Estate Planning with Intentionally Defective Irrevocable Trust

Overview Intentionally Defective Irrevocable Trust (IDIT) Basics Sample IDIT Examples Generation Skipping Transfer Tax (GSTT) Planning Dynasty Trusts Review overview slide with audience. This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and /or tax advisor before making financial investment or planning decisions.

Intentionally Defective Irrevocable Trust Basics IDIT is an irrevocable trust Trust income & deductions flow through to grantor Transactions between grantor and IDIT are generally ignored for income tax purposes (e.g. sale of assets by a grantor to his or her IDIT) Review IDIT basics. Many IDITs are designed as defective for income tax purposes. A defective trust (IDIT) can be beneficial from an income tax perspective for a private split-dollar arrangement between an insured and his or her IDIT.

IDIT Basics Assets are generally intended to be sheltered from inclusion in a grantor’s estate May be used to purchase & own single life or survivorship coverage Review IDIT fundamentals. Explain to agents that IDITs involve complex tax issues. The IRS can scrutinize IDITs based upon a number of theories (e.g. IRC 2036 etc). An ILIT is often designed as an IDIT. Note: IDITs may be subject to increased scrutiny by IRS. Clients should speak with their own legal and tax advisor regarding further details.

IDIT Basics: Grantor Trust Rules There are a number of different ways to make a trust “defective” for income tax purposes Sample trust provisions include: Ability to use trust income to pay life insurance premiums on the life of the grantor and/or the grantor’s spouse Ability to exchange property of equal value Death or termination of grantor trust status Explain to your audience how attorneys can use IRC 673-679 trust powers or interests to make trusts defective for income tax purposes. Death or termination of grantor trust status may have significant income tax consequences (e.g. the recognition of gain) to the grantor and/or the grantor’s estate. Consequently, the client’s tax and legal advisors need to be providing comprehensive tax and legal advice to clients.

IDIT Basics: Considerations Typically used for lifetime sales of grantor’s property (e.g. discounted property*) Installment notes should reflect applicable federal rates (AFR) Imperative to observe all formalities of the transaction in an arms-length, businesslike fashion or else the transaction may not be respected by the IRS. (See Pierre v. Commissioner, T.C. Memo. 2010-106 (May 13, 2010)) Review IDIT fundamentals and remind that an installment sale to an IDIT might be an attractive alternative to a GRAT. Mention that a self-canceling installment note (SCIN) or private annuity can also be used in conjunction with an IDIT with careful planning. The client’s attorney will be able to speak to the use of these techniques in more detail. Emphasize the importance of seeking guidance from tax and legal advisors. Unclear income tax issues demonstrates this importance. * Use of discounts, though legitimate where appropriate, is often the subject of IRS scrutiny. It is important to confer with your independent tax and legal advisors regarding the use of this technique.

IDIT Basics: Tax Considerations In event of the grantor’s death while the Note is outstanding Estate tax: Remaining value of the note is includable. Income tax: Unclear. Some argue that income associated with assets sale should be recognized because the trust is no longer a grantor trust upon death. Clients should seek guidance from tax and legal advisors. Review IDIT fundamentals and remind that an installment sale to an IDIT might be an attractive alternative to a GRAT. Mention that a self-cancelling installment note (SCIN) or private annuity can also be used in conjunction with a IDIT with careful planning. Client’s attorney will be able to speak to the use of these techniques in more detail. Emphasize the importance of seeking guidance from tax and legal advisors. Unclear income tax issues demonstrates this importance.

IDIT Basics: Benefits Grantor’s payment of the trust income taxes increases the growth of trust assets and reduces grantor’s estate over time. Grantor’s payment of the trust income taxes is generally not considered a taxable gift. IDIT can potentially remove significant asset appreciation from estate taxation. Review the potential income and estate benefits of a IDIT.

IDIT Example Business owner and spouse gift cash and other assets to their IDIT. Business owner later sells discounted S corporation stock or family limited partnership units to IDIT for 10- year note. IDIT uses part of annual IDIT cash flow to fund annual interest costs and to purchase survivorship coverage. Appreciated IDIT assets and cash flow used to repay note. Review case study and answer questions. Initial gifts are typically made to avoid a potential IRS estate tax challenge that IDIT assets should be taxed in the grantor’s estate (e.g. under IRC 2036 etc). The sale of discounted property creates additional tax risks (e.g. valuation and other estate challenges applicable to entity planning (e.g. under IRC 2701 & 2702 etc). Note: The IDIT can only hold S corporation stock while grantor is alive, otherwise it may be deemed a disqualified shareholder. This example is hypothetical, actual results will vary. This presentation points to potential advantages available through valuation discounts of limited partnership interest/ S corporation stock. The ability to take valuation discounts, though supported in various court decisions, is complex and will almost certainly be scrutinized by the IRS. Any such discount should be determined by a qualified appraiser. Such issues serve to point out the importance of seeking the guidance of professional tax and legal advisors.

General Skipping Transfer Tax: Basics The GSTT is an additional transfer tax GSTT is in addition to gift or estate tax GSTT exemption $5 million in 2011 and 2012 Scheduled to return to previous level in 2013 Review GSTT basics.

GSTT Planning: Basics GSTT gifts to long-term trusts may pass more wealth to future generations than outright gifts subject to ongoing estate tax erosion Lifetime gifts sheltered by the GSTT exemption can be leveraged using life insurance (e.g. dynasty trusts) Use a dynasty trust as a door opener or discuss with existing IDIT clients during annual review appointments Review basic GSTT planning fundamentals and sales opportunities.

GSTT Planning: Dynasty Trust Example 1 Annual or lump sum gifts to trust sheltered by lifetime gift exemption or by gift tax annual exclusions. Gifts fully sheltered by insured’s or couple’s use of their GSTT exemption(s). Dynasty trust with a zero inclusion ratio. Dynasty trust purchases single life or survivorship policy. Review example. Examples are hypothetical. For illustrative purposes only.

GSTT Planning: Dynasty Trust Example 2 Client may use split-dollar to defer gift outlays Initial and ongoing gifts fully sheltered by GSTT exemptions Single life or survivorship life coverage This example is hypothetical. Actual results will vary.

GSTT Planning: Dynasty Trust Considerations Most states have Rules Against Perpetuities statutes that limit the duration of a trust. Trusts can be perpetual in South Dakota and certain other jurisdictions. Rules are generally based on where the trust is administered and not where the client actually lives. Importance of working with skilled trust officers and experienced tax and legal advisors. A number of different jurisdictions have enacted special income and trust laws favorable to dynasty trusts. Remind audience that dynasty trusts raise complex tax and legal issues for clients and that clients need to rely on their advisors.

GSTT Planning: IDIT Designing the dynasty trust as an IDIT Advanced tax planning technique Requires skilled tax and legal advisors A dynasty trust may be designed as an IDIT.

GSTT Planning: IDIT Example Couple makes initial gift to dynasty trust covered by remaining lifetime gift exemptions and GSTT exemptions. Couple sells discounted LLC interests to dynasty trust/IDIT for 10 year note setting forth AFR. Dynasty trust purchases 10 pay survivorship policy. Note repaid from other trust assets and cash flow. Review example Examples are hypothetical. For illustrative purposes only. Use of discounts, though legitimate where appropriate, is often the subject of IRS scrutiny. Clients should confer with their independent tax and legal advisors regarding the use of this technique.

MetLife Brand One of America’s largest financial companies with roots as far back as 1863 Serves over 90 of the top one hundred FORTUNE 500® companies* Recognized as the Nation’s Largest Life Insurer** Another important thing to talk about today is the brand of the company that stands behind us, which is MetLife. In today’s environment of financial scandals, clients are very concerned about the quality of the financial institutions we are doing business with. Clients want to do business with companies that are well known and have well respected brands. MetLife is the largest life insurance company in the United States and has roots dating back the civil war. Furthermore, we provide financial products to over 90 of the top one hundred FORTUNE 500® companies and serve one out of eleven households. At the end of the day, people really do buy what they know. * MetLife. Quick Facts: Full Year 2009 ** Based on life insurance in-force as of December 31, 2008.

Important Information The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“Act”) impacts the federal gift, estate and generation skipping transfer tax (together referred to as “transfer tax”) through 2012. Among other changes, in 2011 and 2012, the Act provides maximum exemption amounts of $5,000,000 per person for transfer tax purposes, provides for a maximum transfer tax rate of 35% and provides for portability of the estate tax exemption between spouses. Unless Congress enacts new legislation, on January 1, 2013 the transfer tax laws will revert back to the laws (e.g. exemption amounts of $1,000,000 and generally 55% maximum tax rates) that were in effect in 2001. However, it is not clear whether Congress will allow the Act to expire, extend the Act or amend the transfer tax laws for years beyond 2012 to reflect lower tax rates and/or increased transfer tax exemption amounts than as currently legislated. Increased transfer tax exemption amounts and lower transfer tax rates may impact the suitability of any transfer tax planning strategy. Clients need to understand that tax law is always subject to interpretation and legislative change. Metlife and its affiliates do not provide tax advice and therefore clients must speak with their qualified legal and tax counsel to discuss their current estate plan and to discuss what planning options are available and appropriate.

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