©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. Do not put content on the brand signature area Combining an Installment Sale to a Grantor Trust with Privately Financing an Irrevocable Life Insurance Trust Estate Planning: Two techniques are better than one!
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 2 Disclosures These materials are not intended to and cannot be used to avoid tax penalties and were prepared to support the promotion or marketing of the matters addressed in this document. Each taxpayer should seek advice from an independent tax advisor. The Voya ® Life Companies and their agents and representatives do not give tax or legal advice. This information is general in nature and not comprehensive, the applicable laws change frequently, and the strategies suggested may not be suitable for everyone. You should seek advice from your tax and legal advisors regarding your individual situation. Life insurance products are issued by ReliaStar Life Insurance Company (Minneapolis, MN), ReliaStar Life Insurance Company of New York (Woodbury, NY) and Security Life of Denver Insurance Company (Denver, CO). Within the state of New York, only ReliaStar Life Insurance Company of New York is admitted, and its products issued. All are members of the Voya ® family of companies.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 3 Do your clients have assets whose future growth may create an estate tax problem and which they would like to preserve intact for their children or grandchildren? A few questions
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 4 Do your clients have assets whose future growth may create an estate tax problem and which they would like to preserve intact for their children or grandchildren? Do your clients’ insurance needs call for premiums that exceed the available annual exclusions for potential “Crummey” beneficiaries? A few questions
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 5 Do your clients have assets whose future growth may create an estate tax problem and which they would like to preserve intact for their children or grandchildren? Do your clients’ insurance needs call for premiums that exceed the available annual exclusions for potential “Crummey” beneficiaries? Do your clients want to preserve an inheritance for their children and grandchildren without putting their own financial security at risk? A few questions
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 6 What is an “Installment Sale to a Grantor Trust?” It’s a potential estate “freeze” technique where high-growth assets are transferred to an irrevocable grantor trust in exchange for a note obligating the trustee to make payments on an agreed upon schedule.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 7 Freeze part of the estate using an Installment Sale to a Grantor Trust and Privately Finance a life insurance policy owned by an Irrevocable Trust A possible plan
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 8 Client pre-funds Grantor Trust Assets transferred to trust in exchange for a promissory note Trust makes payments on note Grantor pays income taxes for trust Private Loan repaid via from trust values After death assets pass tax free to beneficiaries under the trust* Trust applies for life insurance policy Grantor loans the trust the premiums The loan interest accrues for ten years The loan is repaid from trust values Death benefits are paid to trust and values distributed to beneficiaries under the trust terms First the Grantor creates a Trust *Proceeds from an insurance policy are generally income tax free and if properly structured, may also be free from estate tax. Installment Sale to a Grantor Trust with Private Financing
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 9 The Installment Sale to a Grantor Trust has 6 steps: #1: Client creates a Grantor Trust How does the strategy work?
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 10 The Installment Sale to a Grantor Trust has 6 steps: #1: Client creates a Grantor Trust #2: Client Pre-Funds Trust How does the strategy work?
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 11 The Installment Sale to a Grantor Trust has 6 steps: #1: Client creates a Grantor Trust #2: Client Pre-Funds Trust #3: Assets transferred to Trust in exchange for Promissory Note How does the strategy work?
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 12 The Installment Sale to a Grantor Trust has 6 steps: #1: Client creates a Grantor Trust #2: Client Pre-Funds Trust #3: Assets transferred to Trust in exchange for Promissory Note #4: Trust makes payments on Note How does the strategy work?
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 13 The Installment Sale to a Grantor Trust has 6 steps: #1: Client creates a Grantor Trust #2: Client Pre-Funds Trust #3: Assets transferred to Trust in exchange for Promissory Note #4: Trust makes payments on Note #5: Grantor pays income taxes for Trust How does the strategy work?
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 14 The Installment Sale to a Grantor Trust has 6 steps: #1: Client creates a Grantor Trust #2: Client Pre-Funds Trust #3: Assets transferred to Trust in exchange for Promissory Note #4: Trust makes payments on Note #5: Grantor pays income taxes for Trust #6: After death, assets pass to Beneficiaries Tax-Free* according to Trust terms How does the strategy work? *Proceeds from an insurance policy are generally income tax free and if properly structured, may also be free from estate tax.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 15 Estate “Freeze” – Future asset growth may be removed from the grantor’s estate. Flexibility – Your client can structure the note payments any way he/she wants (so long as the terms are commercially reasonable). No Inclusion on Early Death – Unlike a GRAT, the installment sale works even if the grantor dies before the end of the note’s term; only unpaid principal is included in the grantor’s estate. Exit Strategy – An installment sale can potentially provide the trust with funds to get out of premium financing or private split-dollar arrangements. Potential advantages of the Installment Sale
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 16 Pre-Funding Penalty – If the client doesn’t already have a grantor trust, he/she may have to use some of her lifetime gift & estate tax exemption to fund the trust at 10% of the total value of the sale. Performance Risk – The installment sale technique only works if the asset used grows at a higher rate than the interest required for the note. Regulatory Risk – Unlike a GRAT (which is defined by Section 2702 and regulations thereunder), the installment sale using a defective trust relies on rulings and court cases. Some disadvantages of the Installment Sale
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 17 James Michaels Substantial estate tax need Desire for flexibility Desire to control or eliminate gifting Desire to “freeze” one of his assets A sample case study
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 18 James is a 60 year old with a substantial estate, part of which is a $5,000,000 commercial property. The property currently provides a net income of $500,000 (10%) a year. He is willing to give up ownership of the property and reduce his current income stream. He is also willing to use a portion of his lifetime gift exemption to move future asset growth out of his estate. The Installment Sale in action: James Michaels
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 19 James Michaels James creates a grantor trust and gifts the trust with 10% of the value of the commercial property.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 20 James Michaels James creates a grantor trust and gifts the trust with 10% of the value of the commercial property. He then sells the remainder of the property to the trust using a 10 Year Interest Only Note with a balloon payment to be paid at the end of the term.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 21 James Michaels James creates a grantor trust and gifts the trust with 10% of the value of the commercial property. He then sells the remainder of the property to the trust using a 10 Year Interest Only Note with a balloon payment to be paid at the end of the term. The trust will pay James $118,800 a year in interest assuming a 2.64% interest rate*. *This was the long-term AFR published by the IRS for September 2015
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 22 Plus the life insurance – Private Financing Estate Tax Need Desire for Flexibility Desire to Reduce or Eliminate Gifting
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 23 Private Financing: How does the strategy work? The Private Financing has 5 steps: #1: Create an ILIT
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 24 How does the strategy work? The Private Financing has 5 steps: #1: Create an ILIT #2. The trustee of James’ ILIT purchases a life insurance policy insuring his life pays premiums manages policy cash values as needed
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 25 How does the strategy work? The Private Financing has 5 steps: #1: Create an ILIT #2. The trustee of James’ ILIT purchases a life insurance policy insuring his life pays premiums manages policy cash values as needed #3: Each year a premium is due James lends the ILIT funds to pay it
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 26 How does the strategy work? The Private Financing has 5 steps: #1: Create an ILIT #2. The trustee of James’ ILIT purchases a life insurance policy insuring his life pays premiums manages policy cash values as needed #3: Each year a premium is due James lends the ILIT funds to pay it #4: The ILIT can pay interest, accrue the interest or the interest can be gifted to the ILIT
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 27 How does the strategy work? The Private Financing has 5 steps: #1: Create an ILIT #2. The trustee of James’ ILIT purchases a life insurance policy insuring his life pays premiums manages policy cash values as needed #3: Each year a premium is due James lends the ILIT funds to pay it #4: The ILIT pays James interest (or it accrues or is gifted) on the loans each year (possibly through policy withdrawals or policy loans) #5: At his death, the ILIT uses part of the policy proceeds to repay the remaining loan balance; all remaining proceeds go to the ILIT
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 28 James’ trust purchases a $10,000,000 Voya Indexed Universal Life Global-Choice (Voya IUL Global-Choice) insurance policy. Voya Indexed Universal Life Global-Choice (policy form series # /12) may vary by state and may not be available in all states, and is issued by Security Life of Denver Insurance Company (Denver, CO), a member of the Voya ® family of companies. All guarantees are based on the financial strength and claims-paying ability of Security Life of Denver Insurance Company who is solely responsible for the obligations under its own policies. James Michaels’ Private Financing: details
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 29 James’ trust purchases a $10,000,000 Voya Indexed Universal Life Global-Choice (Voya IUL Global-Choice) insurance policy. James lends the premium of $380,226 for ten years. Male Age 60 Preferred Non Tobacco $10,000,000 Initial Death Benefit $380,226 in premium paid for 8 years Level Death Benefit 100% election to the 2 year Global Indexed Strategy 7.43% illustrated rate assumed The DOLI test is CVAT James Michaels’ Private Financing: details
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 30 James’ trust purchases a $10,000,000 Voya Indexed Universal Life Global-Choice (Voya IUL Global-Choice) insurance policy. James lends the premium of $380,226 for ten years. The loan is a Long Term Loan and the rate charged is 2.64%* Private Long Term Loan Loan rate of 2.64% Loan interest is accrued Loan repaid after ten years from trust funds James Michaels’ Private Financing: details *The loan rate assumed is the Long Term Applicable Federal Rate (AFR) as of September 2015.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 31 James’ Private Financing: continued
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 32 Assuming current charges and the assumed illustrated rate of 7.43% the policy stays in force all years. Assuming guaranteed charges and a 0% crediting rate, the policy would lapse in year 10. James’ case: Putting it together
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 33 James’ Loan Repayment Income from the Commercial Property: $500,000 a year Interest Payments to the Michaels: $118,800 Difference each year: $381,200 Difference over ten years: $3,812,000* *Our hypothetical illustration does not assume any additional growth to the funds in the trust nor the property itself.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 34 James’ Installment Sale James creates a grantor trust and gifts the trust with 10% of the value of the commercial property. He then sells the remainder of the property to the trust using a 10 Year Interest Only Note with a balloon payment to be paid at the end of the term. The trust will pay James $118,800 a year in interest assuming a 2.64% interest rate. At the end of the ten years, the trust will sell the commercial property and repay the note with a balloon payment of $4,500,000.
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 35 James Michaels: What was accomplished? An income producing asset has been removed from his estate
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 36 James Michaels: What was accomplished? An income producing asset has been removed from his estate He continues to receive income for ten years in the amount of the loan payments of $118,800
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 37 James Michaels: What was accomplished? An income producing asset has been removed from his estate He continues to receive income for ten years in the amount of the loan payments of $118,800 He receives an additional lump sum payment of $4,500,000 at the end of ten years
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 38 The premiums were loaned to the ILIT The ILIT repays the loan from the growth from the net income to the trust Under the current hypothetical design the policy will continue until James’ death. James Michaels: What was accomplished? An income producing asset has been removed from his estate He continues to receive income for ten years in the amount of the loan payments of $118,800 He receives an additional lump sum payment of $4,500,000 at the end of ten years He has made it possible for his ILIT to purchase a life insurance policy
Do not put content on the brand signature area ©2015 Voya Services Company. All rights reserved. CN For agent use only. Not for public distribution. 39 For more information contact your Voya representative Questions?