The Tax Relief Act of 2010

(The Money Pros) - The Tax Relief Act of 2010 increased the lifetime gift tax exemption to $5,000,000 per individual for 2011-2012. The law will “sunset” on 12/31/2012 and the lifetime gift exemption will revert back to only $1,000,000 per individual unless Congress enacts new law prior to this “sunset”. This opens up a two-year “window of opportunity” for wealthy clients to take advantage of an incredible leveraged and guaranteed financial opportunity.

What we are talking about is a lifetime gift tax exemption gift of up to $5,000,000 to a single pay no-lapse UL or SUL policy owned by an Irrevocable Life Insurance Trust (ILIT) where the death benefit is income tax free and estate tax free. The lifetime gift taxes associated with this transaction is $0. Or the client could gift the same $5,000,000 to an ILIT to be invested in a portfolio of financial assets where annual withdrawals are made to fund an annual premium for a no-lapse UL or SUL product owned by the ILIT

It gets even better for married clients. A married couple could gift up to $10,000,000 in 2011-2012 with $0 lifetime gift taxes. This $10,000,000 gift could be used to purchase a single pay no-lapse SUL policy. Or the married couple could gift the same $10,000,000 to an ILIT to be invested in a portfolio of financial assets where annual withdrawals are made to fund an annual premium for a no-lapse SUL product owned by the ILIT.

The ILIT could even be a so-called “Generation Skipping” type of trust (Dynasty Trust) for grandchildren, great-grandchildren, great-great grandchildren etc. where the common law “rule against perpetuities” has been extended by the statutory law of certain states for hundreds of years. The “Dynasty Trust” may even be sited in a state that has no state income taxes on trust income.

Take a look at the following single life ILIT and survivorship life ILIT numbers from competitive carriers. Situations 1, 2, 3 illustrate currently competitive single pay policies. Situations 4, 5, 6 illustrate currently competitive annual pay policies. This is an opportunity wealthy estate owners cannot afford to miss! The death benefits are income tax free, estate tax free, gift tax free, and generation skipping tax free.

SITUATION #1
Lifetime exemption gift to ILIT of $5,000,000 for a single pay (MEC) no-lapse SUL face amount of $24,592,217 for Male 70 / Female 70, Preferred N/S (Assume Joint Life Expectancy is 22 years)
• The IRR at Joint Life Expectancy (22 years) is 7.51%. In a 30% combined income tax bracket, the pre-tax equivalent IRR is 10.73%

SITUATION #2
Lifetime exemption gift to ILIT of $5,000,000 for a single pay (MEC) no-lapse UL face amount of $13,897,475 for Male 70, Preferred N/S (Assume Life Expectancy is 15 years)
• The IRR at Life Expectancy (15 years) is 7.05%. In a 30% combined income tax bracket, the pre-tax equivalent IRR is 10.07%

SITUATION #3
Lifetime exemption gift to ILIT of $5,000,000 for a single pay (MEC) no lapse UL face amount of $16,752,734 for Female 70, Preferred N/S (Assume Life Expectancy is 18 years)
• The IRR at Life Expectancy (18 years) is 6.95%. In a 30% combined income tax bracket, the pre-tax equivalent IRR is 9.93%

SITUATION #4
Lifetime exemption gift to ILIT of $5,000,000. This $5,000,000 fund grows at 4% ROR annually. The 4% annual growth of $200,000 is used to pay annual premiums for a $14,964,357 no-lapse SUL for Male 70 / Female 70, Preferred N/S (Assume Joint Life Expectancy is 22 years)
• The IRR at Joint Life Expectancy (22 years) is 9.64%. In a 30% combined income tax bracket, the pre-tax equivalent IRR is 13.77%
• Add the remaining $5,000,000 trust principal to the $14,964,357 ILIT death benefit, and the total amount available for the heirs is $19,964,357

SITUATION #5
Lifetime exemption gift to ILIT of $5,000,000. This $5,000,000 fund grows at 4% ROR annually. The 4% annual growth of $200,000 is used to pay annual premiums for a $7,215,365 no-lapse UL for a Male 70, Preferred N/S (Assume Life Expectancy is 15 years)
• The IRR at Life Expectancy (15 years) is 10.36%. In a 30% combined income tax bracket, the pre-tax equivalent IRR is 14.80%.
• Add the remaining $5,000,000 trust principal to the $7,215,365 ILIT death benefit, and the total amount available for the heirs is $12,215,365

SITUATION #6
Lifetime exemption gift to ILIT of $5,000,000. This $5,000,000 fund grows at 4% ROR annually. The 4% annual growth of $200,000 is used to pay annual premiums for a $9,547,907 no-lapse UL for a Female 70, Preferred N/S (Assume Life Expectancy is 18 years)
• The IRR at Life Expectancy (18 years) is 9.54%. In a 30% combined income tax bracket, the pre-tax equivalent IRR is 13.63%.• Add the remaining $5,000,000 trust principal to the $9,547,907 ILIT death benefit, and the total amount available for the heirs is $14,547,907

Note: The $5,000,000 lifetime exemption gift described above is an “adjusted taxable gift”. At death, the date of gift value of this “adjusted taxable gift” is added