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For Producer or Broker/Dealer Use Only. Not for Public Distribution. Estate Planning with Intentionally Defective Irrevocable Trust.

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Presentation on theme: "For Producer or Broker/Dealer Use Only. Not for Public Distribution. Estate Planning with Intentionally Defective Irrevocable Trust."— Presentation transcript:

1 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Estate Planning with Intentionally Defective Irrevocable Trust

2 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Intentionally Defective Irrevocable Trust (IDIT) Basics Sample IDIT Examples Generation Skipping Transfer Tax (GSTT) Planning Dynasty Trusts This document is designed to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. Clients should consult their attorney and /or tax advisor before making financial investment or planning decisions. Overview

3 For Producer or Broker/Dealer Use Only. Not for Public Distribution. IDIT is an irrevocable trust Trust income & deductions flow through to grantor Transactions between grantor and IDIT are generally ignored for income tax purposes (e.g. sale of assets by a grantor to his or her IDIT) Intentionally Defective Irrevocable Trust Basics

4 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Assets are generally intended to be sheltered from inclusion in a grantors estate May be used to purchase & own single life or survivorship coverage Note: IDITs may be subject to increased scrutiny by IRS. Clients should speak with their own legal and tax advisor regarding further details. IDIT Basics

5 For Producer or Broker/Dealer Use Only. Not for Public Distribution. There are a number of different ways to make a trust defective for income tax purposes Sample trust provisions include: –Ability to use trust income to pay life insurance premiums on the life of the grantor and/or the grantors spouse –Ability to exchange property of equal value Death or termination of grantor trust status IDIT Basics: Grantor Trust Rules

6 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Typically used for lifetime sales of grantors property (e.g. discounted property*) Installment notes should reflect applicable federal rates (AFR) Imperative to observe all formalities of the transaction in an arms-length, businesslike fashion or else the transaction may not be respected by the IRS. (See Pierre v. Commissioner, T.C. Memo (May 13, 2010)) * Use of discounts, though legitimate where appropriate, is often the subject of IRS scrutiny. It is important to confer with your independent tax and legal advisors regarding the use of this technique. IDIT Basics: Considerations

7 For Producer or Broker/Dealer Use Only. Not for Public Distribution. In event of the grantors death while the Note is outstanding Estate tax: Remaining value of the note is includable. Income tax: Unclear. Some argue that income associated with assets sale should be recognized because the trust is no longer a grantor trust upon death. Clients should seek guidance from tax and legal advisors. IDIT Basics: Tax Considerations

8 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Grantors payment of the trust income taxes increases the growth of trust assets and reduces grantors estate over time. Grantors payment of the trust income taxes is generally not considered a taxable gift. IDIT can potentially remove significant asset appreciation from estate taxation. IDIT Basics: Benefits

9 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Business owner and spouse gift cash and other assets to their IDIT. Business owner later sells discounted S corporation stock or family limited partnership units to IDIT for 10- year note. IDIT uses part of annual IDIT cash flow to fund annual interest costs and to purchase survivorship coverage. Appreciated IDIT assets and cash flow used to repay note. This example is hypothetical, actual results will vary. This presentation points to potential advantages available through valuation discounts of limited partnership interest/ S corporation stock. The ability to take valuation discounts, though supported in various court decisions, is complex and will almost certainly be scrutinized by the IRS. Any such discount should be determined by a qualified appraiser. Such issues serve to point out the importance of seeking the guidance of professional tax and legal advisors. IDIT Example

10 For Producer or Broker/Dealer Use Only. Not for Public Distribution. The GSTT is an additional transfer tax GSTT is in addition to gift or estate tax GSTT exemption –$5 million in 2011 and 2012 –Scheduled to return to previous level in 2013 General Skipping Transfer Tax: Basics

11 For Producer or Broker/Dealer Use Only. Not for Public Distribution. GSTT gifts to long-term trusts may pass more wealth to future generations than outright gifts subject to ongoing estate tax erosion Lifetime gifts sheltered by the GSTT exemption can be leveraged using life insurance (e.g. dynasty trusts) Use a dynasty trust as a door opener or discuss with existing IDIT clients during annual review appointments GSTT Planning: Basics

12 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Annual or lump sum gifts to trust sheltered by lifetime gift exemption or by gift tax annual exclusions. Gifts fully sheltered by insureds or couples use of their GSTT exemption(s). Dynasty trust with a zero inclusion ratio. Dynasty trust purchases single life or survivorship policy. GSTT Planning: Dynasty Trust Example 1 Examples are hypothetical. For illustrative purposes only.

13 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Client may use split-dollar to defer gift outlays Initial and ongoing gifts fully sheltered by GSTT exemptions Single life or survivorship life coverage GSTT Planning: Dynasty Trust Example 2 This example is hypothetical. Actual results will vary.

14 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Most states have Rules Against Perpetuities statutes that limit the duration of a trust. Trusts can be perpetual in South Dakota and certain other jurisdictions. Rules are generally based on where the trust is administered and not where the client actually lives. Importance of working with skilled trust officers and experienced tax and legal advisors. GSTT Planning: Dynasty Trust Considerations

15 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Designing the dynasty trust as an IDIT Advanced tax planning technique Requires skilled tax and legal advisors GSTT Planning: IDIT

16 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Couple makes initial gift to dynasty trust covered by remaining lifetime gift exemptions and GSTT exemptions. Couple sells discounted LLC interests to dynasty trust/IDIT for 10 year note setting forth AFR. Dynasty trust purchases 10 pay survivorship policy. Note repaid from other trust assets and cash flow. Examples are hypothetical. For illustrative purposes only. Use of discounts, though legitimate where appropriate, is often the subject of IRS scrutiny. Clients should confer with their independent tax and legal advisors regarding the use of this technique. GSTT Planning: IDIT Example

17 For Producer or Broker/Dealer Use Only. Not for Public Distribution. One of Americas largest financial companies with roots as far back as 1863 Serves over 90 of the top one hundred FORTUNE 500 ® companies * Recognized as the Nations Largest Life Insurer ** * MetLife. Quick Facts: Full Year 2009 ** Based on life insurance in-force as of December 31, MetLife Brand

18 For Producer or Broker/Dealer Use Only. Not for Public Distribution. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (Act) impacts the federal gift, estate and generation skipping transfer tax (together referred to as transfer tax) through Among other changes, in 2011 and 2012, the Act provides maximum exemption amounts of $5,000,000 per person for transfer tax purposes, provides for a maximum transfer tax rate of 35% and provides for portability of the estate tax exemption between spouses. Unless Congress enacts new legislation, on January 1, 2013 the transfer tax laws will revert back to the laws (e.g. exemption amounts of $1,000,000 and generally 55% maximum tax rates) that were in effect in However, it is not clear whether Congress will allow the Act to expire, extend the Act or amend the transfer tax laws for years beyond 2012 to reflect lower tax rates and/or increased transfer tax exemption amounts than as currently legislated. Increased transfer tax exemption amounts and lower transfer tax rates may impact the suitability of any transfer tax planning strategy. Clients need to understand that tax law is always subject to interpretation and legislative change. Metlife and its affiliates do not provide tax advice and therefore clients must speak with their qualified legal and tax counsel to discuss their current estate plan and to discuss what planning options are available and appropriate. Important Information

19 For Producer or Broker/Dealer Use Only. Not for Public Distribution. Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. Your clients should seek advice based on their particular circumstances from an independent tax advisor. MetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. You clients should consult with and rely on their own independent legal and tax advisers regarding their particular set of facts and circumstances. Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policies features, risks, charges and expenses. Investors should consider the investment objectives, contract features, risks, charges and expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. Clients should read the prospectuses and consider this information carefully before investing. Product availability and features may vary by state. MetLife life insurance policies have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the variable investment options in this product will meet its stated goals or objectives. The cash value is subject to market fluctuations so that, when withdrawn, it may be worth more or less than its original value. Guarantees are based on the claims paying ability and financial strength of the issuing insurance company. Life insurance products are issued by MetLife Investors USA Insurance Company, Irvine, CA 92614, in all jurisdictions except New York, where permanent life insurance products are issued by Metropolitan Life Insurance Company. New York, NY and term life insurance products are issued First MetLife Investors Insurance Company, New York, NY All guarantees are subject to the claims-paying ability and financial strength of the issuing insurance company. Variable products are distributed by MetLife Investors Distribution Company, Irvine, CA All are MetLife companies. April 2012 Life Insurance Products: Not A Deposit Not FDIC-Insured Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value BDVL22394 L [0314] © 2012 METLIFE INC. PEANUTS © 2012 Peanuts Worldwide Important Information


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