Advanced Matters. There is a continual exchange of ideas between all minds of a generation. Auguste Rodin. November 2007 AdvancedMatters

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1 Advanced Matters Monthly Advanced Marketing and Product Information from Transamerica There is a continual exchange of ideas between all minds of a generation. Auguste Rodin November 2007 AdvancedMatters

2 Transamerica s Advanced Marketing Department Michael Babikian, JD, LLM, MBA Vice President and Department Manager Advanced Matters David Eisenberg Advanced Marketing Consultant Premium Financing Michael Gunnar, ChFC Advanced Marketing Consultant Charitable Planning Retirement Planning Victor Sanchez Senior Advanced Marketing Consultant Executive Benefits & Retirement Planning Nerre Shuriah, JD, LLM Advanced Marketing Consultant Estate Planning Business Succession Planning Nerre Shuriah, JD, LLM Editor Gay Groomes Managing Editor Jerome Tyler Sr. Design Questions/Information AdvancedMatters@transamerica.com Inside the November Issue of Advanced Matters Just click on any title below to go right to the stories that interest you. [ 2 ] [ 5 ] [ 8 ] [ 9 ] An Old Strategy for a New Opportunity Pension Maximization Learn about Pension Maximization, a strategy designed to help individuals make the most of the income they receive from their pension plan and increase the legacy they leave to loved ones upon their death Taking Advantage of Domestic Asset Protection Trusts When funded with life insurance, domestic asset protection trusts offer creditor protection, tax advantages and grantor access to policy values Trivia Question Planning for Families With Special Needs Why You Need to Know About OBRA Trusts Many families have a dependent with a disability. Planning for families with special needs is important specialized knowledge to have prior to meeting with such clients [ 11 ] Continuing Education News for the Field New courses, new books, new programs! Check it out here! [ 12 ] Did You Know? November 2007 AdvancedMatters 1

3 An Old Strategy FOR A NEW OPPORTUNITY PENSION MAXIMIZATION By Michael Gunnar It seems everywhere we turn we hear it The boomers are retiring. The financial services industry has been promoting this coming wave of retiring boomers as the next great business-building opportunity you won t want to miss. both a higher pension payout AND The Pension Maximization concept is a strategy to help retirees have survivor benefits. What is it about these next few decades that is creating such bullish optimism? The IRA rollover market: It is estimated that, starting in 2010, nearly half a trillion dollars will be rolled out of qualified accounts into IRAs each year. 1 Changing landscape of retirement: Baby boomers are expecting to live much longer than previous generations. Consequently, they ll spend much more time in retirement and this brings up an interesting challenge where will the boomers find the money to fund a retirement that could last 25+ years? 1 Financial Research Corporation, 2004 November 2007 AdvancedMatters 2

4 So, what s new? This is the same message that has been communicated many times over and over these past few years. In addition to the IRA rollover market and helping clients find solutions to their retirement income challenge, what about those who will be retiring with a pension plan? With so many boomers transitioning into retirement, this is an opportunity that s often overlooked. Generally speaking, clients who receive a monthly pension check may not provide much potential as it relates to sales. After all, the only access to the pension plan assets the client has is the check s/he receives. What sort of opportunity does that create? This is where the pension maximization concept comes in. What is the Pension Maximization Concept? It s a strategy designed to help individuals make the most of the income they receive from their pension plan and increase the legacy they leave to loved ones when they die. One of the biggest challenges many pension plan recipients face is deciding which pension payout option to choose. Should they choose the option that pays the largest monthly benefit, or go with a smaller payout in order to provide a survivor benefit? The good news is that they may not have to decide between a higher payout or survivor benefit. The Pension Maximization concept is a strategy to help retirees have both. November 2007 AdvancedMatters 3

5 How It Works The retiree chooses the pension payout option that will pay a retirement benefit for his/her life with no survivor benefits. This will provide the retiree with a higher payout than the survivor option. An insurance policy insuring the retiree is purchased, using a portion of the pension income. Should the retiree pass away first, his/her surviving spouse will receive a federal income tax-free death benefit. One option for the surviving spouse is to use the death benefit and purchase an annuity that will provide him/her with guaranteed lifetime income. Should the spouse pass away first, the life insurance death benefit can be passed on to the retiree s contingent beneficiaries (such as children, grandchildren, or a charity). Mission Accomplished With the pension maximization concept, the retiree is able to maximize the lifetime income from his/her pension plan. At the same time, the retiree can have peace of mind knowing that he/she did not overlook the needs of loved ones in order to maximize the pension plan s benefits. Life insurance and Pension Maximization Life insurance plays an important role in the pension maximization strategy. It provides the retiree with guarantees and a competitive rate of return on his/her retirement savings in the form of a death benefit. Retirees can leverage a portion of their pension dollars to provide a significant death benefit for their loved ones through the purchase of life insurance. Transamerica, Pension Maximization and You If you re interested in the pension maximization strategy, Transamerica has what it takes to help you grow your business in this market from product, to promotional material, to people. Product: Transamerica s TransACE universal life policy is an ideal product for this concept, with its guaranteed death benefit and competitive pricing structure. Promotional materials: Transamerica has an approved consumer brochure and prospecting letter designed specifically for individuals who are nearing retirement and expect to receive a pension check. You can find these tools under "Retirement Planning" on the Advanced Marketing page of TransACT. People: Transamerica s Advanced Marketing Department is at the ready to answer your questions and help you with any potential pension maximization cases you might have. Gave us a call! BACK TO TABLE OF CONTENTS November 2007 AdvancedMatters 4

6 Taking Advantage OF DOMESTIC ASSET PROTECTION TRUSTS By Nerre Shuriah In the past, self-settled trusts were not protected from claims by the grantor s creditors. A self-settled trust is an irrevocable trust from which a grantor may also be a beneficiary. Thus, if a grantor created an irrevocable trust with a trustee who had discretion to make distributions to the grantor, then the grantor s creditors could possibly reach the trust assets to satisfy any claims. In 1997, the state of Alaska enacted a Domestic Asset Protection Trust statute which provided that creditors could not reach assets that a grantor had transferred to an asset protection trust. Since then, Delaware, Nevada, Rhode Island, Utah and Oklahoma have enacted similar asset protection trust statutes. A grantor doesn t need to be a resident of one of these states in order to create a trust governed by a state s asset protection trust statute. An asset protection trust is an irrevocable spendthrift trust which authorizes an independent trustee, in his/her discretion, to make distributions to a class of beneficiaries that includes the grantor. As with any estate planning technique, there are advantages and disadvantages; and careful planning is required to ensure the strategy is implemented for the appropriate client. Although each state s statute differs in its terms, protection is usually afforded to claims of creditors that are post-transfer. If a creditor raises a claim against a grantor after the asset protection trust has been created, then the creditor has the burden of raising the claim within a timely period and proving that the creation of the trust was not a fraudulent attempt to avoid payment. If the claim arose prior to creation of the trust, such as for death, personal injury or property damage, the claimant usually can reach the trust assets. Claims for alimony from a spouse the grantor married prior to the creation of the trust or for child support receive an November 2007 AdvancedMatters 5

7 exception, and such claimants may always be able to reach the assets held in the trust. An asset protection trust created before marrying may act as a substitute to a pre-nuptial agreement. Asset Protection Trusts Offer Several Planning Advantages Each U.S. citizen is allowed to make $1 million worth of gifts during his/her lifetime, exempt from gift taxes. Many people are reluctant to take advantage of this tool because to make a gift is to give up all dominion and control over the asset. Finances and circumstances change, and many individuals fret about the consequences of giving up that much money. By placing such assets in an irrevocable asset protection trust, the grantor can use his/her lifetime gift exemption amount and thus remove those assets from his/her estate. However, should a need or emergency occur, the grantor does maintain the possibility of getting some of those assets distributed back out of the asset protection trust. Funding an asset protection trust with some of your assets may protect those assets from future creditor s claims and financial downturns. This is especially helpful for certain estate planning vehicles. Grantor-retained annuity trusts, charitable remainder trusts and qualified personal residence trusts are self-settled trusts since they are irrevocable and the grantor retains an interest in the trust. By establishing these trusts as asset protection trusts in the appropriate jurisdiction, such arrangements can be protected from the grantor s creditors. Creditor protection through the creation of an asset protection trust may also be a useful pre-immigration planning technique for nonresident aliens prior to moving to the U.S. Such persons could take advantage of favorable gift tax planning that may be available and may possibly retain the benefit from the assets after emigrating to the U.S. 1 Careful Planning is Needed to Ensure Creditor Protection Certain planning guidelines generally must be followed in order to maintain the creditor protection granted in the state statutes. In order to comply with most state asset protection statues 2, the grantor should never be appointed trustee or co-trustee. To ensure that only the law of the state with the asset protection statute 1 Gifts of intangible property made by non-resident aliens, even if the property is situated in the U.S., generally are not subject to federal gift taxes. IRC 2501(a)(2). 2 Since these statutes are state specific, you should advise clients to seek the advice of local counsel. November 2007 AdvancedMatters 6

8 applies and the grantor s state of residence has no jurisdiction, a co-trustee shouldn t be appointed in the grantor s state. Moreover, the grantor should not have the ability to replace the trustee or terminate the trust. The trust assets should not revert back to the grantor at a certain age or in a certain amount of time. Of course, these limitations lessen the control the grantor has over the trust and its assets, so an asset protection trust should only be funded with assets that the grantor anticipates s/he will not need. The ability to get the assets back from the trust is something to be used for peace of mind and only in an emergency. Using an asset protection trust for regular distributions to the grantor, such as with a checking account, will undermine the protection afforded against creditors. The grantor should not put all his/her assets into the asset protection trust. This is especially important if there are existing and/or foreseeable creditors. For instance, if a grantor expects to be named in a lawsuit, putting all his/her assets into an asset protection trust may be considered a fraudulent conveyance; and a court may ignore the trust. Best Assets to Fund an Asset Protection Trust Ideal assets to place in an asset protection trust are cash, stocks and bonds. A grantor can also consider funding his/her trust with a family limited partnership or limited liability company assets, as long as the grantor is not the general partner or manager of the entity. Real estate also can be put in the trust, but real estate located outside of the state governing the asset protection trust may cause problems, including conflict of laws. Asset protection trusts have also been frequently used as a method for ownership of life insurance on grantors lives. By having the trustee of the asset protection trust purchase and own the policy insuring the grantor s life, the grantor retains the ability to access the value of the policy in the event of an unfortunate financial reversal. For instance, if a client wishes to purchase a policy, s/he often has to choose whether to (a) set the policy up in an irrevocable trust and obtain an exclusion from federal estate tax but give up control over the policy, or (b) retain ownership of the policy and access to the federal income tax-free cash value accumulation but have the value of the death benefit included in his/her estate and thus subject to federal estate tax. By choosing to set up an asset protection trust and having the trustee purchase a policy insuring the grantor s life, the grantor now has the best of both options. S/he would be able to exclude the trust assets from his/her estate because the trust is irrevocable, but an independent trustee may take withdrawals November 2007 AdvancedMatters 7

9 or borrow from the policy in order to make discretionary distributions to the grantor in the event of an emergency. For couples seeking to obtain a survivorship policy, this is an excellent alternative to setting up a spousal lifetime access trust, in which only the non-grantor spouse has access to the policy s value. Retaining an interest as a discretionary beneficiary is apparently not enough to be considered a retained incident of ownership in the policy. 2 Conclusion The six states that have asset protection statutes all differ in the degree of creditor protection, the requirements of how the trust must be set up and the types of distributions that are allowed. Selection of the appropriate jurisdiction will depend upon the particular needs and objectives of each client. There are some pitfalls to avoid through careful planning and drafting of the trust; however, asset protection trusts do afford many advantages to a client. When combined with life insurance, they can offer creditor protection, exclusion from federal estate tax and flexibility to access policies values, thus overcoming many possible hindrances to a sale. BACK TO TABLE OF CONTENTS Trivia Question What segment of business was subject to the least audit scrutiny in 2003, according to the Treasury Inspector General for Tax Administration? a. S corporations b. Large C corporations c. Limited liability companies d. Family limited partnerships If you know the answer to our trivia question, please send an to: AdvancedMatters@Transamerica.com. Please put your answer (either A, B, C or D) in the subject line of the and put your address in the text of the message. One lucky person with the correct answer will receive a prize. Last Month s Winner Thanks to those of you who participated in last month s trivia contest. The question was On January 1, 2008, the name for 412i Plans will change to which of the following? The answer to the question is (a) 412(e)(3). The winner is Richard Baldwin of Salt Lake City. Congratulations, Richard! BACK TO TABLE OF CONTENTS November 2007 AdvancedMatters 8

10 Planning For Families with Special Needs- WHY YOU NEED TO KNOW ABOUT OBRA TRUSTS By David Eisenberg I recently gave a presentation on the topic of legacy planning as it relates to special needs families to a group of producers in Mississippi. Before getting started, I asked who in the room had ever done any planning for a special needs family. Not one person raised their hand! So many people in today s world have special needs and, while it surprised me that none of the agents I was speaking to had any experience planning for a special needs person, I knew at some point they would. Providing the information they need to plan for a special needs situation before they are faced with such a client became that much more critical. And because there may be many more agents out there who haven t yet dealt with a client having a special needs situation, I want to discuss the Omnibus Reconciliation Act of 1993 as it relates to special needs individuals. It s hard to understand what it means to be a special needs person. Imagine a worst case scenario where you can t dress yourself, bathe yourself, feed yourself, hold a job, drive a car or carry on an intelligent conversation. Every aspect of your life requires the assistance of somebody else. The services provided for your care are astronomically expensive, and the only way you could afford them is if your family is phenomenally wealthy, or the government provides you with that type of support. Now imagine that you don t come from an affluent family. However, as a result of a recent inheritance, your personally owned assets exceed $2,000. Do you realize that small inheritance would disqualify you from most federal assistance programs such as SSI and Medicaid? 2 PLR , Treas. Reg (c). November 2007 AdvancedMatters 9

11 So, how would a special needs person who inherits a sum of money retain federal and/or state-assisted benefits and keep their inheritance available to supplement that aid? The answer is an OBRA trust. One of the key ingredients to making this trust work is that it be an irrevocable trust. In general, if a trust is revocable, the assets would be considered an available resource per 205(e)(3)(A) of the Foster Care Independence Act of 1999 and therefore includable in the grantors estate. On the other hand, if the trust remains irrevocable, the assets are only considered available to the extent that payments are made to the grantor. Either way, those assets made available would likely disqualify the special needs person from qualifying for government assistance. OBRA trusts are irrevocable trusts established using assets that are set aside for and owned by an individual for his or her benefit. With an OBRA trust, the special needs individual would not be disqualified from receiving government aid and would still be able to use the proceeds of that trust to supplement his or her lifestyle. At the point when the special needs individual dies, the trust remainder would be used to repay the government for the benefits provided during that individual s lifetime. Do you realize that an inheritance as small as $2,001 would disqualify you from most federal assistance programs such as SSI and Medicaid? The benefit repayment is a major distinction between an OBRA trust and more traditional special needs trusts. In a traditional special needs trust, the assets are gifted to an irrevocable trust for the benefit of a special needs person. If the trust listed contingent beneficiaries, they would be entitled to the remaining assets when the primary beneficiary dies. To establish a special needs trust or OBRA trust is complicated and requires a sophisticated attorney who understands what public benefits are available and who can navigate the federal and state tax laws that apply. If a poorly drafted trust is constructed, the special needs beneficiary could be open to taxation of income on assets and, more importantly, could be disqualified from receiving any form of government aid. While there are many different assets that can be held in an OBRA trust, life insurance may be the best option. Life insurance proceeds are provided free of federal income tax and are available instantly upon the death of the insured. The proceeds enable the special needs individual to maintain the health and November 2007 AdvancedMatters 10

12 welfare they had been accustomed to when their caregiver was alive. The best part of an OBRA trust is that the distributions don't count against the $2,000 limit on assets for government aid qualification. Life insurance professionals should work with attorneys, CPAs and trust officers to ensure that proper trust documents are drafted and that the primary asset held in the trust is one that can provide the greatest long-term benefit. For more information on working with special needs trusts, or any other advanced planning question, please contact your Regional Marketing Center, or the Advanced Marketing Department at Transamerica. BACK TO TABLE OF CONTENTS Continuing EDUCATION NEWS We filed a new seminar presentation titled Life Insurance Checkup. This seminar provides advanced training on both the importance of monitoring life insurance policy progress and how to conduct a review of current policies. Please contact Field Education for approval in your state and your Regional Office for seminar scheduling. Be on the lookout for (1) ordering instructions for the 2008 Tax Facts book and (2) a flyer from National Underwriter on the new and updated Tools & Techniques book series. Coming next month! Don t forget our new online CE course coupon program. You can get a free online CE course when you schedule a visit from your Regional Marketing Center. Individuals licensed in Iowa and selling index products must complete 4 hours of CE on index training by 1/1/08. You should have received an Agency Manager s Bulletin on available courses and steps to meet the requirement. If you didn t see it, go to the Library on TransACT. BACK TO TABLE OF CONTENTS November 2007 AdvancedMatters 11

13 Did You Know? Clients with a dependent who has a disability or special needs have complex issues that require sophisticated estate planning. Such clients are not as rare as it may seem, for instance: In 2005, the percentage of working-age people with disabilities receiving Supplemental Security Income payments (SSI) was 15.4% in the U.S.* Over the past 20 years, the life expectancy of those with disabilities has doubled.** Among children age six to fourteen, one in eight has some type of disability.*** Transamerica has devoted an entire section on our TransACT website to planning with Special Needs Trusts. Visit to view our marketing materials and presentations, or contact your Regional Marketing Center or our Advanced Marketing department for more information. BACK TO TABLE OF CONTENTS * 2005 Disability Status Report, by Cornell University, ** Financial Firms Focus on Parents of the Disabled, Christopher Oster, WSJ Online, August 26, *** U.S. Department of Commerce. This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should be advised to consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here. Advanced Matters is a summary of information. It is not a promotion of any strategy discussed herein. Transamerica Occidental Life Insurance Company ( Transamerica ) and its representatives do not give ERISA, tax, or legal advice. This material is provided for informational purposes only and should not be construed as ERISA, tax, or legal advice. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of publication. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamerica s interpretations. Additionally, the information presented here does not take into consideration the general tax and ERISA provisions applicable to qualified defined benefit retirement plans or the applicable state laws of clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of November 1, November 2007 AdvancedMatters 12