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.



    Financial planning professionals often help their clients position assets properly to meet the clients’ financial goals.  Sometimes this means liquidating certain assets in order to reinvest in others.  When a client decides whether or not to sell assets to buy others, the tax consequences must be taken into account.

    When assets are sold, gain or loss on the transaction is usually recognized for federal income tax purposes.  Gain is measured by comparing the net proceeds the client receives against the client’s income tax basis, sometimes also called cost basis.

    What is cost basis, how is it calculated and when is it important?

    The IRS says that cost basis is the amount of investment in property or security for tax purposes. It is used to figure gain or loss on the sale or other disposition of property.  It is also used to figure depreciation, amortization, and casualty losses.

    Cost basis can be an especially important number for the owner of a closely held business.  For example, if the business is organized as an S corporation or partnership, the owner’s cost basis may allow certain distributions to be tax free.  Further, if the owner of a business sells to family or a third party, cost basis will dictate how much of the sales proceeds are subject to capital gains tax.

    In 2010, the concept of basis is even more important in the estate planning context.  The traditional step-up in basis rule has been replaced with a limited step-up rule, accompanied by carryover basis rules for remaining assets.  This change makes planning for the taxes associated with a client’s death more problematic.

    Many of our clients will look for our help in calculating the cost basis of their assets.

    What Every Planner Needs to Know About Employee Stock Ownership Plans (ESOPs)

    Owners of closely held businesses face challenges when seeking to transfer their companies to successor ownership. In some cases, the business owner has trouble identifying the next owner. In others, planning to fund the transfer at the key moment is a problem.

    An employee stock ownership plan (ESOP) is a special kind of defined contribution retirement plan that can help closely-held business owners solve succession issues. Where it fits, an ESOP offers substantial advantages over traditional buy-sell planning. The main advantage is that the business owners and the company are able to fund a buyout with pre-tax money.

    Because an ESOP is a retirement plan, the rules that apply to other qualified plans apply to it.

    o All eligible employees must be included.
    o The plan cannot discriminate in favor of certain employees.
    o Related businesses must be aggregated together.
    o A plan document must be implemented and kept up-to-date.
    o Other strict administrative requirements must be observed.

    Most closely held business owners, if they are considering an ESOP, would need to have several questions answered:

    1. If all employees must be included in an ESOP, how can it be used effectively to transfer the business to the right group?
    2. How can the business owner use the ESOP to buy his business interest?
    3. What tax advantages are available to the business and its owners?
    4. What if the business owner is not ready to turn over control of the business right away?
    5. What special steps need to be taken to effectively implement an ESOP?
    6. How does an ESOP integrate with the rest of the business owner’s financial and estate plans?

    Those who present ESOPs to closely held business owners will also want to understand the role life insurance plays in the process.

    For more information on ESOPs, please contact Kelly Finnell, J.D., CLU, and Benjamin Buffington of Executive Financial Services, Inc., in Memphis, Tennessee (

    For information on how to order the complete article, click here.

    Important Numbers

    The January issue of Think About It has updated pension, IRA, tax and other important numbers. If you are interested in getting a complimentary copy, please contact

    Long Term Care Insurance: The Best Employee Benefit?

    Financial professionals working with closely-held business owners are on a constant search for tax leverage with regard to fringe benefits for the owners and their employees.

    Pension plans create income tax deductions for the business, and allow employees to exclude contributions from their taxable income. However, the employer must include all eligible employees in the plan, and retirement benefits are generally taxable to the participants.

    Nonqualified arrangements that might include life insurance can generally be more selective in terms of participation, but the income tax results are generally not as favorable—especially for the business owners.

    Disability income insurance coverage provided by the business can also be selective, and the premium can be deductible. However, the owner-employee with disability income coverage must generally choose between excluding the premium from income or getting a tax-free benefit in the event of a claim.

    Could the best employee benefit be long term care insurance?

    Long term care insurance coverage (LTCi) has been available for insureds for more than 40 years. LTCi was originally designed to cover the costs associated with confinement in a nursing home. Most policies now provide benefits in situations where an individual needs special care at home or in another specialized non-hospital residence.

    Individuals who receive LTCi benefits are generally not sick, but are usually either suffering from a disabling mental impairment, such as dementia, or they are unable to perform the at least two of the basic activities of daily living (ADLs). The ADLs are dressing, bathing, eating, toileting, keeping continent, moving from one place to another and walking.

    LTCi was developed to provide money to individuals for situations not covered by traditional health insurance, or by government programs such as Medicare or Medicaid.

    Medicare pays only for medically necessary skilled nursing facility or home health care, and then only in limited circumstances for a limited duration. Medicare does not pay for custodial care. Custodial care is the type of service that provides non-professional assistance for everyday activities, such as ADLs.

    Medicaid is a government program that does pay for custodial care. However, its benefits are available only to those who have very limited assets and income.

    In order to encourage businesses to provide LTCi to employees, the federal government has created a number of tax and administrative incentives. Those closely-held business employers who are looking for a tax-favored, high-value benefit to implement for key employees should consider LTCi.

    For information on how to order the complete article, click here.



    Those who are saving for retirement may have to sort through a confusing set of strategies, including:

    •    Employer-provided qualified plans
    •    IRAs
    •    Social security benefits
    •    After-tax personal investments

    Each of these strategies may have an equally bewildering sub-set of choices.

    Take IRAs for example.  Employers may help employees fund traditional IRA accounts through a SEP plan.  Traditional personally-funded IRAs may allow deductible or non-deductible contributions.  And many taxpayers have to decide whether traditional or Roth IRAs are the best choice.

    In 2010, the rules with regard to Roth IRAs are changing.  More taxpayers will be eligible to convert their traditional IRAs to Roth IRAs.  The change will cause clients to ask questions that financial professionals will need to be prepared to answer.  The key question for most will be this:

    Is it better to keep my traditional IRA, or should I convert to a Roth IRA?

    The answer depends on the client’s goals with regard to

    •    Current income tax results,
    •    Retirement income,
    •    Family wealth distribution, and
    •    Tax timing.

    For information on how to order the complete article, click here.