Technology Based Stress-Testing of Wealth Transfer Strategies Wealthy and Wise® by InsMark   Technology Based Stress-Testing of Wealth Transfer Strategies

Important Notice Examples and case studies are for illustration purposes.  Actual results may vary.  Legal and tax information is for general use only and may not be applicable to specific circumstances.  Clients should consult their own legal, tax and accounting advisors to assist in the evaluation of any potential transaction or strategy.    Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS under Circular 230, any U.S. Federal tax advice or information contained in this communication, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.

Focus of This Presentation An effective wealth planning program must address the following core subject: Real wealth involves sustainable Cash Flow, and most people are more concerned with running out of money than any other financial issue.

Focus of This Presentation An effective wealth planning program must: Include the financial impact of a client’s required after tax Cash Flow in the analysis (including a factor for inflation); Calculate the most efficient distribution from liquid assets to produce the required Cash Flow; Convert illiquid assets to liquid assets at any time a shortfall of required Cash Flow exists; Calculate Net Worth using realistic asset-by-asset client assumptions;

Focus of This Presentation An effective wealth planning program must also: Provide a client-approved comfort zone of residual Net Worth in all years; Illustrate revisions to the assets to improve Cash Flow and maximize Net Worth; Integrate life insurance solutions and illustrate comparisons with no life insurance; Maximize Wealth to Heirs coordinated with the most efficient pre-death Net Worth;

Focus of This Presentation An effective wealth planning program must also: Illustrate varying levels of death taxes due to the unstable nature of federal taxes; Analyze all planning variations in “do-it vs. don’t-do- it” graphical comparisons; Provide year-by-year numerical backup for every aspect of the analysis so that professional advisers can easily audit any aspect of it.

Focus of This Presentation Each of the Case Studies in this presentation includes a life insurance component utilizing these wealth planning features.

Main Menu Cash Flow Impact on Net Worth (5 slides) Case Study #1 - Basic Analysis (9 slides) Case Study #2 - Comprehensive Analysis (24 slides) Case Study #3 - IRA Alternatives (8 slides) Case Study #4 - Long-Term Care Analysis (12 slides) Funding Comments (1 slide) Other Concepts (1 slide) Contact Information (1 slide) Final Slide (1 slide)

Cash Flow Impact on Net Worth Couple, ages 65 and 60. Liquid assets available to provide retirement income: $3,000,000. Desired retirement income: Strategy 1: $100,000 a year indexed at 3%; Strategy 2: $150,000 a year indexed at 3%; Strategy 3: $200,000 a year indexed at 3%.

Cash Flow Impact on Net Worth Source: Wealthy and Wise by InsMark Strategy 1: $100,000 a year indexed at 3% (long-range cash flow and net worth both OK) Strategy 2: $150,000 a year indexed at 3% (cash flow and net worth expire at ages 83/78) Strategy 3: $200,000 a year indexed at 3% (cash flow and net worth expire at ages 76/71)

Cash Flow Impact on Net Worth Cash flow should be drawn from liquid assets in the most efficient order. Before

Cash Flow Impact on Net Worth Cash flow should be drawn from liquid assets in the most efficient order. Liquid Assets should be set to produce the highest possible long-range Net Worth. Before After Source: Wealthy and Wise by InsMark

Cash Flow Impact on Net Worth Factorial Solves are Required to Establish the Best Order of Asset Liquidation to Produce Maximum Net Worth 7 asset categories = 1 x 2 x 3 x 4 x 5 x 6 x 7 = 5,040 Solves** 5 asset categories = 1 x 2 x 3 x 4 x 5 = 120 Solves* 10 asset categories = 1 x 2 x 3 x 4 x 5 x 6 x 7 x 8 x 9 x 10 = 3,628,800 Solves*** *Under 10 seconds **Under 20 seconds ***Go to lunch Main Menu Continue to Case Study #1

Case Study #1 Richard and Elaine Masters are ages 65 and 60 -- with two grown children. Their current estate is valued at close to $5.7 million. They are both retired. Their current financial plan has been designed to provide them with $100,000 a year in after tax retirement cash flow -- increasing by 3% a year as an inflation offset.

Case Study #1 Richard and Elaine are considering gifting $25,000 a year in trust to each of their two children (total $50,000). However, they are concerned about the impact of such a gift on their retirement income and residual net worth, i.e., their “comfort zone” of retained assets. They also want to determine what would be the most effective use of the gift – an equity account or life insurance.

Case Study #1 A summary of the strategies in Case Study #1: Strategy 1. Richard and Elaine’s current plan – this does not take into account the new gifts to the trust on behalf of their children. Strategy 2. The new plan with gifts to the trust invested in a hypothetical equity account (6.00% growth and 2.00% dividend). Strategy 3. The new plan with gifts to the trust invested in a survivor life insurance policy. Note: Each analysis includes a provision for $100,000 of increasing annual after tax cash flow for Richard and Elaine’s retirement.

Impact on Net Worth Strategy 1: Current Plan Strategy 2: $50,000 gifts to hypothetical equity account Strategy 3: $50,000 gifts to survivor life insurance Source: Wealthy and Wise by InsMark

Impact on Wealth to Heirs Strategy 1: Current Plan Strategy 2: $50,000 gifts to hypothetical equity account Strategy 3: $50,000 gifts to survivor life insurance Source: Wealthy and Wise by InsMark

Summary Results -- Ages 85/80 Source: Wealthy and Wise by InsMark

Summary Results -- Ages 100/95 Source: Wealthy and Wise by InsMark

Case Study #1 Conclusion Since the source of the funding for the $50,000 annual gift is their capital not their income, Richard and Elaine’s retirement income cash flow is unaffected by the transaction. Consequently, it is likely that they will consider the long-range decrease in net worth well worth the significant increase in wealth to heirs -- and the life insurance policy appears to be the preferred funding instrument. Main Menu Continue to Case Study #2

Case Study #2 Case Study #2 illustrates a wealth preservation strategy that includes a charitable component.

Case Study #2 Ken and Jennifer Hudson are in their mid-fifties with three grown children. Their current estate is valued at close to $4.3 million. They plan to retire in five years. Their current financial plan has been designed to provide them with $150,000 a year in after tax retirement cash flow -- increasing by 3% a year as an inflation offset.

There are three possible beneficiaries of an estate: Family Charity IRS With proper planning, you get to pick two!

With proper planning, you get to pick two! If given the choice . . . Family Charity IRS With proper planning, you get to pick two!

Let’s examine this in context . . . IRS Most people decide this way . . . Family Charity Let’s examine this in context . . .

Case Study #2 (Asset Analysis) Retirement Plan (IRA) ($500,000) Deferred annuity ($500,000) Undeveloped land ($500,000) All the family assets ($4.275 million) We will focus on four planning strategies for Ken and Jennifer regarding the following assets: Each technique works because the social capital portion of the asset classification will go to a favorite Charity or Family Foundation at death, not the IRS. Note: Each analysis includes a provision for $150,000 of increasing annual after tax cash flow for Ken and Jennifer’s retirement.

Strategy 1: Social Capital to IRS Retirement Plan to Charity at Death Net Worth Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 2: Social Capital to a favorite Charity or Family Foundation (plus $3.7 million survivor universal life policy to heirs)

Strategy 1: Social Capital to IRS Retirement Plan to Charity at Death Wealth to Heirs Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 2: Social Capital to a favorite Charity or Family Foundation (plus $3.7 million survivor universal life policy to heirs)

Strategy 1: Social Capital to IRS Retirement Plan to Charity at Death Wealth to Charity Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 2: Social Capital to a favorite Charity or Family Foundation (plus $3.7 million survivor universal life policy to heirs)

Retirement Plan to Charity at Death Combined Wealth Transfer Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Age 85/80

Strategy 1: Social Capital to IRS Deferred Annuity to Charity at Death Net Worth Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 3: Social Capital to a favorite Charity or Family Foundation (plus $5.2 million survivor universal life policy to heirs)

Strategy 1: Social Capital to IRS Deferred Annuity to Charity at Death Wealth to Heirs Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 3: Social Capital to a favorite Charity or Family Foundation (plus $5.2 million survivor universal life policy to heirs)

Strategy 1: Social Capital to IRS Deferred Annuity to Charity at Death Wealth to Charity Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 3: Social Capital to a favorite Charity or Family Foundation (plus $5.2 million survivor universal life policy to heirs)

Deferred Annuity to Charity at Death Combined Wealth Transfer Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Age 85/80

Strategy 1: Social Capital to IRS Undeveloped Land to Charity via CRT Net Worth Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 4: Social Capital to a favorite Charity or Family Foundation (plus $500,000 survivor universal life policy to heirs)

Strategy 1: Social Capital to IRS Undeveloped Land to Charity via CRT Wealth to Heirs Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 4: Social Capital to a favorite Charity or Family Foundation (plus $500,000 survivor universal life policy to heirs)

Strategy 1: Social Capital to IRS Undeveloped Land to Charity via CRT Wealth to Charity Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 4: Social Capital to a favorite Charity or Family Foundation (plus $500,000 survivor universal life policy to heirs)

CRT to Charity at Death Combined Wealth Transfer Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Age 85/80

Zero Estate Tax Net Worth Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 5: Social Capital to a favorite Charity or Family Foundation (plus $10 million survivor universal life policy to heirs)

Zero Estate Tax Wealth to Heirs Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 5: Social Capital to a favorite Charity or Family Foundation (plus $10 million survivor universal life policy to heirs)

Zero Estate Tax Wealth to Charity Analysis Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS Strategy 5: Social Capital to a favorite Charity or Family Foundation (plus $10 million survivor universal life policy to heirs)

Zero Estate Tax Combined Wealth Transfer Do-It versus Don’t-Do-It Source: Wealthy and Wise by InsMark Age 85/80

Flexibility All money to charity from the retirement plan, annuity, and zero estate tax strategies is via a revocable charitable beneficiary designation or a testamentary bequest.* Therefore, these assets remain an active part of Net Worth until death -- and are freely available to Ken and Jennifer during their lifetimes. Should Ken and Jennifer wish to change their minds, they may do so at any time. *If enacted, the Charitable Remainder Trust is a “done deal”.

Illustration Resource To give you a thorough understanding of all the details available in the individual reports from a Wealthy and Wise analysis, click here to review the 52 pages associated with Strategy 1 (Current Situation) versus Strategy 5 (Zero Estate Tax Plan).

What About a Stretch-Out IRA? Case Study #3 What About a Stretch-Out IRA? Which hand do you want to play? Stretch-Out IRA Charitable IRA Good as the stretch-out approach is, it is second best to the charitable strategy. Very few people know this -- but those who do have a very significant planning edge.

What About a Stretch-Out IRA? Case Study #3 What About a Stretch-Out IRA? Using Ken Hudson’s $500,000 IRA as an example, let’s review a wealth preservation analysis that compares a stretch-out IRA to a charitable IRA.

Impact on Net Worth Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS -- no add’l life insurance for heirs Strategy 2: Stretch-Out IRA -- $2.0 million life insurance for heirs Strategy 3: Charitable IRA -- $3.7 million life insurance for heirs

Impact on Wealth to Heirs Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS -- no add’l life insurance for heirs Strategy 2: Stretch-Out IRA -- $2.0 million life insurance for heirs Strategy 3: Charitable IRA -- $3.7 million life insurance for heirs

Legacy to a Favorite Charity or Family Foundation Source: Wealthy and Wise by InsMark Strategy 1: Social Capital to IRS -- no add’l life insurance for heirs Strategy 2: Stretch-Out IRA -- $2.0 million life insurance for heirs Strategy 2: Charitable IRA -- $3.7 million life insurance for heirs

The major difference between charitable and stretch-out is the quality of the inherited capital.

* Source: Wealthy and Wise by InsMark Age 85/80 *Stretch-Out IRA: $3.7 million of the Wealth to Heirs is tax deferred capital on which income tax is still due. Charitable IRA: All the Wealth to Heirs is capital.

Case Study #3 Conclusion The edge clearly goes to the charitable IRA approach (backed up by the life insurance). Main Menu Continue to Case Study #4

Long-Term Care – Insure or Self-Insure Case Study #4 Long-Term Care – Insure or Self-Insure John and Fran Sandor are ages 65 and 60. The Sandors’ financial adviser has recommended they acquire a Long-Term Care policy. They have a current Net Worth of $3.5 million and question whether it is better to self-insure this risk – should it occur.

Case Study #4 Long-Term Care – Insure or Self-Insure Should the Sandors purchase the Long-Term Care policy or is their Net Worth sufficient to self-insure the potential risk? Let’s examine the mathematics . . .

Analysis Assume a claim occurs in 8 years that lasts for 6 years. Assume the total daily benefits for the claim on a monthly basis will be $6,000 in today’s dollars -- and medical inflation averages 5% a year. Assume the annual premium for a Long-Term Care policy covering both John and Fran is $8,600 -- reducing to $4,300 during the claim period. Assume an inflation rider increases total monthly benefits by 5% (compounded) a year. Assume retirement cash flow needs decline by 25% during the claim period.

A Cash Flow Neutral Analysis Retirement cash flow must be unaffected by the transaction. A Cash Flow Neutral Analysis This means the source of the Long-Term Care claims or premiums must be John and Fran’s asset base, not a reduction in their spendable income. An evaluation of alternatives follows . . .

Source: Wealthy and Wise© by InsMark Net Worth Analysis Source: Wealthy and Wise© by InsMark

Wealth to Heirs Analysis Source: Wealthy and Wise© by InsMark

Case Study #4 Conclusion #1 Given the assumptions, John and Fran should seriously consider acquiring the Long-Term Care policy as it is not worth assuming the risk inherent in self-insuring.

Case Study #4 Query Is there a way to improve further the wealth transferred to heirs? Let’s include a Wealth Replacement Trust funded with $2,500,000 of survivorship life insurance ($25,000 annual premium).

The self-insured approach (Strategy 2) is not a desirable option, so our comparison will evaluate the following three alternatives: Strategy 1: Status Quo (no Long-Term Care claims or premiums) Strategy 3: Insure LTC Strategy 4: Insure LTC + $2,500,000 life insurance in a Wealth Replacement Trust

Source: Wealthy and Wise© by InsMark Net Worth Analysis Source: Wealthy and Wise© by InsMark Strategy 4 produces some reduction in Net Worth. As you can see on the next screen, the improved results to heirs make Strategy 4 a highly desirable option.

Source: Wealthy and Wise© by InsMark Wealth to Heirs Source: Wealthy and Wise© by InsMark Strategy 4 produces superior results in Wealth to Heirs.

Case Study #4 Conclusion #2 Given the assumptions, John and Fran should seriously consider acquiring the both the Long-Term Care policy and the Wealth Replacement Trust funded with life insurance. Main Menu Continue to Funding Comments

Continue to Other Concepts Funding Comments One of the conditions for each of the evaluations in this presentation requires that spendable cash flow for planned retirement income should be unaffected by the transactions, and this has been confirmed during each step of each analysis. All the graphics for Net Worth and Wealth to Heirs and/or Charity reflect assets after the funding has been accounted for, and spendable cash flow for retirement income is calculated to be the same whether or not the participants take advantage of any of the protection strategies suggested. Main Menu Continue to Other Concepts

Other Concepts Just A Few of the Many Other Concepts That Can Be Illustrated in Wealthy and Wise Using “Do it” vs. “Don’t do it” Comparisons Pension Rescue (in or out of the estate) Annuity Rescue (in or out of the estate) Arbitrage Uses of Single Premium Immediate Annuities Downsize or Upsize Home (or Refinance) The Overall Economics of Gifts to Heirs Family Limited Partnership Loan-Based Private Split Dollar Main Menu Private Ltd. Collateral Assignment Split Dollar Additional Insurance Inside the Estate (the LEAP approach) Continue to Contact Information

Continue to Final Slide Contact Information Institutional inquiries: David A. Grant, Senior Vice President, Sales. 925-543-0513 or dag@insmark.com. Individual Inquiries: 1-888-InsMark (467-6275) or sales@insmark.com. Or visit our website at www.insmark.com. Main Menu Continue to Final Slide

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