Cincinnati Chapter FSP www.financialpro.org Solutions for a Secure Future (formerly the American Society of CLU & ChFC) Financial 2008-2009 BOARD OF DIRECTORS OFFICERS: President Andrew F. McClintock, CLU, ChFC, RHU, REBC 513-421-2522 amcclintock@cinci.rr.com Immediate Past President Ernest J. Martin, CLU, ChFC, CFP 513-794-1095 emartin@theonfgroup.com President-Elect/Membership Chair Joseph F. Stenken, CLU, ChFC, JD 859-692-2222 jstenken@nuco.com VP Of Education John D. Dovich CLU, ChFC (513) 579-9400 john@jdovich.com Secretary/Treasurer Stephen P. King, CFP, CLTC 513-530-9700 steve@wqcorp.com TRUSTEES: Continuing Education/VTC Robert S. Cottrell, CFP, CLTC (513) 942-1000 rcottrell@finsvcs.com Communications Chair James LeBlond, CLU, ChFC 513-362-1504 jimleb@cinci.rr.com Public Relations Chair Sonya E. King, JD, LLM (859) 692-2242 sking@nuco.com Cincinnati Chapter Pro News and Information Letter of the Cincinnati Chapter www.sfsp.net/cincinnati January/February 2009 What s Inside: President s Podium SFSP MemberGram Large Case Strategies for the High Net Worth Market Segment SFSP January 29th Meeting When Client Objectives Are at Cross-Purposes, Try Private Split-Dollar Member Get A Member Program Rives to Chari FSP Risk Management Section Welcome New Members SFSP Calendar of Events 4100 Executive Park Dr. #16, Cinti, OH 45241 Phone: 513-554-3062 Fax: 513-563-9743 SocietyofFSP@aol.com Chapter Administrator: Lauren Estness
Page 2 President s Podium Happy New Year and Best Wishes for a healthy and prosperous 2009! Your Cincinnati Society of FSP has scheduled 4 outstanding CE credit programs for you to attend starting on January 29 th. Please refer to the enclosed schedule. For our annual meeting, May 21st, the President of our National Society, Roderick P. Hanson, CFP, CLU, ChFC, AEP will be our featured speaker. Mark your calendar for the January 29 th meeting, Estate Planning Update 2009 & Succession Planning in the Family Business System: The Role of the Most Trusted Advisor at the Horan Conference Center. Our annual directory will be going to print the latter part of January. If you by chance have not taken care of your 2008-2009 dues, please do so right away in order to be included. If you have any questions concerning membership, please don t hesitate to call Joe Stenken our Membership Chair. Please note that between now and the end of June there is a Member Get A Member Contest going on. For one new member recruited you receive 25% off your 2009-2010 National dues, for 2 to 4 members receive 50% off, and for 5 or more recruited receive 100% off. Please take a few minutes and share the benefits of FSP with an associate in your office or a CPA or JD with whom you do business. This is an outstanding time for a new member to join. The pro-rated dues effective February 1 are $193.08. The dues schedule and membership application are included in this issue of Financial Pro. The strength and future of our chapter is our members. Thanks for your enthusiastic support. See you on the 29 th! Andy McClintock Andy McClintock CLU, ChFC, RHU, REBC
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Large Case Strategies for the High Net Worth Market Segment Page 4 By Rick Blaser and David Hunter Very wealthy and sophisticated clients deserve only the very best and most sophisticated planning techniques. Not only do they deserve these techniques, they need them. The federal estate and gift tax system is designed to tax the wealthy on the transfer of assets from one generation to another, during life and at death. The tax system has limited exemptions for both lifetime transfers and transfers at death and those exemptions do not increase with the size of an estate: the bigger the estate, the larger the tax. The primary objective of most sophisticated wealth transfer plans is to transfer as much wealth as possible to the intended beneficiaries, paying the least amount of estate and gift tax possible. A major part of the implementation is to use the available exemptions in the most beneficial way possible. Following are summaries of sophisticated strategies that may benefit some of your ultra-wealthy clients. Strategy #1: Dynasty trust planning A dynasty trust is an irrevocable trust designed to last for as long as possible under the state perpetuity laws. In some states a trust can be established to last forever. It is called a dynasty trust because, when properly structured, it can create a family dynasty that can last for many generations. This strategy is attractive to the ultra-wealthy for several reasons. First, it appeals to their sense of well-being by ensuring that future generations remember them and their accomplishments. Second, the strategy can yield significant tax benefits because, when properly structured, the assets in the trust avoid estate taxes at every generational level. Under current law, each individual is allowed a generation skipping transfer tax (GST) exemption in the amount of $2 million; married couples have a total of $4 million. People may allocate their GST exemption amount at death or during life. However, because the federal lifetime gift tax exemption amount is only $1 million per person, most married couples chose to use only $2 million of the exemption during their lives. Any remaining GST exemption can be allocated to assets at death. Of the different ways to fund a dynasty trust, the easiest is to gift $2 million to the trust. Once the trust has the money, it may purchase life insurance to leverage assets in the trust. The life insurance can be purchased on the grandparents or parents, which can increase what the grandchildren get, but will probably limit the benefit of the trust to the parents/ insureds. Depending on the size of the estate and the individual considerations of the clients, they may only want to use a portion of their lifetime gifting exemptions for this strategy. The rest of their exemptions can be used for other strategies. If they are interested in creating a dynasty trust with significantly more assets, they may want to explore Strategy #2. Strategy #2: Sale of assets to an Intentionally Defective Grantor Trust An intentionally defective grantor trust (IDGT) is
Page 5 Large Case Strategies for the High Net Worth Market Segment an irrevocable trust designed to be effective for estate and gift tax purposes (i.e., it is outside the estate) but defective (i.e., ignored) for income tax purposes. Under this strategy, one client is the grantor (creator) of the trust. He or she will gift a significant amount of money (typically about 10%) of what will be transferred to the trust. Let s assume that your client seeds the trust with $1 million. The same client then sells $10 million of assets to the trust for a note, leaving the trust with $11 million of assets. All the growth on the assets, over and above the interest due on the note, is outside the estate and goes to benefit the trust beneficiaries. Interest due on the note is usually set at the appropriate applicable federal rate (AFR) for the term of the note, which the IRS publishes monthly. For this strategy to be effective, the assets inside the trust must appreciate (or generate income) at a rate above the interest amount due to the grantor on the note. Clients could also consider selling assets that have a discount associated with them, typically limited partnership interests, non-managing LLC interests or nonvoting S-corporation stock. For example, let s assume that the $10 million of assets purchased by the trust represent limited partnership interests, discounted at 30%. That would mean that the underlying assets in the partnership could be worth $14,285,714 if the partnership is liquidated. Assuming these numbers, the grantor would have (before growth) transferred $4,285,714 of assets from his or her estate. Furthermore, to meet the current long-term interest rate of 5%, the trust assets would only have to generate about 3.5% of income annually. Excess earnings on the trust property could be used to buy life insurance, the proceeds of which could be then used at death to repay the $10 million loan, thus leaving the other assets intact and eliminating the need to liquidate the partnership. If the note is repaid before the death of the insured, the life insurance proceeds enhance the plan by adding to the amount of wealth transferred. The only gift necessary for this strategy is the seed money, thus making it an effective gift tax leveraging strategy. Furthermore, generation transfer tax exemptions can be allocated to the initial seed money to make the trust a dynasty trust a very big dynasty trust! Strategy #3: Private split-dollar with Grantor Retained Annuity Trust rollout This strategy yields maximum gift tax leverage and enables clients to purchase large amounts of life insurance with only minimal gift tax consequences. First, the clients set up an irrevocable life insurance trust (ILIT). The trustee purchases a survivorship life insurance policy for a specific amount of death benefit. The life insurance trust then enters into a private split-dollar agreement with the insureds. Under the agreement, the insureds are entitled to an interest in the policy equal to the greater of their premiums paid or the total cash value of the policy. The insureds pay most of the premium and the life insurance trust pays only a small fraction of the cost (derived from IRS Table 2001 or an alternate term rate of the insurer). Because the trust is only responsible for a fraction of the premium, only minimal gifts are required and significant gift tax leverage can be accomplished. In fact, it is sometimes possible to structure the trust s share of the premium to be lower than the allowable annual gift tax exclusions.
Page 6 Large Case Strategies for the High Net Worth Market Segment At the same time the clients create the life insurance trust and enter into the split-dollar arrangement, they create a grantor retained annuity trust. A GRAT is a specially drafted trust whereby the grantor retains an annuity (generally, a fixed annual payment) for a number of years and the trust is entitled to whatever property is left at the end of that annuity stream. For gift tax purposes, the value of a gift to a GRAT is determined by subtracting the actuarially determined value of the annuity from the full value of the property contributed. By creating an annuity stream valued at an amount equal to the value of the property contributed to the GRAT, it is possible to fund a GRAT without any gift tax liability (most of the time the annuity stream is valued at slightly less than the full value of the property so that a gift tax return is required and the statute of limitations will begin). In this strategy, the remainder beneficiary of the GRAT is the life insurance trust involved in the split-dollar agreement with the insureds. Assuming the assets transferred to the GRAT appreciate in value, there may be significant assets left when the annuity stream ends. At the end of the annuity stream, the assets left in the GRAT will pour over to the life insurance trust. The trust will then use all or a portion of the GRAT assets to roll out (repay) the insureds their interest in the life insurance policy. End result: the insurance policy should be fully funded and outside of the estate. The primary advantage of this strategy is gift tax leverage. Unfortunately, there are complex tax rules that make this strategy unattractive for generation-skipping tax (GST) purposes. Strategy #4: Private foundation Given the limited number of estate tax exemptions and deductions available, there will very likely be some level of estate tax levied upon the estate, unless the estate is transferred to a charity. The ultra-wealthy are prime candidates for setting up their own charities, termed private foundations. By establishing a private foundation, clients are afforded the choice of paying tax to the government or giving money to a charity that perpetuates their charitable beliefs. Because the amount of the estate that is transferred to charity does not pass to the family, clients may want to replace the value of the assets given to the charity with life insurance. Some clients can simply use their annual exclusions and/or lifetime gift tax exemption to fund an irrevocable life insurance trust (ILIT) to replace the assets. However, it is unlikely that the annual exclusions and lifetime exemptions would provide enough insurance for many high net worth clients. For these clients a private foundation serves as a complement to the strategies discussed in this article. Rick Blaser, J.D., CLU, ChFC is an advanced sales consultant at The Hartford in Simsbury, Conn. His e-mail address is richard.blaser@hartfordlife.com. David Hunter, CFP, CLU, ChFC, CAP, is a senior account executive on The Hartford's Private Wealth Management team. His e-mail address in Salem, VA, is david.hunter@hartfordlife.com Copyright 2009 by National Underwriter Life & Health Magazine. A Summit Business Media publication. All Rights Reserved. Reprinted with permission.
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When Client Objectives Are at Cross-Purposes, Try Private Split-Dollar Page 8 By Bruce A. Guillemette This is a short synopsis of a phone call I received from a producer: I ve got a guy. He s a doctor with a wife and two kids and he s still relatively young: 45-years-old. He doesn t have an estate tax problem yet. He is making a lot of money. He wants to save for retirement and protect his savings from creditors that may arise from future malpractice lawsuits. He also wants to make sure that if he dies, his wife will have enough money to live on. He knows he needs life insurance and heard he could use it to help save for retirement, too. But if his estate grows the way we think it might, we don t want the insurance in his estate. If we put it into a trust, he can t access the cash value. According to the objectives defined, the client needs: Retirement income. Creditor protection for the retirement income. Survivor income/estate liquidity. These objectives conflict with each other. What can we do? Enter private split- dollar The situation may sound similar to those of some of your clients, particularly if you service medical professional clientele. If you ve read the title of this article, you know we recommended a private split-dollar plan as an alternative. Why? Private split-dollar plans allow you accomplish these competing objectives. Although known best for the gift tax leverage they offer, private splitdollar plans can also be arranged to retain access to life insurance policy cash values for retirement income. Here s how it works: The client establishes an irrevocable life insurance trust (ILIT) that will own the policy. The trust is a defective grantor trust for income and estate tax purposes, where the client is both the grantor and the insured. With this type of trust, trust income is taxable to the grantor and any transactions between the grantor and the ILIT are ignored for income tax purposes. The insured s spouse advances money to the ILIT for premium payments. The ILIT will owe the spouse either the amount he or she advances to it or the policy cash values. The ILIT owns the policy to avoid inclusion in the client s taxable estate and to keep it beyond the reach of the client s creditors. Most states laws largely or even entirely protect life insurance from creditors, with the exception of the Internal Revenue Service, provided that the debtor does not own the insurance and that any transfers were not done to defraud creditors. Also, life insurance policy cash values owned by ILITs typically can t be accessed by anyone other than the trustee without subverting estate tax and creditor protection planning. In a private split-dollar plan, the trustee will use the policy values to repay the client s spouse for the money advanced to the trust. The payments the spouse receives from the ILIT may be used to supplement the couple s retirement income. (It helps to have a solid marriage; otherwise, the spouse may be the only one who gets to supplement his or her income.) If the amount owed to the spouse under the
Page 9 When Client Objectives Are at Cross-Purposes, Try Private Split-Dollar continued arrangement is limited to the amount of money he or she advanced to the ILIT, the arrangement will be established as a loan regime private split-dollar plan and interest will be either accrued or paid annually. The interest is often accrued to maximize the amounts paid to the spouse. But if the time horizon for repayment is short (e.g., less than 15 years) or if the policy cash values otherwise won t support the repayment obligation that results from accruing the interest, the ILIT can pay the spouse the annual interest due from cash gifts made by the client. Generally, it is not recommended to use economic benefit regime-based split-dollar arrangements because the ILIT would owe the spouse the entire policy cash value, a debt that could only be satisfied at the death of the insured or upon total surrender of the policy. If the spouse pre-deceases the insured, any amount still owed to him or her would be included in their estate. For the insured to be able to derive retirement income from the policy, the amount owed would have to be passed to the insured. While the policy cash values owned by the ILIT would continue to be beyond the reach of the insured s creditors, the death benefit proceeds could be included in his or her estate. How to best deal with this situation if it arises depends on the client s situation at that point in time. At the client s death, the death benefit is paid to the ILIT. The ILIT then repays any remaining money owed to the spouse and uses the remainder to provide the liquidity needed to settle the client s estate and distribute wealth to beneficiaries. Valuable benefits In summary, private split-dollar plans are not just for gift tax leverage. They have the potential to provide clients with 3 additional valuable benefits: retirement income from policy values, survivor income/estate liquidity from policy death benefits, and creditor protection for the retirement fund (policy values) and the death benefit owned by an ILIT. If you encounter situations like the one described at the beginning of this article, consider evaluating how well a private split-dollar plan might work. Bruce A. Guillemette, MSM, CLU, ChFC, FLMI, is assistant vice president of advanced markets case design for AXA Equitable s independent life channel, AXA Distributors, LLC, New York. He can be reached at bruce.guillemette@axa-equitable.com Copyright 2008 by National Underwriter Life & Health Magazine. A Summit Business Media publication. All Rights Reserved. Reprinted with permission.
Page 11 Dues for the Cincinnati Chapter Note the table below illustrates the total dues amount (both local and national dues amounts) for membership. The Society membership year runs from October 1 to September 30. As a special incentive for new members to join our organization, we are pleased to offer a prorated reduced dues structure program or a 1-month, 2-month, or 3-month free offer for those new members joining at specific points in the membership year. Please note: If you are a renewing member, your membership dues would be the first column labeled "Full Dues Amount." If you are a new member, joining in the months of January thru June, you can take advantage of our special prorated reduced dues structure program. You will pay an amount based on the number of months remaining in the current membership year (our membership year is October 1 to September 30). Select your member type and look for the month in which your dues payment will be paid to find the amount of prorated National and Local Chapter Dues. If you are a new member, joining in the months of July, August or September, your membership dues would be the first column labeled "Full Dues Amount" and you will receive 1-, 2- or 3- months free in addition to your regular 12-months of paid membership. months free in addition
Page 14 Rives to Chair FSP Risk Management Section Bill Rives, Ph.D., CLU, ChFC, RHU, Columbus, OH, has been named Chair of the Risk Management Professional Interest Section for the Society of Financial Services Professionals (FSP). In this volunteer position, he is charged with enhancing the overall value of the Section to FSP members by helping develop practice-specific content for various educational presentations as well as monitoring online discussions to ensure robust and on-topic content. Rives is Senior Lecturer in the Department of Finance of the Fisher College of Business at The Ohio State University. During a career spanning more than three decades, he has held teaching and research appointments at institutions including Duke, Princeton, Rice, Trinity University (San Antonio), the University of Delaware and USAA Real Estate Company, the National Institute on Aging, the National Institute of Mental Health, and the US Department of Commerce. A member of the American Risk and Insurance Association, the National Association of Insurance and Financial Advisors, and the Society of Financial Service Professionals. Rives principal expertise is retirement income planning and retirement asset management, he is a frequent speaker on financial planning issues for professional, civic and non-profit organizations. FSP s nine Professional Interest Sections are national knowledge-sharing communities focused on specific segments of the financial services arena: Business & Compensation Planning; Employee Benefits; Estate Planning; Financial Planning; Investment Management; Leadership and Management; Risk Management; Life, Health, Disability, Casualty & Liability Insurance; Qualified Plans; and Retirement Counseling. Participating in one Section is included in membership dues. Section members have access to an online knowledge exchange, online search capabilities, and targeted FSP educational events in addition to receiving quarterly newsletters and other benefits.
Page 15 Welcome To Our New Members! Jeffrey L. Bertsch, CLU, ChFC Cincinnati Life 7156 Tarragon Ct Hamilton, OH 45011-9162 (513) 870-2689 jeff_bertsch@cinfin.com Thomas J. Lalley, CFP, CFA, MBA, BS John Dovich & Associates LLC 625 Eden Park Dr., Ste 310 Cincinnati, OH 45202 (513) 579-9400 tom@jdovich.com John J Maddrill, CLU, CFP, LUTCF Mass Mutual Financial Group 300 E Business Way Ste 390 Cincinnati, OH 45241 (513) 579-8555 ext 319 johnmaddrill@finsvcs.com Matthew T. Malafa, MBA John V. Dovich & Assoc. 625 Eden Park Dr., Ste 301 Cincinnati, OH 45202 (513) 298-4119 mmalafa@jdovich.com
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