Wealth Transfer & Estate Planningwith IRA Assets

Create A Legacy with Individual Retirement Accounts

For Producer Use Only. Not to be Used with Existing or Prospective Customers.

▪Profile Client▪ Substantial Retirement Savings (IRA, 401(k), etc.)▪ Lifestyle Not Dependent on Retirement Assets▪ Total Assets Exceeding State and/or Federal Estate Tax

Exemption▪ New York: $1 Million Exemption & Top Rate of 16%▪ New Jersey: $675,000 Exemption & Top Rate of 16%

▪ Desire to Maximize Legacy and Minimize Taxes ▪ “I’m Saving It for the Kids”

▪ IRAs & Qualified Plans▪ The Good News . . .

▪ No Income Tax on Contributions or Rollovers▪ Tax-Deferred Earnings & Growth

▪ The Bad News . . .▪ Required Distributions During Lifetime▪ Income Tax on Plan Funds Received During Lifetime or at Death▪ Potential Double Taxation at Death

The Situation

▪ IRAs & Retirement Plans Taxed as “Income in Respect of Decedent” (IRD)

▪ Subject to BOTH Estate Tax & Income Tax

▪Four-Step Calculation

▪ Estate Tax Computed on Full Value of Assets

▪ Amount Subject to Income Tax Determined

▪ Estate Tax Subtracted from Amount Subject to Income Tax

▪ Income Tax Computed on Balance

▪Total Tax Equals Estate Tax Plus Income Tax

Taxation of Retirement Plans

▪Value of IRA at Death - $1,000,000

▪Assumed Tax Rates

▪ Estate Tax (State and/or Federal): 15%

▪ Income Tax (State and/or Federal): 45%

▪Computation of Tax at Death

▪ Estate Tax

▪ $1,000,000 X .15 = $150,000

▪ Income Tax

▪ $1,000,000 Minus $150,000 = $850,000 X .45 = $382,500

▪Total Tax: $150,000 + $382,500 = $532,500 (53%)

IRA Taxation at Death

▪ Continue Accumulation▪ RMD Must Begin at Age 70½

▪ 50%+ Potential Taxes at Death

▪ Transfer Retirement Funds▪ Income Tax Paid at Time of Transfer

▪ Gift Tax May Be Payable

▪ Charitable Gift – Tax “Wash”

▪ Take Distributions▪ Income Tax on Funds Received

▪ Required Minimum Distributions May Not Reduce IRA Value During Lifetime

▪ Conversion to Roth IRA▪ Income Tax Payable on Conversion

▪ No Income Tax on Future Growth or Distributions

▪ No Required Distributions During Lifetime

▪ Funds May Be Subject to State and/or Federal Estate Tax

Options During Lifetime

▪Use Lifetime Distributions to Pay Premiums on Life Insurance Policy

▪Policy Ownership: Insured, Third Party (e.g., Child), Trust (ILIT or SST)

▪ Trust Purchases Life Insurance on Client and/or Spouse - Trust Is Owner & Beneficiary of Policy

▪ Client Receives Funds from IRA & Makes Gifts to Trust

▪ Gross Up Distributions for Income Tax Payable

▪ ILIT – Use Annual Gift Tax Exclusion or Lifetime Exemption

▪ Trust Pays Policy Premiums, Receives Death Proceeds & Distributes Funds to Trust Beneficiary(s)

IRA Wealth Transfer

▪Reduces Amount of “Double Tax” Retirement Assets & Creates Income Tax-Free & Estate Tax-Free Life Insurance Proceeds

▪Life Insurance Cash Values Grow Tax-Deferred & Can Be Accessed Income Tax-Free for Lifetime Distributions to Trust Beneficiary(s)

▪Policy Death Benefits Provide Estate Liquidity for Taxes, Debts, and Estate Settlement Costs

▪Effective Use of Annual Gift Tax Exclusion and/or Lifetime Exemption

Advantages

Example - Assumptions

Married Clients’ Ages Both Age 70

Number of Children Three

Current Value of IRA $1,000,000

Life Expectancy Today 15 years

Assumed Income Tax Rate 45%

Assumed Estate Tax Rate 15%

IRA / Taxable Investment Growth Rate 6% per year*

*For illustrative purposes only. Results do not reflect actual performance of any particular investment, and actual results will vary.

IRA with RMDs

ExampleIRA Wealth Transfer with SIUL

IRA Legacy to Heirs

Net Amount to Heirs

Current Plan Proposed Plan

Total Estate at Death @ Age 85 $1,702,316IRA: $1,137,613

SIUL: $2,500,000

Total $3,637,613

Total Taxes $690,485 $605,779

Net Amount to Heirs $1,011,831 $3,031,834

▪ Income Taxation of Retirement Savings – Pay Now or Pay Later

▪ Will Income Tax Rates Stay the Same in the Future?

▪ Will Future Rates Be Higher or Lower?

▪ Income Tax “Diversification” for Retirement Savings

▪To Convert or Not to Convert?

▪ Income Tax on Conversion Paid with Non-IRA Funds

OR

▪ Relatively Long Time Horizon – Minimum 15 to 20 Years

Conversion to Roth IRA

▪Transfer to Non-Spouse Beneficiary – “Stretch” IRA▪ Does Not Reduce RMD During Owner’s Lifetime▪ Postpones Income Tax Until Distributions Received▪ Does Not Postpone State/Federal Estate Tax at Death▪ Beneficiary Can “Unstretch” IRA With Larger Distributions

▪Testamentary CRT with IRA▪ Stretch Beneficiary(s) Designated As Income Beneficiary(s)

of CRT ▪ No Estate Tax at Death of Owner or Spouse

▪ Income Interest Unlikely to Exceed Exemption Amount

▪ Charity’s Remainder Interest Qualifies for Charitable Deduction

▪ Income Tax Paid as CRT Income Payments Received – Same As “Stretch” IRA

▪ Beneficiary(s) Can’t “Unstretch” Income Payments▪ Substantial Charitable Bequest

Alternative to “Stretch” IRA

▪CRT Designated As Beneficiary of IRA

▪Spouse (or Children) Designated As Income Beneficiary of CRT

▪ No Estate Tax at Death of Owner or Spouse

▪ Spouse’s Income Interest Qualifies for Marital Deduction

▪ Non-Spouse’s Income Interest Unlikely to Exceed Exemption Amount

▪ Charity’s Remainder Interest Qualifies for Charitable Deduction

▪ Income Tax Paid as CRT Income Payments Received

▪ Same as “Spousal Rollover” & “Stretch” Options

Another Solution . . .Testamentary CRT with IRA

▪ IRA @ Death of Owner: $1,000,000

▪Growth Rate After Death: 6% Annually

▪CRUT Payout to Beneficiary(s): 5.5% for 20 Years

▪Total Income Payments to Beneficiary(s): $1,145,500

▪Remainder To Charity @ End of Term: $1,087,602

Example

The preceding examples are for hypothetical illustrative purposes only. The concepts described may not be appropriate for everyone. Your client’s individual results may vary.

For additional information please carefully read the prospectuses for the relevant variable insurance product and its underlying investment options. Penn Mutual’s Variable products are principally offered through Hornor, Townsend & Kent, Inc., (HTK), Registered Investment Advisor, Member FINRA/SIPC, HTK is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.

Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values.

© 2014 The Penn Mutual Life Insurance Company, Philadelphia, PA 19172