10/23/2014. Life Insurance And The New Wealth Transfer Era. Disclosures. CHANGE The Never-Ending Force in Society

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1 Life Insurance And The New Wealth Transfer Era Disclosures The Voya Life Companies and their agents and representatives do not give tax or legal advice. The strategies suggested may not be suitable for everyone and you should consult with your tax and legal advisors before implementing any of the strategies suggested here. These materials are not intended to and cannot be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this document. The taxpayer should seek advice from an independent tax advisor. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All are members of the Voya family of companies. All guarantees are based on the financial strength and claims paying ability of the issuing insurance company who is solely responsible for all obligations under its policies. CHANGE The Never-Ending Force in Society It is change, continuing change, inevitable change, that is the dominant force in society today. No sensible decision today can be made without taking into account, not only the world as it is, but world as it will be. Asimov 1

2 AGENDA The Revolution in Federal Wealth Transfer Rules Life Insurance Policy Design Interesting Life Insurance Opportunities 40 Years In Wealth Transfer Taxes $60,000 exemption $160,000 exemption $400,000 exemption $600,000 exemption $675,000 exemption 40 Years In Wealth Transfer Taxes $1,000, $1,500, $2,000, $3,500, Unlimited $5,000, $5,120, $5,340,000 2

3 Where Are We in 2014? $5,340,000 personal estate, gift & GST exemptions It s Going UP! Adjusted annually for inflation Working Together married couples may transfer nearly $11,000,000 tax free Portability for first spouse s exemption (with 706 filing) Maximum Tax Rate is 40% Bad News The way we used to sell large policies doesn t work as often as it used to fewer people need estate tax liquidity Many well-to-do people don t have to worry about wealth transfer taxes wealth transfer planning has changed Only.2% of US citizens are projected to have a tax problem The federal estate tax is no longer the tax with the biggest bite Good News! Estate Tax Only Part of ATRA It Was A Package Deal Income and Investment Taxes Have Risen A Lot! Income taxes new 39.6% bracket Personal Exemption & Itemized Deductions Phased Out Net Investment Income Tax (3.8%) on passive income Minimum Dividends and Capital Gains Tax Rates Increase from 15% to 20% or 23.8% for some taxpayers 3

4 More Good News Life Insurance retained all its existing tax preferences Income tax-free death benefits Tax-deferred cash value growth Income tax-free distributions And Then Got Some More Cash Value Growth and Distributions aren t subject to the 3.8% net investment tax Good News! The Psychology of Taxation has changed Planning to avoid income/investment taxes is now at least as important as planning to avoid estate taxes Income and Investment Taxes are PERSONAL; they impact a lot of people not rich enough to worry about federal estate taxes Clients don t pay their own estate taxes, but they do pay their own income taxes Good News! Life Insurance is Much Easier to Use! --Fewer People Needs ILITs & Gifts More People Can Own Their Own Policies Ancillary Costs Are Reduced/Eliminated --Drafting & administering ILITs A Group of Wealthy People Can Use CVLI without Complex Planning 4

5 The Concept of Asset Efficiency Different assets lose value because they are subjected to different costs and different taxes Some assets require fewer costs and generate fewer taxes Asset Efficiency tries to estimate an asset s net spendable value An asset s Efficiency can vary depending on whether it is owned an asset or inherit it The Concept of Asset Efficiency Asset Efficiency sets up a discussion about how clients will use their assets to produce retirement income Which assets should be consumed first? Which assets should be held on to as long as possible? How assets and income may change after a spouse dies Assessing Asset Efficiency--Owners Considerations For Asset Owners: Regular management and maintenance costs Costs of Converting an asset into cash Potential for generating growth or income Taxation of that growth /income--how taxed and at what rate? 5

6 Assessing Asset Efficiency Example Stocks Individual Retirement Account / 401(k) account Home / Residence Non-Qualified Annuity Cash Value Life Insurance Assessing Asset Efficiency--Inheritors Considerations For Inheritors: Regular management and maintenance costs Costs of Converting asset into cash Potential for generating growth or income Will growth /income be taxed? If so, how and what rate? Availability of Step Up In Basis at owner s death Federal and State estate / inheritance taxes CVLI Can Be Quite Efficient Income tax-free benefits Cash value growth Cash value distribution Death benefits accelerated benefits for some illnesses Flexibility in policy management and use of benefits It s an asset both insureds and beneficiaries will want to keep to the end 6

7 Assessing Asset Efficiency Bottom Line on Asset Efficiency: Some assets are more efficient than others What costs and taxes have to be paid? When must they be paid? What s the Net Value to the Owner? What s the Net Value to an Inheriting Spouse, Child or Grandchild? Cash Value Life Insurance Is An Asset Most insurance premiums are an expense Not cash value life insurance it s an asset Why? Because it has residual value that carries forward from year to year Here s What CPA Ed Slott Said On PBS: In these volatile and uncertain times, you need to focus on investments that give you control, options, flexibility and certainty. And you want to remove both stock market risk and tax risk. And you want a guarantee. And you want it all tax free. That s a tall order, but you can get all of that with certain kinds of permanent life insurance. Ed Slott, CPA 7

8 The Dual Nature of Cash Value Life Insurance Life Insurance is Easier to Use! CVLI has two important components: Income tax free death benefits Tax-advantaged cash values The tax law changes create opportunities for well-to-do people to capitalize on BOTH A New Story To Tell Yesterday s Life Insurance Value Proposition You pay for it, but you can t own it It benefits everyone except you How much can I get and how little can I pay for it? Today s New Value Proposition You can own it and manage it yourself You can benefit from it yourself while you re alive You can direct the death benefits to those you love when you die Personal Ownership Is Powerful What s In This For Me? Potentially Quite A Lot Insured benefits first! Emergency Funds Supplemental Retirement Income Funds for Chronic, Critical, or Terminal Illness expenses Loan Collateral 8

9 Retirement Financial Defense Policy Design Alternatives Making the Most of Personal Ownership requires re-thinking optimal policy design Traditional Design uses level death benefits (often with insurer guarantees) Traditional Way Level Death Benefit Design Advantages: Predictable death benefit Insurer may have the risk of policy performance Disadvantages: Limited cash value growth and access Little flexibility with premium payments Death benefits don t grow with inflation The longer the insured lives the lower the IRR 9

10 Let s Compare Level Death Benefit Large DB from day one Some cash value Works best with death at or before life expectancy Increasing Death Benefit Low early death benefit DB increases over time Cross over is in year 18, CV is $1.0 more CV is always larger Works best when death is after life expectancy Ed Slott, CPA Speaking on PBS Believe it or not, life insurance is an area where you might want to invest the maximum you can into the policy. If you are approaching retirement or already retired and looking to shelter more of your taxable money into a tax-free vehicle, this is the place for you. But the mistake most people make at this stage of life is trying to pay the least for the policy. How can this be a mistake? Because this is an investment, not an expense... if you were saving money in a bank account, would you want to put in the most or the least? Ed Slott, CPA Jonathan Blattmachr Famous WT Attorney Cash value policies are structured in many ways. The most efficient cash value policy, if there s a significant chance the insured will live to or beyond actuarial life expectancy, is one that provides the minimum initial death benefit, but maximum cash value. Although the initial death benefit obviously will be lower with such a maximum cash value policy, it ultimately will provide a greater death benefit at older ages and almost always will provide greater cash value. Trusts & Estates June,

11 Increasing Death Benefit Design Advantages More cash value and access to it Increased financial flexibility More death benefit when living past LE Disadvantages Beneficiaries get less with death before LE Can this disadvantage be avoided? Increasing Death Benefit Design #2 Consider a combination of term insurance and cash value life insurance Term insurance component provides more death benefits if client dies during the term Term insurance premium will reduce total cash values available to the insured Summary Change Creates Opportunities The Revolution in Wealth Transfer Planning Switch From Estate Tax Planning To Asset Efficiency Planning CVLI fits well into the new era of wealth transfer 11

12 Summary CVLI is an ASSET, not an expense New Value Proposition for many well-to-do people Consider the increasing death benefit policy design CHANGE The Never-Ending Force Change is the Law of Life. Those who only look to the past or the present are certain to miss the future. JFK Make Change Your Friend. McCarthy 12