Advanced Underwriting Consultants



 Clients see a fair amount of information about stretch IRAs.  This can lead to confusion, as they try to understand what stretch might mean in their circumstances. 

Pensions, IRAs and nonqualified deferred annuities (NQDAs) can all potentially be stretched at the account owner’s death.  “Stretch” means that the beneficiary can delay the federal income tax consequences associated with the transfer of the account. 

Stretch choices may differ based on the 

  • Timing of the taxpayer’s death,
  • Type of account,
  • Relationship of the beneficiary, and
  • Timing of the stretch election. 

The financial professional will be called on to help a client draft beneficiary designations for IRAs, pensions and annuities.  One of the key factors in drafting beneficiary designations is the potential tax consequences to the beneficiary or beneficiaries of the account.  

Stretching the tax result associated with an IRA, pension or NQDA is not always the right choice for the beneficiary.  However, since it’s often hard to predict the circumstances that will exist at the account owner’s death, keeping the option of stretching open is usually the best help a client can get.



 Working with clients on their financial and estate plans can be messy.  For every family where the couple has a stable marriage and great relations with responsible children, there seem to be four families with marital issues.  The financial professional’s responsibility is to help clients match up a planning strategy with family particulars. 

Inevitably, those who work in the insurance and financial planning businesses will deal with clients who are going through a separation or divorce.  Both create stress in clients in many ways.  Financial issues and how to sort them out are a big part of the divorce difficulty. 

Each state has its own rules about the divorce process.  We won’t attempt to sort them out in this newsletter.  However, we can make some general observations about the process. One of our objectives is to define the role of the financial professional in helping a client think about tax and practical issues during the early phase of the divorce process.  Another objective is to make sure the details are buttoned up during the final phase. 

What financial issues might a client going through a divorce need help in sorting out? 

  1. Dividing up nonqualified investments
  2. Planning for the division of a pension account
  3. Thinking about the tax issues associated with child support and alimony
  4. Changing life insurance beneficiary designations to conform to new circumstances 

The divorce process is usually a difficult and emotionally-charged process for our clients.  It can be incredibly helpful to be the objective voice of reason during the process.  There are plenty of opportunities for mistakes during divorce, which can be hard to overcome.  The financial professional who acts as a technical and practical guide can strengthen the relationship with the divorcing client.



One of the most important of all Code Sections relating to life insurance is Section 1035 – which enables the very important Section 1035 exchange.  The key to the popularity of this provision is that – if arranged properly – the taxpayer can avoid recognition of any taxable gain from the disposition of an existing policy. 

Section 1035 allows a client to trade one insurance policy for another without an immediate income tax result.  A Section 1035 exchange is an incredibly valuable tool when used correctly. 

What factors might cause a client to consider a Section 1035 exchange? 

  1. The new policy provides better benefits or investment performance than the existing one.   
  2. The cost to maintain the new policy is lower than that for the existing policy. 
  3. The new policy is more suited to the client’s investment philosophy or insurance needs than the old one. 

Section 1035 of the Code is deceptively simple.  However, there are plenty of traps for the unwary financial professional.  Any of the following missteps may lead to an undesirable result: 

  • Failing to follow the steps properly
  • Attempting to complete an unapproved exchange
  • Ignoring special rules 

Our clients rely on us to guide them through the unique tax issues associated with the purchase of insurance products.  They have a right to expect us to know when to implement Section 1035 exchanges  to help them have those exchanges meet the letter of the law, and to sidestep potential minefields. 

They also want us to make sure that the insurance carriers involved will treat the transaction as a proper Section 1035 exchange, and follow the steps necessary so that there are no unexpected problems or arguments with the IRS.



Those who work with clients regarding financial matters often consider the tax implications of various strategies when giving clients professional advice.  In some cases, clients come to the table with tax issues that need to be solved.  In others, the advisor may recommend tax strategies that have some inherent tax uncertainty.  A few clients may be unlucky enough to have an unexpected tax examination thrust upon them.

Many of our clients have an irrational fear of the IRS, and will do everything possible to avoid a potential fight.  Others look at the IRS as simply another creditor, and they almost welcome the opportunity to negotiate over tax liability.

If the client and IRS are poised to have a tax disagreement, what should the client expect?  And what is the advisor’s role and responsibility in the process? 

The bad news is that it is almost impossible to avoid a tax examination by the IRS.  However, there’s plenty of good news:

  • According to the IRS itself, only about one percent of returns are selected for examination. 
  • A taxpayer can reduce the chances of having the return examined—and then fighting with the IRS—with a few sensible precautions. 
  • Even if the IRS examines a taxpayer’s return, the IRS itself says that they usually work the issue out. 
  • If the discussion between the IRS and the taxpayer escalates into a disagreement, the Service has established administrative procedures to allow a taxpayer to appeal the IRS’s position. 
  • At the end of the day, if the taxpayer and IRS still disagree on a tax issue, the courts can resolve the problem.
  • Financial professionals need to understand the rules that apply to a fight with the IRS, so they can

    • Guide clients through IRS audits or disagreements that arise in the normal course of a client’s tax life, and 
    • Coach clients in advance with regard to what to expect if the IRS challenges the client’s tax position.



     When clients approach their estate planning professionals to implement a plan, they expect the parts to work together.  Those of us who work in the estate planning business seek to do our best with lots of different objectives, managing 

    • family issues
    • control issues
    • taxes 

    The sophisticated estate plan may involve use of lots of estate planning tools, such as revocable trusts.  The revocable trust creates advantages for the client, including avoidance of probate and efficient transfer of wealth to heirs.

     The beneficiary designation, while as sophisticated a tool as a revocable trust, is at least as important.  Those of us in the financial services business most commonly see beneficiary designations for

    • life insurance
    • annuities
    • pensions and IRAs

     A specific beneficiary designation allows the property to pass directly to the beneficiary without the need for probate.  Its effect generally supersedes anything that a will or trust might say.  At the death of the insured or account holder, the beneficiary simply produces the death certificate, and the beneficiary immediately vests in the benefit.  That direct and nearly immediate access is a powerful estate planning advantage.  And in most cases, the amounts paid directly to a beneficiary are not subject to the claims of creditors of the decedent.