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Five strategies to reduce your estate tax bill

The timeworn saying, “money doesn’t grow on trees,” is just as true today as it has been for many years prior. No one likes to hand over their hard-earned money, especially to pay a tax that will affect the final gift you will pass on to your beneficiaries. The desire to leave your heirs as much of your assets as possible is a common motivator to finding a way to pay less estate tax. But how does this work?

reduce estate tax bill According to the Internal Revenue Service (IRS), estate tax is a “tax on your right to transfer property at your death.” As of 2015, the federal estate tax exemption rate is $5.43 million, which means that everything up to this amount is exempt from federal estate tax. Not all estates require the filing of an estate tax return, but if the value of your gross assets and total taxable gifts exceeds this number, your estate is taxable. Taxable estate is the fair market value of your assets, excluding any debts, and if your estate surpasses the exemption amount, your beneficiaries will be subjected to estate tax upon your death.

This is where planning can prove to be an extremely important asset to you and your beneficiaries. Fortunately, there are a few strategies that can be implemented during the estate planning process that can greatly reduce or even eliminate your exposure to an estate tax:

1. Annual gifting
A reduction of estate taxes can be accomplished through annual gifting. Each year, you can gift $14,000 per person without having to pay gift tax, which means that a married couple can make joint gifts for a total of $28,000 per person, every year. Therefore, if you have three children, you and your spouse can gift a total of $84,000 each year. Annual gifting reduces the size of your taxable estate, and for those who can afford yearly living expenses with money to spare each year for gifting, this strategy can prove to be very effective.

2. Double your tax exemptions
If you are married, you and your spouse can utilize both estate tax exemptions. The IRS permits each individual a lifetime exemption amount that will not be taxed upon your death. Therefore, you and your spouse have this resource at your disposal. The 2015 federal estate tax exemption rate is $5.43 million, which means that you and your spouse can each have $5.43 million, exempt from taxes. A common problem that used to arise with this strategy, was that once the first spouse died, if the surviving spouse was named the beneficiary, they were at risk of surpassing the exemption rate. If this occurred, once the surviving spouse passed, their estate would be exposed to taxation. However, in 2011 the Tax Relief Act was signed enabling “portability” of a deceased spouse’s lifetime exemption, meaning that a married couple could easily shelter all of both exemptions from estate tax.

3. Donate a portion of your estate to charity
donate to reduce estate taxesDonations made to charitable organizations can prove to be advantageous for reducing estate taxes. This option provides the opportunity for you to create a legacy and support an organization that you care for, all while reducing estate taxes and increasing the amount of inheritance for your beneficiaries. This is a great strategy for those who are actively working with a charity or who desire to dedicate a portion of their estate to a noble cause.

4. Purchase life insurance
Purchasing life insurance can assist in the reduction of estate tax. The proceeds generated from a life insurance policy is income-tax-free for the beneficiaries of the policy, but if you are the owner of the policy, it is considered part of your estate, and therefore, taxable. An effective strategy to avoid the estate taxes for your life insurance policy is to have your beneficiaries purchase the policy instead. If you gift money to your children and they acquire the insurance for you, the proceeds from the policy are not considered part of your taxable estate.

5. Irrevocable trust
An irrevocable trust is another advantageous strategy that can be implemented to avoid high taxes. This form of trust is beneficial for a surviving spouse because these limitations will also limit imposing estate taxes. You will not be limited to the amount that you can transfer into the trust, but always remember that the trust is irrevocable and once you have transferred any assets into the trust, you will be unable to utilize them for your own benefit. This resource is especially useful for life insurance policies through an irrevocable life insurance trust (ILIT), which is designed to hold life insurance policies and, if properly established, is not included in your taxable estate.

If your estate is valued higher than the federal or state estate tax exemption, then it is crucial to evaluate your exposure and take action to reduce your estate tax. Helpful resources, like this Estate Tax Planning Calculator from Bankrate, can provide an idea of where you stand, but it is essential to contact a professional in order to take advantage of all of the opportunities that are available. Estate tax policies vary by state and it is important to consult with a professional in order to ensure that you are taking the appropriate steps to reduce estate taxes and plan for the future of your loved ones.

Contact me today to learn more about how you can reduce your estate tax bill by calling 800-950-8522 or email me at

Increase Your Income with the “Max Plan”

investment planning for familyPlanning for the future is not always easy, yet it is necessary in order to prepare your loved ones for the future and impart the maximum percentage of your assets to your beneficiaries. While there are many wealth management plans available, many do not provide the income necessary to support the individual covered by the plan during their life. At David M. Jones & Associates, we are here, as wealth management experts, to help you make the most out of your finances. That’s why we have designed the “Max Plan” to assist you in managing your income and increasing your rate of return.

The “Max Plan” significantly increases income on a mostly tax-free basis and provides you with guaranteed incomeInvestment Opportunites for the rest of your life. With the “Max Plan,” assets producing a low rate of return (i.e. bonds) are sold in order to purchase immediate annuity. An immediate annuity, is an agreement between you and the insurance company to provide you with guaranteed income for the rest of your life. The annuity has a high payout because it is returned to you in the form of principal and interest. This is beneficial because an annuity is usually not affected by income tax because most of the payments are considered a return of principal. Since this type of annuity is guaranteed only during the annuitant’s life; upon death, these annuity payments will disappear. Therefore, the “Max Plan” capitalizes on this lifetime income and puts the earnings toward a different investment. Using part of the income generated by the annuity payouts, you would purchase a life insurance policy to replace the loss of the initial investment used to purchase the annuity. For example, let’s say that you invested $100,000 to purchase an immediate annuity. From the payouts that you receive from the annuity, you would use part of that income to pay the insurance premium of a $100,000 life insurance policy.

investmentsThis plan is an ideal financial strategy for healthy men or women, aged 70-85, that are dependent on a monthly income or concerned about outliving their savings. With a minimum investment of $100,000, the “Max Plan” has enabled individuals to consistently realize a 4.5 to 6.5 percent net rate of return, which is significantly higher than many other current investment options. Your loved ones will also benefit from this investment strategy because the life insurance will be income and possibly estate tax free to your beneficiaries.

For more information about the David M. Jones & Associates “Max Plan” check out this video on our YouTube channel, which provides a great comparative example that will help you see how the “Max Plan” can positively impact your insurance coverage. To see specifically how the “Max Plan” can affect your income based on your tax bracket, schedule a free consultation at our Florida or California office.

Contact Us Toll-Free: 800-950-8522
Florida: 239-649-7600 | California Office: 805-969-2367

David M. and Judy B. Jones Scholarship Fund: Supporting our community one student at a time

shutterstock_70975837At David M. Jones & Associates, we understand the importance of planning for the future. While we may specialize in serving clients 60 years old and older, planning is typically to benefit younger generations. That’s why we believe that funding the education of future business leaders is so important.

The price for obtaining an education is on the rise. Expenses for attending a four-year college in pursuit of a degree typically ranges from $28,000-$68,000 per year and is anticipated to increase in coming years. The rise in college tuition has proven to be difficult for many families to afford and has compelled many to rely on financial aid to cover the costs.

When it comes to receiving financial aid, the disparity between a family’s household income and qualification for financial aid coverage appears to be hitting middle-class families the hardest. A problem that many families are facing is that they have become too poor to afford college tuition, yet too rich to qualify for financial aid. When considering financial aid, the government chooses how much of the tuition the family is capable of paying based on the family’s income and then compensates the remaining amount. Therefore, a middle-class family’s household income can easily prevent the student from obtaining a higher level of funding.

2015-Scholarship-WinnersIn order to meet the needs of these middle-class families and bridge the financial gap here in our own community, the David M. and Judy B. Jones Scholarship Fund was founded in 2009. The goal of this fund is to provide promising students with a chance to be free from academic loan debt and to focus on furthering their educations. Each year, these scholarships are awarded to students of high academic standing and are designed to assist students that come from low-income or middle-class families that cannot afford the financial burden of a college degree. Through this scholarship foundation, students are awarded either a $5,000 scholarship that is renewable for four years, or a $2,500 non-renewable scholarship.

Since its launch, we’re proud to have awarded 37 students with more than $302,500 in donated scholarship funds to pursue their dreams of a college education. Most recently, we presented seven 2015 graduating Barron Collier High School seniors with $50,000 in scholarship funds to support the costs of college tuition, books and student housing.

Our company is honored to play a role in these students’ educational journey. There is no better feeling than helping a hard-working student further their education and follow a path that will lead to success. This experience has inspired our business, encouraged scholarship recipients, and comforted the families of these hard-working students by giving them peace of mind in knowing that their child will receive the education that they are working so hard to obtain.

At David M. Jones & Associates, we encourage you to think ahead and prepare for the educational future of your children and grandchildren. Through a life insurance policy, you can choose to set aside money for loved ones to help alleviate the financial burden of paying for college. If you would like to schedule a consultation to discuss your options, contact our office today by calling 239-649-7600 or sending me an email at

Annuities: A great investment or a ticking time bomb in your estate

Many retirees have discovered the apparent value of owning tax deferred annuities. However, the possibility of the gain being subject to state and federal income tax, the new Medicare 3.8 percent tax, and the possibility of Federal Estate Tax at the death of the contract owner (annuitant) have created a sizeable tax burden for surviving spouses and children.

There are significant tax advantages that lure retirees to invest in annuities. Normally, all growth and gains on the policy are tax deferred until the contract owner makes a withdrawal. The gain is taxed at the time at ordinary income tax rates. For most investors, these funds are not necessary to live on; therefore they realize many years of tax deferred growth.

The explosion in annuity sales is largely due to the popularity of “indexed” annuities which offer the investor an opportunity to earn a return that is correlated to the S&P 500 index (or other world indexes). The biggest benefit is that they offer downside protection. If the index drops 20 percent you would earn zero and reset for the following year.

Almost all deferred annuities are offered without front-end load but require the owner keep the policy a certain number of years to avoid early surrender penalties. Annual costs vary depending on options and riders selected. Long-term care, critical illness, guaranteed income and enhanced death benefit riders are some of the more popular choices for buyers today.

Investors are very interested in any opportunity to delay paying income tax. In California, a married taxpayer only needs to have $67,751 of taxable income to be in the States 9.3 percent income tax bracket (that goes all the way up to 13.3 percent for higher income earners). Having the ability to have a sizeable sum grow tax deferred for a long period of time has appeal. Couple that with no required distribution at 70 ½ like IRA’s and other qualified plans, provides the annuitant with unlimited “paper” growth.

The “end game” in annuity distributions has always been challenging. The design of these policies was for someone ideally in the 40-55 year old range that was in their peak earning years. Deferring income tax while you are in your top earning years makes sense. When you retire, you may be in a lower income tax bracket (not always of course) and could then withdraw the annuity earnings and hopefully pay income tax at a lower bracket while also having enjoyed the magic of tax deferred growth. Annuity income is treated as “gain out first” to the annuitant.

This model annuitant story does not always play out as illustrated above. Many new retires find that they do not need the income and do not want to have to pay tax if they do not need the money. These polices are also sold to wealthy retirees who have more to invest and would like to lighten their income tax burden on monies they do not need for the foreseeable future.

Both cases cause us to ask the question; when will you ultimately pay income tax (and potentially other taxes) and are there any other alternatives?

At age 60, Jim invested $250,000 in an annuity that has done fairly well over the last 18 years. It is now worth $1,000,000. Now at age 78, Jim is not in need of any additional income and does not want to have to pay more State and Federal tax. With $750,000 of gain, this is subject to the top California income tax of 13.3 (he has other income), the top Federal income tax bracket of 39.6 percent plus the new 3.8 percent Medicare tax and potentially Federal Estate Tax of 40 percent if his estate is over $5,430,000. I will let you and your CPA do all that math, but what you find is this was not a good tax scenario to build up all this gain.

He has a few options that he should consider:

  • Annuitize the money over your lifetime (and maybe a spouse’s lifetime). This involves the insurance carrier paying you back systematic payments of principal and interest over your lifetime. You still have to pay income tax but better to spread it out over a longer period of time.
  • Do the same as above, except take these after tax payments and consider buying a life insurance policy on you and or your spouse’s life. The benefit from the insurance will be Income and possibly Estate Tax free to your beneficiary and likely will be much more than the annuity could have ever grown to! This is a viable strategy up to age 85.
  • Wait until you die and let the beneficiary evaluate their options. Which are:
    • Pay tax on all the gain at your death;
    • Most carriers will allow an additional five years deferral by the beneficiary but then force distribution;
    • The beneficiary can annuitize the money over their lifetime. This might make a lot of sense for someone with a child or children that they want to provide lifetime income after they die.

As I hope you can see, deferred annuities have many great investment components and options but can turn into a tax time bomb if not planned for properly. You should consult your financial planner, CPA and estate tax attorney when deciding on this type of purchase.

The Challenges of Living Longer

Today in America, people are living in good health for as much as a decade longer than their parents. A 65 year old male today has a 50 percent chance of living beyond age 85 and a 65 year old couple has a 50 percent chance that one member will live beyond the age of 92!

There is good news in this, but also reason for concern, especially as it affects life and long term care insurance.

Life Insurance

Most of us reasonably assume that our policies will be in effect for as long as we live and will pay our heirs the face amount upon our death.

However, before the 1980’s, life insurance companies had no need to base their policies on the contingency that the insured would live past 100 years.

Indeed, most policies terminated at age 95 or 100 with the insured simply receiving the cash value (often significantly less than the death benefit) if they ‘out-lived’ the policy.

Moreover, most of us do not realize that this could be the case until it is too late to make a change.

What is more common today is that older policies were written based on an interest rate assumption being earned throughout the life of the policy.

With the historically low interest rates today, many policies are falling short of their projected investment earnings, meaning that the policy you thought would last to age 100 may only last to age 92.

Closing the Gap

There are ways to remedy this dilemma.

First, it is crucial to periodically review your policy.

Just because you are not being advised by the life insurance company of a possible short-fall, and even though you may be paying a level premium, you still need to be diligent.

Your company (or another) may be able to change your policy to their current series which may result in a lower premium. Generally, new policies are less expensive due to decreased mortality experience.

This approach may allow you to:

1) Continue to pay your current premium (or less) and extend the coverage period; or
2) Reduce the face amount of the policy and eliminate premiums.

A quick review of your policy and your unique circumstances is the first step is determining how your policy can best serve you and your beneficiaries.

Long Term Care

There are, of course, other challenges to living longer.

Uninsured health costs exceed $260,000 for a 65 year old couple including nursing home care.

(California residents pay a median rate of $93,988 per year per person (see:

In addition to purchasing supplemental insurance to cover expenses not covered by Medicare part A and B, many seniors purchase long term care insurance as a safeguard against a financially devastating stay in a nursing home.

(Warning: This is a policy that must be purchased prior to your needing nursing home care. It can not be purchased after that determination has been made).

Before buying any long term care policy, know what ‘triggers’ must be met in order for the policy to pay, whether the premiums can be increased and what services are covered.

A Dual Approach

You may also purchase a life insurance policy with a long term care rider which provides a guaranteed payout under any circumstance.

With this type of policy, you may choose for the rider to pay all or part of your long term care costs up to the face amount of the policy. Any amount remaining will then be paid as a death benefit to your beneficiaries.

As detailed in my previous ‘On Estates’ columns, careful tax planning in conjunction with a well-structured life insurance policy will allow some or all of your estate to pass tax-free to your heirs.

Life Insurance: An Array of Uses

With Federal and State income taxes rising, more retirees are concerned that their children will not be able to fully retire. In California, it’s not uncommon to see taxpayers paying over 50 percent of their earned income to taxes.

Wealthy parents are looking for ways to help fund their children (or even grandchildren’s) retirement shortfall. One of the best new plans on the market is an indexed universal life policy (IUL). The concept is fairly simple. Fund a life insurance policy on your child with level payments over a set number of years (usually 5-10 years). We want to have the smallest amount of death protection possible to still qualify as life insurance.

The cash values grow quickly since the costs are minimal due to the low death benefit. They can be invested in an account that tracks the S&P 500 index from year to year. The funds receive 100 percent of the upside of the index during the year (subject to caps of 12-14 percent) but none of the downside risk. In the event of a negative year, the policy is simply credited with zero interest and resets for the next year. For a risk-free investment, the short and long term returns are very favorable.

At some point in the future the monies can be withdrawn income tax free to help supplement retirement. The policy allows a withdrawal of your premiums paid without producing taxable income. After these monies have been withdrawn, the policy owner can continue to take out money by borrowing against the policy. The loan is a “wash loan” meaning no net interest costs. This allows for a completely income tax free distribution while still enjoying a life insurance death benefit. Upon death, whatever death benefit is left in the policy will be paid to the beneficiaries income tax free (and possibly estate tax free also).

I recently worked with someone where we set up a plan to fund $50,000 per year for 10 years for their 42 year son. His initial life insurance coverage is $2.4 million. The plan is to have him start distributions at age 65. We project about $100,000 per year will be distributed to him starting at age 65 through age 90 based on past returns. Of course, if the fund does not produce the projected results then less will be taken out and a higher return will increase the overall retirement payout.

If $100,000 were paid out tax free to him that is the equivalent of earning $200,000 per year before tax based on his current income tax burden.

One strategy is for Mom and Dad (Generation 1 or G1) to fund a plan for their children (generation 2 or G2) by utilizing annual gifts. This gets monies out of their estate and reduces possible estate taxes later. We have also seen G1 decide to keep the monies in their estate in case they need the money themselves later on. They would be the owners of the policy on G2 but turn it over to them at some point in the future or at G1’s demise. Of course, this also works well for Grandchildren (G3) utilizing the same concept except with a longer deferral period.

Lastly, many age 40-60 year old boomers hoping to retire someday do not have parents able to fund such programs so they have to fund their own policies. Often nicknamed a Super Roth, unlimited amounts of money can go into these IUL plans helping to provide income tax free payments in their retirement years.

With the current estate tax exemption of $5.34 million per person, I am finding more people worried about rising income tax rates and its effect on retirement assets than about avoiding estate tax. With indexed universal life, both income and estate tax planning can be accomplished across multiple generations.

It is always best to consult your professional advisors to assist with advice on how best to set up your plan.

Income Strategies for 70+

Record low interest rates have dramatically changed the income and investment strategies for most people 70 and older, leaving them to ask, “How do I continue to receive the income I need and balance my concerns for safety?”

The good news is, you can have your cake (income) and eat it, too (safety) by utilizing two seemingly competing strategies:

The Immediate Annuity

Consider the advantages of purchasing a single premium immediate annuity (SPIA) with the “no certain” option.

You will receive a guaranteed payment each month for the rest of your life. You cannot outlive it! The payment is typically between seven percent for a person aged 70 up to 13 percent for a person aged 85.

People are surprised at how high the income is but remember, this is a return of your principal as well as interest. And, since most, if not all, of the income you receive is coming from the investment of your own money first, it is not subject to income tax.

However, when you die, the annuity is zeroed out (this is the “no certain” option) and no proceeds are distributed to your estate, but that’s a dilemma that is easily solved by …

Universal Life Insurance

Since the annuity will now be paying you a very high income relative to what you may have been earning, allocate part of that to purchasing a universal life policy. Now when you die, your beneficiaries will inherit the principal you invested to purchase your annuity tax free through the proceeds of your life policy.

As you can see by the “max plan” comparison adjacent, the advantages of simultaneously purchasing an annuity and a universal life insurance policy provide guaranteed income and guaranteed safety. In most cases you will realize a net return between 4.5% – 6.5% per year.

What’s more, there will be very little (if any) income tax due on your annuity income until all your principal has been paid back to you (see exclusion ratio). It is also possible to have the life insurance benefit pass to your beneficiaries free of income and estate taxes.

We always use two different insurance companies for the life insurance and annuity as we are really asking each to make opposite wagers. The life insurance provider is betting you will live past your life expectancy (and so will have funded your policy 100 percent) while the annuity provider is betting you will pass before you’ve used up your principal.

Generally a minimum investment of $100,000 is needed to make this worthwhile. You need to be insurable for the life insurance coverage.

So you see, you really can have your cake and eat it, too. As with any investment, consult your legal and tax professional for advice for how best to structure such a plan.

Life Insurance revisited

Mention life insurance in social conversation and your listeners’ eyes might get glazed. Cold calls from life insurance professionals are often met with short, terse terminations. Print the words life insurance in a column headline and some readers will automatically turn to another page. Such is the unfortunate characterization of a much needed financial product and some of the professionals consulting in this asset class.

Why the range of reactions from disinterest to intense dislike? Possibly, per David Jones of David Jones Insurance, because “life insurance is the most misunderstood …and poorly explained… financial product.”

Many in the industry have narrow financial exposure, having brokered a sole asset class of life insurance; some are young in life and experience, having gained entrance through merely passage of a test (on heels of a forty hour course); some are career agents, only selling their firm’s products (unless the insurance applicant is denied in by their firm’s underwriting). Many of the products are complex and, even with clear explanation, they are misunderstood. Many of the assumptions used to create the “illustration” of how the life policy will look/expected to perform in future years have changed. And there are changes by the client: many a policy was created in earlier years to assure a family’s financial security ( e.g. basic coverage in case there is pre mature death of the breadwinner) ) but, in later years, the purpose of the life insurance policy changes to become part of a sophisticated estate tax minimization plan.

It is not for this column to sing life insurance’s praises for old or young; it is not for this column to explain the in’s and outs of all policies. But it is to sound an alarm that policyholders really need to bring their in-force policies to their existing and/or original underwriting agent to get an up-to-date assessment; the owners of the policies need to intermittently understand how the policy is performing relative to original expectations and illustrations …and understand how older policies are performing relative to new types of life insurance products previously not available. You should review your policy not just with the issuing agent or company’s representative; you should take your policy and the current in force illustrations to other insurance agents, especially those who can offer a multitude of different products from different companies. Per Jones, “Many agents owe their duties to their employer; they do not have a fiduciary duty to the client; they are brokers.”

How might a comparative assessment of your excising policy help? If you have term insurance, you can visit with your agent to see if a life insurance company is offering term at more competitive rates. It is certainly true that within a ten year period of time, term rates have dropped as term polices have been reprised to reflect improved longevity of the overall population. A new policy might reflect those new mortality tables.

If you have an older life policy, you absolutely need to understand if the policy is performing in line with the assumptions made at time of original issue. Jones says. “For policies that were issued in the 1980’s and 1990’s, a lot has changed … much to the policy holder’s detriment. Because interest rates have dropped dramatically in the past 25 years, it would be surprising if an older non-guaranteed policy is in line with original policy illustrations. These older policies assumed a continuation of then existing higher interest rates to be paid on their large bond portfolio and , in turn, the new policies assumed the insurance company would be able to pay their insured’s rates of return on the cash value at rates higher than the guaranteed minimum rate. Assumptions of 8% in 1990’s were common. Nowadays, if you want that return, you will have to make a switch to policies that give you some of the upside in the equity market.”

Secondly, you want see if a replacement policy would offer a net benefit (after the cost of a replacement policy) based on today’s more favorable mortality tables. In the past twenty to thirty years, great strides in medicine have appreciably extended mortality for men and women. When insurance was priced 25 years ago, the policy was more expensive as policyholders were thought to die sooner. Current policies have more a beneficial mortality table priced into the policies. You might think you will keep your old policy but just the insurance company to update the mortality table underlying it but Jones says, “No possible: older polices cannot switch to an improved mortality table as the National Association of Insurance Commissioners does not allow life insurance companies to change mortality rates midstream.”

The net of it is that replacement of a policy, long held to be unacceptable and costly to the insured, might really save the insured money by taking advantage of new insurance products, exiting policies that will never perform in line with expectations and might soon lapse, and taking advantage of better mortality rates.

Older policyholders should not be forlorn; there is possibly some very good news. “If they’re still healthy (able to be underwritten) and they have built up a large cash value in the older policy, they will have options to “replace” their policy with a new policy that can still get them to their goal. As odd as it sounds, Jones says, “Many who bought a policy twenty years ago when aged 60 can now find a life insurance policy at age 80 that is less costly and offers better returns.”

Bottom line: take the time to make a review of your life insurances a priority.

Are you paying too much for life insurance?

In 1990, “John” bought a $1 million life insurance policy.

At the time, the insurance company projected that it would be paid in full to age 100 with 10 payments of $15,000 each based on the interest rate at the time of eight percent.

But now, at age 73, John has been advised by the insurance company that the projection is no longer viable and that it will fall vastly short.

This is not a case of the insurance company trying to deceive someone. On the contrary, since the policy was written, interest rates have fallen to historical lows resulting in a lower return on investment than the insurance company had initially projected.

Now, instead of the policy lasting to age 100, it will now only last until John is 87.

The ramifications of this are straightforward:

A) John may die before age 87 in which case none of this will matter;

B) He may let his policy lapse, but then he will lose all of the $150,000 he has invested in it;

C) Interest rates may rise again and “extend” the coverage past age 87, but it’s unlikely that
it would extend much past age 90;

D) He could resume paying premiums again to extend the death ben¬efit back to age 100;

– OR –

E) John may find a new policy exists in the market, one with better mortality rates and better guarantees. He could then roll over the cash value he has in his existing policy via a 1035 tax free exchange, possibly reducing or eliminating future premiums while keeping or increasing his $1 million coverage.

John is like many insureds who have not kept in regular contact with their life insurance agent. Indeed, some have not seen or heard from their agent in years. Often, they have no idea that they are on a trajectory to outlive their policy and since the insurance company has no way of knowing their game plan, the burden falls on them, the policy holder (or their agent), to keep abreast of the policy’s projected coverage.

Fortunately, life insurance premium costs have fallen steadily for the last 20+ years as Americans continue to live longer. However, older policies most often do not get the benefit of these reduced mortality costs without some homework. The process is simple; here is what you should do:

1) Write the insurance compa¬ny and asked for an “in-force illustra¬tion reflecting the current premium being paid” and a second il¬lustration “projecting what premium is needed to carry it to maturity.”

2) These illustrations will determine whether you are outliving your policy. A competent life insurance professional could take these illustrations and tell you whether it is possible to get a better deal with the current company (by asking to move penalty-free to their new series with lower costs) or from another. Of course your health will factor into whether this is possible or not. Be sure the person assisting you has access to all the major carriers in the marketplace. There is a vast difference in costs depending on your age and health.

It’s never too late to have your policy reviewed. Even people age 80 and older still have plenty of options when it comes to making sure you have the best policy for your situation.


Life Insurance Premium Financing

Individuals with the need for large amounts of life insurance for estate liquidity purposes will also need to manage large premium payments. This can often present a challenge. It is not easy for some families to generate large after tax cash flow and as the policy is usually owned by an irrevocable life insurance trust (ILIT) there are limitations as to how much can be gifted each year by each spouse (generally limited to $13,000 per person listed as a possible beneficiary in the trust).

By utilizing a bank (or other loan facility), the trust is able to borrow the necessary premiums needed to fund the policy at extremely attractive rates. There are no gifting issues to deal with since this is a loan to the ILIT and not a gift from the insured. Most loans are based on LIBOR plus a spread of 1-3% based on the size of the loan. An average rate today would be around 2.5%. If we look back to 1995, we find that the one month LIBOR rate was 6%, in 2000 it was 2.5% and today it stands at about .30%. Some arrangements require that some or all interest be paid annually but more are allowing for a “roll up” of interest into the loan eliminating the need to pay any monies toward the loan.

Collateral for the loan is generally required and is an amount equal to the difference between the cash surrender value of the policy and the outstanding loan. These collateral monies can often be invested in stocks, bonds, etc. just as you would now. The lender simply has the collateral assets managed in their custody.

One of the disadvantages of premium financing in the past has been the death benefit would be reduced by the outstanding loan. Some life insurance carriers have designed policies where the death benefit rises each year by the amount of the loan thus providing the full face amount to the ILIT at the insured’s death! There are always risks when borrowing for long periods of time but we have found the arrangement very favorable for our clients since 1995.

There are many nuances to review and due diligence with your advisors is a must; however, life insurance premium finance is worth considering for high net worth individuals or families.

Life insurance policy review- a must for insured’s over age 65

John Simms* bought a $1,000,000 life insurance policy in 1990 to help his children pay possible estate taxes when he died. He remembers the company projection showing him 10 payments of $15,000 would be due and the policy would be “paid up”.

Today, John is age 73 and now realizes that that the 1990 projection of 10 payments has fallen vastly short of paying up the policy. This is largely due to the fact that interest rates have fallen to all-time lows. In 1990, the assumed interest rate for the policy was 8%. Today, his policy is being credited at 4%. The effect of this decline in rates is that the policy will not last to “maturity” (generally age 100 with older polices). John’s policy will now last to age 87 based on the current interest rate of 4% and no further payments.

The ramifications of the above are:
A) John may die before age 87 so everything worked out okay.
B) Interest rates may rise again and “extend” the number of years past age 87. Although it is doubtful it would extend more than a few years.
C) John could decide to start paying premiums again to extend the death benefit back to age 100 or some other later age. The later he waits, the higher the costs to extend the years.
D) John may find that a new policy with better mortality charges and better guarantees may enable him to roll over the cash value via a 1035 tax free exchange and pass less than other alternatives.

John’s story exhibits all the reasons why a life policy review is critical. The insurance company was originally told to bill the insured (or owner) 10 payments of $15,000. Unless the owner or agent ask this to be changed, no further bills will be sent and a big surprise would await John at age 87!

Many clients we see today have relocated to Southwest Florida from somewhere else and have not seen or heard from their agent in years and just assume all is okay as the insurance company would tell them if there were a problem. The insurance company does not have the ability to know what every policy owner’s game plan is so the burden falls on you (or your agent).

Fortunately, in my 27 years in the life insurance business more than 70% of the people I meet with such problems described above end up in a better situation than when we met them. It is not uncommon to also be able to reduce your current premium costs by 25%+.

Insurance companies continue to reduce costs of new policies because people are living longer. However, these lower costs are for new polices sold and the existing business continues to be billed at the current mortality rates at the time of purchase.

Step 1 is to write the insurance company (policy owner should send a letter) and ask for an inforce illustration reflecting the current premium being paid. This is simply a new snapshot of what the carrier projects going forward based on today’s interest rates. A second illustration should be ordered asking for a projection of what premium is needed to carry to maturity. (I do this for people I meet but you could do it yourself too).
This will give you current data to know whether you have a problem or not. Regardless of the outcome, we can use this information to see what other options are available with your current company as well as the rest of the top companies in the industry.

Step 2 would be to take a brief medical to enable us to shop and negotiate for the best rates possible. It is vital that all the top carriers bid on the case. This process is free and takes a couple of months. Once all the bids come back you can see a clear summary of options whether they be to keep your existing coverage as is or to consider changing companies and policies.

It is never too late to go through a policy review. It is not uncommon to meet insured’s over age 80 who still have plenty of options.


The Power of Life Insurance in a Trust

For most of us, life insurance is a stand-alone product, a means of monetizing the insured’s life value at the time of his or her death and thereby supplementing his or her estate. However, this benefit can be greatly increased when life insurance is placed in a trust.

Whether the trust is revocable or irrevocable, each goes into effect while you are still alive, although assets placed into an irrevocable trust typically can not be retrieved by you but are not taxed in your estate at death.

Revocable Trusts
Also known as Living Trusts, revocable trusts provide an excellent vehicle to avoid probate which, in turn, reduces legal fees, minimizes privacy issues and puts your bequests into the hands of your heirs more quickly and efficiently.

However, revocable trusts typically will not shield your estate from federal tax, but merely provide benefits while you are alive as noted above and hopefully make for a smoother transition of assets when you die.

Irrevocable Trust
Also known as an Irrecovable Life Insurance Trust, ILITs are specifically created to own life insurance but can own other investments also.
The ILIT becomes both the owner and the beneficiary of one or more life insurance policies typically written on the life of the grantor (the creator of the trust). When properly structured, proceeds from that life insurance are not subject to income tax or estate tax upon the insured’s death. Administration of the ILIT must be done by an independent trustee (not the grantor of the trsut)

Here’s how they work:
The grantor sets up a trust for the benefit of his heirs and funds it through annual cash contributions. The gifting limits, adjusted annually for inflation, are $14,000 per beneficiary for this year (2013). If the grantor were to name three beneficiaries, for example, he or she could gift a total of $42,000 ($14,000 x 3) to the trust in the current year. )If he were married this could be $84,000 per year)
The grantor could also choose to gift all or part the lifetime exemption amount which is currently $5,250,000.

The Power of Life Insurance

Now here’s the power play. Regardless whether the grantor makes annual contributions, or gifts a partial or full lifetime solution, he or she could put that money toward the purchase of life insurance. Why? First of all, the return on investment is guaranteed to be many fold over the total amount of the contributions made. For example, an annual contribution of $42,000 will support as much as a $1,750,000 life insurance benefit for a healthy 70 year old man. Secondly, that benefit will be passed on to the heirs income and estate tax-free.

Indeed, there is not a safer, more profitable way of investing your trust funds than through the purchase of life insurance in an irrevocable life insurance trust.

ILITs have other advantages as well:

1) Liquidity – for estate taxes and other expenses (remember, death benefits are received income and estate tax free by the trust);
2) Equalization of inheritances / transfer of a family business;
3) Creditor Protection – proceeds from life insurance received by the ILIT are protected from creditors with rare exception; and,
4) Asset Management – By using a trusted advisor, trust company or appointed family member as trustee, the ILIT provides effective management of insurance proceeds which in turn provides added peace of mind for the grantor.

Most larger estates will utilize both revocable and irrevocable trusts and some non-taxable estates may still benefit from the revocable trusts.

But in the world of estate planning, the ILIT reigns as one of the most powerful planning tools for minimizing federal estate taxes and / or paying those taxes with tax free life insurance proceeds.

As always, the advice of a wills and estate attorney together with other advisors (CPAs, CFPs, and life insurance experts) is vital in optimizing your estate plan.