IRA Distribution Planning Estate Planning And Sales Strategies Eva Victor, J.D., LL.M. The Penn Mutual Life Insurance Company

Profile Client and Market Opportunity ►The Profile Client: ●Estate With Significant Retirement Assets (Qualified Plans, IRAs, IRA Rollovers). ●Assets Exceeding Federal Estate Tax Exemption. ●Desire To Minimize Income And Estate Taxation And Maximize Legacy For Heirs. ►The Market Opportunity: ●$11 Trillion In Qualified Retirement Plans And IRAs. ●$300 Billion In IRA Rollovers From 401(k) Plans. ●The IRA Is Often The Largest Asset And Most Significant Asset Of An Estate - And Increasing As A Percentage Of Many Estates.

How Can Life Insurance Enhance IRA Distribution Planning ? ►Life Insurance Plays A Vital Role In IRA Distribution And Estate Planning In Providing: ●Liquidity To Pay Income, Estate Or Inheritance Taxes. ●Wealth Replacement Bequest In Coordination With A Charitable Bequest. ●Equity Of Inheritance Bequest. ●Leveraged Legacy For Heirs. ►Proceeds From A Properly Structured Policy Pass Free Of : ●Federal Income Tax. ●Federal Estate Tax. ●Federal GST Tax.

How Can Life Insurance Enhance IRA Distribution Planning ? ►Lifetime Required Minimum Distributions Must Begin At Age 70 ½. ►Lifetime Distributions After Age 59 ½ Are Free Of Penalty Tax. ►Lifetime Distributions Can Fund Premiums On A Policy Positioned Outside The Taxable Estate: ●Irrevocable Life Insurance Trust (ILIT). ●Flexible ILIT Alternatives... ►Spousal Access ILIT. ►Flexible ILIT. ►Dynasty Trust. ►Credit Shelter Trust. ►Survivorship Standby Trust (SST).

Planning And Sales Strategies

Prospects ►Husband (Age 73); Wife Age (Age 71). ►Net Assets: $5,000,000; ●Husband’s IRA: $1,000,000; Annual Growth 8%. ►Federal Income Tax Rate 35%; Federal Estate Tax Rate 45%. ►Heirs: Son (Age 50); Daughter (Age 47); Grandchildren (Ages 28, 26, 24, 20). ►Planning Objectives: Implement Cost Effective And Tax Efficient Planning And Liquidity Funding To Preserve Value Of IRA: ●Explore Testamentary Distribution Strategies For IRA To Maximize Value Passing To Heirs.

What Taxation Is An IRA Subject To Upon The Owner’s Death ? ►An Important Aspect Of Estate Planning Centers Around Testamentary IRA Distribution Strategies... ►Efficient Planning Which: ●Defers Or Mitigates Taxation. ●Enhances Legacy For Heirs. ►IRAs And IRA Rollovers Can Experience Considerable Erosion At Death Due To A Combination Of... ●Federal Income Tax. ●Federal Estate Tax. ●Federal Generation-Skipping Transfer (GST) Tax. ●State Estate, Inheritance And Income Taxes.

How Quickly Must An IRA Be Distributed Upon The Owner’s Death ? ►Opportunity For Continued Income Tax Deferral... ►Depends Upon Chosen Beneficiary (e.g., Spouse, Non-Spouse, “See Through” Trust, etc): ●Certain Distribution Rules Apply If The IRA Owner Dies Before “Required Beginning Date”. ●Different Distributions Rules Apply If The IRA Owner’s Death Occurs After “Required Beginning Date”. ●“Required Beginning Date” Is 04/01 Following Year The Owner Reached Age 70 ½. ►Note, Financial Institutions Are Not Required To Offer All Distributions Options Available Under IRS Rules.

What Are The Distribution Options For A Spousal Beneficiary ? ►Owner Dies Before Required Beginning Date... ►Spouse Sole Beneficiary; Or Separate Account Established For Spouse (If Spouse Not Sole Beneficiary): ●“5 Year Rule” - Distributed Within Five Years; Or ●“Spousal Rollover” - Spouse Becomes New IRA Owner With Required Distributions Applicable To Living IRA Owner; Or ●“Stretch” - Spouse Remains Decedent’s IRA Beneficiary With Distributions Based On Spouse’s Single Life Expectancy, Recalculated Annually (Non- Recalculated, If No Separate Account For Spouse). ►Distributions Must Begin By 12/31 Of Year Following Owner’s Death; Or By 12/31 Of Year Owner Would Have Reached Age 70 ½.

What Are The Distribution Options For A Spousal Beneficiary ? ►Owner Dies After Required Beginning Date... ►Spouse Sole Beneficiary; Or Separate Account Established For Spouse (If Spouse Not Sole Beneficiary): ●“Spousal Rollover” - Spouse Becomes New IRA Owner With Required Distributions Applicable To Living IRA Owner; Or ●“Stretch” - Spouse Remains Decedent’s IRA Beneficiary With Distributions Based On Spouse’s Single Life Expectancy, Recalculated Annually (Non- Recalculated, If No Separate Account For Spouse). ►Distributions Must Begin By 12/31 Of Year Following Owner’s Death; Or By 12/31 Of Year Owner Would Have Reached Age 70 ½ (Can Be Based On Longer Of Beneficiary’s Or Decedent’s Remaining Life Expectancy).

What Are The Distribution Options For A Non-Spousal Beneficiary ? ►Owner Dies Before Required Beginning Date... ►Non-Spousal Beneficiary; Or Separate Accounts Established For Multiple Beneficiaries: ●“5 Year Rule” - Distributed Within Five Years Of Owner’s Death; Or ●“Stretch” - Distributions Based On Beneficiary's Single Life Expectancy, Nonrecalculated Annually. ►If Separate Accounts Are Not Established For Multiple Beneficiaries, Distributions Are Based Upon Oldest Beneficiary's Life Expectancy. ►Distributions Must Begin By 12/31 Of Year Following Owner’s Death.

►Owner Dies After Required Beginning Date... ►Non-Spousal Beneficiary; Or Separate Accounts For Multiple Beneficiaries: ●“Stretch” - Distributions Based On Beneficiary's Single Life Expectancy, Non-Recalculated Annually. ►If Separate Accounts Are Not Established For Multiple Beneficiaries, Distributions Are Based Upon Oldest Beneficiary's Life Expectancy. ►Distributions Must Begin By 12/31 Of Year Following Owner’s Death (Can Be Based On Longer Of Beneficiary’s Or Decedent’s Remaining Life Expectancy). What Are The Distribution Options For A Non-Spousal Beneficiary ?

What Are The Distribution Options For A “See-Through” Trust ? ►Owner Dies Before Required Beginning Date... ●“5 Year Rule” - Distributed Within Five Years Of Owner’s Death; Or ●“Stretch” - Distributions Based On Beneficiary's (Or Oldest Trust Beneficiary's) Single Life Expectancy, Nonrecalculated Annually. ►Distributions Must Begin By 12/31 Of Year Following Owner’s Death. ►Owner Dies After Required Beginning Date... ●“Stretch” - Distributions Based On Beneficiary's Single Life Expectancy, Nonrecalculated Annually. ►Distributions Must Begin By 12/31 Of Year Following Owner’s Death (Can Be Based On Longer Of Beneficiary’s Or Decedent’s Remaining Life Expectancy).

What Are The Distribution Options For No Designated Beneficiary ? ►A “Designated Beneficiary” Can Only Be An Individual With A Life Expectancy. ►If No “Designated Beneficiary”, (e.g., Non-See Through Trust, Estate, Charity, etc)... ●If Owner Dies Before Required Beginning Date: ►“5 Year Rule” - Distributed Within Five Years Of Owner’s Death. ●If Owner Dies After Required Beginning Date: ►Distributions Based On Decedent’s Remaining Life Expectancy, Nonrecalculated Annually.

Why Would A Beneficiary Consider Disclaiming An IRA ? ►Disclaimer By Spousal Beneficiary In Favor Of Non-Spousal Beneficiary (e.g., Child, Grandchild) In Order To: ●Fully Fund The Decedent's Estate Tax Exemption (e.g., Credit Shelter Trust). ●Fund A Charitable Bequest. ●Reduce Estate Taxes. ►Disclaimer By Oldest Of Multiple Beneficiaries: ●Enables The Younger Beneficiaries To Use Their Longer Life Expectancies To Determine Their Required Minimum Distributions.

Why Would A Beneficiary Consider Disclaiming An IRA ? ►Disclaimed Benefit Passes To “Contingent” Beneficiaries. ►In Order To Avoid Making A Gift To The Other Beneficiaries, The Disclaiming Beneficiary Must: ●Execute And File Qualified Disclaimer Within 9 Months Of Owner’s Death; ●Disclaim Prior To “Designated Beneficiary Determination Date” (September 30th Of Year Following Owner’s Death); ●Not Accept Any IRA Benefits Prior To Making The Disclaimer; And ●Meet All Applicable State And Federal Requirements.

Scenario # 1 Stretch IRA Legacy Enhanced With Life Insurance

►Life Insurance Planning Coupled With Tax Planning. ►Life Insurance Proceeds Pay Estate Taxes On IRA (So IRA Doesn’t Have To): ●Sets Stage For Years Of Tax Deferred Compounding Growth For IRA. ●Keeps As Much Of IRA As Possible In Tact So Maximum Amount Can Be “Stretched” By Beneficiaries. ●Allows Beneficiaries To Stick With Their Stretch Schedules Instead Of Depleting The IRA Before It’s Time.

Example: Stretch IRA And Life Insurance ►IRA Value Upon Second Death (Wife’s Death): $1,464,938. ►Proposed Life Insurance To Pay Federal Estate Taxes On IRA: $659,222; Annual Premium: $16,310. ►Stretch IRAs For Children ($732,469 Each): ●Net Distributions To Daughter Over Remaining Life Expectancy (Age 85): $1,513,855. ►Legacy To Daughter’s Heirs: $9,150. ●Net Distributions To Son Over Remaining Life Expectancy (Age 85): $1,321,240. ►Legacy To Son’s Heirs: $14,497. ►Total Stretch Legacy To Heirs: $2,858,742.

Scenario # 2 Stretch IRA Legacy For Children Life Insurance Legacy For Spouse

Stretch IRA Legacy For Children And Life Insurance Legacy For Spouse ►The Surviving Spouse Is A Common IRA Beneficiary. ►Under Some Circumstances, It May Be A Better Strategy To Pass The IRA To A Younger Beneficiary Upon The Owner’s Death (e.g., Child Or Grandchild): ●A Younger Beneficiary Has Greater Opportunity For “Stretch” - Decades Of Tax Deferred Growth And Enhanced Legacy. ►The Surviving Spouse Can Instead Receive An Equivalent Life Insurance Bequest To Ensure Survivor Resources: ●Proceeds Pass Income Tax Free; ●Proceeds Pass Estate Tax Free If Spouse Owns Policy; Or Is Policy Beneficiary (Unlimited Marital Deduction).

Example: Stretch IRA For Children And Insurance For Spouse ►Value Of IRA Upon First Death (Husband’s Death) At Age 85: $1,424,886. ►Stretch IRA Legacy For Children ($712,443 Each): ●Net Distributions To Daughter Over Remaining Life Expectancy (To Age 85): $1,611,104. ►Legacy To Daughter’s Heirs: $3,675. ●Net Distributions To Son Over Remaining Life Expectancy (To Age 85): $1,404,942. ►Legacy To Son’s Heirs: $10,260. ►Total Stretch Legacy To Heirs: $3,029,981. ►Income And Estate Tax Free Insurance Legacy To Surviving Spouse Upon Husband’s Death: $1,424,886; Annual Premium $41,795.

Scenario # 3 Insurance To Provide Liquidity For Roth IRA Conversion

Life Insurance Legacy To Provide Liquidity For Roth IRA Conversion ►Proceeds Provide Liquidity To Pay Income Taxes And Enable Surviving Spouse To Complete A Roth Conversion. ►Once Spouse Converts Traditional IRA To Roth IRA: ●IRA Is Not Subject To Required Minimum Distributions. ●Withdrawals Are Income Tax Free. ●Surviving Spouse Inherits IRA Without Estate Tax (Unlimited Marital Deduction). ►Children Can Inherit Roth IRA Upon Surviving Spouse’s Death: ●Subject To Required Minimum Distributions; ●Distributions Income Tax Free. ●Life Insurance Can Solve Liquidity Need Upon Surviving Spouse’s Death, If IRA Is Subject To Estate Tax.

Combined Charitable And Life Insurance Legacies ►Life Insurance Can Be Used To Create Or Replace Wealth In Coordination With Charitable Planning... ►Charitable Bequest Of IRA To Charity: ●Eliminates Income Tax On An IRD Asset. ●Wealth Replacement Life Insurance Legacy For Heirs. ►Charitable Bequest Of IRA To Heirs: ●“Stretch” Provides Opportunity To Build Income Tax Deferred Legacy. ●Creates Leveraged Life Insurance Legacy For Charity (Spread Between Premiums And Proceeds). ●Generates Charitable Income Tax Deduction For Premiums (If Charity Owned Policy).

Scenario # 4 CRT Legacy Combined With Wealth Replacement Insurance Legacy

Combined CRT Legacy With Wealth Replacement Life Insurance Legacy ►A Testamentary Charitable Remainder Trust (CRT) Can Compare Favorably With A Stretch IRA: ●CRT Term Can Provide Distributions Based Upon One Or More Individuals Lifetimes (Actual Years Lived); ●Stretch Cannot Extend Distributions Beyond The Life Expectancy Of One Individual. ●CRT Income Beneficiaries Are Not Subject To Required Minimum Distributions. ●NIMCRUT Defers Distributions (And Income Tax) Longer. ►When Charity Receives The CRT Remainder Interest, Heirs Receive Equivalent Legacy In Life Insurance Proceeds: ●Proceeds Pass Free Of Federal Income Tax (Unlike IRA). ●Proceeds Pass Free Of Federal Estate Tax (Unlike IRA), Provided Policy Is Third Party Owned (e.g., ILIT).

Example: CRT And Wealth Replacement Legacy ►IRA Value Upon Second Death (Wife’s Death) At Age 85: $1,464,938. ►NIMCRUTs For Children ($732,469 Each): ●NIMCRUTS Are IRA Beneficiaries. ●Trust Terms Are Based Upon Each Income Beneficiary's (Child’s) Lifetime. ►Children Receive 8% Annual Payments (Deferred Until Age 70): ●Total Net Income To Daughter (Age 85): $4,558,266. ●Total Net Income To Son (Age 85): $3,667,589. ●Value To Charity Following Trust Term: $8,225,855. ►Wealth Replacement Life Insurance Legacy To Children's Heirs.

Scenario # 5 Life Insurance Legacy In Lieu Of IRA Legacy

►Powerful Leverage Of IRA Funds. ►Tax Efficiency: ●Unlike An IRA, Proceeds From A Properly Structured Life Insurance Policy (e.g., ILIT Owned) Pass Free Of Federal Estate And Income Taxes. ►After Age 70 ½ Mandatory Distributions Must Begin; Distributions After Age 59 ½ Are Free Of Penalty Tax. ►It May Make Sense To Consume IRA To Pay Premiums, Particularly If: ●There Are Sufficient Other Non-IRA Assets; ●IRA Funds Are Not Needed; ●IRA Would Likely Be Consumed To Pay Income Or Estate Taxes Following The Owner’s Death.

Example: Insurance Legacy ►IRA Legacy: ●IRA Value Upon Second Death (Wife’s Death): $1,464,938. ●Net IRA Value After Income And Estate Taxes: $523,715. ►Life Insurance Legacy Alternative: ●Liquidate $1,000,000 IRA To Fund Premium. ●Single Pay Premium: $650,000 (After Income Taxes). ●Survivorship Life Insurance Legacy To Children: $3,000,000 Level Death Benefit ($2,350,000 Net After $650,000 Premium). ►Source Of Premium: ●IRA Funds vs. Non-IRA Funds.

Opportunity For The Financial Advisor ►The IRA (Or IRA Rollover) Is Often The Largest Or Most Significant Asset Of An Estate. ►Many Of Your Clients Have Sizable IRAs - Huge Market! ►Other Professional Advisors May Not Have Addressed The IRA In The Estate Plan. ►Presents Great Opportunity For The Financial Advisor - Enabling You To Enhance Your Value And Relationship. ►Wide Range Of Client’s Goals And Objectives Can Be Accomplished With Combining Both Tax Planning And Life Insurance Funding. ►Do Something Now While Client Is Living And Broader Planning Options Still Exist !

This presentation has been prepared based on Penn Mutual's current understanding of federal estate, gift, GST and income tax laws. Any changes in these laws may result in a conclusion different than what is represented. Please consult qualified legal and tax advisor regarding the client’s specific situation. Please note that an irrevocable trust is a legal arrangement that may result in the inability to change the trust in the future, requires relinquishing control over the trust assets, must be properly administered, and has other significant consequences. Before implementing any plans based on specific circumstances and objectives, the client should consult with a personal legal, tax, and financial advisor. Penn Mutual Life Insurance Company 600 Dresher Road, Horsham PA