slide 1 of 35 0234472-00002-00 ed. 02/2013 estate planning strategies for main street and wall...

of 35

0234472-00002-00 Ed. 02/2013

Estate Planning Strategies for Main Street and Wall StreetNavigating an Uncertain Estate Tax Environment

[When presenting in AR, CA, OK, TX or IL, use the phrase “Insurance Sales Presentation.” In CA and AR, add License Number]

of 35

For Financial Professional/CPA/Attorney Use Only. Not For Use With The Public.

Optional Disclosure Slide

Investments are offered through [broker dealer name], a registered broker dealer (member FINRA/SIPC). Insurance is offered through [agency name].

[Broker dealer name] and [agency name], located at [address], are not affiliated with Prudential Financial.

of 35


[Hosted/Presented by:]

[PFR Name]Personal Financial Representative[Allstate Financial Services, LLC or LSA Securities (in LA & PA)]

[For Allstate Financial Services only: This slide must be shown prior to the beginning of the customer presentation]

Securities offered by Personal Financial Representatives through Allstate Financial Services, LLC (LSA Securities in LA and PA). Registered Broker-Dealer. Member FINRA, SIPC. Main Office: 2920 South 84th Street, Lincoln, NE 68506. (877) 525-5727.

of 35


Bank of America Corporation (“Bank of America”) is a financial holding company that, through its subsidiaries and affiliated companies, provides banking and investment products and other financial services.

Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation (“BAC”).

Investment products offered through MLPF&S and insurance and annuity products offered through Merrill Lynch Life Agency Inc.:

Merrill Lynch Life Agency Inc. is a licensed insurance agency and a wholly owned subsidiary of Bank of America Corporation.

The views and opinions expressed in this presentation are not necessarily those of Bank of America Corporation; Merrill Lynch, Pierce, Fenner & Smith Incorporated; or any affiliates.

Nothing discussed or suggested in these materials should be construed as permission to supersede or circumvent any Bank of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated policies, procedures, rules, and guidelines.

The benefit payment obligations arising under the annuity contract guarantees, rider guarantees, or optional benefits and any fixed account crediting rates or annuity payout rates are backed by the claims-paying ability of the issuing insurance company. Those payments and the responsibility to make them are not the obligations of Merrill Lynch or its affiliates ("Merrill Lynch"). Merrill Lynch does not guarantee the claims-paying ability of the issuing insurance company. All guarantees, including optional benefits, do not apply to the underlying investment options.

[REQUIRED SLIDE FOR MERRILL LYNCH EVENTS ONLY]

Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed

Are not Insured by Any Federal Government Agency Are Not Deposits Are Not a Condition to Any

Banking Service or Activity

of 35


Legislative Environment Importance of Estate Plan Reviews Lifetime Strategies Legacy Strategies

Agenda

of 35


2013

Estate Tax Exclusion $5,250,000

Estate Tax 40%

Portability Preserved

Estate, Gift and GST Taxes

2013

Gift and GST Exemption $5,250,000

Gift and GST Tax 40%

Annual Gift Exclusion $14,000

Estate Tax

Gift and GST Tax

The 2011 Estate Tax Exclusion of $5,000,000 was made permanent and indexed for future inflation.

Source: The American Tax Relief Act (H.R. 8)

of 35


Exemption is “Portable” Surviving spouse “inherits” deceased spouse’s

unused exemption• Could result in surviving spouse having up to a $10.50 million

exemption

Estate and Gift Exemptions are “unified”

Legislative Environment

of 35


Legislative Environment

Source: Internal Revenue ServiceThe estate tax exemptions represented here have been adjusted for inflation and are reflected in 2012 dollars. The inflation rate is based on the average Consumer Price Index for each given year as determined and published by the Bureau of Labor Statistics.

1916

1922

1927

1932

1937

1942

1947

1952

1957

1962

1967

1972

1977

1982

1987

1992

1997

2002

2007

2012

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

Historical Estate Tax Exemption (2013 dollars)

of 35Slide 9 of 35


Importance of Estate Plan Reviews

of 35


Dale Earnhardt, Sr

Marlon Brando

John Denver

Sonny Bono

Pablo Picasso

Jimi Hendrix

Chief Justice Warren Burger

Florence “FloJo” Griffith Joyner

Elvis Presley

Importance of Estate Plan Reviews

Source: Forbes, “Estate Mistakes: Where Heath Ledger and Princess Di went wrong.”, November 24, 2009

of 35


Review Wills that use formula provisions to fund credit shelter trusts

Importance of Estate Plan Reviews Wills

John passes away in:

2008 – Wife receives $3,000,000

2009 – Wife receive $1,500,000

2010 – Wife receives $5,000,000

2011 – Wife receives $0



John Smith has $5,000,000

Will states:

“The Smith Family Trust shall be funded with an amount equal to the applicable exclusion amount. The remaining amount shall pass to my spouse.”

of 35


Know the location

Make sure assets are titled correctly

Capital Asset Review

Importance of Estate Plan Reviews Asset review

of 35


Wills only cover probate assets

Review beneficiary designations after life changing events

Dangers of naming trusts as beneficiary of retirement accounts

Importance of Estate Planning Reviews Beneficiary Reviews

Retirement assets account for 42% of the wealth for Americans with at least $100,000 of investable assets*

*Wells Fargo Retirement, December 2011

of 35


Beneficiary designations require regular reviews

Will and trust documents may not reflect current law

Know the location of important documents and assets

Important of Estate Plan Reviews

of 35Slide 15 of 35


Lifetime Strategies

of 35


To Gift $1 for $1 reduction in the

estate

• $14,000 annual gift exclusion

• $5.25 million lifetime exemption

Remove income producing and appreciating assets from the estate

Potential to leverage valuation discounts for business ownership, FLP, LLC, etc

Or Not to Gift Need the asset

Asset would be sold at a loss

Capital assets that would receive stepped-up basis at death

Lifetime Strategies Gifting

of 35


IRA withdrawals, either RMDs or other amounts, are gifted to the ILIT

• Annual gift exclusion currently $14,000

Gifted proceeds can be used to pay for life insurance premiums

IRA withdrawals reduce size of estate and future Income in Respect of Decedent (IRD)

Life insurance death benefit is income- and estate-tax free

Lifetime Strategies Funding an ILIT with IRAs

IRAIrrevocable Life

Insurance Trust (ILIT)

Withdrawals from an IRA may be taxable as ordinary income.

of 35


Conversion to a Roth IRA

$2,000,000 Traditional IRA

Estate subject to estate taxes

$600,000 income tax liability1

Reduces size of estate by $600,000

Eliminates RMDs Roth IRA passes income

tax-free to beneficiaries

Lifetime Strategies Roth Conversions

1Assumes a 30% effective tax rate.

Roth IRA conversions as an estate planning tool

of 35


Gifting exemptions based on current law set at $5.25 Million (indexed for inflation)

Use or lose the exemption Low tax rates can make Roth conversions

attractive

Lifetime Strategies

of 35Slide 20 of 35


Legacy Strategies

of 35


Legacy Strategies Trust Taxation

Estate $8 million

Surviving Spouse$2.75 million

Credit Shelter Trust$5.25 million

Income is taxable to spouse

Undistributed income taxable to the trust

Common estate planning approach

of 35


Trust Income Taxation

Taxable Income Marginal Rate

$0 - $2,400 15%

$2,401 - $5,600 25%

$5,601 - $8,500 28%

$8,501 - $11,950 33%

$11,951 + 39.6%

2013 Federal Trust Tax Rates

$5 million x 3% return = $150,000 $59,892 in taxes unless distributed to

trust beneficiaryOr

Consider a VA to provide tax-deferred growth within the trust

Top Income Tax with the Medicare Surtax is 43.4% on income over $12,000

Sources: The American Tax Relief Act (H.R. 8) ,The Patient Protection and Affordable Care Act (PPACA)

of 35


Legacy Strategies Spousal Protection

*Source: U.S. Annuity 2000 Mortality table, Society of Actuaries

Expected life span of individuals and couples age 65*

of 35


Longevity risk demands “sustainable” withdrawal rates


One financial author has stated: “2% is bulletproof, 3% is probably safe, 4% is pushing it, and, at 5% you’re eating Alpo in your old age.”

-William Bernstein, Author of The Four Pillars of Investing (2010)

RMDs may eventually require a higher rate of withdrawal

of 35


RMDs Increase Each Year*


Age Withdrawal Rate

70½ 3.6%

75 4.4%

80 5.4%

85 6.8%

90 8.8%

*If the spouse is the sole beneficiary and is more than 10 years younger, the RMD rate is lower.

of 35


Age Value Market Return

% of Value RMD End Value

70 $1,000,000 -10% 3.6% $36,496 $863,504

71 $863,504 -13% 3.7% $32,585 $718,663

72 $718,663 -23% 3.9% $28,073 $525,298


Total withdrawals: $97,154 Average market return: -15% Value: -47%

The Market Doesn’t Care Your Client Has an RMD

of 35


Retirement Equity Act The Act was the result of the “inequitable” possibility that the

surviving spouse would receive “no survivor benefits under the plan even though the participant had accrued significant vested benefits before death.”1

Requires defined benefit plans and most defined contribution plans to offer qualified joint and survivor annuity (QJSA) options

While QJSAs provide guaranteed income over two lives, they limit liquidity, growth and control of retirement assets


1 Source: S. Rep. No. 98-575, 98th Congress, 2d Sess. 12 (1984)

All guarantees, including optional benefits, are backed by the claims-paying ability of the issuing company and do not apply to the underlying investment options.

of 35


Age IRA Value Market Return

RMD End Value VA with Living Benefit

70 $1,000,000 -10% 3.6% $855,000 $45,000

71 $855,000 -13% 3.7% $698,850 $45,000

72 $698,850 -23% 3.9% $493,115 $45,000


$45,000 guaranteed for the rest of the IRA owner’s and spouse’s life!

For illustrative purposes only. Does not represent any specific investment.

Consider an annuity with optional living benefit, available for an additional fee

of 35



A VA with a Spousal Living Benefit Helps the IRA Last Two Lifetimes

Couple receives the greater of their annual

RMD or their guaranteed income

amount

IRA Value

4.5% of Step-up

Guaranteed Income Amount

RMD Amount

For illustrative purposes only. Does not represent any specific investment.

of 35


Funded trusts may find tax deferral an attractive alternative

Consider an annuity with spousal optional living benefit (available for an additional fee) to help protect the income for the surviving spouse

Legacy Strategies

of 35


1. Schedule estate plan reviews as part of your annual review process

2. Identify existing clients who may be impacted by new provisions

3. Examine “funded” estate plans to evaluate investment options

4. Structure retirement assets to last two lifetimes

Next Steps

of 35


Estate planning should be part of everyone’s financial strategy

Certain opportunities may not last

Simple decisions can have great impact to those closest to you

Summary

of 35


Investors should consider the contract and the underlying portfolios’ investment objectives, risks, charges and expenses carefully before investing. This and other important information is contained in the prospectus, which can be obtained from your financial professional. Please read the prospectus carefully before investing.

Variable annuities are issued by Pruco Life Insurance Company (in New York, by Pruco Life Insurance Company of New Jersey), Newark, NJ and distributed by Prudential Annuities Distributors, Inc., Shelton, CT. All are Prudential Financial companies and each is solely responsible for its own financial condition and contractual obligations. Prudential Annuities is a business of Prudential Financial, Inc.

Annuity contracts contain exclusions, limitations, reductions of benefits and terms for keeping them in force. Your licensed financial professional can provide you with complete details.

of 35


A variable annuity is a long-term investment designed for retirement purposes. Investment returns and the principal value of an investment will fluctuate so that an investor's units, when redeemed, may be worth more or less than the original investment. Withdrawals or surrenders may be subject to contingent deferred sales charges. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59½, may be subject to an additional 10% federal income tax penalty. Withdrawals, other than from IRAs or employer retirement plans, are deemed to be gains out first for tax purposes. Withdrawals reduce the account value and the living and death benefits.

Variable annuities offered by Prudential Financial companies are available at a total annual insurance cost of 0.55% to 1.75%, with an additional fee related to the professionally managed investment options. Note: All products may not be available through all third party broker/dealers.

Prudential Annuities, its distributors and representatives do not provide tax, accounting, or legal advice. Please consult your own attorney or accountant.

Because qualified retirement plans, IRAs and variable annuities offer a tax-deferral feature, you should carefully consider the other features, benefits, risks, and costs associated with a variable annuity before purchasing one in either a qualified plan or an IRA. Before purchasing a variable annuity you should take full advantage of your 401(k) and other qualified plans.

of 35


This material was prepared to support the marketing of variable annuities. Prudential, its affiliates, its

distributors and their respective representatives do not provide tax, accounting or legal advice. Any tax

statements contained herein were not intended to be used for the purpose of avoiding U.S. federal, state or

local tax penalties. Please consult your own independent advisor as to any tax or legal statements made

herein.

Your needs and suitability of annuity products and benefits should be carefully considered before investing.

Optional benefits may not be available in every state and may not be elected in conjunction with certain

optional benefits. Optional benefits have certain investment, holding period, liquidity, and withdrawal

limitations and restrictions. The benefit fees are in addition to fees and charges associated with the basic

annuity.

© 2012. Prudential Annuities, Prudential, the Prudential logo, the Rock symbol, and Bring Your Challenges

are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions

worldwide.

This proprietary Continuing Education course was prepared by Prudential Annuities for the

education of Financial Professionals only. It is not intended to provide, nor should be relied on

for, accounting, legal or tax advice. Any unauthorized distribution, use, or copying of any part

of this course is strictly prohibited.

slide 1 of 35 0234472-00002-00 ed. 02/2013 estate planning strategies for main street and wall...

Documents

affiliates merrill lynch

obligations of merrill

merrill lynch events

merrill lynch life agency

prudential financial

financial holding company

subsidiaries of bank

registered brokerdealer