Demystifying Estate Planning To Grow Your Practice · 2017-01-05 · Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS

Demystifying Estate Planning To Grow Your Practice

NOT FOR CONSUMER USE.

Presented by: Brett W. Berg Vice President Advanced Markets Prudential Individual Life Insurance Division

0275422-00003-00 Ed. 02/2016 Exp. 08/17/2017


Today’s Session

• Estate Planning Does Affect Your Clients • Importance of Estate Planning • 4 Steps to the Estate Planning Process

• Protecting Your Client • Protecting Your Client’s Legacy • Tax Reduction Strategies • Implementation

NOT FOR CONSUMER USE. 2


Estate Planning Affects Your Clients


MYTH: Only rich

people have estates

FACT: Just about everyone

has an estate


Importance of Estate Planning

• Reduce Expenses and Taxes • Make Wishes Known • Control Asset Distribution • Ease the Transition for Loved Ones



Estate Planning Process – 4 Steps

Protecting Your Client Protecting Your Client’s Legacy Tax Reduction Strategies Implementation


STEP

1 STEP

2 STEP

3 STEP

4



Protecting Your Client

STEP

1

CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS What Clients Can Do To Protect Themselves • Durable Power of Attorney • Medical or Advanced Directives • Guardianship • Business Transfer • Life Insurance




Protecting Your Client’s Legacy

STEP

2


Step 2: Protecting Your Client’s Legacy


• Creating a Will • Estate and other Tax Laws • Establishing a Trust • Performing a Beneficiary Review


When There’s a Will…

• Avoid Intestacy • Reduce Expenses, Taxes • Client’s Wishes Known • Makes it Easier for Family

10 NOT FOR CONSUMER USE.

1 Most Americans Don’t Have a Will; FindLaw.com, 2010 – Accessed February 2016

More than half of American adults don’t have a will.1


Federal Estate Taxes

Aggregate Exemption Amounts

Lifetime Gift Tax Exemption

Estate Tax Exemption

Generation Skipping Transfer Tax Exemption

•Total amount transferrable to all recipients without gift tax, $5,450,000*

•Top Rate of 40% •In addition to annual exclusion gifts

•Reduces federal estate tax exemption if used

•Total amount transferrable to all recipients without estate tax, $5,450,000* •Top rate of 40%

• Total amount transferrable to all skip persons without GST Tax, $5,450,000*

• Top Rate of 40% • Can only be allocated

to a gift or bequest • Unified with other

exemptions *Amount for 2016, indexed annually for inflation; Note that unused portion is portable to one’s spouse.



Don’t Forget State Death Taxes

• Estate Taxes • Inheritance Taxes • Other



Other Taxes Due at Death

• Estate income tax • Tax-deferred accounts



Portability of Exemption for Spouses

• Surviving spouse can use decedent’s unused exemption • Benefits the surviving spouse • Continued need for planning remains • Does not apply to GSTT

Died with $3 million estate

left to children

Estate Tax Return Election: DSUEA

$7 Million Applicable Exclusion amount

($5 Million basic exclusion amount, plus $2 million DSUEA)



Credit Shelter Trust

2. Surviving spouse gets income/principal distributions

1. At death of first spouse, trust is funded with an amount equal to the exclusion amount of first spouse

3. Corpus of trust distributed upon death of second spouse to children/beneficiaries


1 CST

2

3


Trusts – General Types

Trusts are legal arrangement where a trustee owns assets for benefit of another.

• Revocable Trust • Irrevocable Trust



Perform A Beneficiary Review

• Review Insurance Policies and Investment Accounts, such as Annuities and IRAs

• Life Changes • Provide For Your Loved Ones • Avoid Probate




Tax Reduction Strategies

STEP

3


Step 3: Creating Tax Efficiencies

• Lifetime Gifts • Annual Gifting • Trusts



Gifting Goals

• Reduce future estate tax exposure • Leave more to family, less to government • Keep estate assets in tact • Preserve a family business • Enjoy seeing the recipient

benefit during the client’s life



Annual Gifting


Gift $28,000 To Each


Accelerated Gifting


$70,000 529 Plan Contribution Using the “Five-Year Gifting Election

529 PLAN


Gifting-Annual vs. Lump Sum

23

1Annual gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse makes a $5,000,000 lifetime gift utilizing part of their $5,450,000 lifetime gift exemption for 2016.

2Assumes the $84,000 annual gifts would have been accumulated inside the grantors’ estates at a 5% net rate of return then subject to a 40% flat estate tax rate.

2Assumes the appreciation on the $10,000,000 gift at a 5% net rate of return would have been taxable inside the grantors’ estates at a flat estate tax rate of 40%.

Hypothetical Gifts by a Married Couple

$84,000/year Annual Exclusion Gifts1

$10,000,000 Lifetime Exemption Gift1

Hypothetical Estate Tax Savings by Year 202 $1,166,567 $6,613,191

This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.



Why Gift and Life Insurance

24

1 Annual gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse uses $5,000,000 of their $5,450,000 lifetime exemption for 2016.

2Assumes the $84,000 annual gifts would have been accumulated inside the grantors’ estates at a 5% net rate of return then subject to a 40% flat estate tax rate.

Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to age 121. The internal rate of return (IRR) is the after-tax rate of return that would be needed each and every year to accumulate an amount equal to the death benefit by the respective year/age assuming the premiums were alternatively invested. PruLife SUL Protector is issued by Pruco Life Insurance Company except in New York where it is issued by Pruco Life Insurance Company of New Jersey. This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

Hypothetical Gifts by a Married Couple

$84,000/year Annual

Exclusion Gifts1

Hypothetical Estate Tax Savings by Year 202 $1,166,567

Life Insurance Premium $84,000/year Level pay

Death Benefit $6,495,129

Death Benefit IRR at Joint Life Expectancy (age 91) 5.56%



Irrevocable Life Insurance Trust

When properly used, an ILIT will receive the death benefit proceeds of a life insurance policy both income and estate-tax free.



Irrevocable Life Insurance Trust

*There may be federal gift-tax consequences associated with the funding of an Irrevocable Life Insurance Trust. 4

3 2

1. Client’s attorney drafts trust and client gifts premium to trust*

3. Upon death, policy pays death benefit to ILIT federal income and estate tax free

4. ILIT distributes proceeds to trust beneficiaries

2. ILIT purchases policy on client’s life

1



Spousal Lifetime Access Trust (SLAT)

• Only one spouse (grantor spouse) can make gifts to the ILIT which must be done while he or she is alive (beneficiary spouse can not make such gifts)

• Lifetime trust distributions to the beneficiary spouse and/or other trust beneficiaries, can be made through policy loans and withdrawals*

• Indirect access to trust assets could be lost upon divorce or beneficiary spouse pre-deceasing the grantor spouse (consider “floating spouse” provisions)

* Outstanding loans and withdrawals will reduce policy cash values and the death benefit and may have tax consequences.

27

Irrevocable Life Insurance

Trust (ILIT)

Life Insurance

Policy

The ILIT pays premiums to the insurance company.

Upon death, the death benefit is paid to the ILIT income and estate tax free, generally.

The trustee, at their discretion, can make distributions to the spouse while living

Gifted $$$ from grantor spouse

Distributions to other trust beneficiaries

Distributions, via trustee, to beneficiary spouse


Grantor Spouse

Beneficiary Spouse

Future Heirs


Planning for Beneficiaries with Special Needs

• Government assistance programs • Letter of Intent • Reaching the age of majority • Avoiding a mistake with financial gifts or

inheritance • Special Needs Trust and

life insurance



EPIC (ESTATE) FAILS



Marlon Brando

• Dispute over an alleged, verbal promise • Without specific documentation in the will,

the estate settled a claim for $125,000

Wishes need to be documented in a Will and made specific.



Sonny Bono

•No will or trusts – the state appointed the administrator

•Administrator forced to defend claims

A Will is imperative to support intentions.



Phillip Seymour Hoffmann

•Will not updated to include children born after drafting •$30 million taxed at 40% •Missed tax deferral opportunity

It’s critical to update one’s Will due to life changes and to implement a plan to account for estate taxes.



Diana, Princess of Wales

•“Letter of wishes” not carried out as it wasn’t referenced in her will.

Stating specific intentions in one’s Will is imperative.




Implementation

STEP

4


Step 4: Implementation

Team Approach • Attorney • Financial Advisor • CPA • Prudential Representative



Create The Right Plan For Your Client


• Are you aware of what the current estate tax landscape looks like?

• Do you have a Will? If so, do you have an executor or executrix named for your Will?

• Have you considered establishing a trust to help disperse your assets?

• When was the last time you performed a beneficiary review?

If your client fails to plan, plan to fail!


Federal 2016 Budget Proposals

A Law is Only Permanent Until Congress Decides to Change It! • Estate and GST Exemptions $3.5M, Lifetime Gifts $1M, no indexing,

Top Rate 45% • Gifts or Bequests of Appreciated Property is a Capital Gains realization event • Decouple Annual Gift Tax Exclusions from Crummey powers by creating new

category of gifts to trusts of $50k per donor per year • Grantor Retained Annuity Trusts (GRAT) • 90 year perpetual trust limit • Sale to Intentionally Defective Grantor Trust • Eliminate non-spouse stretch IRA’s, must be distributed within 5 yrs • Limit on total of tax-deferred retirement accounts to provide maximum annuity

permitted under DB plan(currently $3.4M at age 62) • Required Minimum Distributions for Roth IRA’s at 70 ½



Federal 2016 Budget Proposals

Key Points – Taxpayer Friendly Proposals • Permit non-spouse beneficiary to roll over to an inherited IRA within 60 days vs. direct trustee to trustee transfer

• No RMD’s from IRA’s and retirement accounts if aggregate value does not exceed $100k




Questions?


Important Information

Death benefit proceeds are generally received federal income tax free as provided in Internal Revenue Code Section 101(a). Life insurance issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY and/or NJ) and Pruco Life Insurance Company of New Jersey (in NY and/or NJ). Securities are offered by Pruco Securities, LLC. All are Prudential Financial companies located in Newark, NJ.


This material has been prepared by The Prudential Insurance Company of America to assist financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that we are not rendering legal, accounting or tax advice. Such services should be provided by the client’s own advisors. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code. Although this material is intended to be accurate as of the date of initial publication, Prudential does not assume any liability or responsibility for any errors or omissions in such materials or undertake any obligation to update such materials.

All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.

Documents

Demystifying Estate Planning To Grow Your Practice · 2017-01-05 · Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to