1. Planting seeds for the future
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Planting seeds for the future
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Balancing retirement income security and wealth transfer
Hello.
My name is [NAME], and I’ll be talking to you today about wealth transfer planning. Our topic is Planting seeds for the future – Balancing retirement income security and wealth transfer
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Through a lifetime of hard work, planning and investing, you have built assets to use and enjoy. And while you may be primarily focused on securing your retirement income, planning your estate needs to be an integral part of that goal. By balancing these two goals, you can create a strategy that can both help you maintain your lifestyle as long as you live and ensure the remainder of your estate transfers to the those you care about most. . .
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Read slide.
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Agenda
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The right balance
Tools for managing and distributing wealth
Steps to building an estate plan
Will there be an estate tax
Estate Planning Strategies
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I’ll be touching on four major topics.
READ SLIDE
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4. It begins with the right balance
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Income Management
Variable expenses usually include travel, leisure activities, gifts, etc.
Fixed expenses include mortgage/rent, utilities, monthly healthcare and prescription costs, and other regular and recurring bills.
Wealth transfer is assets designated for your heirs or charity.
Healthcare assets cover any expenses beyond routine prescriptions and doctors’ bills, such as an emergency and long-term care.
Emergency/ opportunity funds are immediate cash for emergencies you may face or financial opportunities you want to explore.
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The plans you make today will have a profound effect on your retirement and on the future value of your estate. A well-constructed financial strategy provides for the accumulation and efficient management of assets during your lifetime and the transfer of wealth after your death.
This chart illustrates the various uses of income during retirement. The five uses of income are:
Variable – includes things like travel, leisure and gifts
Fixed – includes things like mortgage or rent, utilities and regular prescriptions
Healthcare – this refers to sizable health expenses, or long-term care
Emergency/opportunity funds – immediate cash for emergencies or for financial opportunities.
Wealth transfer – this is assets you want to give to your heirs or charities
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5. Tools for managing and distributing wealth
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Will
Durable Power of Attorney and Health Care Directive
Trusts
Life Insurance
Your Team
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Without the proper planning, your estate may not be distributed as you envision. An effective estate plan utilizes specific strategies that complement your individual goals. Here are some of the most common planning tools.
Will – The cornerstone of any estate plan, a will provides for the disposition of your money, property, and belongings upon your death.
Durable Power of Attorney and Health Care Directive – These documents give someone the power to act for you, make decisions for you, and implement your plan during any time that you are unable to act on your own behalf. The Health Care Directive is intended specifically for healthcare decisions.
Trusts – A trust appoints a trustee to manage and control property according to your written directions for the benefit of a beneficiary. There are two types of trusts – revocable and irrevocable. The key thing to remember is that you can change the terms of a revocable trust. An irrevocable trust, however, generally cannot be changed. Irrevocable trusts are often used to remove assets from a person’s estate.
Life Insurance – Life insurance can provide benefits at the time of death that can be used to pay estate costs, final expenses, and taxes.
Your team – Estate planning can be complicated, so it is important to have team of professionals to help you: your financial advisor, an estate planning attorney, and your accountant.
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6. Steps to building an estate plan
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Establish your goals
A well-designed estate plan can play an important role in helping to secure your retirement income and determine who inherits those assets, and how they receive them. It enables you to designate beneficiaries. Appoint an individual to act on your behalf, and manage potential tax liabilities, to ensure that you help enhance the value of your estate that can be transferred to heirs.
Step 1 is to Establish your goals. Identify special considerations and determine your estate plan’s objectives. Have a clear understanding of who should receive your assets, how and when.
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7. Steps to building an estate plan
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Establish your goals
Do the groundwork
The second step is to do the groundwork. Your share of any assets that you own – either singly or jointly – will be used to calculate the wealth you can pass to heirs and determine any potential tax liability. Estimate the value of your current assets and your future estate.
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8. Steps to building an estate plan
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Establish your goals
Do the groundwork
Account for liquidity
Third, you will want to set aside cash reserves to provide immediate liquidity for beneficiaries, business needs, and estate settlement costs
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9. Steps to building an estate plan
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Establish your goals
Do the groundwork
Account for liquidity
Focus on taxes
Fourth – focus on taxes. Depending on the amount of your wealth, the effect of estate taxes may be significant. If you are subject to the estate tax, you’ll need to consider tools such as trusts to help protect your assets
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10. Steps to building an estate plan
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Establish your goals
Do the groundwork
Account for liquidity
Focus on taxes
Plan for extending your legacy
Finally, you will want to plan for extending your legacy. Consider potential tax-saving strategies such as gifting and charitable donations, which can help increase the amount of your estate that is ultimately transferred to your heirs.
In the booklet “Planting Seeds for the Future,” you have some charts and additional information for each one of these steps. I really want to emphasize that this is an overview, and that it is important to work closely with your estate planning team to identify and utilize the most appropriate strategies based on your individual needs.
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11. Will there be an estate tax?
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Federal estate tax exclusions and rates
Year
Exclusion Amount
Minimum tax rate on
Maximum tax rate
2006
$2,000,000
46%
2007
45%
2008
2009
$3,500,000
2010
N/A
2011
$1,000,000
41%
55%
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People often ask – will there be an estate tax? The answer to that, according to the current tax law, is “when are you going to die?” You can see in the chart on the screen that there was an estate tax last year. According to current law, there is an estate tax this year, and through In 2010, there is no estate tax in the current law. The estate tax then is scheduled to come back in 2011.
Anyone’s guess is as good as anyone else’s. But popular wisdom is that Congress will do something to ensure that there will be some kind of estate tax in place on an ongoing basis.
I bring this up, because some people mistakenly believe that estate taxes are a non-issue. When it comes to planning, we like to encourage people to hope for the best, but to be prepared for whatever the future may hold.
There are no federal estate taxes in On January 1, 2011, the tax law is scheduled to revert to the $1 million exclusion, unless legislation is enacted.
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12. Some planning solutions
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Survivorship Standby Trust
Family Trust Purchasing Life Insurance
Spousal Lifetime Access Trust
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For the final part of my presentation today, I’d like to show you three estate planning strategies to give you some ideas to think about as you look at your own situation.
Read topics from slide.
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13. Survivorship Standby Trust
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Trust Beneficiaries (i.e., children)
Irrevocable Life Insurance Trust
Owner
During Husband’s Life
At First Death
Transfer of Policy
(by Contract or Gift)
At Survivor’s Death:
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This technique allows both access to policy cash values during lifetime and exclusion of death proceeds from the estate. The spouse with the shorter life expectancy (typically the husband) applies for a survivorship policy on himself and his wife. He is the initial owner of the policy, with an Irrevocable Life Insurance Trust (ILIT) named as the contingent owner. The husband pays all premiums from his separate funds (be careful in community property states) and has access to policy cash values.
If the husband dies first, the policy passes to the ILIT and the proceeds are outside the wife’s estate at her death, since she never had any incidents of ownership in the contract. The policy’s account value at the husband’s death is included in his estate.
If the wife dies first, the husband immediately transfers the policy to the ILIT. This is a taxable gift and there is a three-year rule exposure should the husband die soon after making the transfer. However, if he survives the three years after the transfer, the policy proceeds are outside his estate.
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14. Survivorship Standby Trust
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Taxation
How to implement
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Taxation
• Payment of premiums by the husband are not gifts because he owns the policy.
• Husband has access to the policy cash values during his lifetime.
• If the husband dies first, the policy cash value is included in his estate.
• If the wife dies first, the policy is transferred to the trust as a taxable gift and the three year rule applies.
How to implement
• The husband applies for the policy using his separate funds.
• The husband is owner of the policy; the Irrevocable Life Insurance Trust is the contingent owner.
• The Irrevocable Life Insurance Trust may be drafted either during the husband’s lifetime or at the death of the first spouse. The trust cannot be named as the contingent owner until it is drafted and signed.
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15. Family Trust Purchasing Life Insurance
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During Life of Surviving Spouse
Spouse Receives income from marital trust, personal holdings, pensions, Social Security, etc.
B Trust Trustee reallocates income-producing property and purchases life insurance or annuity with trust assets
Children as Trust Beneficiaries
Consider reducing or stopping income
At Death
Distributions
Premiums
Death Benefits
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Life Insurance Company
As a primary estate tax-planning technique for the past 20 years, married couples have been creating Family Trusts that become
funded upon the death of a spouse. These trusts, also known as Credit Shelter Trusts or “B” Trusts, generally are funded with the maximum amount that may be excluded from federal estate taxes.
Family Trusts often provide for income to be paid to the surviving spouse for life, the remainder of which passes to children (or other named beneficiaries).
Problem: Paying income to the surviving spouse may produce more income than the spouse needs or wants, may increase income taxes, and may increase the estate tax exposure of the surviving spouse’s estate.
Solution: Consider the strategy of reducing income and increasing value in the Family Trust. Because the assets of the Family Trust were included in the estate of the deceased spouse, and the trust is irrevocable, increasing value may be passed to the family members without further estate tax consequences. Asset value may be accumulated inside the trust, but care should be taken to defer or reduce taxable income, because trusts are subject to high income tax rates.
Consider using a life insurance policy for the surviving spouse as an asset of an existing family trust. A life insurance policy may accumulate tax-deferred during life and immediately provide a death benefit several times larger than the purchase premium. Because the death benefit may be estate tax-free and income tax-free, this strategy may greatly increase the benefit to the trust remainder beneficiaries.
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16. Family Trust Purchasing Life Insurance
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Considerations for surviving spouse
Considerations for beneficiaries
Tax considerations
How to implement
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Considerations for surviving spouse
• May reduce unnecessary and unwanted income and income taxes.
• May help the surviving spouse to better manage his or her estate to be passed on at death.
• Account values are available to help create income if surviving spouse requires income from the trust in the future.
• This planning technique may not be appropriate if the surviving spouse wants or needs income from the trust.
Considerations for beneficiaries
• May increase amounts available for distributions to children or other remainder beneficiaries.
• May provide liquidity at the time of trust distribution and termination.
• May simplify trust administration and reporting.
• If the surviving spouse is not insurable, consider insurance on the trust beneficiaries or annuities. When the trust ends, the trustee may distribute the contracts directly to the beneficiaries.
Tax considerations
• May reduce overall income taxes of trust and surviving spouse during lifetime.
• May reduce income taxes on amounts distributed to children or other beneficiaries.
• Surviving spouse may be better able to minimize the portion of the estate subject to federal estate taxes.
• May help enhance the total amount transferred to children after estate taxes are paid.
How to implement
• Review surviving spouse’s need for income from the B Trust and surviving spouse’s estate plans.
• Trustee should review powers and responsibilities with legal counsel.
• If appropriate, trustee reallocates trust assets into life insurance policies or annuity contracts.
Please consult with a competent tax specialist or attorney for professional advice on your specific situation.
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17. Spousal Lifetime Access Trust
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Trust Beneficiaries (i.e., children)
Grantor (e.g., husband)
Irrevocable Life Insurance Trust
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Gift of Premium
Remainder
Distributions from Trust & 5
Ascertainable Standard
Sprinkling Power
The Spousal Lifetime Access Trust addresses the issue of providing access to life insurance cash values while simultaneously keeping the death proceeds out of the insured’s estate. Using this technique, an Irrevocable Life Insurance Trust is funded with a single life policy on the grantor (e.g., husband). By making the husband the only grantor, the wife can be given access to policy cash values as a beneficiary of the Irrevocable Life Insurance Trust. This addresses the concerns of clients who fear the policy values are “locked up” in the trust. It also may be attractive to clients who are unsure as to the final outcome of estate tax reform.
The wife has access to policy cash values through her “5 and 5” power as a trust beneficiary, through ascertainable standard language that gives the trustee power to make distributions to the spouse, and by the grantor’s giving the trustee “sprinkling powers” to direct trust income and assets to the wife at his discretion.
Grantor’s Spouse (e.g., wife)
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18. Spousal Lifetime Access Trust
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Considerations
Taxation
How to implement
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Considerations
• Avoid making spouse a grantor.
• Use a life insurance policy insuring the grantor only (i.e., not a joint and survivorship policy).
• Name a third party to serve as trustee.
• If estate tax is repealed, trustee may be empowered to surrender the policy and hold proceeds or distribute.
Taxation
• Gifts to trust may generate gift tax. Annual exclusion and gift tax exemption can be used to shelter gift from taxation.
• Death proceeds are outside the grantor/insured’s estate.
• Distributions to spouse from withdrawals to basis or policy loans from a non-MEC contract are income tax-free.
• Death benefit is income tax-free to trust and retains its character (income tax-free) when distributed to spouse.
How to implement
• Irrevocable Life Insurance Trust is established.
• Husband makes a gift of the premium amount to the trust (from separate funds).
• Irrevocable Life Insurance Trust applies for life insurance on husband’s life.
• Spouse has access as noted.
Please consult with a competent tax specialist or attorney for professional advice on your specific situation
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19. Planting seeds for the future
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It has been a pleasure to meet with you today. I want to thank _________________ from __________________ for this opportunity to be here with you. On behalf of Lincoln Financial Group, I wish you well in your estate planning endeavors. Thank you!
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20. Important disclosures. Please read.
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Insurance company products are issued by Lincoln Financial Group® affiliates. Products and features are subject to state availability.
This material was prepared to support the promotion and marketing of insurance company products. Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives, and/or insurance agents do not provide tax, accounting, or legal advice. Any tax statements contained herein were not intended or written to be used, and cannot be used for the purpose of avoiding U.S. federal, state, or local tax penalties. Please consult your own independent advisor as to any tax, accounting, or legal statements made herein.
©2007 Lincoln National Corporation
Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.
Affiliates are separately responsible for their own financial and contractual obligations.
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