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CAPITAL ASSET TRANSFERS:POST-ESTATE

TAX INSURANCE MARKETING

Thomas F. Commito, JD, LL.M, CLU, ChFCLincoln Financial DistributorsTEL: 802-223-5784FAX: 802-223-5853TOLL-FREE: 1-877-275-8662 (1-877-ASKTOMC)E-MAIL: tcommito@lfd.com

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LEGISLATIONLEGISLATION

• 107th CONGRESS

• 50+ BILLS to Revise, Revamp, Eliminate, and Repeal the Estate Tax

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107th CONGRESS (RIP)

107th CONGRESS (RIP)

• HR 2143- Permanent Repeal in 2010• S2994 (ExTRA)- Repeal of Estate Tax

for All Family Businesses and Family Farms Commencing 1/1/2003

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THE SUGAR LAND EXTERMINATOR

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108th CONGRESS108th CONGRESS• BYRD Amendment Expires April 15, 2003• Sure to be Acceleration Proposal for

Estate Tax Repeal Effective Retroactively to 1/1/2003

• Will Democrats Force or Have Enough Votes (60) For Cloture in Senate ???

• 11 Dems to Watch: Baucus, Johnson (SD), Nelson (FL), Breaux, Landrieu, Miller, Pryor, Lincoln, Edwards, Carper and Jeffords

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BUT EVEN IF THE ESTATE TAX GOES

AWAY…• 50 STATES WILL HAVE 50

DIFFERENT INHERITANCE TAX REGIMES

• CAPITAL GAINS TAX ON HEIRS AND BENEFICIARIES•(CAN I BUY LIFE INSURANCE

ON SOMEONE WHO HAS DIED?)

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WHAT IS MORE IMPORTANT THAN ESTATE

PLANNING?• TAX ADVANTAGED WEALTH CREATION

• Deductible or Leveraged Dollars to Purchase Insurance

• Utilize Tax Advantages of Life Insurance•Tax Free Build-Up•Tax Free Death Proceeds

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THE STRANGE CASE OF THE GIFT TAX

• GIFT TAX EXEMPTION IS $1 MILLION, WITH NO INCREASE

• RATES DECLINE WITH EST TAX• GIFT TAX STILL IN EFFECT AFTER 1/1/2011

- 35% (or Highest OI rate) MAX RATE• WHY??? – Prevent income tax shifting• RETURN TO PRE-1976 CONCEPTS???

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PROBLEM

• THIS IS A TODAY PROBLEM- NOT A TOMORROW PROBLEM

• CONFUSION• MAXIMIZING THE EXEMPTION:

TRANSFERRING MORE ASSETS, BUT VALUING THEM AT $1 MILLION OR LESS

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VALUATION OF POLICY

• Reg. 25.2512-6a - (Gift of Policy) = Interpolated Terminal Reserve

• Reg. 1.83-3(e) - Corporate Transfer of Policy) = Cash Surrender Value

• Reg. 1.402(a)-1(a)(2) - (Distribution from Qualified Plan = Cash Surrender Value

• Reg. 301.6332-2(d) - (Value for Federal Tax Levy) = Cash Surrender Value

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ISSUE – THREE YEAR TRANSFER RULE

• IRC 2035(d)“Subsection (a) and paragraph (1) of subsection (C) shall not apply to any bona fide sale for an adequate and full consideration in money or money's worth.”

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SOLUTION

• No Transfer for Value• Grantor Trust• Spouse’s Grantor Trust

•Ltr Rul 2001-20007 (2/2/2001)

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LTR RUL 2001-20007

“Taxpayers represent that both Trust 1 and Trust 3 are for federal income tax purposes treated as grantor trusts owned by H. Thus, H is treated for federal income tax purposes as the owner of all of the assets of Trust 1 and Trust 3. See Rev. Rul. 85-13. Therefore, the "transfer" of Trust 1's interest in Policy Y1 to Trust 3 is disregarded for federal income tax purposes, and will not affect the application of section 101(a)(1) of the Code to amounts that the beneficiaries of Policy Y1 will receive upon the deaths of H and W.”

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SOLUTION

• “Balloon Note” – Interest Only• IRC 7872• Demand v. Long-Term• Non-IRC 7872 Notes• Rev. Rul. 85-13• RATES

• DECEMBER 2002• Demand – 1.83%• Long-Term – 4.86%

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RETAINED EARNINGS

SALES IDEA

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ACCUMULATED EARNINGS TAX

• LIFE INSURANCE IS A “SPONGE” WHICH SOAKS UP ACCUMULATED EARNINGS

• IT IS A REASONABLE BUSINESS NEED• SEE Motor Fuel Carriers v. Commr., 559 F.2d

1348 (5th Cir., 1977) Vulcan Steam Forging Co., Inc. v. Comm’r. TC Memo 1976-29 (1976),and General Smelting v. Comm’r., 4 TC 313 (1944)

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ABETTER APPROACH TO LOAN “SPLIT DOLLAR”

• RATHER THAN LOAN PREMIUM• CORP BUYS POLICY• SELLS POLICY TO EMPLOYEE’S ILIT OR

LLC FOR CSV• REMEMBER REG 1.83-3(e)• NOTE ABOVE LONG-TERM AFR

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SO WHAT’s THE GOOD NEWS???

QUALIFIED PLANS/ IRAS

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Life Insurance in Qualified Plans

SALES IDEA

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Easy Concept

• Life Insurance in a Qualified Plan is Taxed Just Like Split Dollar

• Buy As Much Life Insurance As Possible.• Fully Tax Deductible • No Concern about Estate Taxation (No need

for subtrusts)• IR 2002-08 may imply have to use Table 2001

to value the protection

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AND THE BIG WINNER IS….?

PROFIT SHARING PLANS

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ACT HAS GREAT PENSION REFORMS

• Annual Additions limit raised to $40,000 or 100% of comp, whichever is lower. Includible comp level raised to $200,000

• Deductible Amounts for Profit Sharing Plans increased to 25% of contrib – Up from 15%

• Monies can be switched from one plan to another – if plan allows and separation from service. No need for conduit IRA’s, Includes 457 and 403(b) plans.

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Advantages of Profit Sharing Plans

• Can make in-service distributions.• 2 year Rule- (Rev. Rul. 71-295)• 5 Year Rule – (Rev. Rul. 68-24)

• IRC 412 Minimum Funding Requirements do not apply (Also ERISA 302 and 305)

• Incidental Benefits – Can Include Family Members (reg.1.401-1(b)(1)(ii)

• Any monies available for distribution can be used for “incidental benefits, I.e. life, accident and health insurance

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SALES IDEA -

PENSION ROLLOU

T

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CONCEPT

• Second to Die Policy Placed in Profit Sharing Plan

• Deductible Premium• At End of 2nd or 3rd Year - Grantor Trust ILIT

purchases policy for CSV. No T for V –Ltr Rul 2001-20007

• In alternative, can be distribution with gift to ILIT – 3 year rule applies.

• Difference between CSV and Premium is Leverage

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LEGAL BACKGROUND• Trade or Business – No Need for Income

• Reg. 1.401-10(b)(1)• Contributions

• 2 year rule (Rev. Rul.71-295)• 5 year rule (Rev. Rul. 68-24)

• Incidental Benefits – Family Rules• Reg. 1. 401-1(b)(1)

• Purchase Price – Cash Value• Reg. 1.402(a)-1(a)(2)

• Not a Prohibited Transaction• PTE 92-6; AMEND 9/3/2002• DOL Advisory Opinion 98-07A

• Anti – “Springing Cash Value” Rule• IR Notice 89- 25; Q&A 10

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IR Notice 89-25 (Q&A 10)

Year Surrender Value 1 $106,000

2 $112,360 3 $119,102 4 $126,248 5 $489,908

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Amendment to PTE 92-6

• Federal Register, Vol. 67, No. 170, P. 56313 (9/03/2002)

• PTE and DOL 98-07A reiterated• PTE requirements of “would be otherwise be

sold” is met in self-directed plan if policy is sold rather than surrendered provided “no undue influence”

• Safe Harbor in PTE applies to Second to Die policies.

• Sale to Trust same as Sale to Employee