10 Tax-Efficient Strategies For High-Net-Worth Investors

Friday, March 4, 2011, at 4 p.m. EST

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• Estate, tax, and retirement planning expert• Partner, Keebler & Associates LLP

– Highly-rated speaker on Advisors4Advisors – Family wealth transfer and preservation planning– Charitable giving– Retirement distribution planning– Estate administration

• Representation for private letter rulings and IRS estate, gift, and income tax examinations and appeals

– Over 150 favorable private letter rulings in past 15 years

– Member, CCH Financial & Estate Planning Advisory Board– Author, 100+ articles & books on wealth transfer & taxation

• Honors– CPA, MST, AEP (Distinguished)– Accredited Estate Planners (Distinguished) award from National

Association of Estate Planners & Councils (2007)– Top 100 Most Influential Practitioners In U.S. (CPA Mag.)– Top 40 Tax Advisors To Know During A Recession (CPA Mag.)– Featured columnist for CCH’s Taxes Magazine

Robert S. KeeblerPartner

Keebler and Associates LLP(920) 593-1700

[email protected] www.keeblerandassociates.com

mailto:[email protected]

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Robert S. Keebler, CPA, MST, AEP (Distinguished)Keebler & Associates, LLP

420 S. Washington St.Green Bay, WI 54301

Phone: (920) [email protected]

Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. If you would like a written opinion upon which you can rely for the purpose of avoiding penalties, please contact us.

Today’s Outline• Estate Tax Overview

• Income Tax Overview

• Tax Asset Classes

• Surtax Overview

• Loss Harvesting

• Roth IRA Conversions

• Annuity Planning

• “Inherited” IRAs

• Life Insurance Planning



Summary of New Estate Tax Law and Reversion in 2013

2011 2012 2013

Top Estate Tax Rate 35% 35% 55%

Estate Tax Exemption $5,000,000 $5,000,000 $1,000,000

Gift Tax Exemption $5,000,000 $5,000,000 $1,000,000

GST Exemption $5,000,000 $5,000,000 $1,000,000

Adjusted for inflation

2011 & 20122013 & Beyond

10% 15%

15% 15%

25% 28%

28% 31%

33% 36%

35% 39.6%

2011 & 20122013 &

Beyond*

0% 10% / 8%15% 20% / 18%

Ordinary Income Capital Gains

Current and Future Tax RatesIncome Tax Overview

*NOTE: In general, the 8% and 18% capital gains rates only apply to long-term capital gains on property that has been held more than five years at the time of sale.

© 2011 Keebler & Associates, LLP Al Rights Reserved.


Interest Income

- Taxable

Capital Gain Income

- Preferential Rate

- Deferral until sale

Roth IRA and

Insurance

- Tax Free Growth/ Benefits

Real Estate, Oil & Gas and Tax Exempt Bonds

- Tax Preferences

Pension and

IRA Income

- Tax Deferred

Money market

Corporate bonds

US Treasury bonds

AttributesAnnual

income tax on interest

Taxed at highest marginal rates

Equity Securities

AttributesDeferral

until saleReduced

capital gains rate

Step-up basis at death

Real EstateDepreciation

tax shield1031

exchangesDeferral on

growth until sale

Oil & GasLarge up

front IDC deductions

Depletion allowances

Pension plansProfit sharing

plansAnnuities

AttributesGrowth during

lifetimeRMD for IRA

and qualified plans

No step-up

Roth IRATax-free

growth during lifetime

No 70½ RMDTax-free

distributions out to beneficiaries life expectancy

Life InsuranceTax-deferred

growthTax-exempt

payout at death

TAX ASSET CLASSES

Dividend Income

Tax Exempt Interest

Equity securities

AttributesQualified

dividends at LTCG rate

Return of capital dividend

Capital gain dividends

Bonds issued by State and local Governmental entities

AttributesFederal tax

exemptState tax exempt

© 2011 Prepared by Robert S. Keebler, CPA, MST, AEP (Distinguished) Keebler & Associates, LLPAll Rights [email protected]

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.

For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.


• Life Insurance – Death Benefit Approach• Life Insurance – Retirement Approach• Life Insurance – Annuity Hedge• Roth Conversion(s)• Life Insurance to Amount to Facilitate Roth

Conversions at the First Death• “Leap-Frog” Annuity• Tax-Free Annuity Distributions to Purchase Long-Term

Healthcare

Spinning Straw into Gold


Financial Planning Strategies in Wake of the New 3.8%

Medicare “Surtax”


Beginning with the 2013 tax year, a new 3.8% Medicare “surtax” will apply to all taxpayers whose income exceeds a certain “threshold amount”. This new “surtax” will, in essence, raise the marginal income tax rate for affected taxpayers.

• Thus, a taxpayer in the 39.6% tax bracket (i.e. the highest marginal income tax rate in 2013) would have a marginal rate of 43.4%!

3.8% Medicare “Surtax” Overview


Tax Rate in 2011 & 2012

Tax Rate in 2013

Tax Rate in 2013+

(w/surtax)10% 15% 15%15% 15% 15%25% 28% 28%28% 31% 34.8%33% 36% 39.8%35% 39.6% 43.4%

NOTE: The chart above assumes that the 3.8% Medicare surtax would not begin to apply until a person’s taxable income reaches the 31% tax bracket (based on certain net investment income and itemized deduction assumptions). However, there are times when the 3.8% could apply to a person in a lower tax bracket (i.e. 15%, 28%) or may not apply to a person in higher tax brackets (31%, 36%, 39.6%).

APPLICATION TO INDIVIDUALS – the new Medicare surtax is equal to 3.8% times the lesser of the following:

1. “Net investment income”, OR

2. The excess (if any) of –

a. “Modified adjusted gross income” (“MAGI”) for such taxable year, over the

b. “Threshold amount”



3.8% Medicare “Surtax” OverviewAPPLICATION TO ESTATES AND TRUSTS – the new Medicare surtax is equal to 3.8% times the lesser of the following:

1. Undistributed “net investment income” for such taxable year, or

2. The excess (if any) of –a. “Adjusted gross income” (as defined in section 67(e)

for such taxable year, over theb. Dollar amount at which the highest tax bracket in

section 1(e) begins for such taxable year ($11,200 in 2010).


Three critical terms associated with the 3.8% Medicare surtax:

• “Net investment income”• “Threshold amount”• “Modified adjusted gross income” (“MAGI”)



• “Net investment income”: is defined as interest, dividends, annuities, rents, royalties, income derived from a passive activity, and net capital gain derived from the disposition of property (other than property held in an active trade or business), reduced by deductions properly allocable to such income.

• Specifically, this does not include the following:

1. Income derived from an active trade or business;

2. Distributions from IRAs or their qualified plans;

3. Any income taken into account for self-employment tax purposes;

4. Gain on the sale of an active interest in a partnership or S corporation; or

5. Items which are otherwise excluded or exempt from income under income tax law, such as interest from tax-exempt bonds, capital gain excluded under IRC §121, and veteran’s benefits.




Subject to Surtax Exempt from Surtax

Wages XTaxable Interest XExempt Interest XDividends XAnnuity Income (withdrawals) XAnnuity Income (inside annuity) XPassive Royalty XActive Royalty XRents X

3.8% Medicare “Surtax” OverviewTypes of Income Subject to Surtax

“Threshold amount”: is the key factor in determining the “lesser of” formula for purposes of calculating the surtax.

Threshold amounts• Single taxpayers - $200,000• Married taxpayers - $250,000• Estates/trusts - $11,200 (i.e. top income tax bracket in 2010)



“Modified adjusted gross income” (“MAGI”): is the amount that is compared to the “threshold amount” to determine the “net investment income” that is subject to the surtax.

MAGI equals:• Adjusted gross income (i.e., Form 1040, Line 37) PLUS• Net foreign earned income exclusion (i.e., gross income

excluded under the foreign earned income exclusion less certain deductions or exclusions that were disallowed due to the foreign earned income exclusion)



3.8% Medicare “Surtax” OverviewExamples

Example 1: John, a single taxpayer, has $100,000 of salary and $50,000 of net investment income for MAGI of $150,000. The 3.8% surtax would not apply because his MAGI is less than $200,000.

Example 2: Linda, a single taxpayer, has $225,000 of net investment income and no other source of income. The 3.8% surtax would apply to $25,000 of income (the lesser of investment income of $225,000 or the excess of $225,000 MAGI over $200,000 “threshold amount”).

SOLUTION: Shelter Investment Income

Example 3: Terry & Tina, married filing jointly, have $300,000 of salaries and no net investment income. The tax 3.8% surtax will not apply because they have no investment income.



Example 4: Peter & Paula, married filing jointly, have $400,000 of salaries and $50,000 of net investment income. They will pay the 3.8% surtax on $50,000.

Example 5: Sarah & Scott, married filing jointly, have $200,000 of salaries and $150,000 of net investment income for total MAGI of $350,000. The 3.8% surtax would apply to $100,000 of income (excess of $350,000 MAGI over $250,000 threshold amount).

Example 6: Randy, a single taxpayer, age 69, has investment income of $200,000 and is not subject to the surtax. In the following year, Randy has an RMD from his IRA of $125,000. In this case $325,000 of MAGI exceeds the $200,000 threshold and $125,000 is subject to the 3.8% surtax.

SOLUTIONS: Shelter Income and Review Roth Conversions


Example 7: The John Smith Trust has investment income of $51,000 and has made no distributions during the current tax year. In this case, $39,800 of income ($51,000 - $11,200 top bracket amount) will be subject to the 3.8% surtax.

Example 8: David and Veronica, married filing jointly, have pension and IRA income and tax-exempt interest income. The 3.8% surtax does not apply regardless of income because they have no “net investment income”.

Example 9: In 2012, Jill, age 60 and single, has wages of $200,000 and taxable interest income from CDs of $100,000.

SOLUTION: During 2012 Jill moves half of her investments into an annuity and purchases a life insurance policy with the remaining CDs. Because of this planning, in 2013 all of her interest income is sheltered in either the annuity or the life insurance policy. Thus, Jill is not subject to the 3.8% surtax.



Example 10: The Anita Jones Trust has net investment income of $100,000 and made a distribution of 100% of that income during the current tax year. In this case, the trust will not be subject to the 3.8% surtax (but the trust beneficiaries might be subject to the 3.8% surtax based on their own tax situations).

Example 11: Gary and Barb, married filing jointly, have $130,000 of pension income and $115,000 of net investment income. Further, Gary withdrew $50,000 from his Roth IRA. Given these facts, none of the investment income is subject to the 3.8% surtax because Gary and Barb’s MAGI ($245,000) was below the $250,000 threshold amount.

Example 12: Same facts as Example 11, except that Gary withdrew $50,000 from his traditional IRA. In this situation, $45,000 [($130,000 + $115,000 + $50,000) - $250,000] of net investment income would be subject to the 3.8% surtax.



Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”

• Municipal bonds

• Tax-deferred annuities

• Life insurance

• Rental real estate

• Oil & gas investments

• Choice of accounting year for estate/trust

• Timing of estate/trust distributions


Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Municipal Bond Example

• Jacob, a single taxpayer, on average has $180,000 of salary income, $5,000 of interest income and $15,000 of dividend income each year. Recently, Jacob inherited $1,000,000 from his uncle and has determined that he would like to invest the money either in: (a) taxable corporate bonds earning 7% or (b) tax-exempt municipal bonds earning 4.5%. Assuming that Jacob is in the 36% marginal income tax bracket for the 2013 tax year and lives in a state without an income tax, below is a summary of the after-tax yield on each investment:

• Corporate bond Municipal bond• 4.214% 4.5%• {7% x [1 – (36% + 3.8%)]}

•


Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Tax-Deferred Annuity Example

• Lisa, a single taxpayer, has recently been approached by her financial advisor to consider investing in a tax-deferred non-qualified annuity. At the advice of her CPA, Lisa decided to invest $500,000 in a tax- deferred non-qualified annuity earning 5% per year. Assuming that Lisa has $200,000 of gross income and is in the 28% tax bracket for the next 10 years, below is a summary of the tax savings achieved by investing in a tax-deferred non-qualified annuity versus investing in a non-qualified diversified investment portfolio (i.e. a taxable brokerage account) earning 6% interest per year on a pre-tax basis.

YearBeginning Balance

Income @ 6%

Income Tax @ 31.8%

Ending Balance

Beginning Balance

Income @ 5%

Income Tax @ 0.00%

Ending Balance Difference

1 500,000$ 30,000$ (9,540)$ 520,460$ 500,000$ 25,000$ -$ 525,000$ 4,540$ 2 520,460$ 31,228$ (9,930)$ 541,757$ 525,000$ 26,250$ -$ 551,250$ 9,493$ 3 541,757$ 32,505$ (10,337)$ 563,926$ 551,250$ 27,563$ -$ 578,813$ 14,887$ 4 563,926$ 33,836$ (10,760)$ 587,002$ 578,813$ 28,941$ -$ 607,753$ 20,751$ 5 587,002$ 35,220$ (11,200)$ 611,022$ 607,753$ 30,388$ -$ 638,141$ 27,119$ 6 611,022$ 36,661$ (11,658)$ 636,025$ 638,141$ 31,907$ -$ 670,048$ 34,023$ 7 636,025$ 38,161$ (12,135)$ 662,051$ 670,048$ 33,502$ -$ 703,550$ 41,499$ 8 662,051$ 39,723$ (12,632)$ 689,142$ 703,550$ 35,178$ -$ 738,728$ 49,586$ 9 689,142$ 41,349$ (13,149)$ 717,342$ 738,728$ 36,936$ -$ 775,664$ 58,322$

10 717,342$ 43,041$ (13,687)$ 746,696$ 775,664$ 38,783$ -$ 814,447$ 67,752$

Tax-Deferred Non-Qualified AnnuityTaxable Brokerage Account

NOTE: The 31.8% income tax rate in the taxable brokerage account scenario is the sum of Lisa’s marginal income tax rate (28%) plus the 3.8% surtax because her gross income was over the threshold amount.


Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Tax-Deferred Annuity - “Leap-Frog” Annuity

• PROBLEM: MAGI is too high during working years and investment income subject to the 3.8% surtax and a higher income tax rate

• SOLUTION: Invest the bond portion of the portfolio in a tax-deferred annuity deferring ordinary income until lower bracket retirement years – this “Leap-Frogs” over the high income “surtax years”


Planning Around the “Surtax”Strategies for Reducing “Net Investment Income”Life Insurance Example

• Tim, a married-filing-jointly taxpayer, recently paid a $250,000 single premium to purchase a $2,000,000 second-to-die whole-life life insurance policy. At the end of Year 10, Tim withdrew $50,000 from the policy’s cash value when it was worth $450,000.

• Given these facts, none of the $200,000 of earnings to-date ($450,000 current cash value - $250,000 initial premium), or any future earnings within the life insurance policy, are subject to the 3.8% surtax until Tim withdraws more than his initial single premium amount.

• Further, even if Tim withdraws earnings from the life insurance policy in a future tax year, none of the earnings will be subject to the 3.8% surtax, provided that Tim’s MAGI (which would include the earnings withdrawn from the life insurance policy) is below the “threshold amount” (i.e. $250,000 for married-filing-jointly taxpayers).


Roth IRA benefits• Lowers overall taxable income long-term• Tax-free compounding• No RMDs at age 70½ • Tax-free withdrawals for beneficiaries• More effective funding of the “bypass trust”

Planning Around the “Surtax”Strategies for Reducing “MAGI”Roth IRA Conversions

PURPOSE OF STRATEGY (as it relates to the 3.8% surtax): To lower MAGI below the “threshold amount” over the long-term.


Loss HarvestingLoss Harvesting Considerations

• Losses relating to individual taxpayers

• Losses relating to trusts/estates

• Losses relating to charitable remainder trusts (CRTs)

• Loss charitable lead trusts (CLTs)


Loss Harvesting

• “Wash sale” rule (IRC §1091)

• Diminishing value of capital losses

• Inefficiency of capital loss offsetting

Loss Harvesting Issues


Capital losses are denied to the extent that a taxpayer has acquired (or has entered into a contract or option to acquire) a “substantially identical” stock or securities within a period beginning 30 days before the sale and ending 30 days after the sale of a stock which was sold at a loss (i.e. “loss stock”)• This rule also applies to ETFs and index funds• Disallowed loss on “loss stock” is added to the cost basis of the new

stock• The holding period of the “loss stock” is carried over to the new stock

CAUTION: The wash sale rules apply to both IRAs and taxable investment accounts. Thus, if there is a loss incurred on a stock in a taxable investment account and a “substantially identical” stock is purchased within an IRA during the 61-day period, then the wash sale rules will apply (see Rev. Rul. 2008-5).

Loss HarvestingWash Sale Rule (IRC §1091)


Loss Harvesting

In general, capital losses are more tax effective if they can be used to offset income taxed at higher tax rates (e.g. short-term capital gains and ordinary income)

• Thus, long-term losses used against short-term gains are more tax-efficient than short-term losses being used against long-term capital gains

Inefficiency of Capital Loss Offsetting

Short-Term Gain Long-Term GainShort-Term Loss NEUTRAL INEFFECTIVE

Long-Term Loss EFFECTIVE NEUTRAL


Roth IRA Conversions


• Lowers overall taxable income long-term• Tax-free compounding• No RMDs at age 70½ • Tax-free withdrawals for beneficiaries• More effective funding of the “bypass trust”• Surtax Planning

Roth IRA ConversionsBenefits of Converting to a Roth IRA


• Strategic conversions – Take advantage of a client’s long-term wealth transfer objectives

• Tactical conversions – Take advantage of short-term client-specific income tax attributes that are set to expire (e.g., low tax rates, tax credits, charitable contribution carryovers, NOL carryovers, etc.)

• Opportunistic conversions – Take advantage of short-term stock market volatility, sector rotation and rotation in asset classes

• Hedging conversions – Take advantage of projected future events that will result in the client being subject to higher tax rates within the near future

Roth IRA ConversionsTypes of Roth IRA Conversions


10% tax bracket

15% tax bracket

25% tax bracket

28% tax bracket

33% tax bracket

35% tax bracket

Current taxable income

Target Roth IRA conversion amount

“Optimum” Roth IRA conversion amount

Roth IRA ConversionsUnderstanding the Mathematics



“Inherited” IRAs


“Inherited” IRAsOverview

• An IRA is treated as “inherited” if the individual for whose benefit the IRA is maintained acquired the IRA on account of the death of the original owner

• Under the tax law the IRA assets can be distributed based upon the life expectancy of the beneficiary


Spouse Beneficiaries“Inherited” IRAs

• Exception to “inherited” IRA rules• Only available to surviving spouse• Allows spouse to rollover the deceased IRA owner’s IRA

into a new IRA in the spouse’s own name– In this case, the spouse is treated as the new IRA owner

• This allows the spouse to defer having to take required minimum distributions (RMDs) until he/she turns age 70½

– Spouse may use the Uniform Lifetime Table to determine distributions• This allows for a greater “stretch” period


Non-Spouse Beneficiaries“Inherited” IRAs

• Utilizes the exemption to the five year rule• Avoids IRA assets being subject to estate tax in spouse’s

estate• Achieves “inherited” IRA to the degree that required

minimum distributions (RMDs) occur over life expectancy of the designated beneficiary

− Life expectancy of non-spouse beneficiary is determined in year after year of the IRA owner’s death by reference to the Single Life Table and then is reduced by a value of one each subsequent year


Life Expectancy Rule

Five-Year Rule

Death Before Required Beginning Date

Death On or After Required Beginning Date

Designated Beneficiary

Non-Designated Beneficiary

Owner’s “Ghost” Life Expectancy

Rule

401(a)(9) Regulations

Life Expectancy

Rule


“Inherited” IRAsExample

$601,269 $624,042

$965,679 $993,194

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

$1,100,000

10Year

IRA Transfer to Family

Immediate DistributionIRA Payable to Non-Qualified Beneficiary (Five-Year Rule)IRA Payable to Surviving Spouse (Spousal Rollover)IRA Payable to Child


$1,205,083 $1,250,725

$1,727,638

$1,917,956

$1,000,000

$1,250,000

$1,500,000

$1,750,000

$2,000,000

20

Year

IRA Transfer to Family

Immediate DistributionIRA Payable to Non-Qualified Beneficiary (Five-Year Rule)IRA Payable to Surviving Spouse (Spousal Rollover)IRA Payable to Child

“Inherited” IRAsExample (cont.)

Annuity Planning

• Roth Life-Time Annuity Strategy• Annuity-Life Insurance Hedge


Planning with Roth Annuities

CONCEPT Roth IRA is converted to an Immediate Annuity

• Protected against market volatility• Protected against future income tax

increases• Protected against longevity risk


Life Insurance Planning


• Inherited IRA “Tax Spiral”• Life Insurance has an Asset Class• Life Insurance has an Alternative to Retirement Plans• Life Insurance versus Traditional IRA• Life Insurance versus Roth IRA

Life Insurance Planning



IRA-ILIT Strategy

ISSUE: Perhaps the single biggest issue with an inherited IRA is that the IRA owner’s estate oftentimes needs to utilize the IRA to pay the applicable estate tax liability. The payment of the estate tax using IRA funds, in turn, causes additional income tax to be incurred at higher income tax rates. As a result, between 60% to 80% of IRA could be lost to taxes. (This is known as the Inherited IRA “tax spiral”.)

Inherited IRA “Tax Spiral” DilemmaLife Insurance Planning


Estate Tax45%

Net to Family32%

Income Tax23%

Life Insurance Planning Inherited IRA “Tax Spiral” Dilemma


Inherited IRA “Tax Spiral” DilemmaLife Insurance Planning

SOLUTION: Establish an Irrevocable Life Insurance Trust (ILIT) to hold a life insurance policy whereby the death benefit proceeds can be used to provide liquidity to the IRA owner’s estate, thereby preserving the inherited IRA.


• A type of dynasty trust which holds a life insurance policy on the grantor’s life so as to benefit the grantor’s beneficiaries without the imposition of future estate, gift and/or GST tax.

• To the extent that the grantor’s estate has insufficient liquid assets cover the estate tax liability, trust assets can be lent to the estate or used to purchase assets from the estate.

• To the extent that the grantor does not hold any “incidents of ownership”, none of the trust assets will be included in his/her taxable estate.

Irrevocable Life Insurance Trust (ILIT)Life Insurance Planning


Payment of premiumsIRA Owner

(Insured)ILIT

(Beneficiary)

Annual gifts to cover life insurance

premiums* Life Insurance Company

Discretionary distributions of income and principal during the

lifetime of the trust’s beneficiaries

Assets outside of the taxable estates of beneficiaries

Payment of death benefit proceeds at

death of insured

Children

* NOTE: Gifts to the ILIT will use IRA owner’s annual gift exclusion and/or lifetime gift exemption.

IRA

Annual distributions

IRA-ILIT Strategy OverviewLife Insurance Planning


$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

5 10 15 20

Year

Net IRA Balance to Family

IRA w/Insurance IRA w/o Insurance

ASSUMPTIONSIRA Balance 1,000,000$ Life Insurance Death Benefit 1,000,000$ Annual Premium 45,000$ Growth Rate 6.00%Income Tax Rate - Annual Withdrawals 25.00%Income Tax Rate - Lump-Sum 35.00%Estate Tax Rate 45.00%

IRA-ILIT Strategy ExampleLife Insurance Planning



Other Planning Considerations for 2010Roth IRA Conversion vs. Purchasing Life Insurance

Example

Year 10 Year 20 Year 30 Year 40

$1,627,266

$2,157,937

$3,146,717

$4,821,812

$753,045

$1,488,597

$2,866,235

$5,463,373

Net Wealth to Family

Traditional IRA w/Insurance Roth IRA w/Annual Gifting

AssumptionsIRA owner’s age - 50Traditional IRA balance - $1,000,000Roth IRA balance (after payment of income tax on conversion) - $650,000Pre-tax rate of return (Traditional IRA/Roth IRA) - 7%

Assumptions (cont.)After-tax rate of return (Taxable investment account) - 5%Income tax rate (Traditional IRA distributions) – 35%Insurance death benefit - $1,000,000Annual insurance premium - $10,000


IRA-Annuity Strategy


• IRA assets are used to purchase lifetime annuity contract

• Every year as annuity payments are credited to the IRA and then distributed to the account owner, the IRA distributions are used to pay premiums on a life insurance policy held in an Irrevocable Life Insurance Trust (ILIT)

• At the account owner’s death, neither the IRA (due to the cancellation-at-death feature of the annuity) nor the ILIT will be included in the account owner’s taxable estate



Traditional IRA

IRAOwner

ILITInsurance

Company- B

Annuity payments

IRA withdrawals

Transfer of cash to pay premiums (i.e. gift)

Payment of premiums

Death benefit proceeds

Overview

InsuranceCompany- A



Traditional IRA$0

ILIT$2,000,000

Inside taxable estate Outside taxable estate

Because the annuity cancels at death, the IRA does not have any value for estate tax purposes

Because the trust is irrevocable and the gifts are “completed

gifts” for gift tax purposes, none of the policy proceeds will be included in the taxable estate

(provided the transferor has no “incidents of ownership” over the

policy)

OverviewIRA-Annuity Strategy

Yr IRA Estate Tax

Trust (Brokerage Account)


1 970,000$ (485,000)$ -$ 485,000$ 5 827,478$ (413,739)$ 305,431$ 719,170$ 10 585,507$ (292,753)$ 699,910$ 992,663$ 15 246,129$ (123,065)$ 1,209,399$ 1,332,463$ 20 -$ -$ 1,731,151$ 1,731,151$ 25 -$ -$ 2,235,864$ 2,235,864$ 30 -$ -$ 2,887,726$ 2,887,726$

Yr IRA Estate TaxTrust (Life Insurance)


1 -$ -$ 2,000,000$ 2,000,000$ 5 -$ -$ 2,000,000$ 2,000,000$ 10 -$ -$ 2,000,000$ 2,000,000$ 15 -$ -$ 2,000,000$ 2,000,000$ 20 -$ -$ 2,000,000$ 2,000,000$ 25 -$ -$ 2,000,000$ 2,000,000$ 30 -$ -$ 2,000,000$ 2,000,000$

ASSUMPTIONS:

Pre-Tax Growth Rate on IRA = 7.00%

After-Tax Growth Rate on Brokerage Account = 5.25%

Combined Income Tax Rate = 45.00%

Beginning IRA balance = $1,000,000

Annual Pre-Tax Withdrawal From IRA = $100,000

Annual Life Insurance Premium = $55,000

IRA Only


ExampleIRA-Annuity Strategy


ExampleIRA-Annuity Strategy

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

1 5 10 15 20 25 30


IRA Only IRA-Annuity Strategy



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Circular 230 Disclosure

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.

For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors.


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