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Insuring A Domestic Key Person: Who’s Running The Show?

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 butler has a couple things in common with the contemporary homemaker/stay-at-home parent.
 
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.
 
Determining an amount is a two-step process.
 
The bread-winner in the home should have adequate coverage (see the easy and reasonable criteria used by carriers in the short article here). 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.
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Business Transition Planning: How To Survive The Buy-Sell Agreement

This article speaks to a ready market. Why? Because statistics suggest that 80% of all small and mid-sized businesses in the country have made no adequate plans for transition in the event of one owner’s retirement, long-term disability, or premature death. And “adequate” includes being properly reduced to writing. All the understandings and oral agreements in the world are not worth the paper they should have been written on. Tell every transition-planning resistant client that they go to bed every night not knowing who will be their business partner when they wake up!
 
In addition, and perhaps most critically, there are no arrangements regarding the rights of a co-owner if another owner decides to sell out to a third party. Again, ask every transition-planning resistant client you have how they would like to get out of bed only to find they are in bed with their competitor.

But the focus here is only about one planning concern when purchasing life insurance to fund the agreed-upon buyout of a deceased owner: avoiding an unmanageable multiplicity of policies.

It usually makes sense to structure the buy-out outside the company through a “cross-purchase” agreement among the owners.
 
This assures that the full purchase price will be reflected in the increase in basis of the surviving owners.
 
In a cross-purchase each owner must own a piece of the insurance on all the other owners to buy a proportionate share should any other die first. If there are only two owners it’s a cake-walk. Each has a policy on the other. But things get exponentially burdensome as the number of parties increase. Three owners would require 6 polices, 4 owners need 12, and on it goes.
 
If the business is a partnership or an LLC taxed as a partnership there is an easier way.
 
Simply purchase one policy on every owner and have each held by the non-insured owners jointly-with-right-of-survivorship. On the death of one of the joint policy owners the rights to the death benefit are automatically reapportioned among the survivors. And since they are “partners” the reallocation of interests in the policy does not raise transfer-for-value issues.
 
But all must understand that anytime personally owned policies are used to fund a buy-sell agreement things only go smoothly when everyone fulfills their obligations – i.e. the estate sells the interest of the deceased owner and the survivors use the death proceeds to make the purchase from the estate, all under the terms of the agreement.
 
If the parties to a buy-sell are uncomfortable with personal ownership or the business structure doesn’t lend itself to protection from possible transfers-for-value (C-Corp, S-Corp, or an LLC taxed as a C-Corp or an S-Corp) then the policies are commonly held in an LLC or a partnership created for that purpose.
 
Contact me with any questions that arise in your casework involving business transition planning, and ask for our simple 4-page summary of business planning issues including the considerations that should be addressed in a well-constructed buy-sell agreement – either call at 706-614-3796 or email at tom@cpsadvancedmarkets.com.
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Term Insurance: Examining The Conversion Options

By the end of the story the pigs have begun to walk upright and they carry whips. Promised improvement in conditions for other citizens have been forgotten. And the Seven Commandments that were to serve as the foundation for the common democracy have been reduced to just one:

All animals are equal, but some animals are more equal than others.

So ends George Orwell’s sobering classic novel, Animal Farm.
 
One danger of advanced technology in the insurance industry has been the “commodity mentality”.
 
Created by the ease and prevalence of spread-sheeting the premiums for any of a broad array of available term products as a starting point for a choice of carrier. Unfortunately the numbers generated are too often the end point as well. It becomes “all about cost” and an agent will recommend Texas Life and Limb because the coverage is a nickel cheaper a month.
 
But a wise advisor looking beneath the price tags will find that, similar cost notwithstanding, some term products are more equal than others.
 
The most important feature of any term policy is the conversion option.
 
The privilege of exchanging the policy for the carrier’s permanent product at the original medical classification without new underwriting. An insured may come to the end of the guaranteed level premium period only to find that he or she has a need for, at least some of, the coverage going forward.
 
There are three options:
 
1) Pay the onerous and rapidly accelerating one-year term rates, or
2) if still in good health, shop for the best price on permanent coverage, or
3) if there have been health incidents during the level premium period, exercise the right of conversion under the existing contract – and the terms and conditions of that conversion option are where the thrill of a lower cost can be quickly forgotten.
 
Consider:
 
  • What permanent products are available for conversion? The most generous carriers allow for conversion to any permanent product in the portfolio at the time the option is exercised. Other carriers restrict the choice to certain contracts now, which may or may not be available later.
  • What is the likelihood that available products will be competitive? Consider term insurance with a carrier that has a reputation for and exhibits a likelihood for future generation of competitive permanent products.
  • How long into the life of the term product is the conversion privilege available? Some policies allow conversion for the full level premium period. Some only to a certain age. Some only for a set number of years, even if less than the level premium period.
  • How much flexibility is there in the amount and segmentation of conversion elections? Can only part of the coverage be converted? Can it be converted in stages?
Nothing will de-commoditize an advisor’s approach to term more quickly than a close examination of the conditions of the policy’s conversion privilege. For assistance in making the best term choice for your client’s situation, all factors considered, contact your Life Sales Representative.
 
Lest readers think that all scary characters in literature are equal, AbeBooks.com conducted a worldwide poll to determine the scariest. The winner was Big Brother, from George Orwell’s other famous dystopic novel, 1984, edging out Hannibal Lecter from the pen of author Thomas Harris.
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Inflating Asset Value? Indexing During Financial Underwriting

What’s good for the goose is good for the gander; or so we are told. But adages aren’t always truisms, so unfortunately the conventional wisdom behind them must be applied categorically and with ginger – especially when building financial justification for a case. The coverage guideline a carrier uses for one insurance need may not be applicable to another.
 
When buying insurance, a thoughtful purchaser and advisor always struggle with whether or not sufficient coverage now will do the job down the road – especially where there is a reasonable anticipation of increasing need. A good example is insuring against future estate tax liabilities.
 
Most successful clients know that they are going to be worth considerably more later.
 
So they would rather go ahead and over-insure against the possibility of a higher tax bill, rather than risk less favorable medical underwriting if they were to wait and try to purchase more at an older age.
 
Most carriers will accommodate this concern by allowing clients to index their estimated taxable estate (usually an amount resembling their net worth) for inflation. A common formula allows application of a reasonable rate of interest (currently 3-4% unless compelling circumstances justify more) for a period equivalent to 75% of the insured’s life expectancy not to exceed 15 years.

The parameters differ from company to company, so the issue of indexing can influence the choice of carrier.

Future increase in asset value is also important when buying coverage to fund buy-sell arrangements.
 
Co-owners set a current purchase price knowing that the business value will increase as the enterprise prospers. Soooo . . . one would think that the estate tax indexing guideline should apply here as well. But if you went to an underwriter back in the 16th century and argued, “Deeply drinketh the goose as does the gander” (that’s how they said it back then), he or she would tell you that it ain’t necessarily so.
 
Carriers will not allow anticipated increases in business value as financial justification for more coverage. Perhaps the concern is rooted in the fact that someone other than heirs could benefit if the insured’s goose is cooked at too early an age. Advisors should suggest that otherwise unneeded key person coverage may be a justifiable source for the additional insurance sought.
 
Indexing, as well as many other issues related to financial underwriting, can create fewer problems when addressed early in the planning process.
 
Call us and talk about situations you have that may require some foresight when insurance is needed for estate or business situations.
 
Speaking of “honkers” – have you ever noticed that when a gaggle flies over in V-formation one side is always longer than the other. There is a good practical reason for this. It’s because there are more geese on that side.
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The Corporate Transparency Act – An Example of Unintended (But Good) Consequences?

During World War II everybody traveled by rail.  And there’s the story of a young soldier shipped home to attend his mother’s funeral, only to find that his particular train was to be delayed several hours to make way for military transports.

He was resigned to missing his Mother’s laying to rest when suddenly his car lurched and begin moving forward.  As the train picked up speed and sped down the track word was quickly passed that the preferential treatment was because the Secretary of State was in one of the private cars and needed to be on time for a meeting down the line.  No one on board suspected or appreciated that the Secretary was the means by which a buck private would get to his Mother’s final rites in time!

The law of unintended consequences often comes into play when things put in motion for one purpose often end up helping those not even in the sights of an original acct. 

And so it is with the Corporate Transparency Act (CTA) and the sales opportunities it offers to alert insurance advisors.

Consider: 

Prior to January 1, 2024, the easiest way for foreign interests to hide their influence and business in the United States was to act vicariously through some U.S. entity where true beneficial ownership could be easily masked.  But beginning this year the CTA requires that those entities report the name, date-of-birth, address, and official identification of all beneficial owners (i.e., those with more than a 25% interest) or those in control, including entity officers.  And any changes must also be reported within 30 days.  Stiff civil and criminal penalties apply for noncompliance, even if unintentional.

The primary purposes of the law are to better identify money-laundering and potential funding of terrorist activities.  In fact, the CTA is a part of the Anti-Money Laundering Act of 2020.

The CTA doesn’t change the estate tax law, but it provides a, perhaps unintended, opportunity for insurance planners.  Previously untraceable U.S. assets in the estates of deceased non-resident aliens (NRAs) are now exposed to the glare of the CTA’s searchlight, as ownership can be easily traced in instances where the death tax previously went often unreported and unpaid.

NRAs are taxed only on U.S.-based assets but are only entitled to a minimalist $60,000 lifetime exemption (unlike the $13,610,000 exemption currently available to citizens and resident aliens). 

So, for example, if an NRA-parent leaves the U.S.-based family company worth $560,000 to his two children who are citizens and manage the business, a tax is due on the value in excess of his $60,000 exemption, i.e., approximately $155,000.  Previously the Feds would have had little notice of the change in beneficial ownership.  Now they will have a filing within 30 days of the change and can cross reference with the residence state’s record to determine the nature of the transaction.

We don’t often run into NRAs that are potential clients.  But in 2021 (prior to CTA reporting requirements) only the estates of 21 NRAs paid a death tax.  Now that number should now increase substantially.  Between 2010 and 2022 foreign buyers purchased over $1.1 trillion in real estate and by 2022 owned over $24.9 trillion in U.S. securities.  Those clients will need life insurance to fund unavoidable death tax liabilities as much as citizens and resident aliens. 

Call with questions and for information concerning this issue for either your non-resident clients or clients who might anticipate receipt of property from non-resident aliens.  Contact Tom Virkler, JD – CPS Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.

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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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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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