InsuranceNewsNet Magazine February 2012 : 22
FEATuRE | BEWARE THE TAx MOnsTER Consider Some Strategies Since each client’s situation is unique, addressing the tax monster is not a mere matter of saying, “Here’s a life policy. It’s all you need.” Advisors who are refresh-ing their tax-planning strategies will need to be ready to talk about taxes in various ways, in view of the current cli-mate. Here are five ideas to consider: 1. Life Insurance Trusts. David Mal-kin, president and CEO of NJL&C, has been talking with wealthy clients about the value of using life insurance trusts, FINANCIAL STRESS: Nineteen percent of 2,000 American adults say they are coming up short on monthly income, while 39 percent say they are just getting by. Just 40 percent say they are making enough to save. Source: The Citibank Economic Pulse survey conducted in mid-November 2011 by Hart Research Associates. especially dynasty trusts. The clients tend to be still-healthy grandparents in their 60s and early 70s, who have $5 mil-lion or more, but some have had smaller potential estates. He nudges them to put some of their money into a trust that then purchases a second-to-die life policy, typically for $1 million but sometimes more. Often, those named as heirs are grandchildren, great grandchildren and even genera-tions yet to be born. “People love it,” he says, because it creates a huge legacy that enables elders to ensure that their heirs, throughout the generations, will receive annual gifts. “They like the fact that the heirs will receive an annual check from their deceased grandparents or great grand-parents,” Malkin says, adding that the likelihood is high that the future 22 InsuranceNewsNet Magazine February 2012 generations will remember the name of the person who arranged for that income. As for tax benefits, he points out that the client pulls money out of the estate and puts it in the trust, thus removing the money from estate taxes. In addi-tion, “the gifts are tax-free to the recipi-ent (unless the trust earns income that is not distributed, in which case the money is taxable to the trust).” If taxes will be going up, this can be an important consideration, he says, because “everything grows tax deferred.” Upon the death of the grandparents, he cautions, the trust-ees do have to invest the money wisely so it will continue to grow and also to minimize taxation. The invest-ments might include tax-free bonds, in years when bonds are doing well, for i n st a nce, or rea l estate or stock port-folios. The point is, he says, “that trust plan-ning involves ‘tax thinking’ all the way through.” 2. Back to Basics. What advisors need to do is not adopt a tax strategy for a rising tax environment so much as adopt a back-to-basics approach to planning, says Foster of Pennsylva-nia. Aggressive tax strategies may not work for typical clients of most insur-ance agents, he explains. His reason: the typical agency client tends to have a net worth range of $1 million to $3 million, not enough to require the intensive tax analysis and structures needed by the super-wealthy. In addition, if tax strate-gies are aggressive, they can raise ques-tions that can flag an IRS audit down the road, he cautions. 3. High-Net-Worth Approach. Fos-ter recommends looking carefully at the client’s net worth. Tax issues could be important for clients with discretionary funds in the $3 million to $5 million or more range, he says. These clients tend to be most concerned about the econ-omy (“will my business stay afloat in these hard times?”) and secondarily about tax increases (“will taxes go up?”). In such cases, he suggests presenting life insurance as an asset class. In this scenario, the advisor would recommend moving a portion of the discretionary funds into a cash value life policy, while the remainder stays in stocks, mutual funds or other vehicles. An indexed life policy would be good in these situations, he says, “because these policies generate decent returns that grow tax deferred.” What the advisor should not do is present the policy as a death benefit sale, Foster contends. These clients are not focusing on that, he says. The life insurance industry “hates” the idea of presenting life insurance as an investment (because it is insurance), Foster allows. “But if the advisor pres-ents the life insurance purchase as a way to reposition and reallocate exist-ing assets into another asset class, that is planning, not an investment strat-egy.” What’s more, these clients like to do planning. Very high-net worth people, especially those with $20 million and up, will be interested, he predicts, because at that asset level, estate taxes are very impor-tant. But he thinks people with more modest discretionary funds, such as a professional earning $500,000 a year, may not be interested, due to uncer-tainty over their future cash flow or to a desire to avoid using products with sur-render charges. 4. Mid-Market Approach. Vagnozzi of Pennsylvania says he is finding peo-ple in the mid-market who are increas-ingly interested in tax solutions along with safe-money solutions. In fact, he says he has been selling life insurance to Generation-X people who gradually roll money out of their individual retirement accounts (IRAs) and into life policies. IRAs do provide tax-deferral, and Gen-Xers know that. However, he says, after suffering stock market losses in their accounts due to the recession and the ensuing volatility, many Gen-Xers tell him they consider it “ludicrous” to lock
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