Leveraging wealth transfer using private financing

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1 Private Financing Strategy Leveraging wealth transfer using private financing Not a bank or credit union deposit or obligation Not insured by any federal government agency Not FDIC or NCUA/NCUSIF insured Not guaranteed by any bank or credit union May lose value LIM /14

2 A flexible planning solution for future generations Life Insurance can be a highly effective vehicle for asset protection and increasing the wealth that passes to your beneficiaries in some cases, over several generations. And a life insurance policy properly structured outside of your estate, in an irrevocable life insurance trust (ILIT), can provide the proceeds of the death benefit both estate and income tax free. Many individuals and couples recognize the value of this estate planning strategy, however they may have used up limitations for their lifetime gift tax exemption and/or gift tax annual exclusions or prefer not to use these exemptions or exclusions to cover the life insurance premium. If your estate could benefit from an ILIT funded with life insurance, but you don t wish to fund the policy with taxable gifts, you may want to consider a private financing strategy. Is a private financing strategy right for you? You may wish to consider private financing if you: Want to minimize or eliminate gift taxes. Want to leave a larger legacy to your beneficiaries. Have used up or don t want to use either your lifetime gift tax exemption(s) and/or gift tax annual exclusions. Want the flexibility to recover the funds supplied to pay premiums. Why use private financing? In a typical ILIT strategy, you or you and your spouse, as the Grantor(s), establish the trust and then make cash gifts to fund the purchase of an insurance policy. If these cash gifts are made in an amount equivalent to the available annual gift tax exclusions and/or lifetime gift tax exemption(s), no gift taxes will result. However, gifts of potentially large life insurance premiums may result in the payment of gift taxes. By lending funds to the trust, rather than gifting them, gift taxes may be reduced or eliminated.

3 The private financing solution In a private loan arrangement (which is sometimes referred to as a private section 7872 loan ), 1 your ILIT borrows funds under a fair market loan to purchase life insurance on your life or the lives of you and your spouse. As the lender(s), you (the Grantor(s)) make either annual loans or a lump sum loan to the ILIT in exchange for a promissory note at the current Applicable Federal Rate (AFR). 2 Any excess funds are invested by the trustee. The loan interest due from the ILIT may be deferred or paid annually using assets in the trust that are not needed for the life insurance premiums. You can continue to make cash gifts to the trust so as to take full advantage of annual gift tax exclusions. 3 The loan may be repaid from the death benefit proceeds, or earlier from trust assets. How the strategy works Grantor Loan Irrevocable Life Insurance Trust (ILIT) Makes either annual loans or a lump sum loan to the trust. Interest due on the loan is gifted or deferred for the life of the loan. 1 Interest payment Loan repayment Owner and beneficiary of policy on Grantor s life. Trustee pays premiums to fund life insurance policy and pays loan interest to the Grantor(s) each year, or has the option to defer it. Pays premium Pays death benefit Insurance Policy 1 A Private Section 7872 loan is governed by IRS Section 7872 split dollar regime plans and will use the applicable federal tax rate (AFR) to measure taxation for income and gift tax purposes. 2 The AFR is published monthly by the IRS. If the specified loan interest rate is less than the AFR, then the difference is imputed income and the trust must pay tax on the imputed income. 3 Any gift to an ILIT that is intended to be a present interest and completed gift must be made to an ILIT, which contains Crummey power language. The applicable federal estate tax exclusion amount (indexed for inflation) is $5.34 million per individual in The estate tax is unified with the federal gift tax and generation-skipping transfer such that in 2014 the lifetime gift tax exclusion and generation-skipping transfer tax is $5.34 million (indexed for inflation) and the maximum tax rate for both of these taxes will be 40%. Individuals can gift up to $14,000 per year, per recipient, free of federal income and estate taxes in (Source: Frequently Asked Questions on Gift Taxes, IRS, accessed January 2014: article/0,,id=108139,00.html). For current information and an assessment of your unique situation, please consult your tax professional.

4 Types of loans demand or term loans Loans in private financing arrangements are either payable at a specific time or upon the grantor s (lender s) demand. If a repayment date is specified in the note, the loan will be treated as a term loan. This assumes the grantor(s) do not have the right to demand loan repayment before the term ends; however, the promissory note should call for the acceleration of repayment if the insured(s) die prior to the expiration of the term. Term loans fall into three categories: Short-term for a loan term of less than 3 years 4 Mid-term Long-term for a loan term of 3 to 9 years for a loan term of 9 or more years Demand loans allow the grantor to demand repayment at any time. These loans use an interest rate at least equal to the blended AFR, and must be re-determined each year at the current published rate. 5 Loan repayment / exit strategies A termination or repayment plan is a key element to help reduce the overall risk of the loan arrangement. There are several strategies available: Death Benefit Upon death, the proceeds can be used to repay the outstanding loan balance, plus any interest due. Other ILIT Resources The ILIT may repay the outstanding loan from other trust assets. Policy Cash Values If the policy has sufficient cash value that exceeds the outstanding loan balance, the ILIT trustee has the option of withdrawing and/or borrowing policy cash values to repay the loan value. The removal of policy cash values will reduce the death benefit, and may cause the policy to lapse. 6 Additional Gifts Over time, it may make sense to forgive all or part of the ILIT s repayment obligation. This is a taxable gift and may reduce the grantor s lifetime gift tax exemption, if available. 7 4 If the loan term is structured on an annual basis, and interest rates increase, this could increase your potential gift tax liability. 5 The AFR is published monthly by the IRS. 6 Loans and withdrawals are only available prior to the death of the grantor(s), and will reduce the policy death benefit and cash surrender value. This may cause the policy to lapse, and may be taxable. Withdrawals or loans on modified endowment contracts (MECs) may be subject to federal income tax and a 10% IRS penalty on amounts taken prior to age 59½. 7 Source: Frequently Asked Questions on Gift Taxes, IRS, accessed January 2014: For current information and an assessment of your unique situation, please consult your tax professional. Private Financing Strategy

5 The benefits of a private financing strategy Using a private loan arrangement with a life insurance trust may help: Minimize gift taxes Gift taxes can be significantly reduced or avoided by lending funds to the ILIT. Gifting can be limited to annual exclusions or the amount of annual interest paid by the ILIT on the cumulative loan balance. Take advantage of low interest rates In the current low interest rate environment, the Applicable Federal Rates (AFRs) may be attractive enough to lock in a rate by making a lump-sum loan to the ILIT. The trustee can then use the loan to fund premiums, and the excess can be invested higher than the loan rate. Making tax-free gifts to an ILIT can help reduce the size of your taxable estate. Avoid paying interest to a third-party lender You, as the lender, will receive loan principle plus any additional loan interest due. Unlike a commercial loan, you do not have to qualify, post collateral or have loan call risks. No income tax The loan interest income is not subject to income tax if your ILIT is a grantor trust for income tax purposes. 8 Transfer assets out of your estate Making tax-free gifts to an ILIT can help reduce the size of your taxable estate. Currently, individuals may gift up to $14,000 annually (per beneficiary), and married couples may gift double the annual amount to $28,000 (per beneficiary). Plus, as long as you stay under the $14,000 limit, these annual gifts do not count against your $5.34 million lifetime cumulative gift-tax exemption or your $5.34 million estate-tax exemption. 9 8 Loan interest income paid to you from the ILIT will not be treated as taxable income if the ILIT is established as a grantor trust for income tax purposes. Refer to revenue ruling If an existing partnership or non-grantor trust is the lender, the loan interest paid by the ILIT will be taxable. 9 Source: Frequently Asked Questions on Gift Taxes, IRS, accessed January 2014: For current information and an assessment of your unique situation, please consult your tax professional.

6 Key considerations of a private financing strategy Loan interest The loan interest paid by the trust is not deductible. Income tax If an existing trust or partnership lends funds to your ILIT, or if your trust is not a grantor trust, the loan interest payments may be subject to income tax when received. Estate tax The loan principal will be paid to your estate and will be subject to estate tax, if applicable. Liquidity The lender(s) must have the available cash flow to make the loan(s). Interest Rates An increase in interest rates could increase potential gift tax liability. Is private financing right for you? If you wish to minimize or eliminate gift taxes, or if you have used up or prefer not to use your lifetime gift tax exemption(s) and/or gift tax annual exclusions, a private financing strategy may be appropriate for you. Contact your financial professional for more information. Private Financing Strategy

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8 Symetra Life Insurance Company th Avenue NE, Suite 1200 Bellevue, WA Symetra is a registered service mark of Symetra Life Insurance Company. Life insurance is issued by Symetra Life Insurance Company, th Avenue NE, Suite 1200, Bellevue, WA Products are not available in all U.S. states or any U.S. territory. Guarantees and benefits are subject to the claims-paying ability of Symetra Life Insurance Company. Neither Symetra Life Insurance Company, nor the other subsidiaries under Symetra Financial Corporation and its insurance producers and advisors give tax or legal advice. Consult your attorney or tax advisor for more information.