1. 1 CAPITAL ASSET TRANSFERS: POST-ESTATE TAX INSURANCE MARKETING Thomas F. Commito, JD, LL.M, CLU, ChFC Lincoln Financial Distributors TEL: 802-223-5784 FAX: 802-223-5853 TOLL-FREE: 1-877-275-8662 (1-877-ASKTOMC) E-MAIL: tcommito@lfd.com

2. 2 LEGISLATION 107 th CONGRESS 50+ BILLS to Revise, Revamp, Eliminate, and Repeal the Estate Tax

3. 3 107 th CONGRESS (RIP) HR 2143- Permanent Repeal in 2010 S2994 (ExTRA)- Repeal of Estate Tax for All Family Businesses and Family Farms Commencing 1/1/2003

4. 4 THE SUGAR LAND EXTERMINATOR

5. 5 108 th CONGRESS BYRD Amendment Expires April 15, 2003 Sure to be Acceleration Proposal for Estate Tax Repeal Effective Retroactively to 1/1/2003 Will Democrats Force or Have Enough Votes (60) For Cloture in Senate ??? 11 Dems to Watch: Baucus, Johnson (SD), Nelson (FL), Breaux, Landrieu, Miller, Pryor, Lincoln, Edwards, Carper and Jeffords

6. 6 BUT EVEN IF THE ESTATE TAX GOES AWAY… 50 STATES WILL HAVE 50 DIFFERENT INHERITANCE TAX REGIMES CAPITAL GAINS TAX ON HEIRS AND BENEFICIARIES (CAN I BUY LIFE INSURANCE ON SOMEONE WHO HAS DIED?)

7. 7 WHAT IS MORE IMPORTANT THAN ESTATE PLANNING? TAX ADVANTAGED WEALTH CREATION Deductible or Leveraged Dollars to Purchase Insurance Utilize Tax Advantages of Life Insurance Tax Free Build-Up Tax Free Death Proceeds

8. 8 THE STRANGE CASE OF THE GIFT TAX GIFT TAX EXEMPTION IS $1 MILLION, WITH NO INCREASE RATES DECLINE WITH EST TAX GIFT TAX STILL IN EFFECT AFTER 1/1/2011 - 35% (or Highest OI rate) MAX RATE WHY??? – Prevent income tax shifting RETURN TO PRE-1976 CONCEPTS???

9. 9 PROBLEM THIS IS A TODAY PROBLEM- NOT A TOMORROW PROBLEM CONFUSION MAXIMIZING THE EXEMPTION: TRANSFERRING MORE ASSETS, BUT VALUING THEM AT $1 MILLION OR LESS

10. 10 VALUATION OF POLICY Reg. 25.2512-6a - (Gift of Policy) = Interpolated Terminal Reserve Reg. 1.83-3(e) - Corporate Transfer of Policy) = Cash Surrender Value Reg. 1.402(a)-1(a)(2) - (Distribution from Qualified Plan = Cash Surrender Value Reg. 301.6332-2(d) - (Value for Federal Tax Levy) = Cash Surrender Value

11. 11 ISSUE – THREE YEAR TRANSFER RULE IRC 2035(d) “Subsection (a) and paragraph (1) of subsection (C) shall not apply to any bona fide sale for an adequate and full consideration in money or money's worth.”

12. 12 SOLUTION No Transfer for Value Grantor Trust Spouse’s Grantor Trust Ltr Rul 2001-20007 (2/2/2001)

13. 13 LTR RUL 2001-20007 “Taxpayers represent that both Trust 1 and Trust 3 are for federal income tax purposes treated as grantor trusts owned by H. Thus, H is treated for federal income tax purposes as the owner of all of the assets of Trust 1 and Trust 3. See Rev. Rul. 85-13. Therefore, the "transfer" of Trust 1's interest in Policy Y1 to Trust 3 is disregarded for federal income tax purposes, and will not affect the application of section 101(a)(1) of the Code to amounts that the beneficiaries of Policy Y1 will receive upon the deaths of H and W.”

14. 14 SOLUTION “Balloon Note” – Interest Only IRC 7872 Demand v. Long-Term Non-IRC 7872 Notes Rev. Rul. 85-13 RATES DECEMBER 2002 Demand – 1.83% Long-Term – 4.86%

15. 15 RETAINED EARNINGS SALES IDEA

16. 16 ACCUMULATED EARNINGS TAX LIFE INSURANCE IS A “SPONGE” WHICH SOAKS UP ACCUMULATED EARNINGS IT IS A REASONABLE BUSINESS NEED SEE Motor Fuel Carriers v. Commr., 559 F.2d 1348 (5 th Cir., 1977) Vulcan Steam Forging Co., Inc. v. Comm’r. TC Memo 1976-29 (1976),and General Smelting v. Comm’r., 4 TC 313 (1944)

17. 17 ABETTER APPROACH TO LOAN “SPLIT DOLLAR” RATHER THAN LOAN PREMIUM CORP BUYS POLICY SELLS POLICY TO EMPLOYEE’S ILIT OR LLC FOR CSV REMEMBER REG 1.83-3(e) NOTE ABOVE LONG-TERM AFR

18. 18 SO WHAT’s THE GOOD NEWS??? QUALIFIED PLANS/ IRAS

19. 19 Life Insurance in Qualified Plans SALES IDEA

20. 20 Easy Concept Life Insurance in a Qualified Plan is Taxed Just Like Split Dollar Buy As Much Life Insurance As Possible. Fully Tax Deductible No Concern about Estate Taxation (No need for subtrusts) IR 2002-08 may imply have to use Table 2001 to value the protection

21. 21 AND THE BIG WINNER IS….? PROFIT SHARING PLANS

22. 22 ACT HAS GREAT PENSION REFORMS Annual Additions limit raised to $40,000 or 100% of comp, whichever is lower. Includible comp level raised to $200,000 Deductible Amounts for Profit Sharing Plans increased to 25% of contrib – Up from 15% Monies can be switched from one plan to another – if plan allows and separation from service. No need for conduit IRA’s, Includes 457 and 403(b) plans.

23. 23 Advantages of Profit Sharing Plans Can make in-service distributions. 2 year Rule- (Rev. Rul. 71-295) 5 Year Rule – (Rev. Rul. 68-24) IRC 412 Minimum Funding Requirements do not apply (Also ERISA 302 and 305) Incidental Benefits – Can Include Family Members (reg.1.401-1(b)(1)(ii) Any monies available for distribution can be used for “incidental benefits, I.e. life, accident and health insurance

24. 24 SALES IDEA - PENSION ROLLOUT

25. 25 CONCEPT Second to Die Policy Placed in Profit Sharing Plan Deductible Premium At End of 2nd or 3rd Year - Grantor Trust ILIT purchases policy for CSV. No T for V –Ltr Rul 2001- 20007 In alternative, can be distribution with gift to ILIT – 3 year rule applies. Difference between CSV and Premium is Leverage

26. 26 LEGAL BACKGROUND Trade or Business – No Need for Income Reg. 1.401-10(b)(1) Contributions 2 year rule (Rev. Rul.71-295) 5 year rule (Rev. Rul. 68-24) Incidental Benefits – Family Rules Reg. 1. 401-1(b)(1) Purchase Price – Cash Value Reg. 1.402(a)-1(a)(2) Not a Prohibited Transaction PTE 92-6; AMEND 9/3/2002 DOL Advisory Opinion 98-07A Anti – “Springing Cash Value” Rule IR Notice 89- 25; Q&A 10

27. 27 IR Notice 89-25 (Q&A 10) Year Surrender Value 1 $106,000 2 $112,360 3 $119,102 4 $126,248 5 $489,908

28. 28 Amendment to PTE 92-6 Federal Register, Vol. 67, No. 170, P. 56313 (9/03/2002) PTE and DOL 98-07A reiterated PTE requirements of “would be otherwise be sold” is met in self-directed plan if policy is sold rather than surrendered provided “no undue influence” Safe Harbor in PTE applies to Second to Die policies. Sale to Trust same as Sale to Employee