Split Dollar Policy - PowerPoint

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					                                 March 10, 2008




How To Maximize Wealth Transfer
   with Private Split Dollar
                  Steve Parrish, JD, CLU, ChFC, RHU
                   National Advanced Solutions Consultant



  For producer and advisor information and education only. Not for use in sales situations.
  ·       Millionaires have little or no debt, pay off their credit
     cards each month, and 40% have no home mortgage.
   ·      97% are homeowners, but only 27% have built their
                          "dream house"
·        92% are married, typically for 28 years, and have three
                  children; only 2% are divorced.
  ·       Most millionaires are business owners or executives
                   who did not inherit their wealth
  ·       90% are college graduates, and 52% hold advanced
  degrees, but most were "B" students, not at the top of their
                                 class.
   ·      52% attend church at least once a month, and 37%
              consider themselves to be very religious
       ·      64% contribute heavily to charity, church, and
                        community activities
     ·     Their average federal income tax bill is $300,000
       SUL Wealth Transfer Techniques-
        Inverted Pyramid of Complexity
                                                                                                                Most Sales
“Smaller”Case          Basic               Basic           Estate            Basic               Basic          Opportunities
   Size                 ILIT                ILIT           Equal.             ILIT                ILIT


                        Annuity              Private                  Private                 IRA
                        Legacy              Split Dollar             Split Dollar           Exchange


                             Interest Only                  Private                  Dynasty
                                  Note                       S.D.                     Trust


                                               IDIT                         GRAT

 Larger Case Size                                                                                           Fewer SUL Sales
                                                      PSD Funded                                            Opportunities
                                                       by GRAT
             For producer and advisor information and education only. Not for use in sales situations   .
           How Big is the Estate’s
            Exposure to Taxes?
              Susan Thompson Buffet
•    $2.76 billion estate
•    $2.62 billion to tax exempts
•    $59 million in taxable bequests
•    $110 million in federal ($75.5), state
     ($29.7) and county ($5.2) taxes = (186%
     of taxable bequests)
    Source: Omaha World-Herald, 2007
    Nebraska Department of Revenue
        Financing Life Insurance
           In Wealth Transfer Cases
•   Annual exclusions
•   Lifetime exclusion
•   Interest only installment sale to ILIT
•   Private financing – grantor loan
•   “Premium Financing” – bank, finance co.
•   Private Split Dollar
                Approach
• Life insurance premium as pennies on the
  dollar.
• Private Split Dollar Gifts as pennies on the
  premium dollar
                           The Dilemma

 The Problem                                                    The Result
Premium equal 48K                                             $24,000 subject to gift
but available                                                 tax
exclusion is only
$24K




 For producer and advisor information and education only. Not for use in sales situations   .
The Solution: Private Split
          Dollar




                            Only pennies on the dollar!

For producer and advisor information and education only. Not for use in sales situations   .
Private Split Dollar
  Pennies on the Dollar
      Economic Benefit Costs




                                                          .15 cents
                                                         per/thousand




For producer and advisor information and education only. Not for use in sales situations   .
   Leveraging Annual Exclusions
 H&W 65 years old; $4,000,000 SUL
            Gifting Premium              Private Split Dollar
Ages   SUL        Annual      Taxable     Econ.       Taxable
       Premium    Exclusion   Gift        Benefit     Gift
65     $109,000     $48,000    $61,000        $600          $0

69     $109,000     $48,000    $61,000       $1,440         $0

74     $109,000     $48,000    $61,000       $3,720         $0

79           $0     $48,000         $0       $9,920         $0

84           $0     $48,000         $0     $26,480          $0

89           $0     $48,000         $0     $72,960    $24,960
     Concerns Addressed with
        Private Split Dollar
How to effectively pay for life insurance
Premium greater than annual exclusion
The “I” in ILIT
Private financing risk – AFR changes
Bank financing risk – LIBOR, etc
“Will it fly?” estate planning concepts
              Concerns about
           Private Split Dollar
 Will it fly legally?
 What rate applies?

 Is there a way to smooth out the gifting strategy?
 What happens if one of them dies?
 What happens if both of them live?

 Who will help with the set up, keeping track of
  the economic benefit,etc?
        What Happens if Both Live?
Economic Benefit Exceeds the Exclusion
            Gifting Premium              Private Split Dollar
Ages   SUL        Annual      Taxable     Econ.       Taxable
       Premium    Exclusion   Gift        Benefit     Gift
65     $109,000     $48,000    $61,000        $600          $0

69     $109,000     $48,000    $61,000       $1,440         $0

74     $109,000     $48,000    $61,000       $3,720         $0

79           $0     $48,000         $0       $9,920         $0

84           $0     $48,000         $0     $26,480          $0

89           $0     $48,000         $0     $72,960    $24,960
What Happens if one Dies?:
Joint Life versus Single Life
                       Single Life
Joint   Age   Single   Economic
 Life          Life      Benefit
  .15   65    11.90    $47,600
  .44   70    20.62    $82,480
 1.12   75    33.05    $132,200
 3.05   80    54.56    $218,240
 8.08   85    88.76    $355,040
           The Exit Strategy
• Limited pay SUL
• Terminate PSD agreement at earlier of:
  – First Death
  – Limited pay period
• Termination equals gift. OPTIONS:
  – Use part of lifetime exclusion
  – Use monies in ILIT to buy policy
  – Use GRAT to pay policy
              Gift at Rollout

• Gift is 1,008,164
• Challenge:
  – Uses up over half of combined lifetime
    exclusions
  – Underutilizes annual exclusion in early years
         Smoothing out the Gift
• Gift the full annual exclusion each year (48,000)
  – YEAR 1: $600 for Economic Benefit; $47,400 into ILIT
    account
  – At 5%, account equals $611,710 in year 10
  – YEAR 10: Terminate agreement: Use ILIT account to
    help buy out policy; the rest via gift
     • $1,008,164 less
     •   $611,710 ILIT balance equals
     ___________________________
     •   $396,454 use of lifetime exclusion
   GRAT matures at Rollout
                               Generation
Generation      Values             B
    A
                “Zero”
                 Out           Untaxed
                                Value
 True
 Value

              Gift   Annuity
                                Zero Gift
             Value    Value
          - YEAR 1-10-             - YEAR 11-

S STOCK
                                 IDIT
                                            Policy
                         IDIT               Value


10 Year
GRAT
                                  GRAT
                                BALANCE
Private Split Dollar in Operation
• Pre-sale
  – Run the numbers
  – Create the trust
  – Underwrite the case
  – Execute
• Post sale
  – Economic benefit reporting
  – Case and legal monitoring
  – Exiting – values, etc
Explaining the Concept
Economic Benefit Reporting
       PRIVATE SPLIT DOLLAR AGREEMENT
               (Use with a Survivorship
                 Life Insurance Policy)
This Agreement entered into this __________ day
   of ______________________, 20_______, by
 and between (Name of Trustee) of (Address), or
its successors in trust, as trustee of a certain trust
agreement dated _________________________,
           hereafter called the “Trustee,” and
     ___(Husband)__________ and _____(Wife)
   __________, of (Address), hereafter called the
               “Spouses.” WITNESSETH:
     WHEREAS, Spouses, and the Trustee, have
  entered into an irrevocable trust agreement; and
  WHEREAS, the Trustee is authorized under the
    trust agreement to purchase insurance on the
 lives of the Spouses, to enter into this Agreement
      with them and to collaterally assign certain
     restricted rights in the insurance policy to the
                         Spouses;
WHEREAS, it is the intent of the parties to create
      an economic benefit, collateral assignment
  Private Split Dollar arrangement under the 2003
Split Dollar Final Regulations where the Trustee’s
          Forest for the Trees:
         Key Points about P.S.D.
• A WAY to pay for life insurance
  – Premium is pennies on the Death Proceeds dollar
  – Private Split Dollar is pennies on the premium dollar
• Needs illustration and materials to create
• Needs on-going economic benefit reporting
• Needs an exit strategy

  WE WANT TO MAKE IT WORTHWHILE FOR
         YOU AND YOUR CLIENT!
                                   Q and A




For producer and advisor information and education only. Not for use in sales situations   .

				
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