Estate Planning in 2015 (Atra, ILIT, UPIA, 1035And Policy Review)

ESTATE PLANNING
IN 2015
ATRA, ILIT, UPIA, 1035
AND POLICY REVIEW

American Taxpayer Relief Act of 2012
 Bipartisan legislation was signed into law in January 2013. The legislation
essentially extends many of the 2001 and 2003 tax cuts permanently.
 ATRA 2012 increased the top federal estate tax rate up to 40% with a $5,000,000
estate and gift tax exemption (indexed).
R D U & A B R E A K T H R O U G H V I E W O N P O L I C Y R E V I E W
Image courtesy of FineMark

ESTATE TAXES
ATRA of 2012
 The new law provides for a permanent estate tax rate of 40% and a permanent
$5 million estate tax exemption for individuals ($10 million married)
(indexed to $5.43 M / $10.86 M in 2015)
GIFT TAXES
 The new law maintains “unification” of the $5 million estate tax exemption with a
$5 million lifetime gift tax exemption per individual ($10 million married)
(indexed to $5.43 M / $10.86 M in 2015)
 This “unification” allows a married couple to gift assets worth about $10.86 million during
lifetime with $0 out of pocket gift tax.

ESTATE TAX PLANNING
(Martial/Credit Shelter Portions)
ATRA of 2012
 The law permanently provides for an election of
“portability” of the indexed $5 million estate tax exemption
from the first death to the second death of a married couple
via the 100% estate tax marital deduction
 This could mean that the surviving spouse could have an
indexed $10 million estate tax exemption at the second
death without the need for splitting the estate into
“marital” (A) and “credit shelter” (B) portions at first death.
ESTATE TAX PLANNING
(Martial/Credit Shelter Portions) (A-B Trust Plans)
 However, planning on a case by case basis may still involve a marital-credit shelter split
at the first death (A-B) so that future asset appreciation on the credit shelter portion (B) will
NOT be included in the estate of the surviving spouse.

Other Estate-Gift Tax Rules
 “Stepped-up cost basis” to date of death value for capital assets included in the gross
estate was permanently back in place already in 2011 after one year of “carryover cost
basis” in 2010
 Federal estate tax deduction for any state death taxes paid is permanent
(ATRA 2012)
 Lifetime exemption gifts ($5.43 M) are added back into taxable estate at death on
Line 4 of Form 706. Only future appreciation above date of gift value is removed from
taxable estate … TRA 1976
 2015 Annual gift tax exclusions ($14,000 per donee each year) plus appreciation are
totally removed from the taxable estate …

State Death Taxes
 20 States Levy State Death Taxes
 2015 … RI-$1,500,000; MA-$1,000,000; CT-$2,000,000 (12% max); NY-$3,125,000 (4/1);
NJ-$675,000. Marginal rates range from about 6% to 16%. NH, FL - No state death taxes
 RI estate taxes alone could range from $35,000 ($2 million taxable estate) to $1,003,000
($10 million taxable estate). MA estate taxes would be $99,000 ($2 million taxable estate)
to $1,067,000 ($10 million taxable estate). Rate is 16% for excess above $10 million
$3,125,0000 $1,000,000
$2,000,000
$1,500,000
$675,000

IRREVOCABLE
LIFE INSURANCE
TRUSTS-ILITS
THE CORNERSTONE OF
ESTATE PLANNING

Advantages of Life Insurance
 Excellent financial leverage (premiums paid vs. death benefit)
 Income tax free death benefit (IRC Section 101)
 Estate tax free (ILIT is owner/beneficiary)
 Gift tax free (annual gift exclusions)
 Guaranteed death benefit insurance products (no-lapse UL or SUL)
 Estate conserved for heirs at lowest “present value cost”

ILIT Summary
 Unique property (life insurance)
 Legal ownership by third party (trust)
 Asset management by trustee over an extended period of time beyond death
 Superior financial results (High after-tax IRR at life expectancy)
 Statutory “fiduciary” protection in most states (Uniform Prudent Investors Act)

IRR for Guaranteed No-Lapse UL and SUL
 No-lapse UL or SUL provides superior financial leverage at low PV cost
 IRR as an after-tax value because death benefit is income tax free (IRC Section 101)
 Assume 30% blended income tax rate
 Run insurance illustration with IRR page
 Determine IRR at LE or joint LE and convert to pre-tax equivalent IRR using
blended income tax bracket

UPIA, POLICY REVIEW,
& IRC SECTION
1035 EXCHANGES
GUIDELINES FOR REVIEW
AND EXCHANGE

Uniform Prudent Investors Act (UPIA)
 Assess risk tolerance by reviewing purpose of the trust
 Take into account current economic conditions and tax consequences of
investment decisions
 Diversifying financial assets of the trust
 Consider the special value of the asset in relation to the purpose of the trust to
one or more of the beneficiaries
 Trustee must mange trust assets by considering purpose, terms, and distribution
requirements of trust
 The potential effect of inflation or deflation
 The expected total return on trust assets
 Need for liquidity, income, and preservation and appreciation of capital
 Make a reasonable effort to verify facts relevant to managing trust assets
UPIA Standards for ALL Trustees to Follow …
A duty to beneficiaries to prudently manage assets

UPIA–Due Diligence Life Insurance Policy Review
 Maintain the life insurance policy…pay the premiums on time
 Policy performance as originally illustrated
 Explore more cost efficient policy offering better guarantees
 Continuing premiums far beyond what was originally illustrated
 Taking steps to prevent a policy lapse
 What are carrier’s rating for financial strength – Comdex?
 Is death benefit guaranteed and for how long?
 Is the face amount adequate to meet current needs? Too much? Not enough?
 What is policy status? When is it projected to lapse if premiums are stopped?
 How much guaranteed coverage can be provided at little or no additional premium cost?
 Does policy allow COI charges to increase?
Trustee Fiduciary Responsibility to Trust Beneficiaries …
A Continuing Responsibility to Conduct “Due Diligence”

Life Insurance Policy Review Fact-Finding
 Insured(s) and date(s) of birth
 Policy owner and date issued
 Total death benefit (base DB + DB of PUA)
 Total cash value (guaranteed CV + CV of PUA)
 Total loans (principal + accrued interest)
 Net policy value (total cash value – total loans)
 Adjusted “carryover” cost basis
 Annual premium and remaining years to pay
 In force policy illustration to analyze projected status of the policy.
Continuing premiums vs. not continuing premiums vs. reduced paid-up
Need the Following Policy Information to do a
“Life Insurance Review Analysis”

IRC Section 1035 Exchanges
Can income tax free and estate tax free life insurance be acquired at reduced or zero future
premium cost by a Section 1035 exchange of existing cash values? ……..
- A “refinancing” of your life insurance portfolio
Can important contractual guarantees (no-lapse protection) be acquired as a result of the
exchange? Can high Internal Rate of Return (IRR) to life expectancy be achieved?
 Life insurance for life insurance
 Life insurance for an annuity
 Annuity for an annuity
 Annuity CANNOT be exchanged for life insurance
Possible tax free exchanges under Section 1035

What Types of Policies Can be Exchanged?
The old policy must cease to exist after the exchange. No “partial exchanges” for life insurance.
Single life for single life
 Survivor life (one insured already deceased) for single life is permitted
 CANNOT exchange one single life for survivor life
 CANNOT exchange two single lives for survivor life. Do not confuse with term conversion
of two single life term policies into a permanent survivor life.
Survivor life for survivor life

Taxable Surrender vs. Tax Free Exchange …
This will be considered to be a taxable surrender to the extent of the policy gain. This is true
even if the policy owner then places the funds into a second previously purchased policy.
If old carrier pays the surrender check to the policy owner
This will be a tax free Section 1035 exchange with “carryover” of cost basis
If the old carrier pays the surrender check directly to the new carrier
What’s the Difference?
Exchange of Policies with Loans
New carrier will determine its own acceptable loan carryover ratio and issue the new policy with
an outstanding loan.
Otherwise, if loan is simply discharged (eliminated) upon the exchange, the LESSER of the
loan or the policy gain will be taxable income as discharge of debt “boot” income and
generate a Form 1099-R
Loans can be carried over from the old policy to the new policy tax free.

 Must have the same insured before and after the exchange
 Must have the same contract owner before and after the exchange
 If a change of ownership is desired, change is done with the old carrier before the
exchange …or with the new carrier after the exchange
 Multiple policies can be exchanged for one policy as long as the insured and owner are the
same…2 for 1; 3 for 1…1 for 2; 1 for 3
 The adjusted cost basis of the old contract(s) “carries over” and becomes the cost basis of
the new contract(s)
Administrative Issues

Current estate LESS than $5.43 million (single)
$10.86 million (married) estate tax exemption
Policy Review Case Study #1
Clients (62/59) purchased a $2 million no-lapse SUL policy in 2003 owned by ILIT with annual
premium of $29,000 (Preferred) to cover estate taxes. Estate of $6 million. Estate tax
exemption in 2003 was $2 million for married couple…$1 million each
Value of estate fell to $4 million in 2009 due to decline of equity portfolio.
Facts … 2003
2015:
Clients (74/71) now have estate of $7.5 million. Estate tax exemption $10.86 million married.
Clients now have $0 federal taxes …. $640,000 of RI state death taxes …. $705,000 MA

Case Study #1
Clients would like to stop annual premiums of $29,000 on $2 million SUL policy and reduce
coverage because they are no longer concerned about federal estate taxes. They are
concerned about LTC expenses and state death taxes
Considerations:
1. Stop paying $29,000 annual premium into SUL policy and reduce the death benefit to
$738,000 to provide no-lapse protection until age 92 of younger insured (net cash value of
$116,000 in 2014)
2. Redirect $29,000 into annual premium for two new single life UL policies with LTC riders
that will be personally owned.
3. $14,500 into $295,000 UL policy with LTC rider on male age 74 and
$14,500 into $413,000 UL policy with LTC rider on female age 71
4. Total insurance after planning: $738,000 SUL+ $295,000 UL + $413,000 UL = $1,446,000

Case Study #1
Result of re-direction of $29,000 premium
1. The reduced death benefit of SUL policy owned by
ILIT will cover current estimated state death taxes
of $705,000 MA and $640,000 RI
2. A pool of potential tax free LTC rider benefits has
been created ($295,000 for male…$197per day
and $413,000 for female…$275 per day)
3. IRR on tax free death benefit at life expectancy for
male is 6.22% (8.89% pre-tax equivalent) and
7.67% (10.96% pre-tax equivalent) at life
expectancy for female if no LTC benefit claims are
ever made

Current estate in EXCESS of $5.43 million (single)
Clients (58/58) purchased a $3 million Survivorship Whole Life policy in 1999 owned by an ILIT
with annual premium of $45,000 (Preferred) to cover about $2.9 million of estate taxes.
Estate of $7 million. Estate tax exemption in 1999 was $1.3 million for a married couple …
$650,000 each
Facts … 1999
2015:
Clients (74/74) now have estate of $14 million. Estate tax exemption is $10.86 million married.
Even with an estate that doubled in value, clients now have only about $1.8 million of
combined federal and state death taxes due to the much larger federal estate tax exemption

Case Study #2
 $3,000,000 base + $400,000 DB of PUAs
 $45,000 annual premium x 16 years = $720,000 cumulative premium (cost basis)
 $1,020,000 total cash value ($890,000 guaranteed CV + $130,000 CV of PUAs)
 Reduced paid-up DB of $1,775,000
Facts about existing Survivorship Whole Life policy

Case Study #2
Clients would like to consider stopping annual premiums of $45,000 on existing $3 million
survivorship policy. Want to reduce the coverage while maintaining enough death benefit to
offset current estate taxes of about $1.8 million. They ask for alternative uses of the
$45,000 of freed up cash flow.
Considerations & Results:
1. Execute a tax free Section 1035 exchange of $1,020,000 to a no-lapse SUL policy with
death benefit of $2,192,871(standard/standard) with IRR at joint life expectancy (17 years)
of 4.61% (7.09% PTE) …. or $2,703,743 (preferred/preferred) with IRR at joint life
expectancy (17 years) of 5.90% (9.08% PTE) …. to offset current $1.8 million estate taxes .
Alternative Cash Flow Considerations:
1. Re-direct $45,000 each year into paying for grandchildren’s education tuition (unlimited gift
exclusion under IRC 2503(e))
2. Re-direct $45,000 each year ($22,500 each) into 10 pay “combo” LTC products
(i.e. “Combo” Flex-Pay for each spouse) to purchase a pool of tax free LTC benefits
3. Re-direct $45,000 each year into tax deductible charitable gifts … maybe annual premium
for life insurance with a favorite charity as the owner and beneficiary of UL or SUL policy

Current estate WELL in EXCESS of $5.43 million (single)
Clients (55/55) purchased a $5 million Survivorship Whole Life policy in 1995 owned by an ILIT
with annual premium of $65,000 (Preferred) to cover about $5.2 million of estate taxes.
Estate of $11 million. Estate tax exemption in 1995 was $1.2 million for a married couple …
$600,000 each. Top federal estate tax bracket was 55%.
Facts … 1995
2015:
Clients (75/75) now have estate of $30 million. Estate tax exemption is $10.86 million married.
Their estimated federal and state estate tax is about $9.8 million.

Case Study #3
 $5,000,000 base + $870,000 DB of PUAs
 $65,000 annual premium x 20 years = $1,300,000 cumulative premium (cost basis)
 $1,946,000 total cash value ($1,656,000 guaranteed CV + $290,000 CV of PUAs)
 Reduced paid-up DB of $3,230,000
Facts about existing Survivorship Whole Life policy

Case Study #3
Clients would like to increase Survivorship Life coverage to $10 million in a financially
efficient way to cover current estate taxes. Consider ….
(1) Full 1035 exchange with ongoing annual premium ….. 1 policy
(2) Keep paying premium on old policy + annual premium on new policy ….. 2 policies
(3) Reduced paid-up on old policy + annual premium on new policy ….. 2 policies
Considerations & Results:
1. Execute a tax free Section 1035 exchange of $1,946,000 to a no-lapse SUL policy with
death benefit of $10,000,000 to offset current $9.8 million of combined federal and state
estate taxes
2. Annual premium on new policy is $192,051 (standard) or $165,344 (preferred) funded by
annual gifts to ILIT using available annual gift tax exclusions and lifetime gift exemptions
($5.43 M / $10.86 M). Form 709 gift tax returns will be filed annually allocating “split-gift”
lifetime gift exemptions.
3. Standard internal rate of return (IRR) at joint life expectancy (16 years) is 5.86%.
In a 35% tax bracket, the pre-tax equivalent IRR is 9.02%
Preferred internal rate of return (IRR) at joint life expectancy (16 years) is 6.47%.
In a 35% tax bracket, the pre-tax equivalent IRR is 9.95%

Estate Planning in 2015 (Atra, ILIT, UPIA, 1035And Policy Review)

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