Family Split Dollar Life Insurance A FLEXIBLE ESTATE PLANNING STRATEGY FOR A LOW INTEREST RATE ENVIRONMENT

Transcription

1 Family Split Dollar Life Insurance A FLEXIBLE ESTATE PLANNING STRATEGY FOR A LOW INTEREST RATE ENVIRONMENT The Prudential Insurance Company of America Ed. 05/ Exp. 11/25/2017

2 ABOUT THIS BROCHURE This brochure is designed to provide general information about the subject matter covered. It should be used with the understanding that we are not giving investment, legal, accounting, or tax advice. Such services should be provided by your own professional advisors. Accordingly, any information in this document cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code. Consult your own professional advisors on how any product discussed may benefit your particular situation and how best to utilize any such product.

3 FAMILY SPLIT DOLLAR What if there was a cost effective estate planning strategy that was especially attractive in a low interest rate environment? And what if that strategy also allowed you to: Loan money to benefit your family, with repayment secured by a dependable asset? Receive cash interest payments in retirement years? Potentially provide your spouse with access to a cash asset? Leverage loaned amounts into an income and estate tax-free death benefit? It s possible when your estate plan includes a family split dollar arrangement implemented with life insurance and an irrevocable life insurance trust (ILIT). STRATEGY COMPONENTS VARIABLE UNIVERSAL LIFE INSURANCE IRREVOCABLE LIFE INSURANCE TRUST (ILIT) FAMILY SPLIT DOLLAR ARRANGEMENT Provides a death benefit that can build cash value and offers funding options. A grantor gives up all rights in the assets that are transferred to the trust. The grantor cannot revoke, terminate, or modify the trust. In turn, the life insurance death benefit will not be included in the grantor s estate and not subject to federal estate taxes, preserving more of his or her assets for heirs. Splits the costs and benefits of a life insurance policy between two parties; generally, (1) an ILIT and (2) the ILIT s creator (the grantor). The ILIT owns the life insurance policy and collaterally assigns back to the grantor/insured an amount equal to the premiums paid, plus any accrued interest. The Family Split Dollar arrangement combines the potential tax benefits of an ILIT with the flexibility of a premium payment plan that takes advantage of today s low interest rate environment. 1

4 FAMILY SPLIT DOLLAR How Family Split Dollar Life Insurance with a Spousal Lifetime Access Trust Works PARTIES AGREE ON THE LOAN TERMS, INCLUDING THE ANNUAL INTEREST RATE. GRANTOR LOANS CASH TO THE ILIT AND ESTABLISHES ANNUAL INTEREST RATE. TRUSTEE USES CASH TO BUY LIFE INSURANCE. TRUSTEE CAN MAKE INTEREST PAYMENTS FROM TRUST ASSETS AND/OR GRANTOR CAN MAKE ANNUAL GIFTS OF LOAN INTEREST. SPOUSE HAS ACCESS TO EXCESS TRUST VALUES, IF ANY. TRUST SHARE OF NET DEATH BENEFIT PROCEEDS HELD FOR BENEFIT OF SPOUSE AND HEIRS You, with your tax and legal advisors, establish an Irrevocable Life Insurance Trust (ILIT) and name a trustee that can be your spouse, your sibling, an adult child, or a trusted friend or associate. The trustee applies for a cash value life insurance policy on your life. You will not have direct ownership in the life insurance policy and you won t be able to withdraw cash values or change the beneficiary. However, the trust may be structured to give your spouse or other party access to some of the policy cash value. You establish a Family Split Dollar Arrangement where you, as the insured grantor, will pay the life insurance premiums, and your heirs or your spouse are designated as trust beneficiaries. You loan each life insurance premium amount to the trust; each loan will bear its own interest rate, consistent with market rates. Your right to repayment is secured by a collateral assignment of the policy s cash value and death benefit. As a borrower, the trust must pay interest on the premium loans, consistent with current low market rates, to you. The interest payment may be in cash, or imputed; that is, if the trustee fails to pay the interest and you do not demand payment, under the split dollar rules, you have made a gift of the amount. In some arrangements, the trustee has the discretion to pay the interest in cash or accrue it. The loans can be repaid with a portion of the policy s cash value or death benefit. If repaid at death, the proceeds in excess of the outstanding loan balance can be received by the trust free of federal income* and estate tax and distributed to your heirs, as per your wishes, according to the trust terms. *Per IRC 101(a). 2

5 Two Hypothetical Examples: End of Year YEARS AGO. YOU WERE 52, IN GOOD HEALTH, AND FUNDED YOUR TRUST TO PURCHASE A VARIABLE UNIVERSAL LIFE INSURANCE POLICY AT THE PREFERRED NON-TOBACCO CATEGORY. AT THE END OF YEAR 15. YOU VE LOANED $250,000 PLANNED ANNUAL PREMIUMS FOR 10 YEARS FOR A $10 MILLION INITIAL DEATH BENEFIT, YOUR NON-GUARANTEED RATES AND CHARGES ARE A NET RATE OF 7.14% ON SEPARATE ACCOUNT ASSETS, 3.00% AVERAGE SPLIT DOLLAR LOAN INTEREST RATE ALL YEARS. EXAMPLE ONE: END OF YEAR 15 (AGE 67) RESULTS (8.0%) At the end of policy year 15, the policy death benefit is $10 million and the cash value is $3,672,461, of which $2.5 million belongs to you as security for 10 loans of $250,000 each. When you die, $2.5 million is payable to your estate from the policy death benefit, with the rest going to your heirs. If any loan comes due prior to the grantor s death, the trustee may repay it using policy values, or the grantor can forgive the debt (resulting in a gift), or can renegotiate the debt with the trustee at new terms. DEATH BENEFIT OF $10 MILLION $2.5 MILLION OF THE CASH VALUE BELONGS TO YOU AS SECURITY FOR TEN LOANS OF $250,000 EACH $2.5 MILLION OF THE DEATH BENEFIT IS PAYABLE TO YOUR ESTATE AS REPAYMENT FOR THE LOAN IF THE LOAN IS NOT REPAID, HEIRS WILL RECEIVE $7.5 MILLION DEATH BENEFIT POLICY CASH VALUE: $3,672,461 POLICY DEATH BENEFIT: $10,000,000 TOTAL OUTSTANDING DEBT: $2,500,000 This information is hypothetical and not representative of any particular product. A personalized illustration must be provided before purchasing a variable life insurance product. The illustration can be based on a return assumption you select (subject to a 12% maximum.) A supplemental illustration can be generated based on actual historical fund performance. 3

6 No one knows when interest rates will rise. Until then, a Family Split Dollar arrangement provides a tax-advantaged opportunity. EXAMPLE TWO: END OF YEAR 15 (AGE 67) RESULTS (0.0%) You ve paid $250,000 planned annual premiums for 10 years for a $10 million initial death benefit. Your non-guaranteed rates and charges are 0% annual rate of return on Separate Account assets, 3.00% average split dollar loan interest rate all years. At the end of policy year 15, the policy death benefit is $10 million and the cash value is $0. When you die, $2.5 million is payable to your estate from the policy death benefit with the rest going to your heirs. If any loan comes due, the trustee may have insufficient policy values to repay it. You can forgive the debt (resulting in a gift), or you can renegotiate the debt with the trustee at new terms. Assuming maximum rates and charges and 0.00% (-0.86%) annual rate of return on Separate Account assets, the policy lapses in year 40 (grantor s age 91). If the premium loans totaling $2.5 million are still outstanding, the grantor may be deemed to have made a taxable gift or bequest to the trust in that amount. POLICY CASH VALUE: $0 POLICY DEATH BENEFIT: $10,000,000 TOTAL OUTSTANDING DEBT: $2,500,000 DEATH BENEFIT OF $10 MILLION THE CASH VALUE IS $0 $2.5 MILLION BELONGS TO YOU AS SECURITY FOR TEN $250,000 LOANS OF THE DEATH BENEFIT THE POLICY CANNOT PAY ANNUAL LOAN INTEREST YOUR SPOUSE HAS NO CASH VALUE TO ACCESS $2.5 MILLION OF THE DEATH BENEFIT PAYABLE TO YOUR ESTATE HEIRS WILL RECEIVE $7.5 MILLION DEATH BENEFIT This information is hypothetical and not representative of any particular product. A personalized illustration must be provided before purchasing a variable life insurance product. The illustration can be based on a return assumption you select (subject to a 12% maximum.) A supplemental illustration can be generated based on actual historical fund performance. 4

7 A FINANCIAL LEADER FOR OVER 140 YEARS Prudential Financial is a worldwide financial leader with a long tradition of serving the public interest. Prudential Financial has approximately 50 million customers. The well-known Rock symbol is an icon of strength, stability, expertise, and innovation that has stood the test of time.

8 Life insurance is issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY and/or NJ), and Pruco Life Insurance Company of New Jersey (in NY and/or NJ). Variable Life Insurance policies are offered through Pruco Securities LLC (member SIPC). All are Prudential Financial companies located in Newark, NJ. Each is solely responsible for its own financial condition and contractual obligations. This concept may be suitable for you only if you will not rely on the assets for living expenses for your expected lifetime(s). As with most financial strategies, there are a number of considerations that require the attention of qualified tax and legal advisors. You should consider the investment objectives, risks, and charges and expenses carefully before investing in the contract and/or underlying portfolios. This and other important information can be found in the prospectus and, if available, the summary prospectus. A copy of the prospectus may be obtained from You should read the prospectus carefully before investing. It is possible to lose money by investing in securities. We do not provide tax, accounting, or legal advice. Clients should consult their own independent advisors as to any tax, accounting, or legal statements made herein. Life insurance policies contain exclusions, limitations, reductions of benefits, and terms for keeping them in force. Your financial professional can provide you with costs, complete details, and a prospectus. Guarantees are based on the claims paying ability of the issuing insurance company and do not apply to the underlying investment options. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities Prudential Financial, Inc. and its related entities. Investment and Insurance Products: Not Insured by FDIC, NCUSIF, or Any Federal Government Agency. May Lose Value. Not a Deposit of or Guaranteed by Any Bank, Credit Union, Bank Affiliate, or Credit Union Affiliate.