their tax and/or legal advisors

concerning any questions they may have with regard to their specific situations.

17FOR PRODUCER USE ONLY—NOT FOR DISSEMINATION TO THE PUBLIC.

Policies issued by:American General Life Insurance Company2727-A Allen Parkway, Houston, Texas 77019

The United States Life Insurance Company in the City of New York70 Pine Street, New York, New York 10270

The underwriting risks, financial and contractual obligations and support functions associated with the products issued by AmericanGeneral Life Insurance Company (AGL) or The United States Life Insurance Company in the City of New York (USL) are each insurer’s own responsibility. Guarantees are subject to the claims-paying ability of the issuing insurance company. USL is authorizedTo conduct insurance business in New York.

American General Life Companies, www.americangeneral.com, is the marketing name for the insurance companies and affiliatescomprising the domestic life operations of American International Group, Inc., including AGL and USL.

Important: Prior to soliciting business, be certain that you are appropriately licensed and appointed with the insurer and thatthe product has been approved for sale by the insurer in that state. If uncertain, contact your American General Life Companiesrepresentative for assistance.

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