owR Sales Idea of the Month
In this new post-ATRA environment, many of our clients are facing higher income taxes while estate taxes have become less of a concern. We are amidst a shift in our industry from guaranteed universal life contracts to cash value life insurance, and a focus on legacy planning rather than estate tax planning. Dynasty Trusts have long been in our arsenal for estate tax planning due to their ability to keep wealth outside of clients’ estates for multiple generations, and, if done properly, avoid GST tax. This sales concept has renewed appeal in today’s environment because of the lasting legacy it allows the grantors to leave.
A Dynasty Trust is created when a grantor or grantors make lifetime gifts to the trust and allocate their GST exemption (currently $5.25M per person) to those gifts. This money then grows inside the trust for the benefit of future generations. The purchase of a survivorship contract in the Dynasty Trust can provide excellent leverage of the money and will be payable, tax-free, to the trust at the death of the second insured (often the grantors/grandparents).
A Dynasty Trust is an irrevocable trust that is not subject to estate taxes for as long as state law allows. Therefore, the state in which it is set up plays an important role. States such as Delaware, Alaska, Nevada, and South Dakota have much more favorable laws in terms of Dynasty Trusts compared to other states.
There is a common drafting error made in many trusts by which they are created as “staggered distribution trusts.” This error can cause large portions of the trust assets to be lost to estate taxes, creditors, and divorcing spouses. However, if a Dynasty Trust is properly set up instead, these pitfalls can be avoided.
The Trusts themselves can be set up as one of two types of ILIT: a support trust or a discretionary trust. A support trust is usually set up for the support of one or more beneficiaries and directs the trustee to distribute trust income as needed for maintenance, education or welfare of said beneficiary(ies). A discretionary trust gives the trustee complete discretion to allocate income or principal when he or she deems it appropriate. A responsible and financially savvy beneficiary can even be designated as the trustee of a Dynasty ILIT
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