LifeShares LLC Slideshare Presentation


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LifeShares LLC Life Settlement Investments are a non-correlated, fixed-income alternative investment that provides equity-like returns without subjecting your portfolio to market volatility or other non-market risks.

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LifeShares LLC Slideshare Presentation

  1. 1. Accredited Investors Only<br />
  2. 2. The Headlines<br />…Welcome to the New Normal<br />2<br />
  3. 3. The New Normal<br /><ul><li>The ongoing economic problems of the past few years have changed investor’s attitudes toward saving and investing in a profound way and the reasons are understandable
  4. 4. We have just experienced two of the most severe bear markets in history and both within the past decade
  5. 5. Unemployment, politics, monetary policy, budget & trade deficits, tax policy, market volatility and other factors continue to weigh heavily on the minds of investors
  6. 6. Investors are telling us that all of this has made them more risk averse and their confidence in the traditional market mechanisms continues to be challenged
  7. 7. Investors are asking for greater clarity and want more protection from the erosive forces jeopardizing their ability to live the lives they want to now and in retirement</li></ul>3<br />
  8. 8. Market Volatility<br /> What Does VIX - Volatility Index Mean?<br /><ul><li> The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility.
  9. 9. The VIX is a widely used measure of market risk.</li></ul>The <br />“Investor Fear <br />Gauge"<br />4<br />
  10. 10. The Challenge to the Advisor<br /><ul><li>The new conservative mindset calls for portfolios to be reengineered to achieve both principal stability and growth while at the same time addressing investor sensitivity to risk
  11. 11. Investors are looking increasingly to safe investments despite the fact that many of the yielding instruments are extremely low
  12. 12. How can an advisor meet the challenge of the New Normal and add value to his/her client relationships</li></ul>5<br />
  13. 13. Life Settlements Emerge As a New Fixed Income Alternative<br />Definition<br /><ul><li>A Life Settlement is the sale of an in-force life insurance policy that is issued on the life of a person usually aged 65 or older, who is not considered terminally ill. The settlement amount exceeds the Cash Surrender Value but is less than the Death Benefit.
  14. 14. An investor becomes the owner, designates his/her beneficiary(ies) and assumes premium payments. The investor collects death benefits upon maturity of policy.
  15. 15. It is estimated that over 70% of life insurance policies lapse or are surrendered without paying a death benefit.</li></ul>6<br />
  16. 16. A Lifeline for Seniors In Need<br />Insured’s Circumstances Change Over Time <br /><ul><li>Insured has become wealthy enough to “self-insure”
  17. 17. Insured’s Tax or Estate status changes
  18. 18. Business Owner’s Buy/Sell Insurance no longer needed
  19. 19. Key Man Insurance policy no longer needed
  20. 20. Death of the policy’s beneficiary
  21. 21. Policy under performs and no longer meets the needs of the insured
  22. 22. Change in family status: Children get married, move out
  23. 23. Desire to donate to a favorite charity
  24. 24. Illness forces sale for financial/employment reasons
  25. 25. Insured may realize profit by selling vs. cash-surrender value</li></ul>7<br />
  26. 26. Life Settlements Good for Consumers<br />GAOstudy Finds that Life Settlements Deliver Almost 8 Times Surrender Value to Seniors<br />HUDSON, Ohio--(BUSINESS WIRE)-- The U.S. Government Accountability Office recently issued a long anticipated report on the state of the emerging Life Settlement market. One of the key findings, based on analysis of over 1,000 life settlement transactions, was that seniors selling their policies in a life settlement transaction received almost 8 times as much money as they would have had they surrendered the policy to the insurance company. “This confirms what we have been saying all along, life settlements are good for consumers and result in maximizing policy value for seniors who no longer want or need their life insurance policy,” said Brian Smith, President of the Life Settlement Institute. For example, proceeds of a life settlement may help a senior pay for long term care. <br />LAPSE<br />SURRENDER<br />SETTLEMENT<br />$$$<br />$$$$$<br />-0-<br />$<br />8<br />
  27. 27. Who Buys Life Settlements<br />Until recently, only institutional buyers invested in life settlements. Commercial banks, hedge funds, private equity, foundations, charitable organizations and the like recognized the unique risk/return characteristics of life settlements. <br />Gen Re, the global reinsurance and risk management arm of Buffett's Berkshire Hathaway Inc., arranged a financing facility upwards of $400 million for Living Benefits Financial Services LLC, a life settlements funder in Minnetonka, Minn. <br />9<br />
  28. 28. A New Tool for the Professional Advisor<br />LifeShares: Life Settlement Investments<br /><ul><li>Only Accredited investors can purchase LifeShares
  29. 29. LifeShares provide a non-correlated, fixed-income alternative
  30. 30. LifeShares play an important role in reducing the overall risk characteristics of a portfolio’s asset allocation
  31. 31. LifeShares represent an anchor diversification strategy to protect investors from market, inflation, volatility, capital, credit, real estate and other traditional market-based risks</li></ul>10<br />
  32. 32. Asset Allocation<br />Risk and Expected Return<br />Modern Portfolio Theory assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less risky one. Thus, an investor will take on increased risk only if compensated by higher expected returns. Conversely, an investor who wants higher expected returns must accept more risk. The exact trade-off will be the same for all investors, but different investors will evaluate the trade-off differently based on individual risk aversion characteristics. The implication is that a rational investor will not invest in a portfolio if a second portfolio exists with a more favorable risk-expected return profile – i.e., if for that level of risk an alternative portfolio exists which has better expected returns.<br />11<br />
  33. 33. Asset Allocation 2.0<br />LifeShares is the missing piece of the asset allocation puzzle for the newly conservative investor seeking higher, risk-adjusted returns<br />LifeShares<br />12<br />
  34. 34. Example Asset Allocation Model<br />10%<br />5%<br />4%<br />17%<br />16%<br />10%<br />10%<br />LifeShares<br />28%<br />13<br />
  35. 35. Non-Correlated Asset Class<br />Defining Correlation<br /><ul><li>Proper asset allocation requires knowing the degree in which different asset classes correlate with one another. The possible correlation values range from -1.00 to 1.00. A value of 1 is perfect correlation, and a value of -1 is negative correlation. For example, if you were comparing two investments, A and B, and they had a correlation of 1, if investment A saw a return of 1%, investment B would realize a 1% return as well. If A and B had a -1 correlation, if investment A had a 1% return, investment B would have a 1% loss.
  36. 36. Of course, in the real world, 1 and -1 correlations almost never exist. But for the sake of comparing asset classes, most people view a correlation value between 0 and 0.5 as a very weak correlation, which is a good starting point for finding diversification.
  37. 37. Return on investment in LifeShares is unaffected by volatility in the stock, fixed income, commodity, real estate, or credit markets. Politics, terrorism, natural disasters or other unforeseen events do not affect the investor’s expected return.</li></ul>14<br />
  38. 38. Safety & Predictability<br />Principal Protection<br /><ul><li>Investment in LifeShares represent the discounted purchase of future dollars and is not subjected to any investment risk during the maturation cycle </li></ul>Stable Value<br /><ul><li>Intrinsic value of LifeShares increases with time relative to policy maturity </li></ul>Predictable Growth<br /><ul><li>LifeShares pay a fixed return, known in advance, representing a percentage of the death benefit of a life insurance policy payable at a future maturity date </li></ul>15<br />
  39. 39. LifeShares vs A 7% Annual Return Hypothetical Portfolio<br />Over a 15 year period, LifeShares outperform a diversified portfolio with a return on investment of 7%. Of course, as Modern Portfolio Theory suggests, if a consistent rate of return can be achieved, a prudent investor would choose it over a more volatile investment. Until now, that portfolio did not exist…<br />7% Hypothetical Portfolio<br />LifeShares<br />Market Indices<br />LifeShares deliver predictable, stable growth for the risk averse investor.<br />16<br />
  40. 40. Risks<br />Limited Liquidity - What if the owner wants to sell LifeShares prior to maturity?<br /><ul><li>LifeShares ownership is designed to be a buy and hold strategy that performs most similarly to a zero coupon bond
  41. 41. LifeShares are transferable in the same way any fixed asset would be (real estate, precious metals, artwork, etc.) but no immediate liquidity exchange exists presently</li></ul>Longevity Risk - Exact date of LifeShares maturity is unknown.<br /><ul><li>Underwriter performs an exhaustive medical review on the insured
  42. 42. Third party actuarial mortality specialists develop target maturity durations without bias or conflict of interest (e.g. November 2010- Fasano Associates report 96% Actual to Expected Accuracy based on 3 successive, independent Actuarial Studies.  Results are based on actual predictions not restated estimates.)
  43. 43. Additional premium calls may be necessary (see following slide)</li></ul>Credit Risk - Will the insurance company pay the death benefit?<br /><ul><li>Underwriter selects policies from insurance companies with appropriate credit ratings (Investment Grade Rated with AM Best, S&P, Moody’s, Fitch)
  44. 44. In the event of an insurer credit default, beneficiary remunerated through state pools
  45. 45. Underwriter performs a thorough fraud review to confirm policies selected satisfy insurable interest existed at the time of issue, is in good standing and is beyond the two-year contestability period</li></ul>Unforeseen changes in regulation (SEC, State).<br />17<br />
  46. 46. Life Expectancy Risk<br />Insured Profile:<br /><ul><li> Male
  47. 47. Aged 72
  48. 48. $1,000,000 Universal Life Policy
  49. 49. Unneeded Business Insurance
  50. 50. $50,000 LifeShares Purchase of $140,000 of Face Amount
  51. 51. Policy Matures 5 Years Beyond Life Expectancy</li></ul>The chart calculates the annualized return on investment for the Purchase of LifeShares. The chart does not include any adjustments to the purchaser’s tax basis which may be encountered. The chart is for illustrative purposes only and no specific rate of return for any policy is guaranteed.<br />18<br />
  52. 52. LifeSharesPlacement Process Flow<br />INVESTOR<br /><ul><li>Completes Subscription</li></ul>Agreement<br /><ul><li>Selects Amount to Invest
  53. 53. Selects Class(es)
  54. 54. Sends in Funds to Escrow Agent</li></ul>Documents, Funds<br />Proceeds at Maturity<br />ESCROW AGENT<br /><ul><li>Holds Funds
  55. 55. Receives Purchase Agreement
  56. 56. Releases Funds for Purchase,</li></ul>Fees & Premium Reserve<br />TRUSTEE<br />•Makes Premium Payments<br />•Receives Proceeds from<br />Matured Policies<br />•Holds Policy for Investors<br />Premiums<br />Proceeds<br />Selects <br />Policy<br />UNDERWRITER<br /><ul><li>Selects policy(ies) for Investor
  57. 57. Adherence to Strict Underwriting Guidelines
  58. 58. Fraud Review
  59. 59. Tracks Insured medical Status
  60. 60. Upon Maturity Secures Forms to</li></ul>Present Claim<br />Funds to Trustee<br />19<br />
  61. 61. Add Value to Client Relationships<br />Private Client<br /><ul><li>Asset Allocation & Diversification – Non-Correlation Increases Risk-Adjusted Return
  62. 62. Alternative Fixed-Income Asset Class – Augment Future Retirement Capital Strategy
  63. 63. Estate Planning – Capital to Fund Estate Tax Liability
  64. 64. Charitable Giving – Leverage Gifting Strategy
  65. 65. College Funding
  66. 66. Insurance for the Uninsurable</li></ul>Business Client<br /><ul><li>Employee Benefits– Deferred Compensation, Pensions, Key Person Benefits
  67. 67. Asset Management - Reinsurance, Foundations, Private Equity, Charitable Organizations
  68. 68. Secure Debt Obligations - Guarantee Investor Funds, Fund Balloon Payments, Purchase Real Property</li></ul>20<br />
  69. 69. Advisor Target Prospects<br /><ul><li>High Net Worth Family Home Office
  70. 70. Trust Funds
  71. 71. Qualified Plans
  72. 72. Foundations
  73. 73. Charities
  74. 74. Pensions
  75. 75. Corporations
  76. 76. Reinsurance
  77. 77. Collateralized Lending
  78. 78. Private Equity
  79. 79. Asset Management
  80. 80. Uninsurable Individuals</li></ul>21<br />
  81. 81. LifeShares Advisors Provide Turnkey Sales, Service & Administration<br /><ul><li>As an advisor, your role is to introduce accredited investors to the LifeShares’ Team. We will attend your client meetings, deliver the presentation and administer the placement process through to completion
  82. 82. Website support, Webinars, Advisor Education & Remote Sales Presentations Available
  83. 83. Travel commitments will be evaluated on a case-by-case basis</li></ul>22<br />
  84. 84. Frequently Asked Questions<br />What is the minimum investment? Can I use my IRA or 401k or any type of retirement account to fund LifeShares?<br /><ul><li>The minimum investment is $25,000. LifeShares can be purchased in cash or retirement accounts including IRA, Roth IRA, SEP, 401k or 403b accounts. We utilize a third-party administrator to act as custodian for qualified accounts. Upon opening a Self-Directed IRA, you would transfer/rollover funds from your existing retirement account in the new SDIRA. Once funds are received, the investment is placed and owned within your SDIRA account.</li></ul>Is this a viatical settlement?<br /><ul><li>No. A viatical settlement applies only to policies of people who have a terminal illness. Such people could be of any age. Life settlement policies are based on the insured’s advanced age and current health status to predict live expectancy. The focus remains on life settlements so as not to expose investors to the subjectivity of a health diagnosis or the effect of new treatments that emerge. Life settlements are solely utilized due to the accuracy and predictability of life expectancy calculations and underwriting procedures.</li></ul>What documentation do I get to show for my investment?<br /><ul><li>As evidence of an investor’s holdings, you will receive copies of your signed purchase agreement and policy disclosure form, a deposit receipt from the escrow company, a copy of the recorded changes of ownership &beneficiary rights, and an assignment of death benefit showing your beneficiary designation issued by the Trustee. You will also receive periodic statements from the trustee. Your financial advisor can be included to receive trustee statements as well.</li></ul>Can I put my money over more than one policy?<br /><ul><li>Yes. You can place money in as many policies as you wish. For example, you can invest $100,000 in a single policy or invest $25,000 in multiple policies with multiple target life expectancies. For larger investments, pools of policies are available.</li></ul>23<br />
  85. 85. Frequently Asked Questions<br />Can I buy this through my stock broker, financial planner or bank?<br /><ul><li>No. This investment is offered by Private Placement Memorandum to accredited investors only. </li></ul>What annual rate of return should I expect?<br /><ul><li>You do not receive annual payments, so your annualized rate of return cannot be determined until policy maturity is attained. At maturity, you receive a fixed return based on the amount of face value of the underlying life settlement contracts. Your rate of return is determined by the duration between purchase of the investment and the date of maturity. For example, with a LifeShares investment paying a 100% total fixed return of $140,000 based on an initial investment of $50,000, if the duration to maturity is five years, your annualized rate of return would be 36%. Correspondingly, if the duration to maturity is shorter or longer, your return on investment would be affected accordingly.</li></ul>How long after I transfer funds to the escrow agent is my investment placed?<br /><ul><li>After the escrow agent is in receipt of your funds, the LifeShares underwriter will begin to custom develop the investor’s case. The transaction can take up to 60 days to complete in some cases. Additionally, there is a five-day waiting period after the policy disclosure form has been received and reviewed by you. </li></ul>What kind of policies are suitable for LifeShares investments?<br /><ul><li>Most common are Universal Life, Whole Life, and Convertible Term Life, Adjustable Life, Survivorship and Portable Group Life also qualify. LifeShares life settlement contracts are further scrutinized to be certain that proposed insured’s are above age 65, the policy has a face amount of $250,000 minimum, life expectancy of 3 years and above and the policy is beyond the 2-year contestability period.</li></ul>24<br />
  86. 86. Frequently Asked Questions<br />Can I put my LifeShares Investment in my company’s name, living trust name, etc?<br /><ul><li>Yes. Virtually any entity with a Federal Tax ID Number can invest in LifeShares.</li></ul>Can I roll my annuity into this investment?<br /><ul><li>If you use annuity money, it would be subject to taxes on the portion rolled out and any applicable penalties the government would impose if you are younger than 59 ½. However, if your annuity is held within your IRA account, penalties would not apply because the investment would be an IRA to IRA transfer.</li></ul>What information do I get about the policy(ies) and the insured?<br /><ul><li>You receive information in the policy disclosure form that you sign which designates the policy in which your money is invested. You also receive the name of the life insurance company, policy number, face value amount of the policy, annual premiums for the policy, type of policy, life insurance company rating, age and gender of the insured.</li></ul>How do I know if the policy is in force?<br /><ul><li>Premiums are paid through the policy premium reserve structure established and maintained by the trustee. You will be supplied with verification of coverage from the insurance company.</li></ul>25<br />
  87. 87. Frequently Asked Questions<br />If I die before the LifeShares investment matures, what happens?<br /><ul><li>Your LifeShares investment would transfer to your heirs per your will or living trust. Your heirs would be required to contact the trustee to re-register the asset to the new assignee.</li></ul>How do I know I will get paid my return?<br /><ul><li>This is exactly why we firewall your investment with protection offered by qualified, bonded ($2,000.000 per account), independent trust company/escrow agents and third-party administrators. Furthermore, your LifeShares investment is backed by the most highly rated, oldest and largest life insurance companies in the world. If your investment in LifeShares does not pay off due to credit default, you will be remunerated through state life pools.</li></ul>What if someone sues the trustee, escrow agent or LifeShares?<br /><ul><li>LifeShares investment assets, such as the policies and the premium accounts, are owned by the trust. If someone were to sue any/all of these entities, he/she could not attach the assets of the trust as they are not owned by any of the aforementioned affiliated entities.</li></ul>26<br />
  88. 88. Life Settlement Taxation – See Appendix A<br />Life Settlements Are Usually Considered Taxable Events*<br />Proceeds From the Sale of a Universal Life Policy Are Typically Classified As Follows:<br /><ul><li>Tax-Free:Generally, the portion of the sale proceeds up to the total premiums paid by the policy-owner into the contract less cost of insurance (or the policy’s adjusted cost basis) will be received free of federal income tax.
  89. 89. Ordinary Income: The portion exceeding the adjusted cost basis, but not exceeding the cash surrender value, will be taxed as ordinary income.
  90. 90. Capital Gain: The portion exceeding the cash surrender value will be a gain, which, in some circumstances may be considered a capital gain.</li></ul>200<br />180<br />160<br />140<br />120<br />100<br /> 80<br /> 60<br /> 40<br /> 20<br /> 0<br />Here’s an example of the life settlement taxation method using data from the IRS’s example outlined in Revenue Ruling 2009-13 and a realistic net sale price.<br />Net Sale Price $200,000<br />Cash Surrender Value $ 78,000<br />Premium Paid $ 64,000<br />Cost of Insurance $ 10,000<br />$132,000 Capital Gain<br />$14,000 Ordinary Income<br />$54,000 Tax Free<br />* Tax obligations will vary based on individual circumstance. Please consult your tax advisor.<br />27<br />
  91. 91. Life Settlement Investment Taxation<br />Life Settlement Investments Are Taxable Events <br />In Non-Qualified Accounts – See Appendix A*<br /><ul><li>Tax-Free:The cost to acquire the Life Settlement Fractional Shares and any additional premiums paid is the investor’s cost basis and is considered tax-free when the shares are held to maturity
  92. 92. Ordinary Income: The portion of the proceeds at maturity exceeding the investor’s cost basis, will be taxed as ordinary income
  93. 93. Capital Gain: Upon the sale of Life Settlement Fractional Shares prior to maturity, the entire sale amount is treated as a capital gain with no consideration for the investor’s cost basis</li></ul>Example A: Shares Held to Maturity<br />Acquisition Cost $ 50,000<br />Proceeds at Maturity $140,000<br />Example B: Shares Sold Prior to Maturity<br />Acquisition Cost $ 50,000<br />Proceeds at Sale $ 82,000<br />140<br />120<br />100<br /> 80<br /> 60<br /> 40<br /> 20<br /> 0<br />140<br />120<br />100<br /> 80<br /> 60<br /> 40<br /> 20<br /> 0<br />$90,000 Ordinary Income<br />$82,000 Capital Gain<br />$50,000 Tax Free<br />* Tax obligations will vary based on individual circumstance. Please consult your tax advisor.<br />28<br />
  94. 94. Appendix A<br /> IRS Issues Guidance On Taxation of Life Settlement Transactions<br /><ul><li>On May 1, 2009, the IRS Issued a Pair of Revenue Rulings Addressing the Tax Treatment of Life Settlement Transactions (Sidley Austin LLP – May 5, 2009).</li></ul>Guidance For Individual Policyholders <br /> Life insurance contracts are capital assets but surrenders are ordinary income.<br /> For individual policyholders, Revenue Ruling 2009-13 clarifies that life insurance contracts are “capital assets” for tax purposes, but also maintains that the surrender of a life insurance contract results in ordinary income, not capital gain. While the IRS stated no specific reason for this conclusion, it is not likely to be controversial; practitioners have generally advised that the surrender of a life policy is not a “sale or exchange” of the policy, such that one of the required elements of capital gain treatment is absent. Thus, in general, the excess of the cash surrender proceeds over the cumulative premiums paid is taxed at ordinary income rates rather than lower capital gain rates.<br /> The IRS did state that Code section 1234A (enacted in 1981) provides no basis for a policyholder to claim capital gain treatment on surrender, another conclusion that is not likely to be controversial. (Section 1234A deals with income from the lapse or settlement of certain options and other derivatives with respect to capital assets, not a disposition of the asset itself.)<br /> Revenue Ruling 2009-13 includes an example in which a policyholder has paid $64,000 in cumulative premiums, of which $10,000 has been consumed for cost of insurance charges imposed under the policy. The policy has cash surrender value of<br /> $78,000, reflecting that amounts credited to the policy by the company (the explicit or implicit investment return) have more<br />29<br />
  95. 95. Appendix A<br />IRS Issues Guidance On Taxation of Life Settlement Transactions<br /> than fully offset the cost of insurance charges. Upon a surrender, the policyholder in this example would be subject to tax at ordinary income rates on the net “inside build-up” in the contract, equal to $14,000 (the $78,000 cash surrender value minus $64,000 in premiums paid).<br />Sale of a life policy - "cost of insurance" excluded from tax basis.<br /> The tax code’s specific rules for computing income received under a life insurance contract assure that the policyholder gets full credit for premiums paid in the case of a surrender, but on a sale to a third party the IRS takes the position that these specific rules give way to the general concept of tax “basis” in an asset.<br /> Revenue Ruling 2009-13 holds that if an individual policyholder sells a policy to a third-party purchaser rather than<br /> surrendering it to the life insurance company, the individual may not use the amounts paid for “cost of insurance” charges to increase tax basis or reduce taxable gain. When the policyholder in the example sells the policy to a third-party investor for $80,000, the policyholder’s tax basis for computing gain on sale is only $54,000 ($64,000 in premiums paid less $10,000 cost of insurance). Under case law discussed in the ruling, the IRS takes the position that a portion of premiums paid represents personal consumption of life insurance protection (the cost of insurance amount) and only the remainder of the premiums paid is the cost of an asset. The gain on sale is therefore $26,000 ($80,000 minus $54,000).<br /> The IRS position on this issue requires policyholders who sell their policies to third parties to obtain their cumulative “cost of<br /> insurance” information from the life insurance company in order to file their tax returns - information that may not be regularly provided to policyholders.<br />Gain is part ordinary, part capital.<br /> Revenue Ruling 2009-13 also holds that $14,000 of the policyholder’s $26,000 gain is taxable as ordinary income, because it is a substitute for the $14,000 of net inside build-up the policyholder would have received upon a surrender. Under case law discussed in the ruling, the IRS takes the position that this portion of the gain represents an accrued right to receive ordinary income, which cannot be transformed into capital gain by assignment to a third party. The remaining $12,000 of gain is treated as capital gain.<br />Basis in term policies.<br /> Finally, Revenue Ruling 2009-13 holds that a policyholder’s tax basis in a pure term life insurance policy having no cash value is limited to the amount of any unearned premium, absent other proof to the contrary.<br />30<br />
  96. 96. Appendix A<br />IRS Issues Guidance On Taxation of Life Settlement Transactions<br />Effective date.<br /> Revenue Ruling 2009-13 indicates that the IRS positions on excluding the cost of insurance from basis, and treating a portion of gain on sale as ordinary income, will not be applied to sales occurring before August 26, 2009.<br />Guidance For Life Settlement Investors<br /> On the same day, the IRS also issued Revenue Ruling 2009-14, which addresses the tax treatment of transactions involving the purchase and sale of life insurance policies by investors.<br />Death benefit produces ordinary income to investor.<br /> Revenue Ruling 2009-14 confirms that where an investor buys a policy as an investment and holds it until death of the insured, the investor is taxable on an amount equal to the death benefit received minus (i) the cost to acquire the policy and (ii) the amount of premiums subsequently paid. (The ruling does not address the treatment of interest paid on a debt-financed investment in a life settlement.)<br /> The ruling states that a life settlement policy may be a capital asset in the hands of the investor, but nonetheless concludes that the taxable portion of the death benefit is ordinary income, not capital gain, without stating a reason for this conclusion. (As noted above, many practitioners would take the view that this result is due to the lack of a “sale or exchange.”)<br />Resale produces capital gain to investor with no haircut for “cost of insurance.”<br /> Revenue Ruling 2009-14 also addresses an investor’s resale of a life settlement policy prior to death of the insured, and holds that an investor’s tax basis includes, in addition to the acquisition cost, the full amount of premiums the investor pays, even though such premiums largely or entirely represent the “cost of insurance.” In this welcome ruling, the IRS has acknowledged that the rationale for treating a portion of a consumer’s life insurance premiums as personal consumption, rather than investment, does not extend to a life settlement investor.<br />31<br />
  97. 97. IRS Issues Guidance On Taxation of Life Settlement Transactions<br />Appendix A<br /> In addition, the ruling concludes that an investor’s gain on resale of a life settlement policy prior to death of the insured is capital gain, using an illustrative example of a 15-year term policy rather than a cash value policy. The IRS notes that these facts do not present the question (discussed above) of whether a portion of taxable gain on resale of a cash value policy should be treated as an accrued right to receive ordinary income. This issue may be of little or no importance in any case, if the life settlement investor maintains the cash values of the policies it holds at minimal levels.<br />Withholding tax.<br /> Finally, Revenue Ruling 2009-14 confirms that the taxable portion of a death benefit paid to a foreign life settlement investor by a domestic life insurer on the life of a domestic insured is “U.S. source FDAP” subject to 30 percent withholding tax (unless the<br /> withholding tax is eliminated by treaty, an issue the ruling does not address). The ruling does not address the issue of how a domestic life insurer can determine what portion of the death benefit paid represents taxable income rather than recovery of acquisition costs and amounts subsequently paid.<br />32<br />
  98. 98. Appendix B<br /> Definition of an Accredited Investor<br />The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:<br /><ul><li>A bank, insurance company, registered investment company, business development company, or small business investment company;
  99. 99. An employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  100. 100. A charitable organization, corporation, or partnership with assets exceeding $5 million;
  101. 101. A director, executive officer, or general partner of the company selling the securities;
  102. 102. A business in which all the equity owners are accredited investors;
  103. 103. A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase;
  104. 104. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  105. 105. A trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. </li></ul>For more information about the SEC’s registration requirements and common exemptions, read our brochure, Q&A: Small Business & the SEC.<br />33<br />
  106. 106. LifeShares Advisors<br />JOHN M. ZANETIS, Senior AdvisorMr. Zanetis is an experienced attorney in the fields of Estate Planning, Business Planning, Business and Estate Tax <br />Law, as well as Asset Protection Strategies.  Mr. Zanetis graduated from Indiana State University (BS Business <br />Administration, 1968) and Indiana University School of Law in Indianapolis (JD, 1971).  He was admitted to the <br />Bar of the Supreme Court of Indiana in 1971, to the Supreme Court of Tennessee in 1978, and the United States <br />District Court of Indiana and Tennessee.Mr. Zanetis is a founding member of the National Network of Estate Planning Attorneys, a member of the National <br />Estate Planning Association, and a member of WEALTHCOUNSEL, LLC.  He is also a member of the American <br />Bar Association, the Indiana Bar Association, the Hamilton County Bar Association and the Tennessee Bar <br />Association.Mr. Zanetis limited his practice to Estate Planning and Administration in 1988 when he became the first attorney in Indiana to hold Living Trust Estate Planning Seminars.  His clients’ estates range in size from several hundred thousand dollars to in excess of fifty million dollars and include large farmers, automobile dealerships, manufacturing concerns, physicians, dentists, real estate developers, and numerous other small businesses.  Since limiting his practice in 1988 he has prepared in excess of 2,500 estates and business plans and administered several hundred.Mr. Zanetis is a published author on the topic of revocable living trusts as well as a practiced speaker who gives statewide seminars not only for the general public but also for CPA’s, Financial Planners, and Insurance Professionals which are approved for continuing education credits and cover topics such as Premium Financed Insurance, Asset Protection Strategies, Irrevocable Life Insurance Trusts, Charitable Remainder and Charitable Lead Trusts, Qualified Personal Residence Trusts,  Family Limited Partnerships, Limited Liability Companies, Exit Strategies for Business Owners, and Who Should Be The Beneficiary Of Your IRA?Mr. Zanetis is licensed life insurance agent specializing in Premium Financed Life Insurance.  His experience in the area of Premium Financed Insurance has resulted in the funding of policies in excess of 50 million dollars.  He has experience working with several of the largest banks in the world.  He is experienced with various annuity products and other means of estate funding.  In addition to working with individual brokers from all the major broker dealers he has given many seminars working in conjunction with organizations such as Royal Bank of Canada Wealth Management, Market Share Financial, A.G. Edwards and Sons Inc., Charles Schwab & Co., Inc, Dean Witter Reynolds Inc., Salomon Smith Barney Inc., Hilliard Lyons, UBS Paine  Webber, Kroger Corporation, General Motors, Delco Remy, National Association of Retired Federal Employees, Indiana Counsel on Aging, and numerous other civic and social organizations.<br />34<br />
  107. 107. LifeShares Advisors<br />Michael J. Bradburn, Senior Advisor<br />Mr. Bradburn is a serial entrepreneur with experience in endeavors ranging from internet technology, retail automotive, <br />financial services, manufacturing and intellectual property.<br />Mr. Bradburn cut his teeth in the automotive retail trade. Born the son of a self-made successful auto dealer, <br />Mr. Bradburn spent time after school, during summer vacations and later in a full time capacity learning the family <br />business. From the age of ten, the auto trade was his preoccupation. As the heir apparent to a small automotive <br />conglomerate, Mr. Bradburn worked tirelessly learning the family business in all capacities that culminated in the sale <br />of the dealerships in 1999.<br />During his collegiate experience as a sophomore at Indiana University, Mr. Bradburn launched his first startup. At the onset of the computer age, Mr. Bradburn recognized and capitalized on an opportunity. At the forefront of the personal computer trend, Mr. Bradburn created a business to serve the needs of the academic community. His first entrepreneurial endeavor achieved early success as a typing, academic and desktop publishing service. However, as the proliferation of the personal computer gained traction on college campuses, the market for personal computing services dwindled signaling the end of his first business.<br />At the conclusion of the sale of the family business, Mr. Bradburn sought a career in the life insurance business. Securing a position with Prudential Preferred Financial Services, Mr. Bradburn developed a thriving practice in insurance and annuity sales that later blossomed into a private wealth management career that led him to Morgan Stanley Dean Witter and Merrill Lynch. Financial services became and continues to be his passion. <br />His entrepreneurial drive was yet to be satisfied however. A private client approached Mr. Bradburn in 2004 with an intellectual property concept in the manufacturing space that peaked his interest. Throwing caution to the wind leaving a ten-year career in financial services behind, Mr. Bradburn accepted an offer to assume an equity position and the role of Chief Financial Officer in a new startup. In uncharted territory, Mr. Bradburn threw himself headlong into this new opportunity. Mr. Bradburn was instrumental in securing patents and developing a completely virtual, vertically integrated, manufacturing and distribution technology serving the global powder metallurgy industry. The startup was immediately commercially viable and profitable.<br />Despite a very successful venture in virtual manufacturing, Mr. Bradburn’s true love lies in financial planning and wealth creation. LifeShares, once again, has presented itself as a cutting edge opportunity to satiate his need to reinvent the startup and quench his desire to serve his fellow man in creating personal wealth. <br />Mr. Bradburn is a single father of a beautiful twelve year old daughter and resides in Fishers, Indiana.<br />35<br />
  108. 108. Disclaimer<br /><ul><li>Any information presented is general in nature and is not intended to provide personal investment advice. The investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance and investment goals.
  109. 109. Asset allocation, diversification, and rebalancing do not assure a profit or protect against loss in declining markets.
  110. 110. Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither LifeShares LLC nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
  111. 111. Not intended for use in solicitation of sales to the public. This is prepared for general information and education. A life settlement is only one option when a life insurance policy is no longer needed. Policy terms, conditions and limitations will apply. LifeShares LLC or its Financial Advisors make no representation regarding the suitability of a life settlement to a client’s needs. Neither LifeShares LLC, its affilliates nor the insurance carriers provide tax or legal advice regarding life settlements.
  112. 112. For guidance on a specific transaction, please review IRS Ruling 2009-13 and/or consult a tax advisor. Insureds should consult their own tax, legal and other advisors before deciding to sell a life insurance policy. To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
  113. 113. NOT TO BE DISTRIBUTED TO PUBLIC</li></ul>36<br />