DYNASTY TRUST/INCENTIVE TRUST A Smart Way to Preserve Your Estate for Future Generations OLA 1620 0613

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Did You Know? Wealth is lost from generation to generation due to: Transfer taxes Divorce Creditors Beneficiaries’ lack of asset management skills How Is Wealth Lost from Generation to Generation? If you have accumulated wealth over your lifetime, your loved ones may face the loss or reduction of their inheritance as the wealth you leave to them is transferred from one generation to the next. Many factors can contribute to this reduction. For example, the amount of wealth you are able to transfer to your children and grandchildren can be significantly reduced due to transfer taxes, such as estate and gift taxes or the Generation-Skipping Transfer Tax (GSTT). In 2013, an applicable exclusion amount of $5.25 Million per person and $10.50 Million per couple, and a top tax rate of 40 percent, applies for the estate, gift, and generation-skipping transfer (GST) tax purposes. This problem, however, does not just stop with your children and grandchildren because each subsequent generation will face additional reductions to the wealth you leave, as it is taxed each time it is passed on to the next generation. Other factors or events that can erode your legacy include: Divorce among your loved ones, which can reduce the pool of wealth available for future generations due to property settlements in the divorce decree Creditors of your loved ones, who may attach inherited wealth to settle outstanding financial obligations Your loved ones who lack the asset management skills required to preserve wealth for future generations. Ultimately, in order to preserve wealth over many generations, it is important to examine each obstacle that must be overcome in order to accomplish this goal.

Types of Transfer Taxes Income tax Gift tax Estate tax Generation-Skipping Transfer Tax To begin, let's take a look at the various transfer taxes which may apply to your estate. There are many different types of transfer taxes which threaten to erode the legacy that you plan to leave for your children, grandchildren and future generations. These taxes include: (1) income tax; (2) gift tax; (3) estate tax; (4) generation-skipping transfer tax (GSTT).

What is the Generation-Skipping Transfer Tax (GSTT)? GSTT applies to: Gifts to grandchildren or later generations Gifts made to unrelated persons who are at least 37½ years younger than the person making the gift For example, you may be subject to a GSTT imposed on large gifts made to grandchildren or unrelated persons who are at least 37½ years younger than you.

How Much Will GSTT Affect My Estate? The GSTT is a flat tax equal to the highest estate tax rate applicable at the time of the gift. This amount is 40% for 2013. GSTT exemption is available to each taxpayer which allows GSTT-free transfers of $5.25 Million in 2013 The GSTT is a flat tax equal to the highest estate tax rate applicable at the time of the gift. That rate is currently 40%. This tax is in addition to the estate, income and gift tax—all of which threaten to erode the legacy that you plan to leave for your children, grandchildren and future generations. Fortunately, a lifetime GSTT exemption is available to each taxpayer which allows GSTT-free transfers of $ 5.25 Million in 2013. In other words, each taxpayer is allowed to give away $5.25 Million in aggregate to grandchildren and/or unrelated persons who are 37 1/2 years younger than the donor taxpayer.

The Overlooked Threat to Wealth Preservation The Loved Ones You Hope to Benefit! Are they all: Financially conservative? Savvy investors? Skilled in asset management? However, transfer taxes are not the only threat to wealth preservation. Assets are lost from generation to generation due to claims from creditors and/or a divorcing spouse. In fact, the loved ones you hope to benefit can themselves pose a threat to wealth preservation; they may lack asset management skills or simply indulge in an excessively materialistic lifestyle, losing in a few months what it took you a lifetime to accumulate.

Problem Solved: Dynasty Trust By establishing a Dynasty Trust, you can erect a wall around your wealth Minimize transfer taxes Provide asset protection for many generations What can you do to preserve your wealth and protect it against these threats? You can establish a Dynasty Trust. By establishing a Dynasty Trust, you can erect a wall around your wealth, minimizing transfer taxes and providing significant asset protection for future generations of beneficiaries.

What is a Dynasty Trust? A trust with a long term Offers tax and non-tax advantages Tax advantages are maximized when trust is funded with life insurance Leverage GSTT exemption which is based on premiums, not death benefit Death benefit received income tax-free A central feature of the trust is its term. In theory, the trust is intended to last forever, allowing its creator to pass wealth from generation to generation without the burden of transfer taxes, including estate, gift and the GSTT. By purchasing life insurance in the trust you can leverage the GSTT exemption, since the exemption will be based on premiums as opposed to the death benefit or policy cash value. Whereas, if you made an outright gift to grandchildren in the amount of the death benefit or cash value, you would use a significant portion of, if not exhaust, your GSTT exemption. Furthermore, the death benefit of a trust-owned life insurance policy will generally pass income tax-free to your loved ones.

Non-Tax Advantages Creditor protection for loved ones Continuity of asset management Aside from the tax advantages, the most compelling reason for implementing a Dynasty Trust is the potential creditor protection afforded to your loved ones. Oftentimes, the trust will include provisions which forbid your loved ones from selling their interest in the trust— which in turn limits the right of your loved ones’ creditors to reach trust assets in satisfaction of a debt. This protection is reinforced by trust terms that grant the trustee ultimate control over trust distributions and limit your loved ones’ access to trust assets. Additionally, trust terms can be tailored to promote positive behavior in your loved ones by requiring that they adhere to certain standards in order to be entitled to trust distributions. This is also called an Incentive Trust. For example, if a college education is important to you and you want to incentivize future generations to adopt your values, your trust can authorize the trustee to make a lump sum distribution of $25,000 to any beneficiary who graduates from an accredited university.

The Incentive Trust “Incentive Provisions” can be included in trust Intended to promote positive behavior in beneficiaries Beneficiaries required to meet certain standards to be entitled to trust distributions Additionally, trust terms can be tailored to promote positive behavior in your loved ones by requiring that they adhere to certain standards in order to be entitled to trust distributions. This is also called an Incentive Trust. For example, if a college education is important to you and you want to incentivize future generations to adopt your values, your trust can authorize the trustee to make a lump sum distribution of $25,000 to any beneficiary who graduates from an accredited university.

How Do I get Started? Consult an experienced estate-planning attorney If you establish the trust in a state that allows trusts to exist indefinitely, your trust assets will have fertile ground to grow and benefit many successive family generations Working with your insurance professional and financial advisor, you should have an experienced estate planning attorney draft the trust documents. The trust can be created during your lifetime or upon your passing. In addition, if you establish the trust in a state that allows trusts to exist indefinitely, your trust assets will have fertile ground to grow and benefit many successive family generations.

Example: The Bucks Bill and Barbara Bucks, both 65 years old Have substantial net worth Have one daughter, Susan, and three teenage grandchildren: Tom, Eileen, and James Example: The Bucks Family Bill and Barbara Bucks, both age 65, have amassed substantial wealth over their lifetimes. They have one daughter, Susan, and three teenage grandchildren: Tom, Eileen, and James.

The Bucks: Goals and Objectives Bill and Barbara want to: Pass their wealth on to their grandchildren without paying federal transfer taxes Use their wealth to promote specific goals and values in future generations The Bucks Family: Goals and Objectives The Bucks would like to pass their wealth on to their grandchildren and subsequent generations in the most tax-efficient way possible. Although the Bucks want to be able to provide for their grandchildren, they are also concerned that such wealth will result in lack of ambition and irresponsibility. Therefore, they would like to ensure that the funds will be passed on to the grandchildren in a way that will encourage them to meet certain goals and maintain desired lifestyles.

The Bucks Family: Action Steps Bill and Barbara create a Dynasty Trust/Incentive Trust They transfer $10.5 Million to trust (each using $5.25 Million of lifetime gift tax and GSTT exemptions) Trust structured to pay income to grandchildren for their lifetimes and to successive generations thereafter The Bucks Family: Action Steps After meeting with their financial advisor, life insurance professional and experienced estate-planning attorney, Bill and Barbara decide to create a Dynasty Trust/Incentive Trust. After the trust is created, the Bucks together transfer a total of $10.5 to the trust. Because this amount is equal to their lifetime gift exemption amount and GSTT exemption (which are $5.25 Million for each individual in 2013), their gift will be not taxed. The trust is designed to pay income to Susan’s children for their lifetimes and to successive generations thereafter. The amount of the payments may vary, depending on whether the grandchildren achieve certain goals and maintain desired lifestyles as set forth in the trust.

The Bucks: Action Steps $10.5 Million + $72,000 annual gifts buys $50 Million life insurance policy Thereby maximizing the legacy they are able to leave to children, grandchildren and future generations In addition to the $10.5 Million gift to the trust, the Bucks gift an additional $72,000 to it each year, using their annual gift exemptions, to fund the purchase of a survivorship life insurance policy with a death benefit of approximately $50 Million. This way, they are able to maximize the legacy they are able to leave to children, grandchildren and future generations.

The Bucks: Trust Incentives The Bucks include the following incentive provisions: Trust will pay $50,000 to each grandchild or future descendant who graduates from college Trust will match 50% of grandchildren’s or future descendants’ earnings Trust will gift $100,000 to each grandchild or future descendant who marries The Bucks Family: Trust Incentives To encourage their grandchildren and their descendants to meet certain objectives and maintain the kind of lifestyle desired by Bill and Barbara, the trust contains some incentives to promote their attainment. The Bucks decide to include the following provisions: One of the grandchildren, Tom, has decided that he does not want to go to college. Both Bill and Barbara strongly believe in the importance of a college education and, therefore, a provision is included in the trust that pays $50,000 to each grandchild who graduates from college. Eileen, another grandchild, thinks that working a “normal” job is too confining and would interfere with her social life. Bill and Barbara are concerned by this lack of ambition and, therefore, include a provision in the trust that states that the trust will match 50% of each grandchild’s earned income. The third grandchild, James, has an exemplary academic record and appears to be positioned to succeed in his future career. Bill and Barbara are proud of his success, but they feel that family values are important too and would like to see him get married. So, they add a provision to the trust that indicates that, when a grandchild gets married, he or she will receive $100,000 from the trust. They also want these provisions to apply to any subsequent generations, such as to their great-grandchildren. Doing this allows them to influence the behavior of all of their direct descendants in ways they feel are important. Please be aware that some incentive provisions may not be legally enforceable.

Summary A Dynasty Trust/Incentive Trust funded with life insurance can help: Provide a legacy for future generations Minimize impact of transfer taxes such as GSTT Encourage descendants to meet certain educational, career, and/or lifestyle-related goals Summary In conclusion, a Dynasty Trust/Incentive Trust can be an effective way for you to create an ongoing legacy for future generations for several reasons. First, use of such a trust can safeguard your assets by providing creditor protection, and can contain other provisions that guard against irresponsible spending. Additionally, use of such a trust can ensure that your GSTT and other transfer tax exemptions are fully utilized, protecting against the reduction of your estate due to transfer taxes. Finally, Incentive Trusts are advantageous because they can be used to offer incentives to your descendants that can both influence their behavior and help guard against negative lifestyle choices.

Next Step What to do next? Contact a Transamerica insurance agent or financial advisor to see if the Dynasty Trust/Incentive Trust is right for you.

Life insurance products are issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499, or Transamerica Financial Life Insurance Company, Harrison, NY 10528. All products may not be available in all jurisdictions. Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively “Transamerica”), and their representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties should rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal laws in effect at the time of publication. However, these laws are subject to interpretation and change, and there is no guarantee that the relevant authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of June 2013. Transamerica Financial Life Insurance Company is authorized to conduct business in New York. Transamerica Life Insurance Company is authorized to conduct business in all other states. OLA 1620 0613

DYNASTY TRUST/INCENTIVE TRUST A Smart Way to Preserve Your Estate for Future Generations OLA 1620 0613