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INSURANCE PRODUCTS:

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INSURANCE PRODUCTS:

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Life Insurance Planning in a Low Interest Rate Environment

Family Split Dollar

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

© 2014 Prudential Financial, Inc. and its related entities

0259922-00001-00 Ed. 04/2014 Exp. 10/08/2015

Introduction

• Why are interest rates so low?• What may cause rates to rise?• How can low rates help with HNW planning?

– Loan-Based Family Split Dollar

• Economy is in recovery mode

• Low interest rates => households, businesses spend, invest more

• More spending, investing => employment growth, rising GDP

Why low interest rates?

The Recovery Cycle – At a Glance

Low Fed Rates

Low Lending Rates

Spending, Investment

Employment, GDP

Consumer, Investor

ConfidenceRecovery

New Demand for Goods, Services

• The Good: Increased consumer, investor demand for credit vs. limited lending capital

• The Bad: Rising inflation

• The Ugly: U.S. debt ratings downgrade

Why could rates rise?

Long-Term Growth – At a Glance

Fed Relaxes Target

Low Fed Rates

Low Lending Rates

Recovery: Sustained

Demand for Credit

Rising Treasury

Yields

Treasury yields determine the AFR (borrowing) and § 7520 (discounting) rates for individual taxpayers

Impact of Rising Treasury Yields

Treasury Yields

AFR § 7520

The Planning Benefits of Low Rates

• Lower interest rates could make some wealth transfer strategies more efficient:

– Interest-only borrowing

– Sale of property where buyer has limited ability to pay

– Valuing a donor’s retained interest in property

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Profile – Family Split Dollar• Works in a low interest environment because:

– Premiums financed at a low rate require smaller gifts of loan interest, and/or lower out of pocket cost for borrower

• Individual clients who… Are interested in transferring as much wealth as possible to the

next generation Are interested in leveraging their annual gift tax exclusion

amounts Who have a life insurance need where the premium is in excess

of their available gifting capacity Are typically over the age of 55

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The Broad Universe of Split Dollar

CorporateSplit Dollar

FamilySplit Dollar

Economic Benefit

LoanArrangement

Economic Benefit

Non-equity collateral

assignment

Endorsement Demand Term

LoanArrangement

SplitDollarSplit

Dollar

Non-equity collateral

assignment

Endorsement Demand Term

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New Split Dollar Arrangements

• Governed by Final Split-Dollar Regulations Applies to arrangements after Sept. 17, 2003 Two Regimes

1. Economic benefit– Non-equity collateral assignment– Endorsement

2. Loan *– Demand loan– Term loan

* Unpaid loans and withdrawals will reduce cash values and death benefits, may shorten or negate the guarantee against lapse and may have tax consequences.

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• Economic Benefit vs. Loan – Which to Choose?– Loan Arrangement:

Interest may be the only gift necessary Rate may be fixed for the life of the loan

Cash value over the premium accrues to the ILIT Potential ability to rollout with cash values

Amount to repay may be lower Premiums plus any accrued interest are owed back

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• Economic Benefit vs. Loan – Which to Choose?– Economic Benefit:

Policyowner’s only cost is based on the term rate for the death benefit protection

Term rate based on grantor’s life/lives Lower initial out-of-pocket cost Very low for survivorship policies while both insureds are

alive Trustee has no equity in the life insurance policy

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Split Dollar Loan Interest Rate

• Demand Loan – callable upon demand of the lender May use the “blended” AFR: average of the short-term AFR rates

for the last full January-June six month term Lower than mid- or long-term AFR, but floats, i.e. changes every

July 2013-14: .22%

• Term Loan – any loan that is not a demand loan Fixed rate based on the term of the loan

• Not over 3 years = short term rate (March 2014 - .28%)• Over 3 years but not over 9 years = Mid-term rate (1.84%)• Over 9 years = Long term rate (3.36%)

*NOTE: Each premium is a new loan subject to a new interest rate.

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Benefits

• Interest may be the only gift necessary Rate may be fixed for the life of the loan

• Cash value over the premium accrues to the ILIT Potential to “roll out” with cash values

• Planning Note: The demand feature of a demand loan could be construed as an incidence of ownership in the life insurance policy. An incidence of ownership would cause the death benefit to be included in the estate of the insured.

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Terminating a Split Dollar Program

• Forgive trust indebtedness Could be done in one tax year or over a period of years Subject to gift tax

• Repay the amount owed Life Insurance cash values may be used Other trust assets

• Advanced planning strategies Discounted gifts – FLP, GRAT, Charitable Lead Trust

Lifetime

Wealth accumulation

benefits

Lifetime AND Legacy

Family Split Dollar with spousal lifetime access provision

Legacy

Wealth replacement

benefits

Spousal Access Trust

Split Dollar death benefit estate and income tax free Spouse may access policy cash value while living

There may be gift tax consequences with the funding of an Irrevocable Life Insurance Trust. In addition, 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.

Survivorship Access Trust

• PLR 9748029 gives us the “roadmap”• SLAT owns survivorship life insurance on the life of the

grantor and the grantor’s spouse

• Indirect access to cash values of the trust’s life insurance policy via a 3rd party trustee

• Life insurance proceeds outside the estate of both spouses

• Caveats / Considerations• Only one spouse may be the grantor of the trust• All premiums must be paid while grantor is alive• Divorce or death of the non-grantor spouse

* Consider “floating spouse” provisions

For Producer Use Only – Not For Use With The Public

Potential concerns:• Estate inclusion of the death benefit

from outright ownership

• No control over cash value

Sample Case

Hypothetical case facts:• Mr. and Mrs. Biggs, both age 50• Seven figure income and high net worth• Need life insurance; interested in its cash

value accumulation characteristics• Want to allocate $250,000 yearly over 10

years for premiums

This is a hypothetical example 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 will vary. Any representation of life insurance premium or death benefit is purely hypothetical in amount and is not a guarantee of cost or death benefit now or in the future from a specific life insurance policy. Any assumptions for life insurance policy values on subsequent slides are based on a male and female, both age 50 and preferred non-nicotine, PruLife SUL Protector, $250,000 annual premium for 10 years and current assumptions.

Sample Case

Split Dollar Access Trust

Mr. Biggs(sole grantor)

Beneficiaries (estate tax-free, if structured

properly)

Irrevocable Life Insurance Trust

(Grantor Trust)

Second-to-Die Cash Value Life

Insurance Policy

$250,000 annual amounts contributed under a loan-based split dollar agreement which the trustee uses to pay premiums

Collateral assignment for value of cumulative premiums paid plus any outstanding loan interest

Loan interest payment (2% all years)

Access to trust values by spouse under lifetime access provision, if necessary

ILIT share of net death benefit proceeds distributed on the second death

Mrs. Biggs

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2

4

3

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2

3

4

Sample Case – Loans and Loan Interest



(Grantor Trust)


Insurance Policy

$250,000 annual loans to pay premiums

Loan interest payment (2% all years)

1

2

1

2

Year New Loan Loan Term Loan Interest Rate

Total Loan Annual Loan Interest/Gift

Cumulative Loan

Interest/Gifts

1 $250,000 10 2.00% $250,000 $5,000 $5,000

2 $250,000 9 2.00% $500,000 $10,000 $15,000

3 $250,000 8 2.00% $750,000 $15,000 $30,000

4 $250,000 7 2.00% $1,000,000 $20,000 $50,000

***

10 250000 1 2.00% $2,500,000 $50,000 $270,000

Sample Case – Varying Loan Rate



(Grantor Trust)


Insurance Policy


Loan interest payment (changes all years)

1

2

1

2

Year New Loan

Loan Term

Loan Interest

Rate

Total Loan Annual Interest on New Loan

Annual Loan Interest

Payable/Gift

Cumulative Loan

Interest/Gifts

1 $250,000 10 2.00% $250,000 $5,000 $5,000 $5,000

2 $250,000 9 2.40% $500,000 $6,000 $11,000 $16,000

3 $250,000 8 1.95% $750,000 $4,875 $15,875 $31,875

4 $250,000 7 2.75% $1,000,000 $6,875 $22,750 $54,625

***

10 $250,000 1 ? $2,500,000 ? ? ?

Sample Case – Demand Loan



(Grantor Trust)


Insurance Policy


Loan interest payment (Demand Loan Rate)

1

2

1

2

Year New Loan Loan Term

Loan Interest

Rate

Total Loan Annual Loan Interest/Gift

Cumulative Loan

Interest/Gifts

1 $250,000 N/A 0.22% $250,000 $550 $550

2 $250,000 N/A 0.40% $500,000 $2,000 $2,550

3 $250,000 N/A 1.01% $750,000 $7,575 $10,125

4 $250,000 N/A 0.75% $1,000,000 $7,500 $17,625

***

10 $250,000 N/A ? $2,500,000 ? ?

Sample Case

In 10 Years


Beneficiaries (estate tax-free, if structured

properly)


Policy Cash Value:$1,979,088

Policy Death Benefit:$17,584,338

$2,500,000 total loan to trust

Value of collateral assignment: $2,500,000

Mr. Biggs’ share of cash value: lesser of $2,500,000 or actual cash surrender value

Mr. Biggs’ share of death benefit: $2,500,000

Cumulative loan interest payments @ 2%: $270,000

Annual Loan Interest years 11+: $50,000

Cash value available to access, if necessary: $0*

ILIT share of net death benefit proceeds: $15,078,838

* $0 Only if the premium loans are not repaid

Mrs. Biggs

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Results

Benefits:

• Clients are able to create wealth outside their estates with relatively small annual exclusion gifts

• Clients have either:– Certainty of a fixed interest rate for the term of the loans– A very low initial loan interest rate (0.22% 2013-14 blended AFR)

• Clients have the option of forgiving part or all of the debt by using some of their lifetime exemptions

• Non-grantor spouse has access to some of the policy value if necessary, bringing it back to the marital unit

Benefits

Getting Started

Talking Points• Are you aware of the factors that may bring the economy

out of this low interest rate environment?

• Do you know what some of the benefits low interest rates could have for your wealth transfer planning?

• “We don’t want to give up control of our assets.”

• If you could find ways to minimize the loss of control over your assets, would you be interested in knowing more?

• Let me share an idea with you…

NOT FOR CONSUMER USE26

Next Steps• Individual meeting

• Identify prospects

• Build and present case

Clients Who May Benefit Family oriented, but reluctant to make large

gifts

Are concerned about the impact of transfer taxes on their financial legacy

Have sufficient income from other sources, besides the assets loaned to the ILIT


• Enter the advanced planning club.

• Help clients to take action now.

• Preserve and/or increase assets under management (AUM).

• Support and Resources

What’s In It For You?


Summary

Why This Strategy, Why Now• Taking advantage of low interest rates using the strategy

described here can help to enhance wealth for heirs.

Getting Started• Implementing the strategy using simple talking points

and our resources


Important ConsiderationsBefore implementing this strategy• Clients should consider developing a comprehensive financial planning strategy to take

into account current and future income and expenses in conjunction with implementing any of the strategies discussed here.

• We recommend that clients consult their tax and legal advisors to discuss their situation before implementing any strategy discussed here.

About this concept• This concept is only suited to clients who do not rely on the assets used as premium loans

for living expenses for the expected lifetime of the insured(s). It is the client’s responsibility 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• If clients need to use the assets or income in the strategies for current or future income

needs and they can no longer make premium payments, the life insurance death benefit may terminate and the results illustrated may not be achieved.

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Important ConsiderationsAbout life insurance• The death benefit protection offered by a life insurance policy can be a key component of

a sound financial plan. It is important for clients to fully understand the terms and conditions of any financial product before purchasing it.

Other notes• Clients should consider that 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.

• If premiums and/or performance are insufficient over time, the policy could lapse, which would require additional out-of-pocket premiums to keep it in force.

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Important InformationThis material has been prepared by The Prudential Insurance Company of America to assist financial professionals. It is designed to provide general information in regard to the subject matter covered. It should be used with the understanding that we are not rendering legal, accounting or tax advice. Such services should be provided by the client’s own advisors. Accordingly, any information in this document cannot be used by any taxpayer for purposes of avoiding penalties under the Internal Revenue Code.

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. [Each is solely responsible for its own financial condition and contractual obligations.

All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. Policy guarantees and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing insurance company.


Thank You

presented by: life insurance planning in a low interest rate environment family split dollar...

Documents

property slide

demand loan term loan

discounting rates

services slide

final splitdollar regulations

loan cash value

recovery mode low

smaller gifts of loan