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Independent Advisors Forum A Penn Mutual Due Diligence Meeting.

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Presentation on theme: "Independent Advisors Forum A Penn Mutual Due Diligence Meeting."— Presentation transcript:

1 Independent Advisors Forum A Penn Mutual Due Diligence Meeting

2 Wealth Transfer & Estate Planning with IRA Assets Create A Legacy With Individual Retirement Accounts David A. Scott, J.D., CLU Vice President, Advanced Sales

3 The Profile Client ►Substantial Retirement Savings (IRA, 401(k), Deferred Annuities, etc.) ►Lifestyle Not Dependent on Retirement Assets ►Total Estate Exceeds $2 Million (2006-2008) ►Desire to Maximize Legacy and Minimize Taxes ●“I’m Saving It for the Kids”

4 IRAs & Qualified Plans ►Qualified Retirement Plans ●Pension & Profit Sharing Plans, 401(k) Plans, 403(b) Plans, SEP, SIMPLE, etc. ●IRA Rollover at Retirement ►The Good News... ●No Income Tax on Contributions or Rollovers ●Tax-Deferred Earnings & Growth ►The Bad News... ●Required Distributions During Lifetime ●Income Tax on Plan Funds During Lifetime ●Potential “Double Taxation” At Death

5 The Problem ►Continued Tax-Deferred Growth Will Create Larger Amount During Lifetime ►Many People Do Not Need or Want to Spend IRA Funds During Lifetime ►If Funds Remain at Death... THE IRS MAY BE THE PRIMARY BENEFICARY!

6 Federal Taxation of Retirement Plans ►IRAs & Retirement Plans Taxed as “Income in Respect of Decedent” (IRD) ●Subject to BOTH Estate Tax & Income Tax ►Four-Step Calculation ●Estate Tax Computed on Full Value Assets ●Amount Subject to Income Tax Determined ●Estate Tax Subtracted from Amount Subject to Income Tax ●Income Tax Computed on Balance Total Tax Equals Estate Tax Plus Income Tax

7 Example - IRA ►Value of IRA at Death - $1,000,000 ►Assumed Federal Tax Rates ●Estate Tax: 45% ●Income Tax: 35% ►Estate Tax ●$1,000,000 X.45 = $450,000 ►Income Tax ●$1,000,000 Minus $450,000 (Estate Tax) = $550,000 X.35 = $192,500 Total Tax: $450,000 + $192,500 = $642,500 (Over 64%)

8 Will the Federal Estate Tax Be Repealed?

9 SNOWBALL And the Answer Is...

10 Options During Lifetime ►Continue Accumulation ●RMD Must Begin at Age 70 1/2 for IRA & Qualified Plans ●IRS May Become Biggest Beneficiary with 60%+ Taxes ►Transfer Retirement Funds ●Income Tax Paid at Time of Transfer ●Gift Tax May Be Payable ●Charitable Gift – Tax “Wash” ►Pension Protection Act – “Much Ado About Nothing” ►Take Distributions ●Income Tax Payable – Lowest Rates in 60 Years ●Lump Sum Distribution ●Periodic Distributions ►Required Minimum Distributions (RMD) ►Distributions Over Life Expectancy or Fixed Period

11 Lifetime Distributions ►Spend the Funds & Remove From Estate ●No Legacy for Family or Beneficiaries ►Invest/Accumulate the Funds in Other Assets ●Assets May Be Subject to Federal & State Death Taxes ►Wealth Transfer - Gift to ILIT to Pay Life Insurance Premiums

12 Wealth Transfer Strategy ►Use Distributions From IRA to Pay Premiums for Life Insurance Policy ●Reduces Amount of “Double Tax” IRA ●Creates Tax-Free Life Insurance Proceeds ►“Triple Leverage” of IRA Because Life Insurance Death Benefits... ●Exceed Premiums Paid ●Are Income Tax-Free ●Are Estate Tax-Free with Irrevocable Life Insurance Trust (ILIT)

13 How Does It Work ►Establish Irrevocable Life Insurance Trust (ILIT) ►ILIT Purchases Life Insurance on Client and/or Spouse - ILIT Is Owner & Beneficiary of Policy ►Client Receives Funds from IRA & Makes Gifts to ILIT Using Annual Gift Tax Exclusion or Lifetime Exemption ●“Gross Up” Distributions for Income Tax ►ILIT Pays Policy Premiums, Receives Death Proceeds & Distributes Funds to ILIT Beneficiary(s)

14 Advantages ►Reduces Amount of “Double Tax” Retirement Asset & Creates Income Tax-Free & Estate Tax-Free Life Insurance Proceeds ►Life Insurance Cash Values Grow Tax-Deferred & Can Be Accessed Income Tax-Free for Lifetime Distributions to ILIT Beneficiary(s) ►Policy Death Benefits Provide Estate Liquidity for Taxes, Debts, and Estate Settlement Costs ►Effective Use of Annual Gift Tax Exclusion and/or Lifetime Exemption

15 Example - Assumptions Married Clients’ AgesBoth Age 70 Number of ChildrenThree Current Value of IRA$1,000,000 Life Expectancy Today15 years Assumed Federal Income Tax Rate 35% Assumed Federal Estate Tax Rate 45% IRA / Investment Growth Rate8% per year* *For illustrative purposes only. Results do not reflect actual performance of any particular investment, and actual results will vary.

16 Example: RMD & Accumulate Assets Federal Estate Tax @ 45%: $1,340,607 Federal Income Tax @ 35%: $310,533 Total Federal Taxes at Death: $1,651,140 (55%) Net Amount to Heirs: $1,327,987 (45%) MINUS EQUALS Total of $2,979,127* IRA Value in 15 Years: $1,613,157 Estate Assets From RMD: $1,365,970 * Assumes 8% annual rate of growth on IRA and investments and death at age 85. For illustrative purposes only. Results do not reflect actual performance of any particular investment, and actual results will vary.

17 Example: RMD & Survivorship Life/ILIT Federal Estate Tax @ 45%: $725,921 Federal Income Tax @ 35%: $310,533 Total Federal Taxes at Death: $1,036,454 (26%) Net Amount to Heirs $2,959,861 (74%) MINUS EQUALS Total of $3,996,315 IRA Value in 15 Years: $1,613,157* Tax-Free Life Insurance Death Benefit: $2,383,158 **Penn Mutual Life Insurance Company EstateMax II universal life policy, level death benefit, preferred non-tobacco rates, with current interest rate and charges as of April 2007. All guarantees are based on the claim-paying ability of the issuer. * Assumes 8% annual rate of growth on IRA and death at age 85. For illustrative purposes only. Results do not reflect actual performance of any particular investment, and actual results will vary.

18 IRA Legacy to Heirs Net Amount to Heirs Current PlanProposed Plan Total Estate at Death$2,979,127 $3,996,315 Total Federal Taxes $1,651,140 $1,036,454 Net Amount to Heirs $1,327,987 $2,959,861

19 Options at Death ►Transfer to Surviving Spouse ●Doesn’t Eliminate or Minimize Taxes, Merely Postpones Taxes Until Distributions Received or Spouse’s Death ►Transfer to Non-Spouse - “Stretch” IRA ●Does Not Postpone Estate Tax ●Postpones Income Tax Until Distributions Received ●Beneficiary Can “Unstretch” IRA With Larger Distributions ►Transfer to Charitable Organization ●Outright ●Charitable Trust

20 Inherited (“Stretch”) IRA ►RMD Calculation Same As IRA Owner Except Based on Age of Beneficiary in Year Following Death of Owner ►Beneficiary Designations Can Be Changed Until Death ►Does Not Reduce RMD During Owner’s Lifetime ►Does Not Postpone Estate Tax ►Postpones Income Tax Until Distributions Received ►Beneficiary Can “Unstretch” IRA With Larger Distributions

21 Another Solution... Testamentary CRT with IRA ►CRT Designated As Beneficiary of IRA ►Spouse (or Children) Designated As Income Beneficiary of CRT ●No Estate Tax at Death of Owner or Spouse ►Spouse’s Income Interest Qualifies for Marital Deduction ►Non-Spouse’s Income Interest Unlikely to Exceed Exemption Amount ►Charity’s Remainder Interest Qualifies for Charitable Deduction ●Income Tax Paid as CRT Income Payments Received ►Same as “Spousal Rollover” & “Stretch” Options

22 What Is A Charitable Remainder Trust (CRT)? ►“Split Interest” Gift Between Charitable & Non-Charitable Beneficiaries ►Inter Vivos (Created During Lifetime) or Testamentary (Created at Death Under Will) ►Donor(s) Transfers Assets/Cash to Trust - Donor(s) or Others Receive Income Payments for Specified Period of Time ►At End of Income Period Trust Assets Transferred Outright to Organization(s) Chosen by Donor(s)

23 Product Enhancement: CRT Endorsement ►Deferred Annuities Are Ideal for NIMCRUT ●Income “Faucet” ►CRT Endorsement Available on Variable & Fixed Annuities ●Not Available with Enhanced Death Benefit Rider or Living Benefits Riders ►Joint Annuitants Permitted ►Normal Surrender Charges Apply ONLY After Earnings & Free Withdrawal Amount ►Multiple Withdrawals in 1st Contract Year

24 Example ►IRA @ Death of Owner: $ 1,613,157 ►IRA Growth: 8% Annually ►Unitrust Payout: 7% for Lifetime of Surviving Spouse (Beginning @ Age 72 – 15 Years) ►Charitable Deduction @ Death: $750,199 ►Total Income Payments to Surviving Spouse: $1,790,767 ($1,163,998 Net After-Tax) ►Remainder To Charity @ End of Term: $1,815,258

25 Wealth Replacement Trust ►Irrevocable Life Insurance Trust ●Prevents Reduction In Family’s Inheritance ●“Equalizes” Bequests to Charity & Heirs ●Life Insurance Proceeds Pass to Heirs Income Tax-Free & Estate Tax-Free ●Use Distributions from IRA to Pay Policy Premiums During Lifetime ►“Gross Up” Distribution to Premiums Plus Income Tax ►Income Tax Savings at Death for Charitable Deduction of Remainder Interest

26 Sales Opportunities ►Annuity Products ●IRA Rollover ●Deferred Annuity for Testamentary NIMCRUT ►Life Insurance Products ●IRA Wealth Transfer with Life Insurance ●CRT Wealth Replacement Life Insurance ●Life Insurance for Estate Liquidity

27 Insurance Planning Techniques ►Outright Policy Ownership ●Access To Cash Value ●Proceeds Included In Estate ●Maintain Flexibility & Control ►Traditional ILIT ●Exclude Proceeds From Taxable Estate ●Relinquish Income & Control ●Compromise Flexibility ►Survivorship Standby Trust ●Lifetime Access To Cash Value ●Exclude Proceeds From Taxable Estate ●Maintain Flexibility

28 Survivorship Standby Trust - How Does It Work? ►Spouse with Shorter Life Expectancy (Age, Health, Gender, etc. - Usually Husband) Is Applicant & Owner of Survivorship Policy ►Policyowner Creates SST Under Terms of Will or Revocable Living Trust ►Policy Is Transferred to SST at Death ►Surviving Spouse Should Not Be Trustee or Beneficiary of SST

29 ►During Policyowner’s Lifetime... ●Complete Ownership & Control of Policy ●Unrestricted Access to Policy Cash Values ►At Policyowner’s Death... ●Policy Transferred to SST ●Cash Value Included In Policyowner’s Estate ●Minimize Tax Impact with Loans & Withdrawals During Lifetime or During Probate Administration ►If Non-Owner Spouse Dies First, Policyowner Can Create ILIT & Transfer Policy ●“Three-Year Rule” Survivorship Standby Trust - How Does It Work?

30 Survivorship Stand-By Trust ►Income Tax-Free & Estate Tax-Free Death Proceeds For Estate Liquidity ►Elimination Of Gift Tax On Policy Premiums Paid During The Policyowner’s Lifetime ►Income Tax Deferral On Growth Of Policy Cash Values ►Income Tax-Free Access to Policy Cash Values During Lifetime If Policy Not MEC ►Additional Savings For Retirement, College Funding, Or Other Lifetime Needs

31 Advanced Sales Support & Services

32 Department Mission ►Provide Sales, Technical, and Legal Support in the Areas of: ●Estate Planning ●Business Succession Planning ●Selective Employee Benefit Plans ●Charitable Planning ●Retirement Planning ●Income, Gift & Estate Taxation

33 Sales Support & Services ►Case Consultation - (800) 818-8184 ►Legal/Technical Assistance ●Specimen Forms & Documents ●Consultation With Clients’ Advisors ►Proposals & Illustrations ●Estate Analysis, Charitable Planning, Selective Benefits & Deferred Compensation, Split Dollar, Other “Advanced” Illustrations & Proposals ►Marketing Materials for “Advanced” Concepts ●Brochures ●Concept Presentation Binders ►Advanced Sales Web Pages ►Software - AMO, Including Documents & Salesmaker

34 Advanced Sales Website ►Department Directory ►Advanced Markets Online (AMO) ►News & Announcements ●Legislation,Teleconferences, etc. ►Advanced Sales Concepts & Markets ►Specimen Forms ►Links to Related Information and Other Websites

35 Advanced Sales Staff ►David A. Scott, J.D., CLU ►Ted Kirchner, J.D., CLU, ChFC ►Eva M. Victor, J.D., LL.M. ►Lynn Nolan, CLU, ChFC 26 Initials 9 Post-Graduate Degrees/Professional Designations 45+ Years with Penn Mutual 85+ Years of Industry Experience

36 FAQs ►Will you speak to my client on the phone? ●No ►Will you speak to my client’s advisors on the phone? ●Yes ►Will you join me on a sales call? ●No ►Will you review my clients legal documents? ●Yes ►Will you draft documents for my client? ●No

37 Penn Mutual’s Advanced Sales Department MORE SALES... LESS ADVANCED!

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