The Smith Family A review of selected planning methods and techniques as they may apply to members of the hypothetical Smith Family

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1 The Smith Family A review of selected planning methods and techniques as they may apply to members of the hypothetical Smith Family Stephen O. Kroeger, CLU, HIA, MBA Senior Director, Crump Advanced Sales Crump Life Insurance Services is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: This information is provided for educational purposes only. This presentation neither provides nor implies any tax advice Disclosure This material is designed only for training purposes and is not intended to be used with the general public. Nothing in this presentation represents a legal or tax opinion or conclusion. This material contains references to concepts that have significant legal, accounting, and tax implications. It is not intended as legal, accounting or tax advice. Agents and clients should always consult their own attorney and/or tax advisor for advice regarding application of these concepts to their particular situation. To ensure compliance with requirements imposed by the IRS, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. The Smith Family In this presentation we re going to be following members of the Smith Family through personal planning and a number of business planning possibilities as well as an estate planning concept that works regardless of the legislative environment which will also discuss Maybe you know them Maybe you know families that are like them For sure your competition knows them and families that are like them! 1

2 Meet the Smith Family Meet the Smiths Roger Age 70 Shirley Age 62 Both are in good health and are mentally and physically active They have not done any significant estate or business planning Roger Smith Owns 75% of ProMedco, a medical supply business ProMedco is a C corporation ProMedco was valued at $25M three years ago They are in a 35% combined federal/state/local/medicare tax bracket Meet the Smith Family Roger and Shirley have two children: John 38 Married with 2 children David 35 Married with 3 children Both work at ProMedco 2

3 What is the current legislative environment? The American Taxpayer Relief Act of 2012 (ATRA) Permanently reunified the Federal Estate, Gift and Generation Skipping Transfer (GST) Taxes Exemption set at $5 million*/$10 million* per couple Max Rate Fixed at 40% Retains Portability of Unused Exemption * Indexed for inflation in 2015 to $5,430,000 and 10,860,000 respectively Critical Personal Tax Changes Income Taxes Max rate to increase to 39.6% for those with AGI s in excess of $400,000 individual/$450,000 couple Capital Gains and Dividend Income Increased to 20% for top bracket filers Limitation on Deductions Permanent AMT Indexing 2% Increase in Wage Tax* Qualified Charitable IRA Distributions* * Incorporated from previous legislation 3

4 The 3.8% Healthcare Surtax Individuals AGI in excess of $200,000 Joint filers with AGI in excess of $250,000 and Married but filing separately with AGI in excess of $125,000 Trusts and Estates Trusts and Estates with undistributed net investment income in excess of $12,300 in 2015 Types of Income Subject to the Surtax Net Investment Income includes: Interest Dividends Annuities Royalties Rents (other than rental income derived in the ordinary course of a trade or business) Sales of non-business property Net Investment Income does not include: Distributions from qualified plans Income from tax-exempt municipal bonds Increases in the cash values and the death benefit of a life insurance contract Let s Head Back to the Smith s and ProMedco 4

5 What s our first step? Where should we begin? We Should Review Roger and Shirley s Personal Insurance The Life Insurance Trifecta Income Tax Free Growth, Living Benefits & Death Benefits In a high income tax environment life insurance becomes even more attractive as another source for retirement income Maximizing contributions to qualified retirement plans Business owners seeking a non-qualified retirement supplement No ERISA Discriminatory 5

6 What are you doing for tax free retirement income? Roth income and contribution limitations Conversions require paying tax now Roth IRA s do not have LTC Riders The tax exemption for life insurance is the single biggest benefit in the tax code. Make it a part of your retirement savings plan. * Ed Slott, CPA- New York Times best selling author and the man who the Wall Street Journal calls The Best Source for IRA Advice * Ed Slott s Retirement Rescue, DVD 2013 Always fund your pretax retirement plan But then what? 39.6% + 3.8% + S&L Taxes Bonds Rents from investment properties Annuities Income Funds REITs 20% + 3.8% + S&L Taxes Dividends Sales of investment properties None of these have a LTC or Chronic Care benefit! Slide 18 Carriers with either an LTC or Chronic Illness Rider Allianz American General American National Assurity Aviva AXA Genworth Guardian ING John Hancock Life of the Southwest Lincoln National MetLife Minnesota Mutual Mutual of Omaha Nationwide North American Penn Mutual Principal Protective Prudential Security Mutual Symetra Transamerica 6

7 Carriers with Over-Loan Protection Rider American General Genworth John Hancock Lincoln Life MET Minnesota Mutual Nationwide Penn Mutual PRU Voya Life Insurance Retirement Planning (LIRP) No contribution limitations* No income restrictions No ERISA or discrimination concerns Death benefits many times larger than the premium payment which completes the retirement plan if individual passes away Living Benefits * Subject to MEC limits, insurability and financial underwriting Sweet Spots Individuals maxing out qualified plan contributions Ages 25 to 55 Earning in excess of: $193,000 for married couples and $131,000 for singles Motivation for Conversions How do you diversify your cash? 7

8 Now Back to Roger and Shirley Roger and Shirley s Personal Insurance Roger: Two individual term life policies both for $500,000 Shirley: One individual term life policy for $500,000 Roger and Shirley s Personal Insurance Consider a conversion to add a long term care living benefit Roger: Converted one of his two term to a $500,000 GUL- $16,747 Annually* Shirley: Converted to a $500,000 GUL- $8,711 Annually* Both include max $10,000/month LTC Benefit** * Assumes MPNS & FPNS+ - Nationwide YourLife NLG UL (5/15/15) ** Lesser of 2% of DB or monthly HIPAA allowance 8

9 One last thought on reviewing in-force contracts Low interest rates lead to soaring premiums for those who bought in the 1980 s Retirees Stung by Universal Life Cost The Wall Street Journal, August 9 th, 2015 The Crump Policy Evaluation Program or PEP Educate the Policy Owner about their policy Review the Policy Current Situation Possible changes in life insurance needs Create and Provide a Presentation that is Logical Provides Real numbers Real analysis Real alternatives Easy to understand PEP Marketing The Process Supporting Materials Broker Side Getting Started Broker of Record Letter Fact Finder/Authorization Letter Consumer Side Sample Prospecting Letters Personalized Flyers Program Overview FAQ Sample In-force Illustration Sample PEP Illustration Additional materials are available at 9

10 How Can I Get an Analysis? Gather the required information Need to obtain two inforce illustrations for the current policy 1.Current situation going forward 2.Modified to meet original sales goal Note any changes in the client s health Fax/Mail/ the inforce illustrations to Nick Torres Receive a completed analysis in 3 5 business days Let s take a look at ProMedco ProMedco A medical supply business Started in 1975 Started with 5 employees Currently has 500 employees Operates in 15 foreign countries Valued at $25M 3 years ago C Corporation 10

11 Buy/Sell Agreements Transitioning the ownership at retirement, death, or disability There are only four ways to fund a Buy/Sell: Sinking Fund/Savings Timing challenge Installment Sale The lifetime solution but for heirs? Loan How friendly will the banks be and at what cost? Life and Disability Insurance The only solution that works exactly when it is needed Buy/Sell Agreements The Mechanics Two basic types of Buy/Sell Agreements: Entity Buy/Sell: the ownership interest of a deceased owner is bought by the business itself The company (entity) is the owner and beneficiary of the policies* Cross Purchase Buy/Sell: the ownership interest of a deceased owner is bought by the other remaining living owners The other shareholders/partners generally are the owners and beneficiaries of policies on each other * Subject to Employer-Owned Life Insurance (Section 101(j)) requirements Buy/Sell Agreements The Details Which is better an Entity or Cross Purchase Buy-Sell? All other things being equal, the Cross Purchase provides the surviving owner a step-up in basis The survivor actually uses proceeds from a policy where they were owner and beneficiary to buy out the decedent s spouse or estate; consequently, there is a greater tax free return of basis when they sell the business later In life, rarely are all other things equal! Percentage ownership differences Age differences Underwriting differences 11

12 Buy-Sell Agreements Target Market Any business without a Buy/Sell Agreement Any business with an unfunded Buy/Sell Agreement Remember Disability Buy/Sell Old Buy/Sell Agreements that need to be reviewed Any business that has not done a recent valuation A Buy/Sell Solution for ProMedco John and David own in an undivided interest a cash value contract on Roger At Roger s death, Shirley gets his 75% of ProMedco under the Unlimited Marital deduction John and David utilize policy proceeds to buy Shirley out John and David get a Step-Up in basis in ProMedco and Shirley gets cash If Shirley dies first, cash value allows for return on premiums for Roger s buy out or death benefit can be used for liquidity at Roger s death Premiums can be provided to John and David in a tax efficient manner through an Executive Bonus Executive Bonus The ProMedco Board of Directors have decided to offer bonuses to some key executives Both John and David Smith will receive a $10,000 bonus to assist in purchasing Life Insurance to protect their families John and David are both in the 35% combined federal/state/local/medicare tax bracket 12

13 Section 162 Executive Bonus Section 162 of the Tax Code Deals with Employee Compensation Employer can Discriminate Simple to Establish Section 162 Executive Bonus The Mechanics A life insurance plan is purchased for one or more executives selected by the Employer Employee is policy owner and names beneficiary Employee pays premiums Section 162 Executive Bonus Bonus Designs Can minimize impact on the additional taxes through the use of additional bonuses (or by design). Single Bonus Covers the premium with the employee paying the additional tax on the bonus (seldom used) Double Bonus Results in a zero net out of pocket cost for the executive 13

14 Section 162 Executive Bonus Bonus Designs If they receive a bonus of $10,000 Total additional taxes = $3,500 Pays taxes out of pocket = $3,500 Net Bonus to David = $6,500 Referred to as Single Bonus Section 162 Executive Bonus Bonus Designs If they receive a bonus of $15,385 ($10,000+$3,500+ and additional $1,885 to cover all taxes) Total additional taxes = $5,385 Out of pocket cost = $0 Net Bonus to David = $10,000 Referred to as Double or Net Zero Bonus David and John have no out of pocket costs! Section 162 Executive Bonus A Final Word Assuming ProMedco is in the 40% tax bracket, in paying the bonus to David and John the company Will enjoy an annual tax savings of: $4,000- Single Bonus $6,154- Double Bonus Provides David and John with a valuable benefit that is tax deductible to business along with being income tax neutral to them 14

15 IRC Section 162 Bonus Plan Target Market C-Corp Owners should always consider this when purchasing life insurance Any Non-Owners regardless of business type Think family who work for the owner Golden Handcuff opportunities Lock the Handcuff with a REBA Key Employee Insurance for ProMedco William Goure, PhD Chief Scientist and Vice President of Research and Development Losses from a Key Employee's Death A business can typically suffer in four ways if a key employee dies: 1. The death may cause a loss of management skill and experience 2. There may be a disruption in sales or business production 3. The business may also sustain losses from the expenses associated with hiring and training a replacement for the key employee 4. The business may experience credit difficulties 15

16 Advantages of Key Employee Life Insurance The employer receives needed funds which can be used to help meet financial obligations and train a replacement if the key employee dies Death proceeds are exempt from the regular income tax (Note: C-Corp may be subject to the corporate AMT * and AET*) While the policy is in force and the employee is alive, the cash value of a permanent policy is available for use * Alternative Minimum Tax & Accumulated Earnings Tax How Key Employee Insurance Works The employer applies for, owns and is the beneficiary of insurance on the key employee's life Section 101(j) applies (Notice and Consent) The business is the policy owner and pays all of the premiums If the employee dies, policy proceeds are paid to the employer to use as it wishes A portion of the death benefit can be endorsed over to the employee to provide personal protection* * Split dollar agreement is required with endorsement & employee must recognize the Reportable Economic Benefit (REB) charge based on Table 2001 Now Back To Mr. Goure 16

17 Key Employee Insurance The value of Mr. Goure to the company is determined to be $2,000,000. ProMedco applies for $2,000,000 on the life of Mr. Goure Notice & Consent completed- ProMedco CPA advised of 101(j) reporting requirements Mr. Goure, age 45, qualifies for preferred best underwriting Key Employee Insurance Term Solution Annual cost of a 20 year term policy = $2,525* Low cost but no cash value If you can t get a tax deduction, make sure you get cost recovery! Annual cost of 20 year ROP Term = $8,723** * Assumes Preferred Best- PruLife Essential 20 (1/30/15) ** Assumes Preferred Best- PruLife ROPTerm20 (1/30/15) Key Person Insurance Target Market Owners whose loss would seriously jeopardize credit availability Top Salesperson or client driver The Intellectual Property Employee Nonprofit s Rainmaker 17

18 Finally, an Estate Planning Idea for the Smith s Roger has IRA He has $750,000 in his IRA He has decided, that based on his other assets, he won t need it and wants it to go to his sons and their families but He now has to start taking his Required Minimum Distributions (RMDs) Assuming he is taxed in a combined 35% tax bracket is there a better option than paying current taxes and just leaving them the remainder at his death? Qualified Plan Maximization Qualified plans distributions are subject to income tax and IRD Current qualified plan is converted to an income stream (SPIA) An ILIT is established and the SPIA payments are gifted (or loaned) to the ILIT Amount gifted to the ILIT is used to purchase a large life insurance policy replacing the asset TAX FREE! 18

19 The IRA Max Process: For a 70-Year Old Male IRA Worth 750,000 SPIA Immediate Produces Annual Annuity Distribution Creates Greater of $56, Income Nationwide 9/4/12 Stream Exchange or Annuitize After taxes and life insurance premium, Client has $16, of ANNUAL INCOME 35% Tax Bracket equals $19, Purchase Immediate Annuity Use Portion of The Cost for $750K of Income Guaranteed Stream Coverage to at Purchase Preferred NT Life Rates Insurance is $20,213 John Hancock 9/4/12 in an ILIT Slide 55 Ownership In most cases, an Irrevocable Life Insurance Trust (ILIT) owns the life insurance Post death distribution to heirs can be more effectively controlled via wording of trust Trusts provide: Creditor protection Divorce/second marriage protection Minor Children Spendthrifts Special Needs Planning This keeps the proceeds out of the person s estate and outside of the reach of Uncle Sam Typical Low Income Producing Assets Certificates of Deposit (CDs) Municipal Bonds Corporate Bonds Government Issues Preferred Stock The holy grail of this technique Annuities/RMD Assets IRA s & Qualified Plans not fully needed in retirement 19

20 Why now? Aging Baby-Boomer Generation Largest transfer of wealth in history Retirement Asset Distribution has become a critical topic Effective regardless of Estate Tax legislation Target assets never receive a step in basis are includable in the gross estate And Finally The Crump Advanced Sales Solution Center can also assist you with: The Crump Toolkits Advanced/Tax Question Research Charitable Giving Specimen Documents Client Consultation Calls Our Goal: Make you more valuable to your clients Our Mission: Support the sale of client focused life insurance solutions! If you re interested in learning more about these and other sales ideas Nick A. Torres (210) Thank you for your attention! 20