Wealth Transfer Suite

The Wealth Transfer Suite is your one stop shop for solutions to your client’s wealth transfer needs. The suite includes strategy specific material, as well as General Wealth Transfer materials.

Wealth Transfer Strategies

Trust Solutions

This area outlines many of the various trusts commonly used as efficient wealth transfer tools. These trusts will often offer opportunities to transfer assets to future generations while reducing potential gift and estate tax liability

ILIT

Traditional ILITs:

Irrevocable Life Insurance Trusts, or ILITs, offer an advantage over other trusts for the purpose of estate planning, in that they authorize the trustee to purchase and maintain life insurance policies on the lives of the grantor, grantor’s spouse and even the trust beneficiaries. By shifting the ownership of the policies from both the insured and the insured’s spouse to the ILIT, it removes the life insurance policy proceeds from federal estate taxation at the death of both the insured and the insured’s spouse. Trust owned life insurance does not just provide liquidity to meet estate settlement costs, but also provides a benefit to their beneficiaries without being reduced by federal estate taxes, state inheritance or estate taxes, or probate costs.

Flexible ILITs:

One problem with a traditional ILIT is that it is inflexible, and once established it can not be altered and the cash values from the life insurance policy can not be accessed by the insured. One possible solution to this problem is a flexible ILIT. A flexible ILIT is simply an irrevocable life insurance trust with provisions allowing the trustee to make distributions to the spousal beneficiary and children. It can only be used with married couples, as one spouse needs to be the grantor and the other the trust beneficiary. This type of ILIT gives the grantor’s spouse access to the policy’s cash value, while keeping the policy out of both spouses’ estate. It can be used with either a single life or survivorship policy. Three distinct financial objectives are accomplished with the establishment of a flexible ILIT: It provides income replacement, estate tax planning and supplemental retirement income. It may even be possible to distribute the entire policy to the spousal beneficiary if the estate tax is permanently repealed.


IDIT

An installment sale to an intentionally defective irrevocable trust (IDIT) is an estate planning technique that facilitates the removal of income producing or appreciating property from a client’s taxable estate with minimal estate, gift, and generation skipping transfer tax costs. The sale of assets to an IDIT is a flexible strategy capable of assisting clients to achieve several common goals, including: “freezing” the value of assets within the taxable estate, paying premiums for trust owned life insurance, transferring assets or business interests to younger generations while paying minimal transfer taxes, or rolling out of an existing premium financing arrangement.

Dynasty Trust

The Generation Skipping Transfer Tax (GSTT) was created to close a loophole used primarily by wealthy families. Assets passing to skip persons, two or more generations below the transferor (e.g., grandchildren), were bypassing estate taxation at each interim generation. Thus, the Generation Skipping Transfer Tax was created to close this gap and is applied in addition to any gift or estate taxes that may apply.

The GSTT provides a limited, lifetime exemption amount that can be transferred GST tax-free to skip persons. The Generation Skipping Trust, utilizing this exemption, creates a legacy for future generations. Gifting to the trust is generally limited to the exemption amount, allowing the transferred assets, and all their appreciation, to avoid GSTT. The Generation Skipping Trust is designed so that it fails to give earlier generations an ownership interest in the property while still allowing them an income interest for life, thus avoiding estate taxation at each subsequent generation for assets that remain in the trust.

The Dynasty Trust, a long-term version of the Generation Skipping Trust, is designed to continue for as many generations as permissible under state law. Depending on state law, the trust may terminate in the future according to the state’s rule against perpetuities which limits the duration of a trust, typically to a maximum of approximately 90 years. However, if the trust is established under the laws of a state that has abolished or modified the rule against perpetuities, the trust may continue for much longer.

GRAT / GRUT

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust where the grantor (client/donor) transfers assets into the trust in exchange for a fixed annuity payment for a specified term of years. A Grantor Retained UniTrust (GRUT) works similarly, except a GRUT pays a fixed percentage of trust assets. This payout will increase or decrease depending on the annual valuation of the trust. When the trust term expires, all remaining assets left in the trust will then pass to the appropriate remainder beneficiaries. At the time the GRAT/GRUT is established, the grantor makes a gift to the trust equal to the projected future value that will pass to the beneficiaries. This value of the gift is determined by calculating the PV of the payments due to the grantor by applying the current Section 7520 rate in effect at the time the transfer to the trust is made. The PV is then subtracted from the total value of the assets transferred to the trust in order to determine the value of the gift.

Potential Gift Tax Leverage –
One of the main goals of using a GRAT/GRUT is for the opportunity to pass assets to heirs at a reduced gift tax cost. The success of this goal is determined by the rate of return achieved by the assets transferred to the trust and the Section 7520 rate applied at the initiation of the GRAT/GRUT. In order to pass along the asset at a reduced gift tax cost, the asset must appreciate at a rate greater than the published Section 7520 rate applied. If this occurs, the remaining assets in the trust will be greater than calculated for at the inception of the GRAT/GRUT and allow the grantor to pass the assets to the remainder beneficiaries for less than the value of the gift.

Walton “Zeroed Out” GRAT –
It is possible to have a zeroed out gift value by using what is commonly referred to as a Walton GRAT. The GRAT is structured to have the PV of the annuity payments be equal to the total value of assets transferred to the trust. By doing so, there would be an opportunity to use a GRAT for individuals who do not have or do not want to use their gifting capacity to fund the GRAT, since the gift would be valued at zero.

Double Leverage –
There are some assets that qualify for a valuation discount due to lack of marketability or lack of control, such as FLP interests or non-voting stock. The grantor can gain additional leverage if the assets transferred to the trust qualify for this type of discount. When the GRAT/GRUT payment is calculated, the payment will be based on the discounted value rather than the FMV of the asset. This can enhance the amount of assets that will eventually pass to the remainder beneficiaries at the end of the trust term because it results in a lower payout.

Use as an Exit Strategy –
Many clients may be considering or currently participating in a financed arrangement such as Premium Financing, Private Financing and/or Private Split Dollar, where the policy owner has been loaned money in order to pay life insurance premiums. When working with younger age clients, typically age 75 or younger, it may be appropriate to implement a strategy to repay the outstanding loan by using assets other than death benefit proceeds. When using proceeds from a death benefit to repay the loan, the client runs the risk of their death benefit decreasing to a level not adequate to cover the estate planning needs due to the lender’s collateral assignment on the policy. A GRAT/GRUT is often structured so that at the end of the trust term the remaining assets pass to the owner of the life insurance policy (e.g., irrevocable life insurance trust) to provide funds to repay the outstanding loan balance. When this occurs the client is able to exit the loan transaction in a timely manner in order to avoid any additional long-term risks associated with letting the loan continue.
 
Credit Shelter Trust

The Credit Shelter Trust (also known as a “B” trust, “bypass” trust or “family trust”) is typically established (generally in the will of the first spouse to die) to remove the ‘applicable exclusion’ amount from a couple’s estate for the benefit of the spouse, children or other heirs. The ‘applicable exclusion’ is the amount a person can transfer (either via gifts or at death) without triggering estate taxation.

The Credit Shelter Trust (CST) is funded with assets equal to an individual’s applicable exclusion amount, allowing property to “by-pass” the second spouse’s estate for inclusion purposes. The surviving spouse can receive principal and income from the trust during his/her life but the remainder passes to the trust beneficiaries at the second spouse’s death. The trust also provides protection from potential creditors or other unforeseen losses of the surviving spouse.

In situations where the surviving spouse doesn’t need trust assets, life insurance can be purchased inside the CST to leverage the amount of wealth transferred to heirs and provide for tax-deferred growth.

Gifting Strategies

The Leveraged Gifting area helps to identify solutions for individuals who want to leverage their gifts by transferring assets at a reduced gift tax cost. These strategies are often used as an exit strategy in conjunction with financed premium arrangements or simply to transfer assets to heirs on a leveraged basis.

IDIT

An installment sale to an intentionally defective irrevocable trust (IDIT) is an estate planning technique that facilitates the removal of income producing or appreciating property from a client’s taxable estate with minimal estate, gift, and generation skipping transfer tax costs. The sale of assets to an IDIT is a flexible strategy capable of assisting clients to achieve several common goals, including: “freezing” the value of assets within the taxable estate, paying premiums for trust owned life insurance, transferring assets or business interests to younger generations while paying minimal transfer taxes, or rolling out of an existing premium financing arrangement.

Family Limited Partnership

A Family Limited Partnership (“FLP”) is a limited partnership in which family members hold all or substantially all of the interests. A limited partnership differs from a general partnership primarily in that at least one of the partners is a limited partner and at least one is a general partner. The general partner, who is entitled to compensation, controls the FLP and makes substantially all decisions concerning the partnership. The limited partners are passive investors who have limited liability for the debts and liabilities of the partnership and little, if any, management control. If properly designed, formed and operated, a FLP may assist clients accomplish a number of tax and non-tax wealth transfer objectives, including:

  • Consolidation of family assets to achieve investment diversification and/or increase investment opportunities.
  • Creditor protection, including in the event of divorce.
  • Simplify gifting of family assets.
  • Centralized and economically efficient management of family assets to continue after death of the senior generation.
  • Prevent fractionalization and/or non-family ownership of family assets.
  • Provide wealth management experience for future generations.
  • Transfer family assets during life or at death at a reduced transfer tax cost.
  • Shift family assets’ income and/or appreciation to future generations.
  • Provide dispute resolution process for intra-family disputes regarding family assets.
  • Simplification or minimization of probate proceedings involving family assets

GRAT / GRUT

A Grantor Retained Annuity Trust (GRAT) is an irrevocable trust where the grantor (client/donor) transfers assets into the trust in exchange for a fixed annuity payment for a specified term of years. A Grantor Retained UniTrust (GRUT) works similarly, except a GRUT pays a fixed percentage of trust assets. This payout will increase or decrease depending on the annual valuation of the trust. When the trust term expires, all remaining assets left in the trust will then pass to the appropriate remainder beneficiaries. At the time the GRAT/GRUT is established, the grantor makes a gift to the trust equal to the projected future value that will pass to the beneficiaries. This value of the gift is determined by calculating the PV of the payments due to the grantor by applying the current Section 7520 rate in effect at the time the transfer to the trust is made. The PV is then subtracted from the total value of the assets transferred to the trust in order to determine the value of the gift.

Potential Gift Tax Leverage –

One of the main goals of using a GRAT/GRUT is for the opportunity to pass assets to heirs at a reduced gift tax cost. The success of this goal is determined by the rate of return achieved by the assets transferred to the trust and the

Section 7520 rate applied at the initiation of the GRAT/GRUT. In order to pass along the asset at a reduced gift tax cost, the asset must appreciate at a rate greater than the published Section 7520 rate applied. If this occurs, the remaining assets in the trust will be greater than calculated for at the inception of the GRAT/GRUT and allow the grantor to pass the assets to the remainder beneficiaries for less than the value of the gift.

Walton “Zeroed Out” GRAT –

It is possible to have a zeroed out gift value by using what is commonly referred to as a Walton GRAT. The GRAT is structured to have the PV of the annuity payments be equal to the total value of assets transferred to the trust. By doing so, there would be an opportunity to use a GRAT for individuals who do not have or do not want to use their gifting capacity to fund the GRAT, since the gift would be valued at zero.

Double Leverage –

There are some assets that qualify for a valuation discount due to lack of marketability or lack of control, such as FLP interests or non-voting stock. The grantor can gain additional leverage if the assets transferred to the trust qualify for this type of discount. When the GRAT/GRUT payment is calculated, the payment will be based on the discounted value rather than the FMV of the asset. This can enhance the amount of assets that will eventually pass to the remainder beneficiaries at the end of the trust term because it results in a lower payout.

Use as an Exit Strategy –

Many clients may be considering or currently participating in a financed arrangement such as Premium Financing, Private Financing and/or Private Split Dollar, where the policy owner has been loaned money in order to pay life insurance premiums. When working with younger age clients, typically age 75 or younger, it may be appropriate to implement a strategy to repay the outstanding loan by using assets other than death benefit proceeds. When using proceeds from a death benefit to repay the loan, the client runs the risk of their death benefit decreasing to a level not adequate to cover the estate planning needs due to the lender’s collateral assignment on the policy. A GRAT/GRUT is often structured so that at the end of the trust term the remaining assets pass to the owner of the life insurance policy (e.g., irrevocable life insurance trust) to provide funds to repay the outstanding loan balance. When this occurs the client is able to exit the loan transaction in a timely manner in order to avoid any additional long-term risks associated with letting the loan continue.

Private Split Dollar

Do You Know a Client . . .

With a high net worth ($10 million in the case of an individual)?

Who needs more life insurance outside his estate but does not want to pay gift tax?

Who is reluctant to do irrevocable planning in light of estate tax uncertainty?

Who does not have sufficient annual gift tax exclusions or and remaining lifetime gift tax exemption to cover premium costs for the death benefit needed without incurring gift tax?

For whom premium financing is not economical or appealing?

Private split dollar may be an ideal solution.

Many affluent clients find the premium costs for the death benefit needed exceed their annual gift tax exclusion and remaining lifetime gift tax exemption amounts.1 As a result, many clients use premium leveraging arrangements, such as premium financing, private financing and/or private split dollar, to facilitate funding their life insurance premiums withlittle or no gift tax impact.

What is private split dollar?

Private split dollar is a premium sharing arrangement between the client and an irrevocable life insurance trust (ILIT).2Client enters into a non-equity collateral assignment agreement with an ILIT wherein the client agrees to pay the full annual premium in exchange for a restrictive collateral assignment in the policy, which entitles the client to be repaid the greater of their premiums paid or the total cash value of the policy at some point in the future. As a result, the client is able to acquire the death benefit needed with little or no gift tax impact. The collateral assignment may be satisfied with life insurance proceeds or from other sources during the client’s lifetime. Potentially, a return of premium rider can be used to satisfy the collateral assignment without diminishing the death benefit needed. In summary, private split dollar can provide a tax-efficient and cost-effective strategy to pay for life insurance.

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Client creates an ILIT, the beneficiaries of which are typically the client’s family members.

Client enters into a non-equity collateral assignment agreement with the ILIT wherein the client agrees to pay the full annual premium in exchange for a restrictive collateral assignment in the policy which entitles the client to be repaid the greater of the premiums paid or the total cash value of the policy at some point in the future.

Client annually gifts the economic value of the death benefit or “term cost” of the premiums to the ILIT.ILIT purchases a life insurance policy on the client’s life, retains ownership rights and designates the ILIT as the beneficiary of the policy.

At the client’s death, the collateral assignment may be satisfied from the life insurance death proceeds. Alternatively, the collateral assignment may be satisfied during the client’s lifetime, from sources outside of the client’s estate.

At the end of the trust term, the ILIT assets, including death proceeds in excess of the amount required to satisfy the collateral assignment, are distributed to the ILIT beneficiaries estate and income tax free.

Assignments are distributed to the ILIT beneficiaries free of estate tax and income tax.

Advantages

  • Death benefit payable to the ILIT should pass to the trust beneficiaries, estate and income tax-free.
  • Minimize gift tax cost associated with the client’s desired level of insurance protection.
  • Annual exclusion gifts can be leveraged significantly.
  • Lock in insurability now at a low gift tax cost, while maintaining flexibility to terminate or continue the plan.
  • Potential ability to be repaid the greater of the premiums paid or the total cash value.

Considerations

  • Collateral assignment may be subject to estate tax.
  • Annual term cost increases as the client ages.
  • Cash is required to fund the premiums.

1The gift tax annual exclusion allows each individual to give up to $13,000 per year (indexed annually for inflation and subject to specific rules) to an unlimited number of people without paying federal gift taxes. 2 Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including generation-skipping tax). Failure to do so could result in adverse tax treatment of trust

Charitable Giving

In addition to serving as an estate and businessplanning tool, life insurance can also serve an importantrole in charitable planning. This Sales Strategy willexamine the different ways in which a life insurancepolicy can be used to fund a charitable gift.

USING LIFE INSURANCE TO MEET CHARITABLE GOALS

Charity-owned life insurance policy. Life insurance can be the ideal solution for philanthropic minded individuals who want to make substantial lifetime charitable gifts. By making annual income tax deductible gifts to the charity which can be used to pay insurance premiums on the donor’s life, an individual can leave significant insurance proceeds to charity at his or her death.’

HOW IT WORKS:

A donor with an established pattern of giving to a charitable organization can take the following steps to increase the amount that he/she gives to the charity:

  • the donor will apply for an insurance policy on his/her life to benefit the organization;
  • the charity will be the owner and beneficiary of the life insurance policy and will maintain control of the policy during the insured’s/donor’s life;
  • the donor will make ongoing cash gifts to the charity that the charity may use to fund additional premium payments on the policy; and
  • the charity can use the policy proceeds for its benefit.

BENEFITS:

  • Current Income Tax Deduction. The insured will receive a current income tax deduction for lifetime contributions made to the charity.
  • Small Annual Gifts Necessary. An insured can fund a substantial life insurance policy with a small annual charitable contribution.
  • Insured Has No Obligation to Continue Premium Payments. If the insured experiences an unforeseen life event and stops making annual contributions, the charity can either: (1) surrender the policy and use the cash value,’ (2) convert the policy to a smaller “paid-up” policy, where available, or (3) continue making premium payments from other sources.

CONSIDERATIONS:

  • Charity Has No Obligation to Maintain Policy. Although the intent of the insured may be to make, a substantial gift at death, the charity is not ordinarily obligated to use the annual contributions to fund the policy.
  • Insurable Interest Concerns. Although most states now allow charities to purchase insurance on donors’ lives, state insurable interest rules should be considered when a charity purchases a life insurance policy. An established pattern of giving and involvement with a charity can provide evidence of insurable interest.’
  • Charitable Deduction Limitations. Lifetime contributions to qualified charities do not create unlimited income tax charitable deductions. Income tax charitable deductions are limited by a percentage of “adjusted gross income” or “AGI.”
  • Limitation on Purchase of Additional Insurance. Once a charity-owned life insurance policy is issued (or an existing policy is donated to a charity), the amount of additional life insurance that the donor can purchase for his/her own personal use in the future may be reduced or affected by the amount of the charity-owned life insurance policy.
Asset Repositioning

These strategies will assist in maximizing dollars left to heirs by taking existing assets and/or life insurance coverage and potentially repositioning these assets so they are efficiently transferred to future generations.

Annuity Arbitrage

The Annuity Arbitrage strategy enables older clients to redeploy underperforming assets, increase discretionary income, and pass additional assets to heirs free of estate taxes. The client purchases a single premium immediate annuity, uses the payments to supply income for life, and fund premiums for a life insurance policy. Annuity Arbitrage is a straightforward concept that allows you to solve both income and estate issues at once.

Aid in the sales process:

Case Analysis Management Program – Develop an Annuity Arbitrage Presentation, with the assistance of the NFP Annuity Arbitrage. Develop an Annuity Maximization Presentation, with the assistance of the UIS Annuity Maximization (SPIA or Withdrawal version) Checklist found below.

Presentation Solutions: Estate Max – Create a customizable, advanced sales presentation illustrating how asset repositioning may increase the legacy a client leaves to their family. Estate Max provides you the ability to analyze this strategy for a number of different asset types including: Deferred Annuities, Certificates of Deposit, Bonds, Individual Retirement Accounts, and Qualified Plans.

Annuity Maximization

The Annuity Maximization strategy may allow your clients to leverage existing deferred annuity assets not needed for retirement income into a life insurance policy held outside of their taxable estate. This simple technique can help clients maximize their wealth transfer goals while utilizing existing assets that might otherwise be exposed to both estate and income taxes.

Survivor Survivorship

Often clients buy a second-to-die policy because of the lower premium cost obtained by delaying the death benefit until after a second death. After the second-to-die policy is issued, one of the insured’s passes away. In some cases a single life policy insuring the life of the survivor may offer an attractive alternative to keeping the existing second-to-die policy. Utilizing the second-to-die policy values (possibly through a Section 1035 exchange) might provide much more for the heirs.

In two private letter rulings, Let. Rul. 9248013 and Let. Rul. 9330040, the IRS noted that when a second-to-die policy was exchanged after the death of one insured, for a policy insuring only the survivor, the new policy was insuring the same single life and thus was an acceptable Section 1035 exchange.

Wealth Transfer Resource Library

Wealth Transfer Charitable Handbook
Tax Reporting to Grantor Trusts
Rx For a Bad ILIT - Whitepaper
Credit Shelter Trust Case Study
GRAT - Whitepaper
Making an ILIT Irrevocable
Dynasty Trust with Life Insurance
Sale to a Grantor Trust with Life Insurance
Tax Reform Forgive Intra Family Loans
Switch Dollar
Charitable Legacy Enhancement
Enhancing a Charity’s Cash Flow
Financial Statement-Based Planning Opportunities
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