Presenting a live 90‐minute webinar with interactive Q&A

Irrevocable Life Insurance TrustsDrafting Flexible ILITs to Achieve Tax Benefits and Plan for Future Circumstances

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, FEBRUARY 15, 2011

Today’s faculty features:

Diana S.C. Zeydel, Shareholder, Greenberg Traurig, Miami, Fla.

Mary Ann Mancini, Partner, Bryan Cave, Washington, D.C.

The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Continuing Education Credits FOR LIVE EVENT ONLY

For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:

• Close the notification box

• In the chat box, type (1) your company name and (2) the number of attendees at your location

• Click the blue icon beside the box to send

Tips for Optimal Quality

S d Q litSound QualityIf you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-866-871-8924 and enter your PIN when prompted Otherwise please send us a chat or e mail when prompted. Otherwise, please send us a chat or e-mail sound@straffordpub.com immediately so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key againpress the F11 key again.

Drafting and Administering Irrevocable Life Insurance Trusts

Diana S.C. ZeydelAMSTERDAM • ATLANTA • BOCA RATONBOSTON • CHICAGO • DENVERFORT LAUDERDALE LOS ANGELES MIAMI Greenberg Traurig, PA

Miami, Florida305.579.0575 • zeydeld@gtlaw.com

FORT LAUDERDALE • LOS ANGELES • MIAMINEW JERSEY • NEW YORK • ORLANDOPHILADELPHIA • PHOENIX • TALLAHASSEETYSONS CORNER • WASHINGTON, D.C.WEST PALM BEACH • WILMINGTON • ZURICH

Purposes of Forming an ILITp g

Deliver policy proceeds to next Deliver policy proceeds to next generation free of transfer taxA id ift t i t Avoid gift tax on premium payments Retain income tax free receipt of

policy proceeds Provide liquidity to estateq y Control distribution of proceeds

5

Basic Provisions of Section 2042 – p.2

Proceeds of an insurance policy are includible in the gross estate of aincludible in the gross estate of a decedent if: Receivable by the decedent’s executor

Section 2042(1) Decedent, at the time of death,

possessed any incidents of ownershippossessed any incidents of ownership, including the power to change the beneficiary, to change the beneficial ownership or the time and manner ofownership or the time and manner of enjoyment, to surrender or cancel the policy, to assign or pledge the policy for a loan Section 2042(2)a loan. Section 2042(2)

6

Attribution of Incidents of Ownership p 3Ownership – p.3

P t d l th Power to remove and replace the trustee. Rev. Rul. 95-58 and PLR 200314009200314009 Grantor as trustee

T R § 20 2042 1( )(4) Treas. Reg. § 20.2042-1(c)(4) Rev. Rul. 84-179 Insured transferred the policy or Insured transferred the policy or

consideration to purchase the policy to the trustI d i t t ’ f Insured can exercise trustee’s powers for the insured’s individual benefit 7

Attribution of Incidents of Ownership pp 4 6Ownership – pp.4-6 Beneficiary as trustee?Beneficiary as trustee? Other powers and interests 5 and 5 powerp Elective share rights Rev. Proc. 2005-24

Through a corporation Reg. §20.2042-1(c)(6) More than 50% ownership, but not if proceeds are

payable to the corporation Note attribution through a grantor trust

Through a partnership Rev. Rul. 83-147 Estate of Knipp Estate of Knipp

8

Gift Tax Issues – pp.6-7pp

Premium payments Premium payments Valuation of an existing policy Reg. §25.2512-6(a) – Interpolated

terminal reserve plus unexpired premiumspremiums Rev. Proc. 2005-25

Lif ttl t k t Life settlement market

9

Funding Using the Annual Exclusion pp 7 8Exclusion – pp.7-8

Section 2502(b) present interest Section 2502(b) – present interest requirement

Q ti i t h titl t b t Question is not when title vests but when enjoyment begins – Fondren An income interest qualifies An income interest qualifies BUT an income interest in a trust

owning an insurance policy does notowning an insurance policy does not 2503(c) trust works but not the best

arrangementarrangement10

Requires a Completed Gift – p.9q p p

Must relinquish dominion and controlMust relinquish dominion and control Power reserved to the donor to name new

beneficiaries or to change the interests of the beneficiaries renders the gift incomplete Power to change timing is not enough toPower to change timing is not enough to

render gift incomplete, but may cause estate tax inclusion under section 2038T f b h k if t b Transfers by check if payment can be stopped are not complete until negotiated by the trusteey

11

Crummey Powers – pp.9-11y pp

Power of withdrawal conferred by the Power of withdrawal conferred by the instrument contemporaneous with transfers to the trusttransfers to the trust Must receive notice – cannot waive

the right to receive noticethe right to receive notice 15 days may be sufficient --

CristofaniCristofani Must have a beneficial interest in the

trustt ust12

Crummey Powers – pp.11-12y pp

A Crummey power of withdrawal A Crummey power of withdrawal right is a general power of appointment under §2514(c)appointment under §2514(c) Lapse of a power of withdrawal is a

release that is a taxable gift by therelease that is a taxable gift by the powerholder to the trust UNLESS the lapse is within the limits of the greater of $5,000 or 5% of the value of the trust

13

Hanging Powers – pp.12-13g g pp

Technique to permit contributions equal to Technique to permit contributions equal to the full amount of the annual exclusion

BUT avoid taxable gifts to the ILITBUT avoid taxable gifts to the ILIT How does it work? Powers of withdrawal in excess of thePowers of withdrawal in excess of the

5 & 5 limitation “hang” into subsequent taxable years until they can lapse within the limitation

WARNING – means the beneficiary has greater estate tax inclusion

14

Gift-Splitting – pp.13-14p g pp

Section 2513 provides that a gift made by Section 2513 provides that a gift made by any person other than to his or her spouse shall, for gift tax purposes, be considered , g p p ,as made one-half by each spouse In general, best to file two returns

PLR 200130030 vs. PLR 200616022 What if spouse is a discretionary beneficiary

Cand trust has Crummey powers

15

Using Loans to Pay Premiums pp 14 16Premiums – pp.14-16

PLR 200603002 PLR 200603002 Complete restructuring of ownership of

policies due to a mistakepolicies due to a mistake Loans to ILIT to pay premiums that

were forgiven shortly afterwardswere forgiven shortly afterwards Loans treated as gifts to the ILIT

16

Estate Tax Issues – pp.16-20pp

“Beemed” transfer doctrine Beemed transfer doctrine Use of protective marital deduction

t ttrust Transfers for full and adequate

consideration under Section 2035(d) Reciprocal Trust Doctrinep

17

Income Tax Issues – pp.20-23pp

Transfer for Value ruleS ti 101( )(2) Section 101(a)(2) Exceptions

Carry over basisy Transfer to excepted transferee – insured,

partner of the insured, partnership in which the insured is a partner, corporation in which the i d i ffi h h ldinsured is an officer or shareholder

Rev. Rul. 85-13 Rev. Rul. 2007-13

Maintaining grantor trust status Crummey powerholders treated as y p

owners18

Generation-Skipping Transfer Tax Issues pp 23 25Tax Issues pp. 23-25

Does giving “skip” persons Crummey Does giving skip persons Crummey powers of withdrawal create a problem?problem? Should you allocate GST exemption

t ILIT?to an ILIT?

19

Alternatives to an ILIT

Consider using another structure to Consider using another structure to own insurance if premium payments exceed the available annualexceed the available annual exclusionsC bi i ith FLP ISGT Combine insurance with FLP-ISGT structure to avoid cash flow issue

d t id li idit tand to provide liquidity necessary to repay the note

20

Checklist

Make sure ILIT permits distributionsMake sure ILIT permits distributions during the life of the insured

Do not allow grantor/insured to be gappointed as trustee

Settle ILIT before acquiring the policy Negotiate checks to pay premiums prior to

the end of the year Make ILIT wholly grantor as to only one Make ILIT wholly grantor as to only one

person Make sure Crummey powers are validMake sure Crummey powers are valid

21

Checklist

Do not permit contributors to exerciseDo not permit contributors to exercise Crummey powers

Permit contributors to eliminate Crummey ypowerholders

Use hanging powers Carefully consider advisability of allocating

GST exemption Consider alternatives to an ILIT Consider alternatives to an ILIT Make sure trustees have adequate

powers to administer the policypowers to administer the policy22

Maintain Your Sense of HumorHumor

These rules are absurdly complex for These rules are absurdly complex for a fairly simple objective

23

Drafting and Administering Irrevocable Life Insurance Trusts

Diana S.C. ZeydelAMSTERDAM • ATLANTA • BOCA RATONBOSTON • CHICAGO • DENVERFORT LAUDERDALE LOS ANGELES MIAMI Greenberg Traurig, PA

Miami, Florida305.579.0575 • zeydeld@gtlaw.com

FORT LAUDERDALE • LOS ANGELES • MIAMINEW JERSEY • NEW YORK • ORLANDOPHILADELPHIA • PHOENIX • TALLAHASSEETYSONS CORNER • WASHINGTON, D.C.WEST PALM BEACH • WILMINGTON • ZURICH

Premium FinancingPremium FinancingTechniques – General

MARY ANN MANCINIPartner Bryan Cave LLPPartner, Bryan Cave LLP

Washington 202.508.6236

maryann mancini@bryancave com

25

maryann.mancini@bryancave.com

Alternatives

• Loans to pay premiums on a life insurance policy (premium financing) can, in general, take two forms – loans that bear interest, at the Applicable Federal Rate (the “AFR”) pp ( )

and – Loans that don’t bear interest at the AFR

• Loans that bear interest at the AFR can take two forms– loans that provide for payment of interest on a current (annual)

basis and – loans that accrue interest at the AFR and pay it with principal at p y p p

the end of the term of the loan

26

Alternatives cont.

• Under the final split-dollar regulations, any post-September 17, 2003 premium financing arrangement (or p , p g g (any prior arrangement “materially modified” thereafter), will meet the broad definition of a “split-dollar loan,” meaning it will be governed by the complex Section 7872meaning it will be governed by the complex Section 7872 rules, unless it provides for the payment or accrual of interest at the AFR

27

Exit Strategies

• Like split-dollar arrangement, premium financing arrangements should be planned at the outset witharrangements should be planned at the outset with an exit strategy for terminating the arrangement during the insured’s lifetime

• Since these are, by definition, “equity arrangements,” policy values in excess of amounts due the lender could eventually be used to do a rollout, without taxcould eventually be used to do a rollout, without tax consequences

28

Split-Dollar Techniques —An Overview

29

Categories of Split-Dollar Arrangementsg p g

• In an employment context, traditionally• In other contexts, traditionally

S ifi ll d fi d d h fi l l i f h• Specifically defined under the final regulations, for the first time

30

Split-Dollar Methods

• Endorsement• Collateral assignment• Co-ownership

F fi l l ti t th t diti ll• For pre-final regulation arrangements, there traditionally was no difference in basic tax consequences regardless of the documentation method used or ownership of the policy

• For post-final regulation arrangements, the tax result generally depends on policy ownershipgenerally depends on policy ownership

31

The Two Issues for Split-Dollar Arrangements are and alwaysArrangements are, and always have been the Measure of the

Economic Benefit and theEconomic Benefit and the Taxation of Equity

32

Measure of the Economic Benefit in Split Dollar ArrangementsSplit-Dollar Arrangements

• The economic benefit is premium insensitive, both as to the level of the premium and whether a premium was paid in a given yearp g y

• Traditionally, the economic benefit is measured by the lower of the carrier’s qualifying term rates or the IRS tables rates under Rev Rul 66-110tables rates, under Rev. Rul. 66 110

• Validity of alternative term rates

33

34