Maximizing Family Wealth Transfer Planning Utilizing Life Insurance

Transcription

1 Maximizing Family Wealth Transfer Planning Utilizing Life Insurance December 2013 Prepared By: William A. Payne, CLU, ChFC, MSFS Principal Richard R. Renwick, CLU, ChFC, MSFS Principal Lawrence T. Gingrow, III, J.D. Director of Advanced Planning

2 Client Profile Mr. Client is Age 54; Ms. Client is Age 51 Three children, no grandchildren Mr. Client s Estate Assets: Investment Account $7,600,000 IRA $1,000,000 Ms. Client s Estate Assets: Investment Account $7,600,000 IRA $16,000 Joint Assets: $1,200,000 TOTAL ASSETS: $17,416,000 Clients are withdrawing $200K per year, indexed for inflation at 2% Clients have used $3M of their Lifetime Gift Tax Exemption Clients are Massachusetts Residents 2

3 Estimated Estate Settlement Costs Age 54/51 Age 94/91 Estate Value (assumes a 4% net blended growth rate): $17,416,000 $56,130,161 Costs at Mr. Client s Death: Admin. Expenses: $50,000 $110,402 Costs at Ms. Client s Death: Admin. Expenses: State Estate Tax: Fed. Estate Tax: $100,000 $220,804 $2,229,360 $8,394,633 $3,014,656 $15,961,729 TOTAL EXPENSES: $5,394,016 $24,687,568 Estate Shrinkage: 31% 44% 3

4 ESTATE FLOWCHART #1: ESTATE DISTRIBUTION AT LIFE EXPECTANCY (AGE 94/91) BASED ON CURRENT ASSET ALLOCATION) Total Estate Assets at Life Expectancy: $56,130,161 $50,551,762 Estate Settlement Costs at Mr. Client's Death Administrative Expenses: $110,402 Ms. Client's Assets: $56,019,759 $50,441,360 Estate Settlement Costs at Ms. Client's Death Administrative Expenses: $220,804 State Estate Tax: $8,394,633 Federal Estate Tax: $15,961,729 TOTAL SETTLEMENT COSTS: $24,577,166 Total Shrinkage of Clients' Estate: 44% Net to Heirs: $31,442,593 $25,864,194 4

5 PLANNING OPTION #1: MAINTAIN CURRENT ALLOCATION Yr Age Estate Estate Tax Net to Heirs Beg. of Year Estate Value End of Year Estate Value Federal/State Estate Tax and Costs Net EOY (a) (b) (c) (d) (b)-(c) $17,416,000 $17,906,960 $5,639,044 $12,267, $20,048,849 $20,632,813 $6,999,093 $13,633, $23,189,794 $23,889,466 $8,623,254 $15,266, $26,965,122 $27,765,072 $10,555,338 $17,209, $31,222,976 $32,155,046 $12,743,567 $19,411, $36,175,289 $37,256,882 $15,286,004 $21,970, $41,909,269 $43,157,654 $18,225,954 $24,931, $48,517,905 $49,954,796 $21,611,874 $28,342, $54,518,573 $56,130,161 $24,687,567 $31,442, $56,130,161 $57,790,411 $25,514,390 $32,276, $64,961,482 $66,902,190 $30,051,554 $36,850, $75,360,706 $77,667,526 $35,410,727 $42,256, $82,541,136 $85,115,219 $39,117,486 $45,997,733 5

6 PLANNING OPTION #2: MAKE $3M GIFT TO GRANTOR TRUST; PURCHASE $10M SURVIVORSHIP UNIVERSAL LIFE INSURANCE Estate Grantor Trust Estate Tax Net to Heirs Yr Age B.O.Y. Estate Value Income Tax Paid for Trust E.O.Y. Estate Value B.O.Y. Trust Investment Assets Life Ins. Premium E.O.Y. Trust Investment Assets Life Ins. Death Benefit IRR on Death Benefit Fed/State Estate Tax and Costs Net at 25% at 5.33% gross EOY EOY (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (c)+(f)+(g)-(i) $14,416,000 -$39,228 $14,746,163 $3,000,000 -$56,048 $3,100,865 $10,000, % $4,071,289 $23,775, $16,162,590 -$46,704 $16,542,532 $3,561,027 -$56,048 $3,691,794 $10,000, % $4,970,314 $25,264, $18,178,612 -$56,396 $18,619,186 $4,288,378 -$56,048 $4,457,913 $10,000, % $6,009,195 $27,067, $20,524,812 -$68,961 $20,995,431 $5,231,362 -$56,048 $5,451,158 $10,000, % $7,197,596 $29,248, $22,965,496 -$85,251 $23,478,606 $6,453,906 -$56,048 $6,738,864 $10,000, % $8,440,053 $31,777, $25,605,278 -$106,371 $26,153,444 $8,038,892 -$56,048 $8,408,329 $10,000, % $9,778,698 $34,783, $28,393,903 -$133,753 $28,962,571 $10,093,768 -$56,048 $10,572,730 $10,000, % $11,185,193 $38,350, $31,248,181 -$169,251 $31,818,263 $12,757,840 -$56,048 $13,378,798 $10,000, % $12,616,154 $42,580, $33,513,072 -$205,090 $34,071,146 $15,447,403 -$56,048 $16,211,714 $10,000, % $13,746,296 $46,536, $34,071,146 -$215,274 $34,625,150 $16,211,714 -$56,048 $17,016,763 $10,000, % $14,024,421 $47,617, $36,788,339 -$274,941 $37,316,182 $20,689,537 -$56,048 $21,733,254 $10,000, % $15,376,894 $53,672, $39,376,418 -$352,297 $39,877,478 $26,494,872 -$56,048 $27,848,014 $10,000, % $16,666,863 $61,058, $40,861,981 -$409,323 $41,343,200 $30,774,508 -$56,048 $32,355,753 $10,000, % $17,406,565 $66,292,389 6

7 COMPARISON OF OPTIONS Yr Age Option #1: Maintain Current Allocation Option #2: Make $3M Gift; Purchase $10M Survivorship Universal Life Net to Heirs Net to Heirs % +/- Option # $12,267,916 $23,775, % $13,633,720 $25,264, % $15,266,212 $27,067, % $17,209,734 $29,248, % $19,411,479 $31,777, % $21,970,878 $34,783, % $24,931,700 $38,350, % $28,342,922 $42,580, % $31,442,593 $46,536, % $32,276,021 $47,617, % $36,850,636 $53,672, % $42,256,799 $61,058, % $45,997,733 $66,292, % 7

8 ESTATE FLOWCHART #2: ESTATE DISTRIBUTION AT LIFE EXPECTANCY (AGE 94/91) WITH $3M GIFT TO TRUST AND $10M SURVIVORSHIP UNIVERSAL LIFE INSURANCE Total Estate Assets at Life Expectancy: $34,071,146 $28,492,747 Estate Settlement Costs at Mr. Client's Death Administrative Expenses: $110,402 Ms. Client's Assets: $33,960,745 $28,382,345 Estate Settlement Costs at Ms. Client's Death Administrative Expenses: $220,804 State Estate Tax: $4,865,190 Federal Estate Tax: $8,549,900 TOTAL SETTLEMENT COSTS: $13,635,894 Grantor Trust $10M SURVIVORSHIP UNIVERSAL LIFE INSURANCE POLICY (AVAILABLE TO FUND ESTATE SETTLEMENT COSTS) Total Shrinkage of Clients' Estate: 6.7% $24,746,451 Net to Heirs: $30,324,851 + Grantor Trust $16,211,714 8

9 Analysis Summary If the Clients were to pass away at life expectancy, estate taxes and costs would reduce the value of their estate by $24.7M (a 44% drop). By gifting $3M of their lifetime gift exemption into a trust, and using the gift to fund premiums on a $10M life insurance policy, the Clients may reduce the shrinkage of their estate from 44% to 6.7%. The life insurance also addresses the risk of death before Life Expectancy. The life insurance provides a fixed asset within the Clients portfolio with little to no volatility and no correlation to the performance of equities or other assets. 9