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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 consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.
Life Insurance in Legacy Planning • Estate and charitable planning should reflect • Current estate tax laws • Careful consideration of various trust and policy structures and designs • Life insurance is critical element for variety of planning needs • Irrevocable life insurance trust (ILIT) is basic tool used in family legacy planning
How Is Wealth Lost from Generation to Generation? • Transfer taxes • Divorce • Creditors • Beneficiaries’ lack of asset management skills • Overspending • Substance abuse
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 gap between these two conflicting interests? • Answer: Dynasty Trust
Dynasty Trust • “Family Bank” trust • Legacy trust • Generation-skipping trust • Can include incentive provisions
What Is a Dynasty Trust? • Provides ability to magnify wealth over several generations • Not just for the ultra-wealthy • Form of irrevocable life insurance trust • Leverage use of assets by purchasing life insurance to fund Dynasty Trust
Dynasty Trust Planning Considerations • Generation-skipping transfer tax (GSTT) • Dynasty Trust helps maximize 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 Considerations—Estate Exclusion • 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—Gifting to the Trust • Create trust with gift of $2 million ($1 million each) using lifetime gift tax exemption and allocating portion of GSTT exemption • Annual gifts of $24,000 per beneficiary—can be split gifts if from separate property Grandparents—Grantors Dynasty Trust • Trust purchases survivorship life insurance policy on lives of grandparents • Death benefit proceeds magnify trust assets through leverage of premium amounts Children and Grandchildren—Beneficiaries Life Insurance Policy
Intentionally Defective Grantor Trusts • Grantor trust structure allows trust to grow more rapidly • No trust income taxation—grantor is taxed on trust income
Benefits of a Dynasty Trust • Effective way to transfer significant assets to successive generations of beneficiaries • Provides creditor protection • Divorce • Irresponsible spending • Continuity of asset management • May contain incentives for beneficiaries
What Is a Special Needs Trust? • Ensures funds available for person with disability when needed • Trust’s principal and earnings supplement disabled beneficiary’s care • Trust funds are not used to pay for benefits provided by government programs
Avoiding Common Mistakes • Families wish to set aside as much money as possible to maintain beneficiary’s quality of life • Common mistake is placing money in Uniform Transfer to Minors Account • Money held in child’s name can eventually disqualify child from governmental assistance
Why Careful Planning Is Important • Omnibus Budget Reconciliation Act of 1993 (OBRA) established OBRA trusts • OBRA trust: State is paid back when disabled beneficiary dies • Assets cannot exceed specified level of $2,000 for government program eligibility • Laws and services vary from state to state
Funding a Special Needs Trust • Cash • Stock • Personal property • Real estate • Life insurance
Owning Life Insurance Ideal way to provide for special needs child or dependent adult because death benefit is: • Income tax–free; • Available quickly; and • Usually received without having to go through probate
What Is a Blended Family? A blended family is one to which the husband and/or wife bring children and assets from a previous relationship
Planning for Blended Families • ILIT can help ensure policy death benefit is excluded from insured’s gross estate to minimize estate taxes • ILIT also allows client to make annual gifts—possibly gift tax–free—to pay life insurance policy premiums • At death, trust receives death benefit proceeds • 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
Charitable Legacy Life Insurance Planning • Designating charity as policy’s beneficiary • Gifting old policy to charity • Purchasing life insurance policy for charity
Director’s Legacy • Board members play crucial role in corporate operations • Challenge to find benefits to attract and retain qualified board members • Board members generally have already reached high level of financial and professional success
How the Director’s Legacy Works • Company agrees to pay life insurance policy premiums on lives of participating board directors • Director selects favorite charity to be applicant and owner of policy, and beneficiary of policy death benefit proceeds • Company pays premiums directly to insurance carrier, or to charity that then pays premiums • At director’s death, charity receives death benefit income tax–free
Executive Legacy: A Rewarding Way to Attract Key Personnel • Company’s top executives play vital role in business’s operations • Challenge to find benefit programs to attract and retain qualified employees • Company can pay premiums on life insurance policy for executives to use as generous charitable donation
How the Executive Legacy Works • Company agrees to pay life insurance policy premiums on lives of its key executives • Executives advise company as to which charity will be applicant and owner of policy, and beneficiary of policy’s death benefit proceeds • Company pays premiums directly to insurance carrier, or to charity that then pays premiums
Benefits of Life Insurance in Charitable Legacy Planning • Individuals gain satisfaction of benefiting favorite charities • Employers attract and retain key executives and/or directors • Charities receive higher donation from executive/director
Life Insurance in Legacy Planning Life insurance is a valuable tool in legacy planning, and is vital in: • Family legacy planning • Charitable legacy planning
Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not give ERISA, tax, or legal advice. This presentation is provided for informational purposes only and should not be construed as ERISA, 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 take into consideration the general tax and ERISA provisions applicable to qualified retirement plans or the applicable state laws of 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 May 2007. Transamerica Insurance & Investment Group is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN 37219-2417. Web site: www.nasba.org. In the state of New York, Transamerica Occidental Life Insurance Company is an approved provider of continuing education courses (Provider Organization Approval Number NYPO-100366).
