Life Insurance. Let the IRS Help You Make It The Most Profitable Year of Your Career. Secure Your Clients Futures. Unlock New Opportunities.

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1 Life Insurance 2012 Let the IRS Help You Make It The Most Profitable Year of Your Career Secure Your Clients Futures. Unlock New Opportunities.

2 Are You Talking To Your Affluent Clients About The December 1 Deadline? The federal estate and gift tax law is currently in a temporary relaxation mode. Between now and the end of the year, everyone can transfer up to $5,120,000 in assets from their estate without paying any gift tax. Under current law, this opportunity will end on January 1, 201, and the tax-free transfer amount will drop to $1,000,000. Only A Short Period Of Time Remains To Spread The Word To Every: High-net-worth individual you have as a client or would like to have as a client. Every Attorney, Accountant or Advisor with high-net-worth clients. Producer Guide 2

3 The Tax Law Is Currently In A State Of Limbo But You Better Not Be! Or You And Your High-Net-Worth Clients Will Lose The IRS Taxes The Assets of High-Net- Worth Clients When They re Coming And When They re Going Your clients money is taxed as it is earned or when it is otherwise received. The tax rate can be as high as 5%. Without adequate planning, your clients can be taxed again when trying to give away their assets, whether during their lifetime or at their death. Herein Lies The Planning Opportunity... Much can be done to minimize the effect of this tax, especially if action is taken this year. What A Difference A Few Months Can Make What Happens This Year... Using a current lifetime exemption, every taxpayer can transfer $5,120,000 worth of assets out of their taxable estate without incurring gift taxes as high as 5%. They can gift any property they would like, to whomever they want. Upon their death, the property will not be included for purposes of estate tax calculation. The transaction must be made prior to midnight, December 1, 2012! What s Going to Happen Next Year... Unless Congress changes the current law, this opportunity will end with the New Year. On January 1, 201, the lifetime exemption amount will drop to $1,000,000 and, perhaps more importantly, the maximum tax bracket will increase to 50%. Producer Guide

4 Why Aren t High-Net-Worth Taxpayers Taking Advantage of This Opportunity? They May Not Know About It! Or If They Are Aware, Taxation May Not Be Their Only Concern. Client Concerns In The Gifting Process Saving taxes on the property gifted three aspects of an asset are a concern when planning for taxes: 1. Current Value 2. Potential for Appreciation. Ability to Generate Income The absolute and irrevocable gift of an asset will eliminate all three from the consequences of gift or estate taxation. An Absolute Or Irrevocable Transfer Can Create Other Issues: The Thought Of An Outright Transfer May Create Separation Anxiety Once The Property Is Removed From The Taxable Estate, There May Be Donor s Remorse Producer Guide 4

5 7 The Magnificent Seven A Planning Primer: Concepts Your Clients Can Use to Customize Transfers to Meet Their Planning Concerns 1. Irrevocable Life Insurance Trust (ILIT) This is the most common third party entity used to transfer assets so that they can be held outside the taxable estate. The flexibility of the drafting options allows a taxpayer, at the time the trust is established, to dictate how property will be used and be distributed for a considerable period of time following its creation, across several generations. A common variation of the trust is a grantor or defective trust, that allows any income tax consequences that occur within the trust to flow back to the taxpayer. This can often be beneficial to other aspects of a client s planning. The ILIT addresses the concerns of removing the value, the appreciation of and the income from the transferred property out of the taxable estate. The ILIT is usually referred to as an insurance trust because it is often the third party owner of Life Insurance policies on the taxpayer s life. This will be discussed later, but first some variations in third-party ownership of assets. 2. Spousal Lifetime Access Trust (SLAT) If the taxpayer is married, property can be transferred to an ILIT in which the spouse has a lifetime interest that allows distributions for his or her health, education, welfare or support. Upon the death of the spouse, the property in the estate will not be included in the estate of either spouse. The spouse may even be the trustee if it doesn t conflict with other planning concerns. In addition, proper drafting by a qualified attorney may allow a married couple to implement cross SLATS for the benefit of each other. The SLAT can remove the value, appreciation and income of an asset from the taxable estate, but still allow a degree of vicarious access to the property through the spouse.. Borrowing From An ILIT An ILIT (or other third-party owner) can be permitted to make loans back to the taxpayer under terms that would be acceptable to the IRS. The loan must be repaid, which keeps the asset out of the taxable estate, but a loan allows the taxpayer use of transferred property if needed in the future. 4. Loaning Property To An ILIT If the taxpayer doesn t want to transfer property, he or she can loan it to the ILIT (or other third party) under terms acceptable to the IRS. The loan must be repaid so the taxpayer maintains access, but the arrangement can keep the appreciation on the property out of the estate along with any income on the property to the extent it is not repaid to the taxpayer as loan interest. 5. Grantor Retained Annuity Trust (GRAT) Property can be transferred to an irrevocable trust in return for a finite stream of income back to the taxpayer. During the income period, the taxpayer has use of the property for income. The transaction can be designed to minimize potential gift taxation at the time of the transfer and, if the taxpayer survives the income paying period, the value and appreciation on the property is not included in the taxable estate. However, if the taxpayer does not survive the period, property in the GRAT reverts back to the taxpayer. 6. Family Limited Partnership Or Limited Liability Company (FLP or FLCC) A FLP allows the taxpayer to put assets in a family business entity and then transfer non-voting ownership interests in the FLP to third parties outside the taxable estate. This allows the taxpayer to control the business while retaining only a small portion of its value. It is also possible to minimize gift tax implications at the time of transfer by applying reasonable discounts to the value of the non-voting shares that are transferred. 7. Charitable Giving During Life Or At Death There is no limit on the exemption from gift or estate taxes on assets properly given to acceptable non-profit organizations. Use of the property can be retained by transferring assets to trusts that will pay the taxpayer, or appointed beneficiaries, predetermined income streams with a remainder interest going to the non-profit organization. Properly constructed charitable giving plans might also afford a client certain current income tax advantages. Remember A client doesn t have to be considering a $5,120,000 gift in order to benefit from these concepts. These are commonly used, and benefit taxpayers, even in situations where lower amounts of assets are being transferred. Producer Guide 5

6 Managing the Remaining Tax Liability Life Insurance The Product That Protects Even the most efficient planning seldom eliminates the entire estate tax liability. The good news is that the exposure that remains can be covered if the taxpayer is insurable. It would be counterproductive to own the life insurance inside the taxable estate where the death proceeds would only increase the amount of estate tax owed. Instead, policies are held by third-party owners, usually irrevocable trusts whose beneficiaries are the same people who would otherwise be the heirs of the taxpayers. Keep in mind some principles concerning trust-owned life insurance for the purpose of paying estate taxes:»» Establishing Trust Ownership The implementation must be coordinated with other advisors to be sure that the policy is properly issued in the existing or new trust created for the taxpayer s estate.»» Sources Of Premium Often the transfers made from the taxable estate using the lifetime exemption are to the trust, where the assets, or the income they generate, are used by the trustee to pay premiums on the trust-owned policy. Annual gift exclusions (usually in the amount of $1,000 per year per beneficiary) are also available for getting money into the trust for premium payments.»» Premium Schedules - Once assets are in the trust, premium payments into the policy can be regulated to amounts that don t create a modified endowment contract.»» Product Choice Term Estate tax liability constitutes a permanent need, Term is usually not the best product choice to generate funds for payment. Guaranteed Permanent Products If the sole concern is liquidity at death, a guaranteed product can lock in the price of coverage for the life of the taxpayer. In most cases, the lifetime level term design of a guaranteed product will have no cash available for use by the trustee in later years. Cash Value Building Products If there is a possibility that lifetime withdrawals or loans might be needed by the trust, the taxpayer might consider a policy that builds sufficient values in the later years, giving flexibility to the trustee if funds are needed. Producer Guide 6

7 From Start to Finish Your Comprehensive Sales Resource & Complete Service Platform Prospecting Sales and Contacting Your Client Base CPS IMIS will provide , letter and brochure templates you can brand Support CPS IMIS will help with presentation preparation and the marketing materials you need Presentation Support CPS IMIS will be involved in discussions with advisors and/or their clients concerning the concepts and products involved in the case Product and Carrier Fit CPS IMIS will determine the best carrier, product and policy design for each situation Medical Underwriting CPS IMIS will obtain the best medical offer available, especially in cases involving health impairments Financial Justification CPS IMIS will organize the data and prepare the report to the carrier making the case for the coverage Implementation CPS IMIS will assist in the coordination of policy placement to coincide with the advisor s timetable for other steps involved in the client s financial plan CPS Integrated Marketing & Insurance Services 8447 Miramar Mall San San Diego, California Producer Guide 7

8 About CPS Integrated Marketing & Insurance Services A Comprehensive Resource & Complete Platform To Help You Grow Your Business. CPS IMIS is the nation s leading independent marketer of products to successful financial and insurance professionals. Copyright 2012 CPS Integrated Marketing & Insurance Services, All rights reserved. For Producer/Broker Dealer use Only. Not for Public Distribution. Pursuant to IRS Circular 20, CPS IMIS is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor. CPS IMIS, its agents and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. Clients should consult with and rely on their own independent legal and tax advisors regarding their particular set of facts and circumstances. CPS Integrated Marketing & Insurance Services 8447 Miramar Mall San Diego, California 92121