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Planning Today The Golden Age of Wealth Transfer

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Presentation on theme: "Planning Today The Golden Age of Wealth Transfer"— Presentation transcript:

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2 Planning Today The Golden Age of Wealth Transfer
Presented by: Robert W. Finnegan, J.D., CLU Highland Capital Brokerage  (518)

3 Help you (and your Clients) answer the question:
Planning Today Help you (and your Clients) answer the question: To Plan or Not to Plan? Spoiler Alert: Everything I am going to speak about today supports the need for planning today.

4 We are Living in Extraordinary Times
Even 5 years ago, who could have guessed where we are today? We live in a very uncertain world. Old paradigms are being uprooted. The bottom line: HNW & UHNW clients are delaying planning. But is that in their and their families best interests? Our role as advisors is to provide the very best advice possible. The Golden Age of Estate Planning.

5 The “Golden Age” of Wealth Transfer Planning!
AFRs are extraordinarily low. Discount strategies are available. Defective Grantor Trusts remain viable. Gift/GST Exemptions are high & indexed. Split $ rules are extremely favorable. Excellent products are available (including NLG).

6 The “Golden Age” of Wealth Transfer Planning!
We have the vehicles and strategies (and favorable state laws) to provide Grantor access to trust assets. Protection against dying too soon or living too long. Strong creditor/divorce protection. Ability to change trust provisions. Control of tax outcomes. These are the good ole days …

7 Planning in Uncertain Times Putting Repeal in Perspective
Since 1998, we have been under the repeal “cloud of uncertainty”. Since 1977 (the last 40-years), except ($600,000), the gift/estate tax exemption has changed nearly every year. It’s just that now the threat of repeal is “in our face”.

8 Repeal is a non-event In today’s political climate, unlikely that anything will get done. Corporate and personal income taxes are higher priority. If the estate tax is repealed, Reconciliation – revert back in 10-years It is unlikely that the gift tax will be repealed. It will be back (in one form or another). Does the future hold an on again/off again transfer tax? The new normal? No matter what transpires in the next few years Clients will continue to need solid long term planning. We need to become better planners, communicators

9 Consider this: If the GST tax is repealed, does that mean that post-repeal, all transfers to trusts will be exempt? Not engaging in Dynasty Planning today may mean OPPORTUNITY LOST!

10 To Plan or Not to Plan?

11 Takeaways Why would a client decide or an advisor advise to sit on the sidelines during the most favorable wealth transfer environment we’ve ever seen? Planning is just as important now as it was 6 months ago and as it will be in 6 months, 10 years or 20 years. One of the biggest issue that we face is client uncertainty regarding the need for planning today. It is our job to look at the big picture & provide our clients with the best advice possible.

12 Planning Today Threats-to-Wealth & the Perfect Hedge
Client: “What’s in it for me?” Overview Life Insurance Planning with Dual SLATs The Synergy of Life Insurance & Non—Insurance Strategies The Cost of Delay Private Financing: The Perfect Strategy Life Insurance Products – Where are We Heading

13 Threats-to-Wealth & The Perfect Hedge

14 Threats-to-Wealth Taxes - We have let taxes dominate our discussions!
Divorce Creditors Predators Destructive Family Dynamics Protecting beneficiaries from themselves Spendthrift –beneficiary can’t manage money Avoid spoiling a child with too much too soon Antisocial behavior Drugs & alcohol abuse Cults Wrong crowd Dying too soon/living too long

15 Takeaways Estate Planning is Not Just or Even Primarily About Taxes.
Family Security. Minimizing OR eliminating Threats-to-Wealth. We now have the ability to create the perfect hedge against threats-to- wealth.

16 The Perfect Planning Hedge
Clients retain access Clients retain control & planning flexibility Trust terms can be changed – decanting, protectors Trustees can be removed and replaced Control through LLCs Assets are creditor protected Protection against dying too soon/living too long Protect beneficiaries from themselves Protect beneficiaries from divorce/creditors Protect against destructive family dynamics Funding Self-completing regardless of tax system in place Funding does not trigger transfer taxes Assets protected from gift, estate, GST taxes Income taxes minimized and control who pays taxes

17 Client: “What’s in it for me?” Flexibility & Control

18 The Perfect Planning Hedge
Clients retain access Clients retain control & planning is flexible Trust terms can be changed – decanting, protectors Trustees can be removed and replaced Control through LLCs Assets are creditor protected Protection against dying too soon/living too long Protect beneficiaries from themselves Protect beneficiaries from divorce/creditors Protect against destructive family dynamics Funding Self-completing regardless of tax system in place Funding does not trigger transfer taxes Assets protected from gift, estate, GST taxes Income taxes minimized and control who pays taxes. Clients Clients Beneficiaries Beneficiaries

19 Access Client, “What’s in it for me?”
Dual Spousal Lifetime Access Trusts (SLATs) Hybrid Self-Settled Trusts Beneficiary Defective Inheritors Trust (BDIT) Loans from trust to grantor Sale and Intra-Family Loan Transactions (No Gifts)

20 The Role of Life Insurance in the Perfect Hedge I Planning with Dual SLATs and Life Insurance

21 Dual SLATs - Case Study H and W each age 60
$40M net worth ($300M → $80M → $40M) Clients considering Single Dynasty Trust $10M gift (25% of net worth) Shelter with a portion of $10.9M Gift & GST exemption $15M Life insurance to pay estate taxes Clients are reluctant to make gifts (They don’t want to give up access/control of gifted assets) Review Slide Content

22 Dual Spousal Access Trusts (Defective Grantor Trusts)
Husband Dynasty Trust 1 Wife & Indep. Trustee FBO Wife, Children, GC, GGC & ILIT (DGT) H Creates & Funds LLC Gifts $5M H Benefits H & W access/control 100% while both alive 50% following 1st death Wife Dynasty Trust 2 Review Slide Content Husband & Indep. Trustee FBO Husband, Children, GC, GGC & ILIT (DGT) W Creates & Funds LLC Gifts $5M Note: Must take steps to ensure Dynasty Trust 1 & 2 are not reciprocal.

23 Dual Spousal Access Trusts with Single Life Insurance
Dynasty Trust 1 Wife & Indep. Trustee FBO Wife, Children, GC, GGC $5M Assets (DGT) $5M UL On Husband H Creates & Funds LLC Husband LI Benefits Surviving spouse retains “access” to 100% Proceeds Available for Estate Taxes Purchase assets from Estate Wife Dynasty Trust 2 Review Slide Content H & Indep. Trustee FBO H, Children, GC, GGC $5M Assets (DGT) $5M UL On Wife W Creates & Funds LLC

24 Dual Spousal Access Trusts with Survivorship Life Insurance
Dynasty Trust 1 SUL ILIT Trustee: Wife & Indep. Trustee Benef.: Wife, Children, GC, GGC, & SUL ILIT. $5M Assets & $5M Term Defective Grantor Trust Dynasty Trust DGT $15M SUL FBO of Children, Grandchildren, etc. H Creates & Funds LLC Husband Wife Dynasty Trust 2 Review Slide Content Trustee: H & Indep. Trustee Benef.: Husband, Children, GC, GGC, & SUL ILIT. $5M Assets & $5M Term Defective Grantor Trust W Creates & Funds LLC

25 Dual Defective Grantor Trusts with Private Split Dollar Life Insurance
Husband Dynasty Trust 1 Insurance Trust H Creates & Funds LLC Trustee: Wife & Indep. Trustee Benef.: Wife, Children, GC, GGC, & SUL ILIT. $5M Assets $5M Term on H Defective Grantor Trust Dynasty Trust 3 $15M SUL FBO of Children, Grandchildren, etc. EBR Split $ or Private Financing Wife Review Slide Content Dynasty Trust 2 W Creates & Funds LLC Trustee: H & Indep. Trustee Benef.: Husband, Children, GC, GGC, & SUL ILIT. $5M Assets $5M Term on H Defective Grantor Trust

26 Non-Reciprocal Trusts
Dynasty Trust 1 Dynasty Trust 2 Husband Grantor NV – Premier Trust Wife Grantor SD – SD Trust Co. Wife & Independent Trustee 1 Husband & Independent Trustee 2 Wife, Children, GC, GGC, etc., ILIT Husband, Children, GC, ILIT W – HEMS (?) H – HEMS (?) Indep. Trustee – Abs. Discretion Indep. Trustee - HEMS Wife holds 5x5 Power Loans to H (Grantor) H holds testamentary LPOA Among Descendants Review Slide Content Other factors to consider: Separate trust formation by time (6 mos.) Fund with different assets W income from day 1 H’s income interest “springs” into being at age 65 Hybrid self settled trust Life Insurance on grantor of each trust?

27 Takeaways Planning in the future will be about flexibility, access and synergies by combining insurance and non-insurance strategies.

28 The Role of Life Insurance in the Perfect Hedge II Synergies combining insurance & non- insurance strategies

29 Funding Hierarchy (Simple to Complex)
Clients Funds Existing Funded Trusts $14,000 AGTE $5.49 Lifetime Gift & GST Transfer Assets Discounted Gift to DGT Discounted Sale to DGT Discounted GRAT (DGT) Loan Premium Structure Full Premium Split $ - Economic Ben. Private Financing Split-$ Demand Loan Pay Gift Tax (> $5.45M) OPM (Premium Financing) Commercial Lender Local Banking Relationship Bank Specialize in Premium Financing Intermediary Dual Loan For Advisor and Producer Use Only. Not For Public Distribution.

30 Case Study Clients M60/F60 Preferred NT
Have a need for $75M*** of SUL G. Carve out $15M of assets from Client’s estate. *** The analysis that follows is just as valid for a $1.5M gift with $7.5M policy as a $15M gift and a $75M policy.

31 Case Study Assumptions: $15M Assets 1/3rd Discount
$10M Gift and GST Exemption ($10M Net Gift to Dynasty Trust/DGT) Rates of Returns 5% Pre-Tax 20% Tax Rate on Earnings 4% Net After-tax AFR (if sale) 2.75% Long Term AFR Evaluate Wealth transferred at age 90/90 (LE)

32 Plan Today – 3 Scenarios Compare the Net to Family in three scenarios:
Do Nothing with $15M – No Planning Discounted Gift Alone (No LI) . Discounted Gift & Private Split $. $15M gift will support $75M*** of fully guaranteed SUL (M60/F60 Preferred NT). *** Analysis just as valid for a $1.5M gift & $7.5M SUL G.

33 Plan Today – Net to Family
1. No Planning Life Expectancy 90/90 *Assumes second death in any given year.

34 Plan Today - Net to Family
1. No Planning vs. 2. Gift (No LI) Life Expectancy 90/90 *Assumes second death in any given year.

35 Net to Family Plan Today (LE 90/90)
No Plan vs. Plan (without LI) Improvement Source 1. No Plan 2. Gift (No LI) 2 - 1  GST Exempt 10,000,000 68,070,592 58,070,592 Estate 24,358,201 (10,484,155)* (34,842,355) Total 34,358,201 57,586,438 23,228,237 Wealth Transfer & Shifting! *$10.5M is the estate’s “tax burn” due to: i) grantor paying taxes on trust income. ii) the loss of the “use” of those funds, net of estate taxes.

36 Plan Today - Net to Family
1. No Planning vs. 2. Gift (No LI) vs. 3. Gift & Split $ LI Life Expectancy 90/90 *Assumes second death in any given year.

37 Net to Family Plan Today (LE 90/90)
No Plan vs. Plan with LI Improvement Source 1. No Plan 3. Gift & Split $ 3. – 1. GST Exempt 10,000,000 106,628,263 96,628,263 Estate 24,358,201 (15,716,086)* (40,074,287) Total 34,358,201 90,912,177 56,553,976 Even Greater Wealth Transfer & Shifting! *$15.7M is the estate’s “tax burn” due to: i) grantor paying taxes on trust income. ii) the “premium burn” due to split $ premium advances. iii) the loss of the “use” of those funds, net of estate taxes. Remember these numbers!

38 The Role of Life Insurance in the Perfect Hedge III The Cost of Delay See Leimberg Estate Planning Newsletter Numbers 2492, 2526 & 2532

39 The Cost of Delay – Example I
The Following Legislation Passed: 2017 Estate & GST taxes repealed. Gift tax retained. 2027 Automatic reversion (sunset) to law as it stand today: Gift, Estate & GST taxes reinstated. Compare Net to Family for 2 Scenarios at LE (Age 90/90) Clients (60/60) Plan Today (2017). Clients (70/70) Plan in 10-years (2027).

40 The Cost of Delay – Example I
Clients delayed planning for 10-years. Both alive & still qualify for preferred rates Planning tools same, support less LI: Gift & GST tax exemption $10M ―› $ 10M Discount /3rd ―› 1/3rd LT AFR % ―› % Life Insurance Supported $75M ―› $50M

41 Remember these numbers
Table I: Plan Today vs. in 10-Years With $22.2M ($15M Gift, $7.2M Sale) Net to LE (age 90/year 31) Plan Today Plan in 10 Years Cost of Delay Dynasty Trust 106,628,263 77,739,009 28,889,254 Estate (15,716,086) (3,881,803) (11,834,283) Total 90,912,177 73,857,205 17,054,972 Remember these numbers

42 The Cost of Delay – Example II
Clients are both alive & still qualify for preferred rates Planning tools less favorable, support less LI: Gift & GST tax exemption $10M ―› $ 7M Discount /3rd ―› 20% LT AFR % ―› % Life Insurance Supported $75M ―› $27.5M

43 Remember these numbers
Table II: Plan Today vs. in 10-Years With $22.2M ($8.75M Gift, $13.45M Sale) Net to LE (age 90/year 31) Plan Today Plan in 10 Years Cost of Delay Dynasty Trust 106,628,263 50,138,253 56,490,010 Estate (15,716,086) 7,097,120 (22,813,206) Total 90,912,177 57,235,372 33,676,805 WOW! Remember these numbers

44 Takeaways The cost of delaying planning is substantial.

45 The Role of Life Insurance in the Perfect Hedge IV Private Financing (Loan Regime Split Dollar)

46 Private Financing (Loan Regime Split Dollar)
Clients lends funds to a Dynasty Trust (a defective grantor trust), Trust invests loan proceeds in order to: Pay each annual premium as it becomes due Repay the loan at the end of the loan term Lump sum loan locks in current favorable AFRs: Mid-Term % (1.97%) >3-Years, ≤9-Years Long Term % (2.75%) > 9-years Accrue interest (powerful benefit)

47 Private Financing - $10M SUL G Example M60/F60 Preferred – 10-Pay – 5% Pre-tax Return
Initial:  $6,357,985 Beginning of Year End of Year  Life Trust End-of-Year  Beginning 10 6.00% Ending  Insurance Assets Loan Balance Value of Annual Pre-Tax Note Death Less Loan Age 1.97% Accrued Premium Earnings Repayment Benefit Balance 60/60 6,483,237 6,357,985 (240,000) 367,079 6,485,064 10,000,000 1,827 61/61 6,610,957 374,704 6,619,768 8,811 62/62 6,741,193 382,786 6,762,554 21,361 63/63 6,873,994 391,353 6,913,907 39,913 64/64 7,009,412 400,434 7,074,341 64,929 65/65 7,147,497 410,060 7,244,402 96,905 66/66 7,288,303 420,264 7,424,666 136,363 67/67 7,431,882 431,080 7,615,746 183,863 68/68 7,578,290 442,545 (7,578,290) 240,000 69/69 (0) 70/70+ Side Fund Exceeds Loan Balance Grantor Repaid End of Year 9

48 Private Financing The Perfect Strategy for the Perfect Hedge?
Design so that the client is fully secured and plan can be unwound at any time. Loaned assets + policy CSV The trustee can choose to repay the loan early. Clients feel more comfortable entering into the transaction. Moves wealth to a dynasty trust without income, gift, estate or GST taxes. Not dependent upon making a gift, it is a loan. It rides out whatever tax regimen we have in place. If the gift tax comes and goes, the strategy is unaffected. The income tax free DB protects against estate and GST taxes as well as a capital gains upon death. Combine with Dual SLATs, BDIT, Self Settled Trusts. Use single life, survivorship, term, current assumption UL, VUL, indexed UL, WL, term The strategy is simple – clients understand a loan.

49 Design Flexibility Can we reduce the loan amount?

50 Can we reduce the loan amount? Yes, of course!
Extend the Premium Paying Term Extend the Loan term Switch from the midterm to the long term AFR. The arbitrage (difference between investment return and loan rate) is greater over a longer period of time (12+ years). Raise the Assumed Rate of Return Earned on Loan Proceeds (take greater investment risk) Use in kind assets. Discounts have the effect of Lowering the loan interest and Increasing the rate of return. Repay in kind (discounted).

51 For a Given DB ($10M) Longer Note & Longer Premium Paying Terms (6% Pre-Tax Return)
Note Terms $10M Life Insurance *** Note August 2017 AFR Annual Years Pay Required Scenario Duration Term Rate Premium Premiums Loan 1 9 MidTerm 1.95% 230,000 10 6,067,431 2 20 Long Term 2.58% 135,000 3,412,100 3 30 112,500 2,621,533 4 Life 105,000 61 2,033,411

52 Reducing the Loan Amount
The longer the loan term The longer the grantors must wait to be repaid 9-year note – grantor repaid end of 9-years Lifetime note – estate is repaid upon death (unless trust side fund outperforms expectations & loan repaid early). There are many years where the loan side fund is less than the outstanding loan balance Upon death, some of the DB may be needed to repay the loan. Lending an amount greater than what is required Reduces the shortfall upon death. Provides a hedge if the side fund investments underperform.

53 Reducing the Loan Amount or Increasing the Death Benefit?
Defined Benefit For a given DB ($10M) Solve for loan amount Defined Contribution: For a given loan amount ($15M) Solve for DB

54 For a Given Loan Amount ($15M) Longer Note & Longer Premium Paying Terms (6% Pre-Tax Return)
Note Terms $10M Life Insurance *** Note August 2017 AFR Annual Years Pay DB Supported Scenario Duration Term Rate Premium Premiums $15M Loan 1 9 MidTerm 1.95% 575,000 10 $25M 2 20 Long Term 2.58% 594,000 $44M 3 30 641,250 $57M 4 Life 777,000 61 $74M GSD* *GSD = (Inter-) Generational Split Dollar. For a given loan, Scenario 4 maximizes DB in dynasty trust.

55 Takeaways Private Financing - the perfect strategy for uncertain times.

56 The Role of Life Insurance in the Perfect Hedge V Life Insurance Products: Where are We Heading?

57 Life Insurance Products Where are we heading?
Consider the following: Carriers continue to experience significant pressure on investment returns, with continued downward pressure on illustrative and crediting rates. Even if investment returns improved tomorrow, it may be 7 or 8 years before an improvement is seen in illustrative and crediting rates. Carriers will continue to manage expenses and look for alternative investments including profitable subsidiary businesses to support returns.

58 Insurance Products Where are we heading?
Product Consequences: Current assumption products will continue to reduce illustrative and crediting rates. No lapse guarantee products will continue to see issue amount reductions, premium increases and product withdrawals. Carriers will continue to improve Indexed UL and Variable UL products, shifting the investment decisions and risk.

59 The “Golden Age” of Wealth Transfer Planning 7 Key Takeaways
Be proactive about the need for planning. Speak in terms of Threats-to-Wealth (not taxes). Create the Perfect Hedge. Put Planning in Terms of: “What’s in it for me (Client)?” Make Life Insurance a mainstay of your Planning. Take advantage of Insurance/Non—Insurance synergies. Hedge dying too young. Understand the Cost of Delaying planning. Consider Private Financing: The Perfect Strategy.


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