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Estate Planning Strategies Using Life

Insurance In Times of Estate Tax

Uncertainty

Estate Planning Strategies Using Life

Estate Planning Strategies Using Life

Insurance In Times

Insurance In Times of

Estate Tax

Estate Tax

Uncertainty

Uncertainty

This has been prepared by the Marketing Staff of Prudential to assist our producers. It is designed to provide general information in regard to the subject matter covered. It is published with the understanding that Prudential is not providing legal, accounting or tax advice. Such services should be provided by the client’s own advisors.

The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777 IFS-A063862, Ed. 08/04, Exp. 02/06

For internal use only. Not for use with the public.

This has been prepared by the Marketing Staff of Prudential to assist our producers. It is designed to provide general information in regard to the subject matter covered. It is published with the understanding that Prudential is not providing legal, accounting or tax advice. Such services should be provided by the client’s own advisors.

The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777 IFS-A063862, Ed. 08/04, Exp. 02/06

(2)

Economic Growth & Tax Relief

Reconciliation Act of 2001

Economic Growth & Tax Relief

Economic Growth & Tax Relief

Reconciliation

Act of 2001

Act of 2001

Created three distinct estate tax periods which has caused uncertainty, complexity, and confusion. Created three distinct estate tax

Created three distinct estate tax periods which has which has caused uncertainty, complexity, and confusion.

caused uncertainty, complexity, and confusion.

2002

2002 20032003 20042004 20052005 20062006 20072007 20082008 20092009 20102010 20112011 Phase I: 2002-2009

Phase I: 2002-2009

Phase-in period of tax rate reduction and exemption increases

Phase-in period of tax rate reduction and exemption increases

Phase II: 2010

Phase II: 2010

Temporary repeal of estate and generation skipping transfer (GST) tax,

replaced by a complex carryover basis tax on appreciated assets

Temporary repeal of estate and generation skipping transfer (GST) tax,

replaced by a complex carryover basis tax on appreciated assets

Phase III: 2011 On

Phase III: 2011 On

Estate, gift and GST tax reverts back to the present law Estate, gift and GST tax reverts

(3)

45% 45% 1,000,000 1,000,000 3,500,000 3,500,000 2009 2009 45% 45% 1,000,000 1,000,000 2,000,000 2,000,000 2008 2008 45% 45% 1,000,000 1,000,000 2,000,000 2,000,000 2007 2007 46% 46% 1,000,000 1,000,000 2,000,000 2,000,000 2006 2006 47% 47% 1,000,000 1,000,000 1,500,000 1,500,000 2005 2005 48% 48% 1,000,000 1,000,000 1,500,000 1,500,000 2004 2004 49% 49% 1,000,000 1,000,000 1,000,000 1,000,000 2003 2003 50% 50% 1,000,000 1,000,000 1,000,000 1,000,000 2002 2002 55%* 55%* 675,000 675,000 675,000 675,000 2001 2001 Tax Tax Rates Rates Gift Gift Transfer Transfer Exemption Exemption Estate & Estate & GST Tax GST Tax Death Time Death Time Transfer Transfer Exemption Exemption Calendar Calendar Year Year

Phase I Changes

Calendar Years 2001 - 2009

Phase I Changes

Phase I Changes

Calendar Years 2001

Calendar Years 2001

-

-

2009

2009

„ Slow reduction of maximum

estate, gift & GST tax rates.

„ 2002 elimination of 5% surtax on

assets valued between $10 million and $17,184,000.

„ Slow increase in estate

exemption/applicable exclusion.

„ 2002 gift exemption/applicable

exclusion increases to

$1 million and remains at this level.

*Plus 5% Surtax on assets valued between $10 million and $17,184,000

„

„ Slow reduction of maximum Slow reduction of maximum estate, gift & GST tax rates. estate, gift & GST tax rates.

„

„ 2002 elimination of 5% surtax on 2002 elimination of 5% surtax on assets valued

assets valued between $10 $10 million and $17,184,000. million and $17,184,000.

„

„ Slow increase in estateSlow increase in

exemption/applicable exclusion. exemption/applicable exclusion.

„

„ 2002 gift exemption/applicable 2002 gift exemption/applicable exclusion increases to

exclusion increases to

$1 million and remains at this $1 million and remains at this

level. level. *

*Plus 5% Surtax on assets valued between $10 million and Plus 5% Surtax on assets valued between $10 million and $17,184,000

(4)

Phase I Changes

Calendar Years 2002 - 2009

Phase I Changes

Phase I Changes

Calendar Years 2002

Calendar Years 2002

-

-

2009

2009

„ 2004 Repeals special deduction provided to farms and family businesses (qualified family owned

business deduction).

„ Phase-out state estate tax credit • 2002 – 25% reduction

• 2003 – 50% reduction • 2004 – 75% reduction

• 2005 – credit repealed and replaced with a deduction for taxes actually paid to states

„ Expands availability of installment payment relief. „ Expands estate tax rule for conservation easements. „

„ 2004 Repeals special deduction provided to farms 2004 Repeals special deduction provided to farms

and family businesses (qualified family owned

and family businesses (qualified family owned

business deduction).

business deduction).

„

„ PhasePhase--out state estate tax creditout state estate tax credit

• • 2002 2002 –– 25% reduction25% reduction • • 2003 2003 –– 50% reduction50% reduction • • 2004 2004 –– 75% reduction75% reduction •

• 2005 2005 –– credit repealed and replaced with a credit repealed and replaced with a deduction for taxes actually paid to states

deduction for taxes actually paid to states

„

„ Expands availability of installment payment relief.Expands availability of installment payment relief.

„

(5)

Short History of Estate & Gift Tax

Short History of Estate & Gift Tax

1797:

1797: EnactedEnacted--federal stamp tax to pay for naval buildfederal stamp tax to pay for naval build--upup for undeclared war with France.

for undeclared war with France.

1802:

1802: RepealedRepealed––When threat of war ended.When threat of war ended. 1862:

1862: EnactedEnacted––Inheritance tax to pay for civil war expenses.Inheritance tax to pay for civil war expenses.

1864:

1864: EnactedEnacted––First gift enacted to pay for mounting civil war First gift enacted to pay for mounting civil war expenses.

expenses.

1870:

1870: RepealedRepealed––When Civil War costs diminish.When Civil War costs diminish. 1898:

1898: EnactedEnacted––Inheritance tax is imposed to fund Spanish Inheritance tax is imposed to fund Spanish American War.

American War.

1902:

1902: RepealedRepealed––when war ended.when war ended. 1916:

1916: Enacted Enacted --Estate tax as a means of wealth redistribution.Estate tax as a means of wealth redistribution. 1924:

1924: EnactedEnacted––Gift Tax as a backGift Tax as a back--up to estate and income tax.up to estate and income tax. 1926:

1926: RepealedRepealed––Gift TaxGift Tax 1936:

1936: EnactedEnacted––Gift Tax to finance government during Gift Tax to finance government during depression.

depression.

1930

1930 ––2001: Numerous revisions.2001: Numerous revisions.

*Information taken from A.M. Best Special Report dated

*Information taken from A.M. Best Special Report dated

May 21, 2001.

May 21, 2001.

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Vulnerable to legislative

changes. Slow back-loaded phase-in takes place over 4 Congressional and 2 Presidential elections which makes it vulnerable to legislative changes.

„ Throughout our history

when the need for

revenue was great, estate tax played a role.

„

„ Vulnerable to legislative Vulnerable to legislative changes

changes. Slow back. Slow back- -loaded phase

loaded phase--in takes in takes place over 4 place over 4 Congressional and 2 Congressional and 2 Presidential elections Presidential elections which makes it which makes it vulnerable to legislative vulnerable to legislative changes. changes. „

„ Throughout our history Throughout our history when the need for

when the need for

revenue was great, estate revenue was great, estate

tax played a role. tax played a role.

(6)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Cost of the legislation was estimated to be $133 billion. Because of the back-loaded nature of the legislation the costs nearly triples between the fifth and ninth year and jumps another 50% between the ninth and tenth years. In contrast, the pre-2001 law was estimated to generate $410 billion in revenue. * „ The greatest cost of the legislation will occur in 2010

just as the baby-boomers reach retirement and begin to affect the budget.

*Estimate is based on the Joint Tax Committee report

„

„ Cost of the legislation was estimated to be $133 Cost of the legislation was estimated to be $133

billion. Because of the back

billion. Because of the back--loaded nature of the loaded nature of the legislation the costs nearly triples between the fifth

legislation the costs nearly triples between the fifth

and ninth year and jumps another 50% between the

and ninth year and jumps another 50% between the

ninth and tenth years. In contrast, the pre

ninth and tenth years. In contrast, the pre--2001 law 2001 law was estimated to generate $410 billion in revenue. *

was estimated to generate $410 billion in revenue. *

„

„ The greatest cost of the legislation will occur in 2010 The greatest cost of the legislation will occur in 2010

just as the baby

just as the baby--boomers reach retirement and begin boomers reach retirement and begin to affect the budget.

to affect the budget.

*Estimate is based on the Joint Tax Committee report

(7)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Congress faced with a budget shortfall, could

modify, delay or repeal the legislation to pay for programs.

„ Since passage of the legislation there have been numerous congressional bills; some seek to extend the length of the repeal, some seek permanent

repeal and others seek to reform the estate tax

system with lower tax rates and higher exemption amounts.

„

„ Congress faced with a budget shortfall, could Congress faced with a budget shortfall, could

modify, delay or repeal the legislation to pay for

modify, delay or repeal the legislation to pay for

programs.

programs.

„

„ Since passage of the legislation there have been Since passage of the legislation there have been

numerous congressional bills; some seek to extend

numerous congressional bills; some seek to extend

the length of the repeal, some seek permanent

the length of the repeal, some seek permanent

repeal and others seek to reform the estate tax

repeal and others seek to reform the estate tax

system with lower tax rates and higher exemption

system with lower tax rates and higher exemption

amounts.

(8)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Modest tax relief. Changes during this period provide only modest federal tax relief over the present laws. „ Moe Wyzzer, a surviving spouse, has a house worth

$2.75 million with a basis of $500,000, investments worth $7 million with a total basis of $2 million and home furnishings that cost $250,000 and are worth the same amount. Assuming she has cash equal to debt, funeral costs and estate administration her net estate is $10 million in 2001.

„ The calculations for the chart on the following slide assumes no growth and growth (3% house, 8%

investments, none balance). „

„ Modest tax reliefModest tax relief. Changes during this period provide . Changes during this period provide

only modest federal tax relief over the present laws.

only modest federal tax relief over the present laws.

„

„ Moe Moe WyzzerWyzzer, a surviving spouse, has a house worth , a surviving spouse, has a house worth

$2.75 million with a basis of $500,000, investments

$2.75 million with a basis of $500,000, investments

worth $7 million with a total basis of $2 million and

worth $7 million with a total basis of $2 million and

home furnishings that cost $250,000 and are worth

home furnishings that cost $250,000 and are worth

the same amount. Assuming she has cash equal to

the same amount. Assuming she has cash equal to

debt, funeral costs and estate administration her net

debt, funeral costs and estate administration her net

estate is $10 million in 2001.

estate is $10 million in 2001.

„

„ The calculations for the chart on the following slide The calculations for the chart on the following slide

assumes no growth and growth (3% house, 8%

assumes no growth and growth (3% house, 8%

investments, none balance).

(9)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

*The calculation do not take into consideration state death tax

*The calculation do not take into consideration state death tax credit credit

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Exemption Estate Tax No Growth* Estate Tax Growth*

N/A $675,000 $4,920,250 $4,920,250 $1,000,000 $4,430,300 $4,751,815 $1,000,000 $4,065,000 $5,007,815 $1,500,000 $4,065,000 $5,060,032 $1,500,000 $3,985,000 $5,333,229 $2,000,000 $3,680,000 $5,392,718 $2,000,000 $3,600,000 $5,688,794 $2,000,000 $3,600,000 $6,133,015 $3,500,000 $2,925,000 $5,935,558 N/A N/A N/A $1,000,000 $4,795,000 $10,136,235

The Changes Provide Only Modest Federal Tax Relief The Changes Provide Only Modest Federal Tax Relief

(10)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ De-coupling of state death taxes can lead to higher total taxes. Change to how the federal estate and state death taxes interact have lead states to “de-couple” their tax from the federal.

„ Pre legislation most state death taxes didn’t actually increase the total amount of tax paid because the

federal estate tax provided a dollar for dollar credit for state taxes paid up to a certain amount. Most

states crafted their tax to equal this credit – “pick-up” tax.

„

„ DeDe--coupling of state death taxes can lead to higher coupling of state death taxes can lead to higher

total taxes

total taxes. Change to how the federal estate and state . Change to how the federal estate and state death taxes interact have lead states to “de

death taxes interact have lead states to “de--couple” couple” their tax from the federal.

their tax from the federal.

„

„ Pre legislation most state death taxes didn’t actually Pre legislation most state death taxes didn’t actually

increase the total amount of tax paid because the

increase the total amount of tax paid because the

federal estate tax provided a dollar for dollar credit

federal estate tax provided a dollar for dollar credit

for state taxes paid up to a certain amount. Most

for state taxes paid up to a certain amount. Most

states crafted their tax to equal this credit

states crafted their tax to equal this credit –– “pick“pick--up” up” tax.

(11)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ By 2005 the federal credit will be replace by a tax deduction. Changes to the federal state estate tax credit eliminates estate tax revenue to states with a “pick-up” tax. This has lead some of these states to “de-couple” their death tax and enact their own

death taxes.

„ Because the value of a tax deduction is less than a credit, even where the state death tax is maintained at the current level total taxes can actually increase. „

„ By 2005 the federal credit will be replace by a tax By 2005 the federal credit will be replace by a tax

deduction. Changes to the federal state estate tax

deduction. Changes to the federal state estate tax

credit eliminates estate tax revenue to states with a

credit eliminates estate tax revenue to states with a

“pick

“pick--up” tax. This has lead some of these states to up” tax. This has lead some of these states to “de

“de--couple” their death tax and enact their own couple” their death tax and enact their own death taxes.

death taxes.

„

„ Because the value of a tax deduction is less than a Because the value of a tax deduction is less than a

credit, even where the state death tax is maintained

credit, even where the state death tax is maintained

at the current level total taxes can actually increase.

(12)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Higher taxes are only part of the problem. Many of the de-coupled states have not linked the value of assets exempt from state death taxes to the increase estate tax credits enacted by the legislation. In these states it’s possible to trigger state death taxes at first death even where they are exempted from federal estate taxes.

„

„ Higher taxes are only part of the problem. Many of Higher taxes are only part of the problem. Many of

the de

the de--coupled states have not linked the value of coupled states have not linked the value of assets exempt from state death taxes to the increase

assets exempt from state death taxes to the increase

estate tax credits enacted by the legislation. In these

estate tax credits enacted by the legislation. In these

states it’s possible to trigger state death taxes at first

states it’s possible to trigger state death taxes at first

death even where they are exempted from federal

death even where they are exempted from federal

estate taxes.

(13)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Planning Dilemmas. Changes do not materially alter the present estate tax structure; however, the changes do impact common estate strategies. Such as . . .

„ Gifting dilemma. Prior to the legislation, lifetime gifts - including taxable gifts - provided a greater transfer of wealth than a transfers at death. Post

legislation gifting for moderately wealthy estates may not make sense because asset retained qualify for

modified step up while gifted assets do not. For the large estates taxable gifts in particular may not be practical as long as there is the possibility death transfers may occur tax-free.

„

„ Planning Dilemmas.Planning Dilemmas. Changes do not materially alter Changes do not materially alter

the present estate tax structure; however, the changes

the present estate tax structure; however, the changes

do impact common estate strategies.

do impact common estate strategies. Such as . . . Such as . . . „

„ Gifting dilemma. Prior to the legislation, lifetime Gifting dilemma. Prior to the legislation, lifetime

gifts

gifts -- including taxable gifts including taxable gifts -- provided a greater provided a greater transfer of wealth than a transfers at death. Post

transfer of wealth than a transfers at death. Post

legislation gifting for moderately wealthy estates may

legislation gifting for moderately wealthy estates may

not make sense because asset retained qualify for

not make sense because asset retained qualify for

modified step up while gifted assets do not. For the

modified step up while gifted assets do not. For the

large estates taxable gifts in particular may not be

large estates taxable gifts in particular may not be

practical as long as there is the possibility death

practical as long as there is the possibility death

transfers may occur tax

(14)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Discounting dilemma. Discounting values for gift tax is only an advantage if there is an estate tax. If the estate tax is replaces with a capital gains tax, discounting techniques will cause additional

capital gains tax since the carryover basis is also discounted.

„

„ Discounting dilemmaDiscounting dilemma.. Discounting values for gift Discounting values for gift

tax is only an advantage if there is an estate tax. If

tax is only an advantage if there is an estate tax. If

the estate tax is replaces with a capital gains tax,

the estate tax is replaces with a capital gains tax,

discounting techniques will cause additional

discounting techniques will cause additional

capital gains tax since the carryover basis is also

capital gains tax since the carryover basis is also

discounted.

(15)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Marital & credit trust planning - the all or nothing dilemma. To escape estate taxes on the death of the first spouse many estate documents provide a

“formula provision” that an amount equal to the

unified credit pass in a “B” trust to non-spouse heirs and the remainder go to the surviving spouse, who takes an unlimited amount tax-free under marital

deduction. Post legislation these formula provisions can result in unintended distributions.

For Example . . . „

„ Marital & credit trust planning Marital & credit trust planning -- the all or nothing the all or nothing

dilemma. To escape estate taxes on the death of the

dilemma. To escape estate taxes on the death of the

first spouse many estate documents provide a

first spouse many estate documents provide a

“formula provision” that an amount equal to the

“formula provision” that an amount equal to the

unified credit pass in a “B” trust to non

unified credit pass in a “B” trust to non--spouse heirs spouse heirs and the remainder go to the surviving spouse, who

and the remainder go to the surviving spouse, who

takes an unlimited amount tax

takes an unlimited amount tax--free under marital free under marital

deduction. Post legislation these formula provisions

deduction. Post legislation these formula provisions

can result in unintended distributions.

can result in unintended distributions.

For Example . . .

(16)

Analysis of Phase I Changes

Time Period of Uncertainty

Analysis of Phase I Changes

Analysis of Phase I Changes

Time Period of Uncertainty

Time Period of Uncertainty

„ Assume a couple with an estate

of 3,000,000 having a typical formula clause passing

maximum credit amount to children balance to spouse.

„ Death 2003 surviving spouse

receives $2M.

„ Death 2006 surviving spouse

receives $1M

„ Death 2009 surviving spouse is

disinherited*

„ Death 2010 children are

disinherited * „

„ Assume a couple with an estate Assume a couple with an estate

of 3,000,000 having a typical of 3,000,000 having a typical

formula clause passing formula clause passing

maximum credit amount to maximum credit amount to children balance to spouse. children balance to spouse.

„

„ Death 2003 surviving spouse Death 2003 surviving spouse

receives $2M. receives $2M.

„

„ Death 2006 surviving spouse Death 2006 surviving spouse

receives $1M receives $1M

„

„ Death 2009 surviving spouse is Death 2009 surviving spouse is

disinherited* disinherited*

„

„ Death 2010 children are Death 2010 children are

disinherited disinherited * * 2,000,000 2,000,000 1,000,000 1,000,000 2011 2011 3,500,000 3,500,000 0 0 2010 2010 0 0 3,500,000 3,500,000 2009 2009 1,000,000 1,000,000 2,000,000 2,000,000 2006 2006--20082008 1,500,000 1,500,000 1,500,000 1,500,000 2004 2004--20052005 2,000,000 2,000,000 1,000,000 1,000,000 2002 2002--20032003 2,325,000 2,325,000 675,000 675,000 2001 2001 Spouse Spouse Children Children Calendar Calendar Year Year

(17)

Phase II Changes

Calendar Year 2010

Phase II Changes

Phase II Changes

Calendar Year 2010

Calendar Year 2010

„ The legislation simply replaced one death tax for another. Legislation provides a temporary one year repeal of the estate and GST tax, replacing it with a complex modified carryover basis tax.

„ Repeals step-up in basis which currently shelters

heirs from capital gains taxes on sale of appreciated assets received from a decedent.

„

„ The legislation simply replaced one death tax for The legislation simply replaced one death tax for

another. Legislation provides a temporary one year

another. Legislation provides a temporary one year

repeal of the estate and GST tax, replacing it with a

repeal of the estate and GST tax, replacing it with a

complex modified carryover basis tax.

complex modified carryover basis tax.

„

„ Repeals stepRepeals step--up in basis which currently shelters up in basis which currently shelters

heirs from capital gains taxes on sale of appreciated

heirs from capital gains taxes on sale of appreciated

assets received from a decedent.

(18)

Phase II Changes

Calendar Year 2010

Phase II Changes

Phase II Changes

Calendar Year 2010

Calendar Year 2010

„ Establishes complex modified carryover basis adjustment equal to:

• Lesser of: (has been referred to as “step-down rules”)

• Adjusted basis of decedent or

• Fair market value on date of decedent’s death

• Plus step-up in basis allowed for:

• Assets valued up to 1.3 million for transfers to any beneficiary; plus

• Assets valued up to 3 million for transfers to surviving spouse. (qualified spousal property)

„

„ Establishes complex modified carryover basis Establishes complex modified carryover basis

adjustment equal to:

adjustment equal to:

• Lesser of: (has been referred to asLesser of: (has been referred to as “step“step--down down rules”

rules”))

• Adjusted basis of decedent orAdjusted basis of decedent or •

• Fair market value on date of decedent’s deathFair market value on date of decedent’s death

• Plus stepPlus step--up in basis allowed for:up in basis allowed for:

• Assets valued up to 1.3 million for transfers to any Assets valued up to 1.3 million for transfers to any beneficiary; plus

beneficiary; plus •

• Assets valued up to 3 million for transfers to surviving Assets valued up to 3 million for transfers to surviving spouse. (qualified spousal property)

(19)

Phase II Changes

Calendar Year 2010

Phase II Changes

Phase II Changes

Calendar Year 2010

Calendar Year 2010

ƒ

Selected assets do not qualify for step-up under the

modified carryover basis system (i.e., IRD assets such as annuities, qualified plans, and nonqualified

deferred compensation arrangement)

„ Only assets transferred from the decedent are eligible for the modified carryover basis adjustment.

„ Repeals unlimited estate tax marital deduction.

„ Gift tax continues with $1 million exemption and tax rate equal to the top individual income tax rate

(currently scheduled to be 35%).

ƒ

ƒ

Selected assets do Selected assets do not not qualify for stepqualify for step--up under the up under the

modified carryover basis system (i.e., IRD assets such

modified carryover basis system (i.e., IRD assets such

as annuities, qualified plans, and nonqualified

as annuities, qualified plans, and nonqualified

deferred compensation arrangement)

deferred compensation arrangement)

„

„ Only assets transferred from the decedent are eligible Only assets transferred from the decedent are eligible

for the modified carryover basis adjustment.

for the modified carryover basis adjustment.

„

„ Repeals unlimited estate tax marital deduction.Repeals unlimited estate tax marital deduction.

„

„ Gift tax continues with $1 million exemption and tax Gift tax continues with $1 million exemption and tax

rate equal to the top individual income tax rate

rate equal to the top individual income tax rate

(currently scheduled to be 35%).

(20)

Analysis of Phase II Changes

A Time Period of Complexity

Analysis of Phase II Changes

Analysis of Phase II Changes

A Time Period of Complexity

A Time Period of Complexity

„ Complexity. The carryover basis provision enacted in this legislation is more complex than the

provisions enacted in 1976. The ’76 provisions were retroactively repealed in 1980 as unworkable.

„ Unequal taxation for similar estates. Families with most of their wealth in IRD items (annuities,

qualified plans) will be worse off than other families with appreciated assets who will qualify for partial basis step-up.

„

„ Complexity.Complexity. The carryover basis provision enacted The carryover basis provision enacted

in this legislation is more complex than the

in this legislation is more complex than the

provisions enacted in 1976. The ’76 provisions were

provisions enacted in 1976. The ’76 provisions were

retroactively repealed in 1980 as unworkable.

retroactively repealed in 1980 as unworkable.

„

„ Unequal taxation for similar estates.Unequal taxation for similar estates. Families with Families with

most of their wealth in IRD items (annuities,

most of their wealth in IRD items (annuities,

qualified plans) will be worse off than other families

qualified plans) will be worse off than other families

with appreciated assets who will qualify for partial

with appreciated assets who will qualify for partial

basis step

(21)

Analysis of Phase II Changes

A Time Period of Complexity

Analysis of Phase II Changes

Analysis of Phase II Changes

A Time Period of Complexity

A Time Period of Complexity

„ Burdensome record keeping. Imposes complicated record keeping on family members.

„ Increase strife & litigation. Increases potential of family strife and litigation for executors who must allocate 1.3 million step-up among different assets and heirs.

„ Tax inequity among heirs. Potential inequity among heirs with some receiving high basis assets and

others low basis assets. „

„ Burdensome record keeping.Burdensome record keeping. Imposes complicated Imposes complicated

record keeping on family members.

record keeping on family members.

„

„ Increase strife & litigation.Increase strife & litigation. Increases potential of Increases potential of

family strife and litigation for executors who must

family strife and litigation for executors who must

allocate 1.3 million step

allocate 1.3 million step--up among different assets up among different assets and heirs.

and heirs.

„

„ Tax inequity among heirs.Tax inequity among heirs. Potential inequity among Potential inequity among

heirs with some receiving high basis assets and

heirs with some receiving high basis assets and

others low basis assets.

(22)

Analysis of Phase II Changes

A Time Period of Complexity

Analysis of Phase II Changes

Analysis of Phase II Changes

A Time Period of Complexity

A Time Period of Complexity

„ Increase tax on assets passing to spouse. With the loss of the unlimited marital deduction, the surviving spouses may pay more tax under a carryover basis system than under the current structure.

„ Increase tax on buy sell arrangements. With the loss of the step-up basis, mandatory buy sell

arrangements triggered by death may cause taxation. „

„ Increase tax on assets passing to spouse.Increase tax on assets passing to spouse. With the With the

loss of the unlimited marital deduction, the surviving

loss of the unlimited marital deduction, the surviving

spouses may pay more tax under a carryover basis

spouses may pay more tax under a carryover basis

system than under the current structure.

system than under the current structure.

„

„ Increase tax on buy sell arrangementsIncrease tax on buy sell arrangements. With the loss . With the loss

of the step

of the step--up basis, mandatory buy sell up basis, mandatory buy sell

arrangements triggered by death may cause taxation.

(23)

„ Less tax motivation for charitable gifts. Some of the tax incentive to make charitable bequests will be

gone; limited to appreciated capital gains property in excess of modified step-up in basis adjustment.

„ Increase use of charitable remainder trusts. CRTs may become more popular because of their ability to avoid capital gains taxation on the sale of appreciated assets inside the trust.

„

„ Less tax motivation for charitable gifts.Less tax motivation for charitable gifts. Some of the Some of the

tax incentive to make charitable bequests will be

tax incentive to make charitable bequests will be

gone; limited to appreciated capital gains property in

gone; limited to appreciated capital gains property in

excess of modified step

excess of modified step--up in basis adjustment.up in basis adjustment. „

„ Increase use of charitable remainder trustsIncrease use of charitable remainder trusts. CRTs . CRTs

may become more popular because of their ability to

may become more popular because of their ability to

avoid capital gains taxation on the sale of appreciated

avoid capital gains taxation on the sale of appreciated

assets inside the trust.

assets inside the trust.

Analysis of Phase II Changes

A Time Period of Complexity

Analysis of Phase II Changes

Analysis of Phase II Changes

A Time Period of Complexity

(24)

„ Eliminates “Zero” tax plan ability. Under current law a decedent can avoid all tax with proper

planning. Estate tax is completely voluntary; the capital gains approach offers less planning

opportunities. „

„ Eliminates “Zero” tax plan ability.Eliminates “Zero” tax plan ability. Under current Under current

law a decedent can avoid all tax with proper

law a decedent can avoid all tax with proper

planning. Estate tax is completely voluntary; the

planning. Estate tax is completely voluntary; the

capital gains approach offers less planning

capital gains approach offers less planning

opportunities.

opportunities.

Analysis of Phase II Changes

A Time Period of Complexity

Analysis of Phase II Changes

Analysis of Phase II Changes

A Time Period of Complexity

(25)

„ Life insurance more attractive. Life insurance may become a more attractive financial vehicle for the wealthy client due to its income-tax-free death

benefit under Section 101(a) of the Code.

„ Life insurance death benefit can help recoup income taxes which will continue to burden many assets such as qualified plans, IRAs and annuities.

„ Life insurance can help replace lost wealth transferred to a CRT.

„

„ Life insurance more attractiveLife insurance more attractive. Life insurance may . Life insurance may

become a more attractive financial vehicle for the

become a more attractive financial vehicle for the

wealthy client due to its income

wealthy client due to its income--taxtax--free death free death benefit under Section 101(a) of the Code.

benefit under Section 101(a) of the Code.

„

„ Life insurance death benefit can help recoup income Life insurance death benefit can help recoup income

taxes which will continue to burden many assets such

taxes which will continue to burden many assets such

as qualified plans, IRAs and annuities.

as qualified plans, IRAs and annuities.

„

„ Life insurance can help replace lost wealth Life insurance can help replace lost wealth

transferred to a CRT.

transferred to a CRT.

Analysis of Phase II Changes

A Time Period of Complexity

Analysis of Phase II Changes

Analysis of Phase II Changes

A Time Period of Complexity

(26)

Phase III Changes

Calendar Years 2011 and Thereafter

Phase III Changes

Phase III Changes

Calendar Years 2011 and Thereafter

Calendar Years 2011 and Thereafter

„ Estate, gift and GST tax laws revert back to present law

• $1,000,000 exemption/applicable exclusion • Unified exemption/applicable exclusion

• 55% top tax rate and 5% surtax • Step-up in basis

• Unlimited marital deduction

“In this world nothing can be said to be certain, except death and taxes”

Benjamin Franklin

„

„ Estate, gift and GST tax laws revert back to Estate, gift and GST tax laws revert back to

present law

present law

• $1,000,000 exemption/applicable exclusion$1,000,000 exemption/applicable exclusion •

• Unified exemption/applicable exclusionUnified exemption/applicable exclusion •

• 55% top tax rate and 5% surtax55% top tax rate and 5% surtax •

• StepStep--up in basisup in basis •

• Unlimited marital deductionUnlimited marital deduction

“In this world nothing can be said to be certain, except death

“In this world nothing can be said to be certain, except death

and taxes”

and taxes”

Benjamin Franklin

(27)

Summary

Summary

Summary

„ Between 2002-2009 the current estate tax structure is not materially altered and presents only modest

relief.

„ 2010 the legislation simply replaces one tax for another potentially more complex tax.

„ 2011 and thereafter the estate tax laws as they existed prior to the 2001 legislation are restored. „ Given the uncertainty of the current estate tax

system planning ideas which provide flexibility to respond to a complex and uncertain future are

needed now as much as ever! „

„ Between 2002Between 2002--2009 the current estate tax structure is 2009 the current estate tax structure is

not materially altered and presents only modest

not materially altered and presents only modest

relief.

relief.

„

„ 2010 the legislation simply replaces one tax for 2010 the legislation simply replaces one tax for

another potentially more complex tax.

another potentially more complex tax.

„

„ 2011 and thereafter the estate tax laws as they 2011 and thereafter the estate tax laws as they

existed prior to the 2001 legislation are restored.

existed prior to the 2001 legislation are restored.

„

„ Given the uncertainty of the current estate tax Given the uncertainty of the current estate tax

system planning ideas which provide flexibility to

system planning ideas which provide flexibility to

respond to a complex and uncertain future are

respond to a complex and uncertain future are

needed now as much as ever!

(28)

What are some of the “flexible” life insurance planning techniques that make sense regardless of the estate tax

situation?

What are some of the “flexible” life insurance planning

What are some of the “flexible” life insurance planning

techniques that make sense regardless of the estate tax

techniques that make sense regardless of the estate tax

situation?

(29)

Flexible Irrevocable Trust

Document Design

Flexible Irrevocable Trust

Flexible Irrevocable Trust

Document Design

Document Design

(30)

Flexible Irrevocable Trust

Document Design

Flexible Irrevocable Trust

Flexible Irrevocable Trust

Document Design

Document Design

„ Irrevocability does not prevent a trust from being flexible

„ Key is in careful drafting

For Example . . .

„

„ Irrevocability does not prevent a trust from being Irrevocability does not prevent a trust from being

flexible

flexible

„

„ Key is in careful draftingKey is in careful drafting

For Example . . . For Example . . .

(31)

Flexible Irrevocable Trust

Document Design

Flexible Irrevocable Trust

Flexible Irrevocable Trust

Document Design

Document Design

„ Changes in marital status

• “Spouse at date trust comes into existence”.

„ Trustee changes

• Beneficiaries can be given power to change trustees.

• Grantor can be given power within limits to change trustee.

„ Changes in Crummey power holders

• Grantor can be given power to exclude a beneficiary from exercising Crummey withdrawal power.

• Grantor can name alternate Crummey power holders if a power holder dies or is removed.

„

„ Changes in marital statusChanges in marital status

• “Spouse at date trust comes into existence”.“Spouse at date trust comes into existence”.

„

„ Trustee changesTrustee changes

• Beneficiaries can be given power to change trustees.Beneficiaries can be given power to change trustees. •

• Grantor can be given power within limits to change trustee. Grantor can be given power within limits to change trustee.

„

„ Changes inChanges in CrummeyCrummey power holderspower holders

• Grantor can be given Grantor can be given power to excludepower to exclude a beneficiary from a beneficiary from exercising

exercising CrummeyCrummey withdrawal power.withdrawal power. •

• Grantor can Grantor can name alternatename alternate CrummeyCrummey power holders if a power holders if a power holder dies or is removed.

(32)

Flexible Irrevocable Trust

Document Design

Flexible Irrevocable Trust

Flexible Irrevocable Trust

Document Design

Document Design

„ Trustee Powers

• Broad powers to non-beneficiary trustee

• Power to change non-dispositive provisions • Discretionary distribution to trust beneficiaries • Power to terminate and distribute trust assets to

beneficiaries

• Limited powers to trust beneficiary

• Limited power of appointment

• Power limited by ascertainable standards (HEMS)

„

„ Trustee Powers Trustee Powers

• Broad powers to nonBroad powers to non--beneficiary trustee beneficiary trustee

• Power to change non-Power to change non-dispositivedispositive provisionsprovisions •

• Discretionary distribution to trust beneficiariesDiscretionary distribution to trust beneficiaries •

• Power to terminate and distribute trust assets to Power to terminate and distribute trust assets to beneficiaries

beneficiaries

• Limited powers to trust beneficiaryLimited powers to trust beneficiary

• Limited power of appointment Limited power of appointment •

(33)

Flexible Irrevocable Trust

Document Design

Flexible Irrevocable Trust

Flexible Irrevocable Trust

Document Design

Document Design

„ Powers of Appointment

• Limited Power. Power holder given power to appoint trust property to a limited class of

beneficiaries excluding the himself, his estate, his creditors or creditors of his estate.

• Example -- Spouse given power to appoint trust assets at her death to whichever of the children she chooses, in any amount she chooses.

• Ascertainable Standards. Power holder can

appoint to himself for his/her for limited purpose of “health, education, maintenance or support” (HEMS).

„

„ Powers of AppointmentPowers of Appointment

• Limited PowerLimited Power. Power holder given power to . Power holder given power to appoint trust property to a limited class of

appoint trust property to a limited class of

beneficiaries excluding the himself, his estate, his

beneficiaries excluding the himself, his estate, his

creditors or creditors of his estate.

creditors or creditors of his estate.

• Example Example ---- Spouse given power to appoint trust Spouse given power to appoint trust assets at her death to whichever of the children

assets at her death to whichever of the children

she chooses, in any amount she chooses.

she chooses, in any amount she chooses.

• Ascertainable StandardsAscertainable Standards. Power holder can . Power holder can

appoint to himself for his/her for limited purpose

appoint to himself for his/her for limited purpose

of “health, education, maintenance or support”

of “health, education, maintenance or support”

(HEMS).

(34)

Getting A Policy Out Of An

Existing

Irrevocable Trust

Getting A Policy Out Of An

Getting A Policy Out Of An

Existing

Existing

Irrevocable Trust

Irrevocable Trust

(35)

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

ILIT Rescue:

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

Getting A Policy Out Of An Existing ILIT

„ If current trust does not meet client’s needs what are the options for removing policy?

• Check trust terms to see if they provide for

distribution of assets. If yes – determine whether the distribution meets objectives (is to appropriate person).

• Determine whether a judicial order under state law is possible. If yes – does the distribution meet objectives (is to appropriate person).

„

„ If current trust does not meet client’s needs what are If current trust does not meet client’s needs what are

the options for removing policy?

the options for removing policy?

• Check Check trust termstrust terms to see if they provide for to see if they provide for distribution of assets. If yes

distribution of assets. If yes –– determine whether determine whether the distribution meets objectives (is to appropriate

the distribution meets objectives (is to appropriate

person).

person).

• Determine whether a Determine whether a judicial orderjudicial order under state under state law is possible. If yes

law is possible. If yes –– does the distribution does the distribution meet objectives (is to appropriate person).

(36)

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

ILIT Rescue:

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

Getting A Policy Out Of An Existing ILIT

„ If current trust does not meet client’s needs what are the options for removing policy? (continued)

• Purchase new policy in new trust stop paying premium in old trust, but . . .

• Client’s health must be assessed • Assess options for old policy

• Transfer existing policy to new trust, but watch out for . . .

• Transfer-for- value issues

• Three year estate tax inclusion issues

What are the methods . . . . „

„ If current trust does not meet client’s needs what are If current trust does not meet client’s needs what are

the options for removing policy? (continued)

the options for removing policy? (continued)

• Purchase new policy in new trustPurchase new policy in new trust stop paying stop paying premium in old trust, but . . .

premium in old trust, but . . .

• Client’s health must be assessedClient’s health must be assessed •

• Assess options for old policy Assess options for old policy

• Transfer existing policy to new trustTransfer existing policy to new trust, but watch , but watch out for . . .

out for . . .

• TransferTransfer--forfor-- value issues value issues •

• Three year estate tax inclusion issues Three year estate tax inclusion issues

What are the methods . . . .

(37)

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

ILIT Rescue:

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

Getting A Policy Out Of An Existing ILIT

„ Options for transferring existing policy to new trust: • #1 Sale to insured followed by gift to ILIT

• Sale to insured avoids transfer for value

• Gift transfer to trust possible problem if significant policy values

• Taxable gain to the trust if policy is in gain position except where trust is “grantor” trust

• 3 years rule applies

„

„ Options for transferring existing policy to new trust:Options for transferring existing policy to new trust:

• #1 #1 SaleSale to insured followed by to insured followed by giftgift to ILIT to ILIT

• Sale to insured avoids transfer for valueSale to insured avoids transfer for value •

• Gift transfer to trust possible problem if significant Gift transfer to trust possible problem if significant policy values

policy values •

• Taxable gain to the trust if policy is in gain position Taxable gain to the trust if policy is in gain position except where trust is “grantor” trust

except where trust is “grantor” trust •

(38)

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

ILIT Rescue:

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

Getting A Policy Out Of An Existing ILIT

„ Options for transferring existing policy to new trust: (continued)

• # 2 Sale to insured followed by sale to ILIT

• Sale to insured avoids transfer for value

• Gift transfer of cash to the new trust to purchase policy may be a problem if significant

• Taxable gain to the old trust if policy is in gain position except where trust is “grantor” trust

• 3 years rule is avoided if sale is for full consideration • Sale to new trust needs to be structured to avoid transfer

–for-value (partner, partnership, grantor trust)

„

„ Options for transferring existing policy to new trust: Options for transferring existing policy to new trust:

(continued)

(continued)

• # 2 # 2 SaleSale to insured followed by to insured followed by sale sale to ILIT to ILIT

• Sale to insured avoids transfer for valueSale to insured avoids transfer for value •

• Gift transfer of cash to the new trust to purchase policy Gift transfer of cash to the new trust to purchase policy may be a problem if significant

may be a problem if significant •

• Taxable gain to the old trust if policy is in gain position Taxable gain to the old trust if policy is in gain position except where trust is “grantor” trust

except where trust is “grantor” trust •

• 3 years rule is avoided if sale is for full consideration 3 years rule is avoided if sale is for full consideration •

• Sale to new trust needs to be structured to avoid transfer Sale to new trust needs to be structured to avoid transfer –

(39)

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

ILIT Rescue:

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

Getting A Policy Out Of An Existing ILIT

„ Options for transferring existing policy to new trust: (continued)

• #3 Sale from old ILIT to new grantor ILIT

• Sale to grantor ILIT may be considered a transfer to the insured possibly avoiding transfer for value

• Gift transfer of cash to trust to purchase policy may be a problem if significant

• Taxable gain to the old trust if policy is in gain position except where trust is “grantor” trust

• 3 years rule is avoided if sale is for full consideration

„

„ Options for transferring existing policy to new trust: Options for transferring existing policy to new trust:

(continued)

(continued)

• #3 #3 SaleSale from old ILITfrom old ILIT to new grantor ILITto new grantor ILIT

• Sale to grantor ILIT may be considered a transfer to Sale to grantor ILIT may be considered a transfer to the insured possibly avoiding transfer for value

the insured possibly avoiding transfer for value

• Gift transfer of cash to trust to purchase policy may be Gift transfer of cash to trust to purchase policy may be a problem if significant

a problem if significant •

• Taxable gain to the old trust if policy is in gain position Taxable gain to the old trust if policy is in gain position except where trust is “grantor” trust

except where trust is “grantor” trust •

(40)

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

ILIT Rescue:

ILIT Rescue:

Getting A Policy Out Of An Existing ILIT

Getting A Policy Out Of An Existing ILIT

„ Options for transferring existing policy to new trust: (continued)

• #4 Sale to grantor’s spouse gift to new ILIT

• Sale to grantor’s spouse avoids transfer for value

because under IRC § 1041 sale to a spouse is deemed a gift, thus qualifies under the carryover basis exception of the transfer for value rule

• Gift transfer of cash to trust to purchase policy may be a problem if significant

• Taxable gain to the old trust if policy is in gain position • 3 years rule does not apply, but proceeds included under

IRC §§ 2036-2038 in spouse’s estate if spouse beneficiary of the new trust

„

„ Options for transferring existing policy to new trust: Options for transferring existing policy to new trust:

(continued)

(continued)

• #4 #4 SaleSale to grantor’s spouse to grantor’s spouse giftgift to new ILITto new ILIT

• Sale to grantor’s spouse avoids transfer for value Sale to grantor’s spouse avoids transfer for value because under IRC

because under IRC §§ 1041 sale to a spouse is deemed a 1041 sale to a spouse is deemed a gift, thus qualifies under the carryover basis exception

gift, thus qualifies under the carryover basis exception

of the transfer for value rule

of the transfer for value rule

• Gift transfer of cash to trust to purchase policy may be a Gift transfer of cash to trust to purchase policy may be a problem if significant

problem if significant •

• Taxable gain to the old trust if policy is in gain position Taxable gain to the old trust if policy is in gain position •

• 3 years rule does not apply, but proceeds included under 3 years rule does not apply, but proceeds included under IRC

IRC §§§§ 20362036--2038 2038 in spouse’s estate if spouse in spouse’s estate if spouse beneficiary of the new trust

(41)

Support Trusts

Single Life & Survivorship

Support Trusts

Support Trusts

Single Life & Survivorship

Single Life & Survivorship

(42)

Client Facts

Client Facts

Client Facts

„ Facts

• Married Couple

• Need for life insurance coverage

„ Obstacles

• Hesitant about placing insurance in an ILIT because of changing estate tax applicable exclusion which may shelter their estate from estate tax

„ Desire

• Access policy cash values if needed

„

„ FactsFacts

• Married CoupleMarried Couple •

• Need for life insurance coverageNeed for life insurance coverage

„

„ ObstaclesObstacles

• Hesitant about placing insurance in an ILIT because of Hesitant about placing insurance in an ILIT because of changing estate tax applicable exclusion which may changing estate tax applicable exclusion which may shelter their estate from estate tax

shelter their estate from estate tax

„

„ DesireDesire

(43)

What Is A Support Trust?

What Is A Support Trust?

What Is A Support Trust?

„ ILIT with trust provisions permitting broad access/ distribution of trust assets for benefit of trust

beneficiary.

„ Can be structured using single life or survivorship life insurance

• Single Life. Spousal support trust (SLAT) • Survivorship. Survivorship support trust „

„ ILIT with trust provisions permitting broad access/ ILIT with trust provisions permitting broad access/

distribution of trust assets for benefit of trust

distribution of trust assets for benefit of trust

beneficiary.

beneficiary.

„

„ Can be structured using single life or survivorship Can be structured using single life or survivorship

life insurance

life insurance

• Single Life. Spousal support trust (SLAT)Single Life. Spousal support trust (SLAT) •

(44)

Single Life Spousal Support Trust

Structure

Single Life Spousal Support Trust

Single Life Spousal Support Trust

Structure

Structure

„ Grantor insured establishes and ILIT.

„ Non-grantor spouse is named one of the trust

beneficiaries and may also be trustee depending on powers given to trust beneficiary.

„ Grantor insured funds the premium gift to the ILIT out of his/her separate property.

„ Individual life insurance coverage on the grantor’s life is purchased by the trustee of the ILIT.

„

„ Grantor insured establishes and ILIT.Grantor insured establishes and ILIT.

„

„ NonNon--grantor spouse is named one of the trust grantor spouse is named one of the trust

beneficiaries and may also be trustee depending on

beneficiaries and may also be trustee depending on

powers given to trust beneficiary.

powers given to trust beneficiary.

„

„ Grantor insured funds the premium gift to the ILIT Grantor insured funds the premium gift to the ILIT

out of his/her separate property.

out of his/her separate property.

„

„ Individual life insurance coverage on the grantor’s Individual life insurance coverage on the grantor’s

life is purchased by the trustee of the ILIT.

(45)

Single Life Spousal Support Trust

Structure

Single Life Spousal Support Trust

Single Life Spousal Support Trust

Structure

Structure

„ ILIT is drafted allowing the trustee broad powers to make distributions of income and principal to the insured’s spouse and children.

„ Where trustee is the non-insured spouse the spouse trustee can have following powers:

• Health, education, maintenance and support • All trust income

• Greater of $5,000 or 5% of trust principal

„ An independent trustee can be given discretionary distribution powers over trust income and principal. „

„ ILIT is drafted allowing the trustee broad powers to ILIT is drafted allowing the trustee broad powers to

make distributions of income and principal to the

make distributions of income and principal to the

insured’s spouse and children.

insured’s spouse and children.

„

„ Where trustee is the nonWhere trustee is the non--insured spouse the spouse insured spouse the spouse

trustee can have following powers:

trustee can have following powers:

• Health, education, maintenance and supportHealth, education, maintenance and support •

• All trust incomeAll trust income •

• Greater of $5,000 or 5% of trust principalGreater of $5,000 or 5% of trust principal „

„ An independent trustee can be given discretionary An independent trustee can be given discretionary

distribution powers over trust income and principal.

(46)

During Life of the Insured

During Life of the Insured

During Life of the Insured

Spousal Support Trust Owner & Ins. Beneficiary Spouse Trust Beneficiary Insured

Life Insurance Policy Premium

Insured Gifts

Health, Education, Maintenance, Support > $5,000 or 5%

Spouse of insured entitled to: Income

(47)

At Death of Insured

Spouse Beneficiary Survives

At Death of Insured

At Death of Insured

Spouse Beneficiary Survives

Spouse Beneficiary Survives

Spousal Support Trust

Spouse

Trust Beneficiary

Insured

Health, Education, Maintenance, Support > $5,000 or 5%

Spouse of insured entitled to: Income

Death Benefit

(48)

Death of Spouse Beneficiary

Death of Spouse Beneficiary

Death of Spouse Beneficiary

Spousal Support Trust Wife Husband Trust Benefits Children Insurer

(49)

Benefits

Benefits

Benefits

ƒ

Access to policy cash values to benefit the non-insured spouse if spousal support becomes

necessary.*

ƒ

Estate tax-free death benefit.

* Of course loans and withdrawals cause a reduction in cash values and death benefits, may affect any policy guarantees against lapse, and may have tax consequences.

ƒ

ƒ

AccessAccess to policy cash values to benefit the nonto policy cash values to benefit the non- -insured spouse if spousal support becomes

insured spouse if spousal support becomes

necessary.*

necessary.*

ƒ

ƒ

Estate taxEstate tax--free death benefitfree death benefit..

* Of course loans and withdrawals cause a reduction in cash v

* Of course loans and withdrawals cause a reduction in cash values and death alues and death benefits, may affect any policy guarantees against lapse, and ma

benefits, may affect any policy guarantees against lapse, and may have tax y have tax consequences.

(50)

Survivorship Support Trust

Structure

Survivorship Support Trust

Survivorship Support Trust

Structure

Structure

„ Similar to single life structure.

„ Grantor insured establishes and ILIT.

„ Grantor insured funds the premium gift to the ILIT out of his/her separate property.

„ Non-grantor spouse is named one of the trust beneficiaries

„ ILIT is drafted allowing the trustee broad powers to make distributions to the beneficiary spouse and

children.

„ Neither of the insureds may be trustee. „

„ Similar to single life structure.Similar to single life structure.

„

„ Grantor insured establishes and ILIT.Grantor insured establishes and ILIT.

„

„ Grantor insured funds the premium gift to the ILIT Grantor insured funds the premium gift to the ILIT

out of his/her separate property.

out of his/her separate property.

„

„ NonNon--grantor spouse is named one of the trust grantor spouse is named one of the trust

beneficiaries

beneficiaries

„

„ ILIT is drafted allowing the trustee broad powers to ILIT is drafted allowing the trustee broad powers to

make distributions to the beneficiary spouse and

make distributions to the beneficiary spouse and

children.

children.

„

References

Related documents

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