Presentation on theme: "The Northwestern Mutual Life Insurance Company – Milwaukee, WI Eido M. Walny, Esq. Walny Legal Group LLC 7670 N. Port Washington Rd., Ste. 200 Fox Point,"— Presentation transcript:
2 Back to Basics: What is an ILIT? A life insurance trust is an irrevocable trust which is both the owner and beneficiary of one or more life insurance policies. Upon the death of the insured, the Trustee invests the insurance proceeds and administers the trust for one or more beneficiaries. Aside from adding liquidity to the estate, the ILIT can inject capital into the overall plan. For internal use only. Not for distribution.
3 Role of the Advisors -Timing is Everything -Find Qualified Teammates -Everyone Wins When You Play Nice -Like any tool, ILIT’s can be very powerful if used properly or cause problems if used improperly. For internal use only. Not for distribution.
4 Common ILIT Traps -Inflexibility in Drafting (why is my ILIT 30+ pages long??) -Trustee/Successor Trustee/Beneficiary Errors -Funding and its Limitations -Crummey Errors -Failure to Monitor Life Insurance Policy -Incidents of Ownership (Sec. 2042) -3-Year Estate Tax Inclusion Rules (Sec. 2035) For internal use only. Not for distribution.
5 Staggered Distribution Trust -Nearly every trust you see is drafted as a staggered distribution trust -A “ staggered distribution trust” is a trust that makes mandatory distributions to the beneficiary at staggered ages -This subjects the trust assets to potential estate taxes, creditors and divorcing spouses For internal use only. Not for distribution.
6 Staggered Distribution Trust - For internal use only. Not for distribution. Pot Trust for Descendants Pot Trust for Descendants Child #1 Child #2 Child #3 Distributes at 25, 30 and 35 Distributions at 25, 30 and 35 Distributions at 25, 30 and 35
7 Beneficiary Controlled Trust -Rather than make mandatory staggered distributions, why not just pick an age to give the beneficiary control? -Very few attorneys understand this which why nearly every trust has the same drafting error -Once the client understands that the trust can be drafted as a beneficiary controlled trust, there is no reason to ever terminate the trust For internal use only. Not for distribution.
8 Dynasty Trust -A “ Dynasty Trust ” is an irrevocable trust that is not subject to estate taxes for as long as state law allows -It can also be drafted to be protected from creditors and divorcing spouses -Rule against perpetuities limitations -Nevada 365-year Dynasty Trust For internal use only. Not for distribution.
9 Dynasty Trust For internal use only. Not for distribution. Pot Trust for Descendants Pot Trust for Descendants Child #1 Child #2 Child #3 Grandchild #1 Grandchild #2 Grandchild #3 Grandchild #4 Grandchild #5 Grandchild #6
10 $1 Million Example: Dynasty Trust vs. 35% Estate Tax every 30 Years For internal use only. Not for distribution.
11 Discretionary Trusts vs. Support Trusts For internal use only. Not for distribution. Discretionary Trusts vs. Support Trusts Discretionary Trusts vs. Support Trusts “ Sole and absolute discretion ” Protected from all creditors Distribution trustee must be independent, otherwise general power of appointment “ Health, education, maintenance and support ” Available to certain “ exception creditors ” such as divorcing spouses Beneficiary can be distribution trustee for HEMS
12 Dynastic Life Insurance Trust -Life insurance is generally income tax-free, but not estate tax-free -We avoid estate taxes on the death benefit by having the insurance owned by an Irrevocable Life Insurance Trust (ILIT) -Every ILIT should be drafted as a Dynasty ILIT (DILIT) For internal use only. Not for distribution.
13 High Cash Value Insurance? -High death benefit life insurance is generally owned by an ILIT * -High cash value life insurance is often left in insured ’ s estate -The wrong move? -Advisor scrutiny -Wrong move for estate tax purposes -Creditor protection *Other investment products or variable life insurance may also be used For internal use only. Not for distribution.
14 High Cash Value Insurance - Solution - Can we have our cake and eat it too? - Completed gift - Ability to access cash value - Protected from creditors - Not subject to estate taxes - For internal use only. Not for distribution.
15 High Cash Value Insurance - Solution -What if the trust assets are includible in the grantor ’ s estate under IRC Sec (transfer with a retained interest)? -Solution: Give independent trustee the power to remove grantor as a beneficiary -IRC Sec. 2035: Remove grantor as a beneficiary more than three years before death, so no estate inclusion For internal use only. Not for distribution.
Tax Act: $5M Exemption - Two-year window of opportunity /2012: $5M estate/gift/GST tax exemption : $1M estate/gift tax exemption / $1M (plus inflation) GST tax exemption on: Likely renegotiation at less than $5M and likely that Congress will take away large gift tax exemption - Consider large transfers to Dynasty ILIT before we lose this gifting ability For internal use only. Not for distribution.
17 What If…… The Exemption Goes back down to $1MM? Liquidity is not a concern? The Estate Tax Goes Away? My client waits until 12/12 to act? My client is not motivated by X, Y, or Z? For internal use only. Not for distribution.
18 QUESTIONS? For internal use only. Not for distribution.
19 NMWMC Resources For More Information on the Advisory and Trust Services offered by the Northwestern Mutual Wealth Management Company vices/index.htm vices/index.htm Or Contact an Account Administrator – (888) Option 5
20 Eido Walny and the Walny Legal Group, LLC are not affiliated with Northwestern Mutual or its subsidiaries. The views and opinions expressed by Eido Walny do not represent the views and opinions of Northwestern Mutual and its subsidiaries.” Concepts in this material are used with permission from Eido Walny and the Walny Legal Group. Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI, a subsidiary of The Northwestern Mutual Life Insurance Company (NM) is a limited purpose federal savings bank authorized to offer a range of financial planning, trust, fiduciary, investment advisory and investment management products and services. Securities offered through Northwestern Mutual Investment Services, LLC, a subsidiary of NM, broker- dealer and member FINRA and SIPC. For Advisor Use Only- Not for use with the General Public #1 UToday Bestseller #1 UToday Bestseller