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Highlights of the 2014 LIMRA Advanced Markets Conference

On August 6th, Matthew Pressler, Director of Advanced Markets for M Financial Group and Steve Hamilton, Director of the Advanced Consulting Group for Nationwide Insurance Company provided an update regarding current planning trends and legislation within the life insurance industry, delving into the key role M Financial Group plays. During this discussion, the two shared the following highlights from the 2014 LIMRA Advanced Markets Conference held at the Peninsula Hotel earlier that week:

Proposal to Eliminate the Use of Crummey Powers

  • The U.S. Department of the Treasury publishes the Treasury Greenbook each year, which provides an explanation of the Administration’s revenue proposals for the following Fiscal Year.
  • One proposal within the 2015 Greenbook would eliminate the use of Crummey powers. Crummey powers currently serve to make gifts to an irrevocable trust gifts of present interest, allowing such gifts to qualify for the annual gift tax exclusion.
  • Instead, the proposal would define a new category of transfers that would allow up to $50,000 per donor (on the donor’s transfers of property) to qualify for the gift tax annual exclusion. It is unclear if this amount would be indexed for inflation in future years.
  • The industry views this development as potentially being to the detriment of an individual with a trust with many beneficiaries, as only a single $50,000 exclusion would be permitted.
  • It should be noted that the Greenbook is only a collection of proposals, not enacted legislation. As such, planning should continue under the current structure, which generally permits each donor to make qualified annual exclusion gifts of up to $14,000, indexed for inflation, to each gift completed.

Transfer for Value

  • Life insurance benefits are generally received free of income tax.
  • However, if a policy is transferred for full and adequate consideration, such an event violates the “Transfer for Value” rule (TFV), which results in some or all of the policy proceeds being subject to income tax at the death of the insured.
  • There are a limited number of exceptions to TFV, including transfers made to the insured, or to the insured’s trust, if it is a grantor trust.
  • One question that has been unclear is whether or not the transfer of a second to die policy to a trust in which only one of the insureds is a grantor will qualify for the exception.
  • In 2014, a series of favorable rulings (PLR 201423009, Rev Ruling 85-13, Rev Ruling 2007-13, PLR 201426005) provided favorable guidance, suggesting that such a transaction would qualify for the exception.

Policy Valuation

  • One area that continues to be clouded in discussion is a very basic one: What is the value of a life insurance policy for income and transfer tax purposes when it changes hands?
  • Matthew advised that although there would logically be a discernable formula for calculating this value, varying and sometimes conflicting guidance from the IRS makes the calculation more complex. He pointed out that the primary rules governing policy valuation go back as early as the 1960s, and policy types have evolved considerably since then.
  • Matthew’s advice: seek the guidance of a qualified life insurance expert to help assess the value of a life insurance policy when needed.
  • Goldstein Financial Group completed an engagement on policy valuation involving a local company and a key employee. The employee was faced with paying an additional $4 million of cash for the purchase of the life insurance policy. With the assistance of M Financial, a solution was presented to reduce the value, resulting in a lower purchase price. Feel free to call us for more details regarding the transaction.

Planning after ATRA

  • The American Taxpayer Relief Act of 2012 (ATRA) resulted in a higher federal lifetime transfer tax exemption ($5.34M in 2013, indexed for inflation), as well as higher federal income taxes. In addition, ATRA introduced portability, allowing the unused portion of the individual’s last deceased spouse to carry forward to the surviving spouse. This created significant changes in the life insurance planning landscape, particularly for those whose taxable estate is below the higher exemption amount.
  • For 99.6% of Americans, federal estate taxes may no longer be an issue, however many will continue to face transfer taxes at the state level.
  • Life insurance will continue to compliment non-tax estate planning needs:
    • Provides tax deferral and tax-free access to cash values, plus an income tax free death benefit
    • Can be used to replace earned income cash flow in retirement • #1 strategy for a safe income tax shelter for those with assets of $1M+
    • Creditor protection
    • Can be used to avoid market risk
    • Can be used to satisfy debt obligations
    • Can be used to avoid probate contests
    • Estate equalization in connection with a family business
    • Second marriages and blended families
    • Special needs children
    • Who will provide care? How will this care be paid for?
    • Can government assistance be preserved, and supplemented by income from a special needs trust?
    • As an alternative to LTC insurance
    • Replacement of wealth spent on LTC expenses, if needed

Planning with existing ILITs - Should ILITs now be discarded if the client's estate is now not subject to Federal Estate Tax?

  • The general consensus among experts is no.
    • Laws could easily change; President's 2014 budget proposal would return estate tax rates to 2009 levels.
      • A change in the estate tax law could occur at a time when the affected grantor is no longer insurable
    • Appreciation in assets may expose client to estate tax in the future
    • Policy may be retained as part of a larger investment portfolio
      • IRR within an insurance policy is competitive
      • Can be non-correlated to equity markets
      • Inside buildup not subject to income tax or new 3.8% tax
    • The ILIT can be a valuable financial planning tool
      • Policy cash values can be accessed
      • ILIT assets can be protected by beneficiaries' creditors
      • Can be exchanged for an annuity to create a source of income at retirement
    • State death taxes may also apply
    • ILITs are now easier to administer
    • Steve offered one planning idea: consider exchanging any unneeded life insurance for an annuity, which can generate retirement income. The rules on trust owned deferred annuities have been relaxed in recent years. Steve recommended working with an experienced life insurance professional to determine if this is a viable strategy for clients.

Flexibility with Existing ILITs

  • In addition to maintaining existing Irrevocable Trusts, the question arose as to whether there was any flexibility to make changes to them. Reasons to do so:
    • Uncertainty about the future of estate taxes
    • Changes in laws and potential increased taxes (new Net Investment Income, as well as state and federal income tax increases)
    • Fluctuating personal net worth
    • Personal circumstances have changed
    • Desire for additional flexibility

Other Trends in Life Insurance Planning

  • Charitable Planning
  • Indexed Universal Life Insurance
  • Long Term Care - Use of hybrid life/LTCinsurance
  • International Planning opportunities:
    • 21% of US households contain a foreign born spouse
    • Demand for US product - stable currency, cost effective (based on US mortality), retention (some countries limit insurance to as little as $1m)
  • Captives
  • Premium finance – borrowing to fund the purchase of a life insurance policy
    • Many things are bought with leverage: cars, homes… and insurance
    • At today's interest rates, there is a great arbitrage play
    • People have the ability to pay for premiums, but they don't want to

Washington Update / Election Update

  • Competitive Senate Midterm Races
    • MT, CO, IA, MI, AR, AK, LA, GA, KY, WV, NC, NH, SD
    • Democrats are defending the highest number of seats
      • Obama approval rating is low 40s
      • Traditionally, when a president is below 50, it's difficult for his party to retain seats and even tougher to gain them
      • Consumer confidence is low
      • 65% chance of Republicans taking the Senate
  • If republicans win the Senate:
    • Estate tax repeal becomes much more possible
      • House will introduce estate tax repeal legislation in 2014 to repeal estate tax, and will succeed, but legislation is DOA due to Democrat controlled Senate
    • Broader tax reform much more likely
    • Obama would likely veto any republican passed legislation
    • After 2016, anything can happen

At Goldstein Financial Group and the Insurance Design Center, we work closely with attorneys and advisors to help them respond to new planning opportunities for their clients. If you have any questions about any of the trends or developments that were discussed at this year's LIMRA conference, we are happy to talk through these issues with you.

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