Posts Tagged: life insurance

“Five Financial Blind Spots That Burden Grieving Spouses – Surprise Debt, Locked Out of Accounts, Invisible Credit Records, New Budgets, Higher Tax Brackets.”

Forget the silly number-crunching.  Forget the extra point or two of return if we recommend putting the money elsewhere.  Forget estate taxes.  Forget all of the sophisticated planning machinations and tell me why a significant income tax-free cash infusion to a surviving spouse isn’t a good idea.  Whether it is $1 Million or $10 Million (the size of the estate is relative), I’ve never seen an estate in which a significant cash infusion didn’t make a difference.  Cash buys time, provides liquidity, and comforts at a most uncomfortable time.  Yet, throughout the entirety of my career, I’ve seen very few instances where advisors have considered the benefits.  A personally owned life insurance policy’s death benefit is one of the cleanest and most cost-effective ways to provide cash when needed (or wanted).

A Question – If we were sitting here today and the client had died last night what would we be discussing?  I suspect having enough sustaining cash would be near the top of the list.

The WSJ article can be found by clicking here.

Someone shared the story below with me.  We really don’t need to make our client conversations or planning any more complicated.

Two Business Owners. Two Stories. One Critical Difference.

Last year, two small business owners, Mark and James, passed away unexpectedly within months of each other. Both had run successful companies for decades, each employing dozens of people and supporting their families through the enterprise they had built from scratch.

Mark had planned carefully. Years earlier, he worked with his advisor to purchase a well-structured life insurance policy tied directly to his business succession plan. When tragedy struck, the death benefit funded a buy-sell agreement. His family received fair value for his share of the company. His business partner used the proceeds to keep operations stable, pay off debts, and reassure employees and customers. Within weeks, the company was back on track. Mark’s vision lived on—and his family’s financial life remained secure.

James’s story was different. He had always said, “We’ll figure it out” when the topic of insurance arose. When he died, his family had no way to access the company’s cash flow or negotiate a buyout. The business struggled with leadership gaps, creditors became anxious, and key employees left. Within a year, the company folded. His family lost both the paycheck and the equity value. The ripple effects reached suppliers, clients, and employees across town.

The difference wasn’t in their work ethic or success—it was in their planning. Life insurance gave Mark’s business and family a future. The lack of it left James’s legacy vulnerable.

Sometimes it takes a real story to remind us why our work matters.

I have a client who wanted to leave a dedicated “pot of money” in trust for his grandchildren.  I knew his grandchildren would not “need” the money, so I asked him why?  His answer was the essence of simplicity and love, “We think of it as a kiss goodbye from us for them.”  A simple life insurance policy inside an ILIT for grandchildren accomplishes the goal – a separate gift solely for the grandchildren and very affordable.  We don’t know how our grandchildren will fare in the world, but a kiss goodbye can certainly make their journey easier and remind them how much they are loved.

In today’s tough housing market, some first-time home buyers are looking to their parents for help. Here’s what to know if you plan to do the same.

The New York Times article can be found by clicking here.

The Washington Report: – Wealth Transfer Edition

“From the Desk of an Estate Planning Attorney: Buy-Sell Planning Since Connelly – What are we doing now?”   KEY TAKE-AWAYS: Post-Connelly, closely held business owners must carefully consider the practical and various tax issues associated with life insurance funded buy-sell structures.

To read the full report, click here.

The Washington Report: – Wealth Transfer Edition

“Although high net worth clients under the $50 million threshold (HNW clients) may continue to implement planning, we’re seeing some hesitancy now, since they have less total gifting capacity than UHNW clients and greater concerns about giving away too much. Many HNW clients prioritize control and flexibility, often viewed by them as the ability to “undo” planning if circumstances or laws change.”

To read the full report, click here.

“Jensen Huang, the chief executive of Nvidia, is the 10^th-richest person in the United States, worth $127 billion.  In theory, when he dies, his estate should pay 40 percent of his net worth to the government in taxes.  He is also the beneficiary of a series of tax dodges that will enable him to pass on much of his fortune tax free….The savings for his family are on a pace to be roughly $8 billion.  It likely ranks among the largest tax dodges in the United States.”

“’From an estate-tax-planning perspective, it’s a grand slam,’ said Jonathan Blattmachr, a prominent trusts and estates lawyer who reviewed Mr. Huang’s disclosures for The Times.  ’He’s done a magnificent job.’”

To read the full article, click here.

The Washington Report: – Business Edition

“The Court removed from the taxpayer’s arsenal of arguments the theory that a redemption obligation necessarily reduces the net value of a corporation. But even before the Court’s decision, many advisors had been hesitant to rely on that theory because of its flawed logic. Taxpayers still have multiple avenues available for structuring redemption agreements funded with life insurance. Given the Connelly decision, it is highly recommended that taxpayers review their sale and redemption agreements to determine what changes, if any, should be made in light of the Court’s decision.” 

To read the full report, click here.

“While a very important tool, premium financed arrangements should be carefully evaluated and actively managed post implementation. Since the success of the arrangement is based on a positive economic arbitrage, advisors should carefully evaluate and stress test (i) fluctuations in interest rates; (ii) fluctuations in the insured’s portfolio; (iii) the parties assigned to monitor performance; (iv) exit strategies; and (v) tax implications.”

To read the full report, click here.

In recent years, many of your clients were sold (yes, sold) commercial premium financing plans.  A recent Wall Street Journal article entitled “Rising Rates Make Life Insurance Funded with Debt More Costly” raises significant concerns:

“Even before rates started to rise, consumers were being forced to make big payments when strategies failed to deliver the promised returns.  Many sued their agents and insurers….The lawsuits claim that agents misled them about the strategy’s risks.  The policies are supposed to generate enough income to repay the loans, which can also be repaid through the death benefit….Since rates started to rise, a benchmark used in many premium-financed transactions, the 12-month Secured Overnight Financing Rate, has jumped from less that half a percent a year ago to more that 4% now.  Borrowers pay 1.5 percentage points to 3 percentage points above this rate….”

The WSJ article which can be found clicking here.

In short, many clients who implemented these plans are experiencing the perfect storm of substantially higher borrowing rates, poor policy performance and significantly higher collateral requirements – and with no relief in sight.

I have never promoted or sold a premium financing case.  In fact, in 2001, I co-authored an article with Steve Leimberg in Estate Planning magazine which raised many of the issues that are even more relevant 20 years later.  As we wrote in our article,

“For decades, one of the most common expressions among life insurance professionals has been, ‘Clients do not object to owning life insurance; they simply object to paying for it.’  In a never-ending quest to satisfy clients’ wishes, a growing number of life insurance agents have been working overtime to devise new strategies to propose to clients and their advisors in the sophisticated, high-income, high net worth marketplace….”  There is no such thing as free insurance!

Exiting these plans can be a thankless, time consuming and costly exercise.  My goal is simply this:  to inform you about this important issue.

Many ultra-high net worth clients used all of their available gift/estate and GST exemptions in 2020 or 2021.  For an individual, the exemption increased by $120,000 in 2021, $360,000 in 2022 and is estimated to increase by $860,000 in in 2023.  We can make assumptions for the increases in 2024 and 2025.  What would it look like if we used the increases to fund additional life insurance.
Click here to find out.