Using Life Insurance in Zero Tax Estate Planning

The Mathematics of Life Insurance for Zero-Tax Estate Planning By Ward J. Wilsey. JD, LLM [email_address] www.wilseylaw.com 2007 (c)

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)

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)

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)

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)

Paying Estate Taxes w/ Insurance
Pros
Simple
Inexpensive up front costs
Ease of administration at death
No realistic audit issues
Cons
You still will pay estate taxes (quasi-zeroed out plan)
Expense of premiums
You must get ILIT right the first time
2007 (c)

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)

TCLAT Strategy
Pros
No estate taxes
Charitable Legacy
All assets pass to kids tax free
Relatively Easy
Cons
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)

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)

TCLAT Strategy combined with Advanced Planning
Pros
Zeroed-Out Tax
Charitable Legacy
Decreased Insurance costs over time
Increased Asset Protection
Ability to pass gifts to children while alive
Cons
More expensive to set up and maintain
Confusing
Still must pay some insurance costs
2007 (c)

The Math-No Planning
Client
Joe and Jane Doe
3 kids
$10,000,000 estate
$4,000,000 personal residence
$6,000,000 stocks
2007 (c) Estate $10,000,000 Exemptions $4,000,000 Charity $0 Taxable Estate $6,000,000 Tax Rate 45% Estate Taxes $2,700,000 Life Insurance $0 Net to Family $7,300,000 Net to Charity $0 Net to IRS $2,700,000

The Math- Life Insurance Only
Joe and Jane Doe
Figure out estate taxes
Buy life insurance in an equal amount
Pay taxes with life insurance
Family nets entire estate
2007 (c) Estate $10,000,000 Exemptions $4,000,000 Charity $0 Taxable Estate $6,000,000 Tax Rate 45% Estate Taxes $2,700,000 Life Insurance $2,700,000 Net to Family $10,000,000 Net to Charity $0 Net to IRS $2,700,000

The Math- TCLAT with Insurance
Joe and Jane Doe
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
2007 (c) Estate $10,000,000 Exemptions $4,000,000 TCLAT $6,000,000 TCLAT payout $7,402,881 TCLAT PV $1,588,275 Tax Rate 45% Estate Taxes $0 Life Insurance $4,411,725 Net to Family $10,000,000 Net to Charity $6,000,000 Net to IRS $0

The Math- TCLAT with Advanced Planning
Joe and Jane Doe
Do TCLAT
Use FLLC-GRAT strategy for 2 year term for securities
Do Family Gifting Trusts
Discount Securities
Results for 2010
10% growth
2007 (c) Estate $12,100,000 Value of House $4,840,000 Securities* $4,864,200 Exemptions $3,520,000 FLLC-GRAT $2,754,022 FGTs $916,316 TCLAT $2,513,861.69 TCLAT PV $142,771..18 Tax Rate 45% Estate Taxes $0 Life Insurance $2,500,000 Net to Family 12,751,588.64 Net to Charity $2,513,861.69 Net to IRS $0

Know Costs of Zeroed Out Plans
Short Run
(cheapest first)
Life Insurance Only
TCLAT Life Insurance
TCLAT Advanced Planning
Long Run
TCLAT Advanced Planning
Life Insurance Only
TCLAT-Life Insurance
2007 (c)

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)

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Using Life Insurance in Zero Tax Estate Planning

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