The Dynasty Trust: A Smart Way to Preserve Your Estate for Future Generations OLA

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How Is Wealth Lost from Generation to Generation? n Transfer taxes n Divorce n Creditors n Beneficiaries’ lack of asset management skills

Influencing the Behavior of Beneficiaries n Wealthy parents have two major concerns: – Future generations are not going to live as well as parents do – Wealth left to children is going to spoil them n How do you bridge gap between these two conflicting worries? – Answer: By establishing Dynasty Trust

What Is a Dynasty Trust? n Used to: – Provide for future generations, and – Minimize taxes on wealth passed on to those generations n Gives ability to magnify wealth over several generations n Not just for the ultra-wealthy n Form of Irrevocable Life Insurance Trust (ILIT) n Leverage use of assets by purchasing life insurance to fund Dynasty Trust

Benefits of a Dynasty Trust n Furnishes effective way to transfer significant assets to beneficiaries n Provides creditor protection by incorporating – Spendthrift provisions to guard against irresponsible spending habits, or – Provision protecting from loss through divorce settlement n Assures continuity of asset management n Can add incentive provisions for beneficiaries

Dynasty Trust Planning Considerations n Generation-Skipping Transfer Tax (GSTT) – Dynasty Trust helps take advantage of GSTT exemption – Proper use of GSTT exemption preserves assets for future generations n Some states have “rule against perpetuities” – Dynasty Trust’s term may be limited by rule against perpetuities – Term is 20 years plus lifespan of named individual

Dynasty Trust Considerations— Estate Exclusion n Policy proceeds not included in insured’s taxable estate if no incidents of ownership exist at any time within three years prior to death of insured n To keep policy out of grantor’s estate, policy applicant should be third party, such as Dynasty Trust n Grantor would then gift premiums to third-party owner

Dynasty Trust Considerations— Gifting to the Trust Grandparents are trust grantors Annual gifts to trust, $12,000 per grandchild in 2006 $2 million split gift per grandparent to trust in 2006: full lifetime gift and partial GSTT extension Trust purchases survivorship life insurance policy on lives of grandparents Assets used to pay income and/or principal to grandchildren during grandparents’ lifetime The Dynasty Trust

Example: The Bucks Family n Bill and Barbara Bucks, both 65 years old n Have substantial net worth n Have one daughter, Susan, and three teenage grandchildren: Tom, Eileen, and James

The Bucks Family: Goals and Objectives n Would like to pass their wealth on to their grandchildren without paying federal transfer taxes n Want to use their wealth to encourage their grandchildren and future generations to achieve certain goals and maintain desired lifestyles

The Bucks Family: Action Steps n Bill and Barbara create Dynasty Trust n Bucks transfer $2 million, each using $1 million of their lifetime GSTT and all of their gift tax exemptions, to trust – Trust structured to pay income to Susan’s children during grandchildren’s lives, and to successive generations thereafter n Bucks gift additional $72,000 to trust, using their annual exclusion, to purchase survivorship policy with death benefit of approximately $5.4 million

The Bucks Family: Trust Incentives Bucks include incentive provisions in trust to encourage grandchildren and their descendants to meet certain goals and maintain desired lifestyle standards:  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 $50,000 to each grandchild or future descendant who marries

Summary Dynasty Trust can help: n Provide a legacy for future generations n Minimize impact of transfer taxes such as gift taxes and GSTT n Encourage descendants to meet certain educational, career, and/or lifestyle-related goals

Life insurance products issued by Transamerica Occidental Life Insurance Company, Cedar Rapids, IA Transamerica Occidental Life Insurance Company (“Transamerica”) and its 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 September 2006.

The Dynasty Trust: A Smart Way to Preserve Your Estate for Future Generations OLA