Using Life Insurance and Private Foundations

Transcription

1 Zero Estate Tax Strategy Using Life Insurance and Private Foundations Presented by: Joe Sample, [Designations per field stationery guidelines] [Company Approved Title][or][DBA Title][or][Brokerage Title] [Agency Name] [or] [DBA Name] [The Prudential Insurance Company of America][if Agency Distribution] [1234 Main Street, Suite 1, Floor 10] [Anywhere], [ST] [12345] [in required states] [<ST> Insurance License Number < >] Phone [ ] Fax [ ] Ed. 12/2013 Exp. 06/23/2015 NOT FOR CONSUMER USE.

2 2 NOT FOR CONSUMER USE. CREATED EXCLUSIVELY FOR FINANCIAL

3 Agenda CREATED EXCLUSIVELY FOR FINANCIAL The Moving Target The Reynolds Case Executing for Success The strategies in this presentation are complex tax planning techniques that may not be appropriate for all persons and should only be entered into with the advice of competent legal counsel. The outcome of each strategy is not certain and will depend upon the individual circumstances including the actual trust and life insurance policy costs, client s life expectancy and future tax law changes. 3 NOT FOR CONSUMER USE.

4 The Moving Target The history of the federal estate tax law is one of change As priorities shifted and the need for revenues Increased or diminished throughout our country s history, the status of the estate tax law has changed several times. Enacted 1797 Repealed 1802 Enacted 1862 Repealed 1870 Enacted 1898 Repealed 1902 Enacted 1916 The first federal estate tax was enacted to pay for a naval buildup in response to heightened tensions with France. Estate tax was repealed when the threat of war ended. Estate tax reenacted to raise revenue for the Civil War effort. Estate tax repealed as the country recovered from the effects of the war. The third federal estate tax was enacted to finance the Spanish- American War. Estate tax repealed for the third time. Estate tax reenacted with the advent of WWI and became a permanent feature of the tax code. Reformed 1930s Various changes made the basic structure of the estate tax similar to the structure of 2009 Reformed Congress passed nine major pieces of legislation that affected the estate and gift tax taxation. Reformed 2001 Economic Growth and Tax Relief Reconciliation Act of 2001 provided a phase-in period of rate reductions, exemption increases, and changes in tax basis. Repealed 2010 Estate tax repealed for the fourth time. Enacted 2011 The Tax Relief, Unemployment Insurance Reauthorization & Job Creation Act of 2010 re-enacted the federal estate tax with unified gift and estate tax exemptions equal to $5 million with top marginal tax rate of 35%. Sunset 2013 All provisions of The TRUIRJCA 2010 scheduled to sunset on January 1st, 2013; all estate tax provisions revert to pre- EGTRRA 2001 as if both laws had never been enacted. Revised 2013 American Taxpayer Relief Act of 2012 was passed to avoid the sunset. $5 million estate, gift and gst exemption indexed for inflation. Top transfer tax bracket of 40% 4 NOT FOR CONSUMER USE.

5 Past Proposals Limit valuation discounts Minimum term for GRATs* 90 year perpetual trust limit Estate taxation of grantor trust assets 6166 deferral period extension * GRAT stands for Grantor Retained Annuity Trust 5 NOT FOR CONSUMER USE.

6 The Moving Target Financial Advisor s response: How would you like to be prepared for any scenario? 6 NOT FOR CONSUMER USE.

7 The Reynolds Case Hypothetical example Clive and Wanda Reynolds Both age 65, good health 2 children, 4 grandchildren $22 million net worth Involved in their community and have a history of charitable giving Credit Shelter Trusts in place Clive & Wanda s goals Minimize estate taxes Preserve wealth for heirs Would rather see money given to charity than to taxes Maintain family control over their wealth Willing to make lifetime exemption gifts This is a hypothetical example used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results will vary. Any representation of life insurance premium or death benefit is purely hypothetical in amount and is not a guarantee of cost or death benefit now or in the future from a specific life insurance policy. Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values. Guarantees are based on the claims-paying ability of the issuing company. Any assumptions for life insurance policy values on subsequent slides are based on a male and female, both age 65 and preferred non-nicotine, Prudential SUL Protector, guaranteed to age NOT FOR CONSUMER USE.

8 The Reynolds Case Social Capital Family Charity Government Where do you want your wealth to go? 8 NOT FOR CONSUMER USE.

9 The Reynolds Case Current Situation Value of estate equal to estate tax exemption amounts ($10 million) Value of estate in excess of estate tax exemption amounts ($12 million) Estate taxes paid to the IRS ($4.8 million) Estate $22,000, Estate Tax Exemption Amounts* Taxable Estate Family $17,200,000 3 Government $4,800,000 *Assumes a federal estate tax exemption equivalent amount of $5,000,000 per spouse, both fully utilized, and a top federal estate tax rate of 40%. Exemption equivalent is indexed for inflation annually, for illustrative purposes the $5,000,000 amount is being used. For 2014 the actual exemption equivalent is $5,340, NOT FOR CONSUMER USE.

10 The Reynolds Case Wealth Replacement Strategy Value of estate equal to estate tax exemption amounts ($10 million) Value of estate in excess of estate tax exemption amounts ($12 million) Estate taxes paid to the IRS ($4.8 million) Annual gifts while alive ( $63,004) to purchase survivor life insurance ($4.8 million death benefit) Estate $22,000, Estate Tax Exemption Amounts* Wealth Replacement Trust with Life Insurance Taxable Estate Family $22,000,000 3 Government $4,800,000 *Assumes a federal estate tax exemption equivalent amount of $5,000,000 per spouse, both fully utilized, and a top federal estate tax rate of 40%. Exemption equivalent is indexed for inflation annually, for illustrative purposes the $5,000,000 amount is being used. For 2014 the actual exemption equivalent is $5,340,000. There may be federal and/or state gift tax consequences with the funding of a wealth replacement trust. In addition, the gifts necessary to pay the premiums may reduce the size of the estate and/or the amount of lifetime gift tax exemption and/or estate tax exemption amount. 10 NOT FOR CONSUMER USE.

11 The Reynolds Case Zero Estate Tax Strategy Value of estate equal to estate tax exemption amounts ($10 million) Value of estate in excess of estate tax exemption amounts ($12 million) At least 5% of foundation assets must be given to charity annually Estate $22,000,000 1 Estate Tax Exemption Amounts* Family $10,000,000 4 Reasonable compensation can be received as foundation directors or employees Taxable Estate 4 Family 2 Foundation 3 Charity $12,000,000 *Assumes a federal estate tax exemption equivalent amount of $5,000,000 per spouse, both fully utilized, and a top federal estate tax rate of 40%. Exemption equivalent is indexed for inflation annually, for illustrative purposes the $5,000,000 amount is being used. For 2014 the actual exemption equivalent is $5,340, NOT FOR CONSUMER USE.

12 The Reynolds Case Zero Estate Tax Strategy Value of estate equal to estate tax exemption amounts ($10 million) Value of estate in excess of estate tax exemption amounts ($12 million) At least 5% of foundation assets must be given to charity annually Reasonable compensation can be received as foundation directors or employees Annual gifts while alive ( $157,304) to purchase survivor life insurance ($12 million death benefit) Estate $22,000, Estate Tax Exemption Amounts* Wealth Replacement Trust with Life Insurance Taxable Estate Family 2 Foundation 3 4 Family $22,000,000 Charity $12,000,000 *Assumes a federal estate tax exemption equivalent amount of $5,000,000 per spouse, both fully utilized, and a top federal estate tax rate of 40%. Exemption equivalent is indexed for inflation annually, for illustrative purposes the $5,000,000 amount is being used. For 2014 the actual exemption equivalent is $5,340,000. There may be federal and/or state gift tax consequences with the funding of a wealth replacement trust. In addition, the gifts necessary to pay the premiums may reduce the size of the estate and/or the amount of lifetime gift tax exemption and/or estate tax exemption amount. 12 NOT FOR CONSUMER USE.

13 The Reynolds Case Current Situation Family $17,200,000 Charity $0 Government $4,800,000 Wealth Replacement Strategy Family $22,000,000 Charity $0 Government $4,800,000 Zero Estate Tax Strategy Family $22,000,000 Charity $12,000,000 Government $0 The strategies in this presentation are complex tax planning techniques that may not be appropriate for all persons and should only be entered into with the advice of competent legal counsel. The outcome of each strategy is not certain and will depend upon the individual circumstances including the actual trust and life insurance policy costs, client s life expectancy and future tax law changes. 13 NOT FOR CONSUMER USE.

14 The Reynolds Case Benefits to Clive & Wanda Eliminated what is paid to the government by choosing charity over taxes Preserved wealth for heirs Family charitable legacy and control over social capital Flexibility to easily adapt to changes in federal estate tax laws Income tax benefits if charitable strategies funded while living Other considerations Large portion of estate may pass to Family Foundation subject to strict IRS guidelines and ultimately distributed to charity Purchase of life insurance is subject to medical and financial underwriting Cost and time associated with setting up Family Foundation Gift tax implications of funding the Wealth Replacement Trust Reduction in wealth to family if the life insurance policy lapses 14 NOT FOR CONSUMER USE.

15 Executing for Success Client Profile $20 million+ net worth Family oriented Conservative lifestyle Involved in community, possible history of charitable giving Estate or income tax concerns Would choose charity over taxes Perspective Don t focus only on the estate tax Non-tax motivations often exist Clients may not want to pass their entire estate to family heirs Perpetuation of ideals or control over wealth may be important If nothing else, this strategy could be a great door opener with clients I want to leave my children enough so they can do ANYTHING but NOT so much that they will do NOTHING 15 NOT FOR CONSUMER USE. Warren Buffet

16 Executing for Success Discovery Questions and Talking Points If you could design the perfect estate plan, what would it look like? Does your current plan potentially zero out your estate tax exposure? If you could make a $1 million gift to a charity of your choosing today, who would you give it to and why? There s three places you can choose to leave money Family, Charity or the Government. If you had to pick two, which would you pick and how much would you like to see go to each? Many clients like yourself typically pick Family and Charity. Would you be interested in a strategy that preserves wealth for your family but chooses charity over taxes? 16 NOT FOR CONSUMER USE.

17 Executing for Success Support and Resources Sales office assistance Point-of-sale support Advanced markets resources Marketing materials Charitable Remainder Trust supplemental illustration Estate liquidity analysis Wealthy and Wise analysis 17 NOT FOR CONSUMER USE.

18 Important Considerations In addition to the asset or income they may be repositioning to implement the strategy, clients should have sufficient liquid assets to support their current and future income and expenses. Equity in the home should not be considered a liquid asset. This concept is only intended to be used for assets that will not be needed for living expenses for the expected lifetime of the insured. It is the responsibility of the client to estimate these needs and expenses and it is recommended that they consider developing a comprehensive financial plan in conjunction with implementing the strategy being considered. The accuracy of determining future needs and expenses is more critical for clients at older ages who have less opportunity to replace assets used for the strategy. If your client s financial or legacy planning situation changes and they need to use the assets or income that are being earmarked for future life insurance premiums, they may be unable to continue to make premium payments, the life insurance policy may terminate and the results illustrated may not be achieved. 18 NOT FOR CONSUMER USE.

19 Important Considerations (continued) If the asset or income earmarked for future life insurance premiums becomes fully exhausted, premiums may have to be paid using other assets or income to keep the life insurance policy in force. Depending on your client s life span, it is possible that your client s beneficiary may receive more by just inheriting the assets, rather than by receiving the death benefit of the life insurance policy that was purchased. Clients may have to pay taxes, early withdrawal penalties, and/or other fees on assets liquidated to pay the life insurance policy premiums. We recommend that your client consult their tax and legal advisor to discuss their specific situation before implementing the strategy discussed herein. 19 NOT FOR CONSUMER USE.

20 Summary CREATED EXCLUSIVELY FOR FINANCIAL The Moving Target Be prepared for any scenario The Reynolds Case Flexibility, control, leverage Executing for Success Go beyond the estate tax! 20 NOT FOR CONSUMER USE.

21 Why? Meet clients needs Strengthen client relationships Attract generational clients Grow your business Dedicated Life Consultant support 21 NOT FOR CONSUMER USE.

22 Next Steps 1. Write down three prospects! 2. Meet with Dedicated Life Consultant to discuss an approach! 3. Set up client appointment! 22 NOT FOR CONSUMER USE.

23 Important Information CREATED EXCLUSIVELY FOR FINANCIAL This material has been prepared by The Prudential Insurance Company of America to assist financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that we are not rendering legal, accounting or tax advice. Such services should be provided by the client s own advisors. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code. Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ, and its affiliates. Like most insurance policies, our policies contain exclusions, limitations, reductions of benefits and terms for keeping them in force. PruLife SUL Protector is issued by Pruco Life Insurance Company, except in New York where, it is issued by Pruco Life Insurance Company of New Jersey. Both are Prudential Financial companies located in Newark, NJ. Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities. Securities and Insurance Products: Not Insured by FDIC or Any Federal Government Agency. May Lose Value. Not a Deposit of or Guaranteed by Any Bank or Bank Affiliate Prudential Financial, Inc. and its related entities. 23 NOT FOR CONSUMER USE.