issued through a U.S. carrier. PRIOR REPORTS: 13-08; 12-41; 12-28; planning with life insurance. WHY CONTINUE TO USE TOLI

Transcription

1 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life AALU AALU Washington Washington Report is published by by AALUniversity, a knowledge service AALU. trusted source actionable technical marketplace knowledge AALU members nation s nation s most advanced life most advanced life Report AALU is prepared Washington by Report AALU staff is prepared Greenberg by AALU Traurig, staff one Greenberg nation s Traurig, leading law one firms in tax nation s leading wealth management. law firms in tax wealth management. Steven B. Lapidus Richard Rebecca A. Manicone Sirus Rebecca Counsel Emeritus Manicone Counsel Stuart Lewis Emeritus Stuart Lewis Topic: Funding Trust-Owned Life Insurance Selecting Best Topic: Option. Using Life Insurance in U.S. Estate Tax Planning Non-U.S. Citizens & Residents. MARKET TREND: Although a higher federal tax exemption means fewer MARKET families will TREND: face federal As eign tax exposure, nationals continue use trusts to view in life U.S. as a desirable plans will continue location to serve both numerous long-term practical residence tax planning investments, needs. re is a growing interest in life planning se individuals to address corresponding SYNOPSIS: Planning increase with in trust-owned ir U.S. transfer life tax exposure. ( TOLI ) must consider funding premiums into trust. Numerous funding methods exist, SYNOPSIS: including: (1) annual Life exclusion gifts, policies (2) lump-sum issued by gifts U.S. carriers gift on GST tax life a noncitizen, exemption, non-resident (3) split-dollar arrangements, U.S. ( NCNR ) (4) installment receive different sales to ILITs treatment or (5) U.S. transfer a combination tax purposes re, with than each some method assets. varying A NCNR in terms is subject administrative to U.S. gift tax only on complexity gifts real tax-efficiency. tangible property physically located in U.S. at time gift to U.S. tax only on assets deemed to have a U.S. situs at time TAKE AWAYS: NCNR s TOLI death. is beneficial A life creditor policy, beneficiary wher protection insuring a NCNR or anor purposes, person, wealth management, is an intangible state asset tax U.S. planning, gift tax purposes. income tax Thus, a NCNR can planning. give a policy selection to anor best person premium without funding imposition method will gift depend tax, regardless on each family s policy s particular cash value. circumstances For U.S. goals, tax purposes, level if on-going NCNR support owns a policy y will have from ir, tax, legal advisors (including policy insuring his or her life, death benefits paid from policy at NCNR s funding reviews). Generally, annual exclusion or lump sum gifts are most death are not U.S. situs property are not subject to U.S. tax, even if efficient approach individuals with s closer to $5 million federal issued through a U.S. carrier. tax exemption. Larger s, however, will benefit greatly from combining se gifts with more advanced funding methods, such as loans or installment TAKE AWAY: Life fers a relatively simple straightward sales, particularly given current, low interest environment. technique to address varied U.S. transfer tax planning needs NCNRs. y can use life to make gifts to family members who are U.S. persons, to fset or provide liquidity to pay U.S. taxes on U.S. situs property without inclusion policy proceeds in ir U.S., as a Prior to recent tax law changes, holding life through an irrevocable trust pre-immigration tax planning tool. NCNRs who intend to become temporary was stard protocol planning, it continues to serve many practical or permanent U.S. residents or have U.S. real property, ownership interests in purposes. Individuals, however, must consider practicalities trust funding a U.S. business (including stock issued by a U.S. corporation), /or family in order to select most suitable tax-effective premium funding method members who are U.S. citizens or residents may have particular interest in TOLI policies. planning with life. Under Internal Revenue Code ( IRC ), life policies issued by U.S. carriers Bee 2013, on most life individuals a non-citizen, placed life non-resident into an irrevocable U.S. ( NCNR ) life receive different treatment trust ( ILIT ) in U.S. order transfer to prevent tax taxation purposes than life some assets. Utilizing life proceeds in in insured s planning. NCRSs permanent requires increase a basic in understing federal U.S. transfer tax exemption tax rules to $5.25 applicable million, to 1 however, NCNRs raises ir question impact on wher life. many families still need ILITs tax planning. NCNRS AND THE U.S. TRANSFER TAX SYSTEM Yet TOLI remains beneficial numerous reasons. A trust fers creditor Who protection is a NCNR? beneficiaries While (as U.S. in cases citizens bankruptcy residents or divorce) 1 are subject provides to U.S. transfer centralized taxes ( on possibly ir worldwide pressional) assets, wealth NCNRs management, are subject particularly to U.S. transfer taxes younger only beneficiaries on assets who having are a not U.S. prepared situs to at hle time large or sudden gift or ascensions NCNR s death. to wealth. Furr, ILITs limit exposure to state taxes in states with separate tax systems or no state income taxes, which typically have much lower determination exemptions than as to who federal is a U.S. tax resident exemption U.S. amount. transfer tax purposes differs from that income tax purposes. A U.S. resident U.S. transfer tax purposes is a non-citizen who has his or her domicile in U.S. (i.e.,

2 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life individual currently resides in U.S. with no definite present intent to leave). 2 Accordingly, a NCNR U.S. transfer tax purposes is an individual who is not a U.S. citizen does not have a U.S. domicile. Topic: Funding Trust-Owned Life Insurance Selecting Best Report is published by Option. AALUniversity, determination a a person s domicile is subjective. IRS considers facts circumstances knowledge surrounding service individual s contacts with U.S. to assess wher individual has established a U.S. MARKET TREND: Although a higher federal tax exemption means fewer AALU. domicile, including trusted source amount time families individual will face federal spends in tax exposure, U.S., visa status, use trusts location in life banking actionable business connections, technical family residences, plans will continue family to serve members numerous or practical social contacts, tax planning needs. written marketplace declarations knowledge individual has made regarding his or her domicile. 3 AALU members nation s SYNOPSIS: Planning with trust-owned life ( TOLI ) must consider most What advanced Assets are life Subject to U.S. Transfer funding Taxes? premiums NCNRs into are trust. subject Numerous to U.S. funding methods gift exist, taxes only on U.S. situs assets (those located or including: deemed located (1) annual in exclusion U.S.). gifts, Note (2) that lump-sum rules gifts determining gift GST tax an asset s situs can be complex,, as exemption, discussed below, (3) split-dollar can differ arrangements, depending (4) on installment wher a sales U.S. gift to ILITs or or (5) tax Report will apply. is prepared U.S. by GST tax applies a only combination if original re, transfer with each was method subject varying to eir in terms U.S. gift administrative or tax AALU was made staff to a skip Greenberg person (e.g., a grchild complexity or more tax-efficiency. remote descendant).4 Traurig, one nation s leading What Assets law firms Are in Subject tax to U.S. TAKE Gift Tax? AWAYS: NCNRs TOLI are is beneficial subject to U.S. creditor gift tax beneficiary only on gifts protection real wealth tangible management. property physically located purposes, in U.S. wealth at management, time gift. state 5 se tax include: planning, income tax planning. selection best premium funding method will depend on each Greenberg U.S. real Traurig property. LLP family s particular circumstances goals, level on-going support Jonathan Tangible M. Forster personal property (automobiles, y will have jewelry, from ir art, furniture,, etc., tax, TPP ) legal physically advisors (including located policy in U.S. Domestic or eign currency (held funding as bills reviews). or coins) Generally, physically annual located exclusion in or lump U.S., sum including gifts are in a safe most deposit box. efficient approach individuals with s closer to $5 million federal Rebecca Cash gifts Manicone made in U.S., including checks tax exemption. wire Larger transfers s, drawn however, on a will U.S. benefit bank greatly account from - even combining if account is at a branch located outside se gifts with U.S. more advanced funding methods, such as loans or installment Counsel Emeritus sales, particularly given current, low interest environment. Gerald Gifts H. intangible Sherman property by a NCNR are not subject to U.S. gift tax, even if intangibles have a U.S. situs Stuart (such as Lewis U.S stocks bonds). What Assets Are Subject to U.S. Prior Estate to recent Tax? tax NCNRs law changes, are subject holding to life U.S. through tax on assets an irrevocable that have trust or are deemed to have a U.S. situs at was time stard protocol NCNR s death. planning, se include: it continues to serve many practical purposes. Individuals, however, must consider practicalities trust funding U.S. real property. in order to select most suitable tax-effective premium funding method TPP physically located in U.S. TOLI policies. Domestic or eign currency (held as bills or coins) physically located in U.S., including currency held in a safe deposit box. Stock a U.S. corporation or company, regardless physical location stock certificates. U.S. registered mutual funds (including Bee 2013, money most market individuals funds). placed life into an irrevocable life Nonbank cash deposits, such as cash certificates trust ( ILIT ) in deposit order to held prevent in U.S. taxation brokerage life firms Deposits with a U.S. branch a proceeds eign bank. in insured s. permanent increase in federal Certain contract rights enceable tax against exemption U.S. to persons. $5.25 million, 1 however, raises question wher many families still need ILITs tax planning. Cash deposits with a U.S. bank are not subject to U.S. tax, regardless wher account is held at a domestic or eign branch. 8 Yet TOLI remains beneficial numerous reasons. A trust fers creditor protection beneficiaries (as in cases bankruptcy or divorce) provides Tax Rates, Credits, Deductions. centralized NCNRs ( possibly are subject pressional) to same wealth transfer management, tax rates particularly applicable to U.S. persons graduated gift tax younger rates beneficiaries up to 40% who are a not flat prepared 40% GST to tax hle rate. large However, or sudden ascensions credits deductions available to a NCNR to in wealth. determining Furr, his ILITs or her limit U.S. exposure transfer to state tax liability taxes are more in states limited, with include following: separate tax systems or no state income taxes, which typically have much lower exemptions than federal tax exemption amount.

3 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life U.S. Gift Tax Gifts made by NCNRs are eligible gift tax annual exclusion ($14,000 per donee in 2013), 9 but Topic: Funding Trust-Owned Life Insurance Selecting Best Report NCNRs is published do not have by a lifetime unified credit to fset or taxable gifts. Option. 10 AALUniversity, Gifts to a U.S. a citizen spouse qualify unlimited gift tax marital deduction, but gifts to a non-u.s. knowledge citizen spouse service do not (regardless spouse s residency or domicile). Instead, an increased gift tax MARKET TREND: Although a higher federal tax exemption means fewer AALU. annual exclusion trusted source ($143,000 in 2013 families 11 ) applies will face to federal gifts to non-citizen tax exposure, spouses, use with trusts any excess in life being subject actionable to U.S. gift technical tax. plans will continue to serve numerous practical tax planning needs. marketplace Gift splitting knowledge is not available to a NCNR, even if his or her spouse is a U.S. citizen. 12 AALU members nation s SYNOPSIS: Planning with trust-owned life ( TOLI ) must consider most U.S. Estate advanced Tax life funding premiums into trust. Numerous funding methods exist, including: (1) annual exclusion gifts, (2) lump-sum gifts gift GST tax $5,250, tax exemption is not available to NCNRs. Rar, U.S. tax credit a exemption, (3) split-dollar arrangements, (4) installment sales to ILITs or (5) Report NCNR is prepared is limited by to $13,000, which a combination shelters only re, $60,000 with each in assets. method 14 varying in terms administrative AALU staff unlimited Greenberg tax marital complexity deduction is available tax-efficiency. bequests to non-citizen spouses only if assets Traurig, are placed one in a qualified nation s domestic trust (a so-called QDOT ). 15 leading Worldwide law firms debts in tax administration TAKE expenses AWAYS: may TOLI be is taken beneficial as deductions creditor only beneficiary in proportion protection that wealth U.S. management. bears to NCNR s purposes, worldwide wealth. management, To take such state deductions, tax planning, NCNR s income worldwide tax assets must be disclosed on U.S. planning. tax return selection something best most premium NCNR funding s are method reluctant will depend to do. on each Greenberg charitable Traurig deduction LLP is only family s available particular bequests circumstances to U.S. charities. goals, level on-going support y will have from ir, tax, legal advisors (including policy U.S. GST Tax. NCNRs do not have a funding separate reviews). exemption Generally, from annual U.S. exclusion GST tax. or lump sum gifts are most efficient approach individuals with s closer to $5 million federal Rebecca See attached Manicone chart a summary tax U.S. exemption. transfer Larger tax rules s, applicable however, to will NCNRs. benefit greatly from combining se gifts with more advanced funding methods, such as loans or installment Counsel TRANSFER Emeritus TAX TREATMENT sales, OF LIFE particularly INSURANCE given current, POLICIES low interest AND environment. PROCEEDS Stuart A life Lewis policy is an intangible PRIOR asset REPORTS: U.S. gift 13-08; tax purposes, 12-41; 12-28; regardless identity insured or wher policy was issued by a U.S. carrier. Accordingly, a NCNR s gift a life policy, wher policy insures life NCNR Prior or to anor recent tax person, law changes, is not subject holding to life U.S. gift tax. through 16 an irrevocable trust was stard protocol planning, it continues to serve many practical For U.S. tax purposes, proceeds purposes. from a Individuals, policy owned however, by a NCNR must consider that insures practicalities only NCNR s trust life funding are not U.S. situs property thus are in not order subject to select to U.S. most suitable tax on tax-effective NCNR s death premium even if funding policy method was issued by a U.S. carrier. 17 However, TOLI if policies. NCNR owns a policy issued by a U.S. carrier that insures life anor person, or a survivorship policy that insures NCNR anor person, that policy is deemed to be U.S. situs property even if or WHY insured CONTINUE also is TO a NCNR. USE TOLI value that policy will be included in NCNR s U.S. U.S. tax purposes if NCNR predeceases or insured. 18 Example 1: H W, both NCNRs, are trust insureds ( ILIT ) in under order a to survivorship prevent taxation policy issued life by a U.S. carrier that has a cash value $500,000. proceeds H holds in insured s policy.. If H predeceases permanent W, increase policy s in cash federal value will be included in H s U.S. tax exemption subjected to $5.25 U.S. million, tax 1 however, because raises policy question did not insure wher only many H. However, if policy passes to families W following still need H s ILITs death, death tax planning. benefits will not be subject to U.S. tax upon W s death because W, as a NCNR, held a policy insuring only her life, which is not U.S. situs property. Yet TOLI remains beneficial numerous reasons. A trust fers creditor protection beneficiaries (as in cases bankruptcy or divorce) provides LIFE INSURANCE PLANNING centralized OPPORTUNITIES ( possibly FOR pressional) NCNRSwealth management, particularly younger beneficiaries who are not prepared to hle large or sudden ascensions Like U.S. persons, NCNRs can use life to wealth. Furr, to fset ILITs U.S. limit exposure tax on to state U.S. assets, taxes provide in states liquidity with payment such taxes, enhance separate amount tax assets systems or NCNR no state can income pass to taxes, his family which typically members have at death, much make lifetime gifts to family members lower exemptions who are U.S. than persons. federal In addition, tax exemption a gift a amount. policy by NCNRs generally is not subject to U.S. gift tax proceeds from a policy owned by insuring NCNR s life are not subject to U.S. tax at NCNR s death. A NCNR also can use life pre-immigration

4 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life planning as a means to defer imposition U.S. income tax if NCNR wishes to reside in U.S. on a temporary or permanent basis. Topic: Funding Trust-Owned Life Insurance Selecting Best Liquidity Report is published Asset by Replacement. Option. relative security U.S. economy attracts investors from all over AALUniversity, world, a recent drop in real prices has encouraged furr investment in U.S. real. As knowledge indicated service above, however, if a NCNR MARKET owns U.S. TREND: real property Although or a higher stock in federal a U.S. company, tax exemption such assets means will fewer be AALU. subject to trusted U.S. source tax upon families NCNR s will death. face federal Although tax NCNR exposure, can set use up complex trusts in domestic life fshore actionable structures technical in planning, plans life will continue can to be serve used numerous in comparatively practical straightward tax planning needs. simple ways marketplace to do such knowledge planning. NCNR can purchase life on his or her life proceeds, which are AALU members nation s not subject to U.S. tax, can be used SYNOPSIS: to fset Planning provide with trust-owned liquidity life U.S. ( TOLI ) tax liability. must consider most advanced life funding premiums into trust. Numerous funding methods exist, Example 2: Y, a NCNR, owns a beach including: house (1) in annual Santa exclusion Barbara, gifts, Calinia, (2) lump-sum worth gifts $25,000,000. gift GST Although tax Y AALU is wealthy, Washington most his wealth is exemption, tied up in (3) closely split-dollar held businesses arrangements, in Asia, (4) installment Y s liquid sales to assets ILITs will or (5) be Report needed is prepared operation by businesses a combination following re, his death. with each Upon method Y s death, varying in U.S. terms administrative tax liability AALU will staff be $9,921,800. Greenberg Y could acquire complexity a $10,000,000 tax-efficiency. policy on his life without using an irrevocable life Traurig, one trust ( ILIT ) nation s to provide necessary liquidity required to pay U.S. taxes. leading law firms in tax TAKE AWAYS: TOLI is beneficial creditor beneficiary protection Gifts wealth to management. U.S. Family Members. A purposes, properly wealth structured management, funded state ILIT can tax planning, be effective income way tax a NCNR to make lifetime gifts to U.S. family members planning. selection enhance funds best premium that pass funding to such method family will members depend at on each NCNR s death, while providing a structure family s that particular can continue circumstances multiple goals, generations level without on-going imposition support U.S. transfer taxes. y will have from ir, tax, legal advisors (including policy funding reviews). Generally, annual exclusion or lump sum gifts are most Steven Example B. Lapidus 3: B, a NCNR, has children efficient approach grchildren individuals who are with U.S. s citizens. closer B to creates $5 million a Delaware federal Rebecca dynasty Manicone trust funds it with $5 million tax exemption. in intangible Larger assets, s, which however, transfer will is benefit not subject greatly to from U.S. combining gift tax ( thus no U.S. GST tax). se trustee gifts with uses more advanced trust assets funding to pay methods, premiums such on as a loans $16 or million installment policy Counsel insuring Emeritus B s life. 19 investments sales, within particularly policy given will grow current, without low interest imposition environment. U.S. income tax. Gerald trustee H. Sherman can take withdrawals cash value from policy, up to trust s basis in policy, without Stuart imposition Lewis tax or policy loans PRIOR to make REPORTS: distributions 13-08; to 12-41; beneficiaries 12-28; without imposition tax. Upon B s death, trust will receive policy proceeds which are not subject to U.S. income transfer taxes can hold se proceeds multiple Prior to recent generations tax law changes, B s U.S. holding family life members without through an irrevocable imposition trust U.S. transfer taxes. was stard protocol planning, it continues to serve many practical purposes. Individuals, however, must consider practicalities trust funding NCNRs also can give a life in policy order directly to select to a U.S. most person suitable without tax-effective imposition premium U.S. funding gift tax. method beneficiary can take withdrawals from TOLI policies. policy, up to NCNR s basis in policy without imposition tax. assets in policy grow without imposition U.S. income tax, upon NCNR s death, beneficiary receives policy proceeds WHY without CONTINUE imposition TO USE TOLI U.S. tax. With se income tax planning considerations, a NCNR may also consider using a private placement product in combination with his or her U.S. transfer tax planning. trust ( ILIT ) in order to prevent taxation life Life also may allow NCNR proceeds to develop in insured s an. distribution permanent structure increase that avoids in federal ced tax exemption to $5.25 million, heirship regimes found in many countries, like France, Germany, 1 however, raises question wher many Italy, Spain, Japan, many Latin American families still need ILITs tax planning. countries, United Kingdom (to a more limited extent). Yet TOLI remains beneficial numerous reasons. A trust fers creditor Pre-Immigration Planning. Life can serve a valuable function when a NCNR is preparing to protection beneficiaries (as in cases bankruptcy or divorce) provides move to U.S. on eir a temporary or permanent basis. Prior to immigrating to U.S., NCNRs generally centralized ( possibly pressional) wealth management, particularly seek to structure ir assets to reduce impact U.S. income transfer taxes. Typically, prior to younger beneficiaries who are not prepared to hle large or sudden ascensions establishing U.S. residency, a NCNR will create a self-settled irrevocable trust benefit NCNR to wealth. Furr, ILITs limit exposure to state taxes in states with his or her family, will transfer a significant portion his or her assets to trust. With proper planning, separate tax systems or no state income taxes, which typically have much this may shift assets out NCNR s U.S. transfer tax purposes. If trustee also invests lower exemptions than federal tax exemption amount. assets in life, n trust its beneficiaries can benefit from U.S. income tax rules

5 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life associated with life, as noted above. A similar AALU strategy, Washington using a eign non-grantor Topic: Funding trust Trust-Owned a policy issued Life by Insurance a eign insurer, Selecting can be used Best if NCNR Report intends is published to be resident by in U.S. Option. only temporarily. If eign trust is properly structured, when NCNR AALUniversity, leaves a U.S., trustee would have discretion to terminate trust distribute assets to knowledge NCNR. Alternatively, service NCNR could MARKET hold TREND: policy Although directly a (purchased, higher federal course, tax prior exemption to becoming means fewer AALU. trusted source a U.S. resident). funds will grow families without will imposition face federal U.S. income tax exposure, tax, NCNR use trusts can take in life withdrawals actionable technical from policy up to NCNR s basis plans without will continue imposition to serve tax, numerous in practical event tax NCNR planning dies needs. while in marketplace knowledge U.S., AALU as members long as NCNR nation s is not deemed to be domiciled in U.S., proceeds will not be subject to U.S. tax. SYNOPSIS: Planning with trust-owned life ( TOLI ) must consider most advanced life funding premiums into trust. Numerous funding methods exist, PRACTICAL CONSIDERATIONS including: REGARDING (1) annual POLICY exclusion OWNERSHIP gifts, (2) lump-sum gifts gift GST tax exemption, (3) split-dollar arrangements, (4) installment sales to ILITs or (5) Although Report is a prepared NCNR can by hold life a combination issued by re, U.S. carriers with each directly method without varying being terms subject administrative to U.S. tax, AALU U.S. staff carriers Greenberg may refuse to issue policies complexity directly tax-efficiency. to NCNR or to provide coverage in desired amount. Traurig, one nation s leading law firms in tax TAKE AWAYS: TOLI is beneficial creditor beneficiary protection wealth management. NCNR also may be reluctant to disclose purposes, all wealth his or management, her assets or state undergo a tax medical planning, exam (in income U.S.) tax as part Greenberg underwriting Traurig process. LLP In addition, planning. NCNR selection will need to best apply premium funding take delivery method will depend policy on in each U.S. Jonathan se M. factors Forster will need to be considered family s particular as circumstances planning process, goals, along with level possible on-going tax issues support in NCNR s home country impact y will any have gift, from, ir, or income tax, tax treaty legal between advisors that (including country policy U.S. Richard 20 funding reviews). Generally, annual exclusion or lump sum gifts are most A. Sirus efficient approach individuals with s closer to $5 million federal TAKE Rebecca AWAYS Manicone tax exemption. Larger s, however, will benefit greatly from combining se gifts with more advanced funding methods, such as loans or installment Counsel Life Emeritus sales, particularly given current, low interest environment. fers a relatively simple straightward technique to address varied U.S. transfer tax planning needs NCNRs. Stuart Lewis A NCNR s gift a life policy, wher policy insures life NCNR or anor person, Prior to recent tax law changes, holding life through an irrevocable trust is not subject to U.S. gift tax. was stard protocol planning, it continues to serve many practical purposes. Individuals, however, must consider practicalities trust funding Proceeds from a policy owned by a NCNR that insures only life NCNR are not U.S. situs property in order to select most suitable tax-effective premium funding method thus are not subject to U.S. tax on NCNR s death even if issued through a U.S. carrier. In TOLI policies. addition, se proceeds generally are paid without imposition U.S. income taxes upon death insured. Thus, NCNRs can use life to make gifts to family members who are U.S. persons, to fset or provide liquidity to pay U.S. taxes on U.S. situs property without inclusion policy proceeds in trust ( ILIT ) in order to prevent taxation life ir U.S., as a pre-immigration tax planning tool. proceeds in insured s. permanent increase in federal tax exemption to $5.25 million, 1 however, raises question wher many NCNRs who intend to become temporary families still or permanent need ILITs U.S. residents tax planning. or have U.S. real property, ownership interests in a U.S. business (including stock issued by a U.S. corporation), /or family members who are U.S. citizens or Yet residents TOLI remains may have beneficial particular numerous interest reasons. in planning A trust with fers life. creditor protection beneficiaries (as in cases bankruptcy or divorce) provides centralized ( possibly pressional) wealth management, particularly younger beneficiaries who are not prepared to hle large or sudden ascensions to wealth. Furr, ILITs limit exposure to state taxes in states with separate tax systems or no state income taxes, which typically have much lower exemptions than federal tax exemption amount.

6 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life Comparison U.S. Transfer Tax Application to U.S. Citizens/Residents NCNRs Topic: Funding Trust-Owned Life Insurance Selecting Best Report is published by U.S. Citizens & Residents Option. NCNRs AALUniversity, a knowledge Assets Subject service to Worldwide assets Real & tangible personal U.S. Gift Tax MARKET TREND: property Although located a higher in federal U.S. tax exemption means fewer AALU. trusted source families will face federal tax exposure, use trusts in life U.S. actionable Gift Tax technical marketplace knowledge $14,000* plans will continue to serve numerous $14,000* practical tax planning needs. Annual Exclusion AALU members nation s most U.S. Gift advanced Tax life Gift to U.S. citizen spouse: SYNOPSIS: Unlimited Planning Gift to U.S. with citizen trust-owned spouse: Unlimited life ( TOLI ) must consider Marital Deduction Orwise: $143,000* per funding year premiums Orwise: into $143,000* trust. per Numerous year funding methods exist, including: (1) annual exclusion gifts, (2) lump-sum gifts gift GST tax U.S. Lifetime Gift $5,250,000* exemption, (3) split-dollar arrangements, None (4) installment sales to ILITs or (5) Tax Exemption Report is prepared by a combination re, with each method varying in terms administrative AALU Gift-Splitting staff Greenberg Yes complexity tax-efficiency. No Traurig, one nation s leading Assets Subject law firms to in tax Worldwide assets TAKE AWAYS: TOLI is beneficial U.S. situs assets creditor beneficiary protection wealth U.S. Estate management. Taxes purposes, wealth management, state tax planning, income tax U.S. Estate Tax $5,250,000* planning. selection best premium funding method will depend on each $60,000 Exemption (less lifetime taxable family s gifts) particular circumstances goals, level on-going support y will have from ir, tax, legal advisors (including policy U.S. Estate Tax U.S. citizen spouse: Unlimited U.S. citizen spouse: Unlimited funding reviews). Generally, annual exclusion or lump sum gifts are most Richard Marital Deduction A. Sirus Orwise: Need a QDOT Orwise: Need a QDOT efficient approach individuals with s closer to $5 million federal Rebecca *2013 amount. Manicone Subject to annual adjustments inflation. tax exemption. Larger s, however, will benefit greatly from combining se gifts with more advanced funding methods, such as loans or installment Counsel NOTESEmeritus sales, particularly given current, low interest environment. Stuart 1 IRC 7701(a)(30). Lewis Treas. Regs (b)(1); Treas. Regs (b). 3 See, Estate Khan v. Commissioner, T.C. Prior Memo to , recent tax 75 T.C.M. law changes, (CCH) 1597 holding (1998). life through an irrevocable trust 4 Treas. Regs (b). 5 was stard protocol planning, it continues to serve many practical IRC 2501(a)(2), 2511(b). 6 IRC purposes. Individuals, however, must consider practicalities trust funding 7 IRC 2104(c). in order to select most suitable tax-effective premium funding method 8 RC 2105(b). A full discussion property TOLI situs policies. rules U.S. transfer tax purposes is beyond scope this article. For a more comprehensive review, see Diana S.C. Zeydel Grace Chung, Estate Planning Noncitizens Nonresident Aliens: What Were Those Rules Again?, 106 Journal Taxation 1, January federal gift tax annual exclusion is $10,000, WHY indexed CONTINUE inflation TO USE after TOLI 1998 in $1,000 increments. IRC 2503(b). 10 See, IRC 2505(a). 11 federal gift tax annual exclusion gifts Bee to a non-citizen 2013, most spouse individuals is $100,000, placed indexed life inflation into after an irrevocable IRC life 2523(i). 12 IRC 2513(a)(1). trust ( ILIT ) in order to prevent taxation life 13 federal gift tax exemption is proceeds $5,000,000, in indexed insured s inflation. after 2011 permanent in $10,000 increase increments. in IRC federal 2010(c)(3). 14 IRC 2102(b). 15 IRC 2056A. A QDOT must meet requirements tax exemption a marital to $5.25 deduction million, trust 1 however, several raises additional question requirements. wher At least many one trustee must be a U.S. citizen or domestic corporation. families still An need election ILITs to treat trust tax as planning. a QDOT must be made on U.S. tax return filed NCNR s It is uncertain, however, wher such gift Yet avoids TOLI inclusion remains beneficial NCNR s numerous under IRC reasons A trust U.S. fers tax creditor if NCNR dies within three years gift. IRC 2104(b) provides that any property which decedent has made a transfer, by trust or protection beneficiaries (as in cases bankruptcy or divorce) provides orwise, within meaning [IRC] sections 2035 to 2038, inclusive, shall be deemed to be situated in United States, if so situated eir at time transfer or centralized at time ( decedent s possibly pressional) death. While IRC wealth 2105(a) management, specifically particularly excludes life proceeds from inclusion in a NCNR s U.S., younger a gift beneficiaries a policy issued who by are a U.S. not prepared carrier might to hle be a transfer large or something sudden ascensions or than an amount receivable as (e.g., rights to wealth. to surrender Furr, policy), ILITs limit which exposure could trigger to state U.S. taxes inclusion states under with IRC 2035 if NCNR dies within 3 years gift. Although separate a lifetime tax transfer systems should or no not state produce income a more taxes, onerous which U.S. typically tax have result much than actual retention policy until death, statute is not clear. lower exemptions than federal tax exemption amount. 17 IRC 2105(a).

7 trusted source actionable technical marketplace knowledge AALU members - nation s most advanced life 18 Treas. Regs (a)(4); Treas. Regs (e). 19 AALU policy Washington premiums will be structured Topic: to ensure Funding it is not Trust-Owned treated as a modified Life endowment Insurance contract. Selecting Best 20 Report This report is published provides an by overview gift tax rules applicable to NCNRs does not contain a complete analysis all Option. relevant tax authorities. Any life structure a NCNR will be subject to potential tax consequences in NCNR s home AALUniversity, a knowledge country, which service should be reviewed with local tax counsel prior to implementation any or or tax planning. MARKET TREND: Although a higher federal tax exemption means fewer AALU. trusted source families will face federal tax exposure, use trusts in life In actionable order to technical comply with requirements imposed by IRS which may apply to Washington plans will continue to serve numerous practical tax planning needs. marketplace Report as distributed knowledge as re-circulated by our members, please be advised following: AALU members nation s SYNOPSIS: Planning with trust-owned life ( TOLI ) must consider most THE advanced ABOVE ADVICE life WAS NOT INTENDED funding premiums OR WRITTEN into trust. TO Numerous BE USED, funding AND methods IT CANNOT exist, BE USED, BY YOU FOR THE PURPOSES including: OF (1) AVOIDING annual exclusion ANY gifts, PENALTY (2) lump-sum THAT gifts MAY gift BE GST IMPOSED tax BY THE INTERNAL REVENUE exemption, SERVICE. (3) split-dollar arrangements, (4) installment sales to ILITs or (5) Report is prepared by a combination re, with each method varying in terms administrative AALU In staff event that Greenberg this Washington complexity Report is tax-efficiency. also considered to be a marketed opinion within Traurig, meaning one nation s IRS guidance, n, as required by IRS, please be furr advised leading following: law firms in tax TAKE AWAYS: TOLI is beneficial creditor beneficiary protection wealth management. purposes, wealth management, state tax planning, income tax THE ABOVE ADVICE WAS NOT planning. WRITTEN selection TO SUPPORT best THE premium PROMOTIONS funding method OR will MARKETING depend on each Greenberg OF THE TRANSACTIONS Traurig LLP OR MATTERS family s particular ADDRESSED circumstances BY THE goals, WRITTEN level ADVICE, on-going AND, support Jonathan BASED ON M. Forster THE PARTICULAR y CIRCUMSTANCES, will have from ir, YOU SHOULD tax, legal SEEK advisors ADVICE (including FROM policy AN INDEPENDENT TAX ADVISOR. Rebecca Manicone Counsel Emeritus Stuart Lewis funding reviews). Generally, annual exclusion or lump sum gifts are most efficient approach individuals with s closer to $5 million federal tax exemption. Larger s, however, will benefit greatly from combining se gifts with more advanced funding methods, such as loans or installment sales, particularly given current, low interest environment. Prior to recent tax law changes, holding life through an irrevocable trust was stard protocol planning, it continues to serve many practical purposes. Individuals, however, must consider practicalities trust funding in order to select most suitable tax-effective premium funding method TOLI policies. trust ( ILIT ) in order to prevent taxation life proceeds in insured s. permanent increase in federal tax exemption to $5.25 million, 1 however, raises question wher many families still need ILITs tax planning. Yet TOLI remains beneficial numerous reasons. A trust fers creditor protection beneficiaries (as in cases bankruptcy or divorce) provides centralized ( possibly pressional) wealth management, particularly younger beneficiaries who are not prepared to hle large or sudden ascensions to wealth. Furr, ILITs limit exposure to state taxes in states with separate tax systems or no state income taxes, which typically have much lower exemptions than federal tax exemption amount.