Maximizing Wealth Transfer using Innovative Trust Designs

Maximizing Wealth Transfer

using Innovative Trust Designs

Why Life Insurance?

• Provides for:

–Personal family protection

–Estate planning

–Business continuation

• Allows for:

–Cash accumulation

–Death benefit protection

• Leverage

Why Life Insurance?

• Estate Liquidity

• Policy’s death benefit should be more

than the cumulative premiums- leverage

• Liquid funds readily available at death

• Income tax-free death benefit

• If structured in an irrevocable life

insurance trust (ILIT) tax-free

Why Life Insurance?

Irrevocable Trust Investment Alternatives

Cost of Death Benefit Protection

Death Benefit Guarantees

Immediate Leveraged Wealth Transfer

Step-Up in Basis (at death)

Tax Free Rebalance

Tax Deferred Accumulation

Wealth Transfer Tax Free*

Life Insurance

Traditional

Investments

YES YES

NO ^YES

NO ^YES

NO YES**

NO ^YES

NO ^YES***

NO ^YES

*Subject to strict adherence to gift tax laws regarding annual exclusion gifts, clients should seek advice from legal and tax advisors before any transfers are made to an irrevocable trust.

**While technically not a stepped up basis at death, life insurance death benefits are generally paid income tax free under IRC §101(a)

***Certain life insurance products can contain guarantees.

Life insurance design:

Accumulation

• Client:

– Younger

– Interested in a tax-deferred vehicle

to accumulate wealth

• Goal:

– Internal rate of return (IRR) of the

cash value

– Focused on long term investments

with income tax benefits

• Product:

– Variable Universal Life Premium:

– Maximum funding

• Death benefit design:

– Minimum death benefit

• Non-Modified Endowment Contract

– Generally preferred design. May provide future tax-free

access to policy cash value*

• Wealth Management design:

– Spousal Lifetime Access Trust

– Dynasty Trust

Life insurance design:

Accumulation cont.

*Loans and withdrawals will decrease the cash value and death benefit.

Life insurance design:

Leverage

• Client:

– Interested in maximizing the amount

passing to beneficiaries

– Usually older in relatively good health

• Goal:

– IRR of the death benefit

– Focused on guarantees, or

– Focused on long term

investments with income

tax benefits

Life insurance design:

Leverage cont.

• Product:

– Universal Life or Joint and Survivor Universal Life

– Variable Universal Life

– Whole Life

• Premium Options:

– Single pay or short funding

– Guaranteed premium (available on certain types of life insurance policies

• Can structure with death benefit design:

– Maximum death benefit

• May be classified as a Modified Endowment Contract

– Generally not used for cash value accumulation or access

• Wealth Management design:

– Leveraged Credit Shelter Trust

– Dynasty Trust

• Dynasty Trust

• Spousal Lifetime Access

Trust(SLAT)

• Leveraged Credit Shelter Trust

Agenda

Dynasty Trust

Dynasty Trust: Client Profile

• Wealthy (wealth is relative)

• Have children with potentially

taxable estates

• Have grandchildren

• Want control of provisions

that specify how assets are

received by beneficiaries

*This material is designed to provide introductory information on the subject matter. MetLife Investors does not provide tax and legal advice. Clients should consult their attorney and/or tax advisor before making financial investment or planning decisions.

Dynasty Trust: Client Concerns

• ^{Tax issues}

• Income, capital gains and income in respect

of a decedent (IRD)

• Estate, gift and generation-skipping

• Multiple taxes, multiple generations

*This material is designed to provide introductory information on the subject matter. MetLife Investors does not provide tax and legal advice. Clients should consult their attorney and/or tax advisor before making financial investment or planning decisions.

$2,000,000 Client (NET OF INCOME TAX)

(700,000) IRS *

1,300,000 Children

(455,000) IRS*

845,000 Grandchildren

(295,750) IRS*

549,250 Great grandchildren

Client Concerns

Tax Issues-Example

*

This example is hypothetical, actual results will vary. Assumes 35% Estate Tax Bracket, the maximum

estate and gift tax rate for 2011 and 2012 is 35%. Beginning 2013, the federal estate tax will be

reinstated with a maximum tax rate of 55%, unless Congress enacts further legislation.

• Irrevocable Trust

– Can benefit multiple generations

– Provides wealth protection

• Creditors and/or divorce

Dynasty Trust: Overview

How it Works

$5,000,000 ( applicable

exclusion)

$13,000+ (annual exclusion)

Allocate GSTT using $1MM

of the exclusion

Grand-

children

Great Grand-

children

Dynasty Trust

Assets Grantor

Children

(The federal estate and GST tax exemption amount is scheduled to return to their 2001 amounts on January 1, 2013 unless Congress enacts legislation.)

Using Life Insurance

• In addition to the need for life insurance

death benefit, the decision to use life

insurance as an asset is based on

economics.

• Is the cost of tax more or less than the

cost of insurance?

• Designing policy to meet client objectives

– Maximum IRR on Cash Value

– Maximum IRR on Death Benefit

• Maximizes use of Generation Skipping

Transfer Tax exclusion

–Provides greater inheritance for

multiple generations

• Can help preserve family values

• Protects assets from creditors/divorces

• No estate taxation upon children’s death

Dynasty Trust: Benefits

$2,000,000 Client (NET OF INCOME TAX)

(0) IRS

$10,033,564 Children

(0) IRS

$10,033,564 Grandchildren

(0) IRS

$10,033,564 Great grandchildren

Case Study

Leveraged Gift -Example

(60/60 Std NS Guaranteed DB, LASUL)

This example is hypothetical, while the premium estimate is based on MetLife's Legacy Advantage Survivorship Universal Life product, the figures do not represent the potential death benefit under any specific product. Also assumes that all income earned in the trust is distributed annually to the beneficiaries. Actual results will vary.

Comparison

Standard Estate Disposition Dynasty Trust

Client:

$2,000,000

Client:

$2,000,000

Child:

$1,300,000

Child:

$10,033,564

Grandchild:

$845,000

Grandchild:

$10,033,564

Great Grandchild:

$549,250

Great Grandchild:

$10,033,564

This example is hypothetical, actual results will vary.

• State law controls

–Laws differ from state to state

• Trust is irrevocable

–Need to draft flexibility

• Spousal Lifetime Access Trust (SLAT)

• Loans and withdrawals of the policy’s

cash value*

Dynasty Trust: Issues

*Tax-free distribution assumes that the life insurance policy is properly structured and not classified as a Modified Endowment Contract (MEC). Withdrawals are made up to the cost basis and policy loans thereafter. If the policy is a MEC, cash value is taxable upon withdrawal and if withdrawn before age 59½, a 10% federal income tax penalty may apply. If a policy should lapse or be surrendered prior to the death of the insured, there may be significant tax

consequences. Loans and withdrawals will decrease the cash value and death benefit.

Spousal Lifetime Access Trust

(SLAT)

SLAT: Client Profile

• Married

• ^Younger

– 30’s-50’s

• Wealthy

– Can afford to make gifts

• Interested in estate planning, but

want provisions that allow spousal

access if circumstances change

unexpectedly

SLAT: Client Goals

• Income Replacement

• Wealth Transfer

–Helps maximize inheritance for the next

generation

–Estate tax liquidity

–Minimize estate taxes

• Access to irrevocable trust assets

• “Win-Win”

SLAT: Overview

• Irrevocable Life Insurance Trust (ILIT)

– With Special Provisions

– Spouse is one of the trust’s beneficiaries

of principal during and after insured’s

lifetime

Tax Free

Death Benefits

SLAT: How it Works

Gift

Tax Free

Death Benefits

death benefit

Non-Grantor

Beneficiaries

Grantor SLAT Life Insurance

• Married Couple

• Estate Tax Liquidity Needs

• Premiums less than annual exclusions

or applicable exclusion

• Desired access to cash values

SLAT: When to use?...

• Provides needed liquidity

• Spousal access to cash

values

• No estate inclusion upon

donor’s death*

• No estate inclusion upon

non-donor spouse’s death*

SLAT: Benefits

*Assuming the trust is properly drafted.

• How is access to cash value obtained?

• How much access is there?

• Are there other issues to consider?

• What happens upon death or divorce?

• Can I use a second-to-die policy?

SLAT: Issues

SLAT: Access to Cash Value

Gift _Non-

Grantor

Grantor SLAT

Indirect

Access

Direct

Access as

Beneficiary

Depends on who the trustee is:

• An independent party should be trustee

• Distributions to the spouse beneficiary is in

full discretion of trustee

SLAT: How much access is there?

• Prevents estate inclusion for

Non-Donor Spouse

• Spouse Can Still “Gift Split”

SLAT: Gifting Issues

Separate Property

Transfers Only

Donor SLAT

SLAT: What happens upon death or divorce?

• Non-donor spouse is removed as

beneficiary

• Grantor loses indirect access

•Access may be regained upon remarriage

YES

SLAT: Can a Second-to-die policy be used?

Tax Free

Death Benefits

SLAT: How it Works

Gift

Tax Free

Death Benefits

death benefit

Non-Grantor

Beneficiaries

Grantor SLAT Life Insurance

Second-to-die policy: Issues

• Neither spouse can be trustee

• All other issues are the same

Leveraged Credit Shelter Trust

• Widow/widower

– Credit Shelter Trust

• Want to maximize the

inheritance for future

generations

LCST: Client Profile

• Wealth Transfer (including

estate tax liquidity)

• Minimize estate taxes

LCST: Client Goals

Using Assets of Credit Shelter Trust

Created by Deceased Spouse to Purchase

Life Insurance on Surviving Spouse

LCST: Overview

Trust established

upon first spouse's

death

LCST: How it works

Tax Free

Death Benefits

Tax Free

Death Benefits

death benefit

Insured

Beneficiaries

Deceased _LCST

potential income per trust

Life Insurance

• Available Source of Funds ($5,000,000 in 2011 and

2012)

• Excellent Leveraging Opportunity

• Avoids Crummey Notices

• Credit Shelter Trust Not Included in Spouses Estate

• No Need for Additional ILIT

LCST: Benefits

• Trust must “qualify”

LCST: Issues

• Trust Must be able to Purchase Insurance

• Spouse Cannot Be Trustee

• No Power of Appointment

LCST: How does the trust qualify?

• Review trust for trust language

– Can be:

• Specific

• Implied: Uniform Prudent Investor Act

LCST: Can the trust purchase

life insurance?

Spouse Must Resign Before Policy is Purchased

OR

Special Trustee Provision

LCST: If serving as trustee

General:

• Disclaim within 9 months of death

Limited:

• Release before life insurance is

purchased

LCST:

If Spouse Has Power of Appointment?

Important Information

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor.

MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this material is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances.

Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are

available from MetLife. The policy prospectus contains information about the policies features, risks, charges and expenses. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state.

MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are subject to the claims paying ability and financial strength of the issuing insurance company.

Life insurance products are issued by MetLife Investors USA Insurance Company, Irvine, CA, Metropolitan Life Insurance Company, New York, NY, and in New York only by First MetLife Investors Insurance Company, New York, NY. All guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company, Irvine, CA. All are MetLife companies. May 2011

PEANUTS © 2011 Peanuts Worldwide

• Not A Deposit • Not FDIC-Insured • Insurance Products are not Insured By Any Federal Government Agency • Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value L0511183338[exp0612]