Transcript Document

Independent
Advisors Forum
A Penn Mutual Due Diligence Meeting
Wealth Transfer &
Estate Planning
with IRA Assets
Create A Legacy With
Individual Retirement Accounts
David A. Scott, J.D., CLU
Vice President, Advanced Sales
The Profile Client
►Substantial Retirement Savings (IRA, 401(k),
Deferred Annuities, etc.)
►Lifestyle Not Dependent on Retirement Assets
►Total Estate Exceeds $2 Million (2006-2008)
►Desire to Maximize Legacy and
Minimize Taxes
● “I’m Saving It for the Kids”
IRAs & Qualified Plans
►Qualified Retirement Plans
● Pension & Profit Sharing Plans, 401(k) Plans,
403(b) Plans, SEP, SIMPLE, etc.
● IRA Rollover at Retirement
►The Good News . . .
● No Income Tax on Contributions or Rollovers
● Tax-Deferred Earnings & Growth
►The Bad News . . .
● Required Distributions During Lifetime
● Income Tax on Plan Funds During Lifetime
● Potential “Double Taxation” At Death
The Problem
► Continued Tax-Deferred Growth Will
Create Larger Amount During Lifetime
► Many People Do Not Need or Want to
Spend IRA Funds During Lifetime
► If Funds Remain at Death . . .
THE IRS MAY BE THE
PRIMARY BENEFICARY!
Federal Taxation
of Retirement Plans
► IRAs & Retirement Plans Taxed as “Income
in Respect of Decedent” (IRD)
● Subject to BOTH Estate Tax & Income Tax
► Four-Step Calculation
● Estate Tax Computed on Full Value Assets
● Amount Subject to Income Tax Determined
● Estate Tax Subtracted from Amount Subject to
Income Tax
● Income Tax Computed on Balance
Total Tax Equals Estate Tax Plus
Income Tax
Example - IRA
► Value of IRA at Death - $1,000,000
► Assumed Federal Tax Rates
● Estate Tax: 45%
● Income Tax: 35%
► Estate Tax
● $1,000,000 X .45 = $450,000
► Income Tax
● $1,000,000 Minus $450,000 (Estate Tax) =
$550,000 X .35 = $192,500
Total Tax: $450,000 + $192,500 =
$642,500 (Over 64%)
Will the Federal
Estate Tax Be
Repealed?
And the Answer Is . . .
SNOWBALL
Options During Lifetime
► Continue Accumulation
● RMD Must Begin at Age 70 1/2 for IRA & Qualified Plans
● IRS May Become Biggest Beneficiary with 60%+ Taxes
► Transfer Retirement Funds
● Income Tax Paid at Time of Transfer
● Gift Tax May Be Payable
● Charitable Gift – Tax “Wash”
► Pension Protection Act – “Much Ado About Nothing”
► Take Distributions
● Income Tax Payable – Lowest Rates in 60 Years
● Lump Sum Distribution
● Periodic Distributions
► Required Minimum Distributions (RMD)
► Distributions Over Life Expectancy or Fixed Period
Lifetime Distributions
► Spend the Funds & Remove From Estate
● No Legacy for Family or Beneficiaries
► Invest/Accumulate the Funds in
Other Assets
● Assets May Be Subject to Federal & State
Death Taxes
► Wealth Transfer - Gift to ILIT to Pay Life
Insurance Premiums
Wealth Transfer Strategy
►Use Distributions From IRA to Pay Premiums
for Life Insurance Policy
● Reduces Amount of “Double Tax” IRA
● Creates Tax-Free Life Insurance Proceeds
►“Triple Leverage” of IRA Because Life
Insurance Death Benefits . . .
● Exceed Premiums Paid
● Are Income Tax-Free
● Are Estate Tax-Free with Irrevocable Life
Insurance Trust (ILIT)
How Does It Work
►Establish Irrevocable Life Insurance
Trust (ILIT)
►ILIT Purchases Life Insurance on Client
and/or Spouse - ILIT Is Owner & Beneficiary
of Policy
►Client Receives Funds from IRA & Makes Gifts
to ILIT Using Annual Gift Tax Exclusion or
Lifetime Exemption
● “Gross Up” Distributions for Income Tax
►ILIT Pays Policy Premiums, Receives Death
Proceeds & Distributes Funds to ILIT
Beneficiary(s)
Advantages
►Reduces Amount of “Double Tax”
Retirement Asset & Creates Income Tax-Free
& Estate Tax-Free Life Insurance Proceeds
►Life Insurance Cash Values Grow
Tax-Deferred & Can Be Accessed Income
Tax-Free for Lifetime Distributions to
ILIT Beneficiary(s)
►Policy Death Benefits Provide Estate
Liquidity for Taxes, Debts, and Estate
Settlement Costs
►Effective Use of Annual Gift Tax Exclusion
and/or Lifetime Exemption
Example - Assumptions
Married Clients’ Ages
Both Age 70
Number of Children
Three
Current Value of IRA
$1,000,000
Life Expectancy Today
15 years
Assumed Federal Income Tax Rate
35%
Assumed Federal Estate Tax Rate
45%
IRA / Investment Growth Rate
8% per year*
*For illustrative purposes only. Results do not reflect actual performance
of any particular investment, and actual results will vary.
Example:
RMD & Accumulate Assets
Total of $2,979,127*
IRA Value in 15 Years: $1,613,157
Estate Assets From RMD: $1,365,970
MINUS
Federal Estate Tax @ 45%: $1,340,607
MINUS
Federal Income Tax @ 35%: $310,533
EQUALS
Total Federal Taxes at Death: $1,651,140 (55%)
Net Amount to Heirs: $1,327,987 (45%)
* Assumes 8% annual rate of growth on IRA and investments and death at age 85. For illustrative purposes
only. Results do not reflect actual performance of any particular investment, and actual results will vary.
Example:
RMD & Survivorship Life/ILIT
Total of $3,996,315
IRA Value in 15 Years: $1,613,157*
Tax-Free Life Insurance Death Benefit: $2,383,158
MINUS
Federal Estate Tax @ 45%: $725,921
MINUS
Federal Income Tax @ 35%: $310,533
EQUALS
Total Federal Taxes at Death: $1,036,454 (26%)
Net Amount to Heirs $2,959,861 (74%)
* Assumes 8% annual rate of growth on IRA and death at age 85. For illustrative purposes only.
Results do not reflect actual performance of any particular investment, and actual results will vary.
**Penn Mutual Life Insurance Company EstateMax II universal life policy, level death benefit, preferred non-tobacco rates,
with current interest rate and charges as of April 2007. All guarantees are based on the claim-paying ability of the issuer.
IRA Legacy to Heirs
Net Amount to Heirs
Current Plan
Proposed Plan
Total Estate at Death
$2,979,127
$3,996,315
Total Federal Taxes
$1,651,140
$1,036,454
Net Amount to Heirs
$1,327,987
$2,959,861
Options at Death
► Transfer to Surviving Spouse
● Doesn’t Eliminate or Minimize Taxes, Merely Postpones
Taxes Until Distributions Received or Spouse’s Death
► Transfer to Non-Spouse - “Stretch” IRA
● Does Not Postpone Estate Tax
● Postpones Income Tax Until Distributions Received
● Beneficiary Can “Unstretch” IRA With
Larger Distributions
► Transfer to Charitable Organization
● Outright
● Charitable Trust
Inherited (“Stretch”) IRA
► RMD Calculation Same As IRA Owner Except
Based on Age of Beneficiary in Year Following
Death of Owner
► Beneficiary Designations Can Be Changed
Until Death
► Does Not Reduce RMD During Owner’s Lifetime
► Does Not Postpone Estate Tax
► Postpones Income Tax Until
Distributions Received
► Beneficiary Can “Unstretch” IRA With
Larger Distributions
Another Solution . . .
Testamentary CRT with IRA
► CRT Designated As Beneficiary of IRA
► Spouse (or Children) Designated As Income
Beneficiary of CRT
● No Estate Tax at Death of Owner or Spouse
► Spouse’s Income Interest Qualifies for
Marital Deduction
► Non-Spouse’s Income Interest Unlikely to Exceed
Exemption Amount
► Charity’s Remainder Interest Qualifies for
Charitable Deduction
● Income Tax Paid as CRT Income Payments
Received
► Same as “Spousal Rollover” & “Stretch” Options
What Is A Charitable
Remainder Trust (CRT)?
►“Split Interest” Gift Between Charitable &
Non-Charitable Beneficiaries
►Inter Vivos (Created During Lifetime)
or Testamentary (Created at Death
Under Will)
►Donor(s) Transfers Assets/Cash to
Trust - Donor(s) or Others Receive Income
Payments for Specified Period of Time
►At End of Income Period Trust Assets
Transferred Outright to Organization(s)
Chosen by Donor(s)
Product Enhancement:
CRT Endorsement
► Deferred Annuities Are Ideal for NIMCRUT
● Income “Faucet”
► CRT Endorsement Available on Variable &
Fixed Annuities
● Not Available with Enhanced Death Benefit Rider or Living
Benefits Riders
► Joint Annuitants Permitted
► Normal Surrender Charges Apply ONLY After
Earnings & Free Withdrawal Amount
► Multiple Withdrawals in 1st Contract Year
Example
►IRA @ Death of Owner: $ 1,613,157
►IRA Growth: 8% Annually
►Unitrust Payout: 7% for Lifetime of Surviving
Spouse (Beginning @ Age 72 – 15 Years)
►Charitable Deduction @ Death: $750,199
►Total Income Payments to Surviving Spouse:
$1,790,767 ($1,163,998 Net After-Tax)
►Remainder To Charity @ End of Term:
$1,815,258
Wealth Replacement Trust
►Irrevocable Life Insurance Trust
● Prevents Reduction In Family’s Inheritance
● “Equalizes” Bequests to Charity & Heirs
● Life Insurance Proceeds Pass to Heirs Income
Tax-Free & Estate Tax-Free
● Use Distributions from IRA to Pay Policy
Premiums During Lifetime
► “Gross Up” Distribution to Premiums Plus
Income Tax
► Income Tax Savings at Death for Charitable
Deduction of Remainder Interest
Sales Opportunities
►Annuity Products
● IRA Rollover
● Deferred Annuity for Testamentary NIMCRUT
►Life Insurance Products
● IRA Wealth Transfer with Life Insurance
● CRT Wealth Replacement Life Insurance
● Life Insurance for Estate Liquidity
Insurance Planning Techniques
► Outright Policy Ownership
● Access To Cash Value
● Proceeds Included In Estate
● Maintain Flexibility & Control
► Traditional ILIT
● Exclude Proceeds From Taxable Estate
● Relinquish Income & Control
● Compromise Flexibility
► Survivorship Standby Trust
● Lifetime Access To Cash Value
● Exclude Proceeds From Taxable Estate
● Maintain Flexibility
Survivorship Standby Trust How Does It Work?
► Spouse with Shorter Life Expectancy (Age,
Health, Gender, etc. - Usually Husband) Is
Applicant & Owner of Survivorship Policy
► Policyowner Creates SST Under Terms of
Will or Revocable Living Trust
► Policy Is Transferred to SST at Death
► Surviving Spouse Should Not Be Trustee or
Beneficiary of SST
Survivorship Standby Trust How Does It Work?
►During Policyowner’s Lifetime . . .
● Complete Ownership & Control of Policy
● Unrestricted Access to Policy Cash Values
►At Policyowner’s Death . . .
● Policy Transferred to SST
● Cash Value Included In Policyowner’s Estate
● Minimize Tax Impact with Loans & Withdrawals
During Lifetime or During Probate Administration
►If Non-Owner Spouse Dies First, Policyowner
Can Create ILIT & Transfer Policy
● “Three-Year Rule”
Survivorship Stand-By Trust
►Income Tax-Free & Estate Tax-Free
Death Proceeds For Estate Liquidity
►Elimination Of Gift Tax On Policy Premiums
Paid During The Policyowner’s Lifetime
►Income Tax Deferral On Growth Of Policy
Cash Values
►Income Tax-Free Access to Policy Cash
Values During Lifetime If Policy Not MEC
►Additional Savings For Retirement, College
Funding, Or Other Lifetime Needs
Advanced Sales
Support & Services
Department Mission
► Provide Sales, Technical, and Legal
Support in the Areas of:
● Estate Planning
● Business Succession Planning
● Selective Employee Benefit Plans
● Charitable Planning
● Retirement Planning
● Income, Gift & Estate Taxation
Sales Support & Services
►Case Consultation - (800) 818-8184
►Legal/Technical Assistance
●Specimen Forms & Documents
●Consultation With Clients’ Advisors
►Proposals & Illustrations
●Estate Analysis, Charitable Planning, Selective Benefits &
Deferred Compensation, Split Dollar, Other “Advanced”
Illustrations & Proposals
►Marketing Materials for “Advanced” Concepts
●Brochures
●Concept Presentation Binders
►Advanced Sales Web Pages
►Software - AMO, Including Documents & Salesmaker
Advanced Sales Website
►Department Directory
►Advanced Markets Online (AMO)
►News & Announcements
● Legislation,Teleconferences, etc.
►Advanced Sales Concepts & Markets
►Specimen Forms
►Links to Related Information and
Other Websites
Advanced Sales Staff
► David A. Scott, J.D., CLU
► Ted Kirchner, J.D., CLU, ChFC
► Eva M. Victor, J.D., LL.M.
► Lynn Nolan, CLU, ChFC
26 Initials
9 Post-Graduate Degrees/Professional Designations
45+ Years with Penn Mutual
85+ Years of Industry Experience
FAQs
►Will you speak to my client on the phone?
● No
►Will you speak to my client’s advisors on the phone?
● Yes
►Will you join me on a sales call?
● No
►Will you review my clients legal documents?
● Yes
►Will you draft documents for my client?
● No
Penn Mutual’s
Advanced Sales Department
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