ECONOMIC TURMOIL PLANNING

RX

TAKING STEPS TO TAKE CONTROL

Janice A. Forgays, J.D., CLU (Advanced Underwriter - June, 2009)

For education purposes only. Not for use with general public.

CRN201009-125315

Disclosure

The information contained in this presentation is not written or intended to be interpreted as specific legal or tax advice and may not be relied on for purposes of avoiding any federal tax penalties. Neither MassMutual nor any of its employees or representatives are authorized to give legal or tax advice. Individuals are encouraged to seek the guidance of their own legal or tax counsel. Any individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

For Education Purposes Only. Not for Use with the General Public.

ECONOMIC TURMOIL PLANNING

Changes in Economic Conditions Creates Opportunities to Meet With Clients

WHY?

 Asset values may have changed  Low interest rate environment For Education Purposes Only. Not for Use with the General Public.

STEPS TO TAKE

1. Will Review 2. Trust Review 3. Estate Planning 4. Gift Planning 5. Charitable Giving 6. Sales to Intentionally Defective Grantor Trusts 7. Grantor Retained Annuity Trusts 8. Split Dollar Loan Treatment *PLRs cannot be relied upon as precedent by anyone other than the taxpayer requesting the letter For Education Purposes Only. Not for Use with the General Public.

WILL REVIEW

CLIENTS: INTENT: Married with 2 adult children Treat children equally WILL PROVISIONS: Commercial Real Estate to Child 1 Stock Portfolio to Child 2 PROBLEM: STRATEGY: Stock portfolio value down 50% Review and rebalance will bequests* *Should be reviewed regularly – provides good opportunity to meet with client For Education Purposes Only. Not for Use with the General Public.

TRUST REVIEW

“A/B” or Credit Shelter/Marital Deduction Planning

“A” or Marital Deduction Trust “B” or Credit Shelter (By-pass) Trust CLIENTS: Married couple where 1 st spouse dies – $3.5 million (estate tax credit equivalent) to “B” trust for benefit of family – Remainder to “A” trust for spouse PROBLEM: Trust assets devalued – all assets to “B” Trust – disinherit spouse STRATEGY: Life insurance for benefit of spouse For Education Purposes Only. Not for Use with the General Public.

ESTATE PLANNING

State of the Estate Tax

Current Law: Estate tax replaced by capital gains tax in 2010 only & no step up in basis * in 2011 $1million estate tax credit/ 55% top tax rate 

Estate Tax Proposals in Congress

Senate 722 - freeze ’09 ($3.5 million/45% top rate) & reunification of gift and estate tax exemptions at $3.5 million   House 2032 - $2 million credit/55% top tax rate House 436 – freeze ’09 and limit FLP Valuation Discounts For Education Purposes Only. Not for Use with the General Public.

ESTATE PLANNING

State of the Estate Tax

 No proposals to eliminate estate tax  Freeze ’09 price tag = $238 billion over 10 years (per Congressional Budget Office) For Education Purposes Only. Not for Use with the General Public.

ESTATE PLANNING

Goes beyond planning for the estate tax….

CLIENT: Has special needs child INTENT: Provide for child without diminishing family lifestyle PROBLEM: Support costs are depleting family wealth STRATEGY: Special needs trust funded with life insurance on parent(s) for benefit of special needs child For Education Purposes Only. Not for Use with the General Public.

GIFT PLANNING

Gift Tax Exclusion/Exemption

Gift Tax Annual Exclusion (per year/per donee) Gift Tax Annual Exclusion (Sec. 2513 split with spouse) Gift Tax Lifetime Exemption* $13,000 $26,000 $1,000,000 * No longer a “unified credit” with the estate tax credit of $3.5 million For Education Purposes Only. Not for Use with the General Public.

GIFT PLANNING

 Review client’s gifting programs  Advantageous to gift devalued assets = lower gift tax  Removes assets from client’s taxable estate  Removes future appreciation  Benefits child without gift tax For Education Purposes Only. Not for Use with the General Public.

CHARITABLE GIVING

In 2008:

 According to the National Philanthropic Trust – 2/3 of charities experienced drops in giving  Tactical Philanthropy Advisor reports that charitable giving in the US suffered the largest percentage drop on record For Education Purposes Only. Not for Use with the General Public.

CHARITABLE GIVING

 Make gifts in will (can amend will as circumstances change)  Adopt charitable giving strategy:  Charitable gift annuities  Charitable remainder trusts For Education Purposes Only. Not for Use with the General Public.

CHARITABLE GIVING

CLIENT: Executive making large annual gifts to her law school INTENT: Continue to support her law school PROBLEM: Salary is frozen and retirement accounts diminished STRATEGY: Maximize charitable contribution using life insurance owned by school – client gifts cash annually to pay premiums – deducts charitable gift OR use charitable remainder trust to provide income to client (may be used to supplement retirement) with trust remainder to law school For Education Purposes Only. Not for Use with the General Public.

SALE TO INTENTIONALLY DEFECTIVE TRUST (IDIT/IDGIT)

Leveraged Wealth Transfer Tool

 IDIT = “Intentionally defective irrevocable trust” or “Grantor Trust” Example: trust income used to pay premiums  Is no tax on sale of property between IDIT and Grantor – considered sale to self for income tax purposes (Revenue Ruling 85-13)    All trust income/loss taxed to Grantor Seller does not pay tax on gain (if any) Interest payments not taxed to Grantor (payments to self) For Education Purposes Only. Not for Use with the General Public.

INTEREST RATES

APPLICABLE FEDERAL RATES (AFR)

September 2009  IRC 1274(d) rates apply to loans sales (IDITs/Split Dollar Loans)    Demand or short term (up to 3 years) Mid-term (from 3 up to 9 years) Long-term (9 or more years) 0.84% 2.87% 4.38%  IRC 7520 rate applies to GRATs and CRTs  120% of Federal mid-term rate For Education Purposes Only. Not for Use with the General Public.

SALE TO INTENTIONALLY DEFECTIVE GRANTOR TRUST

Leveraged Wealth Transfer Tool

CLIENT: Has property worth $1,000,000 INTENT: Remove property from taxable estate without gift tax STRATEGY: IDIT Property Value: Income @ 5%/ growth @ 3% Balloon Note 5%/15 years Annual Payments Value in 15 Years (in Trust) Minus Balloon Payment to Grantor Net Transfer in Trust to Beneficiaries/Out of Estate $1,000,000 $ 50,000 $1,840,000 $1,000,000 $ 840,000 For Education Purposes Only. Not for Use with the General Public.

GRANTOR RETAINED ANNUITY TRUSTS (GRATS)

Leveraged Wealth Transfer Tool

 Parent transfers devalued property to GRAT  Pays gift tax on lowered property value  Trust pays parent fixed amount each year for set number of years – trust remainder to children  Market recovery transfers to children at end of trust term without additional gift tax  If parent dies w/i trust term – trust assets in taxable estate RULE: The lower the Section 7520 rate the greater the remainder interest in trust for beneficiaries For Education Purposes Only. Not for Use with the General Public.

GRANTOR RETAINED ANNUITY TRUSTS

QPRT = Qualified Personal Residence Trust

 Type of GRAT used for personal residences  Used to leverage market recovery on depressed value homes For Education Purposes Only. Not for Use with the General Public.

GRANTOR RETAINED ANNUITY TRUST

Leveraged Wealth Transfer Tool

CLIENT: owns devalued stock portfolio PROBLEM: Needs supplemental retirement income and remove assets from estate STRATEGY: Gift stock portfolio to GRAT   Removes market recovery from taxable estate at end of trust term Gift to trust taxed at initial transfer into GRAT  GRAT income stream used to supplement retirement income For Education Purposes Only. Not for Use with the General Public.

GRANTOR RETAINED ANNUITY TRUSTS

Obama Administration’s 2010 Revenue Proposals

 Limit use of short term GRATs (used to minimize chance of death and estate inclusion of trust assets during trust term)  Imposes minimum GRAT term of 10 years NO BILL YET so still time….

For Education Purposes Only. Not for Use with the General Public.

SPLIT DOLLAR LOAN TREATMENT

 Replaced equity split dollar (after Final Split Dollar regulations)  Employer makes premium loans to employee  Interest rate = AFR  Employee benefits from low interest rate environment  Employee entitled to policy equity in excess of premium loans plus interest NOTE: Split dollar loans may also be made between family members or to an Irrevocable Life Insurance Trust For Education Purposes Only. Not for Use with the General Public.

SPLIT DOLLAR LOAN TREATMENT

CLIENT: Has estate tax liability & only 1 child PROBLEM: Needs to fund life insurance policy sufficient to pay the estate tax in an ILIT (Only 1 Crummey beneficiary) STRATEGY: Client makes split dollar loans to ILIT for premiums  no taxable gifts  death benefit minus loans + interest out of client’s estate & may be used to pay estate tax For Education Purposes Only. Not for Use with the General Public.

Thank You

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