Demystifying Estate Planning To Grow Your Practice

Transcription

1 Demystifying Estate Planning To Grow Your Practice Presented by: Brett W. Berg Vice President Advanced Markets Prudential Individual Life Insurance Division Ed. 02/2016 Exp. 08/17/2017

2 Today s Session Estate Planning Does Affect Your Clients Importance of Estate Planning 4 Steps to the Estate Planning Process Protecting Your Client Protecting Your Client s Legacy Tax Reduction Strategies Implementation 2

3 Estate Planning Affects Your Clients CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS MYTH: Only rich people have estates FACT: Just about everyone has an estate 3

4 Importance of Estate Planning Reduce Expenses and Taxes Make Wishes Known Control Asset Distribution Ease the Transition for Loved Ones 4

5 Estate Planning Process 4 Steps CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS STEP 1 Protecting Your Client STEP 2 Protecting Your Client s Legacy STEP 3 Tax Reduction Strategies STEP 4 Implementation 5

6 STEP 1 Protecting Your Client 6

7 What Clients Can Do To Protect Themselves Durable Power of Attorney Medical or Advanced Directives Guardianship Business Transfer Life Insurance 7

8 STEP 2 Protecting Your Client s Legacy 8

9 Step 2: Protecting Your Client s Legacy Creating a Will Estate and other Tax Laws Establishing a Trust Performing a Beneficiary Review 9

10 When There s a Will Avoid Intestacy Reduce Expenses, Taxes Client s Wishes Known Makes it Easier for Family More than half of American adults don t have a will. 1 1 Most Americans Don t Have a Will; FindLaw.com, 2010 Accessed February

11 Federal Estate Taxes Aggregate Exemption Amounts Lifetime Gift Tax Exemption Total amount transferrable to all recipients without gift tax, $5,450,000* Top Rate of 40% In addition to annual exclusion gifts Reduces federal estate tax exemption if used Estate Tax Exemption Total amount transferrable to all recipients without estate tax, $5,450,000* Top rate of 40% Generation Skipping Transfer Tax Exemption Total amount transferrable to all skip persons without GST Tax, $5,450,000* Top Rate of 40% Can only be allocated to a gift or bequest Unified with other exemptions *Amount for 2016, indexed annually for inflation; Note that unused portion is portable to one s spouse. 11

12 Don t Forget State Death Taxes Estate Taxes Inheritance Taxes Other 12

13 Other Taxes Due at Death Estate income tax Tax-deferred accounts 13

14 Portability of Exemption for Spouses CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Surviving spouse can use decedent s unused exemption Benefits the surviving spouse Continued need for planning remains Does not apply to GSTT Estate Tax Return Election: DSUEA 14 Died with $3 million estate left to children $7 Million Applicable Exclusion amount ($5 Million basic exclusion amount, plus $2 million DSUEA)

15 Credit Shelter Trust 1. At death of first spouse, trust is funded with an amount equal to the exclusion amount of first spouse 1 CST 2. Surviving spouse gets income/principal distributions 2 3. Corpus of trust distributed upon death of second spouse to children/beneficiaries 3 15

16 Trusts General Types Trusts are legal arrangement where a trustee owns assets for benefit of another. Revocable Trust Irrevocable Trust 16

17 Perform A Beneficiary Review Review Insurance Policies and Investment Accounts, such as Annuities and IRAs Life Changes Provide For Your Loved Ones Avoid Probate 17

18 STEP 3 Tax Reduction Strategies 18

19 Step 3: Creating Tax Efficiencies CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS Lifetime Gifts Annual Gifting Trusts 19

20 Gifting Goals Reduce future estate tax exposure Leave more to family, less to government Keep estate assets in tact Preserve a family business Enjoy seeing the recipient benefit during the client s life 20

21 Annual Gifting Gift $28,000 To Each 21

22 Accelerated Gifting $70, Plan Contribution Using the Five-Year Gifting Election 529 PLAN 22

23 Gifting-Annual vs. Lump Sum Hypothetical Gifts by a Married Couple $84,000/year $10,000,000 Annual Exclusion Gifts 1 Lifetime Exemption Gift 1 Hypothetical Estate Tax Savings by Year 20 2 $1,166,567 $6,613,191 1 Annual gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse makes a $5,000,000 lifetime gift utilizing part of their $5,450,000 lifetime gift exemption for Assumes the $84,000 annual gifts would have been accumulated inside the grantors estates at a 5% net rate of return then subject to a 40% flat estate tax rate. 2 Assumes the appreciation on the $10,000,000 gift at a 5% net rate of return would have been taxable inside the grantors estates at a flat estate tax rate of 40%. This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary. 23

24 Why Gift and Life Insurance Hypothetical Gifts by a Married Couple $84,000/year Annual Exclusion Gifts 1 Hypothetical Estate Tax Savings by Year 20 2 $1,166,567 Life Insurance Premium $84,000/year Level pay Death Benefit $6,495,129 Death Benefit IRR at Joint Life Expectancy (age 91) 5.56% 1 Annual gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse uses $5,000,000 of their $5,450,000 lifetime exemption for Assumes the $84,000 annual gifts would have been accumulated inside the grantors estates at a 5% net rate of return then subject to a 40% flat estate tax rate. Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife SUL Protector, guaranteed to age 121. The internal rate of return (IRR) is the after-tax rate of return that would be needed each and every year to accumulate an amount equal to the death benefit by the respective year/age assuming the premiums were alternatively invested. PruLife SUL Protector is issued by Pruco Life Insurance Company except in New York where it is issued by Pruco Life Insurance Company of New Jersey. This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary. 24

25 Irrevocable Life Insurance Trust CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS When properly used, an ILIT will receive the death benefit proceeds of a life insurance policy both income and estate-tax free. 25

26 Irrevocable Life Insurance Trust CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS 1. Client s attorney drafts trust and client gifts premium to trust* 2. ILIT purchases policy on client s life 3. Upon death, policy pays death benefit to ILIT federal income and estate tax free 4. ILIT distributes proceeds to trust beneficiaries *There may be federal gift-tax consequences associated with the funding of an Irrevocable Life Insurance Trust. 26 4

27 Spousal Lifetime Access Trust (SLAT) Grantor Spouse Beneficiary Spouse Gifted $$$ from grantor spouse Distributions, via trustee, to beneficiary spouse Irrevocable Life Insurance Trust (ILIT) The ILIT pays premiums to the insurance company. Upon death, the death benefit is paid to the ILIT income and estate tax free, generally. Future Heirs Distributions to other trust beneficiaries Life Insurance Policy The trustee, at their discretion, can make distributions to the spouse while living Only one spouse (grantor spouse) can make gifts to the ILIT which must be done while he or she is alive (beneficiary spouse can not make such gifts) Lifetime trust distributions to the beneficiary spouse and/or other trust beneficiaries, can be made through policy loans and withdrawals* Indirect access to trust assets could be lost upon divorce or beneficiary spouse pre-deceasing the grantor spouse (consider floating spouse provisions) * Outstanding loans and withdrawals will reduce policy cash values and the death benefit and may have tax consequences. 27

28 Planning for Beneficiaries with Special Needs Government assistance programs Letter of Intent Reaching the age of majority Avoiding a mistake with financial gifts or inheritance Special Needs Trust and life insurance 28

29 EPIC (ESTATE) FAILS 29

30 Marlon Brando Dispute over an alleged, verbal promise Without specific documentation in the will, the estate settled a claim for $125,000 Wishes need to be documented in a Will and made specific. 30

31 Sonny Bono No will or trusts the state appointed the administrator Administrator forced to defend claims A Will is imperative to support intentions. 31

32 Phillip Seymour Hoffmann Will not updated to include children born after drafting $30 million taxed at 40% Missed tax deferral opportunity It s critical to update one s Will due to life changes and to implement a plan to account for estate taxes. 32

33 Diana, Princess of Wales Letter of wishes not carried out as it wasn t referenced in her will. Stating specific intentions in one s Will is imperative. 33

34 STEP 4 Implementation 34

35 Step 4: Implementation Team Approach Attorney Financial Advisor CPA Prudential Representative 35

36 Create The Right Plan For Your Client Are you aware of what the current estate tax landscape looks like? Do you have a Will? If so, do you have an executor or executrix named for your Will? Have you considered establishing a trust to help disperse your assets? When was the last time you performed a beneficiary review? 36 If your client fails to plan, plan to fail!

37 Federal 2016 Budget Proposals CREATED EXCLUSIVELY FOR FINANCIAL PROFESSIONALS A Law is Only Permanent Until Congress Decides to Change It! Estate and GST Exemptions $3.5M, Lifetime Gifts $1M, no indexing, Top Rate 45% Gifts or Bequests of Appreciated Property is a Capital Gains realization event Decouple Annual Gift Tax Exclusions from Crummey powers by creating new category of gifts to trusts of $50k per donor per year Grantor Retained Annuity Trusts (GRAT) 90 year perpetual trust limit Sale to Intentionally Defective Grantor Trust Eliminate non-spouse stretch IRA s, must be distributed within 5 yrs Limit on total of tax-deferred retirement accounts to provide maximum annuity permitted under DB plan(currently $3.4M at age 62) Required Minimum Distributions for Roth IRA s at 70 ½ 37

38 Federal 2016 Budget Proposals Key Points Taxpayer Friendly Proposals Permit non-spouse beneficiary to roll over to an inherited IRA within 60 days vs. direct trustee to trustee transfer No RMD s from IRA s and retirement accounts if aggregate value does not exceed $100k 38

39 Questions? 39

40 Important Information This material has been prepared by The Prudential Insurance Company of America to assist financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that we are not rendering legal, accounting or tax advice. Such services should be provided by the client s own advisors. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code. Although this material is intended to be accurate as of the date of initial publication, Prudential does not assume any liability or responsibility for any errors or omissions in such materials or undertake any obligation to update such materials. Death benefit proceeds are generally received federal income tax free as provided in Internal Revenue Code Section 101(a). Life insurance issued by The Prudential Insurance Company of America, Pruco Life Insurance Company (except in NY and/or NJ) and Pruco Life Insurance Company of New Jersey (in NY and/or NJ). Securities are offered by Pruco Securities, LLC. All are Prudential Financial companies located in Newark, NJ. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. 40