Changing Financial Objectives
Estate planning goals can shift from accumulation to conservation
Your concern may have shifted from cash withdrawals for yourself to preserving a legacy
Annuities & IRAs may not meet your asset protection and transfer goals.
Tax Efficient Retirement SavingsAnnuities and IRAs are very tax-efficient ways to save for retirement
IRA Features Contributions may be partially or totally tax deductible
Growth is tax-deferred
Taxable as income when distributed
Annuity Features Contributions are after-tax money
Tax-deferred growth
Portion of retirement payment can be tax-free return of contributions
Can provide income you can’t outlive
Eroding Your Legacy
• A gift of annuity or IRA during your life results in BOTH gift and income taxes at the time of the gift
• Can be subject to estate taxes at death
• Value at death could result in income taxes due
Eroding Your Legacy
Combined gift and income taxes
or Combined estate and income taxes could result in...
Loss of up to 70% or more to taxes
An Example
Gross value of non-qualified annuity at life expectancy = $1.6 M based on 20 years of growth, tables 5 & 6, 6% net rate.
Harry is 65. His estate is worth $5M at his death
Included in Harry’s estate - a non-qualified annuity that has grown to a value of about $1.6 million
Harry’s LegacyKeep Non-Qualified Annuity (NQA)
Gross Value at Life Expectancy $1,600,000
Estate Tax on NQA $ 855,000
Income Tax on NQA $ 180,000
Net to Heirs $ 565,000
Gross value of annuity at life expectancy = $1.6 M, based on 20 years of growth, tables 5 & 6, 6% net rate.
Estate tax rate = 53%, income tax rate = 28%
Harry’s Legacy
Of the Non-Qualified Annuity (NQA) Valued at $1,600,000
Only $565,000 goes to his daughter
A 65% Reduction in the Asset!
Harry’s LegacyOf the Non-Qualified Annuity (NQA) Valued at $1,600,000
Only $565,000 goes to his daughter
The rest goes to IRS
It could get worse….
Harry’s Legacy
Of the $1,600,000 Non-Qualified Annuity (NQA) --
If NQA beneficiary is a grandchild…
May be subject to Generation Skipping Tax….
Further reducing total Harry passes on to his heirs
What Can Harry Do?
Can’t give NQA away -- would pay both gift & income taxes at time of gift.
Shouldn’t hold until death because of potential estate and income tax liabilities
Legacy Max…A Better Alternative
Legacy Max Exchange for something that has “no value” for estate
taxation purposes
Remove Non-Qualified Annuity from estate WITHOUT gift taxes
Exchange NQA for Immediate Annuity
Step 1 Purchase immediate annuity with payments to Harry for his lifetime
Annuity payable for his life terminates without value at his death
Step 2Exchange NQA for Immediate Annuity
Annuity Payments to
Harry
Harry receives annuity payments and pays income taxes on each payment
Step 3Exchange NQA for Immediate Annuity
Harry establishes irrevocable
trust
Annuity Payments to
Harry
Harry sets up an irrevocable trust
Trust buys life insurance on Harry
Trust purchases life insurance on Harry’s life
Pay current income taxes on distributions from annuity
Exchange NQA for Immediate Annuity
Harry establishes irrevocable
trust
Annuity Payments to
Harry
Trust purchases life insurance on Harry’s life
Harry uses annuity payments to pay premiums
During Harry’s Life
At Harry’s DeathLife insurance pays Harry’s daughter $1.8M non-taxable death benefit
No Income Tax
No Estate Tax
Assumes that $1,300,000 face amount of Security Design II is purchased with the after-tax distribution from the non-qualified annuity and grows to approximately $1.8 million, based on current interest and current mortality assumptions.
If Harry is married…. Annuity can pay income to Harry or his wife until second of
them dies
Life insurance can be designed to insure both spouses and payat second death
Harry’s Legacy
Keep Non-Qualified Annuity
Gross Value at Life Expectancy $1,600,000
Estate Tax on NQA $ 855,000
Income Tax on NQA $ 180,000
Net to Heirs $ 565,000
Exchange & Buy Life Insurance
Policy Death Benefit $1,800,000
Estate Tax onLife Insurance Policy $0
Income Tax onLife Insurance $0
Net to Heirs $1,800,000Gross value of annuity at life expectancy = $1.6 M, based on 20 years of growth, tables 5 & 5, 6% net rate.
Estate tax rate = 53%, income tax rate = 28% 65% AdvantageAssumes that $1,300,000 face amount of Security Design II is purchased with the after-tax distribution from the non-qualified annuity and grows to approximately $1.8 million, based on current interest and current mortality assumptions.
What Did Legacy Max Do? $1.8M vs. $565,000 for Harry’s daughter -- a 65% increase
With a survivorship policy, the increase could be even greater
Assumes that $1,300,000 face amount of Security Design II is purchased with the after-tax distribution from the non-qualified annuity and grows to approximately $1.8 million, based on current interest and current mortality assumptions.
DisclaimersScenarios used the following assumptions: All figures used in this presentation are for illustrative purposes only
Net value of non-qualified annuity at life expectancy = $1.6M based on 20 years of growth, tables 5 & 6, 6% net rate of return. Rollover non-qualified annuity to immediate annuity - payments to ILIT to purchase life insurance, using Security Design II, Policy Form No. 11320 (#11330 in Montana), varies by state and is not available for sale in every state.
Estate tax on annuity = 53%
Income tax on annuity = 28%
Legacy Max concept designed for use with either Universal Life Insurance or Variable Universal Life Insurance products
Insurance and annuities issued by ReliaStar Life Insurance Company and Security-Connecticut Life Insurance Company. Securities offered through Washington Square Securities, Inc., 20 Washington Avenue South, Minneapolis, MN, 55401, (612) 372-5507. WSSI, ReliaStar Life and Security-Connecticut are wholly-owned subsidiaries of ReliaStar Financial Corp., a diversified holding company based in Minneapolis, MN.
Doc. #6176