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Using Life Insurance in Zero Tax Estate Planning
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Using Life Insurance in Zero Tax Estate Planning

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This presentation describes the uses of life insurance in estate plans designed to eliminate the estate tax. For a version with audio as well, please email me at wardwilsey@wilseylaw.com

This presentation describes the uses of life insurance in estate plans designed to eliminate the estate tax. For a version with audio as well, please email me at wardwilsey@wilseylaw.com

Published in: Economy & Finance, Business

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  • 1. The Mathematics of Life Insurance for Zero-Tax Estate Planning By Ward J. Wilsey. JD, LLM [email_address] www.wilseylaw.com 2007 (c)
  • 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)
  • 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)
  • 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)
  • 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)
  • 6. 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)
  • 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)
  • 8. 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)
  • 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)
  • 10. 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)
  • 11. 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
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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)
  • 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)

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