EFTA02674239.pdf

LEON D. BLACK TRUST-OWNED SPLIT-DOLLAR LIFE INSURANCE COVERAGES ANNUAL REVIEW FEBRUARY 2013 Presented by: Donald L. Bryant, Jr. IIIl BrwlocrouP 701 Market Street Suite 1200 St. Louis, Missouri 63101 Office Only the MA Equitable policies are offered through AXA Advisors. LLC. The named individual offers securities through AXA Advisors, LLC (1290 Avenue of the Americas NY, NY 212-314-4600), member SIPC, and offers annuity and insurance products through AXA Network, LLC and its subsidiaries. Bryant Group, Inc. is not owned or operated by AXA Advisors or AXA Network. Securities offered through M Holdings Securities, Inc., A Registered Broker/Dealer, Member FINRAISIPC. Bryant Group, Inc. is independently owned and operated. 2013 Bryant Group Incorporated All Rights Reserved EFTA_R1_01954589 EFTA02674239  LEON BLACK February 2013 Annual Review of Trust-Owned Split — Dollar Life Insurance Coverage The materials in this report have been prepared by Bryant Group, Inc. solely for the use of its clients. - The materials are designed to convey accurate and authoritative information concerning the subject matter covered. However, they are provided with the understanding that Bryant Group, Inc. does not engage in the practice of law, or give legal, accounting or asset allocation advice. For advice in these areas regarding the application of this information to specific transactions, please consult your appropriate advisors. IRS Circular Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of 0) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. - Any hypothetical investment performance data contained in these materials are included for illustrative purposes only and are not guaranteed. Similarly, historical data are presented for informational purposes and are not intended to suggest future performance. - Further, this information contains intellectual property, is proprietary, and may not be shared with any person without the specific written approval of Bryant Group. Inc. Beyond this limited authorization, all rights are reserved and no part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise). Bryant Group. Inc. acts as agent for a number of life insurance companies for the sale of We insurance, annuities and disability insurance. Variable life insurance and variable annuities are offered for sale by associates of Bryant Group. Inc.. who are registered representatives of AXA Advisors. LLC. The named individual offers securities through AXA Advisors. LLC (NY, NY 212-314-4600). member FINRA, SIPC, and offers annuity insurance products through AXA Network, LLC and its subsidiaries. Bryant Group, Inc. is not owned or operated by AXA Advisors or AXA Network. Bryant Group, Inc. acts as agent for a number of life insurance companies for the sale of life insurance. annuities and disability insurance. Variable life insurance and variable annuities are offered for sale by associates of Bryant Group. Inc., who are registered representatives ofM Holdings Inc. Securities Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer, Member FINRAISIPC. Bryant Group, Inc. is independently owned and operated. Bart Dan NyarIA tov read,. Lex,Renessfebrary 2013 Anna %vex Omit Bryant Group (114' If I EFTA_R1_01954590 EFTA02674240  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage TABLE OF CONTENTS I. Review of Need, Solution, and Rationale for Individual and Second-to-Die Life Insurance Coverage I —1 • Collateral Assignment Split — Dollar Life Insurance Diagram I—3 + Review of IRS Notice 2002 — 8 and Final Regulations Regarding Split-Dollar Plans I- 4 II. Summary of Coverage • Current Policy Values and Split-Dollar Advance II — I III. Planning Idea: Trust Purchases Policies and Split-Dollar Agreements Terminated + 8% Gross Rate of Return Policy Projections III — 2 + 6% Gross Rate of Return Policy Projections III — 3 • Re-allocation of Security Life of Denver Policy III - 4 BrYant, Group 8 *pm Or fryaroM evu F8alt eceRasrawastrary 2013 Arnaa RearsOcca EFTA_R1_01954591 EFTA02674241  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage I. Review of Need, Solution, and Rationale for Individual and Second-to-Die Life Insurance Coverage Background: Facts In 1999, $50,000,000 of Individual, Trust—Owned Life Insurance was implemented on Leon's life and $100,000,000 of Second-to-Die, Trust—Owned Life Insurance was implemented on Leon and Debra's lives. The policies utilized are Variable Universal Life Insurance policies with a variety of large, high quality carriers. Below is a summary of the Needs, Solution, and Rationale for these coverages. Needs Need #1: Cash at Leon's death to retire debt and not disturb other assets and investments. Need #2: Liquidity at the second death of Leon and Debra to assist in paying estate taxes. Solution Solution #1: — Individual variable universal life insurance coverage on Leon's life. — Coverage is owned by an irrevocable life insurance trust. — Coverage is financed via a Split-Dollar life insurance plan. Solution #2: — Second-to-Die, variable universal life insurance coverage on Leon and Debra's lives. Coverage is owned by an irrevocable life insurance plan. Coverage is financed via a Split-Dollar life insurance plan. IrApent Cva 9gyarrtA thru Fa ildt LeceRerasfebrary 2013 Anna' %vex aoca Bryant Group INCORPORAI ED I-1 EFTA_R1_01954592 EFTA02674242  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage Rationale Rationale #1: Individual coverage on Leon's life delivers income tax-free and estate tax-free cash at Leon's death. Rationale #2: Second-to-Die coverage delivers income-tax free and estate ..tax-free liquidity at the second death, when the estate tax comes due. By utilizing the Split-Dollar financing arrangement, only the value of the economic benefit of the insurance coverage is considered a gift to the irrevocable trust. Without a Split-Dollar Plan, the full amount of the premium is considered a gift to the trust. Death proceeds are income tax-free. — Assets in irrevocable trust are free of estate tax. The company recovers its premium advances. - Significant wealth transfer is accomplished with minimal gift tax implications. • The following page provides a diagram of the Collateral Assignment Split-Dollar Life Insurance Plan. The policy is owned by the trust, but is collaterally assigned to the company, until the company recovers its share of the premium advances. • The company recovers its premium advances through a cash value withdrawal in the future or through the death proceeds in the event of death of the insureds prior to the recovery of premium advances. At the death of the insured(s), the insurance carrier pays the death benefit to the trust. The payment is income tax-free and estate tax free. - The trustee follows the terms of the trust which may include the ability to buy assets from the estate or lend money to the estate to pay estate taxes. BAgial Don Bryon(A elmPa* LeartRoverffdray 2013 New, Raindin I- 2 Bryant rG,oup INC EFTA_R1_01954593 EFTA02674243  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage COLLATERAL ASSIGNMENT SPLIT-DOLLAR PLAN WEALTH TRANSFER PLAN There are Four Parties to this plan: IRREVOCABLE LIFE ENTITY LIFE INSURANCE INSURED(S) INSURANCE TRUST (Corporation or Family COMPANY (ILIT) Drilled Partnership) (provides insurance policy) ENTITY* (Corporation or Family Spit-Dollar Limited Partnership) Advance/Premium Split-Dollar Advance Repaid Through Cash O Value Withdrawal or Split-Dollar Death Benefit Agreement LIFE INSURANCE COMPANY Life Insurance Policy INSURED(S) Septale Amount Imagined Oran Q Rights of Split- ({) Economic Dollar Benefit/Gift to Agreement the Trust Death Benefit • The Irrevocable Life Insurance Trust (IUT) is the policyowner. The policy is assigned to the Entity until it recovers its loan balance. ' The Entity recovers its loan balance at: • Death of the insured(s), • At a future date, when the life insurance product is funded (with assumptions), or • At termination of the agreement. avertoar aye-mars Flatl, learfahwordetimier 2013 'aa ReS•00O1 I- 3 Bryant Group INCORPORATED EFTA_R1_01954594 EFTA02674244  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage Review of IRS Notice 2002-8 & Final Regulations Regarding Split-Dollar Plans Existing Split-Dollar Plans • In January 2002, the IRS issued Notice 2002-8 outlining "expected proposed regulations" regarding split-dollar life insurance arrangements. • On July 3, 2002, the IRS issued Proposed Regulations on split-dollar life insurance arrangements. • On September 11, 2003, the IRS issued Final Regulations on the tax treatment of Split- Dollar life insurance arrangements. The Final Regulations provide rules for Split-Dollar life insurance arrangements that are entered into or materially modified after September 17, 2003. • Analysis of the Notice and the Final Regulations indicate the following options are available for split-dollar plans in place prior to January 28, 2002: Option #1 — Continue Current Split-Dollar Plan, Pre-January 28, 2002, Notice 2002-8 • The Notice states that "no inference should be drawn from this Notice regarding the appropriate Federal income, employment and gift tax treatment" of split-dollar arrangements entered into before publication of the final regulations. • Some commentators have suggested that this means "business as usual" for split-dollar arrangements entered into before final regulations are published. • This option involves some risk the IRS in the future will successfully argue that remaining policy cash value after the company recovers its premium advances should be taxable income to the participant and subject to gift tax (when applicable). • The "unknowns" are whether the Service will be interested in waging this battle and if so, the outcome. B Don Br an/AWu ears tsmi4.,awf&bay 2017 Alltlia gireete Ca, I- 4 Bryant Group iNCORPORATED EFTA_R1_01954595 EFTA02674245  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage Option #2 — Safe Harbor Provision — Re-characterizes Split-Dollar Advance and Future Premium Payments as Interest Bearing Loans • The Notice 2002-8 provides a "safe harbor provision" which guarantees complete protection from taxation of policy equity in the future when the split-dollar arrangement is terminated and the company recovers its split-dollar advances. • In other words, under the provisions outlined below, there will be no income taxation on the remaining cash value in the policy after the company recovers its premium advances. • Prior to January 1.2004 the split-dollar plan is terminated by repaying the company its split-dollar advance. • In January 2004, the executive and the company enter into an Interest Bearing Note Agreement at the then Applicable Federal Rate. • The loan interest due annually from the executive may be bonused by the company as compensation expense. • The executive pays the annual loan interest to the company. • The bonus payment and receipt of interest income offset each other on a cash flow and taxable income basis to the company. • The executive's cost is the annual tax due on the bonused compensation. • By re-characterizing the split-dollar advance and future premium payments as an interest bearing loan, the policy equity after the company receives its premium loan will not be subject to income tax or gift tax. B Art Clon Elq0KA Ow reink lealReivenfets 209 MVua R6.9s ft* 5 Bryant Group ,A)064If i) EFTA_R1_01954596 EFTA02674246  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage Option #3 — Prior to January 1, 2004, the Company Forgives the Split-Dollar Advance; Premiums in 2004 and Beyond, If Needed, are Bonused by the Company • In 2003, the scheduled premium is paid by the company under the split-dollar plan. • Prior to January 1, 2004, the split-dollar advance is forgiven by the company. • The forgiven split-dollar advance is bonused to the executive as compensation expense and is reportable income and the measure of the gift. • Additional premiums, if necessary, are paid by the company and bonused to the executive or paid directly. Wool Don EirsintA Ow Knock Licalletsfstray 200 Amami ReNtes eta Bryant Gioup INCORPORA I El) I- 6 EFTA_R1_01954597 EFTA02674247  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage All three funding options were analyzed, presented, and reviewed in 2003. After reviewing this information with John Hannan on several occasions, consulting our corporate counsel, Larry Brody, discussing this information with Tom Turrin, Leon's CPA, and considering the trusts have no equity (cash value in excess or premium advances by the company), the consensus was to "stay the course" and continue to monitor the policies' performance and any additional developments regarding split-dollar life insurance. 8 Jr: Cr SayanfA raa,c. iscaliminvefere-w) 1013 Anrwi Ana/tax. Bryant Group iNCOOPORATED EFTA_R1_01954598 EFTA02674248  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage II. Summary of Coverage Individual Life Insurance Coverage on Leon Black • Split-Dollar Entity: AIF IV Management, Inc. • Policy owner: Norman Brownstein, Trustee under the Leon D. Black Insurance Trust 0I dated September 13, 1999. • These policies' register chutes are Scotenther 1999 Net Cash Split-Dollar Amount of Normal Annual Account Value Surrender Value Advance Carrier Policy Number Coverage Premium 12-31-12 12-31-12 12-31-12 Prudential 530.000.000 $502,335 $4,504,232.62 $4,504,232.62 $6,108,212 AXA Equitable $15,000,000 $264,894 $2,053,540.91 S2,019,619.09 $3,172,980 Security Life ofDenver $ 5.000,000 $ 96,380 $584.170.3Q $576 487 8Q___ 51 180 la Total — IndividualLife Insurance Coverage 550.000.000 5863.609 $7.141,943.83 57,100,334.51 510461.330 Second-to-Die, Wealth Transfer Life Insurance Coverage on Leon & Debra Black • Split-Dollar Entity: AIF IV Management, Inc. • Policy owner: Norman Brownstein, Trustee under the Leon D. Black Insurance Trust #2 dated September 13, 1999. • These policies, other than the Prudential policy, have a resister date of April 28. 1999 in order to save Debra's insurance age. (Prudential utilizes "current age" vs. "closest age", therefore backdating was not necessary and the register date for the Prudential policy is 9/13/99.) Net Cash Split-Dollar Amount of Normal Annual Account Value Surrender Value Advance Carrier Polk Number Coverage Premium 12-31-12 12-31-12 12-31-12 Prudential $20,000,000 $179,595 $2,727,667.92 $2,727,667.92 $ 2,304,955 New York Life $20,000,000 SI96,080 53.081,046.27 53,073,203.07 $ 2,514,929 Pacific Life $ 5.010,000 $ 33,218 $457,928.92 $457,928.92 $ 424,480 John Hancock 530,000.000 5359,022 $5,040,643.54 $5,040,643.54 $ 4,622,974 AXA •citable $25,000,000 $205.246 $2.664.966.34 $2.638.569.80 $ 2.627.947 Total Second-to-Die Life Insurance Coverage $100,010,000 $973,161 $13,972,252.99 S13,938,013.25 $12,495,285 This information has been takenfrom sources which we believe to be reliable, but there is no guarantee as to 'ts accuracy. It is not a replacementfor any account statement op transaction confirmation issued by theprovider. Please compare this document to your custodial statement for accuracy, as applicable. tfteniOtal BotinfA Ow raw,. leoriftrne*Fetray 2013 Paved Rena don —Bryant Group EFTA_R1_01954599 EFTA02674249  LEON BLACK February 2013 Annual Review of Trust-Owned Split - Dollar Life Insurance Coverage III. Trust Purchases Policies and Split-Dollar Agreements Terminated A planning idea from Leon's estate planning counsel, Carolyn McCaffrey, which was presented in 2010 is for another Trust to purchase the policies from the two 1999 Trusts. — The respective 1999 trusts use the purchase price of the policies to repay the company its premium advances. • The following pages summarize the policy projections assuming the Trust purchases the policies and the Split-Dollar plans are terminated. - Two scenarios are presented and projected assuming a 6% and an 8% gross rate of return. 1. No additional premium payments. ■ The individual policies on Leon's life will require additional premium payments to maintain coverage to Leon's life expectancy and beyond. policies beyond liftexpectancy. • Another issue to consider is the best use of the $5,000,000 Security Life of Denver individual policy on Leon's life. - Projections are presented which compare: Maintaining the $5,000,000 Security Life of Denver policy versus re-allocating the Security Life of Denver policy values into the other two individual policies on Leon's life. °Nem Don 87am/A nrvreack IF*teary 2013 hvial Ryon don Bryant Group EFTA_R1_01954600 EFTA02674250 Projections Based Upon December 2012 Policy Values 8.00% Gross Rate of Return Assuming 8.00% Hypothetical Gross Rate of Return & Current Policy Charges LEON and DEBRA BLACK • After Purchase and Termination of Split-Dollar Plan. Face Amount Reduced to Initial Death Benefit MALE I CURRENT AGE 61 and FEMALE / CURRENT AGE 58 • Projected Premium Outlays Maintain Life Insurance Coverage as Indicated PREMIUM OPTION: No Premiums Annual Premium Payments to Maintain Coverage Net Cash Annual Initial Death Net Death Benefit Coverage Total Additional Net Death Benefit Coverage Advance Surrender Value Premium Pay Yrs Benefit Coverage December 2012 December 2012 a Life Expectancy VMS Starting 2013 Premium Outlay @ Life Expectancy Until SECOND-TO-DIE POLICIES To Maintain Coverage fo Debra's Age 95+ John Hancock's Majestic Variable 30.000.000 4,622,974 5.040,644 44.973.432 2055 0 0 44,973,432 2055 Estate Protection 98 Policy (Debra's (Debra's • Age 1000 Ago 1000 AXA Equitable's Survivorship 25,000,000 2,627.947 2.638.570 25.000.000 2047 (205,246) 3.1 (827,256) 25,000,000 2055 Incentive Life Policy (Debra's (Debra's Age 92) Age 100.) New York Life's Survivorship 20,000,000 2,514,929 3.073.203 20,000,000 2046 (196,080) I.9 (376,935) 20,000,000 2051 Variable Universal Life Pohl_ (Debra's (Debra's Age 91) Age 96) Prudential' Survivorship Preferred 20,000,000 2.304.955 2.727.668 20.000.000 2044 (179,595) 4.5 (813,380) 20,000,000 2051 Policy (Debra's (Debra's Age 89) Age 96) Pacific Life's Select Estate 5,010.000 424,480 457.929 5.010.000 2046 (33.218) 5.3 (176,905) 5.010.000 2055 Preserver Policy I (Debra's (Debra's Age 91) Age 100') Totals: 100,010,000 12.495.285 13,938.013 114.983,432 (614,139) (1.994,476) 114.953.432 INDIVIDUAL POLICIES To Maintain Coverage to Leon's Age 86• Prudential's Variablo Universal Life 30,000,000 6,108.212 4.504,233 2025 (502,335) 9.3 (4,666,015) 30,000,000 2038 Policy /MI (Leon's (Leon's Age 74) Age 87) Assuming No AXA Equitable's Incentive Life Premiums. Death 2027 15.000,000 3,172,980 2.019,619 (264,894) 13.0 (3,443,622) 20,669.058 2038 Policy St Benefit Coverage is NOT Maintained to (Leon's (Leon's Ago 76) Age 87) Leon's Life Expectancy (Age 85) Security Life of Denver's Firstline II 5,000,000 1,180,138 576,483 2018 (113,694) 24.0 (2,728,651) 5.000,000 2038 Policy 1t (Leon's (Leon's Age 67) Age 87) Totals: 50,000,000 10461.3301 7.100,335 0 f (880,923) r-(10,838.288) 55,669,058 GRAND TOTALS: 150,010.000 I 22,956.615 II 21.038 48 114,983,432 (1.495,062) (12 832 764) 170,652,490 (Please Turn the Page Over for Important Disclosures) III - 2 CuenJaen, Sett Teneeelon Ocean &emery 8%.2012 as EFTA_R1_01954601 EFTA02674251 O Lae expectancies from policy Inception are based on appropriate mortality assumptions. Joint life expectancy is 45 years (Debra's Age 88). Leon's life expectancy is 38 years (His Age 85). O This is an illustraton and is not intended to predict actual performance. Variable Universal Life Insurance policy values shown are not guaranteed. Please refer to the complete in force illustrations and appropriate product prospectus lot detailed Information. Including illustrated policy performance assuming 0.00% Hypothetical Gross Rate of Return and Guaranteed (Maximum) Policy Charges. O For split-dollar plans placed pnor to January 28. 2002. recent IRS notices do not directly address the potential taxation of the executives cash value after the corporation has recovered its share of the premium advances. Please consult your tax advisor for further guidance. CuM.10100 SpitS Ten...nation Opian &mount 8% • 2012 as ;81011 EFTA_R1_01954602 EFTA02674252 Projections Based Upon December 2012 Policy Values 6.00% Gross Rate of Return Assuming 6.00% Hypothetical Gross Rate of Return & Current Policy Charges LEON and DEBRA BLACK ■ After Purchase and Termination of Split-Dollar Plan. Face Amount Reduced to Initial Death Benefit MALE I CURRENT AGE 61 and FEMALE / CURRENT AGE 58 ■ Projected Premium Outlays Maintain Life Insurance Coverage as Indicated PREMIUM OPTION: No Premiums Annual Premium Payments to Maintain Coverage Net Cash Annual Initial Death Net Death Benefit Coverage Total Additional Net Death Benefit Coverage Advance Surrender Value Premium Pay Yrs Benefit Coverage a Life Expectancy Until Premium Outlay @ Life Expectancy Until December 2012 December 2012 Starting 2013 SECOND-TO-DIE POLICIES To Maintain Coverage fo Debrfl Age 95• John Hancock's Majestic Variable 30.000,000 4,622,974 5.040,644 30,000.000 2055 0 0 30.000,000 2055 Estate Protection 98 Policy irk (Debra's (Debra's Age 100•) Ago 100•) SIM AXA Equitable's Survivorship 25,000,000 2,627,947 2.638.570 2041 (205,246) 20.5 (4,208.518) 25.000.000 2055 Incentive Life Policy (Debra's (Debra's Age 86) Age IC0') Assuming No New York Life's Survivorship 20,000,000 2,514,929 3,073.203 Premiums. Death 2039 (196,080) 17.2 (3.380,604) 20,000,000 2051 Variable Universal Life Policy la Benefit Coverage (Debra's (Debra's 500 858 is NOT Maintained Age 84 ) Age 96) to Joint Life Prudential's Survivorship Preferred 20.000,000 2.304.955 2.727.668 Expectancy (45 2039 (179.595) 248 (4.450.280) 20.000.000 2051 Policy # Years) (Debra's (Debra's Age 84 ) Age 96) Pacific Life's Select Estate 5,010,000 424,480 457.929 2041 (33,218) 39.0 (1,295.502) 5.010.000 2052 Preserver Policy (Debra's