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Insights Of An Advanced Sales Attorney

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As an advanced sales attorney, one of my primary responsibilities is estate analysis. In a nutshell, estate analysis is the process of reviewing a client’s existing estate plan, performing a hypothetical probate and projecting tax exposure.

Properly performed, estate analysis is powerful because it often uncovers a variety of permanent life insurance needs. Today, more than ever, permanent life insurance is uniquely positioned to provide guaranteed benefits that most clients desperately need.

In celebration of my 750th estate analysis, here are 7 observations I consistently make:

1. Few married clients take advantage of credit shelter trusts.

Credit shelter trusts enable married couples to maximize estate tax savings. For instance, in 2009, a fully funded credit shelter trust would save your clients over $1.5 million in federal estate taxes versus simple wills. This is a slam dunk planning opportunity for wealthy couples. (See chart 1.)

Surprisingly, few of my clients have taken this relatively simple planning step. The individual of average net worth might get by with a simple will, but wealthy clients should discuss this extra planning step with their legal and tax advisors to achieve their goals as tax efficiently as possible. That’s better for you: As the federal estate tax exemption has risen to $3.5 million, the need for life insurance to fund these trusts has also increased. Your challenge is to point clients in the right direction.

2. Clients misunderstand the taxation of revocable living trusts.

Revocable living trusts provide many benefits including asset management, privacy, ease of estate administration, and probate avoidance. Many clients and advisers mistakenly add tax savings to the benefits list. In my opinion, this is one of the greatest “urban legends” of estate planning.

Transfers to a revocable trust are considered incomplete transfers for income, gift and estate tax purposes. Therefore, while revocable trusts offer powerful planning opportunities, tax savings are not among them. If a client desires an estate tax reduction, an irrevocable transfer, such as gifting to an irrevocable life insurance trust, might be appropriate.

3. State estate and inheritance taxes are usually overlooked.

With repeal of the state death tax credit in 2005, most states saw their state estate taxes eliminated. Faced with losing tax revenue, about half of these states (and counting) have “decoupled” from the federal estate tax system, instituting free-standing estate and inheritance taxes.

For married couples, decoupling has created a tax trap. A credit shelter trust in a decoupled state with a state estate tax exemption lower than the federal exemption could result in a state estate tax at the first death. (See chart 2.)

Paying modest state estate taxes at the first death might be better than paying significant federal estate taxes at the second death. Life insurance often plays a crucial role in leveraging the federal exemption.

There are 3 ways you can help clients address state estate and inheritance taxes: (1) advise clients to have their documents reviewed and updated; (2) provide clients with additional life insurance coverage where needed at the first death; and (3) keep abreast of legislative changes to make sure you and your clients are not blindsided by tax law changes.

4. Illiquid assets dominate large estates.

I rarely see large estates comprised primarily of cash or liquid assets. The typical large estate includes illiquid assets such as closely held family businesses, raw land, investment realty, and farm/ranchland. With few exceptions, clients desire to pass the full value of their estates to heirs without tax shrinkage. The problem is, their existing assets cannot do so efficiently.

For the insurance advisor, this is a sweet spot. Life insurance is uniquely positioned to deliver tax-advantaged estate liquidity at the exact time it is needed. No other financial product can deliver this peace of mind. Continued innovations and improvements in permanent life insurance products make the options more affordable than ever.

5. Life insurance coverage is lacking in type and amount.

More good news for insurance advisors: Clients need help obtaining the appropriate type and amount of life insurance. Existing coverage typically consists of employer-provided term insurance and modest permanent coverage, if any. Rarely does the amount of coverage begin to approach the projected estate liquidity need.

The “buy term and invest the difference” argument goes out the window when a client faces a permanent need for estate liquidity. With permanent repeal of the federal estate tax receiving its last rites, now is the time to remind clients about the power of permanent life insurance.

6. Designations and documents need tidying.

A life insurance policy with a minor child as direct beneficiary, a homegrown will dated 1984, an IRA with an ex-spouse as beneficiary, a qualified retirement plan with no beneficiary, buy-sell agreements with inappropriate policy ownership–the list goes on and on. These glitches often result in legal wrangling, family stress and estate shrinkage.

This observation is a call to all advisors to keep up the good fight and work with clients to keep documents and designations updated. An uphill battle for sure, but a battle worth fighting.

7. Clients want to do the right thing.

Sometimes, the heart gets in the way of the head: In an effort to treat all heirs equally, some clients create a powder keg. This is especially true in the case of the default family businesses plan. Instead of developing a funded buy-sell agreement, clients often leave their business equally to all children, regardless of the level of involvement in the business. You know the rest of the story. It’s no surprise the majority of family businesses fail at the second generation.

The “active” child who put years of sweat equity into the family business is the natural successor. Life insurance death proceeds in a fair amount provided to “inactive” children can help remove the stress and uncertainty that the default plan creates. Your role is to help clients understand that fair does not always mean equal.

The foregoing list consists primarily of planning mistakes. The good news is that most planning mistakes can be rectified with relatively simple changes-if caught in time. Go get ‘em!

David Szeremet, JD, CLU, ChFC, is advanced sales officer for Ohio National Financial Services, Cincinnati, Ohio. He can be reached at [email protected].


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