Washington Report

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Leadership for Advanced Life Underwriting

R

Washington Report

The trusted source of actionable technical and marketplace knowledge for AALU members - the nation’s most advanced life insurance professionals.

The AALU AALU Washington The Washington Report is Report is published publishedby by AALUniversity, aa AALUniversity, knowledge service knowledge serviceofofthe the AALU. The trusted source AALU. The trusted source of actionable technical and of actionable technical and marketplace knowledge for marketplace knowledge for AALU members—the nation’ s AALU members—the namost advanced life insurance tion’ s most advanced life professionals. insurance professionals. The AALU Washington Report is prepared by the The AALU Washington AALU staff and Greenberg Report is prepared by the Traurig, one of the nation’ s AALU staff and Greenberg leading law firms in tax and Traurig, one of the nation’s wealth management. leading law firms in tax and wealth management. Greenberg Traurig LLP Jonathan M. Forster

Greenberg Martin Kalb Traurig LLP Jonathan Forster Richard A.M. Sirus StevenKalb B. Lapidus Martin RebeccaA. Manicone Richard Sirus Steven B. Lapidus Counsel Emeritus Rebecca Manicone

Gerald H. Sherman 1932-2012 Stuart Lewis 1945-2012

Counsel Emeritus Gerald H. Sherman 19322012 Stuart Lewis 1945-2012 Topic

Topic: Funding Trust-Owned Life Insurance – Selecting the Best Washington Report 13-17 Option.

Topic: The Department of Labor Issues Advisory to Assist ERISA Plan FiduMARKET TREND: Although a higher federal estate taxRetirement exemption means ciaries When Selecting and Monitoring Target Date Funds.fewer families will face federal estate tax exposure, the use of trusts in life insurance plans will continue to serve numerous practical and tax planning needs.

MARKET TREND: Target date retirement funds have become an increasingly optionlifeininsurance 401(k) plans and must otherconsider employeeSYNOPSIS: popular Planninginvestment with trust-owned (“TOLI”) directed retirement plans. plan fiduciaries should become wellthe funding of premiums intoERISA the trust. Numerous funding methods exist, informed the material of any or contemplated including: regarding (1) annual exclusion gifts,provisions (2) lump-sum giftscurrent of gift and GST tax exemption, split-dollar arrangements, (4)other installment to ILITs or (5) target date (3) retirement fund, as well as all currentsales or contemplated a combination thereof, with each method varying in terms of administrative investment funds available under the plan, to satisfy their fiduciary complexity and tax-efficiency. obligations under ERISA. TAKE AWAYS: TOLI is beneficial for creditor and beneficiary protection SYNOPSIS: The advisory issued by the Department of Labor provides purposes, wealth management, state estate tax planning, and income tax guidance that should be followed by ERISA plan fiduciaries when selecting planning. The selection of the best premium funding method will depend on each and monitoring date retirement funds. family’s particulartarget circumstances and goals, and the level of on-going support they will have from their insurance, tax, and legal advisors (including policy and

TAKE advisory issued by the or Department of Labor fundingAWAYS: reviews).The Generally, annual exclusion lump sum gifts are thehighlights most the importance identifying differences between datefederal retirement efficient approachoffor individualsthe with estates closer to the target $5 million estate tax exemption. Larger estates, however, will benefit greatlyInfrom combining funds, including the fees and investment strategies of each. addition, these gifts with more advanced funding methods, such as loans or installment this guidance should be applied to the selection and monitoring of other sales, particularly the current, low interest other environment. investment fundsgiven by ERISA plan fiduciaries, than target date retirement funds. PRIOR REPORTS: 13-08; 12-41; 12-28; 12-22

MAJOR REFERENCES: “Target Datelife Retirement Funds –anTips for ERISA Prior to recent tax law changes, holding insurance through irrevocable trust Plan Fiduciaries, ” U.S. Department of Labor, February 2013. was standard protocol for estate planning, and it continues to serve many practical purposes. Individuals, however, must consider the practicalities of trust funding

OVERVIEW in order to select the most suitable and tax-effective premium funding method for TOLI policies.

Target date retirement funds (“TDFs”) have become an increasingly popular WHY CONTINUE TOLI investment optionTO inUSE 401(k) plans and other employee-directed retirement plans. TDFs can be attractive investment options for employees who do not Before 2013, most individuals placed life insurance into an irrevocable life want to actively manage their retirement savings. TDFs offer a long-term insurance trust (“ILIT”) in order to prevent taxation of the life insurance investment strategy based on holding a mix of stocks, bonds and other proceeds in the insured’s estate. The permanent increase in the federal estate investments automatically changesraises over time as the participant ages. A tax exemptionthat to $5.25 million,1 however, the question of whether many TDF’s assetILITs allocation, when the target date is a number of years away, familiesinitial still need for estate tax planning. usually consists mostly of stocks or equity investments, which often have Yet TOLI remains for beneficial numerous reasons. A trust creditor greater potential higherfor returns but also can be moreoffers volatile and carry protection for beneficiaries (as in cases of bankruptcy or divorce) and provides greater investment risk. As the target retirement date approaches (and often centralized (and professional) particularly continuing afterpossibly the target date), the wealth fund’s management, asset allocation shifts to for include younger beneficiaries who are not prepared to handle large or sudden ascensions a higher proportion of more conservative investments, like bonds and cash to wealth. Further, ILITs limit exposure to state estate taxes in states with instruments, which generally are less volatile and carry less investment risk separate estate tax systems or no state income taxes, which typically have much than stocks. lower exemptions than the federal estate tax exemption amount. The U.S. Department of Labor (the “DOL”) issued an advisory that provides

Leadership for Advanced Life Underwriting

R

Washington Report

The trusted source of actionable technical and marketplace knowledge for AALU members - the nation’s most advanced life insurance professionals.

general guidance to assist ERISA plan fiduciaries in selecting and monitoring TDFs and other investment options in 401(k) plans and other participant-directed individual account plans. The advisory notes that there Topic: Funding Trust-Owned Life Insurance – Selecting the Best The AALU Washington are considerable differences among TDFs offered by different providers, even among TDFs with the same Report is published by Option. target date, including different investment strategies, glide paths (that is, the manner in which the TDF’s asset AALUniversity, a knowledge service of allocation will shift overthe time as the participant ages), andAlthough investment-related fees. Thus, focus ofmeans the fewer MARKET TREND: a higher federal estate taxthe exemption AALU. The trusted source guidance issued by the DOL is on thefamilies steps that ERISA fiduciaries will can face help federal estateplan tax exposure, theunderstand use of truststhese in lifedifferences insurance of actionable technical and plans will continue tooption serve numerous practical and tax planning needs. when selecting and monitoring a TDF as an investment for their plan.

marketplace knowledge for AALU members—the nation’s Planning 1. Establish a process for comparingSYNOPSIS: and selecting TDFs.with trust-owned life insurance (“TOLI”) must consider most advanced life insurance the funding of premiums into the trust. Numerous funding methods exist, professionals. including: (1) annual exclusion gifts, (2) lump-sum gifts of gift and GST tax ERISA plan fiduciaries should engage in an objective process to obtain information that will enable them exemption, (3) split-dollar arrangements, (4) installment sales to ILITs or (5) The AALU Washington to evaluate the prudence of any investment option made available under the plan. This should include a combination thereof, with each method varying in terms of administrative Report is prepared by the consideration of how well the TDF’s characteristics align with eligible employees’ ages and likely retirement complexity and tax-efficiency. AALU staff and Greenberg dates. one of the nation’s Traurig, leading law firms in tax and TAKE AWAYS: TOLI is beneficial for creditor and beneficiary protection wealth management. purposes, management, 2. Establish a process for the periodic reviewwealth of selected TDFs. state estate tax planning, and income tax planning. The selection of the best premium funding method will depend on each Greenberg Traurig LLP family’s particular circumstances and goals, and the level of on-going support ERISA plan Jonathan M.fiduciaries Forster are required to periodically review the plan’s investment options to ensure that they they will have their insurance, tax, include and legalexamining advisors (including shouldKalb continue to be offered. At a minimum, thefrom review process should whetherpolicy there and have Martin funding reviews). Generally, annual exclusion or lump sum gifts are the most Richard A. Sirus been any significant changes in the information fiduciaries considered when the option was selected or last efficient approach for individuals with estates closer to the $5 million federal Steven B. Lapidus reviewed. estate tax exemption. Larger estates, however, will benefit greatly from combining Rebecca Manicone these gifts with more advanced funding methods, such as loans or installment 3. Understand the fund’s investments – the allocation in different asset bonds, cash), sales, particularly given the current, low classes interest (stocks, environment. Counsel Emeritus individual investments, and how these will change over time. Gerald H. Sherman 1932-2012 Stuart Lewis 1945-2012 PRIOR REPORTS: 13-08; 12-41; 12-28; 12-22

ERISA plan fiduciaries should understand the principal strategies and risks of the fund, or of any underlying to recent law including changes, holding life insuranceof through an irrevocable asset classes or investments that mayPrior be held by thetax TDF, an understanding the fund’s glide path,trust was standard protocol for estate planning, and it continues to serve many when the fund will reach its most conservative asset allocation and whether that will occur at or after the practical target purposes. Individuals, however, must consider the practicalities of trust funding date. in order to select the most suitable and tax-effective premium funding method for TOLI policies.

4. Review the fund’s fees and investment expenses. ERISA plan fiduciaries should understand the significant variation WHY CONTINUE TO USE TOLI among TDF costs, both in the amount and types of fees.

Before 2013, most individuals placed life insurance into an irrevocable life insurance trust (“ILIT”) in order to date prevent taxation thea life insurance 5. Inquire about whether a custom or non-proprietary target fund wouldofbe better fit for your proceeds in the insured’s estate. The permanent increase in the federal estate plan. tax exemption to $5.25 million,1 however, raises the question of whether many families still needand ILITs for estate tax planning. ERISA plan fiduciaries should understand the costs benefits of offering a pre-packaged product which uses

only the vendor’s proprietary funds as the TDF component investments, versus offering a “custom” TDF which Yet TOLI remains beneficial for numerous reasons. A trust offers creditor incorporates the plan’s existing core funds in the TDF. protection for beneficiaries (as in cases of bankruptcy or divorce) and provides centralized (and possibly professional) wealth management, particularly for

6. Develop effective employee communications. younger beneficiaries who are not prepared to handle large or sudden ascensions ERISA plan fiduciaries must provideto appropriate information about TDFs to in state general, astaxes a retirement investment wealth. Further, ILITs limit exposure estate in states with separate in estate systems or no state income taxes, typically havetake much option, and about individual TDFs available the tax plan. For this purpose, ERISA planwhich fiduciaries must lower exemptions than the federal estate tax exemption amount. into consideration the final fee disclosure regulations issued by the DOL on February 12, 2012. The advisory

Leadership for Advanced Life Underwriting

R

Washington Report

The trusted source of actionable technical and marketplace knowledge for AALU members - the nation’s most advanced life insurance professionals.

indicates that the DOL is also working on regulations to improve the disclosures that must be made to participants specifically about TDFs.

Topic: Funding Trust-Owned Life Insurance – Selecting the Best The AALU Washington Report is published by Option. 7. Take advantage AALUniversity, a of available sources of information to evaluate the TDF and recommendations you knowledge service the of the received regarding TDF selection. MARKET TREND: Although a higher federal estate tax exemption means fewer AALU. The trusted source families will face federal estate tax exposure, the use of trusts in life insurance of actionable technical and will continue to serveof numerous practical and tax sources planningfor needs. ERISA plan fiduciaries should reviewplans the increasing number commercially available information marketplace knowledge for and services to assist plan fiduciaries in their decision-making and review process. AALU members—the nation’s SYNOPSIS: Planning with trust-owned life insurance (“TOLI”) must consider most advanced life insurance the funding of premiums into the trust. Numerous funding methods exist, professionals. 8. Document the process. including: (1) annual exclusion gifts, (2) lump-sum gifts of gift and GST tax exemption, (3) split-dollar arrangements, (4) installment sales to ILITs or (5) The AALU Washington ERISA plan fiduciaries should document the selection and review process, including how they reached decisions a combination thereof, with each method varying in terms of administrative Report is prepared by the about individual investment options. complexity and tax-efficiency. AALU staff and Greenberg Traurig, one of the nation’s leading law firms in tax and SUMMARY & TAKE AWAYS TAKE AWAYS: TOLI is beneficial for creditor and beneficiary protection wealth management. purposes, wealth management, state estate tax planning, and income tax planning. The selection of theplan best fiduciaries premium funding method The guidance issued by the DOL should be followed by ERISA to ensure thatwill theydepend satisfyon each Greenberg Traurig LLP family’s particular circumstances and goals, andofthe level In of on-going their expected fiduciary conduct with respect to the selection and maintenance TDFs. addition,support the Jonathan M. Forster they will have from their insurance, tax, and legal advisors (including policy and aforementioned guidance should be followed with respect to the selection and maintenance of other investment Martin Kalb funding reviews). Generally, annual exclusion or lump sum gifts are the most Richard Sirus TDFs. Therefore, even if an ERISA plan fiduciary does not intend to select or maintain TDFs as options,A. besides efficient approach for individuals with estates closer to the $5 million federal Steven B. Lapidus investment options under the plan, this guidance issued by the DOL should still be relevant to those ERISA plan estate tax exemption. Larger estates, however, will benefit greatly from combining Rebecca Manicone fiduciaries. these gifts with more advanced funding methods, such as loans or installment sales, particularly given the current, low interest environment. Counsel Emeritus In order comply with requirements imposed by the IRS which may apply to the Washington Report as Gerald H.to Sherman 1932-2012 Stuart Lewisor 1945-2012 distributed as re-circulated by our members, please13-08; be advised of12-28; the following: PRIOR REPORTS: 12-41; 12-22 to recent OR tax law changes, holding insurance an irrevocable THE ABOVE ADVICE WAS NOT Prior INTENDED WRITTEN TO BElife USED, ANDthrough IT CANNOT BE trust was standard protocol for estate planning, and it continues to serve many practical USED, BY YOU FOR THE PURPOSES OF AVOIDING ANY PENALTY THAT MAY BE IMPOSED BY purposes. Individuals, however, must consider the practicalities of trust funding THE INTERNAL REVENUE SERVICE. in order to select the most suitable and tax-effective premium funding method for TOLI policies.

In the event that this Washington Report is also considered to be a “marketed opinion” within the meaning of the IRS guidance, then, as required byCONTINUE the IRS, please beTOLI further advised of the following: WHY TO USE THE ABOVE ADVICE WAS NOT Before WRITTEN TO SUPPORT MARKETING 2013, most individuals THE placedPROMOTIONS life insurance intoOR an irrevocable life OF insurance trust (“ILIT”) in order to prevent taxation of the life insurance THE TRANSACTIONS OR MATTERS ADDRESSED BY THE WRITTEN ADVICE, AND, BASED ON proceedsYOU in theSHOULD insured’s estate. The permanent increase in the federal estate THE PARTICULAR CIRCUMSTANCES, SEEK ADVICE FROM AN INDEPENDENT 1 tax exemption to $5.25 million, however, raises the question of whether many TAX ADVISOR. families still need ILITs for estate tax planning.

Yet TOLI remains beneficial for numerous reasons. A trust offers creditor protection for beneficiaries (as in cases of bankruptcy or divorce) and provides centralized (and possibly professional) wealth management, particularly for younger beneficiaries who are not prepared to handle large or sudden ascensions to wealth. Further, ILITs limit exposure to state estate taxes in states with separate estate tax systems or no state income taxes, which typically have much lower exemptions than the federal estate tax exemption amount.