The Tax Cuts & Jobs Act of 2017 OPPORTUNTIES

The Tax Cuts & Jobs Act of 2017 OPPORTUNTIES Presented by: Robert W. Finnegan, J.D., CLU Maurice Sturm, J.D. (518) 424-8928 (860) 470-0204 bfinnegan@highland.com msturm@highland.com The Tax Cuts & Jobs Act (TC&JA) I. Estate Planning* II. Insurance Products Where are We Heading? III. Personal Planning* IV. To Plan or Not to Plan? V. Life Insurance and the Perfect Hedge A. Dual SLATs & Life Insurance B. Synergy Gift to DGT and Private Split Dollar C. The Cost of Delay D. Private Financing E. Life Settlements VI. Non-Qualified Executive Benefit Plans *All personal planning changes sunset (revert to 2017 law, indexed C-CPI) 12/31/2025. 1

Part I: Estate Planning Estate Planning - Highlights 1. Gift/Estate & GST Exemption a. Doubled to $11.2M ($22.4M married couple) Sunsets 12/31/2025 (back to $5M indexed by chained-cpi) b. Indexed chained CPI (slightly lower than CPI) Does not sunset 2. Retained a. Stepped Up Basis at Death b. Portability a. Gift/Estate exemption only (not GST) c. Annual gift tax exclusion $15,000/per donor per donee d. Defective Grantor Trusts Note: Because gift, estate and GST taxes retained, all of our current planning strategies remain valid 2

Estate Planning - Highlights Notes: 1. All of our current planning strategies remain valid: a. Annual exclusion gifts to fund LI b. Lifetime exemption gifts to fund LI c. Private split dollar d. Private financing 2. Planning is more complex due to a. The size of the increased exemptions b. The temporary nature of the changes made Estate Planning Beware Complacency Due to the high exemptions Many clients will/have become complacent Believe that they do not need to plan This is a mistake for many reasons (discussed below): The higher exemptions sunset on December 31, 2025 Democrats feel that a lower exemption is more appropriate The smart money continues to plan. 3

Estate Planning - Gifting Increased Gift/Estate & GST Exemption Key Client Questions: 1. How much can I afford to give away? a. Gifting is irrevocable 2. How should I gift the property? a. For married couples, in Dual Spousal Lifetime Access Trusts (SLATs)? b. For single individuals, in a trust where access is retained? i. Self-settled trust (state must allow; law not entirely settled) ii. BDIT (considered aggressive by some) 3. Should I take advantage of discounts? 4. What assets/property should I gift? Estate Planning - Opportunities Life insurance for all brackets 1. Life insurance is the simple tax effective solution 2. Uncorrelated return 3. Hedge against dying too soon (see Perfect Hedge below) 4. Accelerate funding of life insurance a. Use increased exemptions b. Gift securities, income pays premiums c. Discounted gifting 5. In the T&E community, there is greater focus a. On income tax aspects of estate planning b. Educate on benefits of life insurance 4

Life Insurance & Gifting Guidelines Consider gifting and LI for the following Wealth brackets (married) $ 0-$5M $ 5M - 10M $10M-$50M $50M+ The following are rules-of-thumb only. Consider each client case-by-case: a. Age of client(s) b. Income and lifestyle needs c. Character of assets and earnings d. Client still working, salary and bonus e. Prior gifting, discounts, dynasty planning f. Income taxation at death $0 - $5M Net Worth Personally Owned LI 1. Life Insurance a. Personally owned Life Insurance b. Wealth creation and income protection c. Add a long term care rider d. Beware life insurance creating taxable estate Note: Individual or survivorship policies 2. Gifting a. Annual exclusions gifting ($15,000) b. Concern over federal estate taxes may be reduced c. Exemption retained at death stepped up basis 5

$5 - $10M Net Worth Personally Owned LI At the lower ends of the $5 - $10M range 1. Life Insurance a. Personally owned Life Insurance b. Add a long term care rider c. Less complicated than trust owned d. Beware life insurance creating taxable estate Note: Individual or survivorship policies 2. Gifting a. Other than to fund life insurance, minimal gifting b. Concern over federal estate taxes may be reduced c. Exemption retained at death stepped up basis d. For younger clients, beware of bracket creep as estate grows $5 - $10M Net Worth Trust Owned LI As move to upper end of $5- $10M range, consider: 1. Life Insurance a. Trust owned b. Protects against future estate taxes c. Retain all assets to support clients d. Include long term care rider e. Trust authorizes loans to grantor 2. Gifting a. To fund life insurance b. Annual exclusions c. Some lifetime exemption gifting d. Exemption retained at death for stepped up basis e. For married couples, consider Dual SLATs a. Income to non-grantor b. Individual policies replace assets on first death c. Protect against loss of access following first death 6

$10 - $50M Net Worth 1. Life Insurance a. Trust Owned b. Dynasty trust optional 2. Gifting a. Use annual gift tax exemptions direct to children and grandchildren b. Use some or all of increased exemption (lose amounts not used) c. Exemption retained at death for stepped up basis d. Amount of exemption gifted depends upon i. Age ii. Income needs iii. Character of assets e. Consider all Gifts in Dual SLATs even for UHNW i. Survivorship (separate trust) ii. Single life in each SLAT. $50+M Net Worth 1. Life Insurance a. Dynasty trust owned b. Protects against repeat estate taxes c. Use all of exemption d. Funding i. Lump sum funding (single premium or shortest non-mec) ii. Cash flow from gifted assets e. Split dollar funding super efficient 2. Gifting a. Use annual gift tax exemptions direct to children and grandchildren b. Use all of lifetime exemption c. Benefits of lifetime gifts to dynasty trust d. Exemption retained at death for stepped up basis e. Consider all Gifts in Dual SLATs i. Especially as move up in net worth ii. Even for UHNW 7

Additional Opportunities Sources of Premium Dollars: 1. GRAT Remainder Trusts to Dynasty Trusts a. Loan GRAT assets b. Create LLC to shift control, obtain discounts 2. Sales to Defective Grantor Trust (DGT) for Note a. Gift note balance to trust (extinguish the note) b. Free up cash flow to pay premiums c. Additional discounted gifts Additional Opportunities Trust Review of Existing ILITs 1. If existing trust is non-gst a. Re-direct gifts to fund a new dynasty trust (DGT) b. Purchase new policy in Dynasty Trust c. Freeze existing coverage (reduced paid-up) 2. If existing trust GST a. Review trust terms b. Review coverage 3. Income Tax Planning for Funded Trusts a. Swap low basis trust assets for highly appreciated assets (cash) b. Commercial real estate especially problematic ( negative basis ) c. Focus on income tax free DB of life insurance 8

Additional Opportunities 1. Annual Gift Tax Exclusion a. Gift cash to children, GC+ b. See them enjoy the gift 2. Portability (leave decedent s unused exemption to surviving spouse) a. Take advantage of stepped up basis at H&W s deaths b. GST exemption not portable c. Balance against benefits of dynasty trust planning Part II: Life Insurance Products Where are We Heading? 9

Continued pressure on general account returns: Current assumption products Continue to reduce illustrative and crediting rates. No lapse guarantee products Issue amount reductions, premium increases and product withdrawals. Hybrid (Protection UL/SUL) products Continue to remain competitively priced. Indexed UL and Variable UL products Continued improvement, more uncapped options, more VULOne? Insurance Products Where are we heading? Carriers like VUL because shifting the investment What clients want Guaranteed products will remain popular, especially for older HNW & UHNW clients Hybrid products (Protection UL/SUL) will remain popular due to low cost and combination of guarantees & current assumption Clients Where are we heading? Clients and advisors will want flexibility and market performance with a greater emphasis on cash values 10

Insurance Products Where are we heading? We have the convergence of What clients want What carriers are offering Guaranteed UL Hybrid UL (Protection UL) Indexed UL Variable UL Part III: Personal Planning 11

Personal Planning - Opportunities 1. All the usual needs a. Wealth creation b. Income protection c. Long term care d. Cash accumulation e. Retirement planning (LIRP) 2. To the extent that a client is in a lower tax bracket, life insurance is paid for with (more) lightly taxed dollars. Part IV: To Plan or Not to Plan 12

The Golden Age of Wealth Transfer Planning! AFRs are extraordinarily low. Discount strategies are available. Defective Grantor Trusts remain viable. Gift/GST Exemptions are high & indexed. Split $ rules are extremely favorable. Excellent products are available (including NLG). Planning Today 1.Plan for all Threats-to-Wealth & the Perfect Hedge 2.Answer Client s Question: What s in it for me? 3.Look at the Synergy of Life Insurance & Non Insurance Strategies 4.Understand the Cost of Delay 5.Private Financing: The Perfect Strategy 6.Life Insurance Products Where are We Heading 13

Threats-to-Wealth Taxes - We have let taxes dominate our discussions! Divorce Creditors Predators Destructive Family Dynamics Protecting beneficiaries from themselves Spendthrift beneficiary can t manage money Avoid spoiling a child with too much too soon Antisocial behavior Drugs & alcohol abuse Cults Wrong crowd Dying too soon/living too long Delaying Planning Dilution due to a growing family, inflation and taxes The Perfect Planning Hedge 1.Clients retain access 2.Clients retain control & planning flexibility A. Change trust terms decanting, protectors, non-judicial settlements B. Trustees can be removed and replaced C. Control through LLCs 3.Assets are creditor protected 4.Protection against dying too soon/living too long 5.Spendthrift - Protect beneficiaries from themselves 6.Protect beneficiaries from divorce/creditors/predators 7.Protect against destructive family dynamics 8.Funding A. Self-completing regardless of tax system in place B. Funding does not trigger transfer taxes 9.Assets protected from gift, estate, GST taxes 10.Income taxes minimized and control who pays taxes 14

Client: What s in it for me? 1.Clients retain access 2.Clients retain control & planning is flexible A. Change trust terms decanting, protectors, non-judicial settlements B. Trustees can be removed and replaced C. Control through LLCs 3.Assets are creditor protected Clients 4.Protection against dying too soon/living too long 5.Spendthrift - Protect beneficiaries from themselves 6.Protect beneficiaries from divorce/creditors/predators 7.Protect against destructive family dynamics Benef. 8.Funding A. Self-completing regardless of tax system in place B. Funding does not trigger transfer taxes 9.Assets protected from gift, estate, GST taxes 10.Income taxes minimized and control who pays taxes. Access Client: What s in it for me? Dual Spousal Lifetime Access Trusts (SLATs) Hybrid Self-Settled Trusts Beneficiary Defective Inheritors Trust (BDIT) Loans from Trust to Grantor Sale and Intra-Family Loan Transactions (No Gifts) 15

Part V: The Role of Life Insurance in the Perfect Hedge Dual SLATs What Does $10M Gift Exemption Buy? The Cost of Delay Private Financing Life Settlements Dual SLATs - Case Study H and W each age 60 $40M net worth ($300M $80M $40M) Clients considering Single Dynasty Trust $10M gift (25% of net worth) Shelter with a portion of $10.9M Gift & GST exemption $15M Life insurance to pay estate taxes Clients are reluctant to make gifts (They don t want to give up access/control of gifted assets) 16

Dual Spousal Access Trusts (Defective Grantor Trusts) Husband Dynasty Trust 1 H Creates & Funds LLC Gifts $5M H Wife W Creates & Funds LLC Gifts $5M Wife & Indep. Trustee FBO Wife, Children, GC, GGC & ILIT (DGT) Dynasty Trust 2 Husband & Indep. Trustee FBO Husband, Children, GC, GGC & ILIT (DGT) Benefits H & W access/control 100% while both alive 50% following 1 st death Note: Must take steps to ensure Dynasty Trust 1 & 2 are not reciprocal. Dual Spousal Access Trusts with Single Life Insurance Dynasty Trust 1 H Creates & Funds LLC Husband Wife & Indep. Trustee FBO Wife, Children, GC, GGC $5M Assets (DGT) $5M UL On Husband LI Benefits Surviving spouse retains access to 100% Proceeds Available for Estate Taxes Purchase assets from Estate Wife Dynasty Trust 2 W Creates & Funds LLC H & Indep. Trustee FBO H, Children, GC, GGC $5M Assets (DGT) $5M UL On Wife 17

Dual Spousal Access Trusts with Survivorship Life Insurance H Creates & Funds LLC Husband Dynasty Trust 1 Trustee: Wife & Indep. Trustee Benef.: Wife, Children, GC, GGC, & SUL ILIT. $5M Assets & $5M Term Defective Grantor Trust SUL ILIT Dynasty Trust DGT $15M SUL FBO of Children, Grandchildren, etc. Wife W Creates & Funds LLC Dynasty Trust 2 Trustee: H & Indep. Trustee Benef.: Husband, Children, GC, GGC, & SUL ILIT. $5M Assets & $5M Term Defective Grantor Trust Dual Defective Grantor Trusts with Private Split Dollar Life Insurance Husband Dynasty Trust 1 Insurance Trust H Creates & Funds LLC Trustee: Wife & Indep. Trustee Benef.: Wife, Children, GC, GGC, & SUL ILIT. $5M Assets $5M Term on H Defective Grantor Trust Dynasty Trust 3 EBR Split $ or Private Financing $15M SUL FBO of Children, Grandchildren, etc. Wife W Creates & Funds LLC Dynasty Trust 2 Trustee: H & Indep. Trustee Benef.: Husband, Children, GC, GGC, & SUL ILIT. $5M Assets $5M Term on H Defective Grantor Trust 18

Non-Reciprocal Trusts Dynasty Trust 1 Husband Grantor NV Premier Trust Dynasty Trust 2 Wife Grantor SD SD Trust Co. Wife & Independent Trustee 1 Husband & Independent Trustee 2 Wife, Children, GC, GGC, etc., ILIT Husband, Children, GC, ILIT H Not a Beneficiary or W HEMS (?) H HEMS (?) Indep. Trustee Abs. Discretion Wife holds 5x5 & Testamentary SPOA (Issue) Loans to H (Grantor) Indep. Trustee HEMS or Other Standard H holds Lifetime SPOA Among Descendants of H s Parents Other factors to consider: 1. Separate trust formation by time (6 mos., 15?) 2. Fund with different assets & different amounts 3. W income from day 1 4. H s income interest springs into being at age 65 5. Life insurance different policies/amounts 5. One trust a Hybrid self settled trust 6. Life Insurance on grantor of each trust? 7. Vary special powers of appointment - One broad, one narrow - Different classes of beneficiaries - Lifetime vs. testamentary Funding Hierarchy (Simple to Complex) Clients Funds Existing Funded Trusts $14,000 AGTE $5.49 Lifetime Gift & GST Transfer Assets Discounted Gift to DGT Discounted Sale to DGT Discounted GRAT (DGT) Loan Premium Structure Full Premium Split $ - Economic Ben. Private Financing Split-$ Demand Loan Pay Gift Tax (> $5.45M) OPM (Premium Financing) Commercial Lender Local Banking Relationship Bank Specialize in Premium Financing Intermediary Dual Loan For Advisor and Producer Use Only. Not For Public Distribution. 19

What Does $10M Gift Exemption Buy? A Case Study Clients M60/F60 Preferred NT Have a need for $65M*** of SUL G. Carve out $15M of assets from Client s estate. *** The analysis that follows is just as valid for a $1.5M gift with $6.5M policy as a $15M gift and a $65M policy. Case Study Assumptions: $15M Assets 1/3rd Discount $10M Gift and GST Exemption ($10M Net Gift to Dynasty Trust/DGT) Rates of Returns 5% Pre-Tax 20% Tax Rate on Earnings 4% Net After-tax AFR (if sale) 2.75% Long Term AFR Evaluate Wealth transferred at age 90/90 (LE) 20

Plan Today 3 Scenarios Compare the Net to Family in three scenarios: 1.Do Nothing with $15M No Planning 2.Discounted Gift Alone (No LI). 3.Discounted Gift & Private Split $. $15M gift will support $65M*** of fully guaranteed SUL (M60/F60 Preferred NT). *** Analysis just as valid for a $1.5M gift & $6.5M SUL G. Plan Today - Net to Family 1. No Planning vs. 2. Gift (No LI) vs. 3. Gift & Split $ LI 100,000,000 90,000,000 80,000,000 70,000,000 60,000,000 Life Expectancy 90/90 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 C. Gift & Split $ LI B. Gift Alone (No LI) A. No Planning 0 60/60 65/65 70/70 75/75 80/80 85/85 90/90 95/95 100/100 AGE *Supporting illustrations provided courtesy of Lincoln Financial Group. 21

Net to Family Plan Today (LE 90/90) No Plan vs. Plan with LI Improvement Source 1. No Plan 2. Gift (No LI) 3. Gift & Split $ 3. 1. GST Exempt 10,000,000 68,070,592 96,803,249 89,803,249 T Estate 24,358,201 (10,484,155)* (16,005,490)* (42,163,690) Total 34,358,201 57,586,438 80,797,759 47,639,558 *$16M is the estate s tax burn due to: i) grantor paying taxes on trust income. ii) the premium burn due to split $ premium advances. iii) the loss of the use of those funds, net of estate taxes. Remember these numbers! *Supporting illustrations provided courtesy of Lincoln Financial Group. The Cost of Delay - Case Study Continued Clients M60/F60 Preferred NT Have a need for $65M*** of SUL G. Carve out $15M of assets from Client s estate. *** The analysis that follows is just as valid for a $1.5M gift with $6.5M policy as a $15M gift and a $65M policy. 22

The Cost of Delay Example II Clients are both alive & still qualify for preferred rates Planning tools less favorable, support less LI: 2017 2027 Gift & GST tax exemption $10M $7M Discount 1/3 rd 20% LT AFR 2.75% 3.75% Life Insurance Supported $65M $40M Table II: Plan Today vs. in 10-Years With $22.2M ($8.75M Gift, $13.45M Sale) Net to Family @ LE (age 90/year 31) Plan Today Plan in 10 Years Cost of Delay Dynasty Trust 96,803,249 54,848,509 41,954,740 Estate (16,005,490) 5,919,846 (21,925,336) WOW! Total 80,797,759 60,768,354 20,029,404 Remember these numbers *Supporting illustrations provided courtesy of Lincoln Financial Group. 23

The Perfect Strategy for the Perfect Hedge? 1. Design so that the client is fully secured - plan can be unwound at any time! a. Loaned assets + policy CSV b. The trustee can choose to repay the loan early. c. Clients can feel more comfortable entering into the transaction. 2. Moves wealth to a dynasty trust without income, gift, estate or GST taxes. 3. The DB protects against repeat estate taxation and GST taxes. 4. Not dependent upon making a gift, it is a loan. It rides out whatever tax regimen we have in place. If the gift tax comes and goes, the strategy is unaffected. 5. Income tax planning a. Income tax free benefit. b. Preserve gift/estate exemption for stepped up basis on second death. 6. Combine with Dual SLATs, BDIT, Self Settled Trusts. 7. Use any type product! Single life, survivorship, term, current assumption UL, VUL, indexed UL, WL, term 8. The strategy is simple clients understand a loan, trust investing assets. The Golden Age of Wealth Transfer Planning 7 Key Takeaways 1.Be proactive about the need for planning. 2.Speak in terms of Threats-to-Wealth (not just taxes). 3.Create the Perfect Hedge. 4.Put Planning in Terms of: What s in it for me (Client)? 5.Make Life Insurance a mainstay of your Planning. A. Take advantage of Insurance/Non Insurance synergies. B. Living too long/dying too soon. 6.Understand the Cost of Delaying planning. 7.Consider Private Financing: The Perfect Strategy. 24

Life Settlements Change & Opportunity 1. Basis on Sale Simplified Was: Premiums paid less COIs (costs-of-insurance) Now: Premiums paid 2. New reporting rules apply to policies sold to investors 3. For a sale to an investor, the transfer-for-value-rule exceptions don t apply. Life Settlements Change & Opportunity 1. Many people will think they no longer need their insurance 2. Many life settlements companies are aggressively marketing that clients sell existing coverage 3. For those who decide to sell existing coverage, this could be a huge mistake. 25

Life Settlements Think Twice 1. The smart money recognizes the temporary nature of the increased exemption & continues to plan: 1. The increased exemptions sunset on December 31, 2025. 2. The democrats will reduce the exemption the first chance they get. 2. An investor being willing to purchase a policy suggests that the client should keep the coverage in place. 3. Client(s) may become uninsurable or highly rated, in the future. 4. Life settlements may become a buyer s market - it may not be the best time to sell. 5. Survivorship life owned by an irrevocable trust typically is not accessible to the grantor. 6. Other alternatives may be more appropriate: 1. Reduced paid up coverage. 2. Assuming the client is insurable, alternative coverage may provide better value. Life Settlements Think Twice 1. Life settlement may be appropriate for some clients 2. The decision should be made on a case-by-case basis. 3. When appropriate a. We of course can handle life settlements and work with Ashar Group b. And remember, convertible term insurance has settlement value. 26

Part VI: Non-Qualified Executive Benefit Plans NQDC Planning - Opportunities 1. When compensation is deferred, the employer is using taxable dollars to fund a NQDC plan. 2. Benefits payments are deductible when paid. 3. Since the C corporate rates have been reduced from 35% to 21%, premiums are paid with dollars that are taxed more lightly than under prior law. 4. If tax rates rise in the future, benefits will be deductible at a higher tax rate (a greater benefit). 27

The Tax Cuts & Jobs Act of 2017 OPPORTUNTIES Presented by: Robert W. Finnegan, J.D., CLU Maurice Sturm, J.D. (518) 424-8928 (860) 470-0204 bfinnegan@highland.com msturm@highland.com 28