Avoiding Collateral Damage
Life insurance is often used as security on a loan, usually in a business situation.
Life insurance is often used as security on a loan, usually in a business situation.
When proposing life insurance we would manage client expectations better if we took time to explain the disproportionate obligations that exist once coverage is put in force.
Deferred compensation (or SERPs) and split dollar plans have become too regulation-laden and require too much administration, record-keeping and reporting to jingle any bells amongst most prospects.
The cost of getting with the attorney to draft and implement a written agreement, to say nothing of the time and effort required, is discouragingly disproportionate to the amount of premiums for the coverage.
The phenomenon of deferred-sticker-shock can put the bite on what might otherwise be a nice insurance sale to fund a buy-sell agreement.
I didn’t mean to burst a friend’s bubble when he proudly told me he had been asked to usher at a wedding but wouldn’t take part with the bridal party on the podium during the ceremony. I suggested his role was equivalent to trying out for the neighborhood softball team and being assigned the role of scorekeeper. I suppose I should have let him down with a bit more ease.
Kinder terms might have included sinecure, or minister-without-portfolio that describe a cushy job that has pay but requires little responsibility and has no authority. We tend to look down on such positions as they are usually doled out as political or social favors simply because the recipient is owed a favor or knows someone in the back.
All that being said, a more important concern are your high-net-worth clients who would seriously consider giving away large amounts of property under the current high gift and estate tax lifetime exemptions, but don’t want to lose control over the assets. It might be helpful to quickly review the ins-and-outs of the current exemptions at Time, Tide, and TAXES Wait for No One and High-Lifetime-Exemption Gifting – Playing It Safe!
Two useful planning concepts that may put concern over loss-of-control to rest and result in significant tax savings are the Family Limited Liability Company (FLLC) and the lowly regarded sinecure!
A limited Liability company is simply a separate tax entity usually established to function as an active ongoing business. It can be taxed as a C-Corp, an S-Corp, or a partnership. A Family Limited Liability Company is a plain-ole LLC except all the owners (members) are related. The FLLC can be used by a taxpayer to bundle assets under one roof where they are maintained and managed, even if not for traditional business purposes.
It all reminds me of the time I auditioned for the church choir and ended up being made the music librarian. Didn’t make the baritone section, but the vote was darn close! Contact me about these or any planning issues with your CPS casework at 706-614-3796 or tom@cpsadvancedmarkets.com!
By now all high-net-worth clients should be aware that their biggest death-tax savings opportunity – the lifetime exemption – is going to be cut in half on January 1, 2026. But taking advantage of the high exemption by gifting property now is only the beginning of how much death taxes can be reduced.
A good rule of thumb: your clients who will benefit are single taxpayers worth over $10,000,000 and married taxpayers worth more than $20,000,000.
Consider these very brief descriptions of accepted planning concepts that address the common questions HNW clients will ask, and that can be layered on top of the current use of the high exemptions. They can result in a much smaller tax bill as well as allowing for ongoing property management and use even after gifting takes place.
A single taxpayer who uses the full higher exemption by gifting from an estate growing at 5%, might reduce the tax due in 20 years by over $6,000,000. A married couple using both could save over $12,000,000.
Then use at least one full Again, assuming 5% growth, this could save over $6,000,000 in 20 years.
Transfer of assets can be treated as a Family Loan (usually to an irrevocable trust). If the exemptions are not reduced the loan can be called, and the property returned. If exemptions are lowered then the loan can be forgiven just prior to 1/1/2026 and the property kept in the trust, treated as a gift.
Assets to be transferred can be organized under a Family Limited Liability Company (FLLC) with a small-percentage voting interest and a large non-voting interest. The non-voting interest, representing the bulk of the FLLC value, can be transferred while the taxpayer retains all voting interest.
Yes, property can be transferred to a Spousal Lifetime Access Trust (SLAT), an irrevocable trust in which the other spouse is a beneficiary for life. The beneficiary spouse can receive the income from the trust each year, as well as distributions for his or her health, education, maintenance, and support. This gives the gifting spouse vicarious access (through the beneficiary spouse) to the transferred assets, if needed. When the beneficiary spouse dies, nothing in the trust is included in his or her estate.
Yes, but special attention must be given to the drafting of the trusts by the legal and tax advisors involved, because certain restrictions apply, so as not to run afoul with the IRS.
If you think implementation of any or all of these concepts might help one of your HNW clients, I am available to talk more fully with you, and your client, and their advisors. Let me know at 706-614-3796 or tom@cpsadvancedmarkets.com.
Having already been pestered to don her heavy winter overcoat in the middle of the night, the lady turned to the steward and scowled, “Why should I get into your little boat and leave this great big ship?” As bands blared and bulbs blazed behind her on the 900-foot steel deck of the great liner Titanic, stepping into a swinging dingy as it dangled 70 feet above the black ocean surface did not seem the better choice.
Meanwhile Thomas Andrews, the designer of the colossal craft who knew her every bolt and ballroom, was receiving reports of leaks in the first five of the ship’s 12 compartments. He knew this was enough to create a domino effect that would eventually fill the hull and ultimately spell the Titanic’s demise.
High-net-worth clients are faced with a quandary somewhat akin to that of the lady-on-the-liner.
Should they put in motion a significant shift of assets out of their estate to take advantage of the temporary opportunity under the estate and gift tax law (for a quick review of the ins-and-outs of the current high lifetime exemptions – read the riveting article “Time, Tide, and TAXES Wait for No One”!).
Use of the generous lifetime exemptions must occur by December 31, 2025, before they drop by 50% under prescribed sunset provisions. But transfers out of the taxable estate probably means giving up the control of and the benefits from those assets. Add to this separation anxiety what we are hearing from insurance advisors: that some legal and tax advisors are suggesting delay as there might be a repeal of the sunset of the high exemption amount.
A Sale of Assets to Intended Heirs (and the steps usually suggested, and to be affirmed, by legal counsel)
The sunset provision is not the last iceberg that will threaten your high-net-worth clients. A young passenger named Violet Jessup survived the sinking of the Titanic, only to be on board the HMS Britannic in the Aegean Sea two years later when an explosion took the vessel down, but only after Ms. Jessup was safely adrift nearby. We are ready to help you maneuver the serial obstacles as successfully as she. Contact us about your planning issues at 706-614-3796 or tom@cpsadvancedmarkets.com!
Growing up I lived down the road from a farmer who liked to say, “I lost money yesterday. The price of hogs went up and I didn’t own any!”
It’s one thing to have regrets over a failure to act when an outcome was unknown at the time. It’s quite another, and inexcusable, to suffer loss from predictable consequences.
Case in point: the Tax Cuts and Jobs Act of 2017 (TCJA) told all high-net-worth taxpayers they had eight years during which they could double their estate and gift tax savings using an increased lifetime exemption before a “sunset” measure in the bill would reduce it by 50% on January 1, 2026.
Well, the time to act draws nigh and there are some recurring questions. The current exemption is $12,920,000 per taxpayer and it increases each year for inflation. But for simplicity’s sake, assume the current exemption is $12,000,000 which will drop to $6,000,000 on 1/1/2026.
No. The exemption protects property from the Federal Estate and Gift Tax, which means that the transfer tax does not apply to the first $12,000,000 given away, whether at death or during life.
Using the assumed numbers, at least $6,000,000 must be gifted to take advantage of the high exemption. If $12,000,000 is transferred now, there is no “claw-back,” or retroactive tax due when the exemption is lowered to $6,000,000. But if only $6,000,000 is gifted now and the exemption is lowered to $6,000,000 on 1/1/2026, the taxpayer will be deemed to have used their full exemption and lost the benefit of the temporary excess.
If a taxpayer takes advantage of the full exemption and moves the additional $6,000,000 from their estate (i.e., $12,000,000 total in gifts prior to 1/1/2026) and assumes there would have been 5% appreciation on the property if left in the estate, the tax savings in 20 years (under current law) for the reduced estate will be more than $6,000,000. Savings will double for married couples who currently use both high exemptions.
Then be sure to fully use one spouse’s exemption so that the current excess amount is taken advantage of now and not lost later (see Question #2, above).
The biggest tax advantage when receiving inherited property is that the recipient receives a “stepped-up basis” in the inherited asset equal to its fair-market-value at the time – in most cases – of decedent’s passing (e.g., the decedent purchased stock for $10 that was worth $100 when bequeathed to the heir; the heir’s basis in the stock is $100).
But when property is gifted, the donor’s income tax basis is transferred to the recipient (e.g., in the case of the stock worth $100, the donee would have a $10 basis, the same as the donor). So, the best assets to give – at least regarding eventual income tax consequences – are those whose fair-market-value is closest to the donor’s basis. Notwithstanding, the eventual estate tax savings could still outweigh results from the transferred basis issue when gifting appreciated property.
Since the eventual taxable estate will approximate a taxpayer’s net worth, single persons with a net worth of at least $6,500,000 and married couples with a joint net worth of at least $13,000,000, should consider the advantages of using the current high exemptions?
My farmer-friend never did buy any hogs, so that story ends there. But if you have questions or casework on your clients’ planning matters, I’m always ready to with you, and your client, and their advisors, let me know at 706-614-3796 or tom@cpsadvancedmarkets.com.
Devotees of the popular PBS series Downton Abbey felt the pangs of separation anxiety as they approached the final episode. This generation’s version of Upstairs, Downstairs has done much in the process of its narrative to enlighten viewers with an inside look at the workings of a great English manor home and the hierarchy among the 40-50 servants required to keep the show on the road.
Quickly evident is the fact that if all goes as it should in the house it’s because the butler did it.
He was the highest ranking among the help. From his command center located in his pantry and “. . . in his gentleman’s black suit he radiated calm and confidence upwards and absolute authority downwards.”
Most were unmarried so they could devote full and full-time attention to the management of all the people and the maintenance of all the property that lay within. So serious were some regarding the security of their employer’s valuables that they slept in beds that blocked the doorway to the locked cabinet holding the family silver, glass and plate. So complete and comprehensive was the coordination of affairs by a competent butler that the master concerned himself with little except where to find and sit at the table come dinnertime.
In 1890 the average annual salary for a butler, in addition to room, board, clothing and gratuities he often received from vendors grateful for the household’s business, was around $8000 in today’s dollars.
The importance of both is usually unrecognized and neither is paid very much. Consequently there is a viable market among those who make a full-time profession of creating and maintaining an environment in which to raise children.
Because ‘homemaker’ is not a paid position little thought is given to replacement value and the cost of “hiring out” all the responsibilities should a “non-working” spouse pass away.
It’s usually an easy sale because economical term insurance provides the needed protection with guaranteed premiums until the children reach maturity.
The bread-winner in the home should have adequate coverage. Then let us find the best carrier who will allow an equal amount on the homemaker.
Carrier choice can also save bumps in the road if the facts in the case are outside the norm
Example: In a recent case the bad daughter dropped off the grid leaving her two children with her retired Mom who took responsibility for her grandchildren. The household was supported by the working good daughter, who was single and adequately insured. Rather than allow insurance on Mom equal to the good daughter’s coverage the carrier proposed only a multiple of Mom’s Social Security income.
Their offer was for less than $50,000, proving again that there is more to a term sale than a spreadsheet!
Suggesting to a household that it members should consider coverage on its domestic key person addresses a vital need and can also be a springboard to many other sales and marketing opportunities.
Contact me for assistance and suggestions at 706-614-3796 or tom@cpsadvancedmarkets.com.