1. Planning for the UHNW Client – Part II Generational Split Dollar
Presented by:
Robert W. Finnegan, J.D., CLU
Highland Capital Brokerage  P:

2. Estate Dilution
For our Ultra-High Net Worth Clients, substantial estate dilution can take place due to the following:
Repeat Estate Taxation
A Growing Family

3. Repeat Estate Taxation1.
Parents
$100
Dilution Due to
Repeat Estate Taxation
IRS
Estate Tax Rate
Generation
40%
50% 1
Parents
$100 2
Children
$60
$50 3
Grandchildren
$36
$25 4
Great GC
$21
$12
$$$ 2.
Children
$60
IRS
$$$ 3.
Grand-Children
$36
$$$
IRS 4.
Great GC
$21
IRS
$$$

4. Repeat Estate Taxation & A Growing Family
Dilution Due to
Repeat Estate Taxation & A Growing Family
Parents
$100
$100
Child
$20
Child
$20
Child
$20
$60
($ % ET) GC $4 GC $4 GC $4
$12
($ % ET)
3x3 = $4M/GC
2x3 = $6M/GC
2x2 = $9M/GC

5. multi-generational planning
Estate Dilution
For
UHNW Clients,
multi-generational planning
is in order.

6. Part I Combining strategies creates synergies:
Discounted Sale to DGT & Private Split $ LI (Economic Benefit Regime)
Private Financing (Loan Regime Split $)
Transfer of multi-millions of dollars without gift, estate or GST taxes (& a large portion income tax free)!
This combination works with an
Policies of any size – no upper limit
Existing DGT – add Split $ LI
New DGT – many clients need substantial additional planning.

7. Part I: Sale to DGT & Split $ LI Net to Family

8. Part I: Private Financing
(B)
(C)
(D)
(E)
(F)
Note Terms
Life Insurance
Loan
Note
June 2016 AFR
Annual
Years to Pay
Amount
Scenario
Duration
Term
Rate
Premium
Premiums
Needed 1 9
Mid-Term
1.41%
204,539 10
4,856,047 2 20
Long Term
2.24%
122,329
2,891,442 3 30
104,230
2,298,707 4 41
98,630 74
1,841,046

9. Split $ w/Dynasty Trust
Part I: Which Pocket?
Client
Children
Children, GC+ In
Estate
$300M
Out of Estate
GST Tax-Exempt
(Dynasty Trust, DGT)
New Or
Existing
Split $ w/Dynasty Trust
Traditionally
The Client is the
Insured and
Funder
Out of Estate
Not GST Exempt
$30M
For Example: GRATs
Additional Planning

10. Generational Split Dollar Overview

11. Generational Split Dollar (GSD) Plans
A strategy where …
Parents (G1) fund insurance on the life of children (G2)
In a Dynasty Trust for the benefit of GC and subsequent generations (G3+)
Take advantage of private split dollar rules
Freeze G1’s estate and move the appreciation (LI death benefit) to a Dynasty Trust

12. Split $ w/Dynasty Trust (Same Insured as Part I)
Which Pocket?
Client (Insured)
Client’s Children
Client’s C, GC+
Part I
The Client is the
Insured and
Funder
Split $ w/Dynasty Trust
G1 - PARENTS
G2 – Child
(Same Insured as Part I)
G3 - GC (G2’s C)
(G3, G4, etc.)
$100M
Estate
UHNW
$50M
Estate
UHNW
Out of Estate
GST Tax-Exempt
(Dynasty Trust, DGT)
Part II:
Generational Split $
Client (G2) or G3 Insured
Parents (G1) Funder
G1’s Funds Split $ LI on G2

13. Generational Split Dollar (GSD) Plans
Client Profile:
UHNW Client (Senior Generation - G1)
Older – age(s) 70+
Frequently in poor health
G1 has done substantial planning and moved significant wealth, but needs to do more
G2 (Children) have or will have substantial wealth
G2 has established need for insurance
Keep a closely held business in the family (Control ownership)
Fund estate taxes
Reduce dilution of grandchildren’s & GGC interest

14. GSD – What’s the Attraction? - CLIENTS
Discounts!
Range from 30% to 95%!
G1 & Dynasty Trust enter into split dollar plan
Policy insures G2 or G3 (Children or GC)
G1 advances $30M in premium under Split $ plan
G1 has right to recover $30M upon insureds death (the “Split $ Receivable” or “Receivable”)
That recovery is a long time in the future
Qualified appraisal values Receivable at
$1.5M (95% discount) to
$7.5M (75% discount)

15. GSD – What’s the Attraction - IRS
Needless to say the Service does not like GSD plans (valuations)!!!
The IRS has been
Auditing every Economic Benefit Regime GSD plan
Assessing gift tax deficiencies asserting a 100% gift
Settling some plans
Litigating others
Note: The aggressive discounts have not yet been litigated

16. GSD – With all that attention …
Why would we want to propose a transaction that is sure to invite IRS scrutiny?
We feel that
Planning with G1’s funds to purchase LI on G2 is a perfectly valid planning strategy.
Split $ funding is an attractive planning strategy even without the discounts
All the better if we can obtain discounts
GSD plans can be responsibly promoted, implemented and managed

17. GSD Plans Today we will focus on
Estate of Morrissette vs. Commissioner, 146 T.C. 11 (April 13th, 2016)
Understanding GSD Plans
Aggressive GSD Plans
Designing GSD Plans

18. I. Estate of Morrissette vs. Commissioner 146 T. C
I. Estate of Morrissette vs. Commissioner T.C. 11 (April 13th, 2016) A recent favorable GSD case See Also Estate of Levine vs. Comm. (July 13, 2016)

19. Estate of Morrissette Background
Mrs. Client (G1) established three dynasty trusts, one for each son (G2).
The trusts purchased life insurance on the sons (G2) to fund a cross purchase buy-sell agreement
The policies were funded with split dollar agreements between each dynasty trust and Mrs. Client (through her revocable trust).

20. Estate of Morrissette Background
Mrs. Client (G1) revocable trust contributed $30M in premiums.
The estate valued Mrs. Client’s $30M receivable at $7.5M
A 75% discount!

21. Estate of Morrissette Following Mrs. Client’s death The IRS Background
Treated the full value of $29.9M premium advances as gifts, and
Assessed a gift tax deficiency of $13.8M and penalties of $2.7M.

22. Estate of Morrissette
Ruling in favor of the Client, the full Tax Court granted summary judgement, holding that
The agreements are subject to the split dollar economic benefit regime.
The dynasty trusts’ only economic benefit under the agreements was the right to receive the current life insurance protection.

23. Estate of Morrissette Notes:
In granting summary judgement, the full Tax Court (not a memorandum decision) held that the law was so well established the estate was entitled to prevail without proceeding to a full trial.
Agreements were structured as classic economic benefit regime split $.
The Court
Emphasized the fact that the agreement exactly modeled an example in the preamble to the final split dollar regulations.
Noted that the insurance was for a valid business purpose (buy-sell to keep the business in the family).

24. Estate of Morrissette Morrissette was a gift tax case.
Some advisors overemphasize the importance of Morrissette.
The IRS will certainly litigate or settle the estate appraisal of $7.5M for $29.9M of premium advances - a 75% discount!
It is essential that clients entering into GSD transactions understand the unsettled valuation issues regarding this strategy.

25. II. Understanding Generational Split Dollar Plans

26. Understanding GSD Plans Three Key Concepts
Imputed Gift - One-Year Term Cost
(Economic Benefit Regime)
Split Dollar Receivable
Valuation Methodology

27. Understanding GSD Plans 1. Imputed Gift
With private split $, individual pays the premium.
The economic benefit to the trust =
One-year term rate x the trust share of death benefit
M40: 36₵/$1,000 x $50,000,000/$1,000 = $18,000
M41: 38₵/$1,000 x $50,000,000/$1,000 = $19,000
Under Economic Benefit Regime Split $ there are two alternate modes for treating the economic benefit:
Trust pays the economic benefit (Part I Private Split $)
Imputed gift to the Trust (Part II GSD; gift & GST if Dynasty Trust)

28. Understanding GSD Plans 1. Imputed Gift
GSD utilizes the imputed gift mode:
G1 is obligated (per the split $ agreement) to pay the full premium.
The Trust may optionally and unilaterally decide to pay a portion of the premium equal to the one year term cost.

29. Understanding GSD Plans 1. EBR Split $ - Term Rates
Single life term rates:
Government Rates
Table 2001 (replaced PS58 Rates)
Carriers rates - Must satisfy the IRS' guidelines
Reflect term rates made known to the general public and
Policies actually sold by the carrier
Second-to-Die term rates:
Government Rates Table 2001

30. Split $ - One Year Term Rates Rate/$1,000 of Death Benefit $50,000,000 Coverage
Full
Carrier YRT Rates
Table 2001
Rates
Female
Pay
Rate/$1,000
Term Cost
Multiple 40
261,000
.50
25,000
1.10
55,000
2.2 45
.60
30,000
1.53
76,500
2.5 50
.82
41,000
2.3
115,000
2.8 55
1.17
58,500
4.15
207,500
3.5 60
1.69
84,500
6.51
325,500
3.8 65
2.57
128,500
11.90
595,000
4.6 70
4.11
205,500
20.62
1,031,000
5.0

31. Understanding GSD Plans 1. EBR Split $ - Term Rates
Whether we use the Government Rates or the Carriers rates does not effect the valuation of the receivable
It does effect the transaction costs via the imputed gift to the Dynasty Trust - the Table 2001 rates use substantially more lifetime exemptions:
Gift
GST

32. Understanding GSD Plans 2. G1’s Receivable
Pursuant to the Split $ Plan
G1 advances shortest-pay non-MEC (“Receivable”)
Upon insured’s (G2) death or surrender, G1 has right to recover greater of
Premiums Advanced
Cash Value
A fully guaranteed UL G policy has very low cash value
(always less than the premiums)
The Receivable is only recoverable upon
Insured’s (G2) death
Dynasty Trust surrendering policy

33. Understanding GSD Plans Example
An example will illustrate 1. the imputed gift and 2. the split $ receivable:
Male 40 Preferred
$57.5M UL Lifetime Guaranteed Coverage
$7.5M Single Premium
G1:
Enters into a private EB Regime Split $ Plan with Dynasty Trust
Advances full $7.5M premium

34. Policies Values Allocated Per Split Dollar Agreement
1. Split $ Receivable = $7.5M 2. Imputed Gift to Trust = One-Year Term Cost $50M Net to Trust
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
Policies Values Allocated Per Split Dollar Agreement
Senior Generation (G1)
Dynasty Trust
Premiums = 
Imputed Gift
Prudential
 Split $
Cumulative
Account
Death
Carrier
Cost/$1,000
Age
Receivable
Rollout
Premiums
Value
Benefit
Term Rates
Death Benefit 40
7,500,000
4,931,119
18,000
50,000,000
0.36 41
4,725,643
19,000
0.38 42
4,509,075
20,000
0.40 43
4,279,610
21,500
0.43 44
4,035,935
23,000
0.46 45
3,776,699
24,000
0.48 46
3,501,570
26,000
0.52 47
3,212,380
28,000
0.56 48
2,911,007
30,500
0.61 49
2,594,997
32,500
0.65

35. Policies Values Allocated Per Split Dollar Agreement
1. Split $ Receivable = $7.5M 2. Imputed Gift to Trust = One-Year Term Cost $50M Net to Trust
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
Policies Values Allocated Per Split Dollar Agreement
Senior Generation (G1)
Dynasty Trust
Premium 
Imputed Gift
Prudential
 (Split $
Cumulative
Account
Death
Cost/$1,000
Age
Receivable)
Rollout
Premiums
Value
Benefit
Term Rates
Death Benefit 80
7,500,000
478,000
50,000,000
9.56 81
535,000
10.70 82
600,500
12.01 83
676,000
13.52 84
831,000
16.62 85
889,500
17.79 86
4,958,000 *
99.16 87
57,500,000
* Term rate only extend to age 85.
At that time, the plan would switch to the much higher Government Table 2001 rate.

36. 3. Valuation Methodology
G1 advances $7.5M in premium
G1 has right to recover the $7.5M Receivable only upon
Insured’s (G2) death
Dynasty Trust surrendering policy
Recovery is a long time in the future
G2 age 40, Life Expectancy = 48 Years
Qualified appraisal values Receivable at
$7.125M (95% discount) to
$5.625M (75% discount)

37. 3. Valuation Methodology
G1 is obligated to pay the full premium, the only interest for valuation purposes is the Split $ Receivable.
Notes:
If the Trust were obligated to pay a portion of the premium equal to the one year term cost, then that payment would have to be factored into the valuation of the split $ receivable.
On the other hand, it may be desirable for the Trust to (optionally) pay the one year term cost in order to eliminate the deemed gift & GST transfer. Especially where the client has utilized gift and GST exemptions.

38. 3. Valuation Methodology
Mortality - VBT 2008
(A)
(B)
(C)
(D)
Prob.
Expected
Split $
Death
Payment of
Year
Receivable
Age
VBT 2008 1
7,500,000 40
0.018%
1,316 2 41
0.026%
1,950 3 42
0.032%
2,388 4 43
0.038%
2,825 5 44
0.044%
3,263 6 45
0.050%
3,748 7 46
0.057%
4,281 8 47
0.066%
4,959 9 48
0.077%
5,782 10 49
0.089%
6,700
For each year of the split $ plan, calculate
Receivable x Prob(Death)
Calculate the Present Value of all of the expected payments (Col. D) over the life of the split $ plan.
Notes:
The mortality factors reflect the Age, Sex & Health of the insured.
VBT 2008 is the current table used by insurance carriers.

39. 3. Valuation Methodology
In calculating the present value of the expected recovery of the Receivable, the discount rate used can make a big difference.
What is the appropriate discount?
Valuation firms are using rates from 14% to 18%*.
Based on studies, for example, what is the expected return of funds invested by a life settlement company purchasing life insurance inforce policies?
*See Leimberg Estate Planning Newsletter #2444, by Espen Robak, Pluris Valuation

40. 3. Valuation Methodology UL G, Economic Benefit Regime
Prob.
Expected
PV(Expected Payment of Receivable (Col. D))
If Transferred in Any Given Year
Split $
Death
Payment of
9.00%
Year
Receivable
Age
VBT 2008 PV
Discount 1
7,500,000 40
0.018%
1,316
267,465
96% 2 41
0.026%
1,950
290,094 3 42
0.032%
2,388
314,073 4 43
0.038%
2,825
339,739
95% 5 44
0.044%
3,263
367,248 6 45
0.050%
3,748
396,770 7 46
0.057%
4,281
428,438
94% 8 47
0.066%
4,959
462,400 9 48
0.077%
5,782
498,712
93% 10 49
0.089%
6,700
537,438

41. 3. Valuation Methodology Lower Discount Rate
(B)
(C)
(D)
(E)
(F)
(G)
(H)
Prob.
Expected
PV(Expected Payment of Receivable (Col. D)) 
If Transferred in Any Given Year
Split $
Death
Payment of
6.00% - CV UL
9.00% - UL G
Year
Receivable
Age
VBT 2008 PV
Discount 1
7,500,000 40
0.018%
1,321
701,298
91%
267,465
96% 2 41
0.026%
2,000
742,058
90%
290,094 3 42
0.032%
2,503
784,640
314,073 4 43
0.038%
3,026
829,355
89%
339,739
95% 5 44
0.044%
3,570
876,337
88%
367,248 6 45
0.050%
4,191
925,729
396,770 7 46
0.057%
4,891
977,636
87%
428,438
94% 8
7,640,560 47
0.066%
5,790
1,032,170
86%
462,400 9
7,886,282 48
0.077%
6,897
1,089,359
85%
498,712
93% 10
8,140,346 49
0.089%
8,167
1,149,238
537,438

42. III. Aggressive Generational Split Dollar Plans

43. Aggressive GSD Plans Discounts ranging from 75% to 95%!
Gift or sell the receivable at a fraction, then cash in the policy when CSV = split $ receivable
Example:
G1 advances $20M premiums to fund $60M DB on G2 owned by a Dynasty Trust
Year 3, G1 sells the receivable for $1M (95% Discount) to a separate Dynasty Trust in exchange for a note
Year 5, Dynasty Trust #2 cashes in the policy when the CSV = $20M.
Dynasty Trust #2 is a defective grantor trust, i.e. no gain!
Move $19M to Dynasty Trust with no gift or GST tax
Alternate: G1 borrows initial $20M from bank. After sale, DT #2 lends $20M to G1 to repay bank.

44. IV. Designing Generational Split Dollar Plans

45. 1. Establish a Valid Need for the LI
Establish a valid business or estate planning need for the insurance
Keep a closely held business in the family
Control ownership of a family business
Fund Children’s estate taxes
Reduce dilution of future generations interest in estate
(G1 parents, G2 Children, G3 GC, G4 …)
Plan to keep insurance inforce
Notes:
Avoid aggressive early surrenders
Realizing however that circumstances do change ...

46. 2. Split $ Plan Design
Observe all formalities of the split $ plan (also see F. & G. below)
The Morrissette Court (Economic Benefit Regime)
Emphasized the fact that the agreement exactly modeled an example in the preamble to the final split dollar regulations.
Noted that the insurance was for a valid business purpose (buy-sell to keep the business in the family).
Reported all economic benefit (I.e. term) costs.
Notes:
It is our opinion that a Loan Regime Split $ plan, designed to comply with the appropriate regulations, can be used. (More below)
Loan Regime Split $ is more advantageous for strong CV policies (Indexed & Variable UL).
Loan Regime locks in favorable AFRs and allows accrual of loan interest.

47. 2. Split $ Plan Design
G1 cannot unilaterally terminate the split dollar agreement:
G1 and Trustee (independent trustee preferred) must unanimously agree to terminate (best practice) or
Independent Trustee can have the unilateral right to terminate.
Note:
G1’s unilateral right terminate the agreement at any time could affect the valuation.
G1 would be in constructive receipt and there would be no or low discount.

48. 2. Split $ Plan Design
Although G1 has the right to receive the greater of the premiums advanced or the policy cash values (upon death or surrender), neither party can access the cash values.

49. 2. Split $ Plan Design Loan Regime
Loan Regime is a more desirable way to design GSD plans
Leimberg EP Newsletter $2443 (08/09/2016) by Lee Slavutin and Richard Harris
Authors point out that no Loan Regime GSD plans are being audited.
Note: I believe it is just a matter of time until the IRS catches up with Loan Regime.
Structure as a lump sum loan to lock in low current AFRs (1.90% September 2016).
Accrue interest – no gift!, fewer moving parts but higher valuation (minor).
Notes:
With EB regime, imputed gift of one-year term costs can become quite large
Especially if use Table 2001 rather than carrier rates.
Since transfer is to a dynasty trust, imputed gift and GST transfer
High cash value – UL, IUL and VUL policies.
A loan is understandable to clients.

50. 2. Split $ Plan Design Loan or Economic Benefit Regime?
Attorney’s choice
Some attorneys may prefer to structure as Economic Benefit Regime in order to comply with Morrissette.
Others may prefer the advantages of Loan Regime.
Product choice may dictate Loan Regime (IUL, VUL).
We can help guide the decision, illustrate alternatives.

51. 2. Split $ Plan Design Observe all formalities of the split $ plan
For Economic Benefit Regime account for economic benefits
Imputed gift to the Trust or
Trust (optionally) pays one –year term cost
Account for all of G1’s rights under the plan (greater of premiums advanced or cash value)
For Loan Regime
Account for principal and loan interest
Trust pays interest or accrues (better result)

52. 2. Split $ Plan Design Design plan to optimize discounts
With Economic Benefit Regime
G1 is obligated to pay the full premium, the only interest for valuation purposes is the split $ receivable.
Optionally, the Trust may pay the one year term cost in order to eliminate the deemed gift & GST transfer.
Note: Especially where the client has utilized gift and GST exemptions.
With Loan Regime
Lump sum loan.
Accrue interest.
No gift!

53. 3. Discounts – Under-Promise/Over-Deliver
We don’t know what the discount and the discounting rules will be in the future when G1 transfers Receivable (at death or during G1’s lifetime)! Therefore:
Initially, evaluate and propose the GSD strategy on it’s merits assuming no and/or reasonable discount (0%-30%)
Even with no discount when used to fund a fully guaranteed UL or SUL policy, EB regime GSD is an estate freeze:
G1 is only entitled to receive the premiums advanced back (due to low CV of policies).
Even some cash value policies will result in a “soft” freeze.

54. 3. Discounts C. Managing the Discounts
Year G1 transfers the policy (the farther from issue date, the lower the discount)
Discount rate makes a huge difference
Assumed rollout or termination date of plan
Use a policy that generates cash value rather than a UL G policy (Economic Benefit)
Use a loan rate greater than the appropriate AFR (Loan Regime)
Select a highly qualified and experienced valuation firm!
Work with highly competent counsel and tax advisors
Note on “Discounts”:
We all speak of “discounts”, but that is just a convention.
We are really talking about the FMV of property.
Would you pay $10M today for the right to receive $10M 40-years in the future?

55. 3. Valuation Methodology Hybrid CV Product, Economic Benefit Regime
(J)
Split $
Probablility
Expected
PV (Expected Payment of Receivable) 
Receivable
Death
Payment of
5.00%
7.00%
9.00%
Year
=max(∑prem,CSV)
Age
VBT 2008 PV
Discount 1
7,500,000 40
0.018%
1,316
3,219,636
57%
1,457,908
81%
697,777
91% 2 41
0.026%
1,950
3,379,795
55%
1,558,779
79%
759,220
90% 3 42
0.032%
2,388
3,547,612
53%
1,666,171
78%
825,559
89% 4 43
0.038%
2,825
3,723,615
50%
1,780,730
76%
897,444
88% 5 44
0.044%
3,263
3,908,237
48%
1,902,976
75%
975,385
87% 6 45
0.050%
3,748
4,101,937
45%
2,033,465
73%
1,059,940
86% 7 46
0.057%
4,281
4,305,172
43%
2,172,755
71%
1,151,671
85% 8
7,640,560 47
0.066%
5,052
4,518,429
41%
2,321,447
70%
1,251,194
84% 9
7,886,282 48
0.077%
6,080
4,742,084
40%
2,480,013
69%
1,358,986
83% 10
8,140,346 49
0.089%
7,272
4,976,524
39%
2,648,947
67%
1,475,554
82%

56. 3. Valuation Methodology Hybrid CV Product, Loan Regime
(F)
(G)
(H)
(I)
(J)
Split $
Probablility
Expected
PV (Expected Payment of Receivable) 
Receivable
Death
Payment of
5.00%
7.00%
9.00%
Year
=max(∑prem,CSV)
Age
VBT 2008 PV
Discount 1
7,646,250 40
0.018%
1,342
2,201,446
71%
1,040,132
86%
523,310
93% 2
7,795,352 41
0.026%
2,026
2,310,473
70%
1,111,648
568,987 3
7,947,361 42
0.032%
2,530
2,424,435
69%
1,187,525
85%
618,062
92% 4
8,102,335 43
0.038%
3,052
2,543,732
1,268,250
84%
671,034 5
8,260,330 44
0.044%
3,593
2,668,624
68%
1,354,153
728,244
91% 6
8,421,407 45
0.050%
4,208
2,799,389
67%
1,445,589
83%
790,058 7
8,585,624 46
0.057%
4,901
2,936,278
66%
1,542,884
82%
856,822
90% 8
8,753,044 47
0.066%
5,788
3,079,554
65%
1,646,391
81%
928,911
89% 9
8,923,728 48
0.077%
6,880
3,229,412
64%
1,756,381
80%
1,006,616 10
9,097,741 49
0.089%
8,127
3,386,059
63%
1,873,139
79%
1,090,248
88%

57. Economic Benefit Regime
3. Valuation Methodology Hybrid CV Product, EB vs. Loan Regime Discount Rates: 5%, 7% & 9%
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
(L)
5.00%
7.00%
9.00%
Economic Benefit Regime
Loan Regime
Economic Benefit R
Year PV
Discount % 1
3,219,636
57%
2,201,446
71%
1,457,908
81%
1,040,132
86%
697,777
91%
523,310
93% 2
3,379,795
55%
2,310,473
70%
1,558,779
79%
1,111,648
759,220
90%
568,987 3
3,547,612
53%
2,424,435
69%
1,666,171
78%
1,187,525
85%
825,559
89%
618,062
92% 4
3,723,615
50%
2,543,732
1,780,730
76%
1,268,250
84%
897,444
88%
671,034 5
3,908,237
48%
2,668,624
68%
1,902,976
75%
1,354,153
975,385
87%
728,244 6
4,101,937
45%
2,799,389
67%
2,033,465
73%
1,445,589
83%
1,059,940
790,058 7
4,305,172
43%
2,936,278
66%
2,172,755
1,542,884
82%
1,151,671
856,822 8
4,518,429
41%
3,079,554
65%
2,321,447
1,646,391
1,251,194
928,911 9
4,742,084
40%
3,229,412
64%
2,480,013
1,756,381
80%
1,358,986
1,006,616 10
4,976,524
39%
3,386,059
63%
2,648,947
1,873,139
1,475,554
1,090,248

58. 3. Discounts Managing the Discounts How low do you go?
Can a 95% discount be defended upon audit by IRS?
A 55-75%% discount? Maybe
35-50% discount? Reasonable
Don’t go too low - Leave some negotiating room!
Note: The Service just settled a case at a 35% discount where the appraisal produced a 95% discount. See Unfinished Business Leimberg EP Newsletter #2418 by Jensen & Berselli.

59. 3. Discounts Expect further IRS attacks based upon Sham Transaction
Step Transaction
Code §2703
Modification of Agreement Reg. § (c)(1)(ii)(B)(2)
Code §§2036 and 2038
Code §2043 for excess policy value over value of discounted receivable.
Notes:
In a new case filed with the Tax Court, Estate of Cahill vs. Comm., the Service is asserting #s 3, 5 and 6 above.
Is the Service merely using legal attacks to induce the parties to settle?

60. 3. Discounts Summary
We don’t know what the discounting rules will be in the future when G1 transfers Receivable.
Evaluate plan on merits assuming no or low discount
Manage the discount
Be reasonable with discount to minimize audit risk
But not too low - leave some negotiating room
Avoid aggressive discounts
File a protective gift tax return to start the statute of limitations running
IRS can be expected to audit the plan

61. 4. Defective Grantor Trust
Make the Dynasty Trust a defective grantor trust (for income tax purposes) with respect to G1
If Trust pays a portion of the premium
Under the split $ regulations, that creates income to the grantor (G1).
If the Trust is defective grantor trust with respect to G1 (and his spouse), then the deemed income is negated (a transaction between the grantor and him or herself cannot create taxable income).

62. 5. Consider GST Tax Implications
Trust that owns LI is a Dynasty Trust with respect to G1.
This has a number of important implications.
The imputed gift will be a transfer for gift and GST tax purposes.
Ensure sufficient GST exemption to cover imputed gift of EBCs (eliminate GST transfer of one-year term cost).
Example: 10-Years of imputed gifts of one-year term cost for $50M DB
Child age 40 ≈ $ 203,000
Children ages 40, 42, 44 & 46 ≈ $1,000,000
If Trust has funds, it can optionally pay the one-year term cost
Note: To the extent that the Trust pays the one-year term cost, it eliminates the imputed gift and the imputed GST transfer.

63. 5. Consider GST Tax Implications
The Receivable should pass to
The original Dynasty Trust (with a merger of interests). Not advisable. See Neff case.
To a separate Dynasty Trust (with authority to make distributions to original Trust)
We don’t know
When G1 will pass
What the ultimate valuation of the Receivable will be
Again, the most conservative approach is to assume no or low/reasonable discount for G1’s receivable to ensure sufficient GST exemptions or plan for other alternatives.

64. 5. Consider GST Tax Implications
If insufficient GST exemptions to shelter transfer of Receivable (during G1’s lifetime or upon death)
Consider implementing a discounted sale to a defective grantor trust at the time the GSD plan is implemented. See Example next slide.
Consider the Trust purchasing the Receivable with a promissory note during G1’s lifetime or upon death.
G2 could gift funds to the Trust (must shelter from gift & GST tax) provided G2 is not a beneficiary of Trust.
Consider transferring a portion of the Receivable to a non-GST exempt trust using a defined value clause.
Notes:
IRS does not like defined value clauses.
If Receivable left to non-GST trust, may cause deemed GST transfer issues (with imputed transfer to original Dynasty Trust).

65. 5. Consider GST Tax Implications
Example
Sell sufficient assets to a separate Trust to provide funds (net of the note) to purchase the receivable in a given year:
G1 age 75 with a 10-year LE
Assuming a 50% discount on the $7.5M Receivable, advisors want $3.75M of assets in Trust by year 10.
Sale of $5M of assets
30% discount
9-year interest only 1.6% Midterm AFR
5% pre-tax yield

66. 6. Life Insurance Policy Design
Decide the appropriate type of policy to meet the client’s need
UL G, CV UL, IUL, or VUL.
Note: Use loan regime split $ with IUL & VUL.
Single Life or Survivorship.
Decide Optimal Funding Pattern
Single Premium (MEC).
Shortest # of Payments to create non-MEC.
Note: Short-pays create favorable discounts.

67. 6. Life Insurance Policy Design
Consider the use cash value product to ensure that the policy can be cashed in and Clients can get their premiums back.
Notes:
Cash value may exceed premiums as early as 3rd to 5th year.
G1 and the Trustee (unanimously) or the independent trustee (unilaterally) have the right to terminate the split $ plan.
A strong cash value product increases the value of the Receivable, reducing the discount.

68. 7. Legal Counsel
Be certain that highly competent counsel is involved.

69. T A K E A W A Y S Avoid aggressive plans
Establish valid need for the insurance and plan to keep in force
Policy design
Identify the policy that best suits the client’s needs
UL, UL G, IUL, VUL, Single Life, Survivorship
Economic Benefit vs. Loan Regime
Depends upon type of policy
Let attorney choose
Strictly follow split $ rules & regulations
With EB Regime, G1 obligated to pay all premiums
Discounts
Sell based on no or low discount - Under-promise & Over-deliver
In actuality, argue largest reasonable discount - leave negotiating room
Select a highly qualified and experienced valuation firm
Trust
Dynasty Trust (Consider GST implications)
Defective Grantor Trust
Be sure that highly qualified counsel is involved.

70. Private Finance & Generational Split $
Richard’s Case
Private Finance & Generational Split $

71. Richard’s Case Private Finance $400M of coverage in Dynasty Trust
Combined annual full pay premium > $2.5M
Generational Split $
Insurance on 4 adult children
Mother funding the coverage
By lending assets to a Dynasty Trust
FBO grandchildren and great GC+
No gift, estate or GST taxes!

72. Richard’s Case Family net worth $2B, $1.7B business
Father died unexpectedly at age 73
Attorney had designed laddered GRATS,
Only one GRAT successfully completed!
Balance of stock to QTIP (fbo Mother)
Mother age 71,
4 children ages 40-50
Life insurance one of many planning strategies being implemented

73. Richard’s Case Mother Funds $100M of coverage on each of 4 children
Owned by Nevada Dynasty Trust (DGT) fbo grandchildren, great GC+
Lends company stock to Trust sufficient to pay
Premiums (Pay All Years)
Repay loan at end of term
Loan Regime Split $ plan
Lifetime loan
Accrued interest

74. Richard’s Case Life Insurance Design
$100M of coverage on each of 4 children
Trust owned
Combination of WL, UL, NLG UL
Pay all years

75. Loan of Cash Required Loan (Split $ Receivable) Split $ Receivable
Discount $
Value
FMV Of
$250M
40%
$100M
$150M
50%
$125M
60%

76. Loan of Stock Loan = Split $ Receivable = $250M x 30% Discount = $175M
Value
FMV Of
S/$ Receivable
(Discount %)
FMV
Cash
$175M
40%
$70M
$105M
(58%)
$150M
(40%)
50%
$87.M
$87.5M
(65%)
$125M
(50%)
60%
(72%)
$100M
(60%)

77. Loan of Stock Loan = Split $ Receivable = $250M x 30% Discount = $175M
Original
Value
Loan
FMV
Interest
@1.9%
Effective
Loan Interest
Rate
$250M
Cash
(No Discount)
$4.75M
1.90%
Stock
$175M
(30% Discount)
$3.325M
1.33%

78. Generational Split $ Another strategy in the planning arsenal
Planning with G1’s funds to purchase life insurance on G2 is a perfectly valid planning strategy.
Split $ funding is an attractive planning strategy even without the discounts
All the better if we can obtain discounts
GSD plans can be responsibly promoted, implemented and managed