THE GLUCK REPORT, Part II: Top Trends In Insurance

So if a business owner buys disability insurance through his company and buys a policy for all the employees, their benefits are going to be taxable? If the employees are not picking up the premium as income, and it is being paid by the company, then, yes, their benefit will be taxable. Report the premiums as income. You have to make the determination whether that premium is going to be picked up by you as income before the year begins.

We've been talking about bread-and-butter insurance issues. Any ideas for high-net-worth clients? Say you have clients who set up insurance trusts for their children and grandchildren. Everybody knows you can make a tax-free gift of $11,000 per year to a child or grandchild. If I have an $11,000 exclusion, I can give the $11,000 to my child outright and that will not be a taxable gift. But if I give $11,000 to a trust where my child is the beneficiary, an insurance trust, I can't get the $11,000 exclusion because my child is not getting that money outright. It's being held in trust for him. If you put a Crummey power in the trust, allowing your child to withdraw money from the trust during a 30-day period, however, you can satisfy the law and get the exclusion. But here is the trick in terms of more sophisticated planning. People think they can use the same rule for grandchildren. The answer is no. The GST annual exclusion has a different set of rules for grandchildren as opposed to children. One rule that particularly is important to grandchildren in trusts is that you must have a trust (to get the annual exclusion) that is only for the grandchildren. Another rule is that the trust, besides being only for the grandchildren, has to be included in the grandchild's estate, if he or she dies before the grandparent. The GST is awfully complicated and people can get into a lot of trouble if they do not know this area. Unless you really know the GST rules very well, and not everyone does, you need to be very careful. If you make a mistake on the way you report the GST exclusions and exemptions, you can have a huge liability.

With President Bush's re-election, the elimination of the estate tax is more likely. What should advisors be telling clients? Clients with estates of more than $10 million are behaving as if the estate tax will remain. They are not playing the game of let's wait and see if Bush will eliminate the estate tax. They are planning on the assumption that there will be an estate tax. The practical matter is that if I have a client with a family business or a lot of real estate, that client is not going to take a chance, assuming he wants to transfer the business or real estate or other assets to children and not have a huge problem with estate taxes. They are not going to play around.

How about the under-$10-million-net-worth individual? That's much more marginal. We are not, in our practice, seeing people with a net worth under $10 million buying insurance for estate taxes. Families with a net worth of $3 million or $5 million today have a $1.5 million estate tax exemption per person. If I'm married, I have $3 million covered with the exemption. And the exemption rises in 2006 to $2 million, which means a married couple has $4 million protected. So the estate under $5 million is very marginal, unless it is a business or there are other reasons. Between $5 million and $10 million, you have a bit more of a reason to look at insurance. But remember in 2009, it is going to be a $3.5 million exemption, which is $7 million per couple.

Any other new strategies? Life settlements. They developed in the early '90s as an outgrowth of viatical settlements. People with AIDS who had life insurance wanted to get the money before they died and they wanted to sell their policies.

Viatical settlements were a bit of a racket, though. With some, yes. But other viatical settlement business was good and clean. I'll give you a very good story we were involved in where it provided a phenomenal service to a client.

A viatical or life settlement? A life settlement, which, by the way, is different from a viatical settlement because a viatical means the individual is going to die within 24 months. A life settlement is just a quantitative difference where the person doesn't have a life expectancy of two years, but maybe has a life expectancy of anywhere between three and 10 years. It's for an older person, particularly those who are over age 65–often, someone older with a health problem that has shortened his life expectancy.

Anyway, my wife [a partner in Slavutin's practice] got a call from a lawyer whose client was terribly injured in a ski accident and no longer able to take care of himself. He had a $1 million term insurance policy, but his wife could not afford to convert it to permanent insurance. She couldn't even afford to pay the premium. She was going to simply cancel the policy, and you know what happens when you cancel term insurance: you get nothing. But instead, the lawyer asked us to see if we could sell the policy through a life settlement. We were able to do that and the client received $100,000.

Explain what happens in the transaction of a life settlement. Basically, you contact a settlement-funding company. This entity purchases your policy. The price you receive is dependent on your present age, medical condition, and life expectancy. One company that has been around for a long time that has a very good reputation is First Coventry. They also just received a rating from Standard & Poor's. A life settlement is often appropriate if the only other option is to drop the policy. There are brokers who have access to six to 10 different settlement companies, buyers of policies, and they can shop the market for you, so that you get a good sense of what is out there. I use a guy at Financial Legacies, but there are many such brokers.

Editor-at-Large Andrew Gluck, a veteran personal finance reporter, is president of Advisor Products Inc. (www.advisorproducts.com), which creates client newsletters and Web sites for advisors. Advisor Products may compete or do business with companies mentioned in this column. He can be reached at [email protected].