Leveraged Gifting
Help clients leave more to heirs with gifting and life insurance
PRESENTED BY:
Joe Sample, [Designations per field stationery guidelines]
[Company Approved Title]
[Agency Name]
[The Prudential Insurance Company of America][if Agency Distribution]
[1234 Main Street, Suite 1, Floor 10]
[Anywhere], [ST] [12345]
[in required states] [<ST> Insurance License Number <1234567890>]
Phone [123-123-1234] Fax [123-123-1245]
[joe.sample@prudential.com]
0262963-00003-00 Ed. 03/2015 Exp. 09/20/2016
Not for Consumer Use.
Topics We Will Discuss
• Transfer Tax System
• To Gift or Not to Gift
• To Insure or Not to Insure
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Not for Consumer Use.
Client Profile
• Single or married ages 55+
• Children or grandchildren
• Desire to minimize taxes
• Want to leave more to heirs
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Not for Consumer Use.
Transfer Tax System
Gift Tax
Estate Tax
“GST Tax” stands for Generation Skipping Transfer Tax
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Not for Consumer Use.
GST Tax
Transfer Tax System/Gift Tax & Estate Tax
During life
Transfers may be subject to
Gift Tax
Upon death
Transfers may be subject to
Estate Tax
There may be federal and/or state gift tax consequences with the funding of an Irrevocable Trust and the gifts
necessary to pay the premiums may reduce the size of the estate and/or the amount of lifetime gift tax exemption
and/or estate tax exemption amount.
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Not for Consumer Use.
Transfer Tax System/GST Tax
During life or upon death
First generation
Next
generation
Persons two or more
generations younger
• Transfers, including trust distributions, may also be subject to
Generation Skipping Transfer (GST) Tax
• Levied in addition to any applicable gift or estate tax
• Designed to disallow “skipping” estate taxation at next generation level
• Tax rate equal to top estate tax rate at time of transfer
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Not for Consumer Use.
Annual Exclusion Gifts
• Single client:
• Married client:
$14,000/recipient/year
$28,000/recipient/year*
1
Gift by each spouse:
Total gift to recipient 1:
Gift by each spouse:
Total gift to recipient 2:
Total gifts to all:
Total gift tax paid:
$14,000
$28,000
$14,000
$28,000
$56,000
$0
2
The 2015 annual gift tax exclusion is $14,000, indexed for inflation, non-cumulative, and must be of a present interest. GST
Annual Exclusion rules differ from the basic annual exclusion gifts where the gift must also be for the sole benefit of the recipient
and taxed in his or her estate at death.
*A $28,000 gift by one spouse to one person can be “split” with the non-grantor spouse (requires filing of a gift tax return).
This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy
works best for clients will depend on their individual facts and circumstances. Actual results may vary.
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Not for Consumer Use.
Aggregate Exemption Amounts
• Lifetime Gift Tax Exemption
• Total amount transferrable to all recipients without gift tax, $5,430,000*
• In addition to annual exclusion gifts
• Reduces federal estate tax exemption if used
• Estate Tax Exemption
• Total amount transferrable to all recipients without estate tax, $5,430,000*
• Generation Skipping Transfer Tax Exemption
• Total amount transferrable to all skip persons without
GST Tax, $5,430,000*
• Can only be allocated to a gift or bequest
• Unified with above exemptions
*Amount for 2015, indexed annually for inflation
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Not for Consumer Use.
To Gift or Not To Gift
Gifting strategies can help clients
• Reduce future estate tax exposure
• Leave more to family, less to government
• Keep estate assets in tact
• Preserve a family business
• Enjoy seeing the recipient benefit during the client’s life
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To Gift or Not To Gift
Hypothetical Gifts by a
Married Couple
Hypothetical Estate Tax
Savings by Year 202
$84,000/year
$10,000,000
Annual Exclusion Gifts1
Lifetime Exemption Gift1
$1,166,567
$6,613,191
1Annual
gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse makes a $5,000,000 lifetime gift
utilizing part of their $5,430,000 lifetime gift exemption for 2015.
2Assumes the $84,000 annual gifts would have been accumulated inside the grantors’ estates at a 5% net rate of return
then subject to a 40% flat estate tax rate.
2Assumes the appreciation on the $10,000,000 gift at a 5% net rate of return would have been taxable inside the grantors’
estates at a flat estate tax rate of 40%.
This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which
strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.
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Not for Consumer Use.
Life Insurance As An Asset Class
• Predictability
• Leverage
• Liquidity
Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads,
surrender charges and other charges or fees that will impact policy values.
Guarantees and benefits are based on the claims-paying ability of the issuing insurance company. Broker/dealers,
insurance agencies and their affiliates who sell the policy make no representations or guarantees regarding such ability.
The policy owner must meet all premium requirements.
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Not for Consumer Use.
Predictability
• Predetermined amount of cash upon death1
• Timing of death is not correlated to the financial markets
• Can help counter volatility in other estate and/or trust
assets at death
1Assumes
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premiums are paid, no loans or withdrawals are taken and no benefits have been accelerated.
Not for Consumer Use.
Leverage
Hypothetical Gifts by a
Married Couple
$84,000/year
Annual
Exclusion Gifts1
Hypothetical Estate Tax
Savings by Year 202
$1,166,567
Life Insurance Premium
$84,000/year
Level pay
Death Benefit
Death Benefit IRR at Joint
Life Expectancy (age 91)
$6,495,129
5.56%
1 Annual
gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse uses $5,000,000 of their $5,430,000 lifetime
exemption for 2015.
2Assumes
the $84,000 annual gifts would have been accumulated inside the grantors’ estates at a 5% net rate of return then
subject to a 40% flat estate tax rate.
Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to age 121. The
internal rate of return (IRR) is the after-tax rate of return that would be needed each and every year to accumulate an amount
equal to the death benefit by the respective year/age assuming the premiums were alternatively invested.
This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy
works best for clients will depend on their individual facts and circumstances. Actual results may vary.
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Not for Consumer Use.
Estate Liquidity/ILIT
Deceased’s
Estate
Cash to Buy
Assets or Loan
2
3
Assets or
Loan
Payments
Irrevocable
Trust
1
Life
Insurance
Policy
Death Benefit
Proceeds
Estate Tax
Payment
Government
If trust assets are used to satisfy any obligation or liability of the deceased’s estate, such as direct payment of estate
taxes, then the value of the trust could itself be subject to estate taxes as part of the deceased’s estate. The trustee
may be given the option to purchase assets from or make loans to the estate which does not cause such inclusion and
can help provide the necessary liquidity the estate needs to pay estate taxes.
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Not for Consumer Use.
To Insure or Not To Insure
ASSET INCOME*
$10,000,000 Gift + Invest + Insure
Age
of Both
Insured's
Annual
Level
Premium
63
Death
Benefit
Other
Trust
Assets
Net
Proceeds
to Heirs
500,000
38,711,851
9,975,000
48,686,851
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500,000
38,711,851
9,724,336
48,436,187
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500,000
38,711,851
9,236,525
47,948,376
91
500,000
38,711,851
8,441,932
47,153,783
96
500,000
38,711,851
7,873,326
46,585,177
Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to age 121. This
couple’s joint life expectancy is age 91.
*Assumes a $10,000,000 up front gift to an irrevocable trust and a 5% net ROR on trust investments. Note too that as a result of this
gift, our hypothetical couple would have used up most of their lifetime exemption amount.
This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy
works best for clients will depend on their individual facts and circumstances. Actual results may vary.
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Not for Consumer Use.
To Insure or Not To Insure
Net Proceeds to Heirs
60,000,000
50,000,000
40,000,000
30,000,000
20,000,000
Joint Life
Expectancy
10,000,000
0
Joint Age
Lump Sum Gift + Invest
Lump Sum Gift +Invest + Insure
Assumes a $10,000,000 upfront gift to an irrevocable trust and a 5% net ROR on trust investments.
This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy
works best for clients will depend on their individual facts and circumstances. Actual results may vary.
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Not for Consumer Use.
To Insure or Not To Insure
Internal Rate of Return (IRR) on Net Proceeds to Heirs
10.0%
8.0%
6.0%
4.0%
2.0%
Joint Life
Expectancy
0.0%
Age 81
Age 86
Lump Sum Gift + Invest
Age 91
Age 96
Lump Sum Gift + Invest + Insure
Assumes a $10,000,000 upfront gift to an irrevocable trust and a 5% net ROR on trust investments. The IRR on Net Proceeds to
Heirs represents the level annual after-tax rate of return at which the initial lump sum gift amount must be accumulated annually to
generate the net proceeds to heirs at death by the corresponding years shown.
This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy
works best for clients will depend on their individual facts and circumstances. Actual results may vary.
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Not for Consumer Use.
Beyond Trusts and Life Insurance
• Medical expenses*
• Tuition expenses*
• 529 Plans (5 years up front)
• UGMA or UTMA accounts
*Individuals can pay these expenses on behalf of another without incurring gift tax but payment must be made directly to
the health care provider or education institution. In the case of health care institutions, individuals can pay for the
following expenses on behalf of another without incurring gift tax:
1) Diagnosis, care, mitigation, treatment and prevention of disease,
2) Transportation and lodging related to medical care,
3) Qualified long term care services,
4) Some health insurance premiums.
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Not for Consumer Use.
President Obama’s 2016 Budget Proposals
A Law is Only Permanent Until Congress Decides to Change It !
• Estate and GST Exemptions $3.5M, Lifetime Gifts $1M, no indexing, Top Rate
45%
• Gifts or Bequests of Appreciated Property is a Capital Gains realization event
• Decouple Annual Gift Tax Exclusions from Crummey powers by creating new
category of gifts to trusts of $50k per donor per year
• Grantor Retained Annuity Trusts (GRAT)
• 90 year perpetual trust limit
• Sale to Intentionally Defective Grantor Trust
• Eliminate non-spouse stretch IRA’s, must be distributed within 5 yrs
• Limit on total of tax-deferred retirement accounts to provide maximum annuity
permitted under DB plan(currently $3.4M at age 62)
• Required Minimum Distributions for Roth IRA’s at 70 ½
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President Obama’s 2016 Budget Proposals
Key Points – Tax Payer Friendly Proposals
• Permit non-spouse beneficiary to roll over to a inherited IRA within 60
days vs. direct trustee to trustee transfer
• No RMD’s from IRA’s and retirement accounts if aggregate value does
not exceed $100k
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Not for Consumer Use.
Benefits of Using a Gifting Strategy
For Clients
• Leave more to family, less
to government
• More control over wealth
• Approval of family members
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Not for Consumer Use.
For Advisors
• Deepen client relationships
• Client retention
• Preserve or enhance AUM
• Grow overall business
Summary
• Transfer Tax System
• To Gift or Not to Gift
• To Insure or Not to Insure
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Not for Consumer Use.
Important Considerations
• In addition to the asset or income they may be repositioning to implement the
strategy, clients should have sufficient liquid assets to support their current and
future income and expenses. Equity in the home should not be considered a
liquid asset.
• This concept is only intended to be used for assets that will not be needed for
living expenses for the expected lifetime of the insured. It is the responsibility
of the client to estimate these needs and expenses and it is recommended that
they consider developing a comprehensive financial plan in conjunction with
implementing the strategy being considered. The accuracy of determining
future needs and expenses is more critical for clients at older ages who have
less opportunity to replace assets used for the strategy.
• If your client’s financial or legacy planning situation changes and they need to
use the assets or income that are being earmarked for future life insurance
premiums, they may be unable to continue to make premium payments, the life
insurance policy may terminate and the results illustrated may not be achieved.
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Not for Consumer Use.
Important Considerations (continued)
• If the asset or income earmarked for future life insurance premiums becomes
fully exhausted, premiums may have to be paid using other assets or income
to keep the life insurance policy in force.
• Depending on your client’s life span, it is possible that your client’s beneficiary
may receive more by just inheriting the assets, rather than by receiving the
death benefit of the life insurance policy that was purchased.
• Your client should consider developing a comprehensive financial plan to take
into account current and future income & expenses in conjunction with
implementing a strategy discussed herein.
• Clients may have to pay taxes, early withdrawal penalties, and/or other fees on
assets liquidated to pay the life insurance policy premiums.
• We recommend that your client consult their tax and legal advisor to discuss
their specific situation before implementing the strategy discussed herein.
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Not for Consumer Use.
Other Considerations
• Ability to purchase life insurance is based on medical and financial
underwriting.
• Policy owner won’t receive the value of the gift used for life insurance, until the
insured’s death.
• Some life insurance policies require enough policy value to maintain charges;
therefore, clients may need to pay additional premiums in later years if the
policy does not perform as originally illustrated.
• For GST trust strategies, clients should consider the Rule Against Perpetuities
which is a complex rule designed to prevent trusts from lasting forever.*
*Generally, this rule allows trusts to last until 21 years after the death of the youngest beneficiary alive at trust creation.
Many states have abolished or significantly modified the rule allowing trusts to last for much longer or indefinitely
without limit.
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Not for Consumer Use.
Thank You!
Questions?
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Not for Consumer Use.
Important Information
This material has been prepared by The Prudential Insurance Company of America to assist
financial professionals.
PruLife SUL Protector is issued by Pruco Life Insurance Company, except in New York
where, it is issued by Pruco Life Insurance Company of New Jersey. Both are Prudential
Financial companies located in Newark, NJ.
Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential
Financial, Inc. and its related entities.
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Not for Consumer Use.
Client Identification
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Not for Consumer Use.