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Walls Around Wealth

Walls Around Wealth. Comprehensive Planning, Inc Derek Archey, CFP, ALMI 248-457-2312 x 313 archeyd@compreplan.com. OLA 1865 0114. Legacy Planning. A legacy plan should reflect a client’s unique goals and needs Life insurance producer plays an important role:

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Walls Around Wealth

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  1. Walls Around Wealth Comprehensive Planning, Inc Derek Archey, CFP, ALMI 248-457-2312 x 313 archeyd@compreplan.com OLA 1865 0114

  2. Legacy Planning • A legacy plan should reflect a client’s unique goals and needs • Life insurance producer plays an important role: • A bridge between client goals and desired results • Must ask questions to help clients identify and articulate goals in order to be able to recommend the appropriate strategies

  3. The American Taxpayer Relief Act 2014 Estate, Gift and Generation Skipping Transfer Tax • $5.34 million exemption • 40% top tax bracket

  4. Reframing the Legacy Planning Conversation Shift Emphasis Taxes Goals / Values

  5. How Is Wealth Lost from Generation to Generation? • Transfer taxes • Divorce • Creditors • Beneficiaries’ lack of asset management skills • Overspending • Substance abuse

  6. Influencing the Behavior of Beneficiaries • Wealthy parents have two major concerns: • Children are not going to live as well as they do • Wealth that parents leave their children is going to spoil them • How do you bridge the gap between these two competing concerns? • Answer: Dynasty Trust

  7. Dynasty Trust • “Family Bank” trust • Legacy trust • Incentive trust • Generation-skipping trust

  8. What Is a Dynasty Trust? • A trust with a long term • Not just for the “ultra-wealthy” • Offers tax and non-tax advantages • Tax advantages are maximized when trust is funded with life insurance • Leverage GSTT exemption which is based on premiums, not death benefit • Death benefit received federal income tax-free

  9. Gifting to the Trust • (1) Grantors(Grandparents) Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption Dynasty Trust for Children & Grandchildren

  10. Gifting to the Trust • (1) Grantors(Grandparents) • (1) • (2) Grantors(Grandparents) Grantors(Grandparents) Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption • Ongoing annual gifts of $28,000 per beneficiary ($14,000 per grantor) • Can be split gifts Dynasty Trust for Children & Grandchildren Trust purchases survivorship life insurance policy on lives of grandparents Created using $10.5 Million lifetime gift tax exemptions and allocating portion of GSTT exemption Dynasty Trust for Children & Grandchildren Dynasty Trust for Children & Grandchildren

  11. Gifting to the Trust • (2) • (1) Grantors(Grandparents) Grantors(Grandparents) • (1) Grantors(Grandparents) Grantors(Grandparents) Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption Death benefit magnifies trust assets through leverage of premium amounts Trust purchases survivorship life insurance policy on lives of grandparents • Ongoing annual gifts of $28,000 per beneficiary ($14,000 per grantor) • Can be split gifts Dynasty Trust for Children & Grandchildren Dynasty Trust for Children & Grandchildren Created using $10.5 Million lifetime gift tax exemptions and allocating portion of GSTT exemption Dynasty Trust for Children & Grandchildren Beneficiaries Children or Grandchildren Dynasty Trust for Children & Grandchildren

  12. Gifting to the Trust • (2) • (1) Grantors(Grandparents) Grantors(Grandparents) • (1) Grantors(Grandparents) Created using $10.68 million lifetime gift tax exemptions and allocating GSTT exemption Trust purchases survivorship life insurance policy on lives of grandparents • Ongoing annual gifts of $26,000 per beneficiary ($13,000 per grantor) • Can be split gifts Dynasty Trust for Children & Grandchildren Dynasty Trust for Children & Grandchildren • (3) Grantors(Grandparents) Created using $10 Million lifetime gift tax exemptions and allocating portion of GSTT exemption Death benefit magnifies trust assets through leverage of premium amounts Dynasty Trust for Children & Grandchildren Dynasty Trust for Children & Grandchildren Beneficiaries Children or Grandchildren

  13. 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

  14. Dynasty Trust Planning Considerations • Generation-skipping transfer tax (GSTT) • Dynasty Trust helps leverage GSTT exemption • Proper use of GSTT exemption preserves assets for future generations • Rule against perpetuities • Dynasty Trust usually created in state without rule against perpetuities (RAP)* • In state with RAP, Dynasty Trust term limited to life spans of named beneficiaries, plus 21 years *Clients must seek advice from competent legal counsel concerning trust setup matters.

  15. Intentionally Defective Grantor Trusts One in the Same for Income Tax Purposes Separate Taxpayer for Estate and Gift Tax Purposes Dynasty Trust Dynasty Trust Grantor

  16. Benefits of a Dynasty Trust • Effective way to transfer significant assets to successive generations of beneficiaries • Provides creditor protection • Divorce consequences • Irresponsible spending • Continuity of asset management • May contain incentives for beneficiaries

  17. Private Foundation • Generations of a family can manage charitable bequests • Heirs can serve on foundation board • Reasonable expenses may be paid to board and travel for foundation business may be reimbursed • Removes assets from taxable estate

  18. Private Foundation (cont.) • Reduced federal income tax deduction • 30% of AGI • Deduction for property based on cost basis rather than fair market value • Self-dealing rules • Minimum distribution requirements

  19. The Hilton Family Foundation BarronHilton (Age 80) 97% 3% Family Foundation $2.3 Billion Children & Grandchildren $71 Million Source: USA Today, December 27, 2007

  20. Private Foundation with a Legacy Trust • Grandparents • (Grantors) Trust created using $5.34Million lifetime gift tax exemption and allocating portion of GSTT exemption Legacy Trust for Children & Grandchildren

  21. Private Foundation with a Legacy Trust (cont.) • Grandparents • (Grantors) Initial Contribution Legacy Trust • Family Foundation Trust Owns Survivorship Lifefor Children or Grandchildren

  22. Private Foundation with a Legacy Trust (cont.) • At Death: Legacy Trust 100% of Estate Trust Owns Survivorship Lifefor Children or Grandchildren • Family Foundation • Results: • Reduced estate taxes • Protected wealth for generations • Community influence for heirs • Beneficiaries • Children or • Grandchildren Can serve on board & direct bequests

  23. What Is a Blended Family? A blended family is one to which the husband and/or wife bring together children and assets from a previous relationship.

  24. Blended Family Estate Planning Issues • No Plan + Family Fallout • Traditional Plan Fosters Family Discord

  25. What Is a Blended Family? Current net worth: $15 Million Carol (Age 65) Mike (Age 65) Previous Marriage Marsha Jan Cindy Greg

  26. Carol & Mike’s Living Trust Carol (Age 65) Mike (Age 65) Living Trust $15 Million

  27. Carol & Mike’s Living Trust (cont.) Carol (Age 65) At Mike’s Death: Survivor’s Trust$7.5 Million Available to Carol during her lifetime Exemption Trust$5.34 Million QTIP Trust$2.16 Million

  28. Carol & Mike’s Living Trust (cont.) At Carol’s Death: Survivor’s Trust$7.5 Million Marsha Exemption Trust$5.34 Million Jan Greg Cindy QTIP Trust$2.16 Million

  29. Blended Family–Younger Second Spouse • Carol is 32 and Mike is 71 • Mike has three children from a previous marriage • Mike is currently worth $10 Million

  30. Blended Family–Younger Second Spouse (cont.) Current net worth: $10 Million Carol (Age 32) Mike (Age 71) Previous Marriage Greg Peter Bobby

  31. Carol & Mike’s Living Trust–Younger Second Spouse Carol (Age 32) Carol (Age65) Mike (Age 71) At Carol’s Death in 40–50 years: At Mike’sDeath: Greg Exemption Trust$5.34 Million Living Trust$10 Million Peter QTIP Trust$4.66 Million Available to Carol during her lifetime Bobby

  32. Mike’s Living Trust & Dynasty Trust Carol Mike DynastyTrust (with Life Insurance) At Carol’s Death... Greg Peter Bobby At Mike’s Death... Living Trust $10 Million Next Generation... Greg Jr. PeterJr. BobbyJr. QTIP Trust$4.66 Million Next Generation... Greg III Peter III Bobby III Exemption Trust$5.34 Million

  33. Planning for Blended Families • Establish a Revocable Living Trust • Including marital and bypass trusts • Purchase a separate life insurance policy to specifically benefit only those children born of a previous marriage • Consider establishing a Legacy Trust if facing potential estate tax liability or desire third-party trustee control of trust funds

  34. Planning for Blended Families (cont.) • At death, trust receives death benefit • Children from insured’s prior relationship will receive these proceeds free of federal estate and income tax • Clients can make sure bulk of their assets is available for current spouse and children of second relationship or marriage

  35. Planning for Non-Married Couples • Less than half of all households (48%) are husband and wife households. • Between 2000 – 2010: • 40% increase in opposite-gender partner households • 80% increase in same-gender partner households. • Unmarried households are most common in New England, Washington DC, and the Pacific coastal states.

  36. Planning for Non-Married Couples (cont.) • Differing state common-law/domestic partner laws • Loss of survivor retirement benefits • Asset titling • Real estate planning • Equalizing estates • Loss of unlimited marital deduction • Limitations in gifting

  37. Planning Tools • Agreements • Cohabitation • Partnership • Dissolution • Grantor Retained Interest Trust • Legal Adoption of Partner

  38. Planning for Nonmarried Couples “Naming one another as life insurance beneficiaries—an all-around simple way of transferring assets—is the great equalizer.” — Russell P. Love, McKenna Long & Aldrich

  39. Planning for Nonmarried Couples (cont.) • Tom and Pat, both 62 • $10 Million • No children • Tom has an estate of $8.5 Million while Pat has an estate of $1.5 Million

  40. Planning for Nonmarried Couples (cont.) Net worth: $1.5 M Net worth: $8.5 M Pat (Age 62) Tom (Age 62) • Annual gifts of $14,000 per beneficiary • $5.34 million lifetime gift tax exemption Legacy Trust with Life Insurance Living Trust $8.5 M Living Trust $8.5 M Living Trust $1.5 M

  41. Planning for Nonmarried Couples (cont.) At Tom’s Death... Pat (Age 62) Legacy Trust with Life Insurance Living Trust $8.5 M Living Trust $8.5 M Living Trust $1.5 M Available to payestate taxes or make distributions Tom’s Family

  42. What Is a Special Needs Trust? • Preserves disabled person’s quality of life without endangering eligibility for government programs. • Trust funds supplement—do not replace—government assistance • Two Types: • Self-settled • Third party

  43. Self-Settled Special Needs Trust • Funded with the disabled person’s “own” assets • At disabled beneficiary’s death, remaining trust assets are used to pay back the government for benefits received during lifetime • Laws and services vary from state to state

  44. Third-Party Special Needs Trust • Created and funded by third parties such as parent, grandparent or sibling through will, gift or other transfer of assets • When disabled beneficiary dies, remaining monies can be left directly to a designated contingent beneficiary

  45. Special Needs Trusts • How Do They Work? Disabled Loved Ones Grantors Premiums paid for policy on life of grantor At death, proceeds paid to the trust Eligibility for government benefits maintained SSI & Medicaid

  46. Avoiding Common Mistakes • Coordinate planning efforts with all family members so as to not frustrate the benefits of Special Needs Trust • Uniform Transfer/Gift to Minors Account • Direct inheritance

  47. Planning a Legacy • Ask fact-finding questions • Determine client’s goals and circumstances • Propose strategies that are tailored to accomplish goals and address circumstances

  48. This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. Transamerica Life Insurance Company (“Transamerica”) and its representatives do not give tax or legal advice. This presentation is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of January 2014. • OLA 1865 0114

  49. Walls Around Wealth OLA 1865 0613

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