Estate Planning

1. Estate Planning Chapter 11: Life Insurance in Estate Planning

2. Types of Life Insurance (1 of 2) • Term insurance • Must die during term • Funds temporary needs • Cost as you get older • Universal life • Term policy with a cash accumulation • Premium is flexible • Funds temporary needs

3. Types of Life Insurance (2 of 2) • Variable universal life • Universal life with the ability of the owner to determine how to invest the cash accumulation • Whole life • Permanent insurance • Generally level premium • Funds permanent need

4. Types of Annuities (2 of 2) • Fixed • Payments don’t change • Joint and survivor • Term certain • Rate guarantees: teaser rates • Guaranteed Return (GRA): will always receive investment even in surrender • Market Value (MVA): if surrender and rates have gone up, lose value just like a bond • Funds are not in sub accounts

5. Types of Annuities (2 of 2) • Variable • Payments change based on investment performance • Can make investment selections in sub accounts • Guaranteed Retirement Income Benefit (GRIB): • Income based on account value on account anniversary • Guaranteed Lifetime Withdrawal Benefits (GLWB): • Rider with a fee • Even if market value of accounts fall, can maintain withdrawals

6. Types of Annuities (2 of 2) • Immediate • Payments begin now • Deferred • Payments begin in future • Can invest unlimited amount • Surrender charge generally in first seven years • 10% penalty if withdraw funds before 59 1/2 • Single premium or periodic payment of premiums

7. Types of Annuities • Longevity Annuities (Deferred Income Annuity) • Premiums limited to lesser of: • $100,000 • 25% of account balance • Payments must begin by at least age 85 • Invest $50,000 at age 55 • At age 65: $6168/year male $5837/year female • At age 85: $45733/year male $40362/year female • Can be joint and survivor annuity • Funds used to purchase contract not subject to RMD

8. Objective of Life Insurance • Protect income stream for beneficiaries • Stay at home soccer dad • A source of funds for education • Type of insurance for this? • Provide liquidity at death • Type of insurance for this? • A source for retirement income • Type of insurance for this? • Create or sustain family wealth • Type of insurance for this?

9. Parties to a Life Insurance Policy • Owner • Person who has title to the policy • Insured • Person whose life is covered by the policy • Beneficiary • Person entitled to receive the death benefit once the insured dies

10. Income Tax Treatment of Life Insurance (1 of 4) • General • No income tax • Transfer for value exception • Income tax on proceeds if transferred for value • Except transfers to: • The insured • Partner of insured • Partnership/corporation where insured is partner/ shareholder or officer • Gift of policy

11. Income Tax Treatment of Life Insurance (2 of 4) • Settlement or cash surrender • Lump sum benefit • Annuity • Income taxation occurs to extent of interest • Policy dividends • Return of basis • Loans • No income tax consequences

12. Income Tax Treatment of Life Insurance (3 of 4) • Policy exchanges 1035 • Life insurance can be exchanged for another insurance policy or an annuity tax free • Also long-term care policy • Also annuity for an annuity • Premiums in initial year of policy??? • An annuity can not be exchanged for an insurance policy tax free!!

13. Income Tax Treatment of Life Insurance (4 of 4) • Accelerated death benefits • Viatical settlements are income tax free • Need chronically ill or terminally ill • Chronically Ill • Certified by doctor as being unable to perform at least two activities of daily living • Terminally Ill • Certified by a doctor to die from illness within two years • No income tax consequences even if miraculous recovery

14. Gift Tax Treatment of Life Insurance (1 of 3) • Changing the beneficiary on the life insurance policy • No gift tax consequences • You could always change it again

15. Gift Tax Treatment of Life Insurance (2 of 3) • Outright gift of a life insurance policy • Premium pay status • If premiums are being paid then the gift tax value is the sum of the policy’s interpolated terminal reserve plus unearned premiums • Paid up policy • If paid up where premiums are no longer necessary then the gift tax value is the replacement cost of the policy

16. Gift Tax Treatment of Life Insurance (3 of 3) • Gifts of premiums • The gift is equal to the cash transferred • If paid to a trust – need a Crummey provision • Gifts of life insurance to charities • Income tax deduction equal to the fair market value of the policy • Why would you do this???

17. Federal Estate Tax Treatment of Life Insurance • I.R.C. Sec 2033 – Life insurance on someone else’s life • The interpolated terminal reserve plus any unearned premium will be included in the gross estate • Life insurance on the insured/decedent’s life • Generally he death benefit will be included in the gross estate unless no incidents of ownership • I.R.C. Sec. 2035 – The three year rule • Policies transferred within three years will be included in the gross estate • Exception: does not apply to sale of policy

18. Creation of a Life Insurance Trust (ILIT) • Trust holds life insurance policy! • Utilizing the annual exclusion • Crummey provision • Lapsed powers (5x5 rule) • Continuing power to appoint • Avoid requiring the trust to pay proceeds to estate for taxes or administration expenses because it causes inclusion in the gross estate • Provide liquidity • Allow trust to purchase assets of the estate • Allow trust to loan money to the estate