A Multigenerational Approach to Maximizing Your 403(b) Plan Sam Stratford and Sue Stratford

Transcription

1 A Multigenerational Approach to Maximizing Your (b) Plan Sam Stratford and Sue Stratford Presented by: Joseph Davis, CLU, ChFC 5 Broad Street Charlotte, North Carolina Phone: Mobile Phone: Fax: joseph.davis@aol.com Financial Services Corp. Branch Office 5 Red Road Charlotte, North Carolina

2 Table of Contents Important Notes Tax Considerations Decisions Regarding Your TSA Plan Flowchart - Comparing Approaches Traditional Rollover Approach 6 Rollover to Spouse and Split Approach Non-Spouse Beneficiary Approach 8 The Key to Maximizing 5 Sources of Liquidity 6 Assumptions 7

3 Important Notes These pages depict certain wealth preservation strategies concerning possible methods for taking distributions from your tax sheltered annuity or b Plan. This report provides only broad, general guidelines, which may be helpful in shaping your thinking about and discussing your wealth preservation needs with your professional advisors. This report provides estimates based on our general understanding of current tax laws. To illustrate the impact of various earnings rates over the projected period, it is important to consider multiple interest rate scenarios, including no growth. Each scenario shown illustrates your current situation or an alternative scenario and its possible effects on the financial situation you provided. Inclusion of one or more of these scenarios does not constitute a recommendation of that scenario over any other scenario. Calculations contained in this analysis are estimates only based on the information you provided, such as the value of your assets today, and the rate at which the assets appreciate. Investments offering the potential for higher rates of return also involve a higher degree of risk to principal. Rates of return will vary over time, particularly for long-term investments. The actual values, rates of growth, and tax rates may be significantly different from those illustrated. These assumptions are only a best guess. No guarantee can be made regarding values, as all rates are the hypothetical rates you provided. These computations are not a guarantee of future performance of any asset, including insurance or other financial products nor do they take into account fees and charges associated with any investment. If they did, the results would be lower. It is unlikely that any one rate of return will be sustainable over a long period of time. No legal or accounting advice is being rendered either by this report or through any other oral or written communications. Nothing contained in this report is intended to be used on any tax form or to support any tax deduction. Unless indicated, the tax aspect of the federal Generation-Skipping Transfer Tax (GSTT) is not reflected. The GSTT is similar to an additional level of estate tax on certain transfers to grandchildren, or individuals two or more generations removed from the transferor. State laws vary regarding the distribution of property, and individual circumstances are unique and subject to change. You should discuss all strategies, transfers, and assumptions with your legal and tax advisors. The American Taxpayer Relief Act of was signed into law on January, as P.L. -, also known as Tax Act of in this presentation. To implement a strategy, it may be necessary to restructure the ownership of property, or change designated beneficiaries before specific will or trust provisions, prepared by the client s counsel, become effective. The transfer of a life insurance policy may not result in its removal from the estate of the prior owner for three years. Strategies may be proposed to support the purchase of various products such as insurance and other financial products. When this occurs, additional information about the specific product (including a prospectus, if required, or an insurer provided policy illustration) will be provided for your review. IMPORTANT: The projections or other information contained in this report, and generated by this analysis tool (TSA Plan Distribution Analysis) regarding the likelihood of various outcomes are hypothetical in nature, do not reflect actual results and are not guarantees of future results. IRS CIRCULAR NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any U. S. federal tax advice contained in this presentation is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this presentation. Version.. c May, of 9

4 Tax Considerations Understanding from Your Retirement Plan Your Objectives Tax Deferral Defer the payment of income taxes as long as allowed Security Use your retirement account to provide your family with continued distributions even after your death The Government's View of Retirement Plans Tax advantaged "perks" to encourage retirement savings TSA plans were never intended as a mechanism to pass wealth to future generations To discourage the use of TSA plans as wealth transfer vehicles, Congress created the required minimum distribution rules Distribution Rules Required Beginning Date (RBD) No later than April st of the calendar year following the later of the calendar year in which you become age 7½ or the calendar year in which you retire. Required Minimum (RMD) The amount you must take from your plan each year of TSA plan balance at owner's death are subject to ordinary income tax at beneficiary's tax rate How do you use these rules to meet your objectives? May, of 9

5 Decisions Regarding Your (b) or TSA Account Determining How Long Can Be Taken Beneficiary Designation determines who will benefit from your TSA plan and for how long. It involves: Naming the beneficiary(ies) Giving a spouse the ability to roll the TSA plan over to an IRA Deciding if and when to split the TSA plan into multiple TSA plans Your choice of beneficiary determines the life expectancy over which distributions can be taken after your death. The longer the life expectancy, the longer the distribution period Proper beneficiary designations may "stretch" distributions for a longer period of time TSA determine when and how much to take from your TSA plan. When will you start distributions? At the Required Beginning Date or earlier? Uniform Lifetime Table or Joint Life Expectancy Table Minimum distributions are based on life expectancy, which is determined annually using the Uniform Life Expectancy Table or Joint Life Expectancy Table (if your spouse is your beneficiary and is more than years younger). May, of 9

6 Illustration of Multi-Generational Approaches Total Compared Beginning Account December, : $, Traditional Rollover Approach Split Benefit Rollover and Split Approach Split Benefit Non-Spouse Split Approach Owner's Owner's Owner's TSA Plan TSA Plan TSA Plan to Sam: $ to Sam: $ to Sam: $ Spouse's Rollover IRA Spouse's Rollover IRA to Sue: $,77 to Sue: $,77 Decedent's IRA Decedent's IRA Decedent's IRA TSA Plan Continues to Non-Spouse Beneficiaries (No to Spouse) Decedent's TSA Plan Decedent's TSA Plan to Beneficiaries: $,8,89 to Beneficiaries: $,5, to Beneficiaries: $,58, Total : $,95,7 Total : $,8,8 Total : $,58, NOTE: The Multi-Generational Approaches illustrated in this presentation are designed for participants who will NOT need the funds for their own retirement needs. Other factors should also be considered, such as, possible tax law changes and the impact of inflation. See Comparing Multi-Generational Approaches for details. May, of 9

7 Comparing Multi-Generational Approaches An Explanation of Different Techniques Traditional Rollover Approach You name Sue as your primary beneficiary for this TSA plan. You take minimum distributions using the Uniform Lifetime Table. Your lifetime distributions are $ at your death, at which time Sue rolls over TSA plan to an IRA. Sue names beneficiaries for the IRA. Minimum distributions are based on the Uniform Lifetime Table. Sue's lifetime distributions are $,77. At your death, Sue rolls over the IRA and takes minimum distributions based on the Uniform Lifetime Table. Sue's lifetime distributions are $,77. At Sue's death, if the IRA does not split into separate shares, distributions continue to each beneficiary based on the oldest beneficiary's life expectancy. The distributions to the beneficiaries are $,8,89. At Sue's death, the IRA is split into separate IRAs with named beneficiaries. continue to each beneficiary based on his or her life expectancy. The distributions to the beneficiaries are $,5,. Total : $,95,7 Split Benefit Rollover and Split Approach You name Sue as your primary beneficiary for this TSA plan. You take minimum distributions using the Uniform Lifetime Table. Your lifetime distributions are $ at your death, at which time Sue rolls over TSA plan to an IRA. Total : $,8,8 Split Benefit Non-Spouse Split Approach You and Sue decide that you will not need the TSA plan as a source of income. You take minimum distributions using the Uniform Lifetime Table. At your death, the TSA plan is split into separate TSA plans with named beneficiaries. continue to each beneficiary based on his or her life expectancy. The distributions to the beneficiaries are $,58,. Total : $,58, Although the intent is to show the beneficiaries stretching the distributions over as many years as possible, each beneficiary could elect to take his or her share in a lump sum. The estimated lump sum available at the spouse's death in the Traditional Rollover Approach would be $8,59 to be split among all named beneficiaries. The estimated lump sum available at the spouse's death in the Split Benefit Rollover and Split Approach would be $8,59 to be split among all named beneficiaries. The estimated lump sum available at the owner's death in the Split Benefit Non-Spouse Split Approach would be $5,779 to be split among all named beneficiaries. May, 5 of 9

8 Traditional Rollover Approach A Multi-Generational Approach for Continuing Sam's TSA Plan TSA Plan Value Now (): $, Death Assumed (age 75): $5,779 Sam's death assumed in. No income or estate tax due on TSA plan at death. $ during Sam's lifetime Sue rolls over the value at Sam's death. are based on the Uniform Lifetime Table. Value of Sue's Rollover IRA in : $5,779 The estate must have liquidity of $ for federal estate taxes attributable to the IRA to provide the total distributions shown on this page. Sue dies in 8. Values included in estate. $,77 during Sue's lifetime At Sue's death, minimum distributions continue to each beneficiary based on the life expectancy of the oldest designated beneficiary. Total to: All Non-Spouse Beneficiaries $,8,89 Total distributions during lives of Sam, Sue and beneficiaries: $,95,7 May, 6 of 9

9 Traditional Rollover Approach A Multi-Generational Approach for Continuing Beginning Account December, : $, Client Spouse Life Earnings & Exp. Contributions Actual,,5,5,576,55 9 7,76 7, 7,7 7, ,5 Sam dies and Sue rolls over TSA plan to an IRA. Spouse Life Earnings & Exp. Contributions Income Taxes Paid Allocation of Prem. & Non-Prem. Spending Gifts Reinvested5 Total of All Other6 Assets Account 59,9 5,55 58, 55,8 5,77,,5,55, 55,56 58,7 6,,899 65, 65,985,9 8, 95,9, 5,779 Total of All Other6 Assets Account Actual Income Taxes Paid Allocation of Prem. & Non-Prem. Spending Gifts Reinvested ,77,9,9,56 9, ,87,86,8 9,7 7,87, ,996,5,858 9,59 7,99, ,95,,5, 77,89 6, ,,77 8,6 6,75 799,9 8,59 Total distributions during Sue's lifetime are $,77. At Sue's death, the TSA plan is distributed to the named beneficiaries. Estate taxes of $ will be due on these amounts Sam's death is assumed to occur in. Sue is named beneficiary. Participant qualifies to delay distributions from the qualified plan past age 7½ (see Assumptions pages.) Assumes qualified plan earns 5.% interest. Also includes contributions, if any. For Traditional IRA, (b) or other Qualified Plans, Actual is the greater of distribution required to generate the Desired Distribution (see Assumptions pages) or RMD. Participant qualifies to delay distributions from the qualified plan past age 7½ (see Assumptions pages.) Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. from Traditional IRA, (b) or other Qualified Plans are taxable. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. Actual less Taxes and Penalties, Premium and Non-Premium Gifts and Spending. All Other Assets and Cumulative Reinvested are assumed to earn.% interest and are taxed at a.% income tax rate. Does not include the death benefit of life insurance. Income in Respect of Decedent (IRD) is taxed as distributions are received. If the Account is taken as a lump sum, the income tax on the IRD would be $97,7 at Sam's death, and $,78 at Sue's death. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, 7 of 9

10 Traditional Rollover Approach Next Generation after Sue's Death Beneficiary Considered: Account : Share of Allowable Deductions: All Non-Spouse Beneficiaries $8,59 $ Income Taxation Life Exp ,7 5,76 6,9,77 77,8 8,95 9,8 9,8,7,97 8,95 9,8 9,8,7, ,75 9,9 98,8 5,6,658,,6,,8, ,86,8 7,657,865 5,88,755 5,5 6,6 7,75 8, ,5,6,99,88 9, ,, 7,,5,896 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,8,85,96,,7 6,8 6,5 6,96 7,6 7,65,,6,,8,8,,,85,,8 8,8 8, 8,878 9,7 9,8,755 5,5 6,6 7,75 8,7,6,656,898 5,5 5,,8,86,8,, 9,,7,55,6,7 9,,7,55,6,7 5,7 6, 6,6 6, 6,998,9,5,78 5,5 6,9,559 5,859 7, 8,7,,559 5,859 7, 8,7, 7, 7,758 8,7 8, 9, 7,9 8, 9,6,8,57 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, 8 of 9

11 Traditional Rollover Approach (Continued) Next Generation after Sue's Death Income Taxation Life Exp ,589 85,989,877 5,9 9,,85,579 5, 7,6 9,9,85,579 5, 7,6 9, ,96 75,,98,88 6,59,,6 6,6 9,8 5, Total: ,65 6, 56, 6, 6,5 $,8,89 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction 9,556,7,6,8,8,97,55,788 6,5 7,,,6 6,6 9,8 5,5,98,,986,88 5,76 9,6,8,65,6 6,77 56, 6, 6,5 6,8 8, 8,9 9,6,, Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, 9 of 9

12 Traditional Rollover Approach Wealth Transfer Costs Beginning Account December, : $, Client Spouse Account Other Assets,,5,55, 55,56 59,9 5,55 58, 55,8 5,77 9 7,9 58,7 7 8, 6, 7 95,9,899 7, 65, ,779 65,985 Sue rolls over the TSA plan at Sam's death in and continues taking distributions. Spouse Account Other Assets 7 9,,56 5 7,5 7,87 6 7,77 7, ,799 77, ,59 799,9 At Sue's death, the TSA plan is distributed to the named beneficiaries. Estate taxes of $ will be due on these amounts., 5 Continuation of this analysis assumes that Sue's estate has sufficient cash liquidity for all transfer costs without using this IRA. Sam's Death Occurs in Total of Other Assets Life insurance on Sam inside of estate Estimated Account Estimated share of estate taxes, Liquidity needed to continue this approach Existing life insurance on Sam outside of estate5 Proposed new life insurance outside of estate5 Sue's Death Occurs in 8 Total of Other Assets Life insurance on Sue inside of estate Estimated Account Estimated share of estate taxes, Liquidity needed to continue this approach Existing life insurance on Sue outside of estate5 $65,985 $ $5,779 $ $ $ $799,9 $ $8,59 $ $ $ Other Assets are assumed to be inherited by the surviving spouse and to qualify for the marital deduction. Other Assets are assumed to earn.% interest and are taxed at a.% income tax rate. Life insurance included in the deceased's estate is assumed to be added to Other Assets. Estate tax calculations are based on the total of the Account, the Other Assets, and any Life Insurance included in the estate. No probate fees or expenses are considered. Estimated Share of Estate Taxes is the ratio that the Account bears to the Total Estate. See the Assumptions pages for additional information. Income in Respect of Decedent (IRD) is taxed as distributions are received. If the Account is taken as a lump sum, the income tax on the IRD would be $97,7 at Sam's death, and $,78 at Sue's death. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. Life insurance outside the deceased's estate is assumed to be paid directly to heirs and will not be in the estate of the surviving spouse. May, of 9

13 The Split Benefit Rollover to Spouse and Split Approach A Multi-Generational Approach for Continuing Sam's TSA Plan TSA Plan Value Now (): $, Death Assumed (age 75): $5,779 Sam's death assumed in. No income or estate tax due on TSA plan at death. $ during Sam's lifetime Sue rolls over the value at Sam's death. are based on the Uniform Lifetime Table. Value of Sue's IRA in : $5,779 The estate must have liquidity of $ for federal estate taxes attributable to the IRA to provide the total distributions shown on this page. Sue dies in 8. Values included in estate. $,77 during Sue's lifetime IRA splits into separate shares at Sue's death. are based on the life expectancy of each named beneficiary. Total to: Beneficiary $5,9 Total to: Beneficiary $6, Total distributions during lives of Sam, Sue and beneficiaries: $,8,8 May, of 9

14 The Split Benefit Rollover to Spouse and Split A Multi-Generational Approach for Continuing Beginning Account December, : $, Client Spouse Life Earnings & Exp. Contributions Actual,,5,5,576,55 9 7,76 7, 7,7 7, ,5 Sam dies and Sue rolls over TSA plan to an IRA. Spouse Life Earnings & Exp. Contributions Income Taxes Paid Allocation of Prem. & Non-Prem. Spending Gifts Reinvested5 Total of All Other6 Assets Account 59,9 5,55 58, 55,8 5,77,,5,55, 55,56 58,7 6,,899 65, 65,985,9 8, 95,9, 5,779 Total of All Other6 Assets Account Actual Income Taxes Paid Allocation of Prem. & Non-Prem. Spending Gifts Reinvested ,77,9,9,56 9, ,87,86,8 9,7 7,87, ,996,5,858 9,59 7,99, ,95,,5, 77,89 6, ,,77 8,6 6,75 799,9 8,59 Total distributions during Sue's lifetime are $,77. At Sue's death, the TSA plan is distributed to the named beneficiaries. Estate taxes of $ will be due on these amounts Sam's death is assumed to occur in. Sue is named beneficiary. Participant qualifies to delay distributions from the qualified plan past age 7½ (see Assumptions pages.) Assumes qualified plan earns 5.% interest. Also includes contributions, if any. For Traditional IRA, (b) or other Qualified Plans, Actual is the greater of distribution required to generate the Desired Distribution (see Assumptions pages) or RMD. Participant qualifies to delay distributions from the qualified plan past age 7½ (see Assumptions pages.) Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. from Traditional IRA, (b) or other Qualified Plans are taxable. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. Actual less Taxes and Penalties, Premium and Non-Premium Gifts and Spending. All Other Assets and Cumulative Reinvested are assumed to earn.% interest and are taxed at a.% income tax rate. Does not include the death benefit of life insurance. Income in Respect of Decedent (IRD) is taxed as distributions are received. If the Account is taken as a lump sum, the income tax on the IRD would be $97,7 at Sam's death, and $,78 at Sue's death. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

15 The Split Benefit Rollover to Spouse and Split Approach Next Generation after Sue's Death - Beneficiary 's Remaining Lifetime Beneficiary Considered: Account : Share of Allowable Deductions: Beneficiary $, $ Income Taxation Life Exp , 77,88 8, 8,87 88,,6,,9 5,87 5,5,6,,9 5,87 5, ,6 95,95 99,7,78 5,89 5,7 6, 6, 6,9 7, ,7,,88 5,9 7, 7,77 7,76 8,6 8,587 9, ,7,,97, 9, ,5 6,56,75,57 5,8 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,9,8,8,556,,,8,5,6,88 5,7 6, 6, 6,9 7,,7,89,9,,,,,9,6,9 7,77 7,76 8,6 8,587 9,5,,8,9,576,7 5,6 5, 5,7 6, 6, 9,56,,57,8, 9,56,,57,8,,85,,58,,99 6,65 7, 7, 7,756 8,6,79,9,, 5,,79,9,, 5,,,879,85,,5 8,596 9,5 9,5,,578 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

16 The Split Benefit Rollover to Spouse and Split Approach Next Generation after Sue's Death - Beneficiary 's Remaining Lifetime Income Taxation Life Exp ,79 9,995 8,98 75,55 6,56 5,96 6,789 7,76 8, 9,7 5,96 6,789 7,76 8, 9, ,958 7,5,99, 8,95,8,,,7 6, 6 65 Total: ,7, 8,,7,5 $5,9 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,778 5,7 5, 5,6 5,96,8,75,9,76,8,8,,,7 6, 6,9 6, 6,99 7, 7,88,58 5,6 6,7 7, 8,87 8,,7,5 8, 9,5 9,57 9,6,, Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

17 The Split Benefit Rollover to Spouse and Split Approach Next Generation after Sue's Death - Beneficiary 's Remaining Lifetime Beneficiary Considered: Account : Share of Allowable Deductions: Beneficiary $, $ Income Taxation Life Exp ,65 78, 8, 87,5 9,78,96,6,77,6,87,96,6,77,6, ,9, 5,7 9,5,78 5,86 5,7 5,6 5,9 6, ,858,879 5,76 9,,99 6,55 6,87 7,7 7,6 7, ,7 9,9,76,6 5, ,9 8,98 8,88 8, 7,765 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,88,9,,8,5,77,9,6,,86 5,86 5,7 5,6 5,9 6,5,56,6,7,77,86,56,7,95,8,5 6,55 6,87 7,7 7,6 7,99,96,6,,8,98,575,8 5,59 5, 5,596 8,8 8,8 9, 9,788,98 8,8 8,8 9, 9,788,98,5,65,79,96,89 5,886 6,9 6,5 6,85 7,9,86,,,6,96,86,,,6,96,5,,6,789,989 7,585 7,98 8, 8,8 9,7 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, 5 of 9

18 The Split Benefit Rollover to Spouse and Split Approach Next Generation after Sue's Death - Beneficiary 's Remaining Lifetime Income Taxation Life Exp ,55,7,85 6,5,6,998,7 5,5 6,5 7,,998,7 5,5 6,5 7, ,996 6,5 6, 95, 8,98 8,59 9,5,9,5, , 5,655,6, 86,58,76 5,9 6, 8,, 7 7 Total: ,85 7,7,,65 8,5 $6, Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,99,,657,96 5, 9,799,8,8,7,6 8,59 9,5,9,5,9 5,8 5,7 6,58 6,9 6,78,7,,,9 5,75,76 5,9 6, 8,, 7,9 7,59 7,98 8, 9, 6,65 7,59 8,6 9,75,8,,65 8,5 9,6,8 8,559,8, 9,97 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, 6 of 9

19 The Split Benefit Rollover to Spouse and Split Approach Wealth Transfer Costs Beginning Account December, : $, Client Spouse Account Other Assets,,5,55, 55,56 59,9 5,55 58, 55,8 5,77 9 7,9 58,7 7 8, 6, 7 95,9,899 7, 65, ,779 65,985 Sue rolls over the TSA plan at Sam's death in and continues taking distributions. Spouse Account Other Assets 7 9,,56 5 7,5 7,87 6 7,77 7, ,799 77, ,59 799,9 At Sue's death, the TSA plan is distributed to the named beneficiaries. Estate taxes of $ will be due on these amounts., 5 Continuation of this analysis assumes that Sue's estate has sufficient cash liquidity for all transfer costs without using this IRA. Sam's Death Occurs in Total of Other Assets Life insurance on Sam inside of estate Estimated Account Estimated share of estate taxes, Liquidity needed to continue this approach Existing life insurance on Sam outside of estate5 Proposed new life insurance outside of estate5 Sue's Death Occurs in 8 Total of Other Assets Life insurance on Sue inside of estate Estimated Account Estimated share of estate taxes, Liquidity needed to continue this approach Existing life insurance on Sue outside of estate5 $65,985 $ $5,779 $ $ $ $799,9 $ $8,59 $ $ $ Other Assets are assumed to be inherited by the surviving spouse and to qualify for the marital deduction. Other Assets are assumed to earn.% interest and are taxed at a.% income tax rate. Life insurance included in the deceased's estate is assumed to be added to Other Assets. Estate tax calculations are based on the total of the Account, the Other Assets, and any Life Insurance included in the estate. No probate fees or expenses are considered. Estimated Share of Estate Taxes is the ratio that the Account bears to the Total Estate. See the Assumptions pages for additional information. Income in Respect of Decedent (IRD) is taxed as distributions are received. If the Account is taken as a lump sum, the income tax on the IRD would be $97,7 at Sam's death, and $,78 at Sue's death. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. Life insurance outside the deceased's estate is assumed to be paid directly to heirs and will not be in the estate of the surviving spouse. May, 7 of 9

20 The Split Benefit Non-Spouse Beneficiary Approach A Multi-Generational Approach for Continuing (with a Non-Spouse Beneficiary) Sam's TSA Plan TSA Plan Value Now (): $, Death Assumed (age 75): $5,779 Sam's distributions are based on the Uniform Lifetime Table. Value of Sam's TSA Plan in : $5,779 The estate must have liquidity of $ for federal estate taxes attributable to the TSA plan to provide the total distributions shown on this page. Sam dies in. Values included in estate. $ during Sam's lifetime TSA plan splits into separate shares at Sam's death. are based on the life expectancy of each named beneficiary. Total to: Beneficiary $579, Total to: Beneficiary $9, Total distributions during lives of Sam and beneficiaries: $,58, May, 8 of 9

21 The Split Benefit Non-Spouse Beneficiary Approach A Multi-Generational Approach for Continuing Beginning Account December, : $, Client Life Exp. 7 Earnings & Contributions,,5,5,576,55 Actual Income Taxes Paid Allocation of Prem. & Non-Prem. Spending Gifts 9 7,76 7, 7,7 7, ,5 SamEstate taxes of $ attributable to the account balance will be due at Sam's death Reinvested5 Total of All Other6 Assets Account 59,9 5,55 58, 55,8 5,77,,5,55, 55,56 58,7 6,,899 65, 65,985,9 8, 95,9, 5,779 Sam's death is assumed to occur in. Each beneficiary continues to receive a distribution based on his or her life expectancy. Participant qualifies to delay distributions from the qualified plan past age 7½ (see Assumptions pages.) Assumes qualified plan earns 5.% interest. Also includes contributions, if any. For Traditional IRA, (b) or other Qualified Plans, Actual is the greater of distribution required to generate the Desired Distribution (see Assumptions pages) or RMD. Participant qualifies to delay distributions from the qualified plan past age 7½ (see Assumptions pages.) Taxes and any applicable penalties are paid at the start of the calendar year following the tax liability. from Traditional IRA, (b) or other Qualified Plans are taxable. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. Actual less Taxes and Penalties, Premium and Non-Premium Gifts and Spending. All Other Assets and Cumulative Reinvested are assumed to earn.% interest and are taxed at a.% income tax rate. Does not include the death benefit of life insurance. Income in Respect of Decedent (IRD) is taxed as distributions are received. If the Account is taken as a lump sum, the income tax on the IRD would be $97,7 at Sam's death. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, 9 of 9

22 The Split Benefit Non-Spouse Beneficiary Approach Next Generation after Sam's Death - Beneficiary 's Remaining Lifetime Beneficiary Considered: Account : Share of Allowable Deductions: Beneficiary $6,889 $ Income Taxation Life Exp ,9 7,57 75,9 8,98 8,65,85,,5,,659,85,,5,, ,97 9, 97,59,7 5,8,897 5,9 5, 5, 5, ,799, 7,9,9,9 6,9 6, 6,96 7, 7, ,,6,87 5, 6, ,76 9,9 9,6 9, 8,599 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,,,6,,98,,87,95,,6,897 5,9 5, 5, 5,985,,55,6,78,796,8,6,789,985,9 6,9 6, 6,96 7, 7,8,888,985,88,96,9,5,6,87 5, 5,89 8,97 8,57 8,96 9,6 9,97 8,97 8,57 8,96 9,6 9,97,9,555,8,88,975 5,6 5,96 6,7 6,598 6,9,5,98,556,6,8,5,98,556,6,8,,9,,,8 7, 7,6 8,89 8,5 8,96 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

23 The Split Benefit Non-Spouse Beneficiary Approach Next Generation after Sam's Death - Beneficiary 's Remaining Lifetime Income Taxation Life Exp ,8,76,9 7,9,9,8,95,99 5,78 6,59,8,95,99 5,78 6, ,79 8,58 99,6 88,5 76, 7,88 8,7 9,5,57, ,8 6,5 7,75 6,96 8,8,885, 5,6 7,76 8, Total: ,6 6,,88, 7,76 $579, Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,,58,85,7,978 9,6 9,96,65,,65 7,88 8,7 9,5,57, 5,6 5,5 5,8 6,55 6,98,,96,6,6 5,6,885, 5,6 7,76 8,9 6,8 7,6 7,7 8,5 8, 6,9 6,9 7,95 9,,,88, 7,76 9,65, 8,,, 9, Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

24 The Split Benefit Non-Spouse Beneficiary Approach Next Generation after Sam's Death - Beneficiary 's Remaining Lifetime Beneficiary Considered: Account : Share of Allowable Deductions: Beneficiary $6,889 $ Income Taxation Life Exp ,65 7,8 77, 8,89 86,99,9,6,789,98,86,9,6,789,98, ,9 96,9,896 6,879,85,,65,86 5, 5, ,79, 6,5,9 5,95 5, 5,9 6,5 6,5 6, ,9,88 9,97 5,7 56, ,85 6,578,,8 7,87 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,9,8,7,95,56,,5,65,788,9,,65,86 5, 5,7,,88,59,5,6,8,8,,578,76 5, 5,9 6,5 6,5 6,9,5,78,87,97,7,955,58,7,596,8 7,6 7,65 8,9 8, 8,88 7,6 7,65 8,9 8, 8,88,78,9,9,5, 5,8 5, 5,6 5,9 6,7 9, 9,86,6,87, 9, 9,86,6,87,,8,98,,6, 6,59 6,878 7,6 7,6 8,9 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

25 The Split Benefit Non-Spouse Beneficiary Approach Next Generation after Sam's Death - Beneficiary 's Remaining Lifetime Income Taxation Life Exp ,7 7,5 7,658 7,7 7,99,9,9,,,77,9,9,,, ,55,88 6,57 58,59 5,86 5,55 6,79 7,5 8,7 9, ,78 5, 5,,577 98,97,8,8,5,5 5, , 6,8,5 7,8 89,8 7 7 Total: ,8,8 Account Actual Deduction Applied Taxable Amount Income Tax Paid After Tax Distribution Carryover Deduction,6,8,,, 8,7 8,8 9, 9,8, 5,55 6,79 7,5 8,7 9,9,6,9 5,75 5,5 5,75,888,65,76,7,,8,8,5,5 5,9 6,55 6,8 6,7 7,6 7,5,8,896 5,7 6,58 7,56 6,6 7,95 9,6,, 6,6 7,95 9,6,, 7,98 8,85 8,88 9,,9 8,98 9,5,7,988, 5,77 8,75,96 $9, 5,77 8,75,96,7, 7,9 5, 7,6 6,78 Calculated on December of the year following death and reduced by one each year thereafter. Assumes qualified plan earns 5.% interest. Represents the allowable deduction applied to offset taxable income, if available. Taxable distributions are taxed at an assumed rate of.%. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. May, of 9

26 The Split Benefit Non-Spouse Beneficiary Approach Wealth Transfer Costs Beginning Account December, : $, Client Spouse Account Other Assets,,5,55, 55,56 59,9 5,55 58, 55,8 5,77 9 7,9 58,7 7 8, 6, 7 95,9,899 7, 65, ,779 65,985 At Sam's death, the TSA plan is distributed to the named beneficiaries. Estate taxes of $ will be due on these amounts. Continuation of this analysis assumes that Sam's estate has sufficient cash liquidity for all transfer costs without using this TSA plan. Sam's Death Occurs in Total of Other Assets Life insurance on Sam inside of estate Estimated Account Estimated share of estate taxes, Liquidity needed to continue this approach Existing life insurance on Sam outside of estate5 Proposed new life insurance outside of estate5 Sue's Death Occurs in 8 Total of Other Assets Life insurance on Sue inside of estate Estimated Account Estimated share of estate taxes, Liquidity needed to continue this approach Existing life insurance on Sue outside of estate5 5 $65,985 $ $5,779 $ $ $ $79,6 $ $ $ $ $ Other Assets are assumed to be inherited by the surviving spouse and to qualify for the marital deduction. Other Assets are assumed to earn.% interest and are taxed at a.% income tax rate. Life insurance included in the deceased's estate is assumed to be added to Other Assets. Estate tax calculations are based on the total of the Account, the Other Assets, and any Life Insurance included in the estate. No probate fees or expenses are considered. Estimated Share of Estate Taxes is the ratio that the Account bears to the Total Estate. See the Assumptions pages for additional information. Income in Respect of Decedent (IRD) is taxed as distributions are received. If the Account is taken as a lump sum, the income tax on the IRD would be $97,7 at Sam's death. See the Assumptions pages for information on distributions from a Traditional IRA with an original after-tax amount of $. Life insurance outside the deceased's estate is assumed to be paid directly to heirs and will not be in the estate of the surviving spouse. May, of 9

27 The Key to Maximizing Keeping Your Plan Intact The key to maximizing income tax deferral and stretching out distributions to your heirs is to keep the IRA intact at death. IRS Significant Transfer Costs Are Incurred at Your Death How will the estate taxes and other transfer costs needed to keep your plan in place be paid? Where will the additional liquidity come from? Using the IRA not only accelerates income taxes on these funds but prevents the "stretching" of distributions over future generations Pay the additional liquidity needed from other assets wtihin the estate - assets that might otherwise be passed on and utilized for other planning purposes Or, pay the transfer costs attributable to the IRA transfer using life insurance owned by an irrevocable life insurance trust Your estate needs enough liquidity outside of the IRA to satisfy estate taxes and expenses attributable to the plan to achieve optimal multi-generational strategy. May, 5 of 9

28 Sources of Liquidity Ways to Pay Wealth Transfer Costs Use Cash On Hand Advantages Concerns It's easy to use It's always available No interest costs Who has that amount of cash? Cash is included in taxable estate May be better uses for cash Borrow the Money Advantages No immediate outlay Uses other people's money Single sum transfer Liquidating Assets Advantages No need to save during life No interest costs Concerns Can't find a buyer Asset values subject to market fluctuations Sale takes too long Assets are subject to estate tax Family may want to keep asset Concerns Can't find a lender Interest charges can be high Can you pay back the principal? Loan payments impede lifestyle Life Insurance Advantages Concerns Proceeds are generally Requires annual premiums paid income tax free Must qualify for insurance No interest costs Proceeds may not be estate tax free Flexible outlay options (if owned by the insured) Cash value accumulation Proceeds can be estate tax free May, 6 of 9

29 Assumptions Details and Assumptions for Split Benefit Calculations General Assumptions Sam's DOB: April 5, 98 and Sue's DOB: March 8, 95 Calculations assume that the value of All Other Assets (excluding life insurance) is equal to $5,. These assets are assumed to earn.% interest. Hypothetical rates of return illustrated are not associated with any particular investment product. Calculations assume an ordinary income tax rate of.%. The Account and Other Assets are grown pro-rata based on the date entered. Estate Assumptions Assumes portability of any unused Applicable Exclusion Amount at first spouse's death. Federal Inflation Rate for Applicable Exclusion Amount is.%. Traditional IRA/Qualified Plan Assumptions Current Traditional IRA/Qualified Plan amount is $,, which includes the original after-tax amount of $, and assumes a growth rate of 5.%. Calculations assume all non-deductible and after-tax contributions (also known as basis, investment in the contract, and non-taxable portion) are included in the original after-tax amount of $. Hypothetical rates of return illustrated are not associated with any particular investment product. A portion of the distributions from the Traditional IRA/Qualified Plan that includes any after-tax amount may not be taxable. These illustrations assume there are no other Traditional IRA/Qualified Plan account balances for calculations that include any after-tax amount. Sam is actively employed with the Plan Sponsor and Sam is not a 5% or more owner of the Plan Sponsor; OR the plan is a (b) Plan that is not a government or church plan. Sam qualifies to delay distributions past age 7½. Required minimum distributions must begin the year Sam retires from the employer sponsoring the qualified plan, but they are NOT included in these illustrations. Beneficiary Information Beneficiary Name Beneficiary Beneficiary Date of Birth June, 98 August 5, 988 Percentage Split 5.% 5.% to non-spouse beneficiaries are taxed using an assumed ordinary income tax rate of.%. Traditional IRA Contributions may be tax deductible and earnings are tax-deferred. Annual contribution amounts are limited, and deductibility of contributions is based on modified adjusted gross income (MAGI), and not being a participant in an employer-sponsored retirement plan. Consult your tax advisor to determine the maximum taxdeductible contribution amount allowed annually. Contributions may also be non-deductible (after-tax), but earnings are tax deferred. These illustrations assume there are no other Traditional IRA/Qualified Plan account balances for calculations that include any after-tax amount. Required minimum distributions must begin by age 7½. May, 7 of 9

30 Assumptions (Continued) Details and Assumptions for Split Benefit Calculations Final Regulations Required Minimum are calculated based on the Uniform Lifetime Table. If your beneficiary is your spouse (who is more than years younger than you) distributions during your life may be calculated using the Joint and Last Survivor Table. Traditional IRA Rollover Assumptions Sue is named beneficiary. Each non-spouse beneficiary takes distributions based on the single life expectancy of the oldest beneficiary, minus one each year, if the beneficiaries failed to split the IRA into separate accounts by December of the year following the year of your death. Split Benefit-Rollover and Split Assumptions Sue is named beneficiary. After your death Sue rolls over the balance to an IRA and continues distributions based on his/her own life expectancy according to the Uniform Lifetime Table. At Sue's death, the IRA is split into separate IRAs with named beneficiaries. continue to each beneficiary at Sue's death calculated on the named beneficiary's life expectancy as of / in the year following Sue's death. Sue's estate is assumed to have cash liquidity to fund estate taxes outside of IRAs for this analysis. Split Benefit-Non-Spouse Beneficiary Assumptions At Sam's death, the TSA plan values are split into TSA plans for each non-spouse beneficiary. Sam's death is assumed in year. Your estate is assumed to have enough cash liquidity outside of TSA plans in this analysis. Each non-spouse beneficiary continues taking distributions based on his or her life expectancy and is assumed to live to the life expectancy used in the illustration. continue to each beneficiary at Sam's death calculated on the named beneficiary's life expectancy as of / in the year following Sam's death. May, 8 of 9

31 Assumptions (Continued) Details and Assumptions for Split Benefit Calculations Distribution Assumptions from the Traditional IRA/Qualified Plan that does not include any after-tax amount are taxable. A portion of the distributions from the Traditional IRA/Qualified Plan that includes any after tax amount is not taxable. The non-taxable portion is the amount of the distribution that bears the same ratio to the total amount of the distribution received as the total remaining after-tax amount bears to the Traditional IRA/Qualified Plan account balance at the end of the year. Early retirement distributions are not exempt from the IRC Section 7(t) penalty. Desired distributions from the qualified plan for premiums, expenses, or gifts are deducted from the Account of the owner and/or spouse. If the Account is not sufficient, the payments will still be assumed made from other assets of the owner or spouse and will be deducted from any "Other Assets" shown. Distribution method illustrated is equal to spending. Compliance with Revenue Ruling -6 Section 7(t) distributions are in compliance with the calculation methods stated in Revenue Ruling -6. The following calculation methods may be illustrated under this ruling: ) Extension of the existing Uniform Lifetime Table for use with the Life Expectancy Method. ) Addition of annuity factor table for use with the Annuity Method. ) Addition of interest rate (not more than % of the federal mid-term rate) for use with the Amortization and Annuity Methods. Tax Act of The American Taxpayer Relief Act of was signed into law on January, as P.L. -, also known as Tax Act of in this presentation. Tax Act of applies to deaths and gifts made in and later. Tax Act of provides for 'portability' of a deceased spouse's unused Applicable Exclusion Amount. Unused exclusion amounts may be passed to the surviving spouse (election must be made on timely filed estate tax return.) May, 9 of 9