kugler system the 1 every day applications for irc section 1035 transfers of life insurance the...
TRANSCRIPT
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Every Day Applications for IRC Section 1035 Transfers
of Life Insurance
The Advisors ForumJuly 16, 2008 Teleconference
Presented by
Frank L. Rainaldi, CLU, ChFC, DAEP and William A. Conway, J.D.
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SECONDARY NO-LAPSE GUARANTEE OF THE DEATH BENEFIT
(SHADOW ACCOUNT GUARANTEE)
Age60
Age120
$500,000
No-lapse Premium
$10,000
Age60
Age120
There is no lapse, even if zero cash value, and premium does not cover policy charges.
Account Value from illustration (not guaranteed)
Guaranteed Shadow Account Value May Be Higher or Lower Than Policy Account Value
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Year
1
5
10
20
30
40
50
55
60
Premium
$10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
DeathBenefit
$500,000
500,000
500,000
500,000
500,000
500,000
500,000
500,000
500,000
$3,000
25,000
57,000
103,000
0
0
0
0
0
No-Lapse Guarantee Illustration(Account Based Guarantee)
Non-GuaranteedAccount Value
(Age 40)Guaranteed No Lapse
Guaranteed Shadow Account
Positive Value
ValueNot
ProvidedVia
Illustration
PositiveValue
Guaranteed
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Tax-FreeExchange
Via IRCSection 1035
Mr. Kugler’s Old Policy
$500,000 Face Amount 150,000 Cash Value 100,000 Cost Basis
Mr. Kugler’s Old Policy
$500,000 Face Amount 150,000 Cash Value 100,000 Cost Basis
Mr. Kugler’s New Policy
$750,000 Face Amount 150,000 Cash Transfer 100,000 Cost Basis
Mr. Kugler’s New Policy
$750,000 Face Amount 150,000 Cash Transfer 100,000 Cost Basis
TAX FREE EXCHANGE UNDER IRC SECTION 1035
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RESTRUCTURING P0LICY LOANS PRIOR TO AN IRC SECTION 1035 EXCHANGE
Existing Policies
$500,000 Face Amount $600,000
125,000 Cash Value 150,000
50,000 Loan 100,000
75,000 Cost Basis 75,000
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Revised Policies(after restructuring of loan)
$500,000 Face Amount $600,000
125,000 Cash Value 150,000
75,000 Loan 75,000
75,000 Cost Basis 75,000
Proposed Arrangement
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Revised Policies(after termination of loan)
$425,000 Face Amount $525,000
50,000 Cash Value 75,000
0 Loan 0
0 Cost Basis 0
Results and Benefits
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Tax-FreeExchange via
IRC Section 1035Transfer
Mr. Kugler’s Two Existing
$950,000 Face Amount 125,000 Cash Value 0 Loan 0 Cost Basis
Mr. Kugler’s Two Existing
$950,000 Face Amount 125,000 Cash Value 0 Loan 0 Cost Basis
Mr. Kugler’s New Policy
$1,250,000 Face Amount 125,000 Cash Transfer 0 Loan 0 Cost Basis
Mr. Kugler’s New Policy
$1,250,000 Face Amount 125,000 Cash Transfer 0 Loan 0 Cost Basis
IRC SECTION 72 (e) IRC SECTION 1031
Cash Value Before Loan $150,000 $150,000
Loan Amount 100,000 100,000
Remaining Cash Value $50,000 $50,000
Partial Surrender $100,000 $100,000
Cost Basis (100,000) Lesser of:
Built-In Gain 50,000
Taxable Gain (Boot) $10,000 $50,000*
Computing the Taxable Gain When There is a Partial Surrender on a Policy with a Built In Gain Shortly Before or Shortly After the Section 1035 Exchange
TAX ASPECTS OF A PARTIAL SURRENDER ON A SECTION 1035 EXCHANGE WITH A BUILT-IN GAIN
TO EXTINGUISH A POLICY LOAN
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Account Value
$1,000,000
Age70
M&FAge 50
Pure Life Insurance
Existing Policy
Planned Premium
$255,000
Shadow Account Value
$1,000,000
Age120
M&FAge 70
Pure Life Insurance
No-Lapse Guarantee Policy
No-Lapse Premium $0
$180,000
No Premium Required$9,250
EXCHANGE OF AN OLDER FLEXIBLE PREMIUM POLICY FOR A SECONARY NO-LAPSE PREMIUM
POLICY
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REVIEW OF LIFE INSURANCE POLICY DESIGN AND AMOUNT TO DETERMINE IF THEY ARE CONSISTENT WITH THE ESTATE OWNER’S
CURRENT ESTATE OBJECTIVES
Planned Premium
$9,250
Pure Life Insurance
$1,000,000
M&FAge 95
M&FAge 50
Age 70Current Year
$250,000
Account Value
Existing Policy
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Shadow Account Value
M&FAge 70
Age120
No-Lapse Guarantee Policy
Pure Life Insurance
$1,500,000
$145,000
No-Lapse Premium
$9,250 (Plus $250,000 Rollover)
New Policy
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A SECTION 1035 EXCHANGE OF AN ORDINARY LIFE POLICY WITH AN ADDITIONAL INSURANCE
RIDER
Cash Value of Additions
Age55
Age100
AdditionalInsurance
RiderPremium
$5,500
$1,000,000
Pure Life Insurance Portion of Paid-Up Additions
One Year Term Insurance
Guaranteed Cash Values
Base PolicyPremium$13,500
Pure Life Ins. Protection(Amount at Risk)
$500,000
Age 70 Premium Outlay$19,000 per Year
Existing Policy Ordinary Whole Life Policy with Additional Insurance Rider
$285,000
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Shadow Account Value
Age70
Age120
Pure Life Insurance
$1,000,000
$215,000
Paid-Up GuaranteeNo-Lapse Premium $6,000
New Policy with $285,000 Rollover and a Secondary Death Benefit Guarantee
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IMPLEMENTING AN IRC SECTION 1035 TRANSFER
ON A SURVIVORSHIP LIFE POLICY AFTER
THE FIRST SPOUSE HAS DIED
At Mr. K’s Death
Mr. and Mrs. KAges 60 and 56
$1,000,000Survivorship LifePolicy Owned by
ILIT
Mr. and Mrs. KAges 60 and 56
$1,000,000Survivorship LifePolicy Owned by
ILIT
Mrs. KAge 70
$1,000,000Single Life Policy
Owned by ILIT
Mrs. KAge 70
$1,000,000Single Life Policy
Owned by ILIT
Existing Premium$12,000
At Mr. Kugler’s Death the Survivorship Life Policy Becomes a Single Life Policy
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IRC 1035 Exchange$220,000
Cash ValueRollover
Mrs. KAge 70
$1,000,000Existing
Policy Owned by ILIT
Mrs. KAge 70
$1,000,000Existing
Policy Owned by ILIT
Mrs. K$1,000,000
NewSingle Life Policy
Owned by ILIT
Mrs. K$1,000,000
NewSingle Life Policy
Owned by ILIT
No-LapsePremium
$5,500
Exchanging the Existing Policy for a New Single Life Policy Qualifies as a “Like Kind” Exchange Under IRC Section 1035
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A SECTION 1035 TRANSFER OF A NON-PARTICIPATING WHOLE LIFE POLICY TO A
POLICY WITH A SECONDARY DEATH BENEFIT GUARANTEE
Age50
Pure Life Insurance
Age65
Age120
$460,000
Guaranteed Cash Value
$1,000,000
No PremiumPayments Required
Existing Paid-Up Non-Participating Whole Life Policy
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Shadow Account
$1,500,000
Age120
Age65
No Premium PaymentsRequired
New $1,400,000 Policy with $465,000 Rollover andNo Required Premium to Guarantee the Death Benefit
Pure Life Insurance
$365,000
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