for Medium-size Estates
Estate Planner’s View of Life Insurance and Annuities
for Medium-size Estates
Michael F. Amoia, JD, LLM (Tax), CFP®, CLU, ChFCVice President, Advanced SalesCrump Life Insurance Services
For Training Purposes Only. Not for Client Use.
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DisclaimerThis information is intended solely for the information and education of those agents doing business with Crump Life Insurance Services and is not intended for use as the basis for legal or tax advice. This information cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on such taxpayer. Any individual should consult with his or her own legal or tax advisors for specific legal or tax advice.
This presentation is not intended to be an opinion and does not contain a full description of all facts or a complete exposition and analysis of all the relevant tax authorities. Information in this presentation was not intended or prepared to be used, and it cannot be used or relied upon by any party for the purposes of (i) avoiding any penalties that may be imposed on any taxpayer by any governmental authority or agency; (ii) promoting, marketing or recommending to any party any transaction or matter addressed herein; or (iii) making any investment decision.ADVM11-1633-B, expiration date July 2012
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Agenda
� Planning Needs
� Understanding Life Insurance Financials
� Detailed Review of Life Insurance Policies
� The Policies� The Policies
� How to Use
� Tax Issues
� Opportunities for Annuities
� Features
� Tax Issues for Non-Qualified
� Hybrid Products – Something New(er)3
Word on the Street
“We’re not multi-millionaires. Why do I need to worry Why do I need to worry about estate planning?”
Client
Influencing the Behavior of Beneficiaries
Wealthy parents have two major concerns:
1. Children are not going to live as well as they do
2. Wealth that parents
5%
Don’t Know
25%
The Same
2. Wealth that parents leave their children is going to spoil them
How do you bridge gap between these twoconflicting interests?
Worse
50%
Source: Where America Stands,CBS News Poll, May 2010
20% Better
Estate Planning Defined
The efficient transfer of your assets to another...
Estate Planning is about managing the Estate Planning is about managing the inefficiencies created by:
� Improper transfers
� Market Risks
� Lack of liquidity
� Taxes
Position the Legacy Plan
Shift emphasis
Taxes Goals / Values
Shift emphasis
Non-Tax Reasons for Planning
� Creditor protection
� Divorce/second marriage protection
� Minor Children
� Spendthrifts
� Special Needs Planning� Special Needs Planning
� Professional Management/Investment Options
� Elder Care Planning
Attorney Howard Zaritsky, as quoted in Wall Street Journal, March 5, 2011, “believes the main benefit of long-lived trusts is that they protect family assets from being dispersed by creditor claims and divorce.”
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The MarketYear Return
1995 38.02
1996 23.06
1997 33.67
1998 28.73
1999 21.11
2000 -9.1120
30
40
50Return
2001 -11.98
2002 -22.27
2003 28.72
2004 10.82
2005 4.79
2006 15.74
2007 5.46
2008 -37.22
2009 27.11
2010 14.87
2011 2.05-50
-40
-30
-20
-10
0
10
Not for Client Use
The MarketYear Return
1995 38.02
1996 23.06
1997 33.67
1998 28.73
1999 21.11
2000 -9.1120
30
40
50Return
2001 -11.98
2002 -22.27
2003 28.72
2004 10.82
2005 4.79
2006 15.74
2007 5.46
2008 -37.22
2009 27.11
2010 14.87
2011 2.05-50
-40
-30
-20
-10
0
10
Not for Client Use
400
500
600
700
Value of $1 Invested in 1950
Value of $1 Invested in 1950
Value of $1 Invested in 1950
Value of $1 Invested in 1950
Historical Period Comparison
11.32%
0
100
200
300
400
Value of $1 Invested in 1950
Value of $1 Invested in 1950
Value of $1 Invested in 1950
Value of $1 Invested in 1950
10.77% S&P 500 TotalS&P 500 TotalS&P 500 TotalS&P 500 Total
S&P 500 PriceS&P 500 PriceS&P 500 PriceS&P 500 Price
8.24%
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Not for Client Use
The “Equity Risk Premium”
S&P S&P S&P S&P 500500500500TotalTotalTotalTotalReturnReturnReturnReturn
Moody'sMoody'sMoody'sMoody'sAAAAAAAAAAAA BondBondBondBondCompositeCompositeCompositeComposite
Geometric Mean ReturnGeometric Mean ReturnGeometric Mean ReturnGeometric Mean Return 11.05% 6.86%Standard DeviationStandard DeviationStandard DeviationStandard Deviation 17.79% 3.06%
Data from 1950-2010
Standard DeviationStandard DeviationStandard DeviationStandard Deviation 17.79% 3.06%
Hist. Observed PremiumHist. Observed PremiumHist. Observed PremiumHist. Observed Premium 4.19% 0%
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Not for Client Use
Key Client Drivers
� Guarantees
� Flexibility
� Control
Life Insurance or Annuity
Life Insurance Life Insurance Life Insurance Life Insurance = Creation of an Estate= Creation of an Estate= Creation of an Estate= Creation of an Estate
Temporary ForeverTemporary ForeverTemporary ForeverTemporary Forever
Annuity Annuity Annuity Annuity = Liquidation of an Esta= Liquidation of an Esta= Liquidation of an Esta= Liquidation of an Estatetetete
Now LaterNow LaterNow LaterNow Later
Carriers Financial Strength Review
Ratings as of October 31, 2011
Carrier Sponsors:
Carrier
A.M. Best
Co. (Best's
Rating,
15 ratings)
Standard &
Poor's
(Financial
Strength,
20 ratings)
Moody's
(Financial
Strength,
21 ratings)
Fitch
Ratings
(Financial
Strength,
24 ratings)
COMDEX
RBC % as of YE
financials
(as of cy 2010)
American General Life (NYSE:AIG) A (3) A+ (5) A2 (6) A (6) 82 467%
Aviva Life & Annuity (LSE:AV) A (3) A+ (5) A1 (5) 87 358%
AXA Equitable Life Ins Co (NYSE: AXA) A+ (2) AA- (4) Aa3 (4) AA - (4) 95 1508%AXA Equitable Life Ins Co (NYSE: AXA) A+ (2) AA- (4) Aa3 (4) AA - (4) 95 1508%
Genworth Life Insurance Co (NYSE: GNW) A (3) A (6) A2 (6) A- (7) 79 532%
ING Life Ins & Annuity (NYSE: ING) A (3) A (6) A2 (6) A- (7) 79 426%
John Hancock Life (NYSE: MFC) A+ (2) AA- (4) A1 (5) AA- (4) 94 731%
Lincoln Financial (NYSE: LNC) A+ (2) AA- (4) A2 (6) A+ (5) 88 492%
Metropolitan Life Ins Co (NYSE: MET) A+ (2) AA- (4) Aa3 (4) AA- (4) 95 593%
Nationwide Life A+ (2) A+ (5) A1 (5) A (6) 87 595%
Principal Life (NYSE: PFG) A+ (2) A (6) Aa3 (4) AA- (4) 91 422%
Protective (NYSE: PL) A+ (2) AA- (4) A2 (6) A (6) 87 455%
Prudential Ins Co. of America (NYSE: PRU) A+ (2) AA- (4) A2 (6) A+ (5) 88 533%
Transamerica Life Ins (NYSE: AEG) A+ (2) AA- (4) A1 (5) AA- (4) 93 401%
United of Omaha A+ (2) A+ (5) A1 (5) 92 411%
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Not for Client Use
History of Life Insurance
According to LIMRA,
that in more than 200 years of American history, no death history, no death benefit has ever been denied due to an insurance company’s insolvency.
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The Basics
Whole
Life
Universal
Life
Variable
Life
Indexed Life
Type of Vehicle
Fixed,Long Term
Fixed,
General Account
Fixed, Equity,
Mutual Fund
Clones
Options plus General Account
Clones
Who Controls Insurance Company
Insurance Company
Policy
Owner
Insurance Company
How Credited Credited as Dividends
Credited as Excess Interest
Credited as Investment Returns
Credited based on Index
performance relative to fixed assets
Understanding the Basics
Premium Contribution
POLICYCASH VALUE
Sales ChargesOverhead ExpensesMortality Charges
Rate of Return
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Product Risk & ReturnProjected Returns Variable UL
Indexed UL
Projected Returns
Measure of Risk
Current Assumption UL
19Slide Provided by Bobby Samuelson of Samuelson Design
The Pitch IULMarket Upside
Long-Term Yield
Advantage
Downside Protection
Advantage Over CAUL
20Slide Provided by Bobby Samuelson of Samuelson Design
Indexed UL Financial Construction
Net
EquityHedges(2.9%)
Equity-LinkedCredits
7% Cap
NetPremium(3% Yield)
GeneralAccount(97.1%)
GuaranteedProductFloor
0% Floor
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Not for Client Use
CARRIER A IN-FORCE DATA
Effective Date Cap Illustrated Rate
01/17/2000 10.00% 7.10%08/01/2000 11.00% 7.50%10/16/2000 12.00% 7.90%12/01/2001 11.00% 7.50%04/01/2003 10.00% 7.10%12/15/2003 11.00% 7.50%02/15/2007 10.00% 7.10%02/15/2007 10.00% 7.10%01/01/2010 9.50% 6.35%
10 Year Average (Spreadsheet) 4.83%
Differential (Illustrated vs. Actual) 152bps to 307bps
Information Provided by Bobby Samuelson of Samuelson Design
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Not for Client Use
The Death Benefit:
To GUL or Not...C om p e t i t i v eC om p e t i t i v eC om p e t i t i v eC om p e t i t i v e l a n d s c a p e l a n d s c a p e l a n d s c a p e l a n d s c a p e –––– t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !t h e “ T i p p i n g P o i n t ” i s g e t t i n g c l o s e r !
CurrentAssumptionProduct A
CurrentAssumptionProduct B
No-LapseGuaranteeProduct
Premium $10,784 $12,803 $12,142
Cash ValueCash ValueYear 20 $109,477 $230,601 $56,608
GuaranteeYear 27 30 45
Male, Age 56, Preferred non-tobacco, 1MM death benefit to age 100.
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Not for Client Use
No-Lapse guarantee market movement in 2011
CarrierCarrierCarrierCarrier Price ActionPrice ActionPrice ActionPrice Action CarrierCarrierCarrierCarrier Price ActionPrice ActionPrice ActionPrice Action
American General + MetLife +
Aviva + Nationwide +
Genworth - Minnesota Life FlatGenworth - Minnesota Life Flat
Hartford + Pacific Life +
ING + Principal +
John Hancock + Protective -
Lincoln Benefit + Prudential +
Lincoln Financial + Transamerica Flat
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HOW IT FITSHOW IT FITSHOW IT FITSHOW IT FITS
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Legacy Planning Needs� Spousal Support
� Estate Equalization
� Blended Families
� One-Way Buy-Sell� One-Way Buy-Sell
� Special Needs Planning
� Same Sex Couples
� Asset Class Planning
Life insurance can provide liquidity, guaranteed and control for each.
The MarketYear Return
1995 38.02
1996 23.06
1997 33.67
1998 28.73
1999 21.11
2000 -9.1120
30
40
50Return
2001 -11.98
2002 -22.27
2003 28.72
2004 10.82
2005 4.79
2006 15.74
2007 5.46
2008 -37.22
2009 27.11
2010 14.87
2011 2.05-50
-40
-30
-20
-10
0
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Not for Client Use
Life Insurance as Asset Class
Not for Client Use
ANNUITIESANNUITIESANNUITIESANNUITIES
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What is an Annuity?
A Contract to pay...
Annuity
A contract between you and an insurance company, under which
you make a lump-sum payment or series of payments. In return, the
insurer agrees to make periodic payments to you beginning
immediately or at some future date.
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Phases of a Deferred Annuity
AccumulationPhase Payout PhasePhase
Deferred Annuity
Payout Phase
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Accumulation Phase
Traditional Fixed: Pays declared interest rate
Fixed Index: interest is based on performance of an index or indices
Funds are paid into the contract by the owner
Variable: owner selects sub-accounts, interest based on accountperformance.
Deferred Annuity
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Payout Phase
Payments can be distributed for annuitant’s lifetime
Longer of Annuitant’s Life or Certain Period
Payments can be distributed over a period of time
Payment can be based on lifetime benefits rider
Deferred Annuity
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Living Benefits
At an additional cost:At an additional cost:At an additional cost:At an additional cost:
� A guaranteed minimum death benefitguaranteed minimum death benefitguaranteed minimum death benefitguaranteed minimum death benefit, which locks in the amount you can leave your beneficiaries
� A guaranteed minimum income benefitguaranteed minimum income benefitguaranteed minimum income benefitguaranteed minimum income benefit, which guarantees a particular minimum annuity payment
� A guaranteed minimum accumulation benefitguaranteed minimum accumulation benefitguaranteed minimum accumulation benefitguaranteed minimum accumulation benefit, which guarantees a minimum account value at some point in the future (as agreed upon by you and the insurance company).
� A guaranteed minimum withdrawal benefitguaranteed minimum withdrawal benefitguaranteed minimum withdrawal benefitguaranteed minimum withdrawal benefit, which guarantees a minimum stream of income, either equal to the contract principal or for life, providing you withdraw within specified limits over time.
� Access to additional liquidity due to a longlonglonglong----term care situationterm care situationterm care situationterm care situation, such as entering a nursing facility.
The Basics for Non-Qualified
When considering a nonqualified annuity, most clients and many of their advisors (regardless of whether they are attorneys, certified public accountants, or financial professionals) focus on the tax deferral generally available for nonqualified annuities under Code
§ 72.§ 72.
Qualified Distributions
� Age 59 ½ or older,
� Disability,
� Substantial Equal Periodic payments
� SPIA, or
� Death of Non-Qualified Annuity (NQA) owner.
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NQ Deferred Annuities:
Natural v. Non-Natural
Under Code § 72(u), annuities owned by a person who is not a “natural person” do not qualify for tax deferral because they are not treated as “annuity contracts” for income tax purposes (other than for the insurance company provisions of subchapter L).
Non-natural persons would include:
� Trusts
� Partnerships
� Limited Liability Companies
� Corporations
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Exceptions� Annuities acquired by a decedent's estate because of the
decedent's death;
� Annuities held under a plan described in Code § 401(a) (qualified pension, profit-sharing, or stock bonus plans), as a Code § 403(b) tax-sheltered annuity, or as part of an IRA (including SEPs and SIMPLEs);SIMPLEs);
� Annuities purchased by an employer for distribution to an employee or beneficiary on the termination of a qualified plan or tax-sheltered annuity and held until the annuity is distributed;
� Immediate annuities;
� Annuities used to fund a structured settlement under Code § 130; or
� Annuities Annuities Annuities Annuities held as an agent for a natural person.held as an agent for a natural person.held as an agent for a natural person.held as an agent for a natural person.37
NQ Deferred Annuity:
Grantor TrustConceptually, a grantor trust in which an individual is treated as the grantor under Code §§ 671-678 would seem to avoid the non-natural person tax trap.
� Only three private letter rulings involving whether grantor trusts are agents for natural persons appear to have been issued. agents for natural persons appear to have been issued.
PLRs 9316018, 9322011, 9810015.
� In PLR 9322011, the IRS stated that “[w]here a trust holding an annuity contract is a grantor trust, and a natural person is treated as the owner of the trust under [the grantor trust rules], the trust is treated as holding the annuity contract for that natural person under section 72(u)(1).”
This is different for IRAs... � Special Needs Trust, OK
� By Grantor, NO (See 2011 PLR’s) 38
Death of Non-Qualified Annuity Owner
IndividualsIndividualsIndividualsIndividuals named as beneficiaries of non-qualified annuities have three options :
� NonNonNonNon----Spousal BeneficiarySpousal BeneficiarySpousal BeneficiarySpousal Beneficiary
� Distribution of entire contract within five years
� The value of the annuity must be annuitized within one year of the � The value of the annuity must be annuitized within one year of the date of the owner’s death, or
� Lump sum
� Spousal BeneficiarySpousal BeneficiarySpousal BeneficiarySpousal Beneficiary
� The surviving spouse may choose to become the owner of the contract and no distribution is required.
� However, if anyone else is named as a primary beneficiary along with the spouse, then the spousal option of continuing the contract is lost.
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Trust BeneficiariesIn contrast, if a trust trust trust trust is the beneficiary of a nonqualified annuity:
� Code § 72(s) says that the trust must receive the annuity balance within five years of the annuity owner's death.
It cannot stretch the distributions over the life expectancy of one or more It cannot stretch the distributions over the life expectancy of one or more trust beneficiaries or take advantage of the options available to a spouse, even if the spouse is the sole beneficiary of the trust.*
* For nonqualified annuities, the five-year period ends on the fifth anniversary of the triggering death.
**There is no provision under Code § 72(s) and the associated regulations comparable to that of Treas. Reg. § 1.401(a)(9)-4, A-5, which permits a trust named as the beneficiary of an IRA or an employer-sponsored plan including 401(k) plans, profit-sharing plans, SEPs, and SIMPLEs to be treated as a designated beneficiary if certain requirements are met.
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Estate TaxEstate TaxEstate TaxEstate Tax
For federal estate tax purposes, the total value of the contract is subject to estate tax.
Annuities are income in respect of a decedent (IRD) and Annuities are income in respect of a decedent (IRD) and are not eligible for "step-to" in basis at death. Therefore, the annuity is subject to ordinary income tax when distributed.
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Lincoln MoneyGuard®
Reserve Plus policyCD
Hybrid Products
� Control
� No premiums
• Control
• No additional
$100,000 purchase
� No premiums
� Assets for children
� Will this be enough to pay for her long-term care expenses?
Figures based on 60-year-old female, healthy, nonsmoker.
• No additional premiums (one-pay policies)
• Assets for children
• LTC benefits worth multiple times her premium payment
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Not for Client Use
A smarter alternative to self-insuringSM
A money-back guarantee.At any time, your client can request a return of premium, upon full surrender of the policy. The amount received will be adjusted for any benefits paid and any loans and cash withdrawals, and it may have tax implications. The money back guarantee is included in the policy cost through the Enhanced Surrender Value Endorsement, which is available at issue on all single premium policies and flexible premium policies for ages 35 – 65. See Endorsement for complete terms and conditions.
OR
Your client can purchase a Lincoln MoneyGuard® Reserve Plus policy with a portion of cash reserves. The policy remains an asset in their portfolio, and it offers:
* Beneficiaries can receive an income tax-free death benefit under IRC Section 101(a)(1).† Long-term care reimbursements are generally income tax-free under IRC Section 104(a)(3).
for ages 35 – 65. See Endorsement for complete terms and conditions.
An income tax-free death benefit.When the client dies, the policy pays an income tax-free death benefit to their beneficiaries.*
Long-term care benefits.If the client needs long-term care, the policy can provide income tax-free reimbursements for qualified long-term care expenses.†
OR
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Hypothetical case study: Protecting retirement income
OtherLife insurance tocreate a legacy
Portion of savings
$150,000Premium
Hypothetical example only. Benefit amounts will vary by client’s age, health status, and gender (except in Montana, where gender does not affect rates or benefits).
His maximum available benefit is $92,250 per year for six years ($7,687 per month).
Cashsavings
Investments/retirement products
$553,497Income tax-free long-term
care reimbursements$184,499Income tax-free death
benefit for beneficiaries$150,000
Money back guarantee
OR OR
LCN1109-2059094
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LIFE INSURANCE LIFE INSURANCE LIFE INSURANCE LIFE INSURANCE SETTLEMENTSSETTLEMENTSSETTLEMENTSSETTLEMENTS
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Life Insurance Settlements� Life insurance is no longer needed, or
becomes cost prohibitive, or is not performing as expected
� Insured has outlived risk insured against, business use of life insurance has passedhas passed
� Candidates:
� Over age 65
� Adverse change in health
� $250,000 plus policy death benefit
� No longer wants or can afford
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Life Insurance SettlementsHow Much?
� Market Value� Difference between the present value of the death benefit and the present value of anticipated premiumsanticipated premiums
� Life expectancy of insured is one of biggest factors affecting the value� Shorter life expectancy means smaller discount will apply to death benefit and fewer premiums will be needed
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Life Insurance SettlementsTaxation
� If true viatical settlement � Terminal – death within 24 months it is tax-free
� Sale of policy� Amount up to basis is tax-free
� Difference between basis and CSV is ordinary income tax
� Any proceeds over and above the greater of basis or CSV is capital gains
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Life Insurance SettlementsTaxation
� Example
� Policy is sold for $500,000 Total
$275,000BALANCE is
Capital Gains Tax
$500,000
� Tax Basis is $125,000
� CSV is $225,000
Total Sale Priceis
$500,000$125,000BASIS
is Tax-free
$100,000CSV minus BASIS is
Ordinary Income Tax
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Not for Client Use
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