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Insuring Key Signal-Callers

Why is it good to have a runner on second base? Two reasons: first, he’s in “scoring position” where a well-placed single will drive him home; and second, he can see the signals the catcher is giving the pitcher and pass them on to the batter. In this subtle game of refined skills, anticipating the correct pitch turns even a mediocre hitter into Ty Cobb on the next throw to the plate.
 
The savvy fan is aware of the importance of the ongoing flurry of signals that continually circulate the field as players communicate information, strategies and intentions. He or she is also aware that most originate somewhere in the dugout from one of several players or coaches, all making gestures to confuse and mislead the opponent as to their source.
 
And so it is, sometimes, with businesses whose success is often, in part, because of influence and input from people on the sidelines not involved in the day-to-day activity of the business. Let’s call them key directors.
 
Consider this:
 
Sometimes a position on the Board of a company is an honorary thing, much like sitting in the celebrity box for the Macy’s Thanksgiving Day Parade. More often it entails involvement in decisions and policies whose resolution and implementation require a level of street-smarts and industry background.
 
But, sometimes a director’s input is so impactful that the untimely loss of his or her services could have an adverse economic impact on the business. A little company-owned coverage on such a director might seem wise and in order.

The problem is that carriers don’t traditionally recognize the importance of these off-field signal-callers for purposes of financially justifying any coverage applied for by the business.

But, as always, there is a crack in the door that affords an opportunity if a good case is made.
 
Even if convinced of a director’s unusually disproportionate importance, two things works against a carrier’s standard criteria for granting key person coverage: 1) the director is not an employee and 2) the director has little or no compensation on which to apply the “ten-times annual compensation formula”, employment status notwithstanding.
 
In a recent case we experienced success in getting a carrier to consider modest amounts of coverage ($250,000) on directors where their contributions to the economic well-being of the company was adequately demonstrated, and where they were paid a respectable modicum of compensation ($2,000 a year and $1,000 per meeting), and the company was taking steps to insure its traditionally-defined key people using the standard coverage guidelines. The success on this small matter has allowed the agent to begin personal planning for two of the key people.
 
Back to baseball. So potentially beneficial is the knowledge of a rival’s signals that teams have been known to put a mole in the centerfield bleachers with binoculars to monitor the opposing catcher’s instructions to the pitcher. Recently the FBI has shown interest in investigating allegations of hacking the data bases of opposing teams for information. Oh my! What happened to the good old days when a strategy of success was as simple as Honus Wagner’s remark, “I just hit ‘um where they ain’t?”
 
Contact us with questions or for information on all your key person opportunities, especially those outside the common case parameters – at 706-614-3796 or tom@cpsadvancedmarkets.com.
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Is Your Trustee Trustworthy?

Hope springs eternal in the human breast when even the Cheerios Kid can make a comeback. With his sidekick Sue, he was an iconic mainstay in the ads for the General Mills cereal during the 50s and 60s before his cell-animated storylines were put out to pasture to make way for a wave of faster-paced, sensory-bombarding commercial forms.
 
Only in a more cholesterol-conscious age was he brought out of mothballs to promote the hearty and healthful impact the oat-based product could have on consumers. But the emphasis on good eating habits this time around didn’t hold a candle to the mini-adventures capsulated in those one-minute promotions from olden times where a bowl of “Go-Power” got the Kid through when all else failed.
 
I recall in one the narrator informed viewers that, “When he grabbed his rifle trusty, he found it was a trifle rusty.” They just aren’t making ‘um like that anymore.
 
Trifly rusty rifles got me thinking about the importance of trifly trusty trustees.
 
In the case of U.S. v. Randy Read (memorize that and name-drop at your next dinner party) the taxpayer funded an irrevocable trust with his spouse’s appreciated stock options for the benefit of their children. Over time the options were exercised and the stock sold and the trust accrued an income tax liability to the tune of about $125,000. Rather than paying the tax bill the trustee distributed the trust assets to the kids according to the terms of the trust.
 
When the IRS finally caught up with him, which they always do, the U.S. District Court held the trustee personally liable for the tax owed because he had paid other expenses “having notice of the facts that would lead a reasonably prudent person to inquire as to the existence of the debt” owed to the United States.
 
As insurance advisors we, all the time, encourage clients to make plans that involve the selection of people to serve in fiduciary roles – be it the executor of a will, an attorney-in-fact under a power of attorney, a trustee of a trust, or the like.
 
At this point people usually shuffle about for some super-nice, but semi-reliable Uncle Joe in the family who is willing to fill the role as an accommodation having little understanding of the responsibilities involved.
 
The otherwise esoteric Read case is a rude reminder that fiduciaries do not fill honorary positions.
 
The must be ready to make life-altering decisions, sometimes under extreme circumstances. In addition they must conduct the financial aspects of their office in good order, and while the empowering document may indemnify them from liability involving those in their charge, it does not necessarily absolve them of responsibility to other third parties, especially the federal government.
 
A second admonition is to give proper care in the selection of contingent or co-fiduciaries. In many cases, especially when planning for young children, appointed fiduciaries are usually older than those they will serve, so the likelihood that the contingent may be called upon looms large. And understand that with co-fiduciaries, an appointee must be sure to select like-minded people to advance a planner’s purposes – and make sure there can be no tie votes!
 
Be sure that any legal counselor you recommend adequately tutors clients as to the importance of and qualifications for those selected to conduct their affairs when they cannot.
 
Back to the Cheerios kid…
 
The cereal was named CherriOats when introduced by General Mills in 1941. Over the years 15 additional variations have been marketed, the latest being Ancient Grain Cheerios which includes age-old grists like spelt, quinoa and karmut wheat. Honey Nut Cheerios is the largest selling cereal brand in the United States. The original ole oats roll in at #4.
 
Call us concerning questions you have on the role of fiduciaries in your clients’ Life Insurance, Annuity, Long-Term Care and Disability Income planning.
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“If It Isn’t Written Down, It Didn’t Happen” – Wills, Powers-of-Attorney & Health Proxies

Any fan of the novelist Tom Clancy is probably familiar with these words uttered by the wife of his chief protagonist, Jack Ryan. Ryan is constantly needling Dr. Caroline “Cathy” Ryan about her compulsive habit of making notes about everything as a method for reminder and also a simple record of events.
 
She defends the practice as the best way to keep track of everyone’s commitments and intentions, especially given their hectic lifestyle – in that book he happens to be Vice President and she a busy physician, both with young children in tow.
 
Creative marketers and seminar sales-folk have built and sold entire programs of self-discipline and personal organization around the concept.
 
But the government of the state in which you live is far ahead of both.

Regarding your client’s planning intentions and goals; all 50 states have legislation in effect that effectively says, “If they aren’t written down, then they didn’t happen!”

Who needs Estate Planning?
 
The fact is that everyone needs estate planning, not just the wealthy. Everyone has concerns about what will happen to themselves, their survivors and their belongings in the event of any number of life-changing events.
 
Critical to the assurance that all will go as desired in each circumstance is the execution of at least three written planning documents. If they don’t exist then the State will do your clients’ planning for them.
 
Contact us to discusses these documents in further detail so you can better encourage every client to take necessary steps for their completion in conjunction with their advisors.
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Policy Conversions & Ownership Transfers: All Things In Good Order

It was an eye-opener the first time I walked into the office of a civil engineer back in the 1970s and saw, spread across an entire wall, the flowchart mapping out the relationship and time sequence of all that was involved in getting an eight-story building there in the Burg from ground-breaking to grand-opening.
 
The complexity of the diagram was a mind boggle of boxes at several levels top to bottom, each containing a task that demanded completion before progression on the line to the next box was possible.
 
As we sit comfortably in the air-conditioned result of a similar building plan, the ease with which we can turn a tap or flip a switch seldom causes us to pause and think of all that got us there.

The order of things is essential. The correct order is critical. Fortunately the order and timing of insurance conversions and ownership transfers is less complicated.

A common planning scenario involves a personally-owned term policy where conversion is considered because of a decline in the health. The goal is to transfer the policy to an irrevocable trust either to protect the death benefit from estate taxes, creditors or spendthrift heirs – or any combination of the three!
 
The issue at hand is whether to convert before or after the transfer of the policy to the trust.
 
The answer will probably turn on the “best” fair market value for the contract.
 
Most advisors will probably choose to determine that the FMV of the term policy is its interpolated terminal reserve. Level term products do have a reserve to offset the “underpayment” of premium in the later years when the insured is older, but the premiums remain the same. On the other hand most advisors will determine that the FMV of the new permanent policy (in its first contract year) as premiums paid. Usually the advisor will opt for the lower of the two.
 
If the policy is to be gifted to the trust the lower FMV could keep the gift within sum of the available annual exclusions (usually $14,000 per trust beneficiary) to avoid the need to file a gift tax return.
 
If the policy is to be sold to a grantor trust (to avoid the three-year look-back), the lower FMV will require that less cash be gifted to the trust to be used by the trustee to purchase the policy from the insured/grantor.
 
Call us when client planning involves the combined issues of policy conversion and ownership transfer. We will assist in getting the information for determining the FMV of both policies and will assist legal and tax counsel with the information they need to properly order the transactions.
 
Back to the 70s – before the eight-story was completed I had gotten to know many of the workers at the job-site. They complained that working construction was too much like Christmas Day. They did all the work only to have some fat guy in a suit get all the credit.
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Clean Up Your Beneficiary Mess

In the past the word culture referred to a society’s accumulated knowledge and its time-tested and proven body of values and principles which each generation must pass on to the next if the ongoing continuity and success of the community was to be assured. But much like paper currency, words lose their value over time.

Terms today like youth culture, bantered about endlessly, reflect a contemporary understanding of culture as nothing more than an inventory of current tastes, preferences and distractions, usually defined and pursued by those who aren’t paying the bills.

And if you think that values and principles are hard to pass down, try getting a death benefit to the next generation, especially if the next generation are still minors.
 
The Beneficiary Designation
 
The biggest opportunity for disaster on an insurance application comes when the advisor must complete the beneficiary designation. The most important aspect of the transaction is assuring that the death benefit will go where it is intended, and the space provided to that end is totally inadequate for the purpose. The “little beneficiary box” serves both to intimidate clients into thinking their directions must be short and sweet and to encourage lazy advisors not to take the time to put full and complete instructions on a separate sheet of paper – especially when children are involved.
 
There should never be a contingency that will result in an under-aged beneficiary. Minors (the age of majority differs from state to state) are legally incompetent to accept death proceeds. Guardians to handle their affairs must be appointed in legal proceedings that are time-consuming and expensive.
 
The best solution is to name as beneficiary a trust that will hold and use the funds for the minor children until the trustee is instructed to distribute them by the terms of the document. The difficulty is convincing an insured to get a trust written even when the size of the death benefit makes a compelling argument for the trouble and expense.
 
The good news is that there is an uncomplicated solution.
 
All states have a Uniform Transfers to Minors Act (UTMA) on the books. The law enables you to title property (or craft a beneficiary designation) in the name of a custodian for the benefit of a minor child.
 
The comparative disadvantages versus a trust are 1) the custodian must carry out duties to the child as spelled out in the law, which may not be exactly or as flexible as what the insured would prefer, and 2) distribution of the funds must occur at an age given in the law (21 in most states) which may be younger than the insured would like.
 
Not perfect, but as my Mother used to say, “A speckled axe is better than none.” Call it a poor-person’s trust created for you by the state.
 
But the UTMA designations can be tricky. State may differ in what they require (the word “uniform” notwithstanding) and carriers may differ in what wording they prefer. A full and separate designation must be spelled out for each minor child and successor custodians should be named – and, yes, it will require a separate sheet of paper. But we will help you draft the designation. Then you can devote your time to seeing that the client passes on his or her culture to the minor children involved.
 
Call for help on any ownership or beneficiary designation, but especially one creating a custodianship under your state Uniform Transfers to Minors Act. Try me at 706-614-3796 or tom@cpsadvancedmarkets.com.
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Taxable Estates: The Do’s And Don’ts Of Designations On Life Policies

Why is it that the most important item on an insurance application is allocated so little space? Why is it that the second most important item gets equally parsimonious treatment?
 
All that other stuff is necessary from either a practical or a legal standpoint, but when the dust of policy issue and underwriting have settled and the contract is in force, all that really matters going forward is who owns the policy while the insured is alive and who will get the dough when he or she dies.
 
Now, having so simply acknowledged this truth – look at the room given on most applications to set down in writing the intentions of the applicant.

The dangerous psychology of the inadequately small boxes is that they seem to suggest that if more room is needed then a client, or an agent or advisor making recommendations, must be excessive at best and obsessive at worst.

The little boxes encourage short, compulsive answers that seem workable at the time, but that could result in disaster if not later re-addressed and cleaned up.
 
Real-life case in point:
 
The business owner/proposed insured needs coverage for anticipated estate tax liability (we’re talking several million in coverage). Time is of the essence because the clock is running on a good underwriting offer. Everyone is so busy (and hey, who isn’t?) that the advisors and clients can’t get together to talk through the proper structuring the policy.
 
Finally, the day before the offer will be withdrawn, word comes that for now the policy should be owned by the company (heck, why not, it will be paying the premiums), and the beneficiary will be the insured’s wife. The first of only two items of good news is that, at least, there is coverage in force. The other is that the designations commanded are so short that they fit nicely into the boxes on the application.
 
Other than that there are several potential problems:
  • An “unholy triangle” had been created. The owner, insured and beneficiary are different parties. Payment of the death benefit to the spouse could create an income taxable event. Depending on the manner in which the company was taxed and some other factors this may not be a problem, but nobody took time to think it through.
  • The joint taxable estate of the insured and his wife stands to increase by the amount of the benefit at his death. Policies purchased to help with estate taxes are held by third parties – usually irrevocable trust whose beneficiaries the same as the insured’s heirs. This takes planning during the underwriting stages of case.
  • No instructions are given regarding who should be the beneficiary if the wife dies first (maybe it is just as well given that there was no more room in the beneficiary box on the application). Depending on the contract language the default beneficiary could be either the owner, or the estate of the insured if they are the same. So now the millions could go into probate court where they are subjected to the expense delay and publicity that attends that process.
Accept three good rules to live by:
  • Be prepared to submit ownership and beneficiary instructions on a separate sheet of paper that is referred to in and is a part of the application.
  • Always submit complete descriptions that include contingent owners and beneficiaries where the primary parties are natural persons.
  • Ask us for help – we will assist as you draft thorough instructions for designation of primary and contingent parties to a policy and will, when necessary, get the blessing of the claims department of the carrier involved.
It always works better when you think outside the box.
 
Contact us with any questions regarding this issue on potential or existing cases – either at 706-614-3796 or tom@cpsadvancedmarkets.com.
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How To Successfully Use RMDs In Life Sales

Many argue that the best Super Bowl halftime show took place in Jacksonville, FL, some years ago. In a forum known for mediocre performances that fail to meet the hype and fulfill the expectations, the lights and fireworks opened on a band named Wings, led by one of the last vestiges of an earlier rock group whose work and music had taken a place as the centerpiece in the canon of popular music in the English-speaking world.
 
Paul McCartney chose to lead off with one of his creations from the Beatles’ music catalogue. He and 80,000 spectators sang the song Baby You Can Drive My Car with its tale of a taken young man lured into a position as chauffeur for his rising-star love-interest only to have her confess at song’s end, “I got no car/ and it’s breakin’ my heart,/ but I’ve got a driver/ and that’s a start!”
 
And so it often is with insurance sales to be funded with a proposed insured’s unneeded RMDs coming out of their qualified plans. It makes sense. Use the money you must take, but don’t need, and leverage an eventual death benefit to heirs with insurance coverage. But if you and this concept are driving a successful sale then make sure you have an insurance company that wants to be a “car-rier”.
 
The pill in the jam is financial justification. The insured is 70-1/2 and, seldom, has any earned income. Consequently, coverage can’t be justified for income replacement purposes. And more often than not the proposed insured doesn’t have federal or state death tax concerns.

In these situations it is important to know the carriers who are sympathetic to and will underwrite reasonable amounts of coverage if other facts about the case are in order.

Consider This:
 
First, what percentage of the insured’s annual income is being used for premiums? The acceptable amount could be larger in cases where it is adequately demonstrated that living expenses will be met with what remains.
 
Second, the amount of death benefit will usually be limited by a formula that ties the face amount to certain financial criteria. A common example would be: Permissible coverage = 50% of the net worth attributable to investment assets + FMV of residence – coverage in force.
 
Because insurance is often purchased in situations where no death tax is anticipated, clients overlook the advantages of purchasing the policy in a trust. A living trust will keep the proceeds away from the exposure and expense of the probate court while allowing for their distribution according to a testamentary pattern not practical through a simple beneficiary designation. An irrevocable trust will protect the proceeds from creditors as well.
 
Fifty-one years ago last April the Beatles had the top five single recordings on Billboard’s Hot 100 Chart. No group or singer has every come close to such domination. Billboard Magazine reported that during the first four months of 1964 the Fab Four accounted for 60% of all single records sold in the United States.
 
For similar success in your line of work – call or write to discuss those carriers who are comfortable with the “RMD-to-Life Premium” concept and ask for a marketing piece that will help generate interest and sales – either at 706-614-3796 or tom@cpsadvancedmarkets.com.
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Insurability – The Most Important Retirement Asset?

Few American publishers have had or will ever approach the influence of Henry Luce in his heyday.

Through the middle half of the 20th century, Luce founded and successfully grew a family of magazines whose content was a major factor in shaping the thought and activity of American society.

He named them after the three things he thought most important; Life, Time and Fortune.
 
We have only to look to our retirement planning to appreciate the accuracy his conclusion.
 
Consider this:
 
The purpose of a program of systematic savings during our employment years is to accumulate the Fortune necessary to provide for the Life to which we have grown accustomed hoping we have enough Time to achieve that goal.
 
Traditional qualified retirement plans can prove insufficient toward that end for wealthier clients. Limits on contributions as well as an inadequate period for saving, especially in the event of premature death, can leave a retiree short of funds necessary to maintain his or her lifestyle. Other initiatives must be taken.
 
A time-tested vehicle to provide supplemental retirement income is an over-funded universal life insurance policy.
 
Not only does the contract allow for additional income with many advantages similar to qualified arrangements, but the death benefit feature offers a “self-completion” aspect for the fund in the event of premature death.
 
Contact us today for a complete discussion of this planning concept.
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162 Executive Bonus – More To Life Than Just Life

In addition to the simplicity, ease of implementation and administration, and plan design and funding flexibility, an executive bonus arrangement can meet an array planning needs if presented properly to the employer and comprehensively to the executive.
 
Life for Life or Life for Less
 
The need to protect against death isn’t always one that lasts a lifetime. If coverage is placed in anticipation of future estate tax liability, then the policy better be there until the end – unless an insured wants to bank on the repeal of the inheritance tax during some rare moment of temporary governmental sanity.
 
On the other hand, if the purpose is merely to replace income lost due to death prior to retirement, then term insurance may be a better and more economical choice. There is no reason a plan cannot fund term insurance.
 
An Additional Resource for Retirement
 
In an age of restrictions on access to qualified retirement planning opportunities for the highly compensated, more employees are using over-funded permanent policies as a sort of “Super-Roth IRA” to build cash that will be available on a tax-advantaged basis, and to supplement other retirement fund sources in later years.
 
A plan participant has the freedom to choose whether he or she wants to design their policy under slim or fat funding scenarios, in order to meet their particular needs.
 
Sometimes “Policies” is the Best Policy
 
It may better suit multiple needs if the amount of the bonus to an executive is used to purchase multiple policies; e.g. a term policy to protect for income replacement, and a permanent product for lifelong needs. At retirement, the term policy can lapse or can be converted if the need for permanent protection has increased.
 
Providing for a Long-Term Care Event
 
A participant should consider the option of adding a rider that will allow early access to benefits should long-term care be needed. Withdrawals for long-term care expenses may frustrate the effectiveness of the policy, if the employee is over-funding the contract for use as a supplemental retirement vehicle.
 
Again, this problem can be avoided by using a two-policy executive bonus arrangement – one that is over-funded for retirement purposes, and the other with a LTC rider.
 
And Maybe a Hint of Disability Protection
 
The waiver of premium rider has been pushed to the side in most sales presentations today, but its use can assure that policies will be maintained in the event of a disability, and even if employment ends prior to retirement age for that reason.
 
To Infinity and Beyond – A Bonus is a Bonus is a Bonus
 
The executive bonus can be used to fund any vehicle agreed upon by the employer and the employee. If additional life coverage is not needed, then consider funding an annuity or a free-standing long-term care policy. All aspects and advantages of a 162 bonus plan still apply.
 
Call for design and sales support for a business prospect that needs a simple, non-invasive benefit plan for key employees.
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When A Policy Owner Dies

The circumstances surrounding the case weren’t unusual. A single grandparent wanted to purchase coverage on his five year-old grandchild. He loved his son and daughter-in-law, the parents of the proposed insured, but felt they might be tempted to access the cash values during tough times if they were given control of the policy.
 
The agent involved suggested creating a trust for the contract, but the country-time lawyer involved didn’t like living trusts (because, he said, “Nobody ever takes care of them!”) so he drafted a new will for the grandfather with a testamentary trust that could accept the policy on his death and directed that the grandfather be made the policy owner.
 
Two immediate potential problems should have been considered by the trust-resistant attorney:
 
First, if the insured child died first then the proceeds would become part of the grandfather’s estate. Second, if the grandfather died first the policy would be subject to the unnecessary rigors of the probate court before settling into the trust created by the will – perhaps then only to be managed as poorly as all those living trusts the lawyer had experienced.

There’s an old proverb somewhere that says if something can even be worse than anticipated, it probably will.

In this case the policy language had a little surprise for all involved that rendered what would play out even more undesirable and more unmanageable than any imagined!
 
The grandfather did die first. His will was submitted to probate and the agent and the executor took steps to have ownership of the policy transferred to the newly activated testamentary trust under the will.
 
The carrier title department responded [underscoring added]:
 
We understand that [policy owner] may have provided for these policies in his will, however, the ownership of the policies as stated on the application automatically reverts to the individual insured [the still living minor grandchild]. We must adhere to what the contract states and not what was indicated in his will. In the alternative, if they want the ownership to change to the parent [of the insured minor] as indicated in the email below, we would need documentation from the court proving who is the legal guardian of the minor’s property which is different than being the legal guardian. This is something they would have to go to court for and once they obtain the court order, the legal guardian of the property can change the ownership of the policy. Otherwise, we cannot allow any transactions on the policy until the child is at least 15 years old.
 
A response like that will tend to take the ginger out of one’s step! Not only is control of the policy for the next ten years attainable only through a laborious court process, but even then the result would probably be exactly what the grandfather was attempting to avoid – ownership of the policy by the parents of the insured child.
 
Policy provisions that appoint an insured as a default owner are more common than most agents would think. The issue doesn’t arise often because the policy owner is commonly 1) the same as the insured, or 2) a party who cannot die, e.g. a trust, or 3) a person younger than the insured who usually doesn’t die first. But it occurs enough that at least one major carrier has an appointed person who does little more than handle the “Dead Owner” cases.
 
We rightfully agonize much over the choice of contingent beneficiaries. The same attention should be given to the need for and choice of contingent owners when needed. Call with any questions regarding this issue on potential or existing cases.

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