Transcript Slide 1

Life Insurance Planning in a
Low Interest Rate Environment
Grantor-Retained Annuity Trust
Presented by:
0259907-00001-00 Ed. 04/2014 Exp.10/07/2015
INSURANCE PRODUCTS:
NOT INSURED BY FDIC OR ANY MAY LOSE NOT A DEPOSIT OF OR GUARANTEED FDIC BANK
FEDERAL GOVERNMENT AGENCY
VALUE
BY ANY BANK OR ANY BANK AFFILIATE
Introduction
• Why are interest rates so low?
• What may cause rates to rise?
• How can low rates help with HNW planning?
Why low interest rates?
• Economy is in recovery mode
• Low interest rates => households, businesses
spend, invest more
• More spending, investing => employment
growth, rising GDP
The Recovery Cycle – At a Glance
New Demand
for Goods,
Services
Low Fed
Rates
Low
Lending
Rates
Spending,
Investment
Recovery
Employment,
GDP
Consumer,
Investor
Confidence
Why could rates rise?
• The Good: Increased consumer, investor
demand for credit vs. limited lending capital
• The Bad: Rising inflation
• The Ugly: U.S. debt ratings downgrade
Long-Term Growth – At a Glance
Low Fed
Rates
Low
Lending
Rates
Recovery:
Sustained
Demand for
Credit
Fed
Relaxes
Target
Rising
Treasury
Yields
Impact of Rising Treasury Yields
Treasury yields determine the AFR (borrowing)
and § 7520 (discounting) rates for individual
taxpayers
Treasury
Yields
AFR
§ 7520
The Planning Benefits of Low Rates
• Lower interest rates make some wealth transfer
strategies more efficient:
– Interest-only borrowing
– Sale of property where buyer has limited ability to pay
– Valuing a donor’s retained interest in property
Profile – Grantor Retained Annuity Trust
• Works in low rate environment because:
– A low discount rate makes it easier for assets to achieve gains
that can be transferred to beneficiaries gift and estate tax-free
• For individual clients who…
 Own large income producing and/or highly
appreciated/appreciating assets
 Would like to pass future income and appreciation to the next
generation without making large gifts
 Have a current life insurance need
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GRATs…Overview
• An Irrevocable Trust
• Grantor Retains A Right To Payment of a
Fixed Amount from the trust for a Fixed
Period Of Years
• At The End of the GRAT Period, The
Remaining Value Passes to a NonCharitable Beneficiary (such as a trust or a
child)
• General Rule: A shorter term is more
desirable than a longer term
GRATs….Overview
• Allow Large Transfers of Property With
Little or No Gift Tax Cost
WHY?
• Because of The Gift Formula:
FMV Of Property Contributed
– Value of Retained Interest
= Taxable Gift
• Discount Rate Uses IRC §7520 Rate in
effect when the GRAT is created
• Estate Tax Advantages
GRATs….Overview
• What Types of Property Are Suitable For A
GRAT?
– Virtually Any Type – Special Rules For Personal
Residences
– High Yielding And/Or Expected to Appreciate
Substantially Are Ideal
– FLPs: Even Better Gift Tax Leverage If FLP
Interests Are Transferred To A GRAT
The Sleeper GRAT
Question:
• What if a client doesn’t have the right assets to fund a
GRAT today, but wants to lock in today’s low 7520
rate?
Answer:
• The Sleeper GRAT:
– Locks in the right to value income at today’s rates,
until a time when the GRAT strategy is truly
appropriate
– “Stores” fixed income assets while returning 100%
of their value to the grantor
History of 7520
The Sleeper GRAT
Question:
• You said if the 7520 Rate goes up, that’s because Treasury
yields have risen. If that’s the case, won’t investment
returns in general also go up, and be adequate to “clear”
whatever discount hurdle is then in effect?
Answer:
• Not for all clients. Those with long term fixed assets giving
income at today’s relatively modest rates won’t see their
returns “float” with the interest rate tide.
• Locking in a rate today might benefit these clients by letting
them participate in a low-discount GRAT strategy now, and
buy them time to re-tool the rest of their portfolio should rates
rise.
The Sleeper GRAT
• The concept: create and fund one or a series of
GRATs today (say, 4, 6, 8, and 10 year terms),
and fund them with fixed income assets
• The fixed income assets earn the same or
slightly more than the hurdle rate – a.k.a. the
7520 rate
• The GRAT is therefore scheduled to return all of
the grantor’s asset to him/her over the term, with
a zero remainder, unless and until …
The Sleeper GRAT
• § 7520 rate rises significantly, OR
• Short-term GRATs are eliminated due to tax law
changes, OR
• Grantor acquires an asset that has higher appreciation
potential.
THEN:
• One or more of the GRATs could be “switched on” by
swapping volatile assets of equal value (with high
appreciation potential) into the GRAT
• Net effect: a short-term GRAT (remaining term) pegged
at today’s 7520 rate
The Sleeper GRAT - Examples
– Assume the client has an asset worth $3,094,430 currently
earning fixed interest at a rate of 2.2% per year
– The client is interested in the short-term GRAT idea with de
minimus gifting consequences
– At the current 7520 rate of 2.2%*, is the client in a good position
to fund a GRAT?
– The following slide should provide the answer ..
*March 2014
The Sleeper GRAT - Examples
Short-Term GRAT (Gift = $0)
Uses 2.2% 7520 Discount Rate, 2.2% Annual Income from Assets
Year
Start Value
2.2%
Annual
Income
1
$3,094,430
$68,077
($1,077,185 ) $2,085,322
2
$ 2,085,322
$45,877
($1,077,185 ) $1,054,015
3
$ 1,054,015
$23,188
($ 1,077,185)
Annuity
Balance
$17.84
Switching on the Sleeper GRAT
To preserve the ability to have the three-year GRAT we
just saw eight years from now, and use today’s rate of
2.2%:
Fund a 10-year sleeper GRAT now with the $3,094,430 asset,
which would produce the values on the following slide.
Switching on the Sleeper GRAT
10 Year GRAT (Gift = $0)
Uses 2.2% 7520 Discount Rate, 2.2% Annual Income from Assets
Year
Start Value
2.2% Annual
Income
Annuity
Balance
1
$3,094,430
$68,077
($348,107)
$2,814,400
2
$2,814,400
$61,917
($348,107)
$2,528,210
3
$2,528,210
$55,621
($348,107)
$2,235,724
4
$2,235,724
$49,186
($348,107)
$1,936,802
5
$1,936,802
$42,610
($348,107)
$1,631,306
6
$ 1,631,306
$35,889
($348,107)
$1,319,087
7
$1,319,087
$29,020
($348,107)
$1,000,000
8
$1,000,000
$22,000
($348,107)
$673,893
9
$673,893
$14,826
($348,107)
$340,612
10
$340,612
$7,493
($348,107)
$0
Switching on the Sleeper GRAT
10 Year GRAT (Gift = $0)
Uses 2.2% 7520 Discount Rate, 20% Annual Income Years 8-10
Year
Start Value
Annual
Income
Annuity
Balance
1
$3,094,430
$68,077
($348,107)
$2,814,400
2
$2,814,400
$61,917
($348,107)
$2,528,210
3
$2,528,210
$55,621
($348,107)
$2,235,724
4
$2,235,724
$49,186
($348,107)
$1,936,802
5
$1,936,802
$42,610
($348,107)
$1,631,306
6
$ 1,631,306
$35,889
($348,107)
$1,319,087
7
$1,319,087
$29,020
($348,107)
$1,000,000
8
$1,000,000
$200,000
($348,107)
$851,893
9
$851,893
$170,379
($348,107)
$674,165
10
$ 674,165
$134,833
($348,107)
$460,891
Why Life Insurance?
Why Life Insurance?
– Counters risk of the client dying during the term of the GRAT
– Provides estate liquidity – the GRAT only removes the appreciation
from the estate, not the original asset value, which is paid back via
the annuity:
• A GRAT is an estate freeze, not an estate reducer
– An ILIT can be the remainder beneficiary of a GRAT
– Grantor can allocate GSTT exemption amounts to an ILIT, but not to
a GRAT
Large Case Sales Idea
• Fund large premiums under a Family Split Dollar
agreement
• Create the option to choose among several years to roll
out of the arrangement by funding several sleeper
GRATs alongside the ILIT
• When the right rollout year rolls around, one of the
sleeper GRAT’s remainder repays the premium loans
• The other sleeper GRATs simply pour the low yielding
assets back to the grantors over the remainder of their
terms
Mr. and Mrs. Krepps
Hypothetical case facts:
Potential concerns:
• Mr. and Mrs. Krepps, ages 45 and 44
• Seven figure income and $30MM net worth
• Need life insurance; interested in its role in
estate protection
• Want to allocate $100,000 yearly over 10
years for premiums
• Don’t want to make large gifts
• Access to Policy Cash Values
This is a hypothetical example used for illustrative purposes only to describe how the strategies may work. Which strategy works best
for clients will depend on their individual facts and circumstances. Actual results will vary. Any representation of life insurance
premium or death benefit is purely hypothetical in amount and is not a guarantee of cost or death benefit now or in the future from a
specific life insurance policy.
Any assumptions for life insurance policy values on subsequent slides are based on a male age 45, Preferred Non-Tobacco
underwriting class, and female, age 44 and Preferred Best underwriting class, PruLife SUL Protector, $108,750 annual premium for
10 years, $10,000,000 Level death benefit. The rates for the SUL are Current Assumptions.
Family Split Dollar Arrangement
• Need $10 Million of Life Insurance
• 10 Pay Premium To Guarantee DB through
Mrs. Krepps’ Age 105 = $108,757
This hypothetical example is for illustrative purposes.
Actual results will vary.
Sample Case
Family Split Dollar Arrangement with Sleeper GRAT
1
$5,000,000 GRAT
funding
1
$108,757 annual
premium loans
Mr. Krepps
(sole grantor of ILIT)
2
$562,474 annuity
Payment
Mrs. Krepps
(co-grantor of GRAT)
2
Collateral assignment
(ILIT)
Loan interest payment
(ILIT)
3
Access to trust values
by spouse, if
necessary
4
Death benefit
proceeds distributed
on the second death
2
1
2
Irrevocable Life
Insurance Trust
Mrs. Krepps
3
Second-to-Die
Cash Value Life
Insurance Policy
Beneficiaries (estate
tax-free, if structured
properly)
4
10 Year Sleeper
GRAT (and other
GRATs with different
terms)
Fixed Income
Assets
ILIT is Remainder
Beneficiary
Sample Case
After 7 Years
1
2
$1,615,807 high
yielding assets
$1,615,807 Fixed
Income Assets
1
Mr. Krepps
(sole grantor of ILIT)
Mrs. Krepps
(co-grantor of GRAT)
2
10 Year GRAT
High Yield Assets
ILIT is Remainder
Beneficiary
Sample Case
In 10 Years – Beginning of Year
1
$5,000,000 total
transferred to GRAT
$1,087,570 total loan
to trust
2
Cum. Annuity
payments: $5,062,262
2
Collateral assignment:
$1,087,570
Cash value share:
$672,988 (actual
surrender value)
1
Mr. Krepps
(sole grantor of ILIT)
Mrs. Krepps
(co-grantor of GRAT)
2
10 Year GRAT
1
Irrevocable Life
Insurance Trust
Mrs. Krepps
3
Second-to-Die
Cash Value Life
Insurance Policy
Death benefit share:
$1,087,570
Cum. loan interest
payments $119,633
3
Access cash value: $0
4
ILIT share of death
benefit : $8,912,430
High Yield Assets
2
Beneficiaries (estate
tax-free, if structured
properly)
4
ILIT is Remainder
Beneficiary
Sample Case
In 10 Years – End of Year
1
Final annuity payment
of $562,474
2
$1,098,027 GRAT
remainder paid to ILIT
2
$1,087,570 loan paid
back to Mr. Krepps
3
4
Cash value available
to access, if
necessary: $776,365
ILIT share of future
death benefit
proceeds: $10,000,000
1
Mr. Krepps
(sole grantor of ILIT)
Mrs. Krepps
(co-grantor of GRAT)
10 Year GRAT
2
Irrevocable Life
Insurance Trust
Mrs. Krepps
Beneficiaries (estate
tax-free, if structured
properly)
3
Terminated, No
Remaining Assets
Second-to-Die
Cash Value Life
Insurance Policy
$10,457 Unspent
GRAT Remainder
4
2
Benefits
Results
• Clients receive back value equal to all of their GRAT
transfers, plus time value of money
• Clients had 10 years to re-tool non-GRAT investments,
get higher returns
• Favorable investment returns channeled to benefit the
next generation with no transfer tax
• Premium loans are paid back to the clients
• Excess remainder value stays in ILIT to benefit heirs
Getting Started
Talking Points
• Do you know some of the benefits that low interest rates
could provide for your wealth transfer planning?
• Are you aware of the factors that may bring the economy
out of this low interest rate environment?
• “We don’t want to give up control of our assets.”
• If you could find ways to minimize the loss of control over
your assets, would you be interested in knowing more?
• Let me share an idea with you…
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NOT FOR CONSUMER USE
Next Steps
• Individual meeting
Clients Who May Benefit
• Identify prospects
 High Net Worth ($10MM+) and family
oriented
 Are concerned about the impact of transfer
taxes on their financial legacy
• Build and present case
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NOT FOR CONSUMER USE
 Have sufficient income from other sources,
besides the assets used in the strategies
What’s In It For You?
• Enter the advanced planning club.
• Help clients to take action now.
• Preserve and/or increase assets under management (AUM).
• Support and Resources
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Summary
Why This Strategy, Why Now
• Taking advantage of low interest rates using the strategy described
here can help to enhance wealth for heirs.
Why Life Insurance
• Life insurance is essential in managing the risks inherent in the
strategy, and may also further enhance the amount of wealth going to
heirs.
Getting Started
• Implementing the strategy using simple talking points and our
resources
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Important Considerations
Before implementing this strategy
• Clients should consider developing a comprehensive financial plan to take into account
current and future income and expenses in conjunction with implementing any of the
strategies discussed here.
• We recommend that clients consult their tax and legal advisors to discuss their situation
before implementing any strategy discussed here.
About this concept
• This concept is only suited to high net worth clients who do not rely on the assets for living
expenses for the expected lifetime of the insured(s). It is the client’s responsibility to
estimate these needs and expenses and it is recommended that they consider developing
a comprehensive financial plan in conjunction with implementing the strategy being
considered. The accuracy of determining future needs and expenses is more critical for
clients at older ages who have less opportunity to replace assets used for the strategy.
If your client’s financial or legacy planning situation changes
• If clients need to use the assets or income in the strategies for current or future income
needs and they can no longer make premium payments, the life insurance death benefit
may terminate and the results illustrated may not be achieved.
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Important Considerations
Tax and other financial implications
• There may be tax and other financial implications as a result of liquidating assets within an
investment portfolio. If contemplating such a strategy, it is important for clients to
understand that life insurance is a long-term strategy to meeting particular needs.
About life insurance
• The death benefit protection offered by a life insurance policy can be a key component of
a sound financial plan. It is important for clients to fully understand the terms and
conditions of any financial product before purchasing it.
Other notes
• Clients should consider that life insurance policies contain fees and expenses, including
cost of insurance, administrative fees, premium loads, surrender charges, and other
charges or fees that will impact policy values.
• If premiums and/or performance are insufficient over time, the policy could lapse, which
would require additional out-of-pocket premiums to keep it in force.
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Important Information
This material has been prepared by The Prudential Insurance Company of America to assist financial
professionals. It is designed to provide general information in regard to the subject matter covered. It should be
used with the understanding that we are not rendering legal, accounting or tax advice. Such services should be
provided by the client’s own advisors. Accordingly, any information in this document cannot be used by any
taxpayer for purposes of avoiding penalties under the Internal Revenue Code.
PruLife® SUL Protector is issued by Pruco Life Insurance Company, except in New York where, it is issued by
Pruco Life Insurance Company of New Jersey. Both are Prudential Financial companies located in Newark, NJ.
[Each is solely responsible for its own financial condition and contractual obligations.
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NOT FOR CONSUMER USE
Thank You