A Fair Market Loan Arrangement PRESENTED BY

Transcription

1 Private Financing A Fair Market Loan Arrangement PRESENTED BY PREPARED FOR Mr. Producer John Hancock 200 Clarendon Street Boston, MA 0217 Tel.: (617) Fax: (617) mrproducer@jhancock.com Diane Munson Insurance products are are issued by by: John John Hancock Hancock Life Life Insurance Insurance Company Company (U.S.A.), of New York Boston,, Valhalla MA and NY securities offered Securities through Products John distributed Hancock by Distributors John Hancock LLC Distributors through other LLC broker/dealers through other that broker/dealers have a selling appointed agreement by John with John Hancock Hancock Distributors Distributors LLC, LLC, 197 Clarendon 197 Clarendon Street, Street, Boston, MA Insurance of New York, Valhalla NY April 17, 2012 Boston, MA products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116

2 PRIVATE FINANCING Wealth Transfer Planning with Private Financing Prepared for Diane Munson Presented by Mr. Producer The Concern Like many successful people, you know you need additional life insurance coverage, and you have the means to pay for it. You know that one of the best ways to purchase life insurance is in an Irrevocable Life Insurance Trust, so it will be outside of your estate and not subject to estate taxes. However, you may not have enough annual exclusion gifts available to cover the full premium for the policy you wish to purchase without having to make taxable gifts. How can you get enough money into the ILIT to pay the premiums while reducing your gift tax exposure? The Solution How It Works: Loan(s) to Trust & Additional Gifts (if desired) Donor Loan Interest and Principal Repayment(s) Private Financing provides your ILIT with funds to pay insurance premiums in the form of a loan, instead of a gift that could be subject to gift tax. How Does It Work? In a Private Financing arrangement, your ILIT borrows funds under a fair market loan in order to pay premiums, and then uses the loan to purchase life insurance on your life, or the lives of you and your spouse, if desired. The lender might be you, or a family member, or an entity associated with you, such as a business or family limited partnership (FLP). The loan could be made in a lump-sum amount, or split into scheduled installments, or might be funds to purchase an income-producing asset. Annual Premiums John Hancock Life Insurance Policy Irrevocable Life Insurance Trust Death Benefit Trust Proceeds at Death The Heirs The ILIT would owe annual loan interest based on the current Applicable Federal Rate (AFR), as published monthly by the government. The loan may be structured so that interest could be paid at regular intervals, or it could be deferred and added to the loan balance. In appropriate cases, the lender could consider making a gift of loan interest by using annual gift tax exclusions to forgive that interest. The balance on the loan might be repaid from insurance policy proceeds at death, or earlier from ILIT assets. In addition, the higher lifetime exemption from gift tax available through 2012 might also be used to eliminate or lower the balance on the loan. Page 2 of 13 April 17, 2012

3 PRIVATE FINANCING Wealth Transfer Planning with Private Financing Prepared for Diane Munson Presented by Mr. Producer Benefits Minimize Gift Taxes Gift taxes can be lowered significantly or avoided by making use of annual gift tax exclusions and the lifetime exemption from gift tax. Heirs Receive Loan Repayment Unlike a third party loan, there is no third party lender to repay. Your heirs will receive the life insurance policy as well as the loan balance the ILIT repaid, net of estate tax. Flexibility The ILIT may be able to borrow from a range of potential private lenders, including an existing business, trust, FLP, or family member, keeping the loan principal in the family. If you make a loan to your ILIT, it remains a part of your estate and will be subject to estate tax. Loan requirements, such as those affecting approval and collateral, may be less demanding than in a commercial loan arrangement. Current Interest Rate Environmnet Locking in an advantageous interest rate makes more cash available to your ILIT to promote your estate planning goals. Favorable Tax Treatment If your trust is a grantor trust for income tax purposes, the loan interest paid by your ILIT to you as lender would not be subject to income tax. Life insurance policy cash values grow tax-deferred, helping to minimize the trust s tax burden. Death benefit proceeds are generally not subject to income tax (exceptions may include when life insurance has been transferred for valuable consideration).¹ Considerations Proper Planning 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 applicable to beneficiaries who are more than one generation removed from you. Failure to do so could result in adverse tax treatment of trust proceeds. Liquidity The lender must have available cash flow to make the loan. Estate Tax Although the estate will be reduced by the amount of any gifts made to the ILIT, the loan repayment may be subject to estate tax if you are the lender. Insurance Eligibility Life insurance eligibility will be based on financial and medical underwriting. Additional Costs Life insurance policies have charges associated with them such as the cost of insurance and potential surrender charges. Please consult with your tax advisor for more information. Planning Options The following pages graphically illustrate a projected net amount transferred to your heirs upon your death. based on two scenarios: Please 1. Your see current attached situation Glossary in which of Ledger you are Terms not making for additional any lifetime information. gifts and 2. Establishing an Irrevocable Life Insurance Trust (ILIT) today in which you fund via a Private Financing arrangement to fund a new life insurance policy on your life. Please see attached Glossary of Ledger Terms for additional information. Page 3 of 13 April 17, 2012

4 PRIVATE FINANCING Benefit Summary Prepared for Diane Munson Prepared by: Mr. Producer Policy Details Product: Protection UL 12 Initial Premium: $148,781 Insured(s): Diane Munson Initial Death Benefit: $5,000,000 Female Age 65, Preferred NonSmoker Comparison of Values in Year 27 Do Nothing Buy Life Insurance in an ILIT via Private Financing Estate Today 20,000,000 20,000,000 Prior Taxable Gifts Made 0 0 Cumulative Loans 3,298,638 Total Loan Repaid 3,298,638 Year of Repayment 10 Total Premiums Paid by Year ,339,029 Cumulative New Gifts by Year New Gift Taxes Paid by Yr Summary 45,000,000 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 NET TO HEIRS Life Expectancy is 24 yrs Do Nothing Private Financing Total Estate in Year 27 57,667,372 55,684,415 Estate Taxes 31,371,254 30,280,628 ILIT Proceeds (net of loan) + 5,000,001 Net to Heirs in Year 27 = 26,296,117 30,403,788 Notes All values are shown as of end of year, unless otherwise indicated. Estate tax calculations are based on Current Law. Life expectancy calculation based on the Valuation Basic Table (VBT) 2008 Potential Gain Due from Planning 4,107,670 This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration. Product and/or product features may not be available in all states. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 4 of 13 April 17, 2012

5 PRIVATE FINANCING Flowchart Prepared for Diane Munson Presented by Mr. Producer Total Gross Estate Today: $15,000,000 Results in Focus Year 27 Do Nothing Projected Estate in Year 27: $57,667,372 Buy Life Insurance in an ILIT via Private Financing Projected Estate in Year 27: $55,684,415 Life Insurance (net of loan) $5,000,000 Estate Taxes: $31,371,254 Estate Taxes: $30,280,628 Other Trust Assets: $1 Net to Heirs: $26,296,117 Net to Heirs: $30,403,788 This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration. Product and/or product features may not be available in all states. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 5 of 13 April 17, 2012

6 PRIVATE FINANCING Comparison of Net To Heirs Prepared for Diane Munson Presented by Mr. Producer Year Attained Age DO NOTHING BUY LIFE INSURANCE VIA PRIVATE FINANCING (1) (2) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) Estate Estate Value Value (EOY) (EOY) Difference Credit Shelter Estate Value Credit Credit Shelter Net to Heirs Net to Heirs Total Net to Difference due to due Trust Estate Taxes Net To Heirs (EOY) Shelter Trust Trust Estate Taxes from Estate from ILIT Heirs to Planning #NAME? ,800, ,530,000 15,270,000 20,707, ,497,627 15,209,879 5,000,000 20,209,879 4,939, ,632, ,779,200 15,852,800 21,443, ,713,159 15,730,153 5,000,000 20,730,153 4,877, ,497, ,027,704 10,469,576 22,208, ,868,903 10,339,648 5,000,000 15,339,648 4,870, ,397, ,522,644 10,874,527 23,004, ,306,620 10,697,780 5,000,000 15,697,780 4,823, ,333, ,037,382 11,295,676 23,832, ,761,845 11,070,237 5,000,000 16,070,237 4,774, ,306, ,572,709 11,733,671 24,692, ,235,279 11,457,592 5,000,000 16,457,592 4,723, ,318, ,129,450 12,189,186 25,588, ,727,651 11,860,442 5,000,000 16,860,442 4,671, ,371, ,708,460 12,662,921 26,519, ,239,717 12,279,405 5,000,000 17,279,405 4,616, ,466, ,310,630 13,155,606 27,487, ,772,266 12,715,127 5,000,000 17,715,127 4,559, ,604, ,936,887 13,667,999 28,586, ,376,989 13,209,900 5,000,000 18,209,900 4,541, ,018, ,464,579 16,554,292 34,780, ,783,377 15,996,945 5,000,000 20,996,945 4,442, ,822, ,756,555 20,065,908 42,315, ,927,768 19,387,811 5,000,000 24,387,811 4,321, ,316, ,978,400 24,338,327 51,483, ,970,055 23,513,317 5,000,001 28,513,318 4,174, ,667, ,371,254 26,296,117 55,684, ,280,628 25,403,787 5,000,001 30,403,788 4,107, ,867, ,331,573 29,536,378 62,637, ,104,767 28,532,627 5,000,001 33,532,628 3,996, ,921, ,061,179 35,860,601 76,207, ,568,582 34,639,385 5,000,001 39,639,386 3,778, ,020, ,465,427 43,554,986 92,718, ,649,454 42,069,190 5,000,002 47,069,192 3,514, ,823, ,907,132 52,916, ,806, ,697,724 51,108,683 5,000,002 56,108,686 3,192, ,133, ,827,717 64,305, ,246, ,139,634 62,106,610 5,000,003 67,106,612 2,800, ,927, ,764,236 78,163, ,981, ,493,772 75,487,268 5,000,004 80,487,272 2,324,170 **Estate tax calculations are based on Current Law. This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration. Product and/or product features may not be available in all states. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 6 of 13 April 17, 2012

7 PRIVATE FINANCING Do Nothing Detail Analysis Prepared for Diane Munson Presented by Mr. Producer (1) (2) (3) (4) (5) (6) Year Attained Age Estate Balance (BOY) Estate 4.00% EOY Estate Balance Estate Taxes* Credit Shelter Credit Shelter Trust Trust Net To Heirs [1] x 4.0% ,000, ,000 20,800,000 5,530, ,270, ,800, ,000 21,632,000 5,779, ,852, ,632, ,280 22,497,280 12,027, ,469, ,497, ,891 23,397,171 12,522, ,874, ,397, ,887 24,333,058 13,037, ,295, ,333, ,322 25,306,380 13,572, ,733, ,306,380 1,012,255 26,318,636 14,129, ,189, ,318,636 1,052,745 27,371,381 14,708, ,662, ,371,381 1,094,855 28,466,236 15,310, ,155, ,466,236 1,138,649 29,604,886 15,936, ,667, ,633,529 1,385,341 36,018,870 19,464, ,554, ,136,984 1,685,479 43,822,463 23,756, ,065, ,266,083 2,050,643 53,316,727 28,978, ,338, ,449,396 2,217,976 57,667,372 31,371, ,296, ,373,029 2,494,921 64,867,950 35,331, ,536, ,886,327 3,035,453 78,921,780 43,061, ,860, ,327,320 3,693,093 96,020,413 52,465, ,554, ,330,302 4,493, ,823,514 63,907, ,916, ,666,987 5,466, ,133,667 77,827, ,305, ,276,287 6,651, ,927,338 94,764, ,163,102 **Estate tax calculations are based on Current Law. See attached Glossary of Ledger Terms. The data shown is taken from a hypothetical calculation. It assumes a hypothetical rate of return and may not be used to project or predict investment results. Page 7 of 13 April 17, 2012

8 PRIVATE FINANCING Prepared for Diane Munson Presented by Mr. Producer Irrevocable Life Insurance Trust Detail Values LOAN INFORMATION OTHER TRUST ASSETS NET TO HEIRS (1) (2) (2) (3) (4) (4) (5) (5) (6) (7) (8) (9) (10) (10) Withdrawals (11) (12) (13) Loan Withdrawals to Pay to Attained Loan Amount Loan Loan Interest Loan Interest Loan Amount Balance Balance (EOY) Loan Interest Annual Pay Premium/ Loan Interest Life Insurance Net To Heirs Year Age (BOY) (BOY) Annual Loan Repayments 1.15% Paid (EOY) 6.00% 1.15% Gifts to Trust Premium Loan Interest Paid Death Benefit From ILIT [ ] [ ] *(1.06) *(1.06) ,298, ,934 37,934 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,934 37,934 3,298,638 3,298, , ,715 3,298,638 5,000,000 5,000, ,298, ,298, ,298, ,298, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000, ,000,000 5,000,004 * PY = Prior Year **Estate tax calculations are based on Current Law. This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration. Product and/or product features may not be available in all states. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 8 of 13 April 17, 2012

9 PRIVATE FINANCING Proposed Estate Detail Values Prepared for Diane Munson Presented by Mr. Producer Year Attained Age Estate Estate (BOY)* (BOY)* (1) (2) (2) (3) (4) (4) (5) (5) (6) (7) (8) (9) (9) (10) (11) (12) Annual Gifts to Annual Loan to Trust Gift Gift Taxes Taxes Loan Loan Interest Interest and and Repayments Repayments Cumulative Estate Total Estate Credit Shelter Net To Heirs Total Net to 4.00% Loan (EOY) Taxes** Trust from ILIT Heirs [ ]*(0.04) ,000,000 3,298, , ,572 3,298,638 20,707,506 5,497, ,000,000 20,209, ,408, , ,872 3,298,638 21,443,313 5,713, ,000,000 20,730, ,144, , ,304 3,298,638 22,208,551 11,868, ,000,000 15,339, ,909, , ,914 3,298,638 23,004,400 12,306, ,000,000 15,697, ,705, , ,748 3,298,638 23,832,082 12,761, ,000,000 16,070, ,533, , ,855 3,298,638 24,692,871 13,235, ,000,000 16,457, ,394, , ,287 3,298,638 25,588,092 13,727, ,000,000 16,860, ,289, , ,096 3,298,638 26,519,122 14,239, ,000,000 17,279, ,220, , ,337 3,298,638 27,487,393 14,772, ,000,000 17,715, ,188, ,298,638 1,099, ,586,889 15,376, ,000,000 18,209, ,442, ,337, ,780,321 18,783, ,000,000 20,996, ,688, ,627, ,315,579 22,927, ,000,000 24,387, ,503, ,980, ,483,372 27,970, ,000,001 28,513, ,542, ,141, ,684,415 30,280, ,000,001 30,403, ,228, ,409, ,637,394 34,104, ,000,001 33,532, ,276, ,931, ,207,967 41,568, ,000,001 39,639, ,152, ,566, ,718,644 50,649, ,000,002 47,069, ,467, ,338, ,806,408 61,697, ,000,002 56,108, ,967, ,278, ,246,243 75,139, ,000,003 67,106, ,558, ,422, ,981,040 91,493, ,000,004 80,487,272 * Beginning of year estate values are net of the cumulative loan. **Estate tax calculations are based on Current Law. This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration. Product and/or product features may not be available in all states. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 9 of 13 April 17, 2012

10 Private Financing Prepared for Diane Munson Presented by Mr. Producer Assumptions CLIENT INFORMATION Value Explanation LOAN ASSUMPTIONS (CONT.) Family Name Munson Name of family Total Rate of Return 6.00% Total rate of return for the accumulation fund Client Name Diane Given name of the first client Interest Rate Option Specific Vary Incrementally specified, scheduled or incremen Age 65 Age of the first client Loan Interest Rate 1.15% Sex Female Sex of the first client Smoking Status Preferred NonSmoker Underwriting class of the first client (required) Spouse's Name n/a Given name of the second client Age n/a Age of the second client Sex n/a Sex of the second client Smoking Status n/a Underwriting class of the second client Tax Bracket 40.00% LIFE INSURANCE Value Explanation CPI Rate 0.00% Consumer Price Index Rate Type of Policy Single Life Survivorship or Single Life ESTATE AND GIFT INFORMATION Policy Name Protection UL 12 Heirs' Names The Heirs Names of the heirs State Massachusetts Total Estate Value $20,000,000 Total estate value Initial Policy Death Benefit $5,000,000 Total death benefit After Tax Growth Rate of Estate Assets 4.00% After tax (income) growth rate for estate Policy Premium $148, Annual Premium transferred to the ILIT Years for Premiums 9 Number of years to pay premiums CPI Rate 0.00% Consumer Price Index Rate Current Crediting Rate 5.20% Policy's crediting rate Number of Annual Exclusions Gifts 2 Number of annual exclusions per client Post-76 Taxable Gifts $0 Amount of taxable gifts made after Gifts are assumed to be split equally between spouses. Gift Taxes Paid in Past Three Years Gift Taxes Paid in 2011 $0 Gift Taxes Paid in 2011 Gift Taxes Paid in 2010 $0 Gift Taxes Paid in 2010 PRESENTER INFORMATION Gift Taxes Paid in 2009 $0 Gift Taxes Paid in 2009 Presenter's Name Mr. Producer Name of presenter Use Unified Credit at First Death? Yes Use Unified Credit at first death? Agency Name John Hancock Estate Tax Option Current Law with Clawback Estate tax rates based on the selected option Address Street Gifting Option None Gifting option chosen City, State ZIP Boston, MA 0217 LOAN ASSUMPTIONS Telephone (617) Loan Amount Option Scheduled The loan amount option Fax (617) Loan Amount (1st Year) $3,298,638 The amount of the loan in the first year Address mrproducer@jhancock.com Years to Borrow Premium 1 The number of years to borrow premium RESULTS Interest Rate Option Advance The method by which interest will be paid Focus Year 1 27 Focus year Years to Defer Interest The number of years to defer interest Print Years 56 Pay off Loan Option Accumulated Fund Indicates the method used to pay back the loan YeartoPayoffLoan 10 The year to pay back the loan at year at death 1. The focus year refers to the year that has been chosen by you. The values in the focus year are highlighted, can be changed and are for your convenience only. The year may be life expectancy, a random year, or a year that coincides with your personal planning goals. This is a SUPPLEMENTAL illustration only and is not intended to predict or project actual performance. This illustration is not valid unless accompanied by the BASIC PERSONALIZED HYPOTHETICAL individual illustration. Product and/or product features may not be available in all states. Current interest rates and/or dividend rates and values (unless indicated otherwise) are not guaranteed. This illustration is not intended to be accounting, legal, or tax advice. Clients should consult their accounting, legal, and tax advisors about their particular circumstances before implementing any recommendations. Page 10 of 13 April 17, 2012

11 PRIVATE FINANCING Glossary Prepared for Diane Munson Presented by Mr. Producer The following glossary defines terms that are applicable to the concept of Private Financing, and may be found in the module or come up in your discussion of the topic with your advisor. Annual Gift To Trust This column illustrates the total after-tax gifts made by you to the trust, including those made to cover the annual insurance premiums, as well as those that are deposited into the trust s side fund to be invested separately from the insurance. Annual Distributions This column illustrates the total annual distribution made from the trust to the beneficiaries. It does not include any income taxes that may be payable by the beneficiaries. Applicable Exclusion Amount Sometimes referred to as applicable estate tax exemption; the full amount of assets that at death can pass to heirs free of estate taxes. Applicable Federal Rate (AFR) The statutory interest rate that must be charged for most loans and installment agreements in order for them to qualify as a fair-market loan. BOY Values at the beginning of the year. Credit Shelter Trust If you are married, at the death of the first spouse, a credit shelter trust can be funded with the applicable estate tax exemption that you may have available. This column illustrates the use of a Credit Shelter Trust to calculate estate taxes in an assumed year of the first death. Gift Taxes Paid If the annual gifts you make to the trust result in gift taxes due, this column reflects the gift taxes and pays them from the estate assets. If the annual gifts you make to a life insurance trust are less than the life insurance premium, this column also reflects the difference coming from estate assets. Grantor Retained Annuity Trust (GRAT) A GRAT is an irrevocable trust into which the grantor places assets and receives in turn a fixed amount of income for either a given number of years or until the grantor s death. When the term of the trust expires, assets in the trust (including any appreciation) are distributed to the named remainder beneficiary(s). GRATs frequently are used to potentially reduce gift tax costs when transferring assets. Net GRAT Payment The Net GRAT Payment is equal to the payment from the GRAT less any income taxes payable by the donor. Other Trust Assets This column illustrates the current value of assets, in any given year, in an irrevocable trust or irrevocable life insurance trust, separate from any existing or new life insurance proceeds. These assets grow at an assumed growth rate and include all gifts, net of any premiums due, made in prior years. Withdrawals to Pay Premiums/Loan Interest This column represents withdrawals from the cash assets of the ILIT to pay premiums, loan interest, or both. EOY Values at the end of the year. Gift Tax Exemption Amount The amount of money that can be passed to heirs during lifetime free of gift taxes. Page 11 of 13 April 17, 2012

12 PRIVATE FINANCING Prepared for Diane Munson Presented by Mr. Producer The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 In December of 2010, Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, (the 2010 Act ) providing for a reduction in transfer tax rates for 2011 and 2012, with a return to 2001 transfer tax rates in the year In addition to reducing the tax rates, the 2010 Act increased the available exemptions against the estate and gift taxes and it made changes to the calculation of estate taxes. Due to the temporary nature of the new provisions and the uncertainty they create, the JH Solutions Software system allows the user to choose a variety of potential tax scenarios to illustrate. Each of the scenarios is based on certain assumptions, none of which are guaranteed to happen. Therefore, clients always should consult with their own professional tax and legal advisors to determine the scenario that most adequately addresses their concerns. Current Law Scenario Under the Current Law scenario, the calculations assume a unified Gift and Estate Tax Exemption of $5,000,000 and a maximum transfer tax rate of 35% for the years 2011 and For 2012 calculations, this exemption amount will be indexed by the inflation rate entered by the user. In 2013, this scenario will assume a unified Gift and Estate Tax Exemption of $1,000,000 and a maximum transfer tax rate of 55%. As indicated under current law, the Gift and Estate Tax Exemption will not be indexed for years 2013 and beyond. There is an additional illustration option available under the current law scenario: With Clawback. If taxable gifts have been made during the life of the client, then a gift tax credit is computed at the time of death. Under the estate tax law created by the 2010 Act and the current filing practices as established by the IRS, for the years , this credit is calculated using both the transfer tax rates and the gift tax exemption amount in effect in the year of death. However, for the years 2013 and beyond this credit is calculated using the tax rates in effect at the year of death along with the gift tax exemption in effect in the year the gift was made. This discrepancy may result in additional transfer taxes being due at the death of the client on a gift that the client may have assumed was transfer-tax free. This method is the most accurate reflection of the current law. In addition, use of the transfer tax rates in effect as of the date of death with the gift tax exemption amount in effect as of the date of the gift is consistent with IRS practices prior to the 2010 Act. Without Clawback. Under this method, the gift tax credit at death for all years is calculated using the transfer tax rates in effect in the year of death and the gift tax credit in effect in the year of death. This option is made available because while the IRS forms indicate the need to use the gift tax exemption in the year the gift was made, the law prior to the 2010 Act is silent on the subject. Additionally, legislators are aware of this issue and are discussing potential changes. Therefore, some planners may prefer this approach. Please consult your tax advisor for details. Current/2009 Scenario This scenario assumes that current law is in effect for and that in 2013, a new tax law is developed which will reset the exemptions and transfer tax rates to the 2009 levels. It assumes a unified Gift and Estate Tax Exemption of $5,000,000 and a maximum transfer tax rate of 35% for the years 2011 and This amount will be indexed for the inflation rate entered by the user in In 2013, this scenario will assume a unified Gift and Estate Tax Exemption of $3,500,000 and a maximum transfer tax rate of 45%. The Gift and Estate Tax Exemption will not be indexed in years 2013 and forward. This option may be illustrated with or without the Clawback. Current Extended Scenario This scenario assumes that current law in effect for is extended for years 2013 and beyond. It assumes a unified Gift and Estate Tax Exemption of $5,000,000 and a maximum transfer tax rate of 35% for all years. The exemption amount will be indexed for the inflation rate entered by the user in all years. This method assumes that at death, any credit for prior taxable gifts will be calculated using the tax rates and gift tax exemption in effect in the year of death. Page 12 of 13 April 17, 2012

13 PRIVATE FINANCING Disclosure Prepared for Diane Munson Presented by Mr. Producer Private Financing is is a planning concept designed to assist you in exploring financing life insurance premiums through an intra-family loan arrangement. However, this presentation is isnot intended to be a retirement, benefit, or estate plan nor is is it it a specific recommendation for a retirement, benefit, or estate plan. This material is isfor informational purposes only. As you explore your planning needs with your legal and tax advisors, we hope that you find this analysis useful. John Hancock does New not Yorkguarantee does not the guarantee accuracy theof accuracy the Private of thefinancing Private Financing system orsystem the output. or the John output. Hancock John Hancock will not benew liable York for any willdamages not be liable arising for from anythe damages use or arising misuse of from thisthe software use or or misuse from of any this errors software or omissions or from any in the errors same. or omissions John Hancock in the same. assumes John nohancock duty to update assumes this no software duty to update or to provide this software notice of or any toerrors provide in the notice software any or errors applicable in the changes software in the orlaw. applicable changes in the law. Figures used in this program illustrate the Private Financing concept, which is based on both assumptions Figures usedand in this dataprogram providedillustrate by you, the Private client. Your Financing furnishing concept, of which accurate is data basedwill onhelp both enhance assumptions the value and of data this provided analysis. byhowever, you, the all client. assumed Your growth furnishing rates for of accurate assets anddata loanwill interest help rates enhance are based the value upon ofinformation this analysis. provided However, andall assumed bygrowth you and rates arefor notassets a guarantee and loan ofinterest future performance rates are based of the upon life information insurance policy provided or of andthe assumed loan arrangement. by you and are Thenot usea of guarantee an existing of future trust performance partnershipof asthe lender life insurance a privately policy financed or of the planloan mayarrangement. not be possible Theand useisof dependent an existing ontrust the particular or partnership trust s aslanguage lender in or a privately the partnership financedagreement, plan may not respectively. be possibleindividuals and is dependent interested on the in exploring particularthe trust s possibility language of or using the an partnership existing trust, agreement, partnership respectively. or otherindividuals entity as lender interested should in consult exploring their theown possibility legal, of accounting, using an existing tax and trust, financial partnership planningoradvisors. other entity Please lender reviewshould the assumptions consult theirpage ownfor legal, accuracy accounting, of information. tax and financial planning advisors. Please review the assumptions page for accuracy of information. This supplemental illustration assumes that the currently illustrated non-guaranteed elements will continue This supplemental for all years illustration shown. assumes However, that it the is not currently likely illustrated that the non-guaranteed elements will perform continueexactly for allasyears shown shown. in thehowever, illustration. it is In not addition, likelythe that actual the non-guaranteed consequences ofelements a particular will planning perform exactly alternative as shown will depend in the illustration. many variables, In addition, somethe of which actual consequences may not be fully of aaccounted particular for planning or described alternative in this willpresentation. depend many Therevariables, is a risksome that the of which promissory may note bemay fullyexceed accounted the proceeds for or described of the life in this insurance presentation. policy. There Loan interest is a riskrates thatmay the promissory fluctuate year note tomay year. exceed The life the insurance proceeds contract of the life is insurance completelypolicy. separateloan frominterest the loan rates arrangement may fluctuate and John year Hancock to year. is The not life a party insurance to thecontract loan arrangement. is completely Unless separate otherwise from the indicated, loan arrangement the incomeand tax implications John Hancock of is private not a financing party to the are loan not reflected arrangement. in this Unless analysis. otherwise indicated, the income tax implications of private financing are not reflected in this analysis. This material does is is authorized not constitute for for distribution tax, legal or only accounting only when when accompanied advice preceded andby or neither accompanied basic Johnillustration Hancock by a nor current and any the of prospectus client its agents, guide for for employees the illustrated relevant or registered product. representatives issued by John are Hancock in the business Life NewInsurance York, of offering andcompany for such John advice. (U.S.A.), Hancock It was Trust. and not for The intended John prospectus Hancock or written contains Trust. for usecomplete The and cannot prospectus details be used on contains by investment any taxpayer complete objectives, fordetails the purpose risk, onfees, investment of avoiding charges any and objectives, ThisIRS expenses material penalty. risk, does asitwell fees, was notas constitute written charges othertoinformation tax, support andlegal expenses orabout marketing accounting asthewell of investment advice the astransactions other andcompany neither information John topics which Hancock itabout should addresses. New the be Anyone carefully investment York nor interested any considered. company of its inagents, these which Please transactions employees should read or the beregistered topics carefully prospectus should representatives considered. seek carefully advice are Please based containing the read his business this or theher prospectus and of particular offering other circumstances information carefully such advice. containing It from was product independent not thisintended and other professional or underlying written information advisors. portfolios use onand the cannot product and consider beand used the these byunderlying anyfactors taxpayer portfolios carefully for the before and purpose consider investing. of avoiding thesethis any factors IRS material carefully penalty. isitbefore not wasintended written investing. toas support Product investment the marketing and/or advice. product of the Product transactions features and/or may product not topics beit available addresses. featuresinmay Anyone all states. not be interested available In addition in these intoall thetransactions states. prospectus, In addition or this topics material should the prospectus, must seek be advice accompanied thisbased material on by must the his or basic be her accompanied illustration particular circumstances and by the client basic illustration guide from independent for the and relevant the professional client product. guide for advisors. the relevant product. Variable universal life insurance has annual fees and expenses associated with it in addition to life insurance related charges (which differ with the product chosen), including surrender charges and investment management fees. Variable universal life insurance products are long-term contracts and are sold by prospectus. They are subject to market risk due to the underlying sub-accounts, and are unsuitable as a short term savings vehicle. The primary purpose of variable universal life insurance is to provide lifetime protection against economic loss due to the death of the insured person. Cash values are not guaranteed if the client is invested in the investment accounts. There are risks associated with each investment option, and the policy may lose value. This material does is for not informational constitute tax, purposes legal or only. accounting Although advicemany and neither of John topicshancock presented normay any involve of its agents, legal, employees tax, accounting, or registered or other representatives issues, neither arejohn in the Hancock businessnew of offering York, John such advice. Hancock It Distributors was not intended LLCornor written any for of use their and agents, cannotemployees, be used byregistered any taxpayer representatives for the purpose orofregistered avoiding representatives any IRS penalty. affiliated It was written throughtoa support selling agreement the marketing are inofthe business transactions of offering or topics such it addresses. advice on these Anyone issues. interested You should in theseconsult transactions with your or topics professional should seek advisors advice onbased the legal, on his tax, oraccounting, her particular or financial circumstances planning from aspects independent of the topics professional presented. advisors. Footnotes 1. Life insurance death benefit proceeds are generally excludable from the beneficiary s gross income for income tax purposes. There are few exceptions such as when a life insurance policy has been transferred for valuable consideration. Internal Compliance Number: MLI Page 13 of 13 April 17, 2012

14 John Hancock Life Insurance Company (U.S.A.) A LIFE INSURANCE POLICY ILLUSTRATION A Flexible Premium Universal Life Insurance Policy Valuable Information About Your Life Insurance Illustration Illustration Assumptions Diane Munson Female - Preferred NonSmoker Age: 65 Universal Life Insurance The Universal Life Insurance policy which you are considering provides flexible death benefit protection and premium payment flexibility. The values in the insurance contract grow based on the amount and timing of each premium payment, plus interest and other credits applied to the policy, less insurance and other charges. Protection UL Form: 12PROUL Presented By: Mr. Producer Initial Death Benefit $5,000,000 Face Amount $5,000,000 Initial Planned Premium: $148, / Billing Mode: Annual Death Benefit Option 1; Cash Value Accumulation Test State: Massachusetts Based on Current Charges and an Initial Current Rate of 5.20% received. Death benefit option changes, loans, withdrawals, rider termination or change, and/or face amount decreases will also affect the Death Benefit Protection feature. If a policy loan is outstanding, the Death Benefit Protection feature will not prevent your policy from lapsing if the Net Policy Value falls to zero. Certain aspects of the policy cannot be predicted with absolute certainty. These nonguaranteed elements are described on the following pages. For example, the interest rate credited may exceed the guaranteed rate and monthly charges may be less than the maximum guaranteed charges. This is an illustration only and is not intended to predict actual performance. Death Benefit Protection This policy illustration shows the Death Benefit Protection feature guaranteeing the policy death benefit to the Life Insured s attained age 86. As long as the Death Benefit Protection feature is in effect, your policy cannot lapse even if the Net Cash Surrender Value falls to zero or below. The Death Benefit Protection feature will stay in effect as long as the reference value called the Net Death Benefit Protection Value is greater than zero. The Death Benefit Protection Value is a reference value and is only used to determine whether or not the Death Benefit Protection feature will stay in effect. The policyowner cannot access the reference value. Like your Policy Value, the Death Benefit Protection Value is directly affected by the timing and amounts of premiums paid. To ensure that you have the Death Benefit Protection feature in effect for the period illustrated, it is important that premium payments are paid when they are due, otherwise your policy may lapse. For purposes of calculating your Death Benefit Protection Value, we will apply premiums retroactively to the beginning of the policy month in which they are If you pay only the illustrated Death Benefit Protection Premium, you may be foregoing the advantage of building significant value in this policy, and your Policy Value may be insufficient to keep this policy in force beyond the Death Benefit Protection period. In this event, premiums significantly higher than the Death Benefit Protection Premium may be required to keep your policy from lapsing. The financial consequences of having little or no Policy Value also include a potentially lower death benefit (under death benefit option 2), less available loan value, and less net surrender value available for partial withdrawals or a surrender of the policy. Net Death Benefit The life insurance provided in this illustration reflects a Total Initial Death Benefit of $5,000,000. The Death Benefit is composed of $5,000,000 in Base Face Amount (Option 1). The Net Death Benefit reflects any Policy Debt (total loans plus any loan interest due). Planned Premium Outlay One of the advantages of Universal Life Insurance is premium payment flexibility, allowing you to vary the amount of your payments. This illustration assumes an Initial Planned Premium Outlay of $148, and that all subsequent premium payments are made at the beginning of each modal period. Reduced or discontinued premiums in future years are only possible if the premiums paid and amounts credited are sufficient to cover the cost of insurance and administrative expenses. These factors, as well as any outstanding policy loans or withdrawals, could necessitate additional premiums to maintain your insurance coverage. Paying less than the planned premium can have a negative impact on the policy and This is your Basic Illustration and is valid only if all illustration pages are included. Version: 8.0S[ ] - SP 2 Page 1 of 10 04/17/ :33:41 AM

15 John Hancock Life Insurance Company (U.S.A.) A LIFE INSURANCE POLICY ILLUSTRATION A Flexible Premium Universal Life Insurance Policy Valuable Information About Your Life Insurance Illustration (cont'd) Illustration Assumptions Diane Munson Female - Preferred NonSmoker Age: 65 its guarantees. Payments in excess of the planned premium are subject to underwriting approval. Guaranteed Coverage Premium Based on the initial death benefit shown in the illustration, the level annual premium to guarantee coverage for life is $174, Death Benefit option changes, loans, withdrawals, policy changes, and face amount changes will cause this premium to be recalculated. Premiums are subject to maximum guidelines allowed by the Internal Revenue Code. Minimum Initial Premium The Minimum Initial Premium shown on the Basic Illustration Summary page is the minimum premium to carry the policy for one policy month in the first policy year. If the policy is backdated the Minimum Initial Premium multiplied by the number of months backdated plus one month is required to put the policy inforce. Initial Death Benefit $5,000,000 Face Amount $5,000,000 Initial Planned Premium: $148, / Billing Mode: Annual Death Benefit Option 1; Cash Value Accumulation Test State: Massachusetts Based on Current Charges and an Initial Current Rate of 5.20% to meet your objectives. Illustrations will be shown at the guaranteed minimum interest rate, and an assumed rate (or rates). An assumed illustrated rate will never be higher than the current rate, or lower than the guaranteed minimum rate. Values illustrated at the current or an assumed rate are not guarantees or estimates, but merely illustrate results on the basis of the selected assumption. Changes in the rate of interest that we declare will affect both the interest and Persistency Credit applied to your Policy Value. The table below shows how these changes could affect the continuation of your coverage, keeping other assumptions constant (including planned premiums, issue age, risk class and current charges): Interest Rate Assumption Protection UL Form: 12PROUL Presented By: Mr. Producer Policy Year at Lapse* Interest Rate Interest is illustrated at an initial assumed effective annual rate of 5.20%. We determine the rate of interest to be credited to the Policy Value based on our assessment of investment yields and other considerations as outlined in your policy. The current rate may increase or decrease, but at no point will the interest credited to the policy be lower than the guaranteed annual rate of 2.50%. Our obligations under your policy are backed by our general account assets. In addition to fixed income investments, such as corporate bonds, we expect to invest a portion of the premiums received under this class of policies in equities and other longer-duration assets. This investment approach, which may be different from the mix expected with other universal life policies, is intended to produce results that would permit us to credit values that maximize your policy s performance over the longer term. However, this approach could also cause the policy to experience a higher degree of variability of results year-to-year relative to other universal life policies. It is important to review your annual statement and request periodic in-force illustrations to make sure your policy continues 5.20% Initial Current Rate N/A 4.70% % % % % % Minimum Rate 22 * In this table, the lapse year is hypothetical only, based upon the assumed factors, and is not guaranteed. For instance, the mortality charges used in these calculations are less than the maximum charges, and the Persistency Credit assumed is greater than the guaranteed minimum. Accessing Policy Value After your policy has been in force for one year, you can make partial cash withdrawals. You can surrender your policy for cash at any time. We will pay you the policy value less a Surrender Charge and any policy debts you may have. You can also borrow the available cash value at any time. Amount Credited This is the interest earned on the Policy Value including the amount of interest credited on the Loan Account, This is your Basic Illustration and is valid only if all illustration pages are included. Version: 8.0S[ ] - SP 2 Page 2 of 10 04/17/ :33:41 AM

16 John Hancock Life Insurance Company (U.S.A.) A LIFE INSURANCE POLICY ILLUSTRATION A Flexible Premium Universal Life Insurance Policy Valuable Information About Your Life Insurance Illustration (cont'd) Illustration Assumptions Diane Munson Female - Preferred NonSmoker Age: 65 plus the Persistency Credit. Policy Loans Policy loans may be taken against the Policy Value at any time, and if projected on an illustration, are assumed to be taken at the beginning of the year. The maximum loan amount available is the Surrender Value less any indebtedness, one year of policy charges, and one year's loan spread. The net cost of a loan equals the loan interest rate charged less the loan interest rate credited to the portion of Policy Value securing the loan. This differential is guaranteed to be no greater than 1.25% in policy years In subsequent years, the differential is currently 0.00%, and guaranteed not to exceed 0.25%. Protection UL Form: 12PROUL Presented By: Mr. Producer Initial Death Benefit $5,000,000 Face Amount $5,000,000 Initial Planned Premium: $148, / Billing Mode: Annual Death Benefit Option 1; Cash Value Accumulation Test State: Massachusetts Based on Current Charges and an Initial Current Rate of 5.20% time. We urge you to consult your tax advisor regarding this issue if there are questions about what happens after age 100. Taxation of Life Insurance The information contained in this illustration is based on certain tax and legal assumptions. We suggest that you seek professional counsel regarding the interpretation of current tax laws and accounting practices as they relate to your actual situation. The Technical and Miscellaneous Revenue Act (TAMRA) of 1988 classifies some policies as Modified Endowment Contracts (MECs). Distributions from these policies (excluding death benefits but including policy loans and withdrawals) are taxed differently and may be subject to an IRS 10% penalty tax. TAMRA testing has been performed on the current scale only. Loan interest is payable in arrears. The loan interest rate used in this policy illustration is shown in the Policy Summary. Loan interest rates are variable and subject to change annually on the policy anniversary. Annual Loan Interest This is the interest charged on the outstanding Policy Debt. In the event that you do not pay the loan interest charged in any Policy Year, it will be borrowed against the policy and added to the Policy Debt in arrears at the Policy Anniversary. Withdrawals Withdrawals reduce the Policy Value and the Death Benefit. Withdrawals, if illustrated, are assumed taken at the beginning of the year. Policy Continuation at Age 121 Provided your coverage is in effect on the policy anniversary nearest the date on which the life insured reaches attained age 121, coverage will continue after age 121 and interest will be credited. No additional charges, other than those for any outstanding policy loans, will be deducted. The tax implications with respect to policies that continue beyond age 100 are not clear at the present The initial annual 7-pay premium for this policy is $356, Based on our interpretation of TAMRA, this policy as illustrated would not be considered a Modified Endowment Contract (MEC). Employer-owned Life Insurance. Where the owner of the policy is the employer of the insured, Section 101(j) of the Internal Revenue Code specifies a number of requirements in order for life insurance death benefits to be excluded from income taxation. Potential insureds must be limited to the employer s directors and "highly compensated" employees (as defined by the law). Also, before the issuance of the policy, the potential insured must (1) be notified in writing that the employer/policyowner intends to insure the employee's life and the maximum face amount for which the employee could be insured; (2) give his or her written consent to being a life insured under the policy, and agree that such coverage may continue after the life insured terminates employment; and (3) be informed in writing that the employer/policyowner will be a beneficiary of any proceeds payable upon the death of the employee. Finally, the policyowner is required to keep records and make an annual report concerning its employer-owned life insurance policies. Taxpayers should seek the counsel of qualified tax advisors to determine the applicability of IRC 101(j) or other This is your Basic Illustration and is valid only if all illustration pages are included. Version: 8.0S[ ] - SP 2 Page 3 of 10 04/17/ :33:41 AM