IRA Strategies for Wealth Transfer Presenter Title Hello and welcome. Today we’re going to talk a little about many investors’ most taxed assets, their IRA. Many people will suggest that the taxes on IRAs aren’t as bad because the estate tax exclusion limits are so high. To some extent that’s true. However, the estate taxes that were paid by the decedent created an income-tax-deduction for the beneficiaries. Since IRA owners are now rarely subject to estate taxes, most beneficiaries don’t receive a deduction, making the income tax bite even worse. And, as you’ll see, the way IRA values progress throughout an investor’s retirement often increases the marginal tax rate the beneficiaries are subjected to when they pay taxes on the IRA they inherit. All of this means that, as an advisor, you want to be knowledgeable about IRA tax problems, and equally knowledgeable about the solutions you can propose. Policies issued by American General Life Insurance Company ("AGL“)

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Today’s Objectives Today I’ll demonstrate how you can improve your client’s legacy by describing what IRA investors typically do, & comparing it to two simple but powerful ideas So here are our objectives for today’s discussion. I plan to demonstrate how you can improve your client’s legacy by describing what IRA investors typically do, and comparing it to two simple but powerful ideas so they can maximize their IRA legacy potential and recognize the value you bring to them. As we wrap up our discussion we’ll reflect back on these objectives to see if we were able to accomplish what we set out to do. so they can maximize their IRA legacy potential and recognize the value you bring.

Pension Social Security Savings Sources of Retirement Cash Flow Let’s begin by discussing how sources of retirement cash flow have changed over the years. 30 years ago, pensions were still widely available, and most people stayed with a single employer their entire career, retiring with a solid pension as the flagship component of their retirement cash flow. Next in line was Social Security, which was never intended to provide a full and lavish retirement but, when combined with a Pension Plan, enabled most people to live quite well in retirement relative to their pre-retirement lifestyle. Personal savings were a very small part of the retirement picture. Because people had so much confidence in their employer’s pension plan, they didn’t feel it was necessary to set aside a lot of their own money. 401(k) plans and IRA’s were in their infancy, so there wasn’t a structure in place to promote personal savings. Let’s compare that to today. Today, most companies have eliminated their pension plans. Social Security still plays an important role, but isn’t sufficient to provide a retirement lifestyle equivalent to most investors’ pre-retirement lifestyle. However, there’s been an explosion of personally-owned retirement assets fueled by 401(k)s and IRAs. Today investors have become increasingly dependent on their personal savings to support their retirement, and the bulk of that money is in 401(k) plans that subsequently get rolled-over into IRA plans. Clearly the implications of the two sides of this graphic tell a very different story about retirement planning. It means that, 30 years ago, financially secure retirees didn’t have assets to dispose of when they died. Today, successful investors commonly have lots of assets to dispose of at death. Pension Social Security Savings Pension Social Security Savings 30 Years Ago Today 4

IRAs and RMDs So let’s talk a little bit about IRAs and RMDs, and the interaction between the two.

RMDs as a % of Account Value RMDs vs. Account Value 14% 12% 10% 8% 6% This graph illustrates IRA RMDs as a percentage of the IRA Account Value. This is the reason that IRAs reach a peak value and then decline. . . Because the RMD distribution amount coming OUT eventually becomes larger than the annual earnings going IN. Since many IRAs are forecasted with earnings in the 6% to 9% range, you can see that the IRA will commonly reach a peak value between age 83 and 90. At that point the RMDs exceed the annual earnings and the account value begins to decline. 3.6% RMDs as a % of Account Value

$100,000 IRA; 7% hypothetical annual return Projected IRA Values This graph shows the actual IRA account balance for the IRA in the previous example. For a 70-year-old single male with a $100,000 IRA earning a 7% hypothetical annual return, his IRA will peak at a value of about $138,000 at age 86. After that point the IRA value will begin to decline. Essentially, an IRA will be emptied out at about age 115 (if you’re lucky enough to live that long!). Again, why does that happen? It’s because of the interaction between the asset earnings and the amount of the Required Minimum Distributions. By the way, this calculation assumes a 7% rate of return compounded on an annual basis and is for illustrative purposes only. It does not represent any investments currently available. Results do not include fees, commissions, sales charges or expenses, which would have a negative impact on results. Finish by noticing that, between ages 75 and 95 the IRA is extremely close to its peak value. At what age do most people die? That’s right, between 75 and 90. Therefore, beneficiaries are commonly inheriting – and paying taxes on – IRA’s at or near their peak value. And how old are beneficiaries when their parents die? Commonly in their 50’s and 60’s, which are typically their peak income-earning years. So, when you add the inherited IRA to their high incomes, many beneficiaries will pay exorbitantly high income taxes on the IRA they inherit. In fact, in many cases they’ll pay taxes at a higher rate than their parents were in when they took their deduction! When you think about it, that completely ruins the tax advantages of tax-deductible tax-deferral. Assets in qualified plans and other tax-advantaged plans enjoy tax-deferred growth. However, this favorable tax treatment is for the purpose of encouraging individuals to save for retirement. The Internal Revenue Code has established age 70½ as the maximum deferral age before distributions must begin. These rules prohibit a taxpayer from continuing to indefinitely accrue tax deferred earnings. If the funds are not distributed by the required date, a 50% excise tax will be levied on the participant for failure to take the required minimum distribution.   Minimum distributions apply to assets in a qualified plan, IRA, 403(b), SEP, SIMPLE or 457 plan. While minimum distribution rules do not apply to Roth IRAs, they do apply to Roth accounts in a 401(k) or 403(b) plan. $100,000 IRA; 7% hypothetical annual return

Typical IRA Transfer IRA Owner(s) Children Grandchildren So what do most investors do? Well, because of the perceived benefits of tax-deferral, and the fact that all non-qualified assets are being taxed annually anyway, conventional wisdom often suggests that investors should liquidate their non-qualified assets to support their retirement, and leave their IRA assets as a last resort. Many times your clients simply ask you to reinvest their RMDs back into the portfolio. There’s really no clear PLAN for their IRA. It’ll just be whatever it’ll be. To that I often say, “In the absence of a plan, you still have a plan. Let me show you your plan.” So what does that plan look like? Typically after the IRA owner and their spouse pass away, the IRA goes to the children. If the children have financial wisdom, under common law there’s a good chance they’ll “STRETCH” their IRA inheritance, which usually continues distributions into their mid-80’s. If they die prior to that age, the balance of the stretch can be continued to the grandchildren. However, if the children take a lump-sum distribution, or if the children live beyond their “life expectancy” according to the IRS table, the amount of the IRA passed to the grandchildren is typically ZERO. Let’s shed some additional light on this with a simplified example. Grandchildren

Typical IRA Transfer IRA Owner(s) $500,000 Children $300,000 To bring the story to life, in a typical example of a client that dies while owning a $500,000 IRA, their children could pay 40% in income taxes, totaling $200,000, leaving $300,000 to their kids. Whether the children spend a lump-sum or stretch it over their life expectancy, typically the money will be spent before the children die, leaving nothing for the grandchildren. Grandchildren

Story Selling Let’s talk about a simple story you can tell to your clients to open the door to a conversation about 2 different IRA wealth transfer strategies that might also be very appealing to your clients with IRAs.

3 Circles 2 Questions 3-Point Value Proposition These stories revolve around 3 circles, 2 questions, and a 3-point value proposition. If you can memorize 3 circles, 2 questions and a 3-point value proposition, you’ll be armed with a powerful conversation-starter with your retired clients.

X C G L.O. 3 Circles Cross out the one you would least like Your money can go to three places when you’re done with it: X C G L.O. We begin by understanding that, for many of these clients, these decisions are as much “emotional” decisions as they are “logical” decisions. As such, it’s good to get a feel for your clients’ thoughts and feelings about their money. One great way to do that is to begin by telling your clients that “their money can go to three places when they’re done with it.” Simply draw three circles on a piece of paper and write the letters L.O. in the first circle. In the second circle write the letter C, and in the third circle write the letter G. Then explain to your client that the L.O. stands for “Loved Ones.” The C stands for “Charity.” And the G stands for? --- Give them a minute to come up with a guess. It gets them involved in the conversation, and they normally get it right. Then you say “That’s right, the G stands for “Government.” Then give the piece of paper to your client, hand them your pen, and ask them to cross out the one they would LEAST like to get their money when they’re done with it. In most cases your clients will chuckle and cross out the G. This playful approach is powerful in its ability to get your client emotionally engaged in the conversation, and further helps you to understand not only their financial objectives, but their emotional objectives with their portfolio. Now you are ready to begin by saying something like: “Mr. & Mrs. Smith, that’s why I wanted to talk to you today. I suspected that you might feel this way about your portfolio. That’s why today I want to introduce you to several strategies for your IRA that may help create a significant value for you to pass to your loved ones and charities, without you losing control over the money, and without losing a significant portion of your wealth to income taxes.” Cross out the one you would least like to get your money when you’re done with it.

Client Questions & Value Proposition Mr. & Mrs. Jones, if things go the way you have planned, what’s going to happen to your IRA? Why don’t you give it to them right now? 3-Point Value Proposition: We’ll keep your IRA in your Care, Custody and Control; Potentially double, triple or quadruple the value of your legacy; and Take no additional investment risk in your portfolio On the heels of the three-circle discussion, now you move on to two important questions, and a three-point value proposition that will set the stage for a discussion about any of these wealth transfer strategies. This information is critical because it will engage your clients in the process. First ask “Mr. & Mrs. Jones, if things go the way you have planned, what’s going to happen to your IRA?” (or whatever asset you’re focusing on.) What do you expect their response to be? That’s right, they’ll most likely say “It’s going to my kids.” Then you ask “Why don’t you give it to them right now?” Your expected answer is. . . . “We just might need it.” To which you respond “That’s why I invited you to meet with me today. I’ve been looking at your portfolio and it dawned on me that you’re not spending your RMDs from your IRA. . . We just reinvest them in the portfolio. And it seems like you have sufficient assets outside of your IRA to be confident that you’ll be just fine during your retirement. So I wanted to talk to you about a specific strategy for your IRA that can: Keep your IRA in your Care, Custody and Control for the rest of your life, in case you need it. . . Potentially double, triple, or perhaps even quadruple the value of the asset for your beneficiaries. . . And Do all of this while taking no additional investment risk in your portfolio. Would you like to see how an idea like that might work for you?” In many cases, this will be the door-opener that will have your clients asking to hear more.

IRA Wealth Transfer Strategies So let’s briefly review 2 IRA wealth transfer strategies that you can consider offering your clients.

Typical IRA Transfer IRA Owner(s) Children Grandchildren First, recall your client’s typical IRA plan. Grandchildren

Typical IRA Transfer IRA Owner(s) $500,000 Children $300,000 And when we put numbers into the plan it looked like this. Grandchildren

Life Insurance Solutions for IRA Wealth Transfer Now let’s look at the two life insurance solutions that could change the way they think about their IRA legacy.

1. IRA Income Tax Offset IRA Beneficiaries Taxes RMD’s Life Insurance (equal to taxes) Using the Life Insurance approach, the client simply uses a PORTION of their un-needed RMDs to purchase Life Insurance. How much life insurance? In the first solution, we will project the future value of their IRA, allowing us to estimate the amount of tax the children will have to pay on the IRA when they inherit it. We’ll purchase a life insurance death benefit equal to that projected tax amount. It’s almost like “hiring” the life insurance company to pay the taxes for you, and the “fee” for hiring them is the premium. Now, obviously you are not officially “hiring” the life insurance company to pay the income taxes, but the beneficiaries can use the income-tax-free life insurance death benefits to pay the taxes due on their IRA inheritance. That way, the beneficiaries don’t need to withdraw money from their IRA or from their other investment assets to pay the taxes. Their existing portfolios remain entirely intact, and so does their IRA inheritance. As a result, your beneficiaries end up with the entire value of the IRA, and can enjoy your inheritance with greater value. As you can see, this is a very simple approach with only three easy steps: Forecast the future IRA value Calculate the estimated income taxes the beneficiaries will owe when they inherit the IRA Purchase the life insurance, and name the children the beneficiaries. Taxes

1. IRA Income Tax Offset IRA $500,000 Beneficiaries $500,000 Taxes RMD’s Beneficiaries $500,000 Life Insurance $200,000 As an example of how this might work, your client would use the RMD’s from their $500,000 IRA to purchase a $200,000 survivorship UL policy. When the parents die and the children inherit the IRA, they also inherit the $200,000 life insurance death benefits, which are paid to them income-tax-free. The children can use the life insurance death benefits to pay the $200,000 of taxes they owe for inheriting the IRA. Now, without being reduced by the burden of taxes, the children get to keep the entire $500,000 IRA, increasing their inheritance by over 65% compared to the children’s originally expected after-tax inheritance of $300,000! In fact, if they used the life insurance to pay the income taxes on their IRA, they would have choices: They could liquidate the IRA and invest the entire $500,000 into their investment portfolio where they would have (a) complete liquidity; and (b) no RMD’s; OR Under current law, they could “stretch” their IRA, continuing tax-deferral as long as possible, and using the life insurance to pay the income taxes on their required distributions as they are taken out. Either way, the beneficiaries are significantly further ahead financially than they were in the absence of the Tax Offset plan. Taxes

2. IRA Income Tax Elimination RMD’s Charity Life Insurance (equal to IRA) How do you actually eliminate taxes in an IRA inheritance? You simply need to involve a charity. In this Charitable Contribution strategy we begin with the same approach as the first strategy. However, to make this work, we don’t buy life insurance equal to the forecasted TAXES. We buy life insurance equal to the forecasted VALUE of the IRA. Now, instead of having the children inherit a fully taxable IRA, they inherit the income-tax-free death benefit of the life insurance policy. This strategy only typically requires a PORTION of the un-needed RMDs to pay the life insurance premiums, and the proportion of the premiums-to-the-RMD’s becomes smaller and smaller as they get older and RMDs get larger. Then, once the life insurance is in place for the children to inherit – income-tax-free – we still have a fully taxable IRA to deal with. What can we do with the IRA so that there are no taxes on the inheritance? That’s right, we can give the IRA to your client’s favorite charity! When done properly, giving the IRA to a qualifying 501(c)(3) charitable organization, the charity will pay NO INCOME TAX on your IRA when they inherit it. There you go. . . No tax to your children because of the tax-free life insurance, and no tax to the charity due to the charitable deduction. And you’ve TRIPLED (or more) the after-tax value of your total inheritance created by your IRA. Three easy steps: Estimate the future value of the IRA at the time the children will inherit it. Purchase a life insurance policy equal to the forecasted IRA value. Change the IRA beneficiary to the charity of your choice. Simple, but effective. Beneficiaries

2. IRA Income Tax Elimination $500,000 RMD’s Charity $500,000 Life Insurance $500,000 Here are some numbers that bring this scenario to life. Starting with the same $500,000 IRA, we use the RMD’s to purchase a $500,000 survivorship life insurance policy. But this time, instead of using the death benefits to pay the taxes, the $500,000 death benefit goes to the children income-tax-free. The charity then becomes the beneficiary of the $500,000 IRA. If done properly and the charity is a qualifying 501(c)(3) organization, their inheritance of $500,000 is also income-tax-free. Add it all up, and the combined legacy is now $1,000,000, which is more than triple the children’s original after-tax legacy of just $300,000. That’s pretty powerful. Beneficiaries $500,000 Tax-Free Total: $1,000,000

Comparison of Strategies Total Net After-Tax Legacy Look at the comparison of net, after-tax legacies when you stack the three strategies next to each other. In the investor’s current plan, we’re forecasting that the beneficiaries will only net $300,000 after tax from their $500,000 IRA. In the Tax Offset strategy, we’re forecasting that the beneficiaries can pay all of the taxes on their IRA inheritance and STILL net $500,000. In the Tax Elimination strategy, the combination of Life Insurance to the children, and giving the IRA to charity, creates a combined total after-tax IRA legacy of $1,000,000. Because of you, your client has the opportunity to choose which of these strategies they like best. I don’t suspect a lot of them will choose to stay where they are now.

Do you remember our 3-Point Value Proposition? We’ll keep your IRA in your Care, Custody and Control; Potentially double, triple or quadruple the value to your beneficiaries; and Take no additional investment risk in your portfolio Do you recall our 3-point value proposition? Earlier we said to the client: “I wanted to talk to you about a specific strategy for your IRA that can: Keep your IRA in your Care, Custody and Control for the rest of your life, in case you need it. . . Potentially double, triple, or perhaps even quadruple the value of the asset for your beneficiaries. . . And Do all of this while taking no additional investment risk in your portfolio. Would you like to see how an idea like that might work for you?” One question that sometimes comes up is whether or not to use an ILIT vs. owning the policy personally. Years ago, when estate tax exclusion amounts were much lower, life insurance was commonly owned by Irrevocable Life Insurance Trusts (ILITs) to keep the death benefit out of the investor’s taxable estate for calculating estate taxes. In today’s world, with estate tax exclusion limits exceeding $5 million for individuals, and $10 million for couples, the need for ILITs may have lessened. Why? Because an investor can often include the life insurance death benefit as a part of their taxable estate and still be far below an amount that would trigger estate taxes. Naturally, for additional financial control, and for larger estates, using an ILIT may be practical. Trusts are complex instruments, and all decisions regarding the use of trusts should be discussed with an attorney.

The “Soft” Close “I know you qualify for this program financially, but. . . I don’t know if you qualify medically.” You have time to think about it. Now let’s discuss how to close the sales presentation. Most likely your client wasn’t expecting to come to your office today to consider purchasing more life insurance, and they’ll most likely want some time to think about the idea before making any portfolio changes. But, with this closing technique, you will give them the time they need to think about it. In fact, even if your client wanted to proceed right away, you would not be able to re-allocate any assets into one of these strategies until they are approved for the life insurance. So here’s how you may want to consider closing the conversation. You say “Mr. & Mrs. Smith, when I heard about this strategy I immediately thought of you because I am confident that it’s a good fit with your portfolio objectives. I spent considerable time reviewing your portfolio to make sure that this idea is an appropriate fit, and I believe that the more you think about it, the more you’ll agree. But I also know you probably weren’t thinking that we’d be talking about life insurance today, either. From my review I know you qualify for this program financially, but I don’t know if you qualify medically. If you’d like to consider this as an option, we need to find out if you do qualify medically, and it will take the insurance company about 60 – 90 days to figure that out. During that time I won’t be making any changes to your portfolio for this strategy. I want you to use that time to think about it and, naturally, to call me if you have any questions.” You finish the dialogue by saying: “When I hear back from the life insurance company I will give you a call. We’ll sit down again at that time and review this concept once more. If at that time you feel you would like to proceed, we can implement the plan that day. If you elect not to, we won’t. With your permission I would like to submit a request to the insurance company today to ask them to review your health to see if you qualify medically, OK?”

Questions or Comments I know that was a lot of information to cover in a relatively short amount of time. . . Does anyone have any questions?

IRA Strategies for Wealth Transfer Thank you for joining us for today’s discussion about IRA Strategies for Wealth Transfer.

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