Estate Freezing Techniques. For Producer or Broker/Dealer Use Only. Not for Public Distribution.

Transcription

1 Estate Freezing Techniques

2 Agenda Identify Potential Clients Qualified Personal Residence Trust (QPRT) Grantor Retained Annuity Trust (GRAT) Installment Sale to an Intentionally Defective Irrevocable Trust (IDIT) Self-Canceling Installment Note (SCIN) Please note: This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and /or tax advisor before making financial investment or planning decisions.

3 Identify Potential Clients & Concerns

4 The Client Has appreciating and/or income producing property Need for life insurance Wealth Transfer Wealth Replacement Estate Liquidity

5 The Concern How can I Create flexibility in my estate plan? Limit the impact of gift taxes? Reduce income taxes and capital gains when repositioning assets? Leverage my existing assets to create a larger legacy?

6 The Process Identify wealth management needs & solutions Evaluate assets and estate planning techniques Determine if life insurance is an appropriate asset class

7 Qualified Personal Residence Trust (QPRT)

8 QPRT: What is it? Grantor transfers personal residence to trust for term of years Retains right to live in home during term Home passes to beneficiaries after trust terminates Removes future appreciation from estate Leverages gift tax value

9 QPRT: Tax Treatment No income tax consequences Transfer to QPRT is a taxable gift for gift tax purposes Value of gift is remainder value FMV discounted by the time value of money Based on term of trust and assumed interest rate Interest rate used is the 7520 rate

10 QPRT: Tax Treatment If grantor dies during term of the trust, the entire FMV of the home is included in the estate Once term ends, no estate inclusion as long as grantor chooses on of the following options: Moves out of home Pays the trust (or beneficiaries) full FMV rent

11 QPRT: How It Works Grantor transfers residence to the QPRT for a selected term. Grantor QPRT After the term of the trust the residence passes to the specified beneficiaries without additional gift tax.

12 Benefits to Your Client Leverages gift of personal residence Removes future appreciation from estate Fully supported by tax code Win/tie strategy

13 Drawbacks Must move out or pay rent when trust terminates Works best when client has two homes Low basis for beneficiaries Benefit lost if death during term Must convert to GRAT if home sold and new one isn t purchased Preferable to pay off mortgage before transferring property to a QPRT

14 QPRT: Case Study $1,000,000 Home Husband & wife age year term January is 2.8% Taxable gift* = present value of remainder interest is $615,150 *Assuming the clients have used all of their applicable exemption amount in the year the gift to the QPRT is made. For illustrative purposes only. Actual results will vary.

15 QPRT: Case Study Value of home in 15 4%: $1,800,944 Estate tax savings on 35%: $ 415,028 For illustrative purposes only. Actual results will vary.

16 Grantor Retained Annuity Trust (GRAT)

17 GRAT: What is it? Irrevocable trust Retain a fixed annuity stream for a term of years Minimal or no gift tax depending on structure Zeroed Out GRAT

18 GRAT Transaction Grantor transfers assets to the trust Grantor receives annuity stream from the GRAT for a term of years At the end of the term the assets pass to GRAT beneficiaries

19 GRAT: How It Works Grantor transfers assets to the GRAT with potentially minimal or no gift taxes. Grantor GRAT GRAT pays annuity stream to grantor for a term of years. At the end of the term the remaining assets pass to the GRAT beneficiaries.

20 Using Life Insurance Should not be purchased in GRAT Grantor may still need estate liquidity Remaining estate Death during term of GRAT GRAT may be used as an exit strategy for private or premium financing arrangements

21 Benefits to Your Client Minimal or no gift tax upon transfer Removes asset and any future appreciation from taxable estate Provides cash flow to grantor Gift-tax free type transfers to trust

22 Drawbacks No GST planning Grantor may die before end of GRAT term Strategy is most beneficial with highly appreciating assets

23 GRAT: Case Study 60 year old woman with a $10M estate Transition business ($5M Value) to daughter Goal: Minimize gift and estate taxes Get liquidity for value of business Still receive a cash flow Maximize wealth to family and equalize inheritance For illustrative purposes only. Actual Results will vary.

24 GRAT: Case Study Mom establishes zeroed-out GRAT and transfers $5,000,000 business to GRAT Taxable gift of $2.14 Mom receives annuity payments of $580,187 for 10 years At the end of the GRAT term Daughter receives $2,434,905 For illustrative purposes only. Actual Results will vary.

25 GRAT: Case Study Mom wants to equalize inheritance for other 2 children Purchases a Guaranteed Advantage Universal Life policy inside an ILIT Using some of her GRAT payments Mom funds ILIT for 10 years with a $78,000 premium for a $2,510,558 death benefit For illustrative purposes only. Actual Results will vary.

26 GRAT Case Study: How It Works Grantor Mom uses $78,000 from annuity stream to fund ILIT Mom transfers business to GRAT for 10 year term $2.14 taxable gift $ 580,187 annuity stream from GRAT GRAT Value in 10 years passed to daughter $ 2,434,905 ILIT Death benefit $ 2,510,558 to two other children at mom s death For illustrative purposes only. Actual Results will vary.

27 Installment Sale to an Intentionally Defective Irrevocable Trust (IDIT)

28 IDIT: What is it? Irrevocable Trust Defective for income tax purposes Grantor is responsible for all income tax consequences Not defective for gift, estate, or generationskipping transfer tax purposes Trust is irrevocable and out of estate

29 IDIT Sale: Transaction Grantor transfers seed money to IDIT independent of the sale transaction Minimal gifting: 10-15% of value sold to IDIT Grantor sells assets to IDIT in exchange for installment payments Could be amortized, interest only, balloon note Interest is at the current applicable federal rate (AFR) Appropriate assets Closely held stock Real estate LLC/FLP Interests Rapidly appreciating but generating cash flow

30 IDIT: How It Works Client sells assets to the IDIT in exchanged for an installment note. Client IDIT IDIT makes installment payments to client based upon the terms of the note.

31 Using Life Insurance Trust can purchase life insurance Using excess cash flow after payment of loan interest and/or principal Trust can also use premium/private finance or private split dollar to pay life insurance premiums Assets available to assist with rollout

32 Benefits to Your Client Minimal gifting Taxation on sale to IDIT: Not a taxable event Not a gift No recognition of gain or loss Trust can incorporate SLAT, generation-skipping, and spendthrift provisions Future appreciation removed from taxable estate Provides cash flow to grantor

33 Drawbacks Trust must have some funds other than asset purchased Balance of note included in grantor s gross estate Gain on sale may be subject to income tax at death Remaining payments would be IRD Need income producing property, otherwise interests in the property will be returned to grantor Independent qualified appraisal for asset value may be appropriate

34 IDIT Sale: Case Study with Pass Through Entities Transition S Corp business ($10M Value) to 2 of 3 kids Achieve estate equalization among kids For illustrative purposes only. Actual results will vary. Get liquidity for value of business Maintain control of business Minimize estate taxes and maximize wealth to family

35 IDIT Case Study Pre Recap: Dad owns 100% $10M Post Recap: 10% voting 90% nonvoting Recapitalize S corp- 10% voting, 90% nonvoting Dad gifts a minimum of $630,000 seed money to the trust Dad sells 90% nonvoting stock to IDIT in exchange for 10 year note of $6.3M (assumes discount of 30%) with interest rate of 4.15% The use of discounts, though generally permitted where applicable, are often scrutinized by the IRS. For illustrative purposes only. Actual Results will vary.

36 IDIT Case Study Annual loan payment: $782,544 Payable for 10 years Based on amortized note of $6,300,000 and AFR of 4.15% Value of stock in 10 years: $15,205,311 Based on actual value of $9,000,000 growing at 6% and earning income at 4% Net of loan payments Grantor paying tax on all trust income Gift tax value of seed money: $630,000 For illustrative purposes only. Actual results will vary.

37 IDIT Case Study: How It Works IDIT buys stock using installment payments. $6,300, year Note $ 782,544 Client $630,000 seed gift stock transfer Dad transfers stock in exchange for cash installments $9,000,000 value before discounting IDIT Value in 10 years $ 16,894,790 For illustrative purposes only. Actual results will vary.

38 Benefits to Your Client All future appreciation of nonvoting stock is outside of Dad s estate Dad maintains control over corporation Dad makes additional tax-free gifts through payment of income tax for the trust Business passes to two children immediately Other children can inherit cash from sale not spent by Dad

39 Benefits to Your Client Insurance purchased by IDIT can equalize estate Note could be interest only with balloon payment at conclusion of the term. Balloon payment may be financed at least partially with life insurance* Dad receives the economic value of the business *Tax-free distributions assume the life insurance policy is properly structured, is not a modified endowment contract (MEC), and distributions are made up to the cost basis and policy loans thereafter. Should the policy lapse or be surrendered prior to the death of the insured, there may be tax consequences. Loans and withdrawals will decrease the cash value and death benefit.

40 Drawbacks to Design* IDIT may be unable to make payments Stock must provide cash flow to make payments Trust income taxable to Dad *Legal precedent for the IDIT design is limited

41 Self-Canceling Installment Note (SCIN)

42 SCIN: What is it? Installment note Contains a self-cancellation clause Buyer s obligation to pay ceases on seller s death Purchase price must reflect a principal risk premium or an interest rate premium Valuation expert

43 SCIN Transaction Seller sells asset to buyer in exchange for a SCIN Note must bear interest at least equal to AFR for the term of the note Risk premium Seller reports gain and recognizes interest over period of the note To avoid characterization of a gift, there must be a bona fide sale with the expectation that the note will be paid

44 SCIN Transaction cont d Upon Seller s death, note is cancelled and buyer has no further obligation to make payments. Neither asset or unpaid balance included in seller s estate for estate tax purposes If seller dies before receiving entire sales price, the estate will recognize any unreported gain

45 SCIN: How It Works Seller sells asset using a SCIN. Note must bear interest of at least the AFR and include a risk premium. Seller Buyer Buyer makes installment payments to seller until the earlier of full repayment or until seller s death.

46 Using Life Insurance Buyer can purchase life insurance for repayment Seller may still need estate liquidity and/or to equalize inheritance

47 Benefits to Your Client No gift or GST tax upon sale Upon seller s death, the asset and balance of note is not included in estate Future appreciation removed from taxable estate Provides cash flow to seller

48 Drawbacks Seller may live longer than life expectancy Risk premium Valuation expert Buyer needs cash to pay back installment payment Recognition of gain and interest by seller Potential that transaction could be characterized as gift if not properly structured

49 MetLife Brand One of America s largest financial companies with roots as far back as 1863 Over 70 million customers worldwide* and over 90 of the nation s top one hundred FORTUNE 500 * companies trust MetLife to provide the financial tools and protection they need to live life to the fullest. *FORTUNE 500, December FORTUNE 500 is a registered trademark of FORTUNE magazine, a division of Time, Inc.

50 Important Information This material reflects the law established under The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 ( Act ). Among other changes, the Act temporarily establishes maximum exemption amounts of $5,000,000 per person for estate, gift or Generation Skipping Transfer (GST) tax (together referred to as "transfer tax"), establishes a maximum transfer tax rate of 35% and provides for portability of the estate tax exemption between spouses. These changes, however, are only in effect through December 31, Unless Congress enacts new legislation, on January 1, 2013 the transfer tax laws will revert back to the laws (e.g. exemption amounts of $1,000,000 and generally 55% maximum tax rates) that were in effect in At this time, it is not clear what steps, if any, Congress will take to revise the transfer tax laws for years beyond Future changes in transfer tax exemption amounts and transfer tax rates may impact the appropriateness of any transfer tax planning strategy or product sale. Clients need to understand that tax law is always subject to interpretation and legislative change. Metlife and its affiliates do not provide tax advice and therefore clients must speak with their qualified legal and tax counsel regarding their current estate plan and what planning options are available and appropriate. BDVL20641 L [0410] 2009 PEANUTS United Feature Syndicate, Inc. Not A Deposit Not FDIC-Insured Insurance Products: Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value

51 Important Information Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice based on your particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances. Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policies features, risks, charges and expenses. Investors should consider the investment objectives, contract features, risks, charges and expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state. MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are based on the claims paying ability and financial strength of the issuing insurance company. Life insurance products are issued by MetLife Investors USA Insurance Company, Irvine, CA, Metropolitan Life Insurance Company, New York, NY, and in New York only by First MetLife Investors Insurance Company, New York, NY. All guarantees are based on the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company, Irvine, CA. All are MetLife companies. March 2011 BDVL20641 L [exp0512] PEANUTS 2011 Peanuts Worldwide. Not A Deposit Not FDIC-Insured Insurance Products: Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value