Yours, Mine, and Ours

OLA 1628 0910

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This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Clients and other interested parties to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.

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If you or your spouse merged assets and children from a previous marriage into your current marriage, you are not alone

According to the U.S. Census Bureau, blended families now outnumber traditional families in the United States

Divorce rate for 1st marriages is 41%, 2nd marriages is 60% & 73% for 3rd marriages1

Times Are Changing

1Divorce Magazine, June 2010.

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Traditional estate-planning techniques are no longer as effective

A blended family’s estate plan must deal with the inevitability of death and taxes and also negotiate potential family discord

Evolution of Traditional Family Structure Poses New Challenges

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No plan + family fallout

Traditional plan fosters family discord

Traditional plan & surviving spouse close in age to children from former marriage

Failure to consider the “Ex-Factor”

Blended Family Estate Planning Issues

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State law provides a default estate plan that, in most cases, provides for a surviving spouse to inherit the bulk of a couple’s estate

If the survivor’s relationship with stepchildren sours over time, he or she may later draft a will that disinherits stepchildren

Blended Family Issue: No Plan + Family Fallout

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Generally, a surviving spouse will inherit everything under a traditional estate plan

A couple’s children or stepchildren will not inherit until the survivor passes away

Tension between family members may arise if it appears that the surviving spouse is spending the stepchildren’s inheritance or controlling their financial future by having control of a family business

Blended Family Issue: Traditional Plan Fosters Family Discord

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Under a traditional estate plan, children from a former marriage do not inherit directly from their biological parent if he or she is the first to pass away

These children are forced to wait until the surviving spouse passes away to inherit

This has the potential to effectively disinherit children from a prior marriage if they are close in age to the surviving spouse

Blended Family Issue: Traditional Plan & Surviving Spouse Close in Age to Children

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Without proper planning, a divorced or twice (or more) married spouse may inadvertently leave an inheritance to an ex-spouse as custodian of minor children

This is disturbing if he or she fears the ex-spouse will mismanage the inheritance or spend money intended for the children

Blended Family Issue: Failure to Consider the “Ex-Factor”

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Blended Family Strategy: Combine Traditional Plan & Life Insurance

Establish a Revocable Living Trust

Including marital and bypass trusts

Purchase a separate life insurance policy to specifically benefit only those children born of a previous marriage

Consider establishing a legacy trust if facing potential estate tax liability

A legacy trust is also useful if you want a third party trustee to control trust funds

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Why Life Insurance?

Estate Equalization

By combining an otherwise traditional estate plan with a life insurance policy to benefit only children of a former marriage, a member of a blended family can demonstrate the intent to be fair and provide equally for all loved ones

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Why Life Insurance?

Instant Liquidity

A life insurance policy can infuse an estate with the cash necessary for:

Income replacement

Paying off debt

Paying taxes

Inheritance equalization

Funding family business transfer

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Why Life Insurance?

Self-Completion

As long as premiums are paid on a guaranteed policy, loved ones will receive a minimum guaranteed death benefit upon your passing—whether that day comes in 5 years or in 30 years*

*Assuming all policy provisions remain satisfied.

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Why Life Insurance?

Tax Efficient

The death benefit of a trust-owned life insurance policy will ultimately pass federal income and estate tax-free to named beneficiaries

Life insurance policy cash values grow on a tax-deferred basis and can be accessed in a tax-favored manner

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Blended Family Estate Planning in Action: Duran FamilyTHE FACTS

David and Carolina Duran have been married for five years and have two small children

Carolina is in her late 30s and has not been married before

David is in his late 50s and has a substantial estate

David has two children from a prior marriage who are in their late 20s

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Blended Family Estate Planning in Action: Duran Family

OBJECTIVES

David wants to be fair

He wants to take care of Carolina and the kids

He also wants to provide for his children from his prior marriage

Primary concern is that his estate plan reflects no favoritism for either family

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Blended Family Estate Planning in Action: Duran Family

STEP 1

David establishes a revocable living trust, including a marital and bypass trust

Upon his passing it will provide Carolina with an income stream for her lifetime

The living trust provides that when the surviving spouse passes away, the children of his and Carolina's marriage will inherit the remainder of the couple’s cumulative estate

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Blended Family Estate Planning in Action: Duran Family

STEP 2

David establishes and gifts premiums to a legacy trust

The trust uses these funds to purchase a life insurance policy on David’s life

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Blended Family Estate Planning in Action: Duran Family

THE RESULTS: When David passes away…

The legacy trust immediately receives the life insurance death benefit free of federal income and estate taxes

David’s children from a former marriage do not have to wait until their young stepmother passes away to receive an inheritance

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Blended Family Estate Planning in Action: Duran Family

THE RESULTS: When David passes away…

David’s remaining assets will be deposited into the marital and bypass trusts, providing for Carolina and his children born of the second marriage

This solution is ideal—demonstrating the intent to be fair and provide equally for all loved ones

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Blended Family Estate Planning in Action: A Bird’s Eye View

David Duran

Revocable

Living Trust

Revocable Living Trust

UPON DEATH

Legacy Trust

Children from previous marriage

Carolina and their children

Bypass Trust

Marital Trust

Legacy Trust

DURING LIFEPayment of premiums

Issues policy

Gifts of premiums

Transfer ownership

of assets to revocable living trust.

Death benefit paid federal income and estate tax-free

Payment of death benefits

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Life insurance products issued by Transamerica Life Insurance Company, Cedar Rapids, IA 52499, or Transamerica Financial Life Insurance Company, Harrison, NY 10528.

Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively “Transamerica”), and their representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties should consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here.

Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of this presentation. However, these tax laws are subject to interpretation and change, and there is no guarantee that the relevant authorities will accept Transamerica’s interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects.

Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of September 2010.

Transamerica Financial Life Insurance Company is authorized to conduct business in New York. Transamerica Life Insurance Company is authorized to conduct business in all other states.

Yours, Mine, and Ours

OLA 1628 0910