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Dynasty Trust Analysis(GSTT Planning Strategies)

Maximizing Family Wealth and Avoiding Transfer Tax for Generations

Manulife Financial and the block design are registered service marks and trademarks of The Manufacturers Life InsuranceCompany and are used by it and its affiliates including Manulife Financial Corporation. Copyright 2002. The Manufacturers Life

Insurance Company (U.S.A.). All rights reserved. MLI0124006677. Expires 12/31/2002.

THIS MATERIAL MAY NOT BE COPIED OR USED WITH THE PUBLIC.

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Client Profile

•60s or older

•Wealthy individuals with children who will have estate tax exposure

• Individuals who want to pass substantial wealth to future generations

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The Problem

• Each generation needs liquidity to pay for estate taxes and other administrative costs at death.

• What impact will divorces or lawsuits have on the growth of assets for future generations?

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Background Issues

• Generation-Skipping Transfer Taxes (GSTT)

• Rule Against Perpetuities

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The Dynasty Trust

Solution

Pay the estate tax once, and for all.

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The Dynasty Trust

• Savings

• Availability

• Leverage

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• Purpose.• Flat Tax at a 50% Rate (2002). • Additional Tax. • Applied to “Skip” Gifts.

The GSTT

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• Direct skips. • Outright gift.• Gifts in trust. • Taxable distributions. • Taxable terminations.

GSTT Events

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$1,100,000* Per Estate Owner

$2,200,000* Husband and Wife

The GSTT Exemption

*Effective 2002

• 2002-2003 - $1,100,000*• 2004-2005 - $1,500,000• 2006-2008 - $2,000,000• 2009 - $3,500,000• 2010 - No estate or GST tax• 2011 - $1,000,000*

Increase in GST and Estate Tax Exemptions

(return to current law)

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

'02-'03 '04-'05 '06-'08 '09 '10 '11

FOR BROKER/DEALER AND GENERAL AGENT USE ONLY

*The GST exemption will be inflation adjusted in 2003.

8

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Increase in the Gift Tax Exemption

• Gift tax exemption will stay at $1,000,000 in 2002 and after

• Gift tax has not been repealed• After 2010, the highest gift tax rate will be

the top individual income tax rate

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A Dynasty Trust

• An Irrevocable Life Insurance Trust (ILIT)

• Multi-Generational Benefits

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• GSTT Allocation and Life Insurance

• No Transfer Taxes to Trust

Avoiding Transfer Taxes in Future Generations

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The Stroms

ClientJeremy and Amanda Strom

Ages 67 & 62

Two Children Ages 36 and 33

Two Grandchildren Ages 4 and 1

Estate Value $5,000,000

After-tax Growth Rate 5%

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• Establish a Dynasty Trust.

• Gift $220,000 for 10 years to the Trust.

• Trustee purchases life insurance policy.

Strategy

Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation-skipping tax). Failure to do so could result in adverse tax treatment of trust proceeds.

FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 16

Strom children and grandchildren are named beneficiaries.

Purchase Survivorship Universal Life Policy

#1: Establish The Trust

Jeremy Jeremy & &

AmandaAmanda

Jeremy Jeremy & &

AmandaAmanda

DynastyDynastyTrustTrust

DynastyDynastyTrustTrust

Strom Strom FamilyFamilyStrom Strom FamilyFamily

FOR BROKER/DEALER AND GENERAL AGENT USE ONLY. 17

#2: Funding the Trust

Annual gifts

Trustee pays annual premiums

Jeremy Jeremy &&

AmandaAmanda

Jeremy Jeremy &&

AmandaAmandaDynastyDynasty

TrustTrustDynastyDynasty

TrustTrust

SurvivorshipSurvivorshipUL UL

SurvivorshipSurvivorshipUL UL

$220,000 per year

for 10 years

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#3: In The End…

SurvivorshipSurvivorshipULUL

SurvivorshipSurvivorshipULUL

Income tax free death benefit

Distributions

DynastyDynastyTrustTrust

DynastyDynastyTrustTrust

StromStromFamilyFamilyStromStromFamilyFamily

18

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The Numbers

In 26 years the Strom Estate will be worth

$16,300,908

Ultimately, the Great Grandchildren will end up

with $28,419,323

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Current Situation

In 26 years the Strom Estate will be worth

$11,259,551

Ultimately, the Great Grandchildren will

end up with $144,149,849

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Proposed Dynasty Trust

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Dynasty Trust Analysis

Manulife Financial and the block design are registered service marks of The Manufacturers Life Insurance Company and are used by it and its affiliates including Manulife Financial Corporation. This material is for informational purposes only. For more detailed information please contact your advisor. Manulife Financial or any of its agents, employees, or registered representatives do not give legal, tax, investment, or accounting advice. The information given here is merely a summary of our understanding of the current laws and regulations. Prospective purchasers should consult their tax advisor.

The End