Copyright Founder: The Wealth Preservation. Institute. Society. And: Allen Grosnick, CLU, ChFC

Transcription

1 IRA/Pension Rescue Copyright 2009 By: Roccy DeFrancesco, JD, CWPP P, CAPP, MMB Founder: The Wealth Preservation Institute Co-Founder: The Asset Protection And: Allen Grosnick, CLU, ChFC Society 1

2 IRA/Pension Rescue is a very important topic for millio ons of Americans Helping clients who have the 70-80% tax dilemma is: Helpful to the client Helpful to the heirs Helpful to the advisor (big commissions and client referrals) 2

3 Qualified deferred Money: Good or Bad? For years those that make significant money have been told to defer as much as possible as a way to save taxes (PSPs, DB and 412(i) ()pa plans). Unfortunately, for clients that are and older with estates of $4,000,000, or more, having money in a qualified plan can be a tax trap. IRD = income in respect to decedent, is the worst money a client can have when theree is an estate tax problem. IRD will be taxed with both income and estate taxes at a client s death (55% E.T. in 2011). Main types of IRD assets = IRAs and Pension Plan Money 3

4 Example Dr. Smith has a $5,000,000 estate, a $1,000,000 IRA and lives in a state with a 5% income tax. Assume Dr. Smith dies after his spouse and with an estate tax problem. What taxes will be due on the IRA? IRA Estate Tax: Income Taxes (State and Fe Total Taxes $1,000,000 ($550,000) ) ($, ) ($800,000) ederal)* ($250,000) TOTAL IRA ASSET AFTER TAX $200,000 *The exact calculation of the income tax due in the above example is quite complicated and the $250, number used is an approximation. Also, do not forget that the estate tax in 2011 will revert back to 55%. 4

5 $500,000 Example Now assume you have a client who has $500,000 left in the IRA when the 2 nd spouse dies in a state with a 5% income tax. THIS SLIDE WILL MAKE CLIENTS ILL. The client will be forced to take RMD of $32, at age 70½ if we assume his wife is the beneficiary and is the same age as the primary IRA owner. Start of Year 6.00% Age Balance Growth 60 $500,000 $30, $669,113 $40, $895,424 $53, $1,198,279 $71, $1,603,568 $96, $2,145,935 $128, $2,871,746 $172, $3,843,043 $230, $5,142,859 $308,572 Year End To Heirs After 80% Balance Income & Estate Tax $530,000 $106,000 $709,260 $141,851 $949,149 $189,829 $1,270,176 $254,035 $1,699,782 $339, $2,274,691 $454,938 $3,044,050 $608,810 $4,073,626 $814,725 $5,451,431 $1,090,286 5

6 What Advice is Typically Given to Avoid the Income & double-tax dilemma? Stretch IRA (good, if no estate tax issues) The sales pitch is great. Client, would you like to turn your $1,000,000 IRA into $16,000,000 when your 30 year old child turns 65 years old? Many clients like this sales pi itch. The problem is it ignores estate taxes. A stretch can delay the incom me taxes due on an IRA s distribution by using a client s child as the measuring life. The problem is that a stretch will not delay estate taxes. If a client with an estate tax problem died with a $1 million in an IRA and passed that to the child via a stretch, where is the child going to find $550,0 000 to pay the estate t taxes on 6 the IRA?

7 Stretch IRA continued Where will the child get $550,000 to pay the estate taxes on the $1,000,000 IRA? The child will take $500,000 out of the IRA to pay the estate taxes due. What happens when you take money out of an IRA? Income taxes are due. Where does the client get th he money to pay the income taxes on the money taken out of the IRA? The child takes more money out of the IRA to pay those taxes. This creates a vicious cycle and is why stretch IRAs do not work for clients with an estate tax problem. (Unless they buy life insurance to cover the estate taxes due). 7

8 Liquidate and Leverage L&L is a fancy term for takin g money out of a qualified plan or IRA (at which time taxes are due) and buy life insurance to cover the inevit table income and estate taxes that will be due on the qualified asset. This strategy has a few prob blems. The client then has to gift large premium payments to an ILIT which may make the client use up some of his/her estate tax credit or the client will have a gift tax due. This strategy also creates a situation where the three year look back for gifts comes into play. L&L is not perfect but it s not bad and it s much better than doing nothing. 9

9 Example Dr. Smith is age 60. He has a $5,000,000 estate ($1,000,000 home, $1,000,000 in rental propert ies, a $2,500, brokerage account, and $500,000 in his IRA) Assume he is married, has two adult children, and four grandchildren. Dr. Smith earns enough inco ome from his assets that he does not need the IRA money to live on in retirement. Finally, assume Dr. Smith is in the combined 40% income tax bracket (state and federal). Dr. Smith has the double-tax dilemma. 10

10 Continued Assume for the following charts that the money in the IRA continues to grow at 6% annually. What if Dr. Smith were to take systematic withdrawals of $31,500 from his IRA every year and gift that money to an Irrevocable Life Insur rance Trust, which h would use the money to purchase a large death benefit on his life through a life insurance polic cy? You ll notice that the death benefit from the policy purchased in the ILIT starts at $559,000 and increases to $2,081,000 at age

11 The numbers IRA Start of Year Year End To Heirs Age Balance Balance After 60 $500,000 $490,780 $98,156.0 $559,000 $657, $448,026 $435,688 $87 7,137.5 $645,000 $732, $378,473 $361,961 $72,392.3 $762,000 $834, $285,396 $263, $52 2, $952,000 $1,004, $160,837 $131,267 $26,253.4 $1,200,000 $1,226, $0 $0 90 $0 $0 95 $0 $0 100 $0 $0 Death Benefit IRA After Tax 80% Tax L&L Plus DB $0.1 $1,484,000 $1,484,000 $0.0 $1,705,000 $1,705,000 $0.0 0 $1,904, $1,904, $0.0 $2,081,000 $2,081,000

12 Let s compare Now let s compare the do-nothing scenario from the earlier pages to the Liquidate and Leverage scenario on the $500,000 IRA. To Heirs After 80% IRA After Tax Improvement with Age Income & Estate Tax Plus DB Liquidate & Leverage 60 $106,000 $657,156 $551, $141,852 $732,138 $590, $189, $834, $644, $254,035 $1,004,660 $750, $339, $1,226, $886, $454,938 $1,484,000 $1,029, $608,810 $1,705,000 $1,096, $814,725 $1,904,000 $1,089, $1,090,286 $2,081,000 $990,714 13

13 Traditional/ old school Pension Rescue This was the neatest plan you ever saw. Let s look at an example : Client has $1,000,000 in a qualified plan and an estate tax problem. Assu ume the client does not need the deferred money to live on in retirement. As is 80%+ of fthat tmoney will go to the government via income and estate taxes. 14

14 The abuses Springing cash value polic cies killed pension rescue because clients were having the policies distributed to themselves personally (at an 80% income tax discount), allowing the surrender charges to evaporate, and then borrowing from the policy. Unfortunately, due to abuses, the IRS acted to kill old school pension rescue with Rev. Proc ; and Rev. Ruling ; and The IRS set a new value of a life policy being rolled out of a pension plan at the premiums paid minus actual costs (not including commissions), plus investment returns. 17

15 RPM: Retirement Plan Maximizer Prevent the 70% Tax Trap: Strategies & Software to Make the Most of Your Retirement Allen H. Grosnick, CLU, ChFC Technical Advisor to Accountants, Attorneys & Financial Professionals Grosnick Financial 2

16 Pension Rescue is back! Find a motivated client who: Dislikes paying income taxes Has a total estate of at least $2,000,000 and at least $500,000 in an IRA, 401(k) plan, or other qualified plan that he/she controls Isn t looking for future income from these plans (but this is not a critical factor) 8

17 The IRS offers more guidance In 2005, the IRS came out with Rev. Proc They offered a new safe harbor that included a new Average Surrender Factor (ASF) for the valuation of policies that were to be either distributed or purchased by the plan participant from the plan. You could either pay taxes at the safe harbor or use another reasonable method to come up with the FMV (like asking the IRS to fill out your taxes for you, or like taking the standard deduction). This is equivalent to using the Cash Account Value less a percentage discount from that value to equal an adjusted PERC value roughly 70% to 100% of the account value (depends on the policy year). Example: $1,000,000 over five years let s say the CAV is $800,000. we then apply this ASF and in year five it will typically be 20%; therefore, our safe harbor number is $640,

18 Other Value (FMV) The IRS Rev. Proc. does not preclude plan participants from using another reasonable method to determine FMV. In other words, get a FMV appraisal from a nationally accredited appraisal firm. This method can give a net value of approximately 70 to 80% of premiums actually paid to insurance company (less policy loans). 10

19 Strategy Retirement t Plan Maximizer Grosnick Financial RPM: Retirement Plan Maximizer 11

20 Retirement Account Background Contributions to qualified plans are tax deductible Earnings grow tax deferred Money withdrawn is income taxable At death, account value is estate taxable Income in Respect of a Decedent (IRD) Taxes can reach 70% Exit strategy required RPM Grosnick Financial RPM: Retirement Plan Maximizer 13

21 People Care about Three Things Dependable cash flow during life Asset protection & preservation What family members & charities get Grosnick Financial RPM: Retirement Plan Maximizer 14

22 The Tax Trap Up to 70% Net Estate Net Estate Grosnick Financial RPM: Retirement Plan Maximizer 15

23 Pension RPM *Policy often sold at a discount IRA 401(k) Qualified Plan Grantor Trust (IDGT) Changes Sale* Profit Sharing Plan Where Life Insurance Policy is Purchased Grosnick Financial RPM: Retirement Plan Maximizer 16

24 Plan participant gifts or loans funds* to trust so it can buy policy Pension RPM Profit Sharing Plan Trust Owns New Policy *Personal assets Policy is purchased for its Fair Market Value (FMV) Grosnick Financial RPM: Retirement Plan Maximizer 17

25 Pension RPM Cash flow from Grantor Trust* Distribution Grantor Trust Loan Note Beneficiaries Grantor or Spouse *Income Tax free (Loan decreases Grantor s estate because of the note payable) Grosnick Financial RPM: Retirement Plan Maximizer 18

26 RPM Saves Taxes Takes advantage of tax arbitrage Uses specially designed insurance policy Creates an immediate income tax free death benefit Eliminates future income taxes Keeps assets out of estate Saves money Grosnick Financial RPM: Retirement Plan Maximizer 19

27 Example of Client Benefits

28 Plan Summary for MRS. NIELSEN Plan Information Insurance Policy Information Profit Sharing Plan Plan Starting Date 6/15/2009 Number of Policies Purchased 1 Beginning Balance $5,000,000 Client Name MRS. NIELSEN Policy 1 Purpose Pension Rescue Age 70 Policy 1 Plan Year of Purchase Policy 1 Face Amount 1 $7,000,000 Spouse Policy 2 Purpose Name Age Policy 2 Plan Year of Purchase Policy 2 Face Amount Policies Purchased Policy 1 Insured MRS. NIELSEN Policy 1 Age 70 Policy 1 Relationship Client Policy 2 Insured Policy 2 Age Policy 2 Relationship Proposed Plan Present Plan Advantage Profit Sharing Proposed Plan Elapsed Cumulative Plan Cash Life Insurance Gifts to Total Cumulative Cash Profit Sharing Plan Gifts to Total less Time Cash Flow After Taxes Benefits Charities Benefits Flow Cash After Taxes Charities Benefits Present Plan 1 Year 118, ,906,669 4,640,121 9,665, ,613 1,850, ,968,808 7,696, Years 3,833, ,500,000 5,514,071 14,847,365 4,622,930 1,858, ,481,111 8,366,254 Note: These values are net of Estate and Income Taxes. Income Tax Bracket Estate & Gift Taxes Tax Assumptions Average 35% 45%

29 Total Net Benefits without Other Assets 18,000,000 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000, Year 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years Proposed Plan Present Plan

30 Total Net Benefits without Other Assets 18,000,000 16,000,000 14,000,000 4,783,798 3,476,306 12,000,000 5,514,071 5,641,350 10,000,000 5,321,159 8,000,000 4,640,121 4,746,283 6,000,000 11,016,194 12,851,491 4,000,000 6,912,593 7,959,550 9,333,294 2,000,000 5,025,282 4,889, Year 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years To Heirs To Charity

31 Total Net Benefits without Other Assets 16,000,000 14,000,000 12,000,000 5,514,071 10,000,000 8,000,000 6,000, ,000,000 6,481,111 9,333,294 2,000,000 0 Present Plan After 20 Years Proposed Plan After 20 Years To Heirs To Charity

32 Total Benefits without Other Assets (After Taxes) - Comparison PROPOSED PLAN PRESENT PLAN Plan Year Calendar Year Age of Client (EOY) Total Death Benefits Accumulated Cash Flow Total Gifts to Charities and Foundations Total Benefits Total Death Benefits Accumulated Cash Flow Total Gifts to Charities and Foundations Total Benefits ,906, ,613 4,640,121 9,665,403 1,850, , ,968, ,977, ,447 4,248,376 11,467,712 3,477, , ,723, ,238, ,668 3,820,726 8,428,656 1,615, , ,997, ,140, ,448 3,354,374 7,998,762 1,665, , ,192, ,246, ,988 4,746,283 9,635,486 1,705, , ,388, ,500, ,708 4,873,635 11,151,343 1,743, , ,591, ,500, ,702 4,995,697 11,417,399 1,778,516 1,026, ,805, ,500,000 1,074,872 5,112,248 11,687,120 1,811,678 1,215, ,027, ,500,000 1,238,565 5,220,826 11,959,391 1,841,834 1,417, ,259, ,500,000 1,412,593 5,321,159 12,233,752 1,868,889 1,632, ,501, ,500,000 1,597,553 5,411,747 12,509,300 1,892,325 1,861, ,753, ,500,000 1,794,069 5,490,943 12,785,012 1,911,574 2,104, ,015, ,500,000 2,002,789 5,556,946 13,059,735 1,926,150 2,361, ,288, ,500,000 2,224,385 5,607,794 13,332,179 1,935,600 2,635, ,571, ,500,000 2,459,550 5,641,350 13,600,900 1,939,228 2,926, ,865, ,500,000 2,707,312 5,657,893 13,865,205 1,937,113 3,232, ,169, ,500,000 2,968,137 5,655,505 14,123,642 1,928,627 3,554, ,482, ,500,000 3,242,471 5,632,165 14,374,636 1,913,109 3,893, ,806, ,500,000 3,530,732 5,585,755 14,616,487 1,889,867 4,249, ,139, ,500,000 3,833,294 5,514,071 14,847,365 1,858,181 4,622, ,481, ,500,000 4,147,693 5,419,123 15,066,816 1,818,682 5,011, ,829, ,500,000 4,473,844 5,299,400 15,273,244 1,770,873 5,414, ,185, ,500,000 4,811,551 5,153,459 15,465,010 1,714,274 5,831, ,545, ,500,000 5,160,483 4,979,959 15,640,442 1,648,440 6,262, ,910, ,500,000 5,516,194 4,783,798 15,799,992 1,574,929 6,701, ,276, ,500,000 5,877,760 4,564,800 15,942,560 1,493,669 7,148, ,641, ,500,000 6,244,071 4,323,062 16,067,133 1,404,673 7,600, ,005, ,500,000 6,613,807 4,059,014 16,172,821 1,308,063 8,057, ,365, ,500,000 6,985,407 3,773,482 16,258,889 1,211,850 8,516, ,728, ,500,000 7,351,491 3,476,306 16,327,797 1,116,413 8,968, ,084,980

33 Death Benefits Without Other Assets (After Taxes) - Comparison PROPOSED PLAN PRESENT PLAN Plan Year Calendar Year Age of Client (EOY) Life Insurance Benefits In the Estate Life Insurance and Cash Benefits In the Trust Value of the Profit Sharing Plan Total Death Benefits Value of the Profit Sharing Plan Total Death Benefits ,854,669 52, ,906,669 1,850,195 1,850, ,871, , ,977,889 3,477,689 3,477, ,074, , ,238,262 1,615,724 1,615, ,916, , ,140,940 1,665,517 1,665, ,958, , ,246,215 1,705,816 1,705, ,500, ,500,000 1,743,202 1,743, ,500, ,500,000 1,778,516 1,778, ,500, ,500,000 1,811,678 1,811, ,500, ,500,000 1,841,834 1,841, ,500, ,500,000 1,868,889 1,868, ,500, ,500,000 1,892,325 1,892, ,500, ,500,000 1,911,574 1,911, ,500, ,500,000 1,926,150 1,926, ,500, ,500,000 1,935,600 1,935, ,500, ,500,000 1,939,228 1,939, ,500, ,500,000 1,937,113 1,937, ,500, ,500,000 1,928,627 1,928, ,500, ,500,000 1,913,109 1,913, ,500, ,500,000 1,889,867 1,889, ,500, ,500,000 1,858,181 1,858, ,500, ,500,000 1,818,682 1,818, ,500, ,500,000 1,770,873 1,770, ,500, ,500,000 1,714,274 1,714, ,500, ,500,000 1,648,440 1,648, ,500, ,500,000 1,574,929 1,574, ,500, ,500,000 1,493,669 1,493, ,500, ,500,000 1,404,673 1,404, ,500, ,500,000 1,308,063 1,308, ,500, ,500,000 1,211,850 1,211, ,500, ,500,000 1,116,413 1,116,413

34 Cash Flow (After Taxes) - Comparison PROPOSED PLAN PRESENT PLAN Plan Year Calendar Year Payments from Trust Withdrawals from Profit Sharing Plan Total Cash Flow Accumulated Cash Flow Withdrawals from Profit Sharing Plan Total Cash Flow Accumulated Cash Flow , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,860 1,026, , ,170 1,074, , ,194 1,215, , ,693 1,238, , ,191 1,417, , ,028 1,412, , ,957 1,632, , ,960 1,597, , ,461 1,861, , ,516 1,794, , ,734 2,104, , ,720 2,002, , ,808 2,361, , ,596 2,224, , ,713 2,635, , ,165 2,459, , ,474 2,926, , ,762 2,707, , ,032 3,232, , ,825 2,968, , ,168 3,554, , ,334 3,242, , ,854 3,893, , ,261 3,530, , ,056 4,249, , ,562 3,833, , ,721 4,622, , ,399 4,147, , ,342 5,011, , ,151 4,473, , ,858 5,414, , ,707 4,811, , ,132 5,831, , ,932 5,160, , ,997 6,262, , ,711 5,516, , ,371 6,701, , ,566 5,877, , ,602 7,148, , ,311 6,244, , ,463 7,600, , ,736 6,613, , ,693 8,057, , ,600 6,985, , ,996 8,516, , ,084 7,351, , ,183 8,968,567

35 Cumulative Cash Flow without Other Assets 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Year 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years Proposed Plan Present Plan

36 Profit Sharing - Present Plan Plan Year Calendar Year Age of Client (EOY) Beginning Balance (Taxable) (BOY) Contributions (BOY) Withdrawal (Taxable) (BOY) Tax-Deferred Interest (EOY) Gifts to Charity or Foundation [While Living] (EOY) Additional Withdrawal Needed to Meet RMD (EOY) Balance (EOY) ,000,000 5, , ,482 5,175, ,175,371 5, , ,297 5,350, ,350,290 5, , ,996 5,523, ,523,842 5, , ,637 5,694, ,694,988 5, , ,285 5,862, ,862, , ,007 6,019, ,019, , ,630 6,170, ,170, , ,067 6,314, ,314, , ,063 6,448, ,448, , ,703 6,572, ,572, , ,478 6,684, ,684, , ,437 6,782, ,782, , ,628 6,863, ,863, , ,097 6,926, ,926, , ,883 6,968, ,968, , ,819 6,988, ,988, , ,643 6,985, ,985, , ,314 6,956, ,956, , ,778 6,899, ,899, , ,955 6,810, ,810, , ,449 6,693, ,693, , ,781 6,545, ,545, , ,741 6,365, ,365, , ,072 6,151, ,151, , ,955 5,908, ,908, , ,080 5,638, ,638, , ,097 5,339, ,339, , ,605 5,013, ,013, , ,148 4,660, ,660, , ,666 4,293,895

37 Profit Sharing - Proposed Plan Plan Year Calendar Year Age of Client (EOY) Beginning Balance (Taxable) (BOY) Premium for SPIA (BOY) Contributions (BOY) Premiums for Insurance (BOY) Withdrawal Above RMD (Taxable) (BOY) Tax-Deferred Interest (EOY) Additional Withdrawal Needed to Meet RMD (EOY) Gifts to Charity or Foundation [While Living] (EOY) Proceeds from Insurance Policy Loans (EOY) Income from Sale of Insurance Policies (EOY) Balance (Taxable) (EOY) ,000, , , , , ,640, ,640, , , , , ,248, ,248, , , , , ,820, ,820, , , , , ,354, ,354, , , , , ,900,000 4,746, ,746, , , ,873, ,873, , , ,995, ,995, , , ,112, ,112, , , ,220, ,220, , , ,321, ,321, , , ,411, ,411, , , ,490, ,490, , , ,556, ,556, , , ,607, ,607, , , ,641, ,641, , , ,657, ,657, , , ,655, ,655, , , ,632, ,632, , , ,585, ,585, , , ,514, ,514, , , ,419, ,419, , , ,299, ,299, , , ,153, ,153, , , ,979, ,979, , , ,783, ,783, , , ,564, ,564, , , ,323, ,323, , , ,059, ,059, , , ,773, ,773, , , ,476,306

38 Death Benefits without Other Assets 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Year 5 Years 10 Years 15 Years 20 Years 25 Years 30 Years Proposed Plan Present Plan

39 Insurance Policy 1 Values Policy Year Premiums Net Cash Value Net Death Benefit Tax-Free Loan from Policy to Trust 1 500, ,000, , ,745 7,000, , ,549 7,000, ,000 1,262,927 7,000, ,000 1,754,930 7,000, ,784,928 5,500, ,812,083 5,500, ,836,194 5,500, ,857,033 5,500, ,888,195 5,500, ,951,560 5,500, ,015,458 5,500, ,080,034 5,500, ,145,447 5,500, ,211,874 5,500, ,279,508 5,500, ,318,089 5,500, ,353,595 5,500, ,385,221 5,500, ,412,051 5,500, ,432,377 5,500, ,436,202 5,500, ,418,897 5,500, ,374,422 5,500, ,294,714 5,500, ,141,091 5,500, ,911,882 5,500, ,582,289 5,500, ,156,368 5,500, ,908 5,500,000 0

40 RPM: Retirement Plan Maximizer Issues & Answers Grosnick Financial RPM: Retirement Plan Maximizer 21

41 RPM Concluding Thought An invasion of armies can be resisted, but not an idea whose time has come. Victor Hugo 1852 Grosnick Financial RPM: Retirement Plan Maximizer 22

42 Allen H. Grosnick, CLU, ChFC Chartered Financial Consultant with 39 years of experience Board of Directors Western Massachusetts Chapter of the Society of Financial Service Professionals Member of the Estate Planning Council of Hampden County Lecturer on tax arbitrage to many professional groups Member of Rotary International Paul Harris Fellow Advisor to Philanthropic Organizations and Foundations Planning Strategist for the Financial Planning Community Technical Advisor to Accountants Attorneys Financial Professionals Grosnick Financial RPM: Retirement Plan Maximizer 23

43 RPM: Retirement Plan Maximizer Prevent the 70% Tax Trap: Strategies & Software to Make the Most of Your Retirement Allen H. Grosnick, CLU, ChFC Technical Advisor to Accountants, Attorneys & Financial Professionals December 9, 2008 Grosnick Financial RPM: Retirement Plan Maximizer 24

44 RPM: Retirement Plan Maximizer Appendix Grosnick Financial RPM: Retirement Plan Maximizer 25

45 REFERENCES Purchasing Life Insurance In Profit Sharing Plans Treas. Regulation Section (b)(1) Rev. Ruling Rev. Ruling (Money in PS Plan for at least 2 years can be distributed, i.e. - used to buy life insurance without limit) Rev. Ruling (Any PS Plan more than 5 years old can buy life insurance without limit even with money that has been in plan for less than 2 years.) Rev. Ruling /30/2009 Allen 26H. Grosnick CLU

46 REFERENCES Rolling IRA and other qualified monies over to PS Plan and then Purchasing Life Insurance Without Limit Rev. Ruling Rev. Ruling /30/ Allen H. Grosnick CLU

47 REFERENCES Income Tax Consequences of Selling a Policy to a Trust A Grantor Trust is treated as the grantor for income tax purposes, typically under IRC Sec. 677(a). The sale of the policy will be treated as an exception to the transfer for value rule under IRC Sec. 101(a)(2)(b), ) and the full death benefit will be income tax free. See Swanson v. Commissioner, 75-2 USTC Para (1975), and Revenue Ruling , IRB 68, citing Revenue Ruling 85-13, CB /30/ Allen H. Grosnick CLU

48 REFERENCES Determination of policy Fair Market Value if SOLD by the qualified plan to a Trust (or if the policy is DISTRIBUTED to the participant) Revenue Procedure , superceded by Rev. Proc Under Rev. Proc , 25 a safe harbor value is the greater of a PERC value multiplied by an average surrender factor or the interpolated terminal reserve. Rev. Proc refers to Rev. Rul , CB 18, dealing with policy value in general sales situations, ti Treas. Reg. Sec (a), 2512 dealing with policy value for gift situations, and Revenue Notice 89-25, CB 662, Q&A 10 dealing with policy sales or distributions ib ti from qualified plans. 7/30/2009 Allen 29H. Grosnick CLU

49 Since these valuation standards are defined in Rev. Proc as a safe harbor that t may be chosen by the taxpayer to apply (presumably without challenge), the IRS is admitting to the possibility of a valid lower valuation by an independent appraisal by using some of the valuation methodologies of Revenue Ruling 59-60, CB /30/ Allen H. Grosnick CLU