AD-OC-851A
annuity maximization
Using Life Insurance
Annuities are designed for retirement income —
What if you do not need the income?
Annuity
Maximization
Using Life Insurance
the Situation
Deferred annuities have traditionally been a vehicle for accumulating wealth in a tax-deferred manner for retirement. Over time, however, your goal may change from accumulating wealth to transferring wealth and preserving the estate.
Upon death, annuities do not receive a “stepped-up basis.” Consequently, the annuity beneficiaries will pay income tax on the gain in the annuity when they take distributions. Moreover, if you do not deplete the annuity balance prior to death, the annuity will be included in the estate for deter- mining estate taxes.1 Therefore, annuities are potentially subject to both income and estate taxes. In the proper situation, using distributions from the annuity to purchase life insurance may accom- plish the objective of getting the most of out of the annuity wealth transferred at death.
the Strategy
After planning and having sufficient assets for retirement, you may face a dilemma if you do not need to take distributions from your annuity during life: how to plan for the disposition of an an- nuity in a manner that maximizes the wealth transferred to your heirs. Since annuities cannot be gifted during life without triggering income tax, the options available are limited.
Annuity maximization is a strategy designed for annuity owners who do not need the income from their annuity. As an annuity owner, you take taxable distributions from your annuity.2 You then gift these net after-tax distributions to an irrevocable life insurance trust (ILIT) using your annual exclusions and/or lifetime gift tax exemption equivalent amount.1 The trustee3 of the ILIT, using these net after-tax distributions, then purchases a life insurance policy on you and/or your spouse.4 The ILIT is the owner and beneficiary of the life insurance policy. Upon the death of you and/or your spouse, the death benefit payable to the ILIT should pass to the ILIT free of both income* and estate taxes, if properly structured. The trust beneficiaries may then receive the trust assets per the ILIT terms.
What you accompliSh
Reduce annuity values subject to taxation at death.
Help replace the value of the annuity proceeds lost to taxes for the heirs.
Provide for life insurance death benefit proceeds to pass to the ILIT free from income* and estate taxes.
* For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e., the “transfer-for-value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).
Insurance products are issued by Pacific Life Insurance Company in all states except New York, and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state.
Investment and Insurance Products: Not a Deposit — Not FDIC Insured
— Not Insured by any Federal Government Agency — No Bank Guarantee — May Lose Value
1 Distributions: Annuity owner takes taxable distributions from his or her annuity. 2 Gifts: Annuity owner, with the assistance of an attorney, establishes an Irrevocable Life
Insurance Trust (ILIT). Annuity owner then gifts the net after-tax annuity distributions to the ILIT. Gift taxes may be reduced or eliminated by the use of available annual exclusions and/or lifetime gift tax exemption equivalent amount.
3 Life Insurance: Trustee of the ILIT uses these gifted distributions to purchase a life insurance policy on the life of the annuity owner and/or his or her spouse.
4 Death Benefit Proceeds: Upon the death of the insured(s), the life insurance policy death benefit proceeds will be paid to the ILIT and should be distributed to the beneficiaries per the terms of the ILIT free from estate taxes.1
5 Annuity: Upon the death of the annuity owner and annuitant, the remaining annuity amount passes to the designated beneficiaries and may be included in the estate of the annuity owner for estate tax purposes and will be subject to income taxes upon distribution to the heirs.
2 Gifts
4 Distributions 5
Annuity
3 Premiums
4
Death Benefit
Annuity Contract Annuity Owner/Insured
1 Distributions
Irrevocable Life Insurance Trust
Beneficiaries Life Insurance Policy
This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
419( e ) Welfare Benefit Plans
Using Life Insurance
The Power To Help You Succeed
1 According to the American Taxpayer Relief Act of 2012, the federal estate, gift and generation skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%. As of January 1, 2013, the annual gift tax exclusion is $14,000 per donee (indexed for inflation).
2 Annuity withdrawals and other distributions of taxable amounts will be subject to ordinary income tax. For nonqualified contracts, an additional 3.8% federal tax may apply on investment income. If withdrawals and other distributions are taken prior to age 59½, an additional 10% federal tax may apply. A withdrawal charge also may apply. Withdrawals will reduce the value of the death benefit and any optional benefits.
3 The trustee appointed should not be the insured or the insured’s life insurance producer. A life insurance producer who is paid a commission on the sale of a life insur- ance policy represents both his or her personal interest and the interests of the trust, creating a conflict of interest.
4 Distributions from the annuity to purchase life insurance do not qualify for tax-free exchange treatment under IRC Sec. 1035. Distributions from the annuity to purchase life insurance will be considered a replacement of the annuity under state insurance laws. After considering your individual facts and circumstance, whether any particular replacement is in your best interest is a determination to be made by you, along with your independent tax and legal advisors.
Vital information
Client: _______________________________________________________________________________________________________________________
Date of Birth: ____________________________________________________ Risk Status: Select NS S
Address: ______________________________________________________________________________ State: _______________
Spouse: ______________________________________________________________________________________________________________________
Date of Birth: ____________________________________________________ Risk Status: Select NS S
Annuity Value: ___________________________________________ Cost Basis: __________________
Historical Growth Rate: __________________________________ % Income Tax Rate: ________________________________ %
Beneficiary Income Tax Rate: _____________________________ % Estate Tax Rate: _________________________________ %
Distribution Options: (check one)
o Specific Dollar Amount: $ ______________________________
o Percent of Annuity: _________________________________ %
o Annuity Payments: o Single Life Expectancy o Joint Life Expectancy o Period Certain: ______________________
Payment Amount: _________________________________________________
Life Insurance:
Death Benefit: ____________________________________________ Solve for Death Benefit: ____________________________
Premium Amount: $ _______________________________________ Solve for Premium: ________________________________
Anticipated Years to Pay Premium: ___________________________
This fact finder is provided to help you and your life insurance producer better understand your goals and objectives. Please return the information to your life insurance producer and not to Pacific Life as we cannot and do not provide financial, legal or tax advice.
Annuity
Maximization
Using Life Insurance
Life Insurance Producer’s Name
State Insurance License Number (or affix your business card)
Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the
products it issues. Insurance products and their guarantees, including optional benefits and any fixed subaccount crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company, but they do not protect the value of the variable investment options. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Variable insurance products are distributed by Pacific Select Distributors, Inc., (member FINRA & SIPC), a subsidiary of Pacific Life Insurance
Company, and an affiliate of Pacific Life & Annuity Company, and are available through licensed third-party broker-dealers. Please Note: This brochure is designed to provide introductory information in regard to the subject matter covered.
Neither Pacific Life nor its representatives offer legal or tax advice. Consult your attorney or tax advisor for complete up-to-date information concerning federal and state tax laws in this area.
AD-OC-851A 15-22409-08 5/13
Pacific Life Insurance Company Newport Beach, CA (800) 800-7681 • www.PacificLife.com
Pacific Life & Annuity Company Newport Beach, CA
(888) 595-6996 • www.PacificLife.com
