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CPS Texas Advanced Markets

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Three Sheets Of Paper, Or Three Sheets To The Wind?

Those familiar with Tom Clancy’s novel Debt of Honor will recall how a radical Japanese financial conglomerate sabotaged the U.S. securities markets by electronically erasing a full day’s trading records. But a solution emerged when Ryan’s wife, Caroline Ryan, MD, advised, “If something isn’t written down, it didn’t happen.” Then all proceeded normally as the financial world simply picked up where prices from previous day had left off.
 
Dr. Cathy’s remark is nowhere more pertinent than in your clients’ estate planning.
 

It doesn’t matter how firmly resolved clients are in the desired future conduct of their affairs, or how many people they have told; if it isn’t written down, it doesn’t matter, the difference here being there is no safety net for failure to put pen to paper.

 
While we don’t give legal advice, we do well to alert our clientele that at least three written and properly executed documents are the necessary foundation of any estate plan:
 
Durable Power-of-attorney – Who has authority to handle your clients’ affairs when circumstances (e.g. foreign travel) or lack of mental capacity prevent them from doing so?
 
Health Proxy (or Living Will, or Health Directive) – Who will make medical decisions (up to and including life or death determinations) for your clients if they are unable?
 
Last Will & Testament – How, when, and to whom will your clients’ property be distributed in the event of death?
 
Without written directions, a client’s future affairs are in the wind, with no assurance of results. We will get on the call with you and your clients to discuss the importance of these documents and how they can be effectively coordinated with all that you do for them. Contact Tom Virkler, JD – Director of Advanced Markets at 706-614-3796 or tom@cpsadvancedmarkets.com today!
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Don’t Let Business Clients Train Their Future Competitors!

Because that is what they are doing if time and money is spent cultivating a key employee only to lose him or her to another (in a similar line of business, no less) who offers more money.  Or worse, lose one who starts his or her own shop offering the products and services in which your clients made them so proficient!

“Oh, but I have a non-competition agreement in place,” they might say.  Consider: 1) This old form of “iron handcuffs” is proving decreasingly enforceable in most states, and 2) your client has still lost a valuable employee!

Consider instead some “golden handcuffs” that are the easiest and significantly beneficial fringe benefit that protect key people not just during employment, but for their entire life. 

Call it Super Executive Bonus:
  • Purchase permanent life insurance for a selected employee which he or she will own.
  • Include a long-term care rider on the contract.
  • Pay the premiums until retirement, overfunding it so that it will carry for life without further premiums.
The distinct advantages for your business client over other employee benefits:
  • There is no obligation to fund in any given year.
  • Premiums are deductible and are reported on the employee’s W-2.
  • There are no government reporting requirements or regulations.
  • You have provided an attractive triple post-retirement benefit that protects in the event of death, long-term care, or the need for available cash.

We will help design and present the Super Executive Bonus benefit for your client.  All we need to draft a preliminary proposal is the executive’s age, sex, assumed medical classification, tobacco use, and the state of sale.  Contact Tom Virkler, JD, Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com.

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Beneficiaries Aren’t For Kids

At the age of eleven, the great composer Wolfgang Mozart wrote his first full-length opera. But if you had tried to make him a policy beneficiary when he was that young in any state today, he would be deemed legally incompetent.
 
It doesn’t matter how enlightened or precocious your child, the law doesn’t let a carrier pay a death benefit to a minor.
 
If you do try and then die, a long, drawn-out court proceeding will determine who should manage the funds until the child’s age of legal competency is reached.
 
It’s just as well. How many undirected teens might see even a small benefit (say $25,000 or $50,000) as nothing more than an opportunity for a weekend at the beach with friends?
 
But there is an easy solution! All states have in force a Uniform Transfer to Minors Act (UTMA), or something similar.
 
In a nutshell:
  • A custodian is appointed to manage the death proceeds until the minor’s legal majority. Successor custodians can also be named.
  • The state’s law safeguards the child’s interests by dictating the responsibilities and the powers of the custodian concerning the funds. Consider the arrangement an economical default trust, avoiding the cost and management of a full-blown, free-standing trust.
  • The beneficiary wording is uncomplicated but must conform to the state’s statute.
  • The only downside is that the custodianship unavoidably ends at a given age of the child (21 in most states), which may be earlier than desired.
There is a bit of effort involved for an insurance advisor. The correct wording for UTMA beneficiary designations varies from state to state, and from carrier to carrier. Length of the designation may make an addendum necessary to the policy application.
 
But the sales assistance at CPS Insurance saves you any effort and assures the directions for your client’s death benefit are correct. Remember: the most important section on any application is the beneficiary designation!
 
Contact Tom Virkler, JD – Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com, anytime minors are involved in your client’s insurance planning, or if you have any questions drafting a policy’s beneficiary designation.
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The Probate Court Is Not Your Friend!

Most think the Probate Court is a necessary and unavoidable final landing place for accumulated wealth before it passes to the next generation.  It is neither; and it should be completely avoided if possible.   

Two common examples of probate-avoidance:
  • Jointly owned property (most often with the homeplace between spouses) – Owners have equal shares and a deceased’s ownership interest is automatically re-allocated among the surviving joint owners.
  • Beneficiary designations (most often on life insurance policies) – Upon death of the owner of the account (or the insured on the policy) assets transfer automatically to the named beneficiary.

But… without further planning even these strategies might only kick the can down the road, because upon the death of the last joint owner or the beneficiary, the assets could still end up in the Probate Court. 

And then only four things are certain:
  • The assets of the probate estate will be fully disclosed in the public record,
  • The assets will be subject to the claims of creditors (in fact, that is the purpose of the probate),
  • Receipt of the assets by intended heirs will be delayed, and
  • A portion of the assets will go to pay the fees of the attorneys handling the probate.

A common planning solution to the problems of probate suggested by legal and tax advisors is the use of a simple revocable trust, not be confused with an irrevocable trust.  Managing assets in a revocable trust allows flexibility and control during life and provides greater privacy, less delay, and less expense in the handling of final affairs.

Call Tom Virkler – JD, Director of Advanced Markets, at 706-614-3766, or tom@cpsadvancedmarkets.com today to discuss the features and advantages of revocable trust planning so that you can suggest a revocable trust be part of a client’s overall financial plan and how it can be coordinated with their insurance and annuity arrangements.

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Are Your Clients’ CDs Pulling Their Weight?

Certificates of deposit are a sure thing that let you rest easily at night. You park your money and collect the guaranteed taxable interest each year. No worries. No questions asked.

But, can you use the money elsewhere for better value with just as much, or more, certainty of results?

Consider the case of a 45-year-old male in preferred health, subject to 20% total income tax:
  • His current $100,000 CD pays 4% taxable income for an annual after-tax return of $3,200.
Can this client get a better return and still preserve his capital?
  • He uses the $100,000 to purchase a single-premium immediate annuity that pays $5,944 (a currently available rate of 5.94%) each year for life.  Since a portion of each payment is taxable, his annual after-tax return is $5,277.
  • To preserve his capital for heirs, he purchases a $100,000 level premium permanent policy guaranteed for his life with an annual premium of $994.
  • After the cost of insurance, his net annual after-tax disposable income is $4,283, $1,083 more than the return on his original CD.

Several factors will determine the attractiveness of this strategy, such as age, health and whether the client’s risk-reward profile will be inclined toward a plan with such favorable, but unfluctuating, guarantees.

Reach out to Tom Virkler, JD – Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com concerning your clients who would benefit from putting their CDs, or other fixed assets, to better use.

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Don’t Let Your Clients Lose ANY Of Their Future Earnings!

Clients seldom stop and think about how significant is the amount that they will actually earn over their working life. So, it’s your job to make sure they do so when planning to protect against the loss of that amount. 

The procedure is quick and easy. Follow a few steps:
  • Suggest term coverage. It is economical and is designed to cover only the period of need.
  • Determine the number of future working years, and aim a little long.
  • Multiply that by the client’s current earned income.
  • Find how much that amount of coverage will cost, using a level premium product.
  • Since the death benefit is income-tax free the cost can be reduced by multiplying by only the client’s after-tax
  • Since the death benefit is received in a lump sum, the coverage can be further reduced by accounting for the time value of the lump sum.
  • Do the same for any second wage-earner on which the household depends.
Some thoughts:
  • Suggest maintaining the amount of coverage as each year passes to compensate for inflation and any increases in earnings.
  • Term insurance is not a commodity. There could be significant differences in policy features or a carrier’s medical underwriting. Don’t just choose the lowest price generated on a spreadsheet.
  • Some permanent coverage may be desirable to extend protection beyond the working years – especially if the policy is designed to include critical illness or long-term care riders.
  • This effective process reduces the time and increases the profitability of term sales, especially when coupled with the ease of online procedures for application and placement.

Contact Tom Virkler, JD, Director of Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com in each case for help with product choice, application procedures, the role some permanent or other product coverage might play in the planning process, or assistance with medical underwriting issues that may arise.

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Don’t Make The IRS A Co-Owner Of Your Policy!

Whenever an asset changes hands a risk is involved in the transition of title, especially with life insurance policies! The biggest tax advantage of life coverage is the ability to receive the death benefit income tax-free.

But much of the death proceeds from a transferred policy will be taxable unless the change is an exception under the Internal Revenue Code!

A couple of points:
  • Most intra-family transfers are considered gifts and don’t affect taxation of the death benefit.
  • A policy can always be transferred back to the insured without issues.
  • Even lower-income beneficiaries can feel the effect as the taxable portion of the proceeds is added to, and often exceeds, their normal taxable income.
  • Taxation can be triggered by the transfer of any interest in the policy, not just outright ownership.
  • Most problems occur when unneeded business-owned policies are transferred to someone other than the insured (e.g. a trust).

The good news! Most potentially taxable changes can be avoided, and past taxable changes can usually be fixed.

Reach out to Tom Virkler, JD – Director, CPS Advanced Markets, at 706-614-3796 or tom@cpsadvancedmarkets.com concerning any policy ownership changes you anticipate, or to discuss current policy placement to avoid problems down the road should ownership changes become necessary. 

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Taxes And Trust-Owned Life Insurance: How To Provide Flexibility

The most common strategy that wealthy and healthy taxpayers use to fund against unavoidable anticipated estate tax liability is to purchase life insurance in an irrevocable trust; funding the trust with gifts so the trustee can pay the premiums.
 
Transfers to the trust can be protected from gift taxation by using either available annual exclusions or the grantor/donor’s lifetime exemption. At the death of the insured the proceeds are not included in the taxable estate, but the funds are available to buy assets out of the estate to provide liquidity necessary to pay estate taxes. All is right with the world!
 
But what happens if the insurance is later needed for other purposes outside the trust and back inside the taxable estate?

Careful advisors take the precaution of having the policy in a grantor (or defective) trust that by its terms allows the grantor/insured to purchase the contract out of the trust.

The practice is common and allows for broad future planning options. In the past no one was quite sure if reserving the power to repurchase the coverage didn’t constitute an “incident of ownership” in the policy that would draw the death benefit back into the insured’s taxable estate, even if they didn’t buy the policy back.
 
Not to worry!
 
If your clients are concerned then suggest that they ask their legal or tax advisor about Rev. Rul. 2011-28 which determined that the right to repurchase does not create an incident of ownership so long as:
  • The trustee was obligated to assure that the purchase price paid was adequate.
  • The transaction didn’t shift benefits among trust beneficiaries.
With these provisions in place a trustee can buy life insurance inside the trust without fear of using up a grantor’s insurability that might be needed outside the trust at a later date.
 
Take the planning flexibility one step further.
 
Assume a policy was purchased back from the trust because the grantor/insured needed it for collateral on a business loan (and couldn’t get additional coverage because of medical issues that arose subsequent to the original purchase date). Once the need has passed (i.e. repayment of the loan) the grantor can sell the policy back to the trust without fear, if properly done, of either:
  • The 3-year look-back rule for purposes of estate taxation, because the policy was sold and not gifted to the trust
  • A transfer-for-value for income tax purposes, because the sale to a grantor trust by the grantor is deemed a transfer to himself.
Contact Tom Virkler, JD, at 706-614-3796 or tom@cpsadvancedmarkets.com if your client has concerns about the flexibility he or she may have getting proposed trust-owned life insurance back out if needed down the road or, for that matter, the sale of an existing policy to a trust. Call, too, if you want a copy of Rev. Rul. 2011-28 to read or to pass on the client’s legal or tax advisor.
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Irrevocable Trusts: Pay The Trustee

A long time ago, in a galaxy far, far away I remember reading an IRS Private Letter Ruling that had about it the worst method an insured/grantor could use to pay premiums on a policy inside an irrevocable trust.
 
He was the sole owner of a business that each year cut a check directly to the carrier for the total amount due. The taxpayer was asking for a determination as to whether this quick-and-easy A-to-B transaction for maintaining a policy outside of his taxable estate would be deemed an incident-of-ownership resulting in the inclusion of the benefit in his taxable estate at death.

I’ve searched half-heartedly and unsuccessfully for the ruling. But if memory serves me well, which it well may not, the Service did some “deeming”, but not in the unfavorable direction of finding an incident-of-ownership anywhere in the works.

It treated the taxpayer’s monetary circumlocution as: first, deemed income to the taxpayer from the company that must be reported as income; second, a deemed gift from the taxpayer to the trust that must be reported as such; then third, a deemed premium payment by the trustee to the carrier – all without giving rise to any incident-of-ownership in the grantor/insured. Well, how about that?
 
It’s tempting to jump on such reasoning when it becomes bothersome to set up a trust checking account, or go through the multi-step process of actually gifting money to the trust and hoping that the godparent of the beneficiaries (who graciously offered to serve as trustee) doesn’t forget to pay premiums in the years following his or her retirement to the beach. But there are some serious concerns created by the convoluted route taken by the premium in the illusive PLR mentioned.
 
If avoiding gift taxation is dependent on use of available annual exclusions then two things are necessary to qualify for protection.
 
The beneficiaries must receive notice of their right to withdraw contributions made on their behalf, usually accomplished through timely “Crummey letters”. More important, the trustee should be in a position to actually fulfill requests from beneficiaries should they choose to exercise their Crummey withdrawal privilege.
 
If the only asset in the trust is the policy and the cash for premiums that constitute the annual gift merely flies over the trust each year, the Service is in a strong position to argue that the present interest necessary to qualify for the exclusion is only an illusion.
 
In addition, a properly drafted irrevocable trust implemented to keep death benefits free of estate taxation will only allow and not require a trustee to purchase life insurance on the grantor’s life. This avoids any argument of grantor control over the policy. However, if each year, premiums are paid directly to the carrier the grantor has, in effect, forced the trustee to purchase coverage. So, how do you spell a-u-d-i-t?
 
Too often shortcuts are taken in the establishment of irrevocable trusts and too often insufficient attention is given to their ongoing administration. While it is not the legal responsibility of the insurance advisor to see that all is done according to Hoyle, it should be his or her annual practice to make sure that the proper parties are fulfilling theirs.
 
Contact our Advanced Markets Team with questions you have concerning your casework that involves trust planning or estate and gift tax concerns, at 706-614-3796 or tom@cpsadvancedmarkets.com.
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The 10-Minute Insurance Analysis

Back in the old days kids would buy a comic book for 10 cents (5 cents if the cover had been removed for re-sale) and peruse the back pages for ads that peddled everything from x-ray glasses to work-out programs that promised to make you into a he-man in two weeks. Purchases were made by mail and paid for with cash, checks or stamps. Buyers were alerted to allow 4-6 weeks for delivery!
 
Not today. Now “graphic novels” cost around ten bucks and things kids need are purchased online with delivery assured almost the moment of the last key stroke. Comedian Steven Wright described the acceleration of the pace of life well when he said, “Last night I made some instant coffee in my microwave oven and it almost went backward in time.”

The insurance industry has responded to the fast pace to which a new generation of buyers has become accustomed with abbreviated and accelerated policy underwriting and issuing programs.

And now you can do the same in drawing conclusions with regard to determining financial need for coverage in less time and little financial information. Try this:
 
For most people, there is only one need.
 
If a client doesn’t have estate tax concerns, then the only insurance need he or she has is for income replacement protection. If a family is managing its affairs properly then maintaining its anticipated income level for the anticipated number of working years left will allow for maintaining the household and achievement of retirement goals.
 
Coverage for that need is easily calculated.
 
Simply take the client’s current earned income and multiple it by the number of working years that remain. In fact, because a death benefit is received income-tax free, use of after-tax income would still be adequate, but allow for a reduction in the amount of coverage sought.
 
Protection can be purchased economically.
 
Coverage is needed for a known period of time (i.e. estimated number of working years remaining). This is exactly when term insurance is needed. There is no reason to buy higher-priced permanent coverage. Beyond retirement clients may want to maintain some coverage for estate liquidity, but they can either apply for new permanent coverage or exercise the conversion privilege under the term policy.
 
The cost is guaranteed and can reduce over time.
 
Clients can “lock-in” the cost of their income replacement protection with guaranteed level term insurance for a period that covers the number of anticipated working years. As the number of working years reduces with time the death benefit on the policy can be easily reduced. But often the face amount is left level to accommodate for raises, bonuses, or inflation.
 
A two-policy proposal.
 
Don’t forget coverage on a spouse, especially if he or she is also a wage-earner. But even a stay-at-home spouse raising children should be considered for insurance in an amount that would allow for providing the services necessary to keep the household in its accustomed style and schedule of life.
 
This simplified sales process also allows for more profitable execution of a term sale which, given the lower premium size, is less cost effective for you in terms of commission revenue.
 
Groucho Marx once commented on the pace of life when he observed: “Time flies like an arrow. And fruit flies like an over-ripe banana!” I believe he would advise that to save time you call for help with your case-related tax and planning issues at 706-614-3796 or tom@cpsadvancedmarkets.com.

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