Time is Running Out Planning for the Sunset of the 2010 Tax Act

Transcription

1 Time is Running Out Planning for the Sunset of the 2010 Tax Act Presented By: Steven A. Larson, AVP, NFP Insurance Marketing Services

2 FEDERAL ESTATE, GIFT, & GST TAXES FEDERAL ESTATE, GIFT & GST TAXES 2012 Estate Gift GST Top Marginal/Flat Tax Rate 35% Exemption Amount $5.12MM 2013 Estate Gift GST Top Marginal/Flat Tax Rate 55%** 55%** 55% Exemption Amount $1MM $1MM $1MM *Estate and gift tax exemptions remain unified and portable between spouses. GST exemption equals estate tax exemption. **5% surcharge on estates and cumulative gifts of $10MM - $17.184MM. As indexed for inflation since 1998.

3 CURRENT TAX LAWS FEDERAL INCOME TAXES Top Individual Tax Rates * Ordinary Income 35% 40.5% Long-Term Capital Gain 15% 23.8% Dividends 15% 43.4% *Assumes: 39.6% top individual income tax bracket 20% long-term capital gains top rate Dividends taxed as ordinary income Medicare surtax (e.g., 3.8% of net investment income)

4 PLANNING IMPACT Timing is key - critical for clients to plan now Uncertainty in future tax laws Current market opportunities to transfer potential growth Current low interest rates benefit arbitrage planning Potential future increases in product costs Time value of making gifts early. Gifting earlier provides: More years of growth outside of estate Increased potential to transfer more wealth

5 PLANNING IMPACT If 2013 changes occur, additional planning concerns More need for life insurance in middle and advance markets Less exemption for funding large premiums More interest in insurance products as tax-deferred assets More income tax concerns with wealth transfer plans (e.g., grantor trusts, charitable planning)

6 Act Now! Increased Gifting Capacity Depressed Values Low Interest Rates Legislative Threats For Rep/Agent Use Only. Not For Further Distribution.

7 Act Now! For Rep/Agent Use Only. Not For Further Distribution.

8 Act Now! What Estate Tax Liability? I can t afford to make a large gift. I don t see a downside to waiting. For Rep/Agent Use Only. Not For Further Distribution.

9 Act Now! POTENTIAL ESTATE TAXES

10 Act Now! For Rep/Agent Use Only. Not For Further Distribution.

11 Act Now! Legislative Threats Transfer Tax Proposals Coordinate income & transfer taxation of grantor trusts Return to 2009 transfer tax rates and exemptions Limits on valuation discounts for transfers of family entity interests 10-year GRAT s with potential minimum remainder 90 year limit on GST exemption Life Insurance Proposals Life Settlement Reporting Reporting on PPL Inside Build-up Calculating Dividends Received Deduction (DRD) Interest Deduction Limits Related to COLI Policies

12 Act Now! Case Examples: Leverage Exemption with Life Insurance Assumes $10MM unused exemption

13 Act Now! Assumes $2MM gift, Joint LE of 31 years, 30% discount where applicable, 5% return, 40% effective income tax rate For Rep/Agent Use Only. Not For Further Distribution.

14 Act Now! For Rep/Agent Use Only. Not For Further Distribution.

15 Act Now!

16 Act Now! For Rep/Agent Use Only. Not For Further Distribution.

17 Trending Now Life Insurance Industry Diminishing carrier profit margins Reserving issues for guaranteed products Pricing effects Product: IUL, Current Assumption Legislative Threats May extend all cuts for one year and deal with real reform in 2013 With fundamental reform, could see very serious changes to income taxes, capital gains, estate/gift taxes, etc. Everything is on the table Favorable Planning Environment Continued market volatility Depressed values Low interest rate environment continues Working with Centers of Influence Moving clients forward in the face of uncertainty requires a team effort Must identify opportunities that unify all advisors on a single approach Relationships, technical knowledge, and adaptability are critical to sales success in this environment

18 Trending Now: Working with Advisors Team with Other Advisors Team approach increases probability and speed of closing sales But legal/financial advisors can be wary of insurance planning Don t understand products Don t view insurance as an asset Don t fully realize the mortality/market hedging benefits Insurance advisors must understand issues to remove blocks Clients expect all advisors to know tax issues and full spectrum of products available for their investment and risk protection needs Affiliated advisors also may need guidance with unfamiliar products Knowledge develops trust with both clients and affiliated advisors

19 Trending Now: Working with Advisors Recommend products tailored to client needs/goals Must understand needs of target client Clients with sufficient asset base Life insurance as an alternative asset Operates like a forced savings account If insured dies at or beyond LE, internal rate of return (IRR) typically equals that of a highquality bond portfolio* Ultra high net worth clients Life insurance Protects against mortality risk and interest rate volatility Lottery effect if client dies early (supercharged IRR) Can complement fixed income/bond portfolio E.g., Dedicate 5-10% of bond portfolio to a GUL product *There are different risks, objectives, costs, guarantees, liquidity and tax treatments between life insurance and bonds. While returns have the potential to be similar these assets are not directly comparable.

20 Trending Now: Working with Advisors

21 Trending Now: Working with Advisors

22 Trending Now: Working with Advisors

23 Trending Now: Working with Advisors Recommend products tailored to client needs/goals Match product features to goals E.g., Cash value products for retirement planning, GUL products for estate liquidity needs, etc. Review non-mec vs. MEC issues Need for cash value access through loans and withdrawals: Non-MEC: Tax-free (up to investment in contract for withdrawals) MEC: Taxed as ordinary income up to investment in contract & 10% penalty on amounts included in gross income Selection also should consider: Carriers no longer providing benefit for front-loaded premiums Non-MECs initially offer higher IRR in case of premature death Less initial risk exposure to carrier default with non-mecs IRR analysis of a MEC vs. a non-mec

24 Trending Now: Working with Advisors Review non-mec vs. MEC issues Example: Non-MEC vs. MEC IRR Analysis H & W (61 and 59) fund ILIT with $8MM of exemptions ILIT will acquire guaranteed SUL coverage of $35.4MM $8MM single premium vs. $459,000 level annual premiums Incremental IRR analysis performed: Calculated hurdle rate needed to achieve if $8MM gift invested and used to pay level premiums Need annual return of 4.6% to match economics of single premium In this case, level annual premiums selected: Clients believe can beat hurdle rate Prefer to limit carrier risk exposure