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Passing Property To Kids – Give It Now Or Leave It Later?

Recall the Prodigal Son, whose insistence led to his receiving his inheritance during life thus enabling him to proceed to squander his wealth in riotous living. Among the lessons in the tale is the not so gentle admonition about gifting property before the next generation will accept the responsibility that attends.

But even in the case of children rightly raised, there are several planning considerations when deciding whether to pass property now or at death.

Among other things:
  • The effect on the property’s income-tax basis is different – A recipient of a gift takes the same basis in the property as the gift-giver. Sale of the property later could result in a high capital gains tax. But an heir gets a “stepped-up-basis” in inherited property to its fair-market-value. As a result, sale of the property later results in less taxable gain.
  • Planning strategies – Gift only high-basis property or property that is unlikely to be sold later. Otherwise consider waiting and bequeathing the property to the intended recipient.
  • But… remember that a Will can be easily changed – If property is promised at death, the instrument that would make that happen (either a Last Will & Testament or the dispositive provisions of a revocable trust) can be changed with no duty to inform the initial intended beneficiaries.
  • Make sure there are no remaining first generational needs – As an example, sometimes a family business is left to children by a deceased managing parent overlooking a surviving spouse who might still need distributions from the company’s revenue stream. Make sure that the potential for income from any asset to be transferred will not be needed down the road by those passing the property.
We are ready to help you fully inform clients regarding the planning issues that are involved with transferring property to their next generation either during life or upon death. We are ready and available to take part in conversations with you and your clients and eventually, if needed, with their advisors. Contact Tom Virkler at tom@cpsadvancedmarkets.com or 706-614-3796.
 
For what it’s worth: As for the Prodigals to be found in any clientele, astute planners keep in mind the adage regarding family wealth that has proven reliable enough to still be around: The first generation builds it, the second maintains it, the third loses it.”
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Buy-Sell Planning And Frogs – Look Before You Leap

Aesop has a fable about two frogs whose pond dries up and are left to find a new home. One enthusiastically suggests they descend into a nearby deep well that would both provide water as well as shade on hot sunny days. With much caution the other replies, “But suppose the water should fail us. How can we get out again from so great a depth?”
 
When planning for business partners, don’t simply address the immediate concern upon the death or disability of a co-owner. Address the long-term problem created if the company relies heavily on the day-to-day involvement of the owner.
 
Before getting any signatures, alert your business clients that complete buy-sell planning must address two critical needs! Consider:
  • Need #1 – Funding the buy-out – Life or disability coverage provides the funds to assure the family of the deceased or disabled receives an agreed-upon price for their interest, and the remaining owner is assured of ongoing control.
  • Need #2 – Assuring ongoing success without the partner – “Key person coverage” with a company-owned policy provides cash to make up revenue shortfall caused by loss of a participating owner’s services.
  • Flexibility in the Use of Policy Proceeds – Once coverage for both is in force the benefits can be used for either need (e.g., when the agreed purchase price increases and an owner’s replacement cost deceases with the approach of retirement).
  • The “One-policy” Policy – Most carriers allow two owners to cross-own one policy that covers both needs when the agreement will result the purchaser being sole owner.
We are equipped to help you fully inform clients regarding their buy-sell planning so they can more efficiently talk to and make decisions with their legal and tax advisors. We are ready and available to take part in conversations with you and your clients and eventually, if needed, with their advisors. Contact Tom Virkler, JD – Director of Advanced Markets at tom@cpsadvancedmarkets.com or 706-614-3796.
 
For what it’s worth: Most frogs can jump up to 20 times their length, suggesting that Aesop might be fine with the first frog’s suggestion, depending on the depth of the well.
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The Insurance That Ought To Sell Itself!

We hear people say that something is, “As easy to sell as a bar of soap!” The expression derives from the fact that soap almost sells itself because it is a simple, common, necessity of life that is inexpensive and easy to carry out of the store!

Can we not make the same case for income replacement life insurance?

Consider:
  • It’s essential – Every wage-earner on whom someone depends needs it.
  • The risk is easily determined – Just use a carrier-approved formula: Earned Income x Anticipated Working Years Left.
  • Most are underinsured – …often having only group term ($50,000) or a policy whose face amount seems like a large sum until compared to the income actually lost over the remaining working life.
  • It is an economical solution – Because the period of risk is known, inexpensive term insurance fits the bill.
  • It’s simple – Level term insurance with a guaranteed death benefit and a guaranteed premium is the easiest product on the market to explain to a client.
  • It’s easy for you – More than any other sale, the speed and simplicity term policy placement is maximized by online application, underwriting, and policy delivery.
For assistance with marketing pieces or determining the best term product for each situation (it’s not always just the cheapest one!) get in touch with Tom Virkler, JD – Director of Advanced Markets, at tom@cpsadvancedmarkets.com or 706-614-3796.
 
For what it’s worth: If selling the suds is that easy, then the least demanding sales position may be in Unilever’s Beauty & Wellbeing Division which manufacturers the Dove Beauty Bar which is far and away the best-selling bar soap in the United States.
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Kids Who Won’t Mind Their Business!

When eating an apple, the only thing worse than finding a worm… is finding half of a worm!
 
For a business-owning parent, the only thing worse than having no kids interested in the succession of the company is when only half the kids are interested in carrying on and inheriting the family store.
 
Consider several scenarios you should address with clients before a life change forces decisions without the time or necessary pre-understandings for proper resolution:
  • If the kids are all uninterested – Begin discussions of the best way to transition ownership to outside the family.A keyperson buy-out arrangement funded with life insurance on the parent is a common arrangement.
  • If only some of the kids are involved and interested – The goal here is estate equalization.To prevent involvement of non-participating siblings, life insurance is often purchased on the parents to provide funds for the bequests to those who won’t inherit any of the family business.
  • A surviving spouse – A non-participating husband or wife left behind that still depends on equity distributions must not be overlooked.Life insurance can be purchased on the parent operating the business that allows children to purchase the business from the surviving spouse.
  • Non-family owners in the mix – A parent who is not a sole owner may want his or her share to go to participating children first.This requires a two-tiered buy-sell agreement giving the children a right-of-first-refusal to purchase or inherit a parent’s interest before non-family owners have a right to purchase.
An attorney will be needed to advise and properly draft the legal documentation. But you can make clients aware of potential problems and initiate serious thinking toward steps to plan properly.
 
Any frustrated homemaker will tell you, “Cleaning your house while your kids are still growing up is like shoveling the sidewalk before it stops snowing.” And so, it might seem to attempt succession planning when everyone is fine and business is going-and-blowing, but it eliminates heavy lifting down the road.
 
For help in getting family business owners to start shoveling the walk now, we will review existing documents and get on the phone with you, your clients, and their advisors to help get discussions started. Contact Tom Virkler, JD – Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.
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Are Only The Rich “Trusty?”

The author F. Scott Fitzgerald once said to Ernest Hemingway, “The rich are different from you and me.” Hemingway retorted, “Yes! They have more money!”

Unfortunately, that is often the only difference clients see between themselves and people who plan with irrevocable trusts to protect assets from death taxes.

But there are many planning advantages to suggesting irrevocable trust planning for folks who don’t have to worry about Federal estate taxes.
 
Consider:
  • Avoiding state death taxes – Many states have their own death or inheritance taxes that levy on much smaller amounts of taxpayer net worth.
  • Protection from creditors – Assets in the trust are free from judgement or levies against the creator of the trust.Trust beneficiaries are also protected so long as assets remain in the trust.
  • Detailed and private distribution planning – Sophisticated and multi-generational gifting and inheritance scenarios can be carried out free from the public scrutiny of the Probate Court.
  • Ongoing control of property – Transfers of non-voting interests in property held by a Family LLC allows the creator of a trust to continue to determine use of the trust property.
  • Spousal access – A married creator can grant broad access to trust property to a husband or wife allowing for withdrawals if assets and funds are needed later on.
  • Lower income taxation – Trusts can be designed so that income on assets are taxed in the creator’s lower tax brackets, rather than the compressed high trust rates.
Hemingway also said, “The best way to find out if you can trust somebody is to trust them.” And he would probably say that the best way you can find out if a trust can help is to trust us to help you and your client with their next case, especially in coordinating a trust with their insurance planning. Contact Tom Virkler, JD – Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.
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Winning In Overtime With Unneeded Life Policies

“I went to a fight the other night and a hockey game broke out!” The famous one-liner by the late comedian Rodney Dangerfield finds it humorous foundation in the reality that those athletes on skates are resourceful in finding occasion for fist-a-cuffs.
 
But the sport offers a life lesson in making the best of a bad situation. If a team wins a game in regulation it is awarded two points in the standings and the loser gets nothing. But if a game is tied even the team that loses in overtime or a “shootout,” gets one point.

As an insurance advisor don’t miss the opportunity to make the “loss” a client may have in an unneeded policy into a positive transaction.

Example: Your client has a life policy into which he or she has paid $50,000 in premium and has a surrender value of only $10,000. The policy requires too much to maintain or is no longer needed.
 
But rather than tossing in the towel, suggest using the policy loss to earn some tax-free money! Consider:
  • Swap the policy for an annuity in a 1035 exchange.
  • Section 1035 allows for transfer of both the cash value ($10,000) and the old policy tax basis ($50,000) into the new contract.
  • Account values in annuities are taxed only to the extent of gain in the contract, the exchanged-for annuity allows room for $40,000 in growth before there is any potential income taxation on full surrender.
  • Additional premium can be contributed at the time of the exchange allowing for quicker loss recovery (e.g., $20,000 new premium results in an initial policy value of $30,000 and initial tax basis of $70,000 – loss in the policy is not affected!).
A 1035 exchange to an annuity is not without its hoops and details, so contact Tom Virkler, JD – Director of Advanced Markets, at tom@cpsadvancedmarkets.com or 706-614-3796 concerning these and any opportunities for increasing your annuity business.
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Getting Full Trade-In Value For Exchanged Policies

We all know when you buy a car not to let the dealer know you have a trade-in until the terms or the new automobile are negotiated. Otherwise, the salesperson can more easily make a less than competitive offer on the ole rust-bucket/clunker/hooptie and hide it in the overall transaction for both vehicles.
 
A loss can also occur when trading in an old life insurance or annuity policy using the cash value for a new contract more suitable for a client’s current needs. Surrender of the existing contract triggers income tax on any gain in the policy value, leaving less to purchase new coverage.
Fortunately, IRC 1035 allows a non-taxable exchange, but here the trade-in must be in the picture upfront.
Because the transfer of funds must be carrier-to-carrier there are additional steps in the 1035 exchange process, which we will do for you:
 
  • After you have submitted the application we will take all steps to see that all replacement paperwork (much of which cannot be done online) is completed in a proper and timely manner.
  • We determine the exact amount of the old policy value that is to be rolled over and ensure that your sales illustration reflects that amount.
  • Once we have received approval for the new coverage, we will see that the old carrier transfers the funds promptly so the new coverage can get in force.
Contact Tom Virkler, JD – Director of Advanced Markets, at tom@cpsadvancedmarkets.com or 706-614-3796 with all your casework that anticipates a 1035 exchange and we will help your clients maximize their trade-in value by taking effective advantage of this tax-saving opportunity.
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Getting Sales Returns From Tax Returns

Way back in time I had the good fortune to work in a firm whose in-house CPA happened to be the author of the joke column for a well-known accountant publication.
 
He well understood the contradiction between the nature of his editorial role and the droll reputation his profession has concerning things related to any form of humor. Thinking about it always caused him to laugh.
 
He would add, “An accountant is an actuary with a personality. I was going to become an attorney, but felt it would be worse to be thought a shyster!” I think he used both of those lines in his column.
 
If the professional stereotype has some substance you don’t have to look far into the Internal Revenue Code to understand the cause, at least among tax accountants.
 
There is nothing funny about it, and you do have to look far and wide to find tax jokes, because there just aren’t any. Such a morose work environment understandably takes a widespread toll on even the most affable of professions.

The only joke, perhaps, is the one played on taxpayers when the government set filing day as April 15.

Note that it is about as far as they could get from Election Day without being too obvious. So by the time you vote in November the sting of taxation is far from your mind as you pull the lever for the folks who will use the next year’s April showers to rain on your parade.
 
The Opportunity
 
Right now the last thing most clients want to re-address is the return they just did address to the IRS. But herein lies the planning and sales opportunities.
 
Left to themselves clients will wait until after next New Year’s to call and ask what you can do to reduce their income tax for this year. Short of a couple of possible qualified money deductions, maybe, there’s not much to offer.
 
Now is the time to act and several of our core carriers have materials that make the process more focused and beneficial – with illustrations and commentary concerning how to walk through a client’s tax return pointing out opportunities and making suggestions for planning advantages.
 
The material might also be put to good use with CPAs, encouraging them to review the returns of clients they might send to you for planning help.
 
Besides, they are in such a good mood this time of year they may even respond to a couple of your jokes about insurance advisors.
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Put “Side-boosters” On Your Term Insurance Plan

The world watched as Artemis II took the U.S. space program on its first manned step toward beyond Earth’s orbit in 54 years. A common sight is the side-boosters on the rocket that allow for the easy disposal of those sections’ weight once they are no longer needed for a fuel source as the space-craft approaches orbit.
 
Term life insurance plans should be structured so economically!
 
Consider a 35-year-old male preferred non-smoker making $100,000 who wants income replacement protection until anticipated retirement at age 65. The annual level premium for a 30-year $3,000,000 policy ($100,000 x 30 years) is $2646.Not too bad, but the cost over his working life will be $79,380.
 
But he has less years to insure for as time goes on. So, assume he reduces the death benefit to $2,000,000 after year 10, and to $1,000,000 after year 20. His total savings would be $26,460.But many carriers severely limit or do not allow face amount reductions. And even if they do, he has paid 30-year rates on two-thirds of the coverage he did not need for that long.
 
As an alternative implement “side-boosters” by “laddering” three term policies as follows:
  1. $1,000,000 in 10-year term for $298 annually…
  2. $1,000,000 in 20-year term for $509, and…
  3. $1,000,000 in 30-year term for $882 – the total premium over 30 years is reduced to $39,620, a total savings of over 50%!
Laddered term can be accomplished in a single application with instructions in the Comment Section for structuring the multiple policy arrangement. But for a smoother take-off, contact Tom Virkler, JD, Director of Advanced Markets, at tom@cpsadvancedmarkets.com or 706-614-3796.
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Should A Life Policy Be In A Revocable Trust?

If love is blind, and if marriage is an institution, and if love and marriage go together… then, is marriage an institution for the blind? Maybe things don’t always go together, but many times they do.
 
A revocable trust is a common management device that holds assets for the creator/grantor who has freedom to add or subtract property as he or she pleases and which includes instructions to distribute assets at death. It is his or her alter-ego for both income and estate tax purposes, with the same results as if all were owned directly.
 
So, do a revocable trust and a life policy go together?
 
Consider the pluses and minuses of a trust-owned contract:
  • Cost – Creating the trust is an additional expense beyond the fees for the usual last will & testament, power-of-attorney, and health directive.
  • Creditors – Unlike with an irrevocable trust, assets are not protected from claims against the grantor.
  • Court – Death benefits are not subject to probate, but this may not be a compelling reason.Beneficiary designations (other than to the estate of the insured) serve to avoid probate court anyway.
  • Continuity of Control – If an individual owner of a policy is not competent, or cannot be found, management of the policy is onerous. The trust can re-direct authority.
  • Contingent Beneficiaries – This is the biggest advantage.Primary policy beneficiaries are usually simple (e.g., 100% to my spouse).Beyond that things can get complicated quickly (e.g., to my children).Must a child survive?Are there children of more than one marriage?Will distribution be equal among all?Is there a desire to manage the proceeds for a time prior to complete distribution?All these concerns are much better accommodated in a trust document than in the beneficiary box on a policy application.

If you have questions about a client policy and trust planning, or any other case planning issues, contact Tom Virkler, JD – Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.

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