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Making Heads Or Tails Of Executive Benefits

A simple coin toss is the most popular form of settling disputes or making decisions. Subterfuge is often used to improve a participant’s odds. If the caller sees through the “heads-I-win/tails-you-lose” ploy then the flipper can introduce a GMO known as a two-headed coin, usually a Washington quarter, available for a few bucks at any novelty store.
 
All this to illustrate that, for all the similarity of circumstances that the obverse and the reverse have on the dime, they can dictate significantly diverse patterns of events. We use the phrase two sides of the same coin to describe the different, but closely related features, of an idea or course of action. And so it is with certain non-qualified executive benefits.

All employers want economical ways to keep their key people. You make your coin by helping them decide which side of the opportunities available best meet their needs and goals.

An Executive Bonus plan (EB) is the most common selective benefit format in the business marketplace, and a Death-Benefit-Only Plan (DBO) is the most overlooked. Both have as their primary purpose to keep a key person with the company by providing life insurance protection.
 
Their primary difference is the amount of control the employer has – should the executive choose to leave. Both are easy to explain, implement and administer.
 
With an EB plan, simply put, the employer pays for the executive’s personal insurance coverage. In a DBO plan the employer promises to pay a benefit to a named beneficiary if the executive dies while employed, then buys a company-owned policy to fund against the contingency. In either case the vehicle can be a permanent or term product.
 
Often with a DBO the employer chooses to roll the policy out to the executive at the time of retirement. Even with term coverage the conversion privileges can make the transfer attractive if the executive has had health issues.
 
Consider the different sides of this coin:
 
 
Call to talk about executive benefits in particular and business planning issues in general that you should be discussing with every business client and prospect you have.
 
For what it’s worth – the simplest of all Super Bowl wagers made by bettors is on the outcome of the opening coin toss. Those who prefer the NFC did well around and after the turn of the century. The senior conference won the toss from 1999-2012 defying the odds (going in) of 16,384:1.
 
Tom Virkler, JD, Director of Advanced Markets
706-614-3796
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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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LTC Planning – What’s The States Got To Do With It?

In 1984 the Grammy Award for Best-Record-of-the-Year was given to a singer whose sobriquet within the industry was The Queen of Rock ‘n’ Roll.  It was Tina Turner’s first and only #1 Billboard hit and, at age 44, she became and remains the oldest female artist to ever achieve the honor.  Turner’s winning song, What’s Love Got to Do with It?, offers some sobering advice in its opening lyrics:

You must understand/ though the touch of your hand/ makes my pulse react/

That it’s only the thrill/ . . . You must try to ignore/ that it means more than that.

Lately it seems that all that talk about state-mandated long-term care programs is making a lot of pulses react.  But maybe, like Ms. Turner suggests, it shouldn’t amount to much and is not the important thing to which attention should be paid.

First, a few observations about what is going on in many statehouses across the fruited plain:
  • To date only Washington has enacted a government-provided long-term care. California has completed its LTC program feasibility report.  Fourteen more are giving serious consideration to their own LTC initiatives.
  • The trend suggests that the plans will be funded by a mandatory payroll tax. The one plan in force takes .58% of W-2 income with no cap.  The feasibility in the other may charge a progressive tax ranging from 1.5% to 2.5% on all earned income.
  • The Washington plan allowed a waiver period during which a taxpayer could initiate his or her own private coverage under a qualifying plan and avoid the tax levy. There is no certainty that any future legislation in any state will provide waivers for those with either existing coverage or policies purchased in anticipation state plan implementation.
So, what’s the bottom line regarding what we should be telling clients concerning all these state rumblings?  Simply this, to modify Tina Turner a bit:  What’s the state’s got to do with it? 
  • Motivation to consider private long-term coverage shouldn’t be to achieve a possible waiver and avoid the risk of a mandated levy against salary if a state plan is implemented.
  • Concern should, as always, be about the greater risk of a possible long-term care event that 1) becomes more likely and 2) more expensive to insure against with increased age.
  • At best state plans, like Washington’s, would most likely serve primarily as revenue-raising devices to shore up rapidly shrinking funding bases for current Medicaid plans. Any benefits they provide would, again, most likely prove inadequate for the level of care most clients would prefer.

It’s good that the activity of states is causing many to re-focus on the too-often overlooked need for long-term care protection.  Our job is to use this window-of-opportunity to demonstrate how a client’s future can be made truly more secure with the various forms and features of coverage available in the current marketplace. 

Contact us to discuss more!

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Policy Valuation: How Much Are You Worth?

A bidder at an auction purchased a Stradivarius and a Rembrandt for what he felt was an unbelievably low price. He took them to an appraiser to see if they were authentic. The appraiser informed him, “Yes, they are authentic. It’s just a shame that Stradivarius couldn’t paint and that Rembrandt didn’t know beans about making a violin.”

The common legal definition for fair market value of an asset is the price on which a seller and a buyer can agree, neither being under any constraint and both being aware of all the circumstances. Simple enough. So why is there so much confusion with regard to valuation of an inforce life insurance policy?

The need for a reliable value occurs often in the business, estate and financial planning process.

And by “reliable” we mean one that the IRS will find acceptable, because usually the value is needed to calculate the tax consequences at the time of an ownership change.
 
The reason the IRS takes such an interest with life policies is, probably, because most transactions don’t involve parties whose opposing interests are characterized by a level of dynamic tension that will necessarily result in a fair and final value.
 
Consider This:
  • An employer distributing a business-owned contract to an employee-insured (e.g. distribution of a key person policy at retirement) may appreciate the corresponding business deduction, but probably would be happy to undervalue it to augment the benefit to a long-time employee by decreasing the amount he or she must recognize as income.
  • When a policy is distributed from a qualified plan, the stated value matters not at all to the plan trustee. But to the participant who must recognize the value as income (perhaps even with a 10% tax penalty) the lower the valuation, unrealistically or not, the better.
  • In a gifting situation the transferor of a policy is of a donative mindset anyway, so a lower value doesn’t reduce anything he or she might have received in return, except the size of a gift tax bill. So the lower the better, again realistically or not.
The difficulty is that neither Congress nor the IRS nor the courts have put together a reliable set of laws, regulations and rulings that allow for easy or certain valuation of a policy. Taxpayers must deal with a hodge-podge of criteria that vary with circumstances and with interpretation of the facts.
 
The good news for the insurance advisor is – it is not your responsibility to determine value, nor should you try. Rendering an opinion is outside the scope of your legitimate professional activity. The best you can, and should, do is offer to request from the carrier their “Form 712” valuations used by an executor in determining a policy’s value in an owner’s estate. You will get back one or more numbers.
 
The most common is the interpolated terminal reserve, but many will also include: accumulated cash value, PERC value, premiums paid, cash surrender value, tax reserve, statutory reserve, etc. Provide it to the attorney, CPA or appraiser to assist in their valuation. You’ve done all you can and more than most would.
 
There is another story of an auctioneer who was interrupted when his clerk handed him a note. Reading it the auctioneer announced, “A gentleman has lost a wallet containing $500 in cash. If it is returned, he will pay a reward of $100.” After a moment someone in the audience shouted, “$150!”
 
Call with any questions concerning policy valuation. We will make it worth your while.
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Having Your (Wedding) Cake and Eating It, Too?

As the years go by, America is slowly raising a generation that knew not Johnny Carson.  Fewer now remember when in 1992 the “King of Late-Night Television” broadcast his last episode on The Tonight Show to a viewing audience of over 50,000,000!

Carson wasn’t doing quite so well years before when an attempt to shore up his floundering career involved hosting a daytime gameshow entitled Do You Trust Your Wife.  Much smaller audiences tuned in as Johnny gave the category of an upcoming question to a husband-contestant, who then decided whether to try to answer it himself or “trust” his offstage wife to take a shot at it.

Married high-net-worth clients often ask if there is a way they can get property out of their taxable estate, but still benefit from its use.  The answer is, “Yes,” but before moving forward the client would be well-advised to watch a few episodes of Carson’s early gameshow.

The concept is a common and time-tested planning device most-often referred to as the Spousal Lifetime Access Trust (SLAT).  Its implementation and use will require that the work be done by the client’s legal and tax advisors. 

It works like this:
  1. The married taxpayer sets up an irrevocable grantor trust with his/her intended heirs (usually the kids) as beneficiaries.
  1. An additional feature is that the taxpayer’s spouse is made a lifetime beneficiary of the trust – that is what makes it a
  1. So long as the rights and privileges granted to the spousal beneficiary are not too extensive and they end it death, none of the assets still in the trust will be included in the taxable estate of either spouse.
The extent to which the beneficiary spouse can benefit is significant, including:
  1. The right to withdraw all income generated in the trust each year.
  1. The right to withdraw each year the greater of $5,000 or 5% of the trust corpus.
  1. The power of the SLAT trustee to make discretionary distributions to the spousal beneficiary so long as it is for health, education, maintenance, or support (HEMS!). This is pretty open-ended!  Most agree that if your trustee can’t justify a distribution for one of these reasons, someone should be appointed who has a better imagination!
  1. The spousal beneficiary can even be the SLAT trustee who has the power to make the discretionary distributions discussed in #6!

So, the high-net-worth client can now make full use of the current high lifetime exemption (currently $12,920,000) by transferring that amount of property to a SLAT for the other spouse and still maintain access to the benefits of the property gifted (for a brief discussion of the current use of the high exemptions, see the entertaining and finely crafted article at Time, Tide, and TAXES Wait for No One. 

Of course, it is only vicarious access because the conduit for enjoyment is the beneficiary spouse.  As an acknowledgement to Johnny Carson, we could call it the Do-You-Trust-Your-Spouse Trust, but SLAT is a much more manageable acronym than DYTYST, is it not?

When the Tonight Show was still performed in New York, Johnny liked to joke, “Anytime four people in this city get into a cab without arguing, a bank robbery has just taken place.”

Get in touch with any questions you have concerning this or other advanced planning matters that come up in your CPS casework at tom@cpsadvancedmarkets.com or 706-614-3796.

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LTC Awareness Month Resources From Thrivent

Every November, the industry – led by Life Happens – comes together to sponsor Long Term Care Awareness Month. This campaign is designed to educate consumers about the importance of long-term care and the role it plays in protecting families’ financial security.

To take advantage of heightened awareness in the marketplace during the month of November, Thrivent has packaged some of the most popular resources designed to raise awareness and drive contact with financial advisors.

The lack of conversations:
  • 92% of consumers believe that financial professionals should talk about long-term care plans with their clients.1
  • 59% of people have not had a conversation with anyone about LTC planning.2
  • 2% of those that have had such a conversation had it started by their Financial Advisor.2
The opportunity:
  • 29% of respondents to a LIMRA survey believe they own some form of long-term care insurance, while data shows actual LTC ownership is closer to 3.1%.3

To take advantage of heightened awareness in the marketplace during the month of November, Thrivent has packaged some of the most popular resources designed to raise awareness and drive contact with financial advisors.

  • This kit includes:
  • About Thrivent
  • Conversation resources
  • LifeHappens videos, social media and flyers
  • Upcoming events
  • Sales strategies
  • Info on the Caregiver Resources benefit

and more!

DOWNLOAD RESOURCE KIT

1 Planning for Long-Term Care—New Findings from a 2023 Survey of Financial Professionals and Consumers. Versta Research, August 2023.
2 Thrivent’s 2021 Extended Care Planning Survey, Conducted by Morning Consult, March 2021.
3  Do Consumers Really Understand Long-Term Care Insurance?, LIMRA Newsroom, 11/15/22.

Webinar

Nov 8, 2023 01:00 PM Central Time
A Deep-Dive on Thrivent’s Traditional LTCi Solution

Learn about the benefit-rich standalone LTCi product, backed by an A++ rated fraternal insurer, that is now available to independent producers. Thrivent will discuss the benefits, riders and sweet spots where Thrivent shines.

This session provides a deeper look at Thrivent’s traditional LTC solution, including:

  • A refresher on Thrivent’s differentiators against others in the industry.
  • Innovative inflation options
  • Case studies showcasing plan design concepts.
  • Underwriting niches and the importance of prescreening health.
  • Caregiver resources benefit to support family caregivers.
REGISTER NOW
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Use the Exemption, But Don’t Lose the Store

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.

Consider how an FLLC can take advantage of the high exemption (assume $12,000,000 and a taxpayer with children) and still keep control without the gift being included in the taxable estate (all with the assistance and approval of legal and tax advisors, of course):

  1. The taxpayer chooses the $12,000,000 in assets to gift, creates an LLC, then contributes the assets to the LLC.
  2. The LLC is formed with two classes of ownership interest – assume 1% of the interest has voting rights, and the other 99% is non-voting interest.
  3. The taxpayer can now gift the 99% non-voting interest to heirs, usually to an irrevocable grantor trust for their benefit, without giving up any control or responsibility (sounds like a sinecure to me!).
  4. Even though the book value of the gift is $11,880,000 (99% of $12,000,000) the transfer is protected from tax by the exemption, but even better, the taxpayer still runs the show by retaining all the voting membership. The allocation between the membership classes does not have to be 1%-99%, rather whatever best suits the planning situation.
  5. Even better, advisors may suggest the book value can be reasonably discounted for gift tax purposes because of lack of control over and marketability of the FLLC interest. If so, even a 25% discount would allow for the transfer of non-voting membership with a book value of up to $16,000,000 that would still be protected by a $12,000,000 exemption.

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!

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High-Lifetime-Exemption Gifting – Playing It Safe!

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.

Fortunately, there may be a sensible planning-safe-harbor!  Consider:

A Sale of Assets to Intended Heirs (and the steps usually suggested, and to be affirmed, by legal counsel)

  •  Consider the assets to sell – Choose as if actual gifting was being done.
  • Determine the purchaser – This is usually an irrevocable third-party grantor trust for the benefit of intended heirs (which will be assumed). An existing trust may suffice, otherwise one must be established.
  • Purchase price – A reasonable and supportable fair-market-value of the assets chosen.
  • Payment – Evidenced by a standard commercial promissory note from the trustee requiring regular payment of a reasonable rate of interest.
  • Seed money – Most advisors suggest an existing trust corpus equal to a reasonable percentage of the amount of the note.
The Lifeboat or Not, Both Options Remain Open
  • If the sunset will occur as planned – As 12/31/2025 draws near, a timely forgiveness of the note will be treated as a gift of the property made during the high exemption period.
  • If the high exemptions are extended – The taxpayer can call the note, the trustee can repay in-kind by returning the property to the taxpayer who is then free to think about large gifts at a later time.

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!

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Time, Tide, and TAXES Wait for No One

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.

Does the taxpayer have to die to benefit from the exemption?

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.

How much of the exemption must a taxpayer use before 1/1/2026 to really benefit?

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.

How significant are the possible tax savings from current use of the high exemption?

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.

What if a “lower-end high-net-worth” married couple can’t practically gift both exemption amounts?

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).

What are the best assets to give away now?

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.

What is a good general demographic of those who can benefit from use of the current high exemptions?

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.

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