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Slide 1: The Mathematics of Life Insurance for Zero-Tax Estate Planning By Ward J. Wilsey. JD, LLM wardwilsey@wilseylaw.com www.wilseylaw.com 2007 (c)
Slide 2: Circular 230 Warning Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. 2007 (c)
Slide 3: Purpose     Define Zeroed Out Estate Tax Define why we use life insurance in Zeroed Out Tax Plans Identify where the math works Give 3 choices for zero estate tax planning 2007 (c)
Slide 4: Uses of Life Insurance in Zeroed Out Planning    Paying the estate tax with life insurance and leaving all assets to family TCLAT Life Insurance Replacement Strategy TCLAT Strategy with advanced planning 2007 (c)
Slide 5: Paying Estate Taxes w/ Insurance    Client’s Irrevocable Life Insurance Trust will purchase life insurance on the client’s life At death, Trust will purchase assets equal to estate tax from client’s estate Client’s estate will use liquidity to pay estate taxes 2007 (c)
Slide 6: Paying Estate Taxes w/ Insurance  Pros      Cons  Simple Inexpensive up front costs Ease of administration at death No realistic audit issues   You still will pay estate taxes (quasi-zeroed out plan) Expense of premiums You must get ILIT right the first time 2007 (c)
Slide 7: TCLAT Insurance Replacement Strategy      Client leaves their taxable estate to a Testamentary Charitable Lead Annuity Trust (TCLAT) Trust pays out annuity to Charity for 15-20 years At end of term, trust pays remainder to beneficiaries Distribution is tax free because Annuity is calculated to leave a Zero remainder Life Insurance equal to the taxable estate less present value of remainder is purchased 2007 (c)
Slide 8: TCLAT Strategy  Pros      Cons  No estate taxes Charitable Legacy All assets pass to kids tax free Relatively Easy Much more Life Insurance must be purchased  Premium financing not always viable long term  WARNING: TCLATs do not work in an of themselves without a ton of charitable intent  LAWSUIT!!! 2007 (c)
Slide 9: TCLAT Strategy combined with Advanced Planning      Implement TCLAT Strategy Use other estate planning techniques such as GRATs, IDGTs, etc to remove assets from the estate Reduce the overall need for life insurance as time goes on Purchase one permanent policy for anticipated taxes Purchase one term policy in case plan does not have time to come to fruition 2007 (c)
Slide 10: TCLAT Strategy combined with Advanced Planning  Pros       Cons    Zeroed-Out Tax Charitable Legacy Decreased Insurance costs over time Increased Asset Protection Ability to pass gifts to children while alive 2007 (c) More expensive to set up and maintain Confusing Still must pay some insurance costs
Slide 11: The Math-No Planning  Client      Estate Exemptions Charity Taxable Estate Tax Rate Estate Taxes Life Insurance Net to Family Net to Charity Net to IRS 2007 (c) $10,000,000 $4,000,000 $0 $6,000,000 45% $2,700,000 $0 $7,300,000 $0 $2,700,000 Joe and Jane Doe 3 kids $10,000,000 estate $4,000,000 personal residence $6,000,000 stocks
Slide 12: The Math- Life Insurance Only  Joe and Jane Doe     Estate Exemptions Charity Taxable Estate Tax Rate Estate Taxes Life Insurance Net to Family Net to Charity Net to IRS 2007 (c) $10,000,000 $4,000,000 $0 $6,000,000 45% $2,700,000 $2,700,000 $10,000,000 $0 $2,700,000 Figure out estate taxes Buy life insurance in an equal amount Pay taxes with life insurance Family nets entire estate
Slide 13: The Math- TCLAT with Insurance  Joe and Jane Doe   Estate Exemptions TCLAT TCLAT payout TCLAT PV Tax Rate Estate Taxes Life Insurance Net to Family Net to Charity Net to IRS 2007 (c) $10,000,000 $4,000,000 $6,000,000 $7,402,881 $1,588,275 45% $0 $4,411,725 $10,000,000 $6,000,000 $0   Figure out taxable estate Buy life insurance in same amount (less PV of remainder interest) Taxable estate goes to TCLAT, with remainder paid in 15-20 years Life Insurance used to make sure family gets the same as had they paid the taxes with life insurance
Slide 14: The Math- TCLAT with Advanced Planning  Joe and Jane Doe      Estate Value of House Securities* Exemptions FLLC-GRAT FGTs TCLAT TCLAT PV Tax Rate Estate Taxes Life Insurance Net to Family Net to Charity Net to IRS 2007 (c) $12,100,000 $4,840,000 $4,864,200 $3,520,000 $2,754,022 $916,316 $2,513,861.69 $142,771..18 45% $0 $2,500,000 12,751,588.64 $2,513,861.69 $0 Do TCLAT Use FLLC-GRAT strategy for 2 year term for securities Do Family Gifting Trusts Discount Securities Results for 2010  10% growth
Slide 15: Know Costs of Zeroed Out Plans  Short Run (cheapest first)     Long Run    Life Insurance Only TCLAT Life Insurance TCLAT Advanced Planning TCLAT Advanced Planning Life Insurance Only TCLAT-Life Insurance 2007 (c)
Slide 16: Summary  You now know the 3 approaches to zero-tax planning    Life Insurance only TCLAT Life Insurance TCLAT Life Insurance with Advanced Planning  All three may be right, but the client must be aware of the implications 2007 (c)