Advanced Underwriting Consultants

Question of the Day – September 19

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Here’s the question of the day.

Question: My client died naming her testamentary trust the beneficiary of his IRA.  The trust names the client’s four children the trust beneficiaries.  Can the IRA be split into four accounts, with each stretched based on each beneficiary’s life expectancy?

Answer: Probably not.

Under the Section 401(a)(9) regulations, if sub-accounts are established for each beneficiary by December 31 of the year following the year of death, each child can take distributions from his or her respective sub-account without affecting the other children.  The required minimum distribution for each sub-account will be based on that sub-account owner’s age.

Experts had hoped that this same result could be accomplished with a trust as beneficiary; that is, the trust could be divided into sub-trusts for the benefit of each trust beneficiary and each sub-trust would be treated as if it were an IRA sub-account owned by that beneficiary.

The final regulations have provisions for what is generally referred to as a “look-through” trust.  Beneficiaries of a trust may be treated as designated beneficiaries providing four requirements are met:

(1)  The trust is valid under the appropriate state law

(2)  The trust irrevocable or becomes irrevocable on death of the grantor

(3)  The beneficiaries of the trust are readily identifiable from the trust instrument, and

(4)  A list of beneficiaries or a copy of the trust agreement is provided to the IRA custodian no later than October 31st of the year following the year of death

But, the final regulations provide that the separate account rules are not available to beneficiaries of a trust.  Therefore, in the case where a trust is the beneficiary of an account, the account must be paid out over the life expectancy of the oldest trust beneficiary.

This was illustrated in three Private Letter Rulings, 200317041, 200317043, and 200317044.  In those rulings, each beneficiary was forced to take required minimum distributions based upon the age of the oldest trust beneficiary even though the trust was divided into separate sub-trusts – one for each trust beneficiary.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 15

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Today’s Question of the Day is being answered by guest experts, Rich Miles and Ben Turner. Rich and Ben are with Capstone Business Advisors, a Brentwood, Tennessee-based company that assists privately-owned businesses with acquisitions and exit strategies.

Question: What does a closely held business owner need to do to make the business attractive to a potential buyer?

Answer: Buyers are attracted to businesses that have real and sustainable profits. Owners of privately-held businesses typically operate their businesses to maximize personal benefits and minimize taxes.  That operating strategy usually minimizes profits.  If the owner wants to make the business attractive to a buyer, the owner likely needs to think about adjusting their strategy.

Once an owner has demonstrated profitability over a period of two to five years, it is important to recognize who the potential buyer(s) might be and what is attractive to them. With that in mind, the business owner can make appropriate adjustments to their business and their expectations.

There is a difference in making a business attractive enough to get the initial attention of buyers and making the business attractive enough to close a successful sale transaction.  The difference lies in the enormous scope of material that could be explored by the prospective buyer during the due diligence process.

In due diligence, a buyer could investigate more than fifty different aspects of a business.  The aspects can be boiled down to 4 general considerations of a buyer as they weigh risk/return and ultimately value:

1.       Financial

2.       Credibility

3.       Transferability

4.       Owner(s)

A business owner planning to sell the company may find that an objective and experienced assessment of the business is helpful in understanding how attractive the business is to the various buyers now.  The business owner can also find out how much work, if any, needs to be done to improve the business’ appeal prior to a sale.    Seeking that kind of help well in advance of putting the business on the market can increase the chances for sale and help maximize the amount of money they get to keep.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 14

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Here’s the question of the day, answered by guest blogger Paul McGillivray.  Paul is Senior Vice President of Advanced Marketing at Creative Marketing.

Question: What are the most exciting product trends in the life insurance and annuity marketplace?

Answer: When interest rates are at lifetime low levels as they are today, annuities and life insurance sales have to be benefited-oriented solutions to identified client needs.  There are very few interest rate-driven sales possible today.

Lifetime income riders on annuities deliver an income-longevity guarantee, and some of these same annuities or riders add higher potential death benefits too.  A few fixed annuities are offering additional LTC benefits, though these are very hard to market when rates are so as now.  The additional LTC benefits available on some single-premium life insurance contracts provide real value and real protection, and the LTC accelerated death benefits on some life contracts are also very marketable.  You have benefits when you live AND benefits when you die AND money if you quit.

How can an agent market these trends to help a 60- to 75-year-old reasonably healthy client with a life insurance need?  Use a bonus indexed annuity and immediately turn on the guaranteed lifetime income rider to pay for an indexed UL contract with a strong no-lapse guarantee.

For the first twenty years, and maybe much longer, the total benefits at death will be greater than either contract left alone, and the total cash values will be higher.  That’s better for the client, and the agent can earn two commissions—one for the annuity, and one for the life contract.  It only takes a little health, and a little love, and one CD or annuity.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 13

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Here’s the question of the day.

Question: I have a client who works at a nonprofit and participates in a Section 457(f) plan.  What options does the client have for continued deferral of the plan benefit at retirement?

Answer: Unfortunately, there are no options for continued income tax deferral at retirement.

Section 457 plans are a special kind of deferred compensation available only to employees of nonprofits and government entities.  The usual kind of 457 plan is governed by Section 457(b) of the Revenue Code, and it has strict rules about plan configuration.

A government entity or nonprofit may also have a plan that permits excess contributions in favor of a highly compensated management group.  In general, these plans are called ineligible plans, and are governed by Code Section 457(f).

Distributions from a government entity-sponsored 457(b) plan may be eligible for rollover to an IRA, so continued tax deferral to the participant is possible.  However, distributions from a nonprofit 457(b) plan, and distributions from 457(f) plans, are not eligible for rollover.  Distributions from a nonprofit 457(b) plan are potentially eligible for rollover to another nonprofit 457(b) plan.

Once the employee is entitled to distributions from a 457(f) plan, no further tax deferral is possible.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 12

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Today’s Question of the Day is answered by guest expert, Shawn Sigler. Shawn is the Life Director at FIG Marketing.

Question: What are the most exciting product trends in the life insurance (or annuity) marketplace?

Answer: Probably the most exciting product trend in the life insurance marketplace is the explosion of indexed universal life products.  Several carriers have introduced new IULs in 2011, thus creating an even more competitive landscape in this market segment.  Also, there is talk of a few carriers who will enter this space in 2011 who’ve never had IULs in their portfolio.  Finally, the advent of guaranteed income riders on life insurance policies will definitely make for a unique opportunity in the income planning arena.

In the estate planning and wealth transfer marketplace, the concept of no-lapse guarantees is still prevalent, however we are seeing more and more advisors and clients intrigued by having flexibility in their policies – that is, having access to cash value in the form of a withdrawal or return of premium.  This is especially true for those in the 55 – 65 year old market.  Because of these client concerns, we are also seeing resurgence in whole life because of the guarantees on both the death benefit and cash value.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day- September 8

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Here’s the question of the day.

 

Question: My client’s husband is trying to qualify for Medicaid.  The case worker told the family that the husband’s IRA should be transferred to the wife to make the husband eligible for Medicaid benefits.  Is such a transfer income tax-free?

Answer: No.

Transfers of IRA balances to the surviving spouse at death are generally income tax-free.  The surviving spouse has the option to make a tax-free rollover of the inherited account to an IRA in her own name.

However, rollovers during lifetime can only be made to IRA accounts titled in the name of the taxpayer doing the rollover.  Any attempt to roll over money to a differently titled account will be treated as a taxable distribution from the existing account, and as a potentially excess contribution to the new one.

The question underscores that a case worker’s recommendation with regard to Medicaid planning should always be double-checked with an elder care attorney, tax professional, financial planner or insurance professional.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 7

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Here’s the question of the day.

Question: If an insurance company fails, does the guaranty fund of the insurance company’s domicile or the guaranty fund of the policy owner’s state of residence kick in?

 

Answer: Each state has its own system for guaranteeing the life insurance products and annuity contracts of a failed life company.  In general, each state’s system will provide limited protection for the owner of a life or annuity contract issued by a carrier that is no longer able to meet its obligations.

 

Financial and insurance professionals may not tell their prospective clients about state guaranty funds (SGFs)—at least as any kind of solicitation to purchase insurance.  While each state has its own version of law prohibited using SGF information with clients, each of them does have such a law.  New York’s law is typical.

For policyowners of an insolvent company licensed to do business in the policyowner’s state of residence, the state of residence will provide the guaranty.  Policyholders who reside in states where the insolvent insurer was not licensed to do business are usually covered by the guaranty association of the company’s home state.

The National Organization of Life & Health Insurance Guaranty Associations is a gateway for additional information about state life and health guaranty rules.  Their website is at www.nolhga.com.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 6

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Here’s the question of the day.

Question: What’s the biggest potential indicator of future failure in a start-up business?

 

Answer: According to an article in Reuters, it’s the start-up company’s tendency to get too big too fast.  The article’s source cites failures (Pets.com and Webvan) as examples of this tendency, and predicts another (Groupon) as a premature scaling that might lead to failure soon.

 

The attorneys at the ICS Law Group have a different perspective.  When they see these characteristics in budding entrepreneurs, they become skeptical about the business’s chances for success:

 

  • The start-up person or team does not have enough money for the business to survive until cash flow is self-supporting.

 

  • The entrepreneur has a poor business plan—or none at all.

 

  • The business organizers lack business savvy.

 

  • Where there are two or more people starting the business, they lack a strong shared vision for the business.

 

Most businesses fail within the first five years.  New entrepreneurs should seek advice before they start.

 

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.

Question of the Day – September 2

 

Today’s question is answered by John Lensi, VP of Sales  at Impact Technologies Group based out of Charlotte, North Carolina.

 

Question: “What should I tell my customers about estate taxes now?”

Answer: Don’t wait, act now!

There are a lot of diverse opinions on what the future has in store for estate & wealth transfer taxes on the federal and state level.  Recent history has told us legislators are unpredictable and with a major election year in 2012, any ‘permanency’ with estate tax legislation in my opinion is not in the near future.  I’m anticipating an eventual a 1-year extension to the current estate tax law before congress ever gets serious about doing anything on a longer-term basis.  Congress has too many other pressing issues to deal with than estate tax legislation and recent history has demonstrated they have difficulty agreeing on anything anyway.

High net worth clients can’t continue to sit around and wait for congress to enact a more ‘permanent’ legislation before planning their wealth transfer.  My advice would be building in flexibility into client estate plans so adjustments when and if needed can be made going forward.  Establish plans based on today’s legislation and work with a competent advanced sales attorney who will make the appropriate changes when the time comes.  Death can occur anytime, so waiting until the ‘right time’ can be a foolish ‘plan’ in itself.  Besides, if new life insurance is needed as part of the wealth transfer plan, delaying only increases the cost of the insurance (solution) and often, because of health and other underwriting reasons, prevents a HNW client from qualifying.

Question of the Day – September 1


 

Question: My client did a conversion of a traditional IRA to a Roth IRA in 2010.  The client intended to do a two year deferral of the income tax into 2011 and 2012, but he recently passed away.  Can his beneficiaries still take advantage of the tax deferral on the conversion?

Answer: No.

The Instructions for IRS Form 8606 for 2010 state

If the taxpayer died during 2010 after making a conversion, the taxable amount of the conversion may not be spread over 2 years (2011 and 2012). The tax return of the deceased taxpayer must show (a) the entire taxable amount in 2010 or (b) a re-characterization (see page 3) of the conversion.

Likewise, if the taxpayer does a conversion in 2010, elects to defer, and dies in 2011, the entire previously unreported amount is taxable in the year of death.

 

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.