The Ziff Agency Monthly
From the Desk of Larry Ziff The Ziff Agency, LLC
this issue ATRA Analysis and Impact [P.02] The Underwriting Corner: Alcohol [P.03] No One is Invincibleâ€”Protect Against the Unexpected [P.04]
Life Insurance Planning Opportunities Created By The American Taxpayer Relief Act (ATRA) 2012 The relatively high indexed gift and estate tax exemptions may prevent some estates from paying an estate bill. But, for those who do face an estate tax liability, life insurance remains an effective component of the estate plan. 1. L ife insurance generally remains a viable and costeffective solution. 2. F unding irrevocable life insurance trusts may trend more toward outright gifting (using the indexed lifetime gift tax exemption) versus more complicated, risky, and costly funding strategies. 3. T he indexed estate and gift exemption may create opportunities for new gifting. In addition to the initial use of the lifetime gift tax exemption, existing irrevocable trusts (where a less-than-maximum gift was used to fund the trust) may be strengthened with additional gifts to support premium-paying responsibilities. 4. T erm to permanent conversion may be attractive. Clients who purchased term insurance in their irrevocable life insurance trusts may now be ready to convert an appropriate amount of that coverage to a permanent policy.
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5. S urvivorship insurance may become more popular due to portability. Clients need to carefully consider how or if portability should become part of their estate plan. The law now allows a simple will with portability to also move estate tax liability to the second death. This may be accomplished, for example, with a qualified terminable interest property (QTIP) trust for all estate assets that (1) gives all income to a surviving spouse; (2) provides control over ultimate estate distribution for the first spouse to die; and (3) postpones the estate tax bill to the second death. A similar result is already
possible for the traditional two-trust estate plan using marital and bypass trusts. ynasty trust funding using the gift tax exemption and 6. D Generation-Skipping Transfer (GST) exemption may become more popular. 7. M any prior estate planning strategies will remain appropriate. Some of those strategies may not survive the next round of tax reform and should be given immediate consideration by anyone developing an estate plan. The primary strategies that may be addressed in the next round of estate tax reform include: (1) discounted estate values involving family-owned or controlled business interests; (2) implementing zeroed-out grantor-retained annuity trusts with a duration of less than 10 years; and (3) adoption of an irrevocable trust to hold assets in an estate tax-efficient manner, but where trust income is taxed to the trust grantor. 8. T he gift tax annual exclusion increased to $14,000 for 2013. While this increase was not a part of ATRA 2012, this small increase may allow additional premium to be paid on policies where the trust grantors were intending to only use an annual exclusion-funding approach. Most estate planning legal and accounting advisors recommend full use of available gift tax exclusions since they (1) actually reduce the taxable estate; (2) future appreciation and income from the gifted property is removed from the taxable estate; and (3) properly documented discounts can leverage gift tax annual exclusions. 9. E state growth may occur faster than expected, state death tax needs may still exist, and other liquidity [continued on page 2]
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Invest or Save? When the stock market roars or interest rates are high, the decisions are much easier. However, when we have continuous stock market volatility and historically low interest rates, the decisions we make are of utmost importance. These decisions will impact the future of our financial retirement. So how does one decide? When we put money in an investment program (generally linked to the stock market), the principal will go up or down, based on the economy. When we put money in a savings program (interestbearing account) our principal does not go down. The only thing that may change is the interest rate. The real question to ask is: "Based on today's economy, how much of your principal do you want to protect against a negative economy?" Once a decision is made, review interestbearing account choices: CDs offered by banks or credit unions, or fixed annuities offered through insurance companies. Whether a person wants 50 percent or 100 percent of their principal protected against a negative economy, that amount must be placed in either a CD or a fixed annuity. An investment program, on the other hand, cannot protect principal. Additionally, people may want their principal protected and the highest rate possible without risking their principal. The solution in this situation would be a fixed index annuity. However, if they prefer a steady guaranteed rate, then a fixed annuity with the added benefit of tax-deferral may be the answer.
needs may also arise. Smaller estate owners who previously purchased life insurance to prevent estate shrinkage at a time when the per person estate tax exemption was significantly smaller than it is today, may find they still need this life insurance. In addition, a life insurance death benefit could be used to help individuals pay income taxes and facilitate the conversion of a retirement account (IRA) to a Roth IRA. 10. E state planning involves more than just federal estate taxes. Even though the federal estate tax exemption is set at a relatively high level, many needs often addressed by estate planning remain. Other considerations include:
• Providing for children with special needs • Multi-generational planning • Liquidity planning for income taxes • Distribution planning / inheritance equalization • Asset protection • Estate administration • Gifting (while still providing for lifetime objectives) • Navigating second marriages • Planning for same-sex couples • Planning for non-citizen spouses • Charitable giving • Health care planning • Long-term care planning
• State estate and inheritance taxes
• Business protection
• Providing for spouse and children
• Business continuation planning
ATRA 2012 Analysis and Impact For the first time since 2002, there is no expiration date on either the amount of the unified credit (exemption or exemption amount) or the top marginal estate/gift tax rate. Impact: Although the estate tax has generally been susceptible to political activity and comment during the last 12 years, an expiration date associated with this law no longer exists. Larger estates with term insurance acquired for estate tax needs may now want to think about converting such coverage. Other clients who have been sitting on the fence hoping for repeal or some other form of estate tax relief may now be more open to an insurance solution. For wealthy clients, many advanced planning strategies (grantor-retained annuity trusts, irrevocable life insurance trusts, charitable remainder trusts, private split dollar financing, large gifts, etc.) remain as possibilities. The top marginal estate/gift tax rate is now 40 percent for taxable estate values in excess of $1 million. Impact: This is 5 percent higher than the 2012 top marginal rate. For those who will actually owe estate tax, the higher tax rate will create bigger estate tax liabilities and a greater need for life insurance to help pay these liabilities. The indexed $5 million exemption amount of 2011 (Tax Relief Act 2010) is now the law. The 2013 per person exemption amount is $5.25 million. Impact: Permanent indexing of this exemption is a new factor for estate planners and must now be taken into consideration when developing long-term insurance recommendations. Assuming the same indexed percentage increase from 2012 to 2013, the 2013 exemption of $5.25 million to grow to $8,602,736 in 20 years. Growth rates for personal estates, which are typically in excess of the rate of inflation, may mitigate the impact of the larger estate tax exemption and its inflation indexing feature. This may prevent the type of market contraction that many may have expected given the scope of the ATRA 2012 changes. Another possibility is that this higher exemption will lead to more simplified funding of irrevocable life insurance trusts
through taxable gift planning. The large exemption amount available to both spouses should cause wealthy business owners to revisit their business transfer plans. Possibilities for lifetime transfers to family members now exist. Clients may want to more fully explore gifting business interests instead of waiting for death to occur. Life insurance can be very helpful in equalizing inheritances in this circumstance. Portability of estate tax exemptions has been adopted without an expiration date. This refers to a surviving spouse being able to use some (or all) of the deceased spouse's exemption amount with proper documentation. Impact: Clients can now depend on portability to help prevent wasting any estate tax exemption when the first spouse passes. Generally, if the growth rate on estate assets significantly exceeds the indexed growth rate on the exemption amount, using a credit shelter (bypass) trust at first death will tend to increase the estate passed to the heirs over 30 years. If the estate's growth rate is lower, the difference between these two strategies becomes less meaningful from an estate preservation perspective. Unification of the estate and gift tax exemption amount was maintained. The GST exemption amount was also maintained at the same level as the estate/gift tax exemptions. Impact: Retaining the same exemption amount for the estate and gift taxes may encourage more gifting, particularly of family businesses or farms. This may create a stronger market for inheritance equalization life insurance sales for non-business heirs. The typical income tax-free nature of life insurance death proceeds remains very attractive. In addition, since the GST exemption is also set at the same level as the estate/gift exemption, and since most states do not impose a gift tax, funding dynasty trusts may be more popular. The federal credit for state estate taxes is now permanently repealed, and the federal deduction for state estate taxes paid remains in place.
03 Impact: This outcome may cause more states to re-think their approach to estate taxes. Some may adopt stand-alone estate tax regimes, while others may eliminate the state estate tax altogether. Where a state estate tax remains, it will tend to support the need for a life insurance solution and life insurance for the federal estate tax. Higher income and capital gains tax rates may impact grantor trust planning and trust investment strategies. In addition, the 3.8 percent Medicare surtax will apply to investment income earned by a trust. Impact: If a trust is other than a grantor trust for income tax purposes, it
will hit the top marginal income tax rate of 39.6 percent at $11,950 of income. In contrast, an individual is affected by the 39.6 percent top marginal rate at an adjusted gross income of $450,000 if married and filing jointly ($400,000 for single filers). While there may not be any one general rule that describes the proper planning strategy, the income tax aspect of trust planning will likely become a more prominent part of the planning discussion. It may also be helpful to remember that trust income distributed to a beneficiary is generally taxed at the beneficiary's personal income tax rate. This may reduce income tax paid on trust income when the trust is not a grantor trust for income tax purposes.
The Underwriting Corner ď‚Ş Alcohol Consumption of alcohol is common in American society. For the majority of drinkers of alcoholic beverages, there is little risk to health or longevity. However, excess alcohol intake has a substantial impact on population mortality. In applicants with a history of risky alcohol habits, an increased premium (or possibly rejection, depending on severity) is necessary on their life insurance policy. The underwriter will use medical records (especially those related to treatment for substance abuse and psychiatric illness), social profile, motor vehicle reports, laboratory results, and physical findings in order to assess the risk associated with excessive alcohol consumption. Complications of alcohol excess significant to life underwriting: Cardiac: Atrial fibrillation, cardiomyopathy, hypertension Nervous system: Blackouts, seizures, delirium tremens (DTs), peripheral neuropathy, tremors, brain damage, psychosis, balance and gait impairments. Gastrointestinal: Fatty liver, hepatitis, cirrhosis, pancreatitis, gastrointestinal bleeding (sometimes massive) due to gastritis, varices, and esophagitis, cancer, diarrhea. Bone marrow: Abnormal blood counts including anemia. Psychiatric and social: Depression, anxiety, suicide, violent behavior, marital/occupational/familial problems, abuse of other drugs as well as alcohol. Miscellaneous: Aspiration pneumonia, accidents, and trauma. Alcoholism is a primary, chronic disease with genetic, psycho-social, and environmental factors influencing its development and manifestations. The disease can be progressive and fatal. It is characterized by impaired control over drinking, preoccupation with the drug alcohol, use of alcohol despite adverse consequences, and distortions in thinking, most notably denial. Each of these symptoms may be continuous or periodic. Binge drinking is highly risky for accidental mortality. It is defined as heavy drinking to the point of intoxication on a periodic basis. Risky drinking per the National Institute on Alcohol Abuse and Alcoholism (NIAA) is: For men, more than 14 drinks per week or more than 4 per occasion For women, more than 7 drinks per week or more than 3 per occasion Note: One drink = 12 g of pure alcohol = 12 oz. of beer = 5 oz. of wine = 1/5 oz. (jigger) of hard liquor.
Famous Estate Planning Failures NAME: Amy Winehouse DIED: July 23, 2011 AGE: 27 CAUSE: Alcohol overdose ESTATE MISTAKE: Like many pop stars who live fast and die young, Winehouse did not leave a will or any planning. She was divorced at the time of her death, but still reportedly professed a deep love for her co-dependent and friends said she would have wanted to have left something for her soulmate. But that wish went with her to the great gig beyond. -As appeared in InsuranceNewsNet Magazine, June 2012
"Do I Need Disability?" The answer is simple: If you have a job, you need disability insurance. Why then do so few Americans have it? 75% of Americans are concerned about being able to support themselves if they are unable to work due to a disabling illness or injury. 50% of workers say they don't need disability insurance. But where is the money going to come from if their paychecks were to disappear? Government? Family? Friends? 42% of Americans live paycheck to paycheck. If you rely on your paycheck to make ends meet, then you can't afford to not have disability insurance. -Limra & Life Foundation 2012 Barameter Study -CareerBuilder Survey, 2011
No One is Invincible—Protect Against the Unexpected The Goal:
HERE’S A THOUGHT... “Life is not a dress rehearsal. Stop practicing what you're going to do and just go do it. In one bold stroke you can transform today.“ - Marilyn Grey
Kevin has always been fit and healthy. He was on the swim team in college, and after graduation, he continued going to the gym to swim laps three mornings a week. He rarely got sick, and he never thought he would really need a life insurance policy. However, in his mid-thirties, he and his wife, Julie, each took out a $750,000 policy—just in case. A year after his policy was issued, at age 37, Kevin began experiencing unusual abdominal pain. At Julie's urging, he went to see a doctor. Tests revealed that Kevin had lymphoma, and he passed away four months later. Kevin's death took Julie by surprise. The couple had built a small savings, but she knew it was not enough to replace Kevin's income in the long term. Suddenly, the life insurance policy they had purchased on principle became the lifeline that kept Julie afloat. The benefit helped her cover the remaining medical bills and make mortgage payments until she could make the move to a more afforadable home.
There are many who think "It won't happen to me" and put off buying life insurance. But no one is invincible, and everyone has loved ones they would want to provide for if the unthinkable were to happen. That is why it is important to help people understand the value life insurance holds for them.
The Deadline: Life waits for no one and no one wants to be caught off guard. 41% of adults in America (95 million people) do not have life insurance - LIMRA's Facts About Life 2011
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