2013 MDRT Annual Meeting e Handout Material Title: The Top 22 Overlooked Uses of Life Insurance in 2013 Speaker: Philip Kavesh, J.D., LL.M. Presentation Date: Monday, June 10, 2013 3:30 5:00 p.m. The Million Dollar Round Table does not guarantee the accuracy of tax and legal matters and is not liable for errors and omissions. You are urged to check with professionals in your state, province or country. MDRT also suggests that you consult local insurance regulations pertaining to the use of visual material with clients. 2013 Million Dollar Round Table Million Dollar Round Table Phone: +1 847.692.6378 325 West Touhy Ave Fax: +1 847.692.4615 Park Ridge, IL 60068 USA Website: www.mdrt.org
Slide 1 PHILIP KAVESH, J.D., LL.M. THE TOP 22 OVERLOOKED USES OF LIFE INSURANCE IN 2013 Slide 2 Today s Special Seminar The 22 Overlooked Uses of Life Insurance in 2013 How many of you are? Would you be happy if? 2 Slide 3 Keep In Mind The Sale of Life Insurance can often involve the sale of an Annuity! Example: Immediate annuity to fund premiums Life Insurance may in certain cases, take the form of a death benefit rider on an Annuity 3
Slide 4 Commonly Thought of (Standard) Uses Income replacement Buy-out of business partners Estate tax payment Show how taxable estate value calculated Project value at the date of death ( Rule of 72 ) Apply exemption (best and worst case) Estimate Tax due (best and worst case) Discuss fire sale at discount because due in cash in 9 months 4 Slide 5 Commonly Thought of (Standard) Uses Estate tax payment (cont d) Show the leverage of life insurance versus other investments, because known amount available at right time and benefits can be both income and estate tax-free Emphasize flexibility vs. other large gift planning Discuss quick-pay options Or write the check to the IRS now! All these uses for life insurance are less emotionally compelling 5 Slide 6 6
Slide 7 Estate Equalization What s that? *KEY: Look at EP at 1 st meeting Balance specific bequests Real property Business Replace remainder interest to charity (CRT) Possible annuity sale too Don t need exactly equal amount of LI Income tax-free Estate tax-free 100% liquid 7 Slide 8 Avoid World War III Remaindermen waiting for their inheritance Blended or mixed marriage ( QTIP not the answer!) Marriage with no children and each has different beneficiaries Surviving spouse has life estate or right to reside 8 Slide 9 Avoid World War III Beneficiaries forced to be in business together Shared ownership of real estate (either on title or in FLP / LLC!) Keep it all in the family and maintain family harmony Surviving spouse wants to make changes No-contest clause in ILIT is powerful disincentive to beneficiaries who question changes 9
Slide 10 Funding Special Needs of Beneficiaries Assure amount will be there - - not relying on a certain number of years to grow the fund or on certain investment results Disabled on government benefits Special Needs Trust College education / head start Family Bank Trust Discuss how standard of living gone down Be sure some goes directly to grandkids ( legacy ) Variation: pyramid the family s real estate empire 10 Slide 11 Stabilizing the Legacy Make up portfolio losses Make up losses in IRAs and other retirement plans Make up tax paid on lifetime Roth conversion 11 Slide 12 Estate Maximization New Stretchout Rules for IRAs and QRPs that may be rolled into IRAs Special IRA Opportunity #1: Dynastic IRA Super Stretchout Grandchildren: IRA Annuity with Restricted Beneficiary Payout or IRA Inheritance Trust Children: ILIT 12
Slide 13 Estate Maximization Special IRA Opportunity #2: Super-Leveraged IRA Pay income taxes on RMDs Pay income taxes on post-death Roth conversion (by spouse or non-spouse beneficiaries) 13 Slide 14 Estate Maximization Special IRA Opportunity #3: QTIP Rescue Plan Blended or mixed marriage Why QTIPs are for Ears, not Heirs! No deferral until 70½ Less desirable RMD table Spouse may live too long, RMDs strip out account Children can t use own life expectancies Accounting and investment rules are a Trustee nightmare! World War III! Single life policy to spouse Or second to die policy to children 14 Slide 15 Estate Maximization Special IRA Opportunity #4: IRA Rescue Plan Particularly if taxable estate Bottom Money not likely to withdraw and spend The Stripout rather than the Stretchout Utilize an immediate Annuity May work better than Roth conversion (because Roth taxed in estate) 15
Slide 16 Estate Maximization Super-Leveraged B Trust Watch out for spouse as Trustee Watch out for power of appointment Annuity with extra death benefit may also work well 16 Slide 17 Estate Maximization Perpetual Family Legacy Private foundation Combo sale with immediate annuity Pass on values, with family involved Pyramids with each generation 17 Slide 18 Estate Tax Wrinkles Non-traditional marriage No marital deduction Potential conflict between families May couple with CRT Or just do LI / ILIT 18
Slide 19 Estate Tax Wrinkles IRS audit insurance Hard to value assets (closely held business, royalties, antiques) Aggressive lifetime or death planning, such as deep discounting, QPRT, GRAT, installment sale note 19 Slide 20 Premium Options What if large premiums and don t want to use lifetime gift exemption (or it s used up?) Personal loan (e.g. to kids or ILIT to buy insurance, done carefully) Third party premium financing (also carefully) Distributions of business or rental income through FLP / LLC or sale to IT Rent (such as after QPRT term) 20 Slide 21 Overlooked Uses: Income Tax Reduction Create tax deductions Defined benefit pension plan Even if retired! (better if older!) May set up new consulting or management company Possible Annuity sale too Reduce taxable income / double tax on Social Security Front-end load (using CDs, other accounts bearing taxable interest) Tax-free zero cost policy loans (if non-mec) Or keep tax-free income inside policy to pay future premiums 21
Slide 22 Overlooked Uses: Income Tax Reduction Avoid capital gains taxes Capital Gains Bypass Trust or Tax Exempt Trust (CRT) Stocks and mutual funds Raw land Business property or business itself Home buydown LI replacement Combo sale of an Annuity CRT wrinkle: municipal bonds portfolio 22 Slide 23 Overlooked Uses: Retirement Planning Pension Maximizer QRP only provides life annuity options Single life plus LI beats joint and survivor 23 Slide 24 Overlooked Uses: Retirement Planning Pension Replacement or Private Retirement Plan or Supplemental Retirement Plan Single premium or front-end load Tax-free withdrawals (if non-mec) Makes most sense if also a need for LI If use ILIT, carefully structure as borrowing or discretionary distributions 24
Slide 25 Overlooked Uses: Retirement Planning No Lose Nursing Care Insurance LTCI: can t get too expensive, use it or lose it Did you know there are new alternatives to traditional LTCI? Single deposit contract Universal LI policy with LTC benefits Income tax deferral Liquidity Guaranteed return - - live or die Can be used in combination with LTCI and reduce cost Easier to qualify Easy way to explain to clients - - that works! LI combo Plan Limited pay LI with DB and LTC combo Larger DB, reduced by LTC benefits paid Variation: Tax-free exchange of existing life policy 25 Slide 26 Overlooked Uses: Retirement Planning Employer securities in QRP ( NUA ) IRA rollover all but securities Securities fund CRT Income tax deduction / savings purchase LI Reduce expenses / increase retirement cash flow Review and convert old policies Reduce or even stop premiums (or increase coverage) Use 1035 tax-free exchange Alternative: sell old policy Way to explain to clients - - that works! 26 Slide 27 Overlooked Uses: Retirement Planning For Insured s Children or Grandchildren Guaranteed Retirement Plan Child buys on parent What if parent lives too long and the child needs money? Or parent buys on child to fund grandchildren s retirement If want to guarantee proper use of proceeds, ILIT appropriate 27
Slide 28 Overlooked Uses: Asset Protection For insured An exempt asset? More bulletproof : Own inside pension plan (including IRA rolled back) Own inside ILIT / single premium (or contribution of existing policies) Nevada DAPT Watch for fraudulent conveyance rules For beneficiaries Flexible Irrevocable LIT Key: Special Trust Protector provisions 28 Slide 29 Why ILIT Is Almost Always the Best Way to Own Life Insurance! (versus insured or beneficiaries owning) Control by insured Premiums paid Not prematurely cashed out Directly or indirectly change trustees, beneficiaries and how they get it Enhanced asset protection for insured, benes Including during lifetime of insured, e.g. divorce, lawsuit Dynasty Trust for several generations 29 Slide 30 Why ILIT Is Almost Always the Best Way to Own Life Insurance! (versus insured or beneficiaries owning) Avoid estate tax when insured dies Ways to get around 3 year rule Cash out or borrow max and gift cash Sale to ILIT (take care in valuing policy) Avoid second estate tax (generation skip) Avoid taxable gift if one beneficiary owns the policy Overcome the objection of Irrevocable! Malpractice if you don t use an ILIT? 30
Slide 31 The Moral of the Story is You can almost always find a legitimate use of life insurance, if you look carefully enough! It s better for the client and heirs And it s better for you! 31 Slide 32 Here s a Final BONUS TIP! Answer objections before they re asked! I hate life insurance I don t want to pay for it I might need the money later 32 Slide 33 Where Do You Go From Here? 33
Slide 34 Action Steps Use this outline and our Special Handout as a Planning Checklist If not at first meeting, then preparing for second Position self as a problem solver, rather than a product pusher! Find out hot button and let prospect tell you what he wants to buy! 34 Slide 35 Action Steps We can help Other technical and sales training Presentation to Professional Referral Sources Establish a mutually successful estate planning attorney relationship Flexible Irrevocable Trust document form Free gift to get you started Hand in your business card with e-mail address (or send an e-mail to phil@ultimateestateplanner.com) 35 Slide 36 Any Questions? 36