IRAs Unique strategies for transferring wealth and giving to charity

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1 IRAs Unique strategies for transferring wealth and giving to charity 8/24/2011 IRA Strategy #1: Giving to charity during your lifetime Applies to IRA owners who do not need their IRA distributions for retirement Enables IRA owners to pass on the value of their IRAs to their heirs, plus make annual lifetime gifts to charity An immediate annuity is bought within the IRA 1 to fund: life insurance premiums for a life insurance policy held in trust, the death benefit of which may be equal to the original value of the IRA, and which is paid to the trust for distribution to the trust's beneficiaries; and annual gifts to charity during the life of the IRA owner 1 Immediate annuities cannot be purchased within a UBS custodial IRA and must be held at the insurance company itself. 1 1

2 Help the people you love and the charities important to you The life insurance death benefit passes income and estate tax free through life insurance purchased in an Irrevocable Life Insurance Trust ("ILIT") to your beneficiaries upon your death. Your estate taxes are reduced by removing the value of the IRA from your estate. A portion of the annuity income stream can be gifted to your favorite charities during your lifetime. Charitable donations are tax deductible as permitted under IRS rules. 2 Implementing the strategy Step 1 IRA owner buys immediate annuity within an existing IRA Step 2 IRA owner uses a portion of the regular annuity distribution to pay premiums on a life insurance policy within an Irrevocable Life Insurance Trust (ILIT), with a death benefit that may be equal to value of IRA Step 3 IRA owner uses the remaining regular annuity distribution to make periodic tax-deductible gifts to charities of choice 3 2

3 Transforming your IRA to benefit heirs and charities IRA An immediate annuity is purchased within the client's IRA 1 IRA containing Immediate Annuity A portion of the after-tax annuity income stream pays premiums on an insurance policy within an ILIT* the policy's death benefit may be equal to the value of the IRA Irrevocable Life Insurance Trust ("ILIT") Insurance death benefit passes estate and income tax free to the trust, which will pay your beneficiaries in accordance with the terms of the trust Beneficiaries The remaining portion of the after-tax annuity income stream can be donated tax-free to charity Charitable Organization(s) 1 Immediate annuities cannot be purchased within a UBS custodial IRA and must be held at the insurance company itself. * An ILIT is recommended clients should consult their personal tax advisors 4 IRA Strategy #2: Using your IRA to leave a charitable legacy Applies to IRA owners who need their IRA distributions for retirement Enables an IRA owner to pass on a portion their IRA value to charity, plus collect lifetime income for retirement An immediate annuity is bought within the IRA 1 to fund: life insurance premiums for a life insurance policy benefiting charity (which is paid to the charity upon the IRA owner's death) annual income to the IRA owner 1 Immediate annuities cannot be purchased within a UBS custodial IRA and must be held at the insurance company itself. 5 3

4 Help the charities important to you A portion of the annuity income stream provides you with retirement income during your lifetime. The life insurance death benefit passes tax free through life insurance to charity upon your death. Your estate taxes are reduced by removing the value of the IRA from your estate. Charitable donations are tax deductible as permitted under IRS rules. 6 Implementing the strategy Step 1 IRA owner buys immediate annuity within an existing IRA Step 2 IRA owner uses a portion of the regular annuity distribution to pay premiums on a life insurance policy benefitting your favorite charity Step 3 IRA owner uses a portion of the annuity distribution as retirement income 7 4

5 Transforming your IRA to provide retirement income and benefit charities IRA An immediate annuity is purchased within the client's IRA 1 IRA containing Immediate Annuity A portion of the after-tax annuity income stream pays premiums on an insurance policy A portion of the after-tax annuity income stream provides the IRA owner with retirement income Life Insurance IRA Owner Insurance death benefit passes tax free to the charity Charity 1 Immediate annuities cannot be purchased within a UBS custodial IRA and must be held at the insurance company itself. 8 Considerations for both strategies Works best for retirees All or part of an IRA's current value can be used. You must be generally in good health and are subject to a brief medical exam before you will be permitted to buy the life insurance policy. You should confirm your insurability before purchasing an immediate annuity. You will have flexibility in the event of economic hardship: In Strategy #1, pledge of annuity income is revocable In Strategy #2, the payment of insurance premiums is revocable In Strategy #1, donations to charity can be used to fully or partially fund a Donor Advised Fund for strategic giving. 9 5

6 Immediate annuities What is an immediate annuity? An immediate annuity is an insurance product that a client can use to provide income in retirement. It is typically intended to provide income for the life of the annuitant. In exchange for the insurance company's guarantee of income for life, it can offer protection against outliving your assets. A client can decide how the payments from the annuity are determined. A client can choose a fixed annuity, the income payments of which are set at a fixed amount and are not adjusted for inflation. This provides for consistency and the confidence that each payment is the same. A client can also choose a variable annuity, which offers the client the ability to receive payments that are pegged to a basket of either equity or fixed-income securities. This makes the payment stream variable and offers the client the chance for higher payments than with a fixed annuity. It is possible that income payments could also fall below those of fixed annuities, so clients must consider their ability to handle volatility in their income stream when purchasing a variable annuity. Regardless of the type of annuity chosen, the insurance company guarantees that some level of income will always be available for the life of the client or some other specified period. This guarantee is based on the claims- paying ability of the insurance company that issued the annuity product. In this strategy an Irrevocable Life Insurance Trust (ILIT) is used. An ILIT is an irrevocable, non-amendable trust which is both the owner and the beneficiary of the life insurance. The insurance proceeds are paid out in accordance with the terms of the ILIT. 10 Contact information For further information, please contact: J. Christopher Wilmerding Senior Portfolio Manager Portfolio Management Program UBS Financial Services Inc. One Post Office Square Boston, MA (w) (c) [email protected] 2011 UBS Financial Services Inc. All rights reserved. Member SIPC ubs.com UBS Financial Services Inc. is a subsidiary of UBS AG. 11 6

7 Important disclosures Annuities are long-term investment vehicles designed for retirement purposes. Withdrawals or surrenders may be subject to surrender charges. For tax purposes, withdrawals are generally deemed to be earnings out first. Taxable amounts withdrawn will be subject to ordinary tax income, and if taken prior to the age of 59½, a 10% IRS penalty may also apply. Withdrawals have the effect of reducing the death benefit, optional benefit riders and the contract value. Annuity products are issued by unaffiliated third-party insurance companies and made available through insurance agency subsidiaries of UBS Financial Services Inc. Guarantees are based on the claims-paying ability of the issuing insurance company. If properly structured, insurance proceeds in an irrevocable life insurance trust (ILIT) will pass to beneficiaries free of estate tax, but assets left in an IRA at the IRA owner's death will potentially be subject to both estate tax and income tax. Distributions to charity will be deductible for income tax purposes, subject to applicable AGI limitations. UBS Financial Services Inc. and its affiliates do not provide legal or tax advice. Accordingly, this material is not intended to be used, and cannot be used or relied upon, by any taxpayer for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter(s). Clients should consult with their legal and tax advisors regarding their personal circumstances. Because IRAs are already income-tax-deferred accounts, a standard benefit of an annuity, tax-deferral, is not applicable in this context purchasing an annuity is one of many possible strategies one can pursue with the money in their IRA 2011 UBS Financial Services Inc. All rights reserved. Member SIPC ubs.com UBS Financial Services Inc. is a subsidiary of UBS AG. 12 7