Independent Life Insurance Experts

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Effective Life Insurance Strategies (With or Without the Federal Estate Tax)

A Session Specifically Designed for The ITM TwentyFirst University

Thursday, June 22, 2017 at 2 PM ET

Michael Amoia, JD, LLM (Tax), SVP,Advanced Sales and Life Product Management at Crump Life Insurance Serviceswww.crumplifeinsurance.com

Presented By:

This course has been approved for 1 hour of Continuing Education for CTFA (Fiduciary) and CFP®

The Institute of Certified Bankers (ICB), a subsidiary of the American Bankers Association, is dedicated to promoting the highest standards of performance and ethics within the financial services industry. This statement should not be viewed as an endorsement of this program or its provider.

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Effective Life Insurance Strategies (With or Without the Federal Estate Tax)

Michael Amoia, JD, LLM (Tax), SVP,

Advanced Sales and Life Product Management at Crump Life Insurance Services

Copyright © 2017 Michael Amoia. All rights reserved.

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Upcoming Webinars

Unique and Hard to Value Asset ManagementUniversity of Notre Dame

July 9 – 15, 2017

DURING OUR SUMMER BREAK: As we did last year, we will be teaching at the Cannon Financial

Institute’s week long course on Unique and Hard to Value Asset Management held on the Notre

Dame campus in South Bend, Indiana. We will be teaching a session on life insurance.

The Court’s View of TOLI Trustee and Fiduciary LiabilityMichael Brohawn, CFP®, CLU®

Chief Marketing Officer – ITM TwentyFirst

Thursday, September 14, 2017 at 2 PM ET

Artificial Intelligence in Banking and FinanceCory Cates, Chief Information Officer, ITM TwentyFirst

Cody Pobuda, Manager of Technology, ITM TwentyFirst

Thursday, October 12th, 2017 at 2 PM ET

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Presenter

Michael AmoiaJD, LLM (Tax), SVP, Advanced Sales and Life Product Management at

Crump Life Insurance Services

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Trump/Ryan

Total repeal of estate and GST tax

◦ Unclear if gift also eliminated

Condense indiv. income tax brackets down to three

(12%, 25% & 33%)

Reduce corp. tax rate to 15% (House was 20%)

Repeal Alternative Minimum Tax (indiv. & corp.)

Repeal 3.8% NII tax

Tax carried interest as ordinary income

Tightens the rules around contributions to private charities

According to the Urban-Brookings Tax Policy Center, Trump’s tax plan will reduce federal revenue by $6.2 trillion over the first 10 years and by another $8.9 trillion in the second decade

11/10 DRAFT: For Internal Use Only.

Without an Estate Tax…�Will your wife or kids spend money differently?

�Will it solve any concerns about your kids or grandkids ever having a bad marriage?

�Or entering into a bad business deal?

�Will the needs of your charity change?

�Will the stock market always go up?

�Will all disabilities be cured and your children and/or grandchildren will never have a need to have someone manage their money and protect it from government programs?

�Will the states eliminate their estate tax?

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Tax Basis:

• “carry-over” basis

• “stepped-up” basis

Analysis:

G1’s Estate Tax attributable to

Asset

Capital Gains Taxes Imbedded in

Asset when Sold by G2

vs.

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Estate vs. Income Taxes

ESTATE TAX

Flat Tax: Federal + NY = 56%

◦ Assume lifetime exclusion applied to other assets (currently $5.45M)

$125M Commercial Prop.

Taxes Due: $61.6M

◦ May be deferred until spouse’s death

◦ May be eligible for 6166 treatment

INCOME TAX

Federal Plus NY St. & City

* Estimated based on a combined, marginal effective federal,

state and city tax rate of 33.47%. Does not include liability for

any 1245 or 1250 recapture.

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FMV $416M

Debt ($291M)

Equity $125M

Taxes* ($139.3M)

Net Proceeds ($14.3M)

Tax Cost 111.4%

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*Revenue and Incentive Effects of Basis Step-Up at Death: Lessons from the

2010 "Voluntary" Estate Tax Regime Robert Gordon, David Joulfaian, and

James Poterba NBER Working Paper No. 22090 March 2016 JEL No. H24

The New Political Life Expectancy Calculator

Client’s Age

Equals: Number of

Presidential

Elections until DeathDivided by 4Client’s LE

Translates to:

Number of Possible Administrations with

Different Opinions on Tax Policy until Death

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Honor the Past. Own your Future.

So, what are clients doing this year?

Already Planned In Middle of Process Did not Start

No Change Continuing Not as willing to start

• Review current structure for

proper compliance.

• Add leverage where possible.

• Consider the income tax

impact on prior transfers.

• Use structures that are not

large gifts.

• Look to add leverage.

• Realize assets don’t get a

step up in basis

• Review the key items:

AFR

SOL

COI

TAX

1. Policy Review

2. Split Dollar to new trust

3. Insure G2 and beyond

1. Show how adding Life

Insurance increase flexibility

and income tax benefits

2. Split Dollar

1. Evaluate Need for Cash

2. Business Succession Issues

3. Find hard to value assets

that might be impacted by

2704 regs in future

LeveragingLow AFRs with Non-Business Assets…THINK ABOUT ASSET PROTECTION TOO

Historical and Future

1989-2013 Average

Short 2.78%

Mid 3.67%

Long 4.65%

7520 5.87%

Jun-15 Rate

Short 0.43%

Mid 1.6%

Long 2.5%

7520 2.0%

5.49%

Data Source: http://www.leimberg.com/software/7520rate.html

7520 Rate

July-17 Current

Short 1.22%

Mid 1.89%

Long 2.60%

7520 2.2%

Applicable Federal Rates

Jan-14 Rate

Short 0.25%

Mid 1.75%

Long 3.49%

7520 2.20%

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Loan to the Family Bank (Grantor Trust)• Grantor lends assets to an irrevocable trust in lieu of gifting.*

• Loan must be arms-length

• Loan made to: (i) an existing trust with assets, (ii) a new trust with seed capital, or (iii) a new trust combined with a personal guarantee

• Estate “freeze” technique• Loan payable remains in estate (or repayments received)

• ROR on assets > loan interest rate = excess growth remains outside estate

• Annual or lifetime exclusions are not used (except maybe on seed gift)

• Leverage excess growth• Trust cash may be invested in a number of assets, including life insurance

*Actual structure may be set up as a sale to grantor trust, depending on type and class of asset(s).

Loan to Family BankThe trustee may invest the funds in any manner that the trustee deems appropriate, which may include:

◦ marketable securities,

◦ private equity,

◦ real property, or

◦ life insurance.

For investments other than life insurance that are NOT very liquid, it may be advisable to establish an LLC owned by the trust to hold these assets, making it easier for the trust to make future exchanges with the grantor or other parties.

Prepared By:

(1) (2) (3) (4) (5) (6) (8) (9) (10) (11) (12) (13)

Nominal Beg Yr Beg Yr Cash Asset Interest Loan Loan Repay Insurance

EOY Loan Asset Cash Insurance Growth Income Payment Repay Cash Fund In Kind Death Trust Value

Age Payable Val. @ 3% Gifts Premium @ 2% @ 4% @ 2% Cash Balance (Nom. Val.) Benefit Net of Loan

59 (10,000,000) 10,300,000 0 (200,000) 16,000 400,000 (200,000) 0 1,016,000 0 13,760,000 15,076,000

60 (10,000,000) 10,609,000 0 (200,000) 16,320 412,000 (200,000) 0 1,044,320 0 13,760,000 15,413,320

61 (10,000,000) 10,927,270 0 (200,000) 16,886 424,360 (200,000) 0 1,085,566 0 13,760,000 15,772,836

62 (10,000,000) 11,255,088 0 (200,000) 17,711 437,091 (200,000) 0 1,140,369 0 13,760,000 16,155,457

63 (10,000,000) 11,592,741 0 (200,000) 18,807 450,204 (200,000) 0 1,209,379 0 13,760,000 16,562,120

64 (10,000,000) 11,940,523 0 (200,000) 20,188 463,710 (200,000) 0 1,293,277 0 13,760,000 16,993,800

65 (10,000,000) 12,298,739 0 (200,000) 21,866 477,621 (200,000) 0 1,392,763 0 13,760,000 17,451,502

66 (10,000,000) 12,667,701 0 (200,000) 23,855 491,950 (200,000) 0 1,508,568 0 13,760,000 17,936,269

67 0 4,489,179 0 (200,000) 26,171 506,708 (200,000) (1,441,447) 200,000 (8,558,553) 13,760,000 18,449,179

68 0 4,623,855 0 (200,000) 0 179,567 0 0 179,567 0 13,760,000 18,563,422

69 0 4,762,570 0 (200,000) (409) 184,954 0 0 164,113 0 13,760,000 18,686,683

70 0 4,905,447 0 (200,000) (718) 190,503 0 0 153,898 0 13,760,000 18,819,345

71 0 5,052,611 0 (200,000) (922) 196,218 0 0 149,194 0 13,760,000 18,961,804

72 0 5,204,189 0 (200,000) (1,016) 202,104 0 0 150,282 0 13,760,000 19,114,471

73 0 5,360,315 0 (200,000) (994) 208,168 0 0 157,455 0 13,760,000 19,277,770

The trustee may invest the funds in any manner the trustee deems appropriate, which may include marketable securities, private equity, real property, or life

insurance. For investments other than life insurance that are not very liquid, it may be advisable to establish an LLC owned by the trust to hold these assets,

making it easier for the trust to make future exchanges with the grantor or other parties.

Se

ed

Gif

t

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Concentrated Stock Position

Successful investor who has built an impressive and high-performing securities portfolio concentrated in low-basis stocks

Has little cash or other assets outside of portfolio

Female, age 75, single, children and grandchildren

Meet “Ms. Investor”

Chart Published in Article: Stock Protection Trusts, by Thomas Boczar and Elizabeth Ostrander, Trusts & Estates (Mar 25, 2015)

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Summary of Solutions

Create Liquidity Consideration

Sell Position Capital Gains and NII

Variable Prepaid Forward Contract Acts like a collar and defers gain

Buy Put Option Option cost very expensive

Zero-premium Collar Limits upside

Exchange Fund Holding period of at least 7 years and

investment choices

But, what about the Estate Planning…

1. Borrow against stock portfolio and lend proceeds to a grantor trust◦ Now, debt against the estate and an asset outside of the estate

◦ Loan from client to trust may be eligible for discount if interest rates change in the future

2. Trust buys a) assets that generates income taxes annually and has no step-to basis at death, or b) life insurance which has a step up in basis

3. When client passes away, current stocks receive a step-to basis and may pay off margin loan. Otherwise, life insurance can.

Concentrated Stock Positions

Insurance

Company

Irrevocable

Grantor

Trust

4. Interest and principal payments

6. Trust may use

excess return to fund

a life insurance policy

Client

(Grantor*)

2. The ILIT is created and a seeding gift made.

3. Private Loan @ applicable AFR Assets

5. Trust uses loan to

invest in assets and

receives return*

Institutional

Lender

1. Client borrows against

his/her stock portfolio and

pays interest on the loan.(Additional collateral may be required.)

* Grantor is responsible for income taxes on all growth/income realized by trust

Stock

Portfolio

Concentrated Stock Positions

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20,014,088 19,519,278

9,917,698

30,623,730

18,083,212

1,789,572

52,902

1,850,992

6,473,957

1 10 20

ROP Level DB No Insurance

ROP vs. Level DB vs. No InsuranceBORROW and LEND - COMPARISON OF TRUST VALUES AND NET-TO-HEIRS

Without Plan PLAN ROP Death Benefit Level Death Benefit No Insurance

Net Estate Net Estate Trust Assets Combined Plan Trust Assets Combined Plan Trust Assets Combined Plan

Year Age to Heirs to Heirs to Heirs to Heirs Advantage to Heirs to Heirs Advantage to Heirs to Heirs Advantage

1 75 24,516,000 24,472,584 20,057,504 44,530,088 20,014,088 30,667,146 55,139,730 30,623,730 96,317 24,568,902 52,902

10 84 29,888,192 29,270,549 20,136,921 49,407,470 19,519,278 18,700,855 47,971,404 18,083,212 2,468,635 31,739,184 1,850,992

20 94 37,724,936 37,146,888 10,495,747 47,642,635 9,917,698 2,367,621 39,514,509 1,789,572 7,052,006 44,198,894 6,473,957

*Assumes trust is a grantor trust that includes swap powers.

Seed Gift

Allocate GST

Annual Payments

AFR

Hybrid Lifetime Loan

Private Split Dollar

Old

Non-GST Trust New Dynasty

Trust

Life Insurance

Thinking Outside the Box

Private Banking Structure

Hybrid Lifetime Loan

Private Split Dollar

Distribute Receivable

Swap*

Cash for

Assets

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Term Loan � Repayment made on or before a certain date� Rate is fixed for term of the loan with rate based on length of loan� Amount of imputed interest is a present value calculation for term

(tested on the day the loan is made)

Demand Loan � Exists where lender can demand repayment at anytime� Rate is blended short term AFR (See Rev. Rul. 86-17)

� Amount of imputed interest is determined annually

Split Dollar Exception (“Hybrid”): The following loans are taxed annually (like demand loans) but with AFR appropriate for the term -life expectancy and separation from service

Loan Structure

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The $5 Million HangoverThe $5 Million HangoverThe $5 Million HangoverThe $5 Million Hangover

Minimizing Income Taxes Generated by Large Grantor Trusts

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IDGTS: Managing the “tax burn”

MAKING YOU POOR SO YOUR CHILDREN CAN BE RICH…

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*Assumes a grantor trust in which the payment of taxes is not a further gift to

trust (Rev. Rul. 2004-64 ).

Grantor TrustsIntentionally Defective Grantor Trusts

◦ Swap Powers

◦ Add Beneficiary

◦ Other

Unintentionally Defective Grantor Trust

◦ Life Insurance Premiums may be paid with income

◦ IRC 678 – beneficiary deemed income tax payor

◦ IRC 672(e): Spouse “unity” rule – at time of creation and may survive divorce

◦ What is the impact to prior drafted trust because of Rev Rul 2013-17 (in connection with elimination of DOMA)?

Rev Rul 2013-17: Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

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Tax Reimbursement Tax reimbursement clauses became popular when Treasury issued Revenue Ruling 2004-64.

◦ If the trust instrument gives the trustee the discretion to make reimburse the grantor from trust funds, then—assuming there is no express or implied understanding between the grantor and the trustee that the trustee will exercise its discretion in favor of the grantor—there is no inclusion of the trust’s assets in the grantor’s gross estate at death under § 2036(a)(1)

Cost –assets are transferred back to the grantor and not to the beneficiaries.

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$5,516,847

difference at LE

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Turn Off Grantor Trust StatusAre there provisions in trust that would allow this to happen?

◦ Are there other provisions that limit this option (Rev Rul 2013-17)

◦ Will this impact future planning considerations

◦ Most likely, trust income will be taxed at highest tax rate – so no opportunity to play the brackets

◦ Notices 2009-55 and 2009-59, the IRS reminded taxpayers that certain “toggle trusts” (and substantially similar transactions) continue to be considered “transactions of interest”

Will income taxes be triggered now because:

◦ Debt against the transferred property is in excess of basis

◦ Originally sold asset to trust under Rev Rul 85-13 and an in-kind payment is required

◦ Other

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Taxable v. Non-Taxable Assets

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Don’t Forget About the Business Plan

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Business Review Programs

Items to Review:

– Buy-Sell Funding

– Key Person Coverage

– Section 101(a)(2)

(Transfer for Value)

– Section 101(j) Compliance

(Employer-Owned Life Insurance)

– Section 409A Compliance

(Deferred Compensation)

NO

PLA

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ING