LIFE SOLUTIONS LEVERAGING TO MINIMIZE THE GIFT TAX SPRING 2016 Thomas F. Commito, JD, LL.M, CLU, ChFC, AEP (Disting.) Lincoln Financial Distributors Advanced Sales Group Products issued by: The Lincoln National Life Insurance Company Products distributed by: Lincoln Financial Distributors, Inc., a broker dealer LCN-146309-040516 For agent broker use only. Not for use with the public. 2016 Lincoln National Corporation
PLEASE READ This seminar is for educational and informational purposes only and not for the purpose of providing legal or tax advice. Further, Lincoln Financial Group provides the strategies and concepts herein for educational and informational purposes only. This information is not intended to be used with the public. Further, this information is not intended to constitute a complete description of all tax consequences regarding the subject matter covered and is presented with the understanding that neither Lincoln Financial Group, nor its employees, are being engaged to render legal or tax advice. While this seminar discusses general legal or tax aspects and concepts of financial or estate planning with annuities and life insurance, it does not discuss all aspects of U.S. federal income taxation that may be relevant to individuals in light of their particular circumstances and income tax situations. Lincoln Financial Group makes no representations as to the suitability for individual clients. Interested parties should seek separate tax and legal advice before implementing a plan or strategy of the type described in this presentation. This advice should also include the application of state, local and other tax laws and the possible effects of changes in the federal or other tax laws. 2
WHAT WE MEAN BY GIFT TAX LEVERAGE THE PROBLEM The Premium or Policy Value will be a gift It may eliminate or reduce the available annual exclusions or the exemption THE SOLUTION Discount the Value of the Gift Loan Regime Split Dollar Private Premium Financing (PPF) AND OF COURSE Still be able to access the CSV Tax Free 3
WHY IT WORKS!!!! 4
SPLIT DOLLAR LIFE INSURANCE 5
Lincoln VUL One (2014) For Agent Broker For agent Use broker Only. use only. Not Not for for Use use with the Public. public. Only Registered Representatives can sell Variable Products 6
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LEDGER 8
PROBLEMS WITH ECONOMIC BENEFIT SPLIT DOLLAR Term Cost Rises with Age Can be Higher than the Premium Employer / Donor has to own entire cash value Can constitute entire death benefit Employee / ILIT can not access cash tax free for lifetime income purposes Have to Do a Rollout Bonus policy High tax on PERC / ITR Withdraw funds from policy May cause a crash Do A Crawl Out Takes a lot of time Payoff employer / Donor Can eat up a lot of cash 9
THE BETTER SPLIT DOLLAR LOAN REGIME LOAN REGIME PRIVATE SPLIT DOLLAR Loan Regime Split Dollar (IRC Reg. 1.7872-15) create the highest leverage of all gift transfers. Low interest environment makes this very advantageous Grantor Benefits Split Ownership of policy. Grantor owns amount equal to contributions ILIT owns all other benefits Income tax free death benefit Future policy values can offset employer contributions Cash value for potential lifetime benefits ILIT Benefits Imputed Interest on Loan is gift to ILIT Can use blended rate on cumulative premiums No IRS prequalification, annual reporting or disclosure requirements No annual administrative costs Discriminatory and flexible 10
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Lincoln LifeReserve Accumulator IUL (2014) 12
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LOAN REGIME SUPPLEMENTAL RETIREMENT COMBO USING ASSETEDGE Loan Regime Split Dollar Lincoln AssetEdge VUL (2015) 50% Allocated to Indexed S&P Fund 50% Allocated to Dimensional Core Equity Fund Participating Loans Commence at 66 Until 80 Policy Carries Through Age 126 (20 Year No Lapse) Only Registered Representatives Can Sell Variable Products 15
SPLIT DOLLAR ILLUSTRATION 16
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IRR PAGE 1 19
IRR PAGE 2 20
SUMMARY OF BENEFITS IRR AT Life Expectancy (84) = 6.78% INCOME or GIFT COST AT AGE 84 (LE) =$212,273 TRUST TAX FREE INCOME Age 66 through 80 = $5,653,460 TAXABLE EQUIV. @ 40% = $9,422,433 A/T RETURN = 2663% TRUST INCOME @ 0% = $1,124,830 A/T RETURN = 530% DB @ LE = 0 IRR @ LE = 0 21
LOCK IN SPLIT DOLLAR Loan a Lump Sum to ILIT Amount Can be in Premium Deposit Fund Can be in a Side Fund Use A Long Term Loan 30 to 50 Years (See Southern Railway Co. v. Comm r., 27 BTA 673 (02/09/1933); Chicago, Milwaukee, St. Paul, Pacific RR v. U.S., 186 Ct Cl 250 ( US Ct Cl 12/13/1968); Union Pacific RR v. U.S., 22 AFTR2d 5947 (US Ct Cl 11/29/1973) Lock In Long Term AFR 2.62% Rate for 02/2016 22
ILLUSTRATED VALUES CURRENT ASSUMPTION LEDGER PAGE 1 Lincoln WealthAdvantage IUL 23
LEDGER PAGE 2 24
LUMP SUM DEPOSIT ASSUMING 3% RETURN 25
INTEREST LEDGER ON LOAN 26
TERMINATION OF ARRANGEMENT Can Keep it in loan regime forever If you want to Terminate Best Way is to do a Crawl Out Employer bonuses a portion of its interest in CSV over a number of years Can do a Double Bonus to Eliminate tax Employee can borrow tax out of CSV 27
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LEDGER LINCOLN WEALTHADVANTAGE IUL 29
LINCOLN S LIFE COMP ADVANTAGE 30
PRIVATE PREMIUM FINANCING (PPF) For broker dealer use only. Not for use with the public. 31
PRIVATE PREMIUM FINANCE Grantor lends money to ILIT to create a sidefund* Loan is for 9 years so that AFR Mid Term Rates Apply Interest Can be Accrued or can be paid annually Arbitrage is the Key The differential between the Loan AFR and what the sidefund earns. From the differential, the premium is paid and the loan principal and interest is accumulated *Note that there is no guarantee that the sde fund will produce positive returns 32
OVERVIEW OF LOAN ASSUMES SIDE FUND INTEREST RATE OF 7% 33
CASH FLOW PAGE Lincoln Wealth Advantage IUL M/60/Pref PL 6.55% Index Assumption ASSUMES SIDE FUND INTEREST RATE OF 7% 34
Lincoln Wealth Advantage IUL; M/age 60/ Pref Plus Index Ret Assumption 6.55% 35
IRR PAGE 36
PREFERRED RETURN LLC 37
PREFERRED RETURN LLC Similar to Limited Partnership Except everyone Has Limited Liability Insured is member manager and retains control of the policy. Contributions made to LLC by Member Manager. Limited units are gifted when they have no value. Contributions are additional gifts, however Premiums are paid made while premiums exceed the cash surrender value. The additional premiums therefore have no gift tax consequences Asset Protection Avoiding Chapter 14 LIMITED UNITS Value units generally at full value of general interest Valued at ZERO if a Qualified Interest 38
QUALIFIED INTEREST RULES Reg. 25.2702 3(c)(1)(i): A qualified unitrust interest is an irrevocable right to receive payment periodically, but not less frequently than annually, of a fixed percentage of the net fair market value of the trust assets, determined annually. Reg25.2702 3(c)(1)(ii) Fixed percentage. A fixed percentage is a fraction or percentage of the net fair market value of the trust assets, determined annually, payable periodically but not less frequently than annually, but only to the extent the fraction or percentage does not exceed 120 percent of the fixed fraction or percentage payable in the preceding year. 39
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LEDGER PAGE 1 Lincoln VUL One (2014) 41
LEDGER PAGE 2 42
SUMMARY OF BENEFITS PREMIUMS PAID = $1,683,066 TAX FREE INCOME = $3,657,400 RETURN = 217% DB @AGE 80 = 7,754,688 TOTAL RETURN @ AGE 80 = $11,412,088 RETURN = 678% GIFT TAX VALUE = 0 ESTATE TAX VALUE = 0 43
THE TRUST PLANNING PROBLEM FOR AGENT OR BROKER USE ONLY. NOT FOR USE WITH PUBLIC 44
IRC 2036 THE HEART OF THE ESTATE TAX a) General rule The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.
I Spousal Lifetime Access Trusts (SLATs)
IRS LETTER RULING APPROVING SLATS LTR RUL 9748029 (11/28/1997) In the present case, A created and funded the Trust in 1990 and made all transfers to the Trust. B has made no direct contributions nor indirect contributions by reason of the lapse of the $5,000 withdrawal right. See section 2514(e). Under the terms of the Trust, B does not possess any rights within the meaning of sections 2036 or 2038. Assuming B is not named as an additional trustee, B will not have any incidents of ownership in the policy by reason of section 20.2042 1(c)(4). Assuming B does not make any contributions to the Trust (either directly or indirectly) we conclude that the Trust and insurance policy will not be included under sections 2036, 2038, and 2042(2) in B's gross estate upon her death. 47
Self Settled Trusts 48
THE SELF SETTLED STATES Alaska, Colorado, Delaware, Hawaii, Missouri, Mississippi, Nevada, New Hampshire, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, and Wyoming.
DISCRETIONARY DISTRIBUTIONS DELAWARE CODE ANNOTATED TITLE 12 SEC 3572 (11)(B) Creditors cannot Attach Trust Assets, if Section 6. The transferor's potential or actual receipt or use of principal if such potential or actual receipt or use of principal would be the result of a trustee's acting:.. In such trustee's discretion; Section 7. The transferor's right to remove a trustee or adviser and to appoint a new trustee or adviser;
NO IRC 2036 LTR 200944002 (10/09/2009) "In addition, the trustee's discretionary authority to distribute income and/or principal to Grantor, does not, by itself, cause the Trust corpus to be includible in Grantor's gross estate under 2036. ***We are specifically not ruling on whether Trustee's discretion to distribute income and principal of Trust to Grantor combined with other facts (such as, but not limited to,an understanding or pre existing arrangement between Grantor and trustee regarding the exercise of this discretion) may cause inclusion of Trust's assets in Grantor's gross estate for federal estate tax purposes under 2036." LCN-1201919-051815
WRAP Trusts
CONCEPT Trust Lends Money Back to Grantor Interest is Accrued. The higher the better. At Death, Trust is Repaid Principal and Interest Repay Amount is Deductible to the Estate under IRC 2053
PAYBACK AMOUNTS $5000 PAID ANNUALLY AND ACCUMULATED FOR 20 YEARS INT. RATE 6 8 12 20 24 RETURN $183,927.96 $228,809.82 $360,262.21 $933,440.00 $1,714,723.48
POLICY INFORMATION Issuers: The Lincoln National Life Insurance Company, Fort Wayne, IN The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. All guarantees and benefits of the insurance policy are subject to the claims-paying ability of the issuing insurance company. They are not backed by the broker-dealer and/or insurance agency selling the policy, or any affiliates of those entities other than the issuing company affiliates, and none makes any representations or guarantees regarding the claims-paying ability of the issuer. Products, riders and features are subject to state availability. The insurance policy and riders have limitations, exclusions, and/or reductions. Check state availability. Interest Rates and Policy Values Illustrated are Not Guaranteed Distributor: Lincoln Financial Distributors, Inc., a broker-dealer Policies Illustrated: Lincoln WealthAdvantage Indexed UL is issued on policy form UL6064/ICC15UL6064,and state variations by The Lincoln National Life Insurance Company, Fort Wayne, IN. The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. Lincoln Accumulator Indexed UL (2014) is issued on policy form UL6024/ICC14UL6024,and state variations by The Lincoln National Life Insurance Company, Fort Wayne, IN. The Lincoln National Life Insurance Company does not solicit business in the state of New York, nor is it authorized to do so. Lincoln AssetEdge (2015) is issued on contract/policy form LN863/LR863 and state variations by The Lincoln National Life Insurance Company, Fort Wayne, IN. The Lincoln National Life Insurance Company is not authorized nor does it solicit business in the state of New York Lincoln VUL One (2014) is issued on contract/policy form LN696 and state variations by The Lincoln National Life Insurance Company, Fort Wayne, IN. The Lincoln National Life Insurance Company is not authorized nor does it solicit business in the state of New York Variable Products are sold by prospectus, which contains the investment objectives, risks, and charges and expenses of the variable product and its underlying investment options. Please read carefully. Policy values will fluctuate and are subject to market risk and the possible loss of principal. 2016 Lincoln National Corporation LincolnFinancial.com 55
THOMAS F. COMMITO, JD, LL.M, CLU, CHFC, AEP (DISTING.) Director Sales Concepts Advanced Sales Group Lincoln Financial Distributors Mr. Commito is licensed to practice law in the states of Massachusetts and Vermont but does not practice, and nothing herein shall be deemed to be tax advice or the practice of law. All clients or prospects MUST obtain private representation to ascertain whether or not a particular tax plan or strategy is appropriate for their individual needs. Nothing herein shall constitute a warranty or guarantee of a particular tax result in any particular factual situation. Securities and investment advisory services distributed by Lincoln Financial Distributors, Inc., a broker dealer and registered investment advisor. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. FOR AGENT OR BROKER USE ONLY. NOT FOR USE WITH PUBLIC 56