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Two Sure Things-Death and Taxes Q and A
Are taxes paid on policy distributions? Taxes are only paid on distributions (dividends, withdrawals, and partial surrenders) that exceed the amount of the policy owner’s investment in the policy. Are taxes paid on policy loans? No, because loans are not considered to be distributions from the policy, unless the policy lapses. What are the tax…
Sequence of Return Risk By The Numbers
Sequence of return risk refers to the phenomenon by which a few bad years early in a retirement portfolio can cause havoc for the life of the portfolio. Sequence of return risk is only relevant if the portfolio amounts are changed by either an annual addition or withdrawal. Consider the following annual returns: We begin…
Reasons to Buy and Reasons to Avoid Annuities
In its simplest form, an annuity is a contract between the annuitant (the person who owns the annuity) and an insurance company. In exchange for the company’s promise to pay later, the annuitant agrees to pay now.As a financial tool, the annuity is as important in retirement planning as a hammer is to a handyman.…
Parts ABCD of Medicare Plans
Medicare was launched in 1965 to provide health insurance coverage for America’s seniors. It has become a very popular program with seniors and insurance companies. Like most government programs, it has grown and become far more expensive than ever envisioned. Roughly 60 million people are insured under Medicare. In this article I will walk you…
Special Needs Trusts
A Special Needs Trust (SNT) is a trust set up for the benefit of someone with a disability. Trusts must be irrevocable with no written requirement that the beneficiary receives the income from trust assets to qualify as an SNT. Technically, there are two types of SNT’s. The vast majority of SNT’s are Supplemental Care…
Using Loans to Pay Life Insurance Premiums
Premium financing concerns borrowing money to pay life insurance premiums. While there may be multiple reasons to employ this strategy, it is often used to avoid liquidating other investments to pay premiums. It is important to remember that premium financed insurance is not the same thing as free insurance. Nor is it designed to allow…
Underwriting – Changes Coming
Underwriting is a process by which a financial institution evaluates the risk associated with insuring or lending to an applicant. In the case of life insurance companies, companies are taking a calculated risk on when they will need to pay a death claim. The industry has collected an enormous amount of data over the last…
Transfers to Key Employees
Business succession planning for owners of closely held businesses can take many paths. For multiple reasons, a business owner may want to sell a business to key employees. Selling a business to a family member is a complicated process. Yet in comparison to the thought and preparation that accompanies a transfer to key employees, the…
Transfer of Value for Life Insurance
A life insurance policy’s death benefit is usually paid to beneficiaries free of federal income tax. One exception to this rule is when a policy is sold or transferred for valuable consideration. In this scenario, the income tax exemption only applies to the purchase price plus premiums paid by the transferee. The death benefits less…
Comparing Popular Grantor Trusts
[Readers unfamiliar with Intentionally Defective Grantor Trusts (IDGTs) are recommended to read the IDGT article in this Estate Planning section before reading this article.] Grantor Retained Annuity Trusts (GRATs) and Intentionally Defective Grantor Trusts (IDGTs) are similar trusts used primarily to transfer privately held businesses and income producing property to future generations. Both are grantor…
Buying an Annuity
Buying an annuity is not like buying a car or deciding which college to attend. There are numerous review websites, blogs, and books to help a buyer evaluate cars and colleges. There is no equivalent for annuities. There are no substitutes for knowledge and curiosity. Buying the product that best suits your needs requires that…
Defined Benefit Plans for Small Businesses and the Self Employed
Retirement savings plans fall into one of two classifications: defined benefit (DB) plans or defined contribution (DC) plans. Hybrid plans, such as cash balance plans that contain characteristics of both, are considered defined benefit plans. Pension plans and Social Security are two examples of DB plans. Pension plans were once common among larger employers and…
Effective Buy-Sell Agreements Article
Privately held businesses with multiple owners present unique organizational and managerial challenges. Partners do not always agree on the business direction. Circumstances change, and people can change over the years. While most businesses wind down at some point, they are designed to be perpetual. The ownership change is inevitable as people retire, become disabled, or…
Evaluating Life Insurance Companies
When one commits to a life insurance policy, a person naturally assumes that the policy they were sold will be honored. Unfortunately, this is not always the case. Many universal life policyholders have found that their insurance company has changed the policy assumptions as a result of financial losses. The ultimate policy change is the…
Executors
A critical issue for people in the estate planning process is the selection of people to handle their affairs when they die or become incapacitated. The key positions to be filled include executors, trustees, and guardians. This paper identifies what these people do, how to select them, items to consider, and legalities associated with the…
ESOPs as an Exit Strategy
When a business owner begins to consider an exit strategy, the universe of strategies includes several options: Give the business to the children Sell the business to the children Sell the business to company management Go public Sell to a financial buyer (private equity or private investor) Sell to a strategic buyer (competitor, supplier, or…
Intentionally Defective Grantor Trusts
While the name intentionally defective grantor trust (IDGT) may sound like an odd name for a powerful estate tax reduction technique, it is very descriptive. Trusts are subject to multiple forms of taxation. Two specific forms are estate taxes and income taxes. Estate taxes are assessed upon death. Income taxes are annual events. When one…
Family Trusts
Family Revocable Trusts Family Trust describes a trust (sometimes called a Deed of Trust or Trust Deed) in which the beneficiaries are all related by blood, marriage, or adoption. The Family Trust can be revocable or irrevocable, though the revocable version is more common. This article will focus on revocable living trust as the key…
Federal Tax and Long Term Care Insurance
Long Term Care Insurance (LTCi) policies that are federally qualified are subject to various tax treatments depending upon who is paying for the policy, who is receiving the benefit, and the age of the policy benefactor. The tax advantages described in this article are current with 2018 tax regulations, though readers should seek the advice…
Life Insurance: Giving It Away
Many people desire to make large charitable gifts during their lifetime but hesitate due to concerns about compromising their family’s financial security. Life insurance can help alleviate these concerns by enabling the donor to give to his/her favorite charity while providing for the donor’s heirs and beneficiaries. One common technique employs a life insurance policy,…
Introduction to Annuities
Choosing an Annuity Annuities can be useful for creating retirement income by providing a “check for life.” There are many different types of annuities, including the following: A single premium immediate annuity, or SPIA This is the most common type of annuity. Once the premium is paid, the annuity will provide a consistent stream of…
Life Insurance in Pension Plans Q & A
Life Insurance in a Pension Plan Q. Are unisex rates required when life insurance is bought in a pension plan? Yes, these are required. Unisex rates are the same rates for men and women. Q. Should I ask for an estimate of the economic benefit I will have to realize each year as taxable income?…
Life Insurance in Trusts
Life insurance trusts are a key tool for estate planning attorneys. Trusts enable donors to pass capital from a donor to his/her heirs at an enormous transfer tax savings. Policies held in trusts are not included in a donor’s estate, thereby reducing the estate tax liability. Proceeds from the life insurance policies can be, but…
Life Insurance Rider Alternatives: Chronic Illness, Long Term Care & More
Many people are hesitant to spend their limited retirement savings on long-term care (LTC) insurance policy. LTC policies are ‘use it or lose it’ insurance. Unlike a life insurance policy, LTC insurance premiums are not guaranteed to remain the same over the life of the policy. They can be expensive with premiums showing large increases…
Life Settlements
Introduction Life insurance is an assignable asset. It can be given away, transferred, or sold. With a life settlement, the owner of a life insurance policy sells the policy to a third party in exchange for cash. The owner receives less than the amount of the death benefit but more than the cash surrender value.…
Long Term Care Q & A
What events will trigger a LTC policy and are the benefit “triggers” clearly spelled out? For a long-term care policy to be triggered, you must be unable to perform at least two activities from a list of Activities of Daily Living, or ADLs. These activities include things such as bathing, eating, dressing, getting in and…
Minority Shareholders
Succession planning often includes a transition plan for a business. Businesses commonly use one of three forms of incorporation, ‘C’ Corp, ‘S’ Corp, or LLC, though there are other legal forms of incorporation. Regardless of the form of incorporation, there are those who hold the power to make decisions for the business and those who…
Maximizing The Sale Price of Your Business
When the time comes to sell a business, the owner typically wants to sell for the highest price. There are times, including the sale of the business to a family member, when the highest price is not the objective. But when the buyer is an unrelated third party, the highest price is the main priority.…
Transfers of a Closely Held Business to Family
Transferring a family-owned business to a future generation of owners can involve some complex estate planning issues depending upon the value of the business. The state and federal taxman may have an interest in any estate, gift, or capital gains taxes that may result from the transfer. The second section of this article provides an…
Long-Term Care Alternatives
Statistics indicate that seven out of 10 Americans over the age of 65 will need some form of long-term care (LTC) services during their lifetime. In addition, four out of 10 Americans over 65 will enter a nursing home and two out of 10 will remain there for at least five years. Long term care…
Longevity Annuities
What are Longevity Annuities? Longevity annuities are a type of deferred fixed annuity. They are specifically designed to provide income guarantees to people who might outlive their savings. These annuities target people approaching retirement. They simplify the process of retirement financial planning by eliminating concerns with a possibly very long lifespan. Longevity annuities target people…
A Primer on Long Term Care Insurance
The Need for LTCi According to an August 31, 2017 article by Christine Benz for Morningstar (http://news.morningstar.com/articlenet/article.aspx?id=823957), the following statistics identify the need for Long Term Care insurance (LTCi). 46.7% of men turning 65 will have a need for long term care in their lifetimes. 57.5% of women turning 65 will have a need for…
QPRT
A QPRT is an estate planning tool to gift a house from parents to children at a discounted value. This irrevocable grantor trust has temporarily fallen out of favor due to the substantial increase in the estate exemption due to the Tax Cuts and Jobs Act of 2017. If the estate tax exemption reverts to…
Private Foundations
When people make philanthropy a part of their lives, and their estate plans, they have choices in how and to whom they donate. Most people opt to contribute to a public charity, be it a church, university, or a service-oriented charity such as the American Diabetes Association or United Way. Some choose to establish their…
Private Company Board of Directors
A private business has choices to make when it comes time to develop a board of directors. Companies organized as a C or S corporation are required to have a board. Delaware and Massachusetts law permit a minimal board consisting of one member. Most states require more than one board member. All states require S…
Private Annuities
A private annuity is a means of transferring an asset from its current owner to a preferred future owner. Its common use is to transfer ownership of a privately held company or an investment property to the future generation of owner-manager. The mechanism for the transfer is relatively simple, though it comes with multiple requirements,…
Preparing and Protecting Heirs
Many people who have amassed considerable wealth recognize that it can be both a blessing and a curse. Raising children in an environment of wealth, high expectations, and considerable resources present unique challenges. The prospects of transferring considerable wealth to children and grandchildren generate concern in many people of means. Examples of misspent wealth as…
Phantom Stock Plans in Privately Held Businesses
Introduction A phantom stock plan is a form of long-term incentive plan (LTIP) typically used by privately held businesses. Also known as simulated stock, shadow stock, or synthetic stock, these plans allow key employees to share in company growth without owning company shares. Stock Appreciation Rights (SARs) are a form of phantom stock. Phantom shares…
Optimizing Your Social Security Benefits
Social Security was signed into law in 1935 to become America’s retirement program of last resort. The original program was an annuity program based on the demographics of the time. Since its founding, the program has been enhanced and modified several times. The country’s demographics have changed. What was once a relatively simple and basic…
Mixing Business with Philanthropy
No presentation on succession planning would be complete without a discussion of post-succession activities.After building their businesses, doing the hard work to ensure a smooth transition to new ownership, and taking a well-deserved vacation, one still needs a focus in life. Increasingly, philanthropy has filled that void.Many business owners and managers find philanthropy to be…
Questions – Guaranteed Universal Life
Q. Are the guarantees affected by paying premiums before the due date, within 30 days after the due date, or after 30 days from the due date? You need to know how the timing of premium payments can affect the guarantees. To find out, obtain an annual enforce illustration to make sure the guarantees are…
Questions – Annuities General
Questions to ask an insurer before buying an annuity: What is the current interest rate and for how long is it guaranteed? What is the guaranteed minimum interest rate and for how long is it guaranteed? What is the surrender period? This is the time period during which you must keep your annuity contract at…
Questions – Deferred Variable Annuities
For how long are surrender charges assessed and what are the surrender charges each year? Annuities have different surrender charges and surrender charge periods. Make sure you understand this and compare surrender charges and surrender charge periods between different annuities. Is there an amount that can be taken out of an annuity each year without…
Questions – Deferred Index Annuities
Q: For how long are surrender charges assessed and what are the surrender charges each year? A: Annuities have different surrender charges and surrender charge periods. Make sure you understand this and compare surrender charges and surrender charge periods between different annuities. Q: Is there an amount that can be taken out of an annuity…
Questions – Fixed Deferred Annuities
Q: Is there a market value adjustment (MVA) at surrender if interest rates go up or down? A: When an annuity has a market value adjustment feature, the value you receive at surrender is adjusted up or down based on the direction of interest rates after you purchase the annuity. Note that the market value…
Questions – Immediate Annuities
Which companies offer immediate annuities? Many different companies offer immediate annuities, so be sure to get quotes from at least five different carriers. What’s the difference between a life only annuity, a life annuity with a period certain, a period certain annuity, and a life annuity with an installment refund? How do the payment amounts…
Questions – Index Universal Life
What is the cap rate and what is the guaranteed cap rate? The cap rate is the maximum performance you will get from the index you selected. The guaranteed cap rate is the minimum rate the insurer can pay to the policyholder. It is usually around 3%. Are historical cap rates important? Yes, it is…
Questions – Life Insurance General
Can I pay for an insurance policy monthly or annually? Some plans may offer discounts if you pay the premium on an annual basis. Is there a waiting period before coverage goes into effect? Life insurance policies do not have a waiting period. They have contestability periods.These typically apply for fraud.Policies also require an exclusionary…
Questions – Term Life Insurance
Q: Can I convert a term policy to a permanent policy? If so, when can I do this? Most term policies allow for conversion to permanent insurance without a medical exam. And some policies offer a conversion premium credit that reduces your first year’s premium on the permanent policy. This will make it easier to…
Questions – Universal Life
Q. Do I need to determine how the policy will perform based on the guaranteed interest rates and mortality costs? Unless you are acquiring a fully guaranteed universal life policy, you need to determine how the policy will perform based on the insurance company paying you the lowest return they are required to pay and…
Small Business Uses for Life Insurance
Succession Planning and Buy-Sell Agreements Succession planning is critical for business owners preparing to transfer their ownership interest in the business to partners or heirs should they die, become disabled or choose to leave the business for any reason. A buy-sell agreement is a legal document detailing how a business owner’s shares will be distributed…
Role of Annuities in Retirement Planning
History The recession of 2000 – 2001 convinced many corporations to eliminate their defined benefit programs for their employees. Declining stock prices, compounded by ERISA requirements that companies catch up with unfunded plan liabilities, devastated company earnings, and valuations. The shift from defined benefit programs to defined contribution shifted the risks of retirement income, longevity,…
Reverse Mortgages
Depending upon who one talks to, reverse mortgages are either a way to unlock equity in a retiree’s house or an even worse idea than the worst annuity. Financial planners are rarely ambivalent about reverse mortgages. They have their supporters and their detractors. What is a Reverse Mortgage and How Does It Work? As the…
Retirement Plan Required Minimum Distributions
The US Government has established multiple retirement plans allowing one to save money on a pre-tax basis. Consider a person in the 40% marginal tax bracket (federal and state combined). If someone can move $10,000 from salary to a qualified pre-tax money savings program, this person can save $4,000 in immediate taxes. The money can…
Replacing an Existing Life Insurance Policy
Replacing a life insurance policy can be costly and complex. It is a decision that policyholders should carefully evaluate to identify the costs and pros and cons of replacing a policy. Once the decision to replace is made, the policyholder can anticipate paperwork concerning the act of replacing. This article will identify who wants…
Questions – Whole Life
Q. Is it important to determine how the policy will perform if the dividend rate paid on the policy decreases? Yes, this is very important. It is quite possible based on the low-interest-rate environment we have had the last 10 years. Even if interest rates go up, many bonds that mature will still be invested…
Questions – Variable life
Q. What are the current investment options and their performance and fees? The investment options you choose will be the key to the performance of the policy. Make sure you get a prospectus and carefully review the investment options and the management fees charged. Q. Is it important to run illustrations based on the investment…
A Target Date Fund Primer
Target Date funds (TDF’s) are retirement vehicles designed to gradually reduce the amount of equity exposure in the portfolio as retirement approaches. These funds have become very popular in company 401(k) programs. 90% of all 401(k) programs have a target date fund option. As of 2015, 23% of all 401(k) assets were invested in these…
ABLE Accounts for the Disabled
Congress passed the Stephen Beck Jr., Achieving a Better Life Experience Act of 2014, commonly known as the ABLE Act, to simplify the process of providing money to improve the lives of the disabled. 529 education savings accounts served as the pattern for the ABLE accounts. With the passage of the ABLE Act, Congress finally…
Approaching Retirement Totally Not Ready
Lieutenant General Lewis B. “Chesty” Puller is credited with saying “We’re surrounded – that simplifies the problem”.He wasn’t referring to someone approaching retirement with minimal savings, but the concept is appropriate. You are in your late 50’s or early 60’s and your savings are minimal or non-existent. You no longer have options. So, in some…
Business Valuation Techniques
Most business owners conduct their business with little in-depth knowledge about the value of their company. Whether the company is worth $15 million or $26 million makes little difference in how one manages a business on a day to day basis. While one can argue it should be relevant in long term business planning, most…
Why business valuations are a key ingredient in business succession planning
Most business owners do not routinely concern themselves with the value of their business unless they have plans to sell. Many may be curious, but when they hear a price tag to obtain a formal business valuation, pragmatic thinking overrides curiosity. The cost of a formal business valuation can rival that of a financial audit.…
