Independent Advisors Forum

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Independent Advisors Forum

• A Penn Mutual Due Diligence Meeting

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Wealth Transfer Estate Planningwith IRA
Assets

• Create A Legacy With
• Individual Retirement Accounts

David A. Scott, J.D., CLU Vice President,
Advanced Sales
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The Profile Client

• Substantial Retirement Savings (IRA, 401(k),
  Deferred Annuities, etc.)
• Lifestyle Not Dependent on Retirement Assets
• Total Estate Exceeds 2 Million (2006-2008)
• Desire to Maximize Legacy and Minimize Taxes
• Im Saving It for the Kids

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IRAs Qualified Plans

• Qualified Retirement Plans
• Pension Profit Sharing Plans, 401(k) Plans,
  403(b) Plans, SEP, SIMPLE, etc.
• IRA Rollover at Retirement
• The Good News . . .
• No Income Tax on Contributions or Rollovers
• Tax-Deferred Earnings Growth
• The Bad News . . .
• Required Distributions During Lifetime
• Income Tax on Plan Funds During Lifetime
• Potential Double Taxation At Death

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The Problem

• Continued Tax-Deferred Growth Will Create Larger
  Amount During Lifetime
• Many People Do Not Need or Want to Spend IRA
  Funds During Lifetime
• If Funds Remain at Death . . .
• THE IRS MAY BE THE
• PRIMARY BENEFICARY!

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Federal Taxationof Retirement Plans

• IRAs Retirement Plans Taxed as Income in
  Respect of Decedent (IRD)
• Subject to BOTH Estate Tax Income Tax
• Four-Step Calculation
• Estate Tax Computed on Full Value Assets
• Amount Subject to Income Tax Determined
• Estate Tax Subtracted from Amount Subject to
  Income Tax
• Income Tax Computed on Balance
• Total Tax Equals Estate Tax Plus Income Tax

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Example - IRA

• Value of IRA at Death - 1,000,000
• Assumed Federal Tax Rates
• Estate Tax 45
• Income Tax 35
• Estate Tax
• 1,000,000 X .45 450,000
• Income Tax
• 1,000,000 Minus 450,000 (Estate Tax)
  550,000 X .35 192,500
• Total Tax 450,000 192,500 642,500 (Over
  64)

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Will the Federal Estate Tax Be Repealed?
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And the Answer Is . . .
SNOWBALL
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Options During Lifetime

• Continue Accumulation
• RMD Must Begin at Age 70 1/2 for IRA Qualified
  Plans
• IRS May Become Biggest Beneficiary with 60
  Taxes
• Transfer Retirement Funds
• Income Tax Paid at Time of Transfer
• Gift Tax May Be Payable
• Charitable Gift Tax Wash
• Pension Protection Act Much Ado About Nothing
• Take Distributions
• Income Tax Payable Lowest Rates in 60 Years
• Lump Sum Distribution
• Periodic Distributions
• Required Minimum Distributions (RMD)
• Distributions Over Life Expectancy or Fixed Period

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Lifetime Distributions

• Spend the Funds Remove From Estate
• No Legacy for Family or Beneficiaries
• Invest/Accumulate the Funds in Other Assets
• Assets May Be Subject to Federal State Death
  Taxes
• Wealth Transfer - Gift to ILIT to Pay Life
  Insurance Premiums

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Wealth Transfer Strategy

• Use Distributions From IRA to Pay Premiums for
  Life Insurance Policy
• Reduces Amount of Double Tax IRA
• Creates Tax-Free Life Insurance Proceeds
• Triple Leverage of IRA Because Life Insurance
  Death Benefits . . .
• Exceed Premiums Paid
• Are Income Tax-Free
• Are Estate Tax-Free with Irrevocable Life
  Insurance Trust (ILIT)

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How Does It Work

• Establish Irrevocable Life Insurance Trust
  (ILIT)
• ILIT Purchases Life Insurance on Client and/or
  Spouse - ILIT Is Owner Beneficiary of Policy
• Client Receives Funds from IRA Makes Gifts to
  ILIT Using Annual Gift Tax Exclusion or Lifetime
  Exemption
• Gross Up Distributions for Income Tax
• ILIT Pays Policy Premiums, Receives Death
  Proceeds Distributes Funds to ILIT
  Beneficiary(s)

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Advantages

• Reduces Amount of Double Tax Retirement Asset
  Creates Income Tax-Free Estate Tax-Free Life
  Insurance Proceeds
• Life Insurance Cash Values Grow Tax-Deferred
  Can Be Accessed Income Tax-Free for Lifetime
  Distributions to ILIT Beneficiary(s)
• Policy Death Benefits Provide Estate Liquidity
  for Taxes, Debts, and Estate Settlement Costs
• Effective Use of Annual Gift Tax Exclusion and/or
  Lifetime Exemption

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Example - Assumptions
Married Clients Ages Both Age 70
Number of Children Three
Current Value of IRA 1,000,000
Life Expectancy Today 15 years
Assumed Federal Income Tax Rate 35
Assumed Federal Estate Tax Rate 45
IRA / Investment Growth Rate 8 per year
For illustrative purposes only. Results do not
reflect actual performance of any particular
investment, and actual results will vary.
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ExampleRMD Accumulate Assets
Total of 2,979,127 IRA Value in 15 Years
1,613,157 Estate Assets From RMD 1,365,970
MINUS
Federal Estate Tax _at_ 45 1,340,607
MINUS
Federal Income Tax _at_ 35 310,533
EQUALS
Total Federal Taxes at Death 1,651,140
(55) Net Amount to Heirs 1,327,987 (45)
Assumes 8 annual rate of growth on IRA and
investments and death at age 85. For illustrative
purposes only. Results do not reflect actual
performance of any particular investment, and
actual results will vary.
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ExampleRMD Survivorship Life/ILIT
Total of 3,996,315 IRA Value in 15 Years
1,613,157 Tax-Free Life Insurance Death
Benefit 2,383,158
MINUS
Federal Estate Tax _at_ 45 725,921
MINUS
Federal Income Tax _at_ 35 310,533
EQUALS
Total Federal Taxes at Death 1,036,454
(26) Net Amount to Heirs 2,959,861 (74)
Assumes 8 annual rate of growth on IRA and
death at age 85. For illustrative purposes
only.Results do not reflect actual performance
of any particular investment, and actual results
will vary.
Penn Mutual Life Insurance Company EstateMax
II universal life policy, level death benefit,
preferred non-tobacco rates, with current
interest rate and charges as of April 2007. All
guarantees are based on the claim-paying ability
of the issuer.
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IRA Legacy to Heirs
Net Amount to Heirs Net Amount to Heirs
Current Plan Proposed Plan
Total Estate at Death Total Estate at Death 2,979,127 3,996,315
Total Federal Taxes Total Federal Taxes 1,651,140 1,036,454
Net Amount to Heirs Net Amount to Heirs 1,327,987 2,959,861

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Options at Death

• Transfer to Surviving Spouse
• Doesnt Eliminate or Minimize Taxes, Merely
  Postpones Taxes Until Distributions Received or
  Spouses Death
• Transfer to Non-Spouse - Stretch IRA
• Does Not Postpone Estate Tax
• Postpones Income Tax Until Distributions Received
• Beneficiary Can Unstretch IRA With Larger
  Distributions
• Transfer to Charitable Organization
• Outright
• Charitable Trust

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Inherited (Stretch) IRA

• RMD Calculation Same As IRA Owner Except Based on
  Age of Beneficiary in Year Following Death of
  Owner
• Beneficiary Designations Can Be Changed Until
  Death
• Does Not Reduce RMD During Owners Lifetime
• Does Not Postpone Estate Tax
• Postpones Income Tax Until Distributions
  Received
• Beneficiary Can Unstretch IRA With Larger
  Distributions

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Another Solution . . .Testamentary CRT with IRA

• CRT Designated As Beneficiary of IRA
• Spouse (or Children) Designated As Income
  Beneficiary of CRT
• No Estate Tax at Death of Owner or Spouse
• Spouses Income Interest Qualifies for Marital
  Deduction
• Non-Spouses Income Interest Unlikely to Exceed
  Exemption Amount
• Charitys Remainder Interest Qualifies for
  Charitable Deduction
• Income Tax Paid as CRT Income Payments Received
• Same as Spousal Rollover Stretch Options

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What Is A Charitable Remainder Trust (CRT)?

• Split Interest Gift Between Charitable
  Non-Charitable Beneficiaries
• Inter Vivos (Created During Lifetime) or
  Testamentary (Created at Death Under Will)
• Donor(s) Transfers Assets/Cash to Trust -
  Donor(s) or Others Receive Income Payments for
  Specified Period of Time
• At End of Income Period Trust Assets Transferred
  Outright to Organization(s) Chosen by Donor(s)

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Product EnhancementCRT Endorsement

• Deferred Annuities Are Ideal for NIMCRUT
• Income Faucet
• CRT Endorsement Available on Variable Fixed
  Annuities
• Not Available with Enhanced Death Benefit Rider
  or Living Benefits Riders
• Joint Annuitants Permitted
• Normal Surrender Charges Apply ONLY After
  Earnings Free Withdrawal Amount
• Multiple Withdrawals in 1st Contract Year

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Example

• IRA _at_ Death of Owner 1,613,157
• IRA Growth 8 Annually
• Unitrust Payout 7 for Lifetime of Surviving
  Spouse (Beginning _at_ Age 72 15 Years)
• Charitable Deduction _at_ Death 750,199
• Total Income Payments to Surviving Spouse
  1,790,767 (1,163,998 Net After-Tax)
• Remainder To Charity _at_ End of Term1,815,258

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Wealth Replacement Trust

• Irrevocable Life Insurance Trust
• Prevents Reduction In Familys Inheritance
• Equalizes Bequests to Charity Heirs
• Life Insurance Proceeds Pass to Heirs Income
  Tax-Free Estate Tax-Free
• Use Distributions from IRA to Pay Policy Premiums
  During Lifetime
• Gross Up Distribution to Premiums Plus Income
  Tax
• Income Tax Savings at Death for Charitable
  Deduction of Remainder Interest

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Sales Opportunities

• Annuity Products
• IRA Rollover
• Deferred Annuity for Testamentary NIMCRUT
• Life Insurance Products
• IRA Wealth Transfer with Life Insurance
• CRT Wealth Replacement Life Insurance
• Life Insurance for Estate Liquidity

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Insurance Planning Techniques

• Outright Policy Ownership
• Access To Cash Value
• Proceeds Included In Estate
• Maintain Flexibility Control
• Traditional ILIT
• Exclude Proceeds From Taxable Estate
• Relinquish Income Control
• Compromise Flexibility
• Survivorship Standby Trust
• Lifetime Access To Cash Value
• Exclude Proceeds From Taxable Estate
• Maintain Flexibility

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Survivorship Standby Trust - How Does It Work?

• Spouse with Shorter Life Expectancy (Age, Health,
  Gender, etc. - Usually Husband) Is Applicant
  Owner of Survivorship Policy
• Policyowner Creates SST Under Terms of Will or
  Revocable Living Trust
• Policy Is Transferred to SST at Death
• Surviving Spouse Should Not Be Trustee or
  Beneficiary of SST

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Survivorship Standby Trust - How Does It Work?

• During Policyowners Lifetime . . .
• Complete Ownership Control of Policy
• Unrestricted Access to Policy Cash Values
• At Policyowners Death . . .
• Policy Transferred to SST
• Cash Value Included In Policyowners Estate
• Minimize Tax Impact with Loans Withdrawals
  During Lifetime or During Probate Administration
• If Non-Owner Spouse Dies First, Policyowner Can
  Create ILIT Transfer Policy
• Three-Year Rule

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Survivorship Stand-By Trust

• Income Tax-Free Estate Tax-FreeDeath Proceeds
  For Estate Liquidity
• Elimination Of Gift Tax On Policy PremiumsPaid
  During The Policyowners Lifetime
• Income Tax Deferral On Growth Of PolicyCash
  Values
• Income Tax-Free Access to Policy Cash Values
  During Lifetime If Policy Not MEC
• Additional Savings For Retirement, College
  Funding, Or Other Lifetime Needs

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Advanced SalesSupport Services
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Department Mission

• Provide Sales, Technical, and Legal Support in
  the Areas of
• Estate Planning
• Business Succession Planning
• Selective Employee Benefit Plans
• Charitable Planning
• Retirement Planning
• Income, Gift Estate Taxation

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Sales Support Services

• Case Consultation - [phone]
• Legal/Technical Assistance
• Specimen Forms Documents
• Consultation With Clients Advisors
• Proposals Illustrations
• Estate Analysis, Charitable Planning, Selective
  Benefits Deferred Compensation, Split Dollar,
  Other Advanced Illustrations Proposals
• Marketing Materials for Advanced Concepts
• Brochures
• Concept Presentation Binders
• Advanced Sales Web Pages
• Software - AMO, Including Documents Salesmaker

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Advanced Sales Website

• Department Directory
• Advanced Markets Online (AMO)
• News Announcements
• Legislation,Teleconferences, etc.
• Advanced Sales Concepts Markets
• Specimen Forms
• Links to Related Information and Other Websites

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Advanced Sales Staff

• David A. Scott, J.D., CLU
• Ted Kirchner, J.D., CLU, ChFC
• Eva M. Victor, J.D., LL.M.
• Lynn Nolan, CLU, ChFC

26 Initials 9 Post-Graduate Degrees/Professional
Designations 45 Years with Penn Mutual 85 Years
of Industry Experience
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FAQs

• Will you speak to my client on the phone?
• No
• Will you speak to my clients advisors on the
  phone?
• Yes
• Will you join me on a sales call?
• No
• Will you review my clients legal documents?
• Yes
• Will you draft documents for my client?
• No

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Penn MutualsAdvanced Sales Department
MORE SALES . . . LESS ADVANCED!