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                                 Bernstein’s Three Gs

              What if There Was a Way to Improve the Result?
              By: Peter R. Moison, Esq. and Alan R. Jahde, Esq., LL.M

The “Three Gs” article is an excellent presentation of how a high net worth husband and
wife can plan to shift wealth to their children and perhaps grand children while at the
same time retain sufficient assets, “Core Capital”, to meet their personal spending and
living objectives.

Basic Premise: The basic premise is the gift program to the children can be greatly
enhanced through the use of an irrevocable grantor trust (“GT”) because the parents pay
the income tax on all of the GT’s income. Bernstein makes the argument that, because the
grantor (in this case the high net worth husband and wife) pay the income tax on the
income generated by the assets owned by the GT, the assets in the GT grow “tax free”.

For Every Action there is an Opposite and Equal Reaction: The “Powerful
Combination” of the Three G’s, based on Bernstein’s projections, shows that effectively
the parents increase the amount to the children by almost $12M. In order to do this the
parents had to pay the GT income tax, with the result they lost the ability to invest the tax
money. Had they been able to invest the tax money then the parent’s estate would be
increased by $12M as well. This is money that can be used by the parents to enhance
lifestyle, leave to their children, or leave to charity or a family foundation. Even after the
payment of estate tax the parents would have an additional $7.8M to leave to their
children or the full $12M to leave to a charity or family foundation.

The Three Gs Takes Time: Depending on how the markets perform, Bernstein notes
that it will take anywhere from 10-30 years for the parents to complete the Three Gs and
achieve the illustrated result. What happens if one or both parents die prematurely?
Complete success is based on both parents living the full term. If one parent dies too
soon, then only part of the Three G plan will be realized. If both die prematurely, an even
smaller part of the Three G program will be realized. Also note thirty years seems like a
long time to complete an estate plan. That takes a lot of discipline and from experience,
clients prefer a more simple but effective approach.

Carry Over Basis: The amount gifted may not be as great as illustrated if the property
gifted in any of the Three G programs is appreciated property. The income tax basis of
the property in the hands of the donee of the gift is the same as the income tax basis of
the donor of the gift. There is no step up in basis on gifted property when the donor dies.
If the GT owns appreciated property after the death of the parents and the property is
subsequently sold then the GT will have to pay both federal and state (where applicable)

capital gains tax. The capital gains tax will have a significant impact on the net amount
given to the children.

ADVISED PPVUL as part of the Three G Plan: ADVISED PPVUL* (AP*) is a new
concept that for the first time allows life insurance to be custom designed and
manufactured for the unique needs of each client. No more off the rack high commission
and lapse supported products. AP pays no commissions and is not a sold life insurance
product. Rather it is an advised concept that is used in an advisory manner no different
than the way the Three Gs or any other estate planning concept is used. It can be a stand
alone plan or it can be integrated with just about any other estate planning concept. The
first job is to determine the client’s objectives and the second is to design the best estate
plan for the client using the concepts available. AP now allows life insurance to truly be
one of those concepts. No more trying to fit a square peg retail life insurance product into
a round estate planning hole.

Early Death Problem Solved with Better Tax Results: Since AP has a death benefit
component the death benefit can be structured to make an estate plan work in the event of
a premature death. If the client is concerned about the possibility of dying too soon and
feels a hedge of seven, ten or more years is wise then the death benefit can be tailored to
a term that makes the client comfortable (Note: under the Seven Pay rules the death
benefit will, for the first seven years, provide a significant and perhaps a sufficient
hedge). The entire death benefit is paid income and estate tax free. Thus, the carry over
basis problem is mitigated.

AP as the Investment Container: AP is US tax compliant variable life insurance for tax
purposes. The cash value is held in a segregated account that is private and asset
protected. The segregated account can be managed and invested with an independent
investment advisor through the use of a discretionary investment management agreement.
All or part of the funds used in the Three G program can be coordinated to go into the
cash value component of an AP policy. Since AP is a tax compliant life insurance policy,
there is no income tax on the growth of the cash value. Thus a significant portion, if not
all, of the income tax the parents pay in the Three G program is eliminated. AP not only
saves on the income tax it allows the investments to be more efficiently managed since
there is no income tax on any item of income or gain on assets held by the AP policy. The
investment decisions can be efficiently made based on what makes financial sense and
not on what the tax impact may be. The additional benefit is when the insured parent dies,
in that the entire death benefit is income tax free. No more loss due to carry over basis.

With AP Less is More: AP uses the Less is More* concept in its design. Unlike
traditional insurance products that compete on how much death benefit can be purchased
for each dollar of premium, AP believes the less death benefit, after the initial period, will
result in the most death benefit when it is needed the most—when a client is likely to die.
The reason why most insurance programs fail is because the cost of the insurance
component becomes too high late in life. This is the wrong time for an insurance program
to fail and when the program starts to fail it is too late to rescue it. If the death benefit is
kept very low in relationship to the cash value, then the cost of the insurance component

is kept very low. This means the cost of insurance (COI) and all other insurance costs
(typically less than 100bps annually) have very little impact on the investment returns of
the cash value. The cash value can actually grow in value. Less is More means the death
benefit can be as little as 105% of the cash value starting at age 75 and equal to the cash
value at age 95. Once the death benefit equals the cash value, there is no more cost
debited against the cash value for the cost of the insurance. The client and his/her
professional estate planning team get to design when the death benefit becomes less in
order for it to become more later in life when it is needed the most. The interesting thing
is the Three G targeted wealth shift amount can become the ultimate AP targeted death
benefit. The death benefit is paid free of any income or estate tax.

Conclusion: AP not only makes the overall estate plan more efficient, it also has the
potential to do two very important things that the client may truly appreciate: (1) it
simplifies the plan and (2) it will take less time to complete, thus giving the client more
time to enjoy life and family! Less complication and more time to enjoy life makes it
easier for the client to adopt what would otherwise be a confusing and time consuming
program. How many clients really want to commit to 30 years to complete a plan?

* ADVISED PPVUL, ADVISED PPVUL, AP, and Less is More are terms and concepts
created by Moison and Jahde and are considered protected and proprietary terms and
concepts. They may not be used without the prior written permission of Moison and


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