Insurance Analysis & Implementation: What CPA Financial Planners Need to Know. Presented by: Dr. Lee Slavutin, MD, CLU

Transcription

1 Insurance Analysis & Implementation: What CPA Financial Planners Need to Know Presented by: Dr. Lee Slavutin, MD, CLU

2 Introduction Lee Slavutin, MD, CLU Stern Slavutin 2, Inc. 2

3 Caveat The information provided herein is not written or intended as tax or legal advice and may not be relied upon for purposes of avoiding any federal tax penalties. Entities or person distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel. 3

4 Agenda Analysis of life insurance (CRN ) Life insurance trusts (CRN ) Policy valuation* Top 10 insurance planning mistakes made in an estate planning context* *Content provided courtesy of Lawrence Brody, Esq. of Bryan Cave LLP 4

5 Annually Renewable Term Life Insurance Tabular Values A: Name of company B: Annually renewable term C: Age and underwriting class D: Amount of insurance E: Premium F: Premium frequency F : State 5

6 Annually Renewable Term Life Insurance Narrative Summary G: Conversion option 6

7 Annually Renewable Term Life Insurance Narrative Summary H: Premium mode charges 7

8 Life Insurance Preliminary Information Tabular Values L: Universal life with a secondary guarantee M: Death benefit option 1, 2 or 3 N: Guaranteed values 8

9 Universal Life Insurance Illustration Tabular Values R: Universal life regular S: Death benefit option T: Guaranteed values U: Non-guaranteed values 9

10 100 Whole Life Insurance Illustration X: Whole life Y: Premiums payable to age 100 Z: Annual premium AA: Guaranteed values BB: Non-guaranteed values CC: MEC limit 10

11 Life Insurance Analysis HH: IRR at year 5 II: IRR at year 15 11

12 Life Insurance Analysis JJ: IRR at year 30 12

13 Review of Life Insurance Trusts Date of trust Date of insurance application - 3-year rule Grantor Is the trust a defective grantor trust? 13

14 Review of Life Insurance Trusts Trustees Who will be responsible for managing and monitoring the life insurance companies and the performance of policies? - Financial strength of carrier - Suitability of policy - Premium adequacy - Competitive pricing - Health of insurance and eligibility for a reduction in premiums 14

15 Review of Life Insurance Trusts Property transferred to the trust Is the cash for a new policy or an old policy being transferred? How is a policy valued for gift tax purposes? - Value of annually renewable term insurance is usually the unearned premium - Value of level premium insurance may be the unearned premium or the interpolated terminal reserve (ITR) - Value of an old whole life policy in premium paying mode is ITR plus unearned premium - Value of an old universal policy may be ITR plus unearned premium of the PERC value may need to consult actuary at insurance company - Value of a universal life policy with secondary guarantees consult actuary at insurance company 15

16 Review of Life Insurance Trusts Property transferred to the trust (continued) Is a policy being sold to the trust? How is it valued? When should a sale be considered? Will a sale trigger transfer for value? (RR ) Using partnerships to avoid transfer for value Irrevocable Fixing an irrevocable ILIT Two methods decant or sell policy Decanting in 7 states (ability of trustee to invade principle) Sell policy to new trust 16

17 Review of Life Insurance Trusts Beneficiaries Insurable interest STOLI Power to withdraw (Crummey) Gift and GST annual exclusions Automatic allocation of GST Electing out of automatic allocation Payment of premiums from trust income Defective grantor trust 17

18 Review of Life Insurance Trusts Invasion of principal see decanting in previous slide Insurable interest Power of trustee to sell assets or make loans Avoiding trap of paying obligations of the estate Incidents of ownership - Avoiding incidents of ownership by corporation in split dollar agreements and loan arrangements (PLR ) Remember that the insurance company estate planning attorneys are a valuable resource 18

19 Life Insurance Policy Values The following schedule is designed to assist the owner of the life insurance policy and the owner s tax and legal advisors in their calculation of the fair market value of the policy for tax purposes. We do not provide legal or tax advice and cannot guarantee that any particular value will be accepted for tax purposes. Insured: Policyholder: Issuing Company: AXA Equitable Life Insurance Company Policy Number Policy Name: Athena Survivorship Universal Life II As of: December 31, 2009 Contract Issue Date: September 10, 2008 Policy Account Value: $229, Policy Cash Surrender Value: $0.00 ADJUSTED ITR AMOUNT Interpolated Terminal Reserve (including unearned premiums) or Primary Benefit Reserve: $97, No Lapse Guarantee Based Reserve: $217, Estimate of Prorated Dividends for Policy Year: Adjusted ITF Amount: $314, ADJUSTED PERC AMOUNT PERC Amount $229, *Content provided courtesy of Lawrence Brody, Esq. of Bryan Cave LLP 19

20 Life Insurance Policy Values Average Surrender Factor: This calculation applies only to valuations of policies that are distributed or sold by a qualified plan. For all other valuations, the Average Surrender Factor is 1.0. Applicable Surrender Factors Over Ten-Year Period Beginning with Year of Transfer Year Projected Account Value Projected Surrender Value Applicable Surrender Factor Average Surrender Factor (average of applicable surrender factors) 1.0 Adjusted PERC Amount (PERC Accrual x Average Surrender Factor) $229, *Content provided courtesy of Lawrence Brody, Esq. of Bryan Cave LLP 20

21 Top 10 Insurance Planning Mistakes 1. The three-cornered life insurance policy a different owner, insurance, and beneficiary the Goodman problem 2. Creating phantom income by surrendering a policy subject to an outstanding loan. 3. Exchanging a policy under Section 1035, which is subject to a loan, for a new policy, not subject to a loan in the same amount. 4. Loans against or withdrawals from a modified endowment contract (a MEC ), or using such a policy as collateral for a third party loan. 5. Surrendering a policy for its cash value without checking the life settlement market. *Content provided courtesy of Lawrence Brody, Esq. of Bryan Cave LLP 21

22 Top 10 Insurance Planning Mistakes 6. Calculating the amount and character of the gain on a policy sale in the settlement market. 7. Borrowing against a policy in excess of the owner s income tax basis and then transferring the policy subject to the loan to a new owner. 8. A transfer of a new life insurance policy to an irrevocable insurance trust or other third party owner after its acquisition by the insured the three year transfer rule. 9. Transferring a policy from the insured to a third-party owner (such as an ILIT) without obtaining the policy s gift tax value from the carrier, in advance. 10. Transferring a policy during the insured s lifetime without considering the transfer for value rule and its exceptions. *Content provided courtesy of Lawrence Brody, Esq. of Bryan Cave LLP 22

23 Questions? 23

24 PFP Section Resources New! The CPA s Guide to Financial & Estate Planning Volumes 1-3 now available (Volume 4 coming soon!) New! The CPA s Guide to Social Security Planning PFP Practice Center ( Upcoming Web Seminars ( Deaths and Form 706 (November 15 th, 1:00-2:30p.m. ET) Series: Year-End Planning for Individuals in an Uncertain Environment - Part 1: Year-End Financial and Estate Planning Strategies That Should Be Considered Now - Part 2:Client Review Meeting Essentials (November 15 th, 3:30-5:30p.m. ET) Collaborative Divorce - Getting Through a Divorce without Financial Disaster (November 16 th, 1:00-2:30p.m. ET) Transforming How You Address Client Needs: A Multi-Disciplinary Solution to Financial Planning (November 21 st, 1:00-2:30p.m. ET) Series: The Window of Opportunity for Successful Financial Planning in 2011 and Part 2: Specific Planning Techniques (November 22 nd, 1:00-2:30p.m. ET) For the full calendar, visit and click on CPE & Events Advanced Personal Financial Planning Conference ( January 15-18, 2012 in Las Vegas, NV Live PFS Exam Review Course (Sunday & Monday of the Advanced PFP Conference) Implementing PFP Services in Your Firm: Developing Step by Step Plans for Success (Sunday & Monday mini event at Advanced PFP conference) 24

25 PFP Section Resources PFS Program ( PFS requirements 3,000 hours of business experience, 80 hours of financial planning CPE and completion of comprehensive exam PFS in-depth education available covering the financial planning process, retirement, estate, tax, investment, and insurance planning PFS exam review course available on CPA2Biz.com (32.5 hours of CPE) Two-day live PFS Exam Review Class at Advanced PFP Conference Winter PFS exam registration open. Learn more & register at (exam window December 19, January 27, 2012) $400 sponsorships offered to PFP Section members $700 sponsorships are available for PFP Section members who purchase the two-day live PFS Exam Review Class and the PFS self-study review materials, as well as sit for the PFS exam during the upcoming winter window. PFP homepage: 25