for producer use only. not for distribution to the public. w alls a round w ealth ola 1865 0114...
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For producer use only.Not for distribution to the public.
WALLS AROUND WEALTH
OLA 1865 0114
Comprehensive Planning, IncDerek Archey, CFP, ALMI
248-457-2312 x [email protected]
For producer use only.Not for distribution to the public.
• A legacy plan should reflect a client’s unique goals and needs
• Life insurance producer plays an important role:
• A bridge between client goals and desired results
• Must ask questions to help clients identify and articulate goals in order to be able to recommend the appropriate strategies
Legacy Planning
For producer use only.Not for distribution to the public.
The American Taxpayer Relief Act
2014 Estate, Gift and Generation Skipping Transfer Tax
• $5.34 million exemption
• 40% top tax bracket
For producer use only.Not for distribution to the public.
Reframing the Legacy Planning Conversation
Shift Emphasis
Taxes Goals / Values
For producer use only.Not for distribution to the public.
• Transfer taxes
• Divorce
• Creditors
• Beneficiaries’ lack of asset management skills
• Overspending
• Substance abuse
How Is Wealth Lost from Generation to Generation?
For producer use only.Not for distribution to the public.
Influencing the Behavior of Beneficiaries
• Wealthy parents have two major concerns:
• Children are not going to live as well as they do
• Wealth that parents leave their children is going to spoil them
• How do you bridge the gap between these two competing concerns?
• Answer: Dynasty Trust
For producer use only.Not for distribution to the public.
• “Family Bank” trust
• Legacy trust
• Incentive trust
• Generation-skipping trust
Dynasty Trust
For producer use only.Not for distribution to the public.
What Is a Dynasty Trust?
• A trust with a long term
• Not just for the “ultra-wealthy”
• Offers tax and non-tax advantages
• Tax advantages are maximized when trust is funded with life insurance
• Leverage GSTT exemption which is based on premiums, not death benefit
• Death benefit received federal income tax-free
For producer use only.Not for distribution to the public.
Gifting to the Trust
Gifting to the Trust
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption
(1)
For producer use only.Not for distribution to the public.
(1)
Gifting to the Trust
Gifting to the Trust
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption
Gifting to the Trust
(2)
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Trust purchases survivorship life insurance policy on lives of grandparents
For producer use only.Not for distribution to the public.
Gifting to the Trust
Gifting to the Trust
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Trust purchases survivorship life insurance policy on lives of grandparents
(2)
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption
(1)
BeneficiariesChildren or Grandchildren
Grantors(Grandparents)
Death benefit magnifies trust assets through leverage of
premium amounts
Dynasty Trustfor Children & Grandchildren
For producer use only.Not for distribution to the public.
Gifting to the Trust
Gifting to the Trust
BeneficiariesChildren or Grandchildren
Grantors(Grandparents)
Death benefit magnifies trust assets through leverage of
premium amounts
Dynasty Trustfor Children & Grandchildren
(3)
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Trust purchases survivorship life insurance policy on lives of grandparents
(2)
Grantors(Grandparents)
Dynasty Trustfor Children & Grandchildren
Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption
(1)
For producer use only.Not for distribution to the public.
• Policy proceeds not included in insured’s taxable estate if no incidents of life insurance policy ownership exist at any time within three years prior to death
• To keep policy proceeds out of grantor’s estate, applicant and owner should be third party, such as Dynasty Trust
• Grantor then gifts premiums to third-party owner
Dynasty Trust Considerations:Estate Exclusion
For producer use only.Not for distribution to the public.
• Generation-skipping transfer tax (GSTT)
• Dynasty Trust helps leverage GSTT exemption
• Proper use of GSTT exemption preserves assets for future generations
• Rule against perpetuities
• Dynasty Trust usually created in state without rule against perpetuities (RAP)*
• In state with RAP, Dynasty Trust term limited to life spans of named beneficiaries, plus 21 years
Dynasty Trust Planning Considerations
*Clients must seek advice from competent legal counsel concerning trust setup matters.
For producer use only.Not for distribution to the public.
Separate Taxpayer for Estate and Gift Tax PurposesOne in the Same for Income Tax Purposes
Dynasty Trust
Intentionally Defective Grantor Trusts
GrantorDynasty Trust
For producer use only.Not for distribution to the public.
• Effective way to transfer significant assets to successive generations of beneficiaries
• Provides creditor protection
• Divorce consequences
• Irresponsible spending
• Continuity of asset management
• May contain incentives for beneficiaries
Benefits of a Dynasty Trust
For producer use only.Not for distribution to the public.
• Generations of a family can manage charitable bequests
• Heirs can serve on foundation board
• Reasonable expenses may be paid to board and travel for foundation business may be reimbursed
• Removes assets from taxable estate
Private Foundation
For producer use only.Not for distribution to the public.
• Reduced federal income tax deduction
• 30% of AGI
• Deduction for property based on cost basis rather than fair market value
• Self-dealing rules
• Minimum distribution requirements
Private Foundation (cont.)
For producer use only.Not for distribution to the public.
The Hilton Family Foundation
97%
BarronHilton
(Age 80)
Family Foundation
$2.3 Billion
Children & Grandchildren
$71 Million
3%
Source: USA Today, December 27, 2007
For producer use only.Not for distribution to the public.
Private Foundation with a Legacy Trust
Legacy Trustfor Children & Grandchildren
Grandparents(Grantors)
Trust created using $5.34 Million lifetime gift tax exemption and allocating portion of GSTT exemption
For producer use only.Not for distribution to the public.
Private Foundation with a Legacy Trust (cont.)
Family Foundatio
n Trust Owns Survivorship Lifefor Children or Grandchildren
Legacy Trust
Grandparents(Grantors)
Initial Contribution
For producer use only.Not for distribution to the public.
Private Foundation with a Legacy Trust (cont.)
Family Foundation
At Death:
BeneficiariesChildren or
Grandchildren
Can serve on board & direct bequests
Trust Owns Survivorship Lifefor Children or Grandchildren
Legacy Trust
Results: • Reduced estate taxes
• Protected wealth for generations
• Community influence for heirs
100% of Estate
For producer use only.Not for distribution to the public.
A blended family is one to which the husband and/or wife bring together children and assets from a previous relationship.
What Is a Blended Family?
For producer use only.Not for distribution to the public.
• No Plan + Family Fallout
• Traditional Plan Fosters Family Discord
Blended Family Estate Planning Issues
For producer use only.Not for distribution to the public.
What Is a Blended Family?
Carol(Age 65)
Mike(Age 65)
JanMarsha Cindy Greg
Previous Marriage
Current net worth: $15 Million
For producer use only.Not for distribution to the public.
Carol & Mike’s Living Trust
Carol(Age 65)
Mike(Age 65)
Living Trust$15 Million
For producer use only.Not for distribution to the public.
Carol & Mike’s Living Trust (cont.)
Carol(Age 65)
Survivor’s Trust
$7.5 Million
Exemption Trust
$5.34 Million
QTIP Trust
$2.16 Million
Available to Carol during her lifetime
At Mike’s Death:
For producer use only.Not for distribution to the public.
Carol & Mike’s Living Trust (cont.)
Survivor’s Trust
$7.5 Million
Exemption Trust
$5.34 Million
QTIP Trust
$2.16 Million
At Carol’s Death:
Marsha
Jan
Cindy
Greg
For producer use only.Not for distribution to the public.
• Carol is 32 and Mike is 71
• Mike has three children from a previous marriage
• Mike is currently worth $10 Million
Blended Family–Younger Second Spouse
For producer use only.Not for distribution to the public.
Blended Family–Younger Second Spouse (cont.)
Carol(Age 32)
Mike(Age 71)
PeterGreg Bobby
Current net worth: $10 Million
Previous Marriage
For producer use only.Not for distribution to the public.
At Carol’s Death in 40–50 years:
Carol & Mike’s Living Trust–Younger Second Spouse
At Mike’s Death:
Carol(Age 32)
Mike(Age 71)
Exemption Trust
$5.34 Million
QTIP Trust
$4.66 Million
Living Trust$10 Million
Available to Carol during her lifetime
Greg
Peter
Bobby
Carol(Age 65)
For producer use only.Not for distribution to the public.
Mike’s Living Trust & Dynasty Trust
BobbyAt Mike’s Death...
Dynasty Trust(with Life Insurance)
Greg
Carol
Exemption Trust
$5.34 Million
Peter
Mike
Living Trust$10 Million
QTIP Trust
$4.66 Million
Greg Jr. Peter Jr. Bobby Jr.
Greg III Peter III Bobby III
Next Generation...
Next Generation...
At Carol’s Death...
For producer use only.Not for distribution to the public.
• Establish a Revocable Living Trust
• Including marital and bypass trusts
• Purchase a separate life insurance policy to specifically benefit only those children born of a previous marriage
• Consider establishing a Legacy Trust if facing potential estate tax liability or desire third-party trustee control of trust funds
Planning for Blended Families
For producer use only.Not for distribution to the public.
• At death, trust receives death benefit
• Children from insured’s prior relationship will receive these proceeds free of federal estate and income tax
• Clients can make sure bulk of their assets is available for current spouse and children of second relationship or marriage
Planning for Blended Families (cont.)
For producer use only.Not for distribution to the public.
• Less than half of all households (48%) are husband and wife households.
• Between 2000 – 2010:
• 40% increase in opposite-gender partner households
• 80% increase in same-gender partner households.
• Unmarried households are most common in New England, Washington DC, and the Pacific coastal states.
Planning for Non-Married Couples
For producer use only.Not for distribution to the public.
• Differing state common-law/domestic partner laws
• Loss of survivor retirement benefits
• Asset titling
• Real estate planning
• Equalizing estates
• Loss of unlimited marital deduction
• Limitations in gifting
Planning for Non-Married Couples (cont.)
For producer use only.Not for distribution to the public.
• Agreements
• Cohabitation
• Partnership
• Dissolution
• Grantor Retained Interest Trust
• Legal Adoption of Partner
Planning Tools
For producer use only.Not for distribution to the public.
“Naming one another as life insurance beneficiaries—an all-around simple way of transferring assets—is the great equalizer.”
— Russell P. Love, McKenna Long & Aldrich
Planning for Nonmarried Couples
For producer use only.Not for distribution to the public.
• Tom and Pat, both 62
• $10 Million
• No children
• Tom has an estate of $8.5 Million while Pat has an estate of $1.5 Million
Planning for Nonmarried Couples (cont.)
For producer use only.Not for distribution to the public.
Planning for Nonmarried Couples (cont.)
Tom (Age 62)
• Annual gifts of $14,000 per beneficiary
• $5.34 million lifetime gift tax exemption
Legacy Trust with Life
Insurance
Pat(Age 62)
Living Trust
$1.5 M
Living Trust
$8.5 M
LivingTrust
$8.5 M
Net worth: $1.5 MNet worth: $8.5 M
For producer use only.Not for distribution to the public.
Planning for Nonmarried Couples (cont.)
Available to pay estate taxes or make
distributions
Pat(Age 62)
Tom’s Family
At Tom’s Death...
Living Trust
$1.5 M
Living Trust
$8.5 M
LivingTrust
$8.5 M
Legacy Trust with Life
Insurance
For producer use only.Not for distribution to the public.
• Preserves disabled person’s quality of life without endangering eligibility for government programs.
• Trust funds supplement—do not replace—government assistance
• Two Types:
• Self-settled
• Third party
What Is a Special Needs Trust?
For producer use only.Not for distribution to the public.
• Funded with the disabled person’s “own” assets
• At disabled beneficiary’s death, remaining trust assets are used to pay back the government for benefits received during lifetime
• Laws and services vary from state to state
Self-Settled Special Needs Trust
For producer use only.Not for distribution to the public.
• Created and funded by third parties such as parent, grandparent or sibling through will, gift or other transfer of assets
• When disabled beneficiary dies, remaining monies can be left directly to a designated contingent beneficiary
Third-Party Special Needs Trust
For producer use only.Not for distribution to the public.
Special Needs Trusts
How Do They Work?
Disabled Loved Ones
SSI & Medicaid
Premiums paid for policy on life
of grantor
At death, proceeds paid to the trust
Eligibility for government benefits
maintained
Grantors
For producer use only.Not for distribution to the public.
• Coordinate planning efforts with all family members so as to not frustrate the benefits of Special Needs Trust
• Uniform Transfer/Gift to Minors Account
• Direct inheritance
Avoiding Common Mistakes
For producer use only.Not for distribution to the public.
• Ask fact-finding questions
• Determine client’s goals and circumstances
• Propose strategies that are tailored to accomplish goals and address circumstances
Planning a Legacy
For producer use only.Not for distribution to the public.
This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.
Transamerica Life Insurance Company (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.
Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects.
Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of January 2014.
OLA 1865 0114
For producer use only.Not for distribution to the public.
WALLS AROUND WEALTH
OLA 1865 0613