Leveraged GiftingHelp clients leave more to heirs with gifting and life insurance

PRESENTED BY:

Joe Sample, [Designations per field stationery guidelines][Company Approved Title][Agency Name] [The Prudential Insurance Company of America][if Agency Distribution][1234 Main Street, Suite 1, Floor 10][Anywhere], [ST] [12345][in required states] [<ST> Insurance License Number <1234567890>]Phone [123-123-1234] Fax [123-123-1245]

[joe.sample@prudential.com]

Not for Consumer Use.

0262963-00003-00 Ed. 03/2015 Exp. 09/20/2016

Topics We Will Discuss

• Transfer Tax System

• To Gift or Not to Gift

• To Insure or Not to Insure

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Client Profile

• Single or married ages 55+

• Children or grandchildren

• Desire to minimize taxes

• Want to leave more to heirs

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Transfer Tax System

“GST Tax” stands for Generation Skipping Transfer Tax

Gift Tax

GST TaxEstate Tax

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Transfer Tax System/Gift Tax & Estate Tax

During life

Upon death

Transfers may be subject toGift Tax

Transfers may be subject to Estate Tax

There may be federal and/or state gift tax consequences with the funding of an Irrevocable Trust and the gifts necessary to pay the premiums may reduce the size of the estate and/or the amount of lifetime gift tax exemption and/or estate tax exemption amount.

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Transfer Tax System/GST Tax

• Transfers, including trust distributions, may also be subject to Generation Skipping Transfer (GST) Tax

• Levied in addition to any applicable gift or estate tax

• Designed to disallow “skipping” estate taxation at next generation level

• Tax rate equal to top estate tax rate at time of transfer

Persons two or more generations younger

Next generation

During life or upon death

First generation

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Annual Exclusion Gifts

• Single client: $14,000/recipient/year• Married client: $28,000/recipient/year*

Gift by each spouse: $14,000

Total gift to recipient 1: $28,000

Gift by each spouse: $14,000

Total gift to recipient 2: $28,000

Total gifts to all: $56,000

Total gift tax paid: $0

The 2015 annual gift tax exclusion is $14,000, indexed for inflation, non-cumulative, and must be of a present interest. GST Annual Exclusion rules differ from the basic annual exclusion gifts where the gift must also be for the sole benefit of the recipient and taxed in his or her estate at death.

*A $28,000 gift by one spouse to one person can be “split” with the non-grantor spouse (requires filing of a gift tax return).

This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

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1

2

Aggregate Exemption Amounts

• Lifetime Gift Tax Exemption• Total amount transferrable to all recipients without gift tax, $5,430,000*• In addition to annual exclusion gifts• Reduces federal estate tax exemption if used

• Estate Tax Exemption• Total amount transferrable to all recipients without estate tax, $5,430,000*

• Generation Skipping Transfer Tax Exemption• Total amount transferrable to all skip persons without

GST Tax, $5,430,000*• Can only be allocated to a gift or bequest• Unified with above exemptions

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*Amount for 2015, indexed annually for inflation

To Gift or Not To Gift

Gifting strategies can help clients

• Reduce future estate tax exposure

• Leave more to family, less to government

• Keep estate assets in tact

• Preserve a family business

• Enjoy seeing the recipient benefit during the client’s life

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To Gift or Not To Gift

1Annual gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse makes a $5,000,000 lifetime gift utilizing part of their $5,430,000 lifetime gift exemption for 2015.

2Assumes the $84,000 annual gifts would have been accumulated inside the grantors’ estates at a 5% net rate of return then subject to a 40% flat estate tax rate.

2Assumes the appreciation on the $10,000,000 gift at a 5% net rate of return would have been taxable inside the grantors’ estates at a flat estate tax rate of 40%.

Hypothetical Gifts by a Married Couple

$84,000/year Annual Exclusion Gifts1

$10,000,000 Lifetime Exemption Gift1

Hypothetical Estate Tax Savings by Year 202 $1,166,567 $6,613,191

This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

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Life Insurance As An Asset Class

• Predictability

• Leverage

• Liquidity

Life insurance policies contain fees and expenses, including cost of insurance, administrative fees, premium loads, surrender charges and other charges or fees that will impact policy values.

Guarantees and benefits are based on the claims-paying ability of the issuing insurance company. Broker/dealers, insurance agencies and their affiliates who sell the policy make no representations or guarantees regarding such ability. The policy owner must meet all premium requirements.

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Predictability

• Predetermined amount of cash upon death1

• Timing of death is not correlated to the financial markets

• Can help counter volatility in other estate and/or trust assets at death

1Assumes premiums are paid, no loans or withdrawals are taken and no benefits have been accelerated.

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Leverage

1 Annual gifts assume 6 total annual exclusions. Lump sum gift assumes each spouse uses $5,000,000 of their $5,430,000 lifetime exemption for 2015.

2Assumes the $84,000 annual gifts would have been accumulated inside the grantors’ estates at a 5% net rate of return then subject to a 40% flat estate tax rate.

Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to age 121. The internal rate of return (IRR) is the after-tax rate of return that would be needed each and every year to accumulate an amount equal to the death benefit by the respective year/age assuming the premiums were alternatively invested.

This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

Hypothetical Gifts by a Married Couple

$84,000/year Annual

Exclusion Gifts1

Hypothetical Estate Tax Savings by Year 202 $1,166,567

Life Insurance Premium $84,000/year Level pay

Death Benefit $6,495,129

Death Benefit IRR at Joint Life Expectancy (age 91)

5.56%

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Estate Liquidity/ILIT

Death Benefit Proceeds

1

Cash to Buy Assets or Loan

2

Assets or Loan Payments

3

If trust assets are used to satisfy any obligation or liability of the deceased’s estate, such as direct payment of estate taxes, then the value of the trust could itself be subject to estate taxes as part of the deceased’s estate. The trustee may be given the option to purchase assets from or make loans to the estate which does not cause such inclusion and can help provide the necessary liquidity the estate needs to pay estate taxes.

Estate Tax Payment

Irrevocable Trust

Life Insurance Policy

Government

Deceased’s Estate

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To Insure or Not To Insure

Life Insurance assumptions: Male/Female, both age 62, non smoker plus, PruLife® SUL Protector, guaranteed to age 121. This couple’s joint life expectancy is age 91.*Assumes a $10,000,000 up front gift to an irrevocable trust and a 5% net ROR on trust investments. Note too that as a result of this gift, our hypothetical couple would have used up most of their lifetime exemption amount.This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

ASSET INCOME*$10,000,000 Gift + Invest + Insure

Age of Both

Insured's

Annual Level

PremiumDeath Benefit

Other Trust

Assets

Net Proceeds to Heirs

63 500,000 38,711,851 9,975,000 48,686,851

71 500,000 38,711,851 9,724,336 48,436,187

81 500,000 38,711,851 9,236,525 47,948,376

91 500,000 38,711,851 8,441,932 47,153,783

96 500,000 38,711,851 7,873,326 46,585,177

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To Insure or Not To Insure

Assumes a $10,000,000 upfront gift to an irrevocable trust and a 5% net ROR on trust investments.

This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

Lump Sum Gift + Invest Lump Sum Gift +Invest + Insure

Joint Age

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

Joint Life Expectancy

Net Proceeds to Heirs

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To Insure or Not To Insure

Internal Rate of Return (IRR) on Net Proceeds to Heirs

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Age 81 Age 86 Age 91 Age 96

Lump Sum Gift + Invest Lump Sum Gift + Invest + Insure

Assumes a $10,000,000 upfront gift to an irrevocable trust and a 5% net ROR on trust investments. The IRR on Net Proceeds to Heirs represents the level annual after-tax rate of return at which the initial lump sum gift amount must be accumulated annually to generate the net proceeds to heirs at death by the corresponding years shown.

This is a hypothetical example and used for illustrative purposes only to describe how the strategies may work. Which strategy works best for clients will depend on their individual facts and circumstances. Actual results may vary.

Joint Life Expectancy

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Beyond Trusts and Life Insurance

• Medical expenses*

• Tuition expenses*

• 529 Plans (5 years up front)

• UGMA or UTMA accounts

*Individuals can pay these expenses on behalf of another without incurring gift tax but payment must be made directly to the health care provider or education institution. In the case of health care institutions, individuals can pay for the following expenses on behalf of another without incurring gift tax:

1) Diagnosis, care, mitigation, treatment and prevention of disease, 2) Transportation and lodging related to medical care, 3) Qualified long term care services, 4) Some health insurance premiums.

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President Obama’s 2016 Budget Proposals

A Law is Only Permanent Until Congress Decides to Change It !

• Estate and GST Exemptions $3.5M, Lifetime Gifts $1M, no indexing, Top Rate 45%

• Gifts or Bequests of Appreciated Property is a Capital Gains realization event

• Decouple Annual Gift Tax Exclusions from Crummey powers by creating new category of gifts to trusts of $50k per donor per year

• Grantor Retained Annuity Trusts (GRAT)

• 90 year perpetual trust limit

• Sale to Intentionally Defective Grantor Trust

• Eliminate non-spouse stretch IRA’s, must be distributed within 5 yrs

• Limit on total of tax-deferred retirement accounts to provide maximum annuity permitted under DB plan(currently $3.4M at age 62)

• Required Minimum Distributions for Roth IRA’s at 70 ½

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President Obama’s 2016 Budget Proposals

Key Points – Tax Payer Friendly Proposals

• Permit non-spouse beneficiary to roll over to a inherited IRA within 60 days vs. direct trustee to trustee transfer

• No RMD’s from IRA’s and retirement accounts if aggregate value does not exceed $100k

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Benefits of Using a Gifting Strategy

For Clients

• Leave more to family, less to government

• More control over wealth

• Approval of family members

For Advisors

• Deepen client relationships

• Client retention

• Preserve or enhance AUM

• Grow overall business

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Summary

• Transfer Tax System

• To Gift or Not to Gift

• To Insure or Not to Insure

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Important Considerations

• In addition to the asset or income they may be repositioning to implement the strategy, clients should have sufficient liquid assets to support their current and future income and expenses. Equity in the home should not be considered a liquid asset.

• This concept is only intended to be used for assets that will not be needed for living expenses for the expected lifetime of the insured. It is the responsibility of the client to estimate these needs and expenses and it is recommended that they consider developing a comprehensive financial plan in conjunction with implementing the strategy being considered. The accuracy of determining future needs and expenses is more critical for clients at older ages who have less opportunity to replace assets used for the strategy.

• If your client’s financial or legacy planning situation changes and they need to use the assets or income that are being earmarked for future life insurance premiums, they may be unable to continue to make premium payments, the life insurance policy may terminate and the results illustrated may not be achieved.

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Important Considerations (continued)

• If the asset or income earmarked for future life insurance premiums becomes fully exhausted, premiums may have to be paid using other assets or income to keep the life insurance policy in force.

• Depending on your client’s life span, it is possible that your client’s beneficiary may receive more by just inheriting the assets, rather than by receiving the death benefit of the life insurance policy that was purchased.

• Your client should consider developing a comprehensive financial plan to take into account current and future income & expenses in conjunction with implementing a strategy discussed herein.

• Clients may have to pay taxes, early withdrawal penalties, and/or other fees on assets liquidated to pay the life insurance policy premiums.

• We recommend that your client consult their tax and legal advisor to discuss their specific situation before implementing the strategy discussed herein.

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Other Considerations

• Ability to purchase life insurance is based on medical and financial underwriting.

• Policy owner won’t receive the value of the gift used for life insurance, until the insured’s death.

• Some life insurance policies require enough policy value to maintain charges; therefore, clients may need to pay additional premiums in later years if the policy does not perform as originally illustrated.

• For GST trust strategies, clients should consider the Rule Against Perpetuities which is a complex rule designed to prevent trusts from lasting forever.*

*Generally, this rule allows trusts to last until 21 years after the death of the youngest beneficiary alive at trust creation. Many states have abolished or significantly modified the rule allowing trusts to last for much longer or indefinitely without limit.

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Thank You!

Questions?

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Important Information

This material has been prepared by The Prudential Insurance Company of America to assist financial professionals.

PruLife SUL Protector is issued by Pruco Life Insurance Company, except in New York where, it is issued by Pruco Life Insurance Company of New Jersey.  Both are Prudential Financial companies located in Newark, NJ.

Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities.

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Client Identification

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