The New Era of Wealth Transfer Planning #1. American Taxpayer Relief Act Boosts Life Insurance. For agent use only. Not for public distribution.

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1 The New Era of Wealth Transfer Planning #1 American Taxpayer Relief Act Boosts Life Insurance For agent use only. Not for public distribution.

2 In January 2013 Congress stepped back from the fiscal cliff and passed The American Taxpayer Relief Act of 2012 ( ATRA or the Act ). The Act answered questions about the Bush tax cuts by making most of them permanent.* Many people and organizations have published good summaries of the Act s provisions. This brochure focuses on how it impacts life insurance and wealth transfer opportunities. Life Insurance Income Taxation Unchanged Over the years Congress has granted life insurance policies a unique combination of valuable income tax benefits. Whenever politicians talk about increasing taxes and raising revenue, there is always concern that some of life insurance s tax benefits may be reduced. Fortunately, the Act makes no changes in how life insurance policies are taxed. Income tax-free death benefits, tax-deferred cash value growth, 1035 exchanges, and the taxation of cash value distributions all remain the same under federal tax laws. New Income Tax Rates for High Income Taxpayers The Act left income tax rates unchanged for all taxpayers except those with large taxable incomes. Single taxpayers earning more than $400,000 and married couples filing jointly earning more than $450,000 will be subject to a marginal rate of 39.6% on the portion of their income which exceeds these limits. The Act also increases tax rates on capital gains and dividend income to 20% for these high income taxpayers. Transfer Tax Rules Made Permanent* The Act ends the twelve years of regular change and uncertainty on the taxation of wealth transfers during life and at death. It retains the concept of unification of the gift, estate and generation skipping transfer (GST) taxes by setting their top marginal rates at 40% and establishing their 2013 exemptions at $5,250,000 (which will be adjusted annually for inflation). The Act provision that adjusts these exemptions annually for inflation is important because it gives these exemptions the potential to keep growing year after year. The Act also simplifies wealth transfer planning for married couples by making permanent the portability of the estate tax exemption to a surviving spouse. *Note on Permanent : Many of the provisions of ATRA are considered permanent enactments. This does not mean that these provisions cannot be changed by Congress in the future (even this year). To designate a provision as permanent indicates only that the provision will not expire unless Congress acts to change it. The Transfer Tax Landscape in 2013 Now that the phase-ins, phase-outs and sunsets have ended, 2013 may be the beginning of a new era in wealth transfer planning. Legal and tax advisors retained all their planning tools and now they have increasing exemptions with which to use them: Lifetime Gifts** Annual Exclusion Gift Limit $14,000 annually to each donee Lifetime Gift Tax Exemption $5,250,000 GST Tax Exemption on Gifts $5,250,000 Transfers At Death*** Estate Tax Exclusion $5,250,000 GST Tax Exemption on Death Transfers $5,250,000 ** Married couples can work together to combine their gift tax annual exclusions and lifetime gift tax exemptions through coordinated separate actions or through split gifts under IRC Section *** Married couples may use the portability feature of the Act to defer use of the estate tax exemption of the first spouse to die until the death of the surviving spouse. 1 For agent use only. Not for public distribution.

3 General Impact on Wealth Transfer Planning The Act simplifies wealth transfer planning in several important ways: It reduces the number of people who need to plan and position their assets to avoid federal estate and GST taxes. Establishing the gift, estate and GST tax exemptions at over $5,000,000 per person and indexing them annually for inflation likely means that less than 1% of estates will be subject to federal estate taxes. With inflation indexing, these exemptions will keep growing year after year. As a result, only the very wealthy (currently individuals with estates over $5.25 million and married couples with estates in excess of $10.5 million) will have federal estate tax problems. Making portability of estate tax exemptions between spouses permanent could change how many married couples decide to transfer their wealth. Permanent portability could greatly simplify planning for wealth transfers between spouses. When a federal estate tax return is filed at the first spouse s death, the surviving spouse will be able to use two estate tax exemptions instead of one. As a result, married couples shouldn t need to divide up their assets to make sure each has enough to use their individual exemptions. When portability is used, the order of spouses death is irrelevant for estate tax purposes. Both exemptions can potentially be used regardless of which spouse dies first. 3. The Act reinforced opportunities to transfer wealth by making large gifts. By indexing the lifetime gift tax exemption for inflation, taxpayers will have new and recurring opportunities to make large gifts (even those who may have maxed out their gift tax exemptions in previous years). Because of these changes, many attorneys could change how they draft wills, revocable trusts and other wealth transfer documents for married couples. Portable estate tax exemptions allow married spouses the convenience of full use of the marital deduction without any increase in estate taxes. Consequently, the need for credit shelter trusts (also known as bypass trusts and family trusts) may be significantly reduced. Instead, more people may use so-called I Love You plans in which the first spouse leaves everything to the surviving spouse. If a spouse wants to limit the amount of control a surviving spouse has over estate assets, he/she could use any of the different marital trusts, including Qualified Terminal Interest Property (QTIP) trusts. The potential simplicity and relative ease of using portability will change how many married couples implement their wealth transfer plans. Portability could allow these couples to postpone some difficult decisions about distributing assets until the second spouse s death. Many couples could benefit from a review of their current wills, revocable trusts, beneficiary designations and other wealth transfer documents to see if portability will help them meet their wealth transfer goals. For agent use only. Not for public distribution. 2

4 General Impact on Income Tax Planning The Act s increase in income taxes on high income taxpayers coupled with the 3.8% increase in taxes on investment income under the Affordable Health Care Act may also have a significant impact. Many high income taxpayers may be interested in strategies to offset their tax increases. 1. They may be open to changing the makeup of their asset portfolio and decide to shift some of their holdings into assets with the potential to provide taxdeferred growth but won t generate current taxable income. Cash value life insurance is an asset with this potential. High income people who also have a need for death benefits may wish to use life insurance to warehouse funds that they don t expect to need in the near future. Life insurance cash values have the potential to grow in value over time. Long-term irrevocable trusts might also benefit from using cash value life insurance to reduce income tax exposure. Trusts that don t distribute their income annually are taxed at a 39.6% rate on all taxable income in excess of $11,800. When an insurable interest is present, cash value life insurance could help reduce the impact of income taxes on these trusts. Impact on Life Insurance Life insurance comes through the Act unchanged. It continues to offer protection against potential financial problems caused by an insured s death. Over the years life insurance has been very effective in helping people accomplish important financial objectives, including: 1. Replacing future earnings that could be lost through premature death. 2. Solving equalization problems arising when assets won t be divided equally. 3. Serving as a source for supplemental retirement income. 4. Providing liquidity to pay estate settlement costs and expenses. 5. Transferring wealth at death. The Act does not change the ability of life insurance to accomplish any of these important financial goals. In fact, the market for four of these five uses of life insurance remains unchanged. The only use of life insurance negatively impacted by the Act is the estate liquidity market (#4 on the list above) and only part of that market has been hurt by the new wealth transfer tax rules Income tax savings could become an incentive for lifetime gifts. High income taxpayers could elect to make gifts of income-producing assets to children and grandchildren who are in lower income tax brackets than the donor. Income from the gifted assets could avoid both the new 3.8% tax on investment income and the 39.6% marginal income tax bracket as long as the child/grandchild s taxable income stays below the $400,000-$450,000 threshold. There is another potential income tax advantage from using portability at the first spouse s death. That advantage is a possible double step up in basis. Many assets in the first spouse s taxable estate will be eligible for a step up in basis. Any of those assets still owned by the surviving spouse could receive another step up in basis at the spouse s death. For example, suppose a husband has $1,000,000 in IBM stock when he dies which he acquired for $500,000. At his death under the terms of his will the IBM stock goes to his wife. She takes it with a stepped up basis to $1,000,000. If the stock has grown in value to $2,000,000 and she still owns it at her death, her heirs will get another step up in basis to $2,000,000. They could sell it immediately and avoid capital gains tax on all the stock s growth. 3 For agent use only. Not for public distribution.

5 Life Insurance and Estate Liquidity A portable and inflation-indexed estate tax exemption of $5.25 million per person ($10.5 million per married couple) will likely reduce the number of people who will have federal estate tax concerns. And, lowering the maximum estate tax rate to 40% reduces how much federal estate tax will be due from the few taxpayers with taxable estates in excess of the exemption. (Estates of decedents residing in the twenty states that have estate/inheritance taxes will still need liquidity to pay those taxes.) The bottom line here is that only people with very large estates will need to plan for federal estate taxes. As a result, there will likely be fewer opportunities to sell life insurance for federal estate tax liquidity. Although fewer people will need to pay federal estate taxes, many will still have significant liquidity needs at death. Life insurance death benefits can still provide funds for a number of death-related liquidity needs, including: State estate/ inheritance taxes Income tax liabilities Nursing home costs Estate administration expenses Cash bequests Debts Funeral expenses Medical expenses Property management fees Charitable bequests Change in Marketing to Part of the High Net Worth Market The increase in exemption limits should change how life insurance is sold to the segment of the high net worth market that no longer has a federal estate tax problem. Even though they may not need as much estate liquidity, they may still enjoy significant benefits from using life insurance. Financial advisors will simply need to discuss life insurance in a different way. They will need to design their presentations to demonstrate how life insurance can help them meet their wealth transfer objectives more easily and efficiently. Why Life Insurance May Be a Useful Wealth Transfer Tool Over the years many high net worth people have used life insurance to accomplish many different goals. With their tax and legal advisors, they ve adopted customized plans to pass on their wealth. Although many different financial products and strategies are available to them, when they are in good health they often use life insurance in their planning. Why? Because life insurance offers them a unique combination of potential advantages: Predictable Value A policy can be structured to pay a known death benefit amount when the insured dies. Death Benefit Value Not Linked to Market Performance A policy may be structured so that the death benefit is a fixed amount which is known in advance. Liquidity Death benefits are paid in cash when the insured dies; generally no taxes, costs, commissions or fees are subtracted. Growth / Leverage Policy death benefits (including the amount in excess of premiums) are generally federal income tax free under IRC Section 101. Federal Income Tax Free Payment Death benefits may be structured to be paid directly to the beneficiaries (or a trust for their benefit) without the costs and delays that often impact assets distributed through probate. Avoids Probate Death benefits may be structured to be paid directly to the beneficiaries (or a trust for their benefit) without the costs and delays that often impact assets distributed through probate. For agent use only. Not for public distribution. 4

6 Most high net worth people and their advisors are careful people. They didn t build their fortunes by being reckless. Many don t need to make more money. Often it s more important to them to protect what they have. Consequently, they are usually interested in products and strategies that offer protection and minimize risk. Before they act, they carefully analyze available alternatives and the potential risks associated with them. Every financial product and strategy has an element of risk. Life insurance is no different. However, when properly designed and implemented, policies issued by financially strong insurance companies can be reliable financial tools. Although results will vary with a variety of factors, when premiums are paid in a timely manner and the policy is well managed, life insurance can provide a reasonable rate of return through life expectancy. An internal rate of return analysis can help show the financial benefits a life insurance policy has the potential to deliver. The changes The American Taxpayer Relief Act makes in the federal estate tax could actually make it easier for some high net worth people to benefit from using life insurance. People who don t have a federal estate tax problem may not need an ILIT to own the policy; instead, they may be able to own the policy themselves. Personal ownership makes life insurance more attractive and easier to use in several ways: Eliminates Extra Costs When you can own your policy yourself, you don t need to pay an attorney to draft an ILIT and you don t have to pay a trustee to administer it. Easier to Pay Premiums Gifts or loans to supply premium dollars to a trustee aren t needed; Crummey withdrawal powers aren t a problem. Insureds can pay their premiums directly to the insurance company. Privacy Owning a policy personally means no one else has to know about it; there are no trustees or trust beneficiaries with a right to know about the policy or to ask questions about it. Control When you own your own policy, you maintain full control; within the limits of the policy you can exercise all policy rights, including changing the death benefit, premiums, primary and contingent beneficiaries, 1035 exchanges, etc. Unlike ILIT ownership, you can manage the policy to fit your needs and make adjustments whenever you wish. If you wish to control how policy benefits are delivered to family members, you can create a trust in your will and name it the policy beneficiary. And you can retain the ability to change the terms of the trust as long as you live. 5 For agent use only. Not for public distribution.

7 Conclusion The American Taxpayer Relief Act is good news for life insurance! It doesn t change any of the advantages life insurance policies have enjoyed or the ways in which it can help clients accomplish their financial goals. In addition, it opens up new opportunities for high income and high net worth people to use life insurance. Although some high net worth people may not need as much life insurance for estate tax liquidity, the increased gift, estate and GST tax exemptions make life insurance easier to use. The opportunity for some to own policies personally without increasing their transfer taxes increases its attractiveness. The ability to retain control and privacy without the need to pay for complex trusts creates new sales opportunities. We ve entered a new era of wealth transfer planning. This is a great time to show high net worth people the many reasons they ll want to use life insurance as part of their legacy. For agent use only. Not for public distribution. 6

8 These materials are not intended to and cannot be used to avoid tax penalties and they were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor. The Voya Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently and the strategies suggested may not be suitable for everyone. Clients should seek advice from their tax and legal advisors regarding their individual situation. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted and its products issued. All are members of the Voya family of companies. Not FDIC/NCUA Insured Not A Deposit Of A Bank Not Bank Guaranteed May Lose Value Not Insured By Any Federal Government Agency For agent use only. Not for public distribution Voya Services Company. All rights reserved. CN /01/2014 Voya.com