Wealth structuring and estate planning. Your vision and your legacy. Life s better when we re connected

Transcription

1 Wealth structuring and estate planning Your vision and your legacy Life s better when we re connected

2 Inside 1 Helping you shape the future 2 The elements of wealth structuring 4 The power and flexibility of trusts 6 The strategy and satisfaction of gifting 8 Life insurance as a wealth transfer tool 10 Fulfilling aspirations and passing on values 12 Comprehensive, integrated personal solutions Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated ( MLPF&S ), a registered broker-dealer, and Member SIPC. Merrill Lynch Life Agency Inc. ( MLLA ) is a licensed insurance agency. Both are wholly owned subsidiaries of Bank of America Corporation ( BofA Corp. ). Investment products offered through MLPF&S and insurance and annuity products offered through MLLA: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured by Any Federal Government Agency Are Not a Condition to Any Banking Service or Activity

3 Helping you shape the future The wealth transfer plan you put in place now can create enduring benefits for the people and philanthropic causes that matter most to you. One of the most important facets of planning is wealth structuring, the process of aligning your assets with your most important estate planning goals. Through the wealth structuring process, your Merrill Lynch advisor, 1 working together with trust and insurance specialists from Merrill Lynch and your estate planning attorney, can help you: Address long-held family goals while maintaining control of assets that have special importance to you and your family Pass on both your wealth and your values Protect and preserve assets while seeing they are distributed in the way you envision Support the philanthropic causes that may be significant to you Minimize taxes on assets passed to your heirs Building on the knowledge of your values and commitments, your Merrill Lynch advisor, together with a trust or insurance specialist and your estate planning attorney, can help make sure that your wealth transfer strategy and the estate plan that embodies it will reflect your vision and enhance your legacy. 1 Your Merrill Lynch advisor may be a financial advisor within Merrill Lynch or a private wealth advisor within the Private Banking and Investment Group. 1

4 The elements of wealth structuring Wealth structuring is both technical and highly personal. Meeting your specific needs and pursuing your objectives may involve a range of financial strategies and structures, combined in a single holistic, integrated strategy. Integrating the personal and financial Managing your portfolio typically focuses on short- and long-term investment objectives. Wealth structuring and estate planning, however, are likely to affect future family members you may never meet and influence events that may be difficult to anticipate. Wealth structuring is about positioning the assets in your estate to address your goals and aspirations. The components of your estate It is easy to underestimate the importance of planning without a full understanding of what may be included in your estate. In addition to financial assets such as bank accounts and investments, your estate will include: Retirement assets Insurance and annuities Business interests and investment real estate Personal assets, such as your home, boat or art collection With an inventory of your assets, you may discover that wealth structuring and estate planning have a greater role to play than you had realized. Minimizing transfer taxes Estate planning can help address many personal and financial goals, but one of the most significant is minimizing taxes that may be imposed as a result of assets being transferred to others. Additionally, the increase in the gift and estate tax exemption amount as a result of the Tax Cuts and Jobs Act of 2017 (the 2017 Tax Act ), which became effective on January 1, 2018, makes it especially important for you to review your existing plan or put a plan in place. By undertaking the planning process now, you can maximize the amount that is available to heirs and causes that are important to you before the higher exemption amount expires at the end of The federal tax system imposes three types of taxes that are directly related to wealth transfer planning: Estate tax This tax is paid on the amount of your estate after taking into account any unused estate tax exemption and certain other deductions. Gift tax Gift tax exists so that you cannot avoid all estate tax by simply giving away the majority of your assets during your lifetime. Amounts gifted that exceed the annual and lifetime exemption amounts are subject to gift tax. 2

5 Generation-skipping transfer (GST) tax This tax applies to assets that pass to grandchildren and others who are more than one generation away from you and it can apply in addition to regular gift and estate tax. Estate and gift tax exemptions are unified, which means that each dollar you make in taxable gifts during your lifetime that is sheltered by the unified exemption amount reduces your available estate tax exemption by one dollar. U.S. citizen spouses may receive an unlimited amount of assets from one another, in either lifetime gifts or through their estates, without incurring gift or estate tax. Keeping your plan up to date It is important to review your estate plan regularly to make certain it continues to address your goals, reflects your financial situation and takes advantage of any changes in tax laws. An important part of this review is analyzing asset titling and beneficiary designations along with your formal estate planning documents. Additionally, with the large increase in exemption amounts in 2018, it is important for anyone with an estate plan to update documents to ensure assets are directed in the way they were originally intended. If you already have an estate plan, a trust specialist working with your attorney can review it with an eye to your current goals and any changes in tax rules. Shaping your wealth transfer plan to help minimize transfer taxes Your spouse Marital deduction Unlimited taxfree transfers to spouses who are U.S. citizens Federal gift, estate and GST tax exemption amounts and highest tax rates Calendar Year Beneficiaries Annual exclusion $15,000 per recipient per year Lifetime gift exemption Allows aggregate lifetime gifts up to $11.18 million in 2018 free of federal gift tax Taxable transfers At gift tax rates YOU Education/ Health care Payments made directly to a provider (such as a school or physician) for qualified tuition or health care expenses are not considered taxable gifts Exemption Amount Gift Tax** Estate Tax** GST Tax** Charitable entities Charitable deduction Unlimited taxfree transfers to qualified charities* (Income tax deductions may be limited in certain situations) 2011 $5 million $5 million $5 million 35% 2012 $5.12 million $5.12 million $5.12 million 35% 2013 $5.25 million $5.25 million $5.25 million 40% 2014 $5.34 million $5.34 million $5.34 million 40% 2015 $5.43 million $5.43 million $5.43 million 40% 2016 $5.45 million $5.45 million $5.45 million 40% 2017 $5.49 million $5.49 million $5.49 million 40% 2018 $11.18 million $11.18 million $11.18 million 40% Highest Gift, Estate, and GST Tax Rate * Applies to gifts to private foundations as well as to public charities. ** The estate, gift and GST tax reverts back to the $5 million inflation adjusted exemption amount in

6 The power and flexibility of trusts Trusts remain one of the fundamental and most powerful wealth structuring tools, and can be used to address many estate planning objectives, from protecting and managing wealth during your lifetime to directing how you want your assets distributed and used in the future. Trusts during your lifetime Trusts are an effective way to transfer ownership of assets to others through gifting in the process, removing assets from your estate to reduce estate taxes. They can also help you avoid probate and maintain privacy. But they can do much more and may hold significant additional benefits during your lifetime. For example, using a living trust, you can provide for continuity of investment management and attention to the financial needs of you and your family if you become incapacitated removing a significant burden from your spouse and children during a particularly difficult time. Your Merrill Lynch advisor can help you determine which types of trusts may be appropriate for your goals and call in an experienced trust specialist to analyze and suggest trust structures to address your most complex needs. If a trust is needed, experienced professionals from U.S. Trust 2 will join the team, working with your attorney and tax advisor to help make the transition from concept to implementation seamless. 2 U.S. Trust is a division of Bank of America, N.A. 4

7 Passing on and protecting assets You can arrange for one or more trusts called testamentary trusts to be created effective upon your death. Not only can these trusts transfer assets to your designated beneficiaries, but they can also be structured to protect the assets from creditors and the effects of divorce, and to pursue specific personal objectives. How trusts can help you address special goals The variety and flexibility of trust structures mean that you can use them to address a wide range of very specific objectives. For example, with a spendthrift trust, you can give a trustee complete discretion over distributions to a beneficiary who may make poor financial decisions, and at the same time protect assets from the beneficiary s creditors. Or a family member who may need assistance managing money. You can establish a trust to address these goals and, if appropriate, incorporate life insurance into the strategy to provide a targeted inheritance amount or liquidity to offset taxes and other expenses. Case study: Distribution of assets between children and spouse John s will was drafted in 2009 when his net worth was $7 million and the federal estate tax exemption was $3.5 million. His estate planning documents direct that a bypass trust naming his children as beneficiaries be funded upon his death with his remaining exemption amount. * The assets that remain are to be placed in a trust to provide for his second wife. At the time John s estate planning documents were drafted, the estate tax exemption amount was $3.5 million. Had John passed away that year, $3.5 million would have been used to fund the trust for his children and the remaining $3.5 million would have been placed in the trust for his wife. By 2017, John s estate increased to an estimated $10 million. If he had passed away in 2017 without changing his estate planning documents, $5.49 million would have been placed in the trust for his children and $4.51 would have been left for his wife. Now, if he passes away those same formula clauses would direct the entire $10 million to be placed in the bypass trust for his children, leaving nothing to fund the trust for his wife Assets $7 million $3.50 $ Assets $10 million $5.49 $ Assets $10 million $10.00 $0.00 CHILDREN SPOUSE CHILDREN SPOUSE CHILDREN SPOUSE * The gift and estate tax exemptions are unified. Lifetime gifts reduce the amount of the estate tax exemption that can be claimed upon death, dollar for dollar. The remaining exemption amount refers to the estate tax exemption amount available to an estate after taking into account any lifetime gifts. 5

8 The strategy and satisfaction of gifting Gifting is one of the most effective ways to reduce the value of your taxable estate. You remove not only the asset from your estate, but also any appreciation. By making gifts during your lifetime whether to a charity or to an heir or beneficiary you also have the opportunity to observe the impact of your gifts firsthand. Balancing current benefits and long-term needs Gifting usually has an emotional dimension, but to have the greatest benefit, it should be based on a well-considered strategy. Remember that gifting is a balancing act between assets you will need to sustain your own lifestyle and amounts you may gift now to reduce future estate taxes. 6 It is important to discuss your gifting goals with your Merrill Lynch advisor and a trust or insurance specialist. In helping you create an overall plan that anticipates your needs, they can work with your attorney to protect against major unknowns, such as the cost of long-term care, and work with you to help you determine how much you can comfortably afford to give.

9 Gifted property versus inherited property While making lifetime gifts can be a powerful strategy for reducing estate tax, potential capital gains tax should be analyzed. When you gift assets, your tax basis (normally the price you paid) typically is carried over to the recipient whether that s an individual or a trust. If the recipient later sells the gifted property, capital gains taxes will be triggered based on the difference between the sales price and the tax basis. As a result, the gift recipient/seller will recognize a taxable capital gain that includes the property s appreciation arising both before and after you made the gift. Depending on the recipient s income level, the gain may also be subject to the 3.8% surtax on investment income. Inherited property, except for taxdeferred assets such as IRAs, is afforded different treatment. For capital gains purposes, the tax basis of the property generally is stepped up to its fair market value at the time of the owner s death. So if you leave property to a child who later sells it, he or she will be responsible for capital gains tax only on any appreciation generated after your death. Case study: Dynasty trusts passing more to future generations Earnings accumulate in trust Child Grandchild Greatgrandchild Future generations YOU Dynasty Trust Assuming an initial transfer of $11,180,000** Value of a Delaware dynasty trust End of year 1 $11,739,000 $11,739,000 End of year 20 $29,663,868 $29,663,868 End of year 40 (transfer to next generation) End of year 70 (transfer to next generation) End of year 100 (transfer to next generation) Gift/GST tax on amounts over $11.18 million* Up-front payment of tax on amounts in excess of gift and/or GST exemption Dynasty trusts help minimize future gift and estate taxes and usually benefit multiple generations. They typically last as long as state law allows and undistributed assets remain in the trust. You may find it beneficial to integrate life insurance into a dynasty trust, using all or a portion of the funds gifted to the trust to purchase a life insurance policy. Transfer tax benefits of a Delaware dynasty trust* $78,707,074 $340,167,437 $1,470,184,063 Value of an outright gift $47,224,244 (after transfer tax)*** $122,460,277 (after transfer tax)*** $317,559,758 (after transfer tax)*** * These projections are estimates only and are based on constantly changing assumptions. Actual results may be better or worse. Long-term financial projections cannot be made with any certainty and are never guaranteed. Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy. Calculations assume a 5% rate of return after taxes and fees and no distributions. ** Assumes 2018 federal GST exemption of $11,180,000 and federal gift exemption of $11,180,000, as set forth by the 2017 tax reform bill, are applied to the transferred assets (fully shields the transfer from federal GST and gift tax). *** Transfer tax rate = 40%, as set forth by the American Taxpayer Relief Act of

10 Life insurance as a wealth transfer tool The strategic use of life insurance can help you maximize the wealth you pass on to the people and causes you care about with less risk and potentially greater tax efficiency. When properly structured inside an irrevocable trust, life insurance benefits pass outside of your estate and are distributed to heirs without estate, gifting or income taxes. Your Merrill Lynch advisor, working together with Merrill Lynch insurance specialists and your attorney, can help you explore how life insurance can address a broad range of planning objectives. Creating a tax-free estate One of the most common ways of using life insurance in estate planning is by using it in conjunction with an irrevocable trust. Properly structured by your attorney, the irrevocable trust becomes the owner and beneficiary of a life insurance policy on your life. All the assets owned by the trust, including the life insurance death benefit, are excluded from your taxable estate. Combining life insurance and trusts Life insurance can work with trusts in your estate plan to control the way your wealth is distributed and ensure your heirs are getting the maximum benefit. You can purchase a life insurance policy within a dynasty trust to provide a legacy for children, grandchildren and future generations. You can also use life insurance in conjunction with a credit shelter or spousal access trust to provide for your spouse and create an estate for your children. If you have several children and plan to leave business interests or other high-value assets to one child, you may want to consider using life insurance to equalize your estate. Making the children who are not involved in the business beneficiaries of an irrevocable trust that holds a life insurance policy enables you to use life insurance to provide an inheritance of known value to them. This approach can also be useful if you have a blended family that includes older and younger children from two different relationships. Assets such as a home and an income source can be used to support younger children, while life insurance equalizes the inheritance received by older children. Providing liquidity to offset taxes The life insurance policy within the irrevocable trust can also perform another important role: providing funds to offset estate taxes. For example, the death benefit can be used by the trustee to purchase assets from your taxable estate or to lend money to the estate in both cases providing liquidity to pay taxes and avoid forced sales of assets. 8

11 How a life insurance policy in an irrevocable trust works To establish the irrevocable trust as the owner and beneficiary of a life insurance policy insuring your life, you transfer cash to the irrevocable trust for the trustee to pay life insurance premiums. Depending on your current financial situation, there are several ways to use gifts to pay the premiums. These include annual exclusion gifts or a single, large gift that uses all or a portion of your lifetime gift tax exemption. The benefits of this strategy can be even greater if a married couple has the trustee purchase a second-to-die life insurance policy. Generally, the cost will be less than a single-life policy, so for the same premium, you may be able to purchase a larger amount of coverage. In addition to life insurance, an irrevocable trust can own almost any kind of asset: cash, stocks, bonds, mutual funds, and real estate. It is important to remember that it is irrevocable, and you will not be able to change its terms after the trust has been established. Additionally, the assets that you transfer to the irrevocable trust are no longer your assets. The trustee will manage the trust assets, and the individuals who have been named as beneficiaries will receive those assets pursuant to the terms of the trust. Case study: Maximize the wealth you pass on Using an irrevocable trust as a vehicle to invest in life insurance can produce significant returns. Assume you and your spouse are age 65 and both of you are in good health and don t smoke. You use your annual gift exclusions of $45,000 to fund an irrevocable trust. The trustee can then purchase a $3,470,984 policy with an annual premium of $45,000. By using gifted assets to insure your life and your spouse s life, the death benefit then passes to your heirs outside of your estate. The chart below shows the internal rate of return on the investment of premiums paid for the $3,470,984 death benefit over a 25- and 30-year period, offering competitive rates through life expectancy and beyond. Age Gift of $45,000 annually Estate and income tax-free payment Policy Years YOU Irrevocable Trust Children or grandchildren Annual Policy Premium $45,000 annual insurance premium Death benefit Cumulative Premium $3,470,984 Life Insurance Policy On both husband and wife Net ROR on Life Insurance $45,000 $1,125, % $45,000 $1,350, % Understanding how insurance fits with your goals Your Merrill Lynch advisor can help you explore your options for using life insurance as a wealth transfer tool based on an understanding of your full financial picture and what you want to achieve. Working together with an insurance specialist and your tax and legal advisors, your advisor can help identify appropriate life insurance strategies. Merrill Lynch s rigorous due diligence and selection process means that you can choose from a range of professionally screened insurance solutions. 9

12 Fulfilling aspirations and passing on values Many individuals find that one of the most gratifying aspects of success is the ability to provide financial support to help transform charitable goals into meaningful actions. You may want your estate plan to include institutions that have made a difference in your own life, as well as charitable organizations that can positively affect the lives of others. Helping you give back Merrill Lynch has a long commitment to helping individuals and families pursue their personal visions and create a tradition of giving. Your Merrill Lynch advisor, together with a trust specialist, will help you evaluate the range of philanthropic vehicles and integrate your philanthropic vision into your overall wealth management plan helping you to make your vision a reality. The power of philanthropy in families Including your children and grandchildren in philanthropic plans is an effective way to demonstrate your family s values in action. Some families have found that working together to define and pursue shared charitable goals has helped to bridge the generations. And depending on the way you structure your giving, your children can become actively involved in analyzing potential recipients, evaluating impact and even managing assets. 10

13 Financial and tax dimensions of philanthropy Like gifts you make directly to family members or trusts, transferring assets to charitable organizations reduces the size of your estate and your estate tax liability. You may also receive an income tax deduction for charitable contributions made during your lifetime and simultaneously generate a payment stream for yourself. Although tax law may limit the federal income tax charitable deduction you receive, these limits are generous, and there are even fewer limitations on charitable deductions for federal estate or gift tax purposes. You can fund your charitable contribution in a number of ways. If you donate appreciated securities rather than cash, you may eliminate payment of capital gains taxes on the sale of the securities a fact that often makes charitable contributions an attractive way to reduce the risk of a concentrated stock position. Moreover, you may be able to make a larger gift than if you had sold the securities and donated the after-tax proceeds. You may want to consider making a charitable gift of life insurance. You can do that in two ways: Donate an existing policy Purchase a new policy that names the charity as beneficiary You can also use life insurance to replace wealth that passes to charity under your estate plan. This approach allows you to address your charitable goals while maintaining the value of the estate you pass to heirs. Philanthropic strategies and solutions What is an appropriate way to make gifts to benefit charitable causes? Your Merrill Lynch advisor and trust specialist can help you evaluate alternatives, taking into consideration your charitable goals, the types of assets you wish to give, the broader goals for your estate, and your desire to receive payments or provide for others. Among the options available to you are: Charitable remainder trusts that enable you to leave assets to charity, but generate a stream of payments for you or a designated individual. Charitable remainder trusts are particularly useful for individuals who have appreciated assets and want to diversify without triggering immediate capital gains taxes. Charitable lead trusts that enable you to provide for a charity and pass assets on to heirs at a reduced value for gift and estate tax purposes. Donor-advised funds that enable you to make a taxdeductible charitable contribution now but decide over time how you would like the funds distributed. Private foundations that offer you the greatest control over the management and distribution of your assets but also involve greater complexity and cost. To help you implement your philanthropic strategy, an experienced professional from U.S. Trust will join the team, working with you, your Merrill Lynch advisor and trust specialist, and your attorney and tax advisor. As one of the nation s largest and oldest providers of personal trust services, U.S. Trust brings deep fiduciary knowledge and philanthropic experience. 11

14 Comprehensive, integrated personal solutions Through the wealth structuring process, your Merrill Lynch advisor and trust and insurance specialists will work with you, your family and your other advisors to help you analyze each facet of your financial life in the context of your long-term goals and aspirations. Ultimately, the strategies you choose to implement will encompass all the factors that play a part in pursuing your vision for your family and your legacy: long-term goals for yourself and your children, unique opportunities for family members, investments, real estate, business interests, and other assets. The result is a holistic approach designed to provide comprehensive, integrated solutions of lasting value to you, your heirs and the charitable causes that are important to you. As your focus turns from concept to implementation, trust professionals from U.S. Trust will join the team, bringing deep fiduciary knowledge and experience. Working closely with your attorney and tax advisor, your team of Merrill Lynch and U.S. Trust professionals will help bring your wealth transfer plans to life, helping you to create a lasting and meaningful legacy. 12

15 Learn more today Contact your advisor to learn more about the role that Merrill Lynch and U.S. Trust can play in helping you structure your wealth and analyze your estate planning alternatives. 13

16 ml.com/legacy Investments involve risk, including the possible loss of principal investment. Merrill Lynch, U.S. Trust and their affiliates do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions. The case studies presented are hypothetical and do not reflect specific strategies we may have developed for actual clients. They are for illustrative purposes only and intended to demonstrate the capabilities of Merrill Lynch, U.S. Trust, and/or Bank of America. They are not intended to serve as investment advice, since the availability and effectiveness of any strategy are dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality. All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company. The Private Banking and Investment Group is a division of MLPF&S that offers a broad array of personalized wealth management products and services. Both brokerage and investment advisory services (including financial planning) are offered by the Group s private wealth advisors through MLPF&S. The nature and degree of advice and assistance provided, the fees charged, and client rights and Merrill Lynch s obligations will differ among these services. Investments involve risk, including the possible loss of principal investment. The banking, credit and trust services sold by the Group s private wealth advisors are offered by licensed banks and trust companies, including Bank of America, N.A., Member FDIC, and other affiliated banks. Trust and fiduciary services are provided by U.S. Trust, a division of Bank of America, N.A., Member FDIC. Insurance and annuity products are offered through Merrill Lynch Life Agency Inc. ( MLLA ), a licensed insurance agency. Bank of America, N.A., and MLLA are wholly owned subsidiaries of BofA Corp. Donor-advised fund and private foundation management are provided by Institutional Investments & Philanthropic Solutions ( Philanthropic Solutions ). Philanthropic Solutions is part of U.S. Trust. Banking activities are performed by wholly owned banking affiliates of BofA Corp., including Bank of America, N.A. Brokerage services may be performed by wholly owned brokerage affiliates of BofA Corp., including MLPF&S. MLPF&S and Bank of America, N.A. make available investment products sponsored, managed, distributed or provided by companies that are affiliates of BofA Corp Bank of America Corporation. All rights reserved. AR9PS8FT PM-0418 Made with 10% post consumer waste (PCW) recycled paper. Leaf icon is a registered trademark of Bank of America Corporation. 14