YPASS TRUST. Program Highlights & Fact Finder. Preserving Assets for Your Loved Ones

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1 B YPASS TRUST Program Highlights & Fact Finder May 2005 Preserving Assets for Your Loved Ones

2 BYPASS TRUST Trusts have always played an important role in estate planning by allowing the trust creator to direct how assets will be distributed after death. For wealthy married couples, a commonly used device is the Bypass Trust. What Is a Bypass Trust? This type of trust is usually funded at the first death of either the husband or wife to hold the applicable exclusion amount that is sheltered from estate taxes at the time of the first death. The trust is called bypass because the amount directed to it at the first death will bypass estate taxes at the second death while still providing benefits to the surviving spouse during the remainder of his or her lifetime. This trust is also known as a Credit Shelter Trust. At the surviving spouse s death, the trust principal is typically distributed to the couple s children. Under current law (in 2005), the deceased spouse can leave an unlimited amount of assets to the surviving spouse without any estate tax ramifications. However, at the second spouse s death, these assets are typically included in the spouse s estate and subject to estate tax. What Assets Can Be Placed in the Trust? Typically, the trust will contain the maximum lifetime exclusion amount, but less may be contributed. In 2005, the amount at death that can be exempted from estate taxes is $1.5 million per individual (scheduled to increase to $3.5 million in 2009 and drop to $1 million in 2011). Given the collective value of property and other assets that people acquire over a lifetime, it s easy to see how many people may exceed the current estate tax exemption amount. A variety of assets can be used to fund the trust at death and, thereafter, the trustee has the discretion of managing these assets for the spouse, beneficiary, and children. The income needs of the surviving spouse often dictate how the trustee will manage the assets. In many cases, the spouse may have adequate income from other sources and need little, if any, income from the trust. In that case, the trustee might want to employ a strategy to enhance the value of the trust for the children at the death of the second spouse. By purchasing a life insurance policy within the trust on the surviving spouse s life, the trustee may be able to greatly enhance the value of the trust for the children. In addition, since a life insurance policy s cash values grow tax-deferred, the trustee may reduce the trust s income tax liabilities. How Would Life Insurance Work? Consider the example of Frances Fortune, age 68, and in excellent health. At her husband s death, $1.5 million of stocks and bonds were used to fund a Bypass Trust to benefit Frances during her lifetime and then to pass on to her three children at her death. Frances owns substantial income-producing property outside the trust and does not need income from the trust. Instead, she would like to maximize the trust value for her children. She also thinks the children might use some of the Bypass Trust assets to pay estate taxes on assets included in Frances s estate and bequeathed to them at her death.

3 Marital Deduction: $3,500,000 Bypass Trust Arrangement Mr. Fortune (1st Death) $5,000,000 Bypass Trust: $1,500,000 Federal Estate Tax: $0 Trust Value without Trust Value with Year Life Insurance Life Insurance* 5 $1,896,259 $4,060,000** 10 2,397,199 4,420, ,831,042 5,140, ,843,099 5,500, ,122,513 5,860,000 * TransUltra EX universal life insurance policy, female, preferred underwriting, nonsmoker, age 68, and based on a current interest rate of 4.5% and current charges. Fluctuations in interest rates and/or policy charges may require the payment of additional premiums to keep the policy in force. ** $1.5 million + death benefit + 5 years of premiums. In our example, assume the trust can earn income equal to 8% of trust assets annually and is in a 40% tax bracket. The trustee can use the after-tax amount of $72,000 to purchase a $2.2 million TransUltra EX universal life insurance policy with the return of premium death benefit option on Frances s life. Alternatively, the trustee can reinvest the after-tax amount and add the income to the trust principal. Here is a comparison of reinvesting the after-tax amount of interest back into the trust every year versus purchasing a life insurance policy inside the trust. In this situation, the life insurance provided more trust value to the children for 24 years. Of course, investment performance will vary as will tax brackets, and with the policy shown here, the policy performance is not guaranteed. There are a variety of factors to evaluate before purchasing a life insurance policy inside a Bypass Trust, such as beneficiary needs, trust terms, investment alternatives, the type of life insurance policy desired, and the overall estate plan. Advisors, including an attorney, are needed to determine the proper course of action for the bypass trustee. An insurance advisor can develop a number of life insurance options depending upon each family s situation, and work with other advisors to ascertain if life insurance inside the trust can help achieve the family s planning objectives. Bypass Trust with Life Insurance Step 1: Funding the Trust Bypass Trust is funded at first spouse s death to hold applicable exclusion amount. Step 2: Purchasing Life Insurance Trust purchases life insurance on surviving spouse. Trust is owner and beneficiary of policy. Step 3: Loved Ones Upon death of surviving spouse, policy death benefit is paid to trust. Trust principal is distributed to loved ones with no estate or gift taxes on proceeds at second death. Surviving Spouse s Right to Income Income and trust assets may be accessed during surviving spouse s lifetime with certain limitations.

4 BYPASS TRUST Fact Finder 1. Who is currently serving as trustee? Surviving spouse Other (specify) 2. Does the surviving spouse have a general power of appointment over trust assets? Yes No Can he/she distribute trust assets to anyone, including himself/herself or his/her estate and/or creditors? Yes No 3. Does the surviving spouse have a right to the trust income? Yes No If yes, is the right to income limited by an ascertainable standard? Yes No 4. Must all income be paid to the surviving spouse beneficiary at least annually? Yes No 5. Does the surviving spouse have the power to alter the amount of distributions that will be paid to other beneficiaries after his/her death (limited power of appointment)? Yes No 6. Does the surviving spouse have a special power of appointment that allows him/her to distribute trust assets to anyone other than himself/herself or his/her estate or creditors? Yes No 7. Does the trustee have broad investment powers and/or does the trust specifically allow for the purchase of life insurance? Yes No Illustration Product Name Policy Interest Rate Assumptions Current Guaranteed Name of Proposed Insured Insured s DOB Gender Issue State Face Amount $ Insurance Premium $ Years to Pay Premium or to Age Non-Tobacco User Tobacco User Risk Classification Select Preferred Standard Table Rating? Death Benefit Option Level Flat Extra Amount? How Many Years? Increasing Plus-Premium Lump Sum $ If 1035 Exchange: Number of exchange Internal exchange amount Endowment? External exchange amount Yes No or Cash Value at Age 100

5 Producer Information Producer Name Broker/Dealer Affiliation (required for variable life proposal) Phone No. Address Date BYPASS TRUST Life insurance professionals can obtain more information on this and other cutting-edge advanced marketing concepts by contacting their Transamerica General Agent or visiting the Advanced Marketing section of TransACT at Transamerica Insurance & Investment Group and its representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties should be urged to consult with and rely solely upon their own independent tax advisor regarding the concepts presented and their particular situation. Transamerica Occidental Life Insurance Company OLA Bypass Trust Fact Finder

6 Life insurance professionals can obtain more information on this and other cutting-edge advanced marketing concepts by contacting their Transamerica General Agent or visiting the Advanced Marketing section of TransACT at Transamerica clients and prospects can learn more about products and services at Transamerica Occidental Life Insurance Company ( Transamerica ) and its representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of publication. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of May TransUltra EX is a nonparticipating, flexible premium universal life insurance policy issued by Transamerica Occidental Life Insurance Company, Cedar Rapids, IA. Policy Form # (CVAT). Group Certificate # (CVAT) for certificates issued under a group policy issued to the Rhode Island National Consumer Protection Trust. Policy form and number may vary, and this product may not be available in all jurisdictions. In most states, in the event of suicide during the first two policy years, death benefits are limited only to the return of premiums paid. Transamerica Occidental Life Insurance Company OLA Bypass Trust Program Highlights & Fact Finder