By pa s s Tru s t Program Highlights & Fact Finder
Trusts have always played an important role in estate planning by allowing you to direct how your assets will be distributed after death What Is a Bypass Trust? A Bypass Trust is usually funded at the first death of either the husband or wife to hold the applicable exclusion amount that is sheltered from federal estate taxes. The trust is called bypass because the amount directed to it at the first death will bypass estate taxes at the surviving spouse s death while still providing benefits to the surviving spouse during the remainder of his or her lifetime. You may also have heard this trust called a Credit Shelter Trust or a B Trust. At the surviving spouse s death, the trust principal is usually distributed to the couple s children. Under current federal law, 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? The trust can contain the maximum lifetime exclusion amount, but less may be contributed. In 2007, the amount at death that can be exempted from estate taxes is $2 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 accumulate over their lifetimes, it s easy to see how you could exceed the current estate tax exemption amount. You can use a variety of assets to fund the trust at death and, thereafter, the trustee can decide how to manage these assets for the spouse, children, and other beneficiaries. Often, the income needs of the surviving spouse shape 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. Then, the trustee might want to find ways to enhance the value of the trust for the children at the death of the surviving 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 value grows tax deferred, the trustee may reduce the trust s income tax liabilities. How Would Life Insurance Work? Consider Frances Fortune. She is 68, and in excellent health. At her husband s death, $2 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 doesn t 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 left to them at her death.
Bypass Trust Arrangement Mr. Fortune (1st Death) $5,500,000 In this example, let s 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 aftertax amount of $96,000 to purchase a $2.8 million TransUltra Plus 2006 universal life insurance policy with the return of premium death benefit option on Frances s life. Marital Deduction $3,500,000 Bypass Trust $2,000,000 Federal Estate Tax: $0 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. Year Trust Value without Life Insurance Trust Value with Life Insurance* 5 $ 2,528,345 $ 5,312,607 10 3,196,265 5,792,607 20 5,108,056 6,752,607 25 6,457,465 7,232,607 30 8,163,351 7,712,607 * TransUltra Plus 2006 universal life insurance policy, female, preferred underwriting, nonsmoker, age 68, and based on a current interest rate of 5.75% and current charges. Fluctuations in interest rates and/or policy charges may require the payment of additional premiums to keep the policy in force. Trust value equals $2 million plus life insurance death benefit. In this situation, the life insurance provided more trust value to the children for 28 years. Of course, policy performance and tax brackets will vary and, with the policy shown here, performance is not guaranteed. There are a variety of factors you should consider 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. It is important to consult with your advisors, including an attorney, to determine the proper course of action for the bypass trustee. We can develop a number of life insurance options depending upon your family s situation, and work with your other advisors to ascertain if life insurance inside the trust can help achieve your 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. Surviving Spouse s Right to Income Income and trust assets may be accessed during surviving spouse s lifetime with certain limitations. 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.
Bypass Trust Fact Finder We can develop a number of life insurance options depending upon your family s situation, and work with your other advisors to ascertain if life insurance inside the trust can help achieve your family s planning objectives. 1. Who is currently serving as trustee? Surviving spouse Other (specify) 2. Can he/she distribute trust assets to anyone, including himself/herself or his/her estate and/or creditors via a general power of attorney? 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 any conditions? 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 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 Flat Extra Amount Years Death Benefit Option Level Increasing Plus-Premium Lump Sum $ If 1035 Exchange: Number of exchange Endowment? Yes No or Cash Value at Age 100 Internal exchange amount External exchange amount Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company ( Transamerica ), and their representatives do not give tax or legal advice. This material and the concepts presented here are provided for informational purposes only and should not be construed as tax or legal advice.
Bypass Trust Producer Information Producer Name Broker/Dealer Affiliation (required for variable life proposal) Phone No. E-mail Address Date OLA 855 T 1008
This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should be urged to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively Transamerica ), and their representatives do not give tax or legal advice. This material and the concepts presented here are provided for informational purposes only and should not be construed as tax or legal advice. 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, these laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica s interpretations. Additionally, the information presented here does not consider the impact of the applicable state laws upon clients and prospects. TransUltra Plus 2006 is a nonparticipating, flexible-premium universal life insurance policy issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499. Policy Form #1-11311106 (CVAT). Group Certificate #2-73036106 (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. In Missouri, suicide is no defense to payment of benefits unless the Company can show that the insured intended suicide at the time of application for coverage. Life insurance products are issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499, or Transamerica Financial Life Insurance Company, Purchase, NY 10577. All products may not be available in all jurisdictions. Transamerica Financial Life Insurance Company is authorized to conduct business in New York. Transamerica Life Insurance Company is authorized to conduct business in all other states. 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 September 2007. OLA 855 T 1008