One of the biggest challenges for producers working in affluent markets is to adapt to a constantly changing environment. They must evolve in tandem with new laws, planning techniques and products.
To prudently plan for clients, producers need to understand fully current and pending tax legislation. Producers can provide value-added services to clients by developing creative legal and trust planning solutions in compliance with those laws.
Producers also must understand the latest advances in products–how they work and where they fit into a client’s overall plan. Through the advancement of protection products, agents can access improved solutions. Some companies are creating innovative ways to increase the leverage created through the use of life insurance in planning situations for affluent clients.
Regardless of the future transfer-tax system, many believe that affluent families will continue to be exposed to some estate tax liability. These wealthy individuals often have many financial goals, including the efficient transfer of their wealth, minimizing estate taxation, making charitable bequests and protecting their wealth from creditors.
For affluent grandparents who have earmarked a portion of their wealth to create a legacy for future generations, the dynasty trust can provide a legacy for grandchildren while avoiding unnecessary estate, gift and generation-skipping transfer taxes.
Once a dynasty trust is funded, life insurance can provide an enhanced inheritance for future generations. Life insurance is typically purchased on the life or lives of the grantors, multiplying the original gift.
Innovations in life insurance products can further enhance the wealth of generations to come. Some companies catering to the affluent marketplace have developed options allowing the guaranteed purchase of life insurance on an individual at a future point in time–regardless of his or her future health.
Consider this application in a dynasty trust. To illustrate the leverage we can gain through the use of life insurance–purchased today and in the future–let’s look at the “Stevens” family.
Mrs. Stevens’ late husband built a successful family business. When he died, Mrs. Stevens was left with a large estate. The business passed on to her son, David, who still runs the firm.
The business continues to grow under David’s management. Mrs. Stevens knows the business will take care of David and his family well. She wants to leave a portion of her estate to her three grandchildren.
As a grantor, Mrs. Stevens transfers $1 million into a dynasty trust for the benefit of her grandchildren. To do this, she uses all of her lifetime gift exemption and most of her generation-skipping transfer tax exemption. To maximize the amount of wealth that will pass to heirs, the trustee purchases a life insurance policy on Mrs. Stevens.
When the life insurance policy is issued, an option is included to allow the trustee to purchase a new life insurance policy on the life of David at Mrs. Stevens’ death. This new policy will be based on David’s health today.
When Mrs. Stevens passes away, the death benefit is paid to the trust. To further maximize the wealth in trust for Mrs. Stevens’ grandchildren and future generations, the trustee exercises the option to buy a new life insurance policy on David.
At David’s death, the death benefit will be paid into the trust for the benefit of his children and future generations. Now the grandchildren are starting families of their own. Their grandmother’s legacy can provide a lifetime of security for years to come.
In this example, Mrs. Stevens successfully has transferred a portion of her estate without subjecting it to estate taxes, gift taxes, or generation-skipping transfer taxes. The leverage provided by life insurance multiplies the initial gift.
The option to purchase additional insurance on David increases the leverage offered by life insurance and enhances the inheritance of the grandchildren and future generations.
A second option, buying additional life insurance on one or several of the grandchildren at Mrs. Stevens’ death, would further multiply the wealth passing on to future generations. Planners employing this technique without the guaranteed option to purchase additional insurance may be missing an opportunity to maximize the wealth for their clients.
Working in the affluent market in a constantly changing environment presents many challenges to producers. Tax laws and planning techniques are only part of the solution. For producers to remain on the cutting edge of advanced planning for the affluent, they must fully understand the product environment.
Robert Dehais, CLU, ChFC, LUTCF, is vice president, IB product marketing, at MetLife. His e-mail address is firstname.lastname@example.org.