The Farm Bureau Estate Planning Program A Service-to-Member

The Farm Bureau Estate Planning Program A Service-to-Member Program Since 1974 Southern Farm Bureau Life Insurance Company Jackson, Mississippi (601) 981 -7422 EPSIMG 1 REVISED 11/01

Uses of Life Insurance In Estate Planning I. Policy Types II. Life Insurance Trusts (“Family Private Bank Fund”) III. Dividing The Estate (Distribution Planning) IV. Business Transfer (The Buy/Sell) V. Charitable Gifts

Policy Types I. Term Insurance A. Insures For a Limited Period (5, 10, 20 years). B. Useful for Family Protection: Income Replacement and Debt Payment. C. Used Only in “Special Strategies” in Estate-tax Planning. D. Big Coverage Amounts/Modest Price

Policy Types II. Whole Life Insurance A. Best For “Long Term” Needs B. Develops Cash Value (Savings) C. May Pay Dividends (Benefit Growth) D. Delivers Money at “Indeterminate Time” E. Very Useful in Estate Planning

Policy Types III. Survivorship Life Insurance (“Last Survivor” Life) A. Insures Two People (Mom & Dad) B. Pays Benefit at Death of Survivor C. Provides Largest Amount of Death Benefit per Premium Dollar. D. Excellent for Estate Liquidity & Tax E. Often Funds Trust for Tax Payment

Your Life Insurance Can: 1. Fund bequests for children and grandchildren outright or in trust. 2. Equalize estate distributions to your heirs. 3. Fund tax-free charitable bequests to your favorite charity. You might receive an income-tax deduction for the premiums. 4. Pay estate taxes and transfer costs. 5. Provide Security For surviving Spouse 6. Provide Liquidity to Continuing Business

Irrevocable Life Insurance Trust (ILIT) I. Why Use A Trust ? A. Privacy B. Removes Life Policy Death Benefit From Estate Tax C. Provides Funds to Pay Estate taxes From “Outside” D. Provides Liquidity for Other Estate Needs Without Increasing Estate Size

Irrevocable Life Insurance Trust (ILIT) II. The Trust Acts Like a “Family Private Bank” A. Can Make Loans to Estate B. Can Purchase Assets From the Estate C. Can Divide Property to Heirs D. Can Execute Continuing Management Instructions E. May Protect Against Creditors

Irrevocable Life Insurance Trust (ILIT) III. How To Set Up An ILIT A. Estate Attorney Drafts Trust B. You Choose a Trustee C. You Transfer an Existing Policy to the Trust (3 -Year Rule) or Trustee Applies for New Policy D. You Make Money Gifts to Trust to Fund Policy E. Trustee Handles Administrative Duties

Irrevocable Life Insurance Trust (ILIT) IV. The ILIT Funded With Life Insurance in Summary: A. “Leverages” Relatively Small Cash Gifts into Large Amounts of Tax-Free Funds When Funded with Life Insurance B. Funds Pay Taxes or Replaces Estate Money Lost to Taxes C. Funds Available to Solve Estate Distribution “Problems”

Estate Distribution Problems I. The “Equitable Split” Problem A. Children/Child In the Family Business Need/s Most of the Value of the Estate Represented by the Capital Assets B. How do You Make an “Equitable” Distribution? C. Life Insurance Proceeds (Often Survivor Life) Can Provide Cash Distributions to Children Not in the Family Business

Estate Distribution Problems II. "Surviving Mom/Business Risk” Problem A. Mom Has Participated In the Business or Farming Operation Risk With Dad All Her Life. B. At Dad’s Death, There is/are Child/Children in the Business Who Need the Business Assets to Continue. C. Therefore, Mom Cannot Liquidate the Equipment and Other Assets for Her Security. D. Mom Is Forced to Continue to “Ride” the Business Risk With the Child/Children.

Estate Distribution Problems II. "Surviving Mom/Business Risk” Solution A. Child/Children Who Will Continue the Family Business Purchase and Own Life Insurance On the Primary Business Operator (Often Dad). B. At the Primary Owner’s Death, Child Purchases Business Interest or Needed Assets From Owner’s Estate. C. Mom Has Cash for Security, May Continue to Lease Land to Children, and Children Have Assets They Need. Mom Relieved of Risk.

Estate Distribution Problems II. "Surviving Mom/Business Risk” Solution D. The Estate Size Is Not Increased by This Purchase Since Cash is EXCHANGED for Assets. E. The Cash Paid to Mom Can Be Used, at Her Death to Help With “Equitable Distribution Problem” for Children Not In the Business. F. Kids “Not In the Business” Know Children “In the Business” Paid For some of the Assets They Received.

Business Transition Planning 1. As We Just Discussed, Have a Plan for Business Transfer to Children or Business Partners. 2. Formalize business relationship with children as soon as it’s sure they’re committed to the business. 3. Formalize the Transfer Terms with Other Partners, Whether Family or Not, with a “Buy/Sell” agreement: A. Preserves the value/establishes market B. Protects Business Value & Relationships

The Buy/Sell Agreement Benefits to Deceased’s Heirs & New Owners: 1. Everyone Knows How the Business Will Be Valued and What’s Going to Happen 2. Heirs have an Opportunity to Receive Cash vs. Partial Interest in the Business: A. The estate can be settled promptly and efficiently B. Heirs are not burdened with business responsibilities 3. Surviving Owner/s Not “In Business” With the Deceased’s Heirs 4. Surviving Owners Can Set New Goals Unimpeded

The Buy/Sell Agreement Basic Kinds of Buy/Sell Agreements: 1. Entity-Purchase Plans The agreement is between the Corporation, Partnership, LLC and the Stockholders or Partners 2. Cross-Purchase Plans The agreement is between the Stockholders or Partners and AVOIDS Potential Tax Problems 3. “Wait and See” Plans Are a combination of “Entity” and “Cross-Purchase” 4. Buy/Sell plans should address Death, Disability, and Retirement.

Funding The Buy/Sell 1. Assets of The Business Might Be Used A. Business Loses Assets B. There May Be Income-Tax Problems 2. Loans Might Be Obtained A. Have to Pay Back Principal & Interest B. Cash Flow of the Business Is Impaired 3. Installment Buyout A. Payee Continues In the Business Risk B. Continuing Drain on Earnings & Cash 4. Life Insurance Is an Inexpensive Way

Funding The Buy/Sell 1. Term Insurance: Low-Cost Funding Option A. Premium Fixed for 10, 20, 30 Years B. Can Be Used When the Coverage Time Period is Known & Cash Flow Critical 2. Whole Life Can Be Used When the Coverage Period is indefinite or Cash Value Desired 3. Deceased’s Family Is Immediately Paid or Receives a Large Down Payment 4. Entity Buyout: Business Owns & Pays Policy 5. Cross Purchase: Owners Insure Each Other

Charitable Gifting With Life Insurance 1. Giving Life Insurance Allows You To make Larger Gifts than Otherwise 2. Government Encourages Charitable Gifts 3. Therefore, You and Charity Get Benefit 4. Several Ways to Make Insurance Gifts: A. Make the Charity the Beneficiary 1. You retain control of policy & Cash Value 2. You don’t get an Income-Tax deduction 3. Your Estate gets Charitable Deduction for death benefit.

Charitable Gifting With Life Insurance Ways to Make Insurance Gifts (Cont. ) B. Transfer An Existing Policy to Charity 1. You Give Up Control of Policy 2. You Gift Money for Premium to Charity 3. You get Charitable Income-Tax Deduction for Gift. C. Charity Takes Out New Policy on You 1. You Gift Premium Money to Charity 2. Charity Owns Policy & All Rights 3. You get Charitable Tax Deduction

Charitable Gifting With Life Insurance Ways to Make Insurance Gifts (Cont. ) D. Gift Dividends of An Existing Policy to Charity 1. You get Income-Tax Deduction for Dividend Amount 2. Deduction gets Larger if Dividend Increases 3. You control Cash Value & Death Benefit still goes to Your Family E. Larger Income-Tax Deductions May Result from Premium Gifts to Charity Rather than Your Paying Insurance Company Directly F. Whole Life or Survivor Life Policies Best

Poor Planning May Equal Unnecessary Estate Taxes And Inefficient Distribution

Farm Bureau Estate Planning Service For FB Members Since 1974 9808 EPSIMG 1

No information presented should be viewed as tax advice. A tax advisor should be consulted to review your particular circumstances.