Comprehensive Income Tax, Estate Tax, Retirement Planning & Business Planning...


To meet your unique planning goals and objectives, it is important that we look at your entire financial picture. To this end, we work with our clients to provide comprehensive planning to reduce and or eliminate income and estate taxes, provide sufficient assets in retirement, and provide business and exit planning strategies for business owners and key employees.

What follows is a brief description of some of the strategies we use to accomplish these objectives, including a brief description of a common funding vehicle for many of these strategies, life insurance.

Life Insurance

Life insurance is a unique asset in that it serves numerous diverse functions in a tax-favored environment. Life insurance proceeds are received income tax free and, if properly owned by an Irrevocable Life Insurance Trust, life insurance proceeds can also be received free of estate tax.

Some of the frequent uses for life insurance include:

  • Wealth Creation: Where age or other circumstances have prevented one from accumulating a desired level of wealth, life insurance can create instant wealth, for example, to build an estate, to replace a key employee, to buy out the interest of a business co-owner at death, or to pay off a mortgage.
  • Income Replacement: Life insurance can provide wealth to replace income lost upon the premature death of the family “bread winner.”
  • Wealth Replacement: Life insurance can provide the liquidity to pay estate or capital gain taxes after death. Life insurance can also be used to replace the value of gifts to charity or non-family members.

There are several types of life insurance, including term, permanent, and survivorship or second-to-die insurance. Term insurance, which includes annual renewable and fixed-level term (for example, 20-year Level Term) is temporary in that at the end of the term, the policy terminates and the insured must reapply at the then-going rates, based upon age, health, etc. Therefore, term insurance is often recommended for temporary needs.

Permanent insurance, of which there are several types including whole life, universal life, and variable universal life, are intended to remain in-force until the insured’s death, and thus are often recommended for permanent needs.

Survivorship or second-to-die insurance pays out at the death of the survivor. Therefore, second-die insurance is often recommended in those circumstances where the liquidity need arises only at the second death; for example, with a married couple, the need for liquidity to pay estate taxes.

Life Insurance Owned by a Wealth Replacement Trust

At death, the death proceeds of life insurance you own are included in your estate for estate tax purposes. This adverse result can be avoided by transferring new or existing life insurance policies to an irrevocable life insurance trust that would become the owner and beneficiary of the policy. The dispositive provisions of the trust would mirror the provisions of your will or revocable living trust. While this trust will be irrevocable, an independent trust protector can be granted significant flexibility to modify the terms of the trust to account for unanticipated future developments, such as changes in the tax laws or your personal circumstances.

If you are concerned about accessing the cash value of the insurance during your lifetime (e.g., as part of retirement), the trust can be carefully drafted so that the trustee can make loans to you during your lifetime or so that trustee can make distributions to your spouse during your spouse’s lifetime. Alternatively, we can structure the trust so that it creates a legacy for your descendants if that is your goal. Even with these provisions, the life insurance proceeds will not be included in your estate for estate tax purposes. 

These trusts can be created by you individually (and typically own an individual policy on your life) or they can be created by your and your spouse jointly (and own a survivorship policy. Whether it is an individual or joint trust will be depend upon the specific purposes for the insurance.

Buy-Sell Planning

As you probably know, many small, closely held businesses fail to survive beyond the first generation – and an even smaller number survive beyond the second generation. One reason: failure to plan for the disposition of the business at the owner’s death, disability, or retirement. A second reason: the death or disability of a key employee. Have you thought about what will happen to your business in these circumstances? This may be one of the toughest issues that you will have to face and, as a result, proper planning is absolutely essential.

Buy/Sell Arrangements: You can successfully plan for the future disposition of your business through a properly structured buy-sell agreement. This agreement can provide for the sale of your business to a co-owner, employee, family member or other interested party. Not only does it create a ready market for your business, it also establishes the method for valuing the business at the time of sale.

The agreement should also include how payment will be made for the business interest. Options include: cash payments from savings, borrowing, installment sale, or life and/or disability income insurance. Since death and disability can occur without notice, planning to save for these events may be impractical. A savings account established for this purpose may not have accumulated sufficient funds when they are needed. With the loss of an owner who is a key figure in the success of your business, loan institutions may be reluctant to lend money to the company at the precise time it is needed. Selling the business through an installment sale requires that the former owner’s heirs rely upon the future success of the business in order to receive payments.

A buy-sell agreement funded with life insurance is often the most economical and practical solution when a business owner dies. If you use life and/or disability income insurance to fund the obligations under the arrangement, you can be assured that CASH will be available when you need it. Life insurance also covers the risk of premature death by providing an immediate death benefit that is generally received free of federal income tax at the death of the insured owner.

Where cash value life insurance is used, the life insurance policy may serve double duty, providing both death benefit and cash value that accumulates on an income tax-deferred basis and that can be accessed through withdrawals or loans for lifetime buyouts.

Key Employee Protection: When a key employee, on whose talents, managerial skills and experience you depend on is lost because of disability or death, the financial loss to your business can be devastating. Creditors may become nervous about extending credit. The goodwill you have worked so hard to establish may be diminished by a change in management. But you can protect your business from such a loss through the use of life or disability income insurance.

Life insurance proceeds or disability income benefits will be paid to the business to be used to help meet debt obligations, offset lost sales or cover the expenses associated with recruiting hiring and training replacement personnel.

Stay Bonus

A Stay Bonus is an inducement to your key employees to remain with the company after your death to preserve the enterprise value of the business. It is a contract with your key employees which provides that they will receive a significant bonus in every paycheck for a two or three year period after your death if they stay with the company.

The Stay Bonus is funded with life insurance on your life. This life insurance is owned by an irrevocable life insurance trust that is earmarked to pay the bonus. Since the life insurance is owned by the life insurance trust, the insurance proceeds will not be subject to estate tax at your death.

Planning for Tax-Qualified Plans

Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value. Therefore, beneficiaries who receive these assets do so subject to income tax. If your estate is subject to estate tax, the value of these assets may be further reduced by the estate tax. And if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax. All tolled, these assets may be reduced by 70% or more.

There are several strategies available to help reduce the impact of these taxes:

§         Structure accounts to provide the longest term payout possible.

§         Name a Retirement Trust as Beneficiary

§         Take the money out during lifetime and pay the income tax, then gift the remaining cash either outright or through an irrevocable life insurance trust.

§         Take the money out during lifetime and buy an immediate annuity to provide a guaranteed annual income, to pay the income tax, and to pay for insurance owned by a wealth replacement trust.

§         Name a Charitable Remainder Trust as beneficiary with a lifetime payout to your surviving spouse.  The remaining assets would pass to charity at the death of your spouse.

§         Give the accounts to charity at death.

Structure Accounts to Provide the Longest Term Payout Possible.

Structuring the accounts to provide the longest term payout possible is the most simple and therefore the most common option. With this strategy you name beneficiaries in such a way that requires them to withdraw the least amount possible as required minimum distributions, or those distributions that must be made in order to avoid significant penalties. To achieve this maximum “stretch-out,” you should name individuals who are young (e.g., children or grandchildren, although there are special considerations when naming grandchildren or younger generations) as the designated beneficiary of your tax-qualified plans. Significantly, the beneficiary should take only those minimum distributions that are required by law. The younger the beneficiary, the smaller these required minimum distributions.

This can be accomplished by naming the beneficiaries individually or by directly naming their shares of a trust. Frequently, the surviving spouse is named as the primary beneficiary so that he or she may roll over the account into the surviving spouse’s name and treat it as his or her own account. Alternatively, if you are concerned the loss of creditor or divorce protection by naming the surviving spouse individually, you can name a trust for the survivor’s benefit.

Name a Retirement Trust as Beneficiary to Ensure the Longest Term Payout Possible.

Naming a beneficiary outright to accomplish tax deferral with a tax-qualified plan has several disadvantages. First, if the beneficiary is very young, the distributions must be paid to a guardian; if the beneficiary has no guardian, a court must appoint one. Another disadvantage is the potential loss of creditor protection or bloodline protection, particularly where the named beneficiary is the surviving spouse. A third, practical disadvantage is that many beneficiaries take distributions much larger than the required minimum distributions, often consuming this “found money” in only a couple of years.

However, by naming a trust as the beneficiary of your tax-qualified plans, you can ensure that the beneficiary defers the income and that these assets remain protected from creditors or a former son or daughter-in-law. A stand-alone Retirement Trust (separate from your revocable living trust and other trusts) can help ensure that it accomplishes your objectives while also ensuring the maximum tax deferral permitted under the law. This trust can either pay out the required minimum distribution to the beneficiary or it can accumulate these distributions and pay out trust assets pursuant to the standard you set in advance (e.g., for higher education, etc.)

Take the Money Out During Lifetime and Pay the Income Tax, Then Gift The Remaining Cash Either Outright or Through a Wealth Replacement Trust.

Another option is to take the money out during lifetime and pay the income tax, then gift the remaining cash either outright via lifetime giving or through an irrevocable life insurance trust. If you desire to make the gifts through an irrevocable life insurance trust, this strategy makes the most sense where you are in good health and able to obtain life insurance at reasonable rates. Unlike the IRA or retirement plan, the beneficiaries will receive the life insurance proceeds free of income and estate tax and, under certain circumstances, free of generation-skipping transfer tax.   

Take the Money Out During Lifetime and Buy an Immediate Annuity to Provide a Guaranteed Annual Income, to Pay the Income Tax, and to Pay For Insurance Owned by a Wealth Replacement Trust.

Another option is to withdraw your IRA or qualified plan and purchase an immediate annuity, which will generate a guaranteed income stream during your life (or during the lives of you and your spouse). You can use this income stream to pay the income tax caused by the withdrawal, and also pay the premiums on life insurance owned by a Wealth Replacement Trust. Again, this strategy makes the most sense where you are in good health and able to obtain life insurance at reasonable rates. Unlike the IRA or retirement plan, the beneficiaries will receive the life insurance proceeds from the Wealth Replacement Trust free of income and estate tax and, under certain circumstances, free of generation-skipping transfer tax.

Alternatively, it may make sense to use other assets to purchase the immediate annuity, saving the IRA for family members. This strategy makes the most sense when you can defer the income tax on the IRA or qualified plan for many years by naming a very young beneficiary.     

Name a Charitable Remainder Trust as Beneficiary With a Lifetime Payout to Your Surviving Spouse; the Remaining Assets Pass to Charity at the Death of the Your Spouse.

Yet another option is for you to leave the accounts to a Charitable Remainder Trust (“CRT”), a type of trust specifically authorized by the IRS. These irrevocable trusts permit you to transfer ownership of assets to the trust in exchange for an income stream to the person or persons of your choice (typically you or, if you are married, your spouse or you and your spouse) for life or for a specified term of up to 20 years. With the most common type of Charitable Remainder Trust, at the end of the term, the balance of the trust property (the “remainder interest”) is transferred to a specified charity or charities. Charitable Remainder Trusts reduce estate taxes because you are transferring ownership to the trust of assets that otherwise would be counted for estate tax purposes.

Naming a Charitable Remainder Trust will allow the accounts to pass free of any estate taxes and will pay to the surviving spouse an annual income stream, either in a specified dollar amount or the lesser of the trust income or a percentage of the net fair market value of the assets.

With this option, a testamentary CRT may be established upon the death of the first of you to die.  The survivor is guaranteed an annuity for his or her lifetime that will help maintain his or her lifestyle should the family’s income stream be insufficient. The property will only go to the CRT at death.  It is only at death or incompetency that this aspect of your estate plan becomes irrevocable. However, even after the first death occurs, the survivor still has the ability to change which charities are to receive the assets or to bypass the CRT entirely. At the second death, the property in the CRT will pass to charity.

Give the Accounts to Charity at Death

Another relatively simple option is for you to give the accounts to charity at your death or at the death of the survivor of you and your spouse if you are married. This strategy is particularly attractive if you intend to make gifts to charity at your death and the question is simply what assets should you select. As a tax exempt entity, a qualified charity does not pay income tax and therefore receives qualified retirement plans free of income tax.

In other words, if your beneficiary is in a 35% tax bracket, a $100,000 IRA is worth only $65,000 in his or her hands, but worth the full $100,000 if given to charity. Therefore, it makes economic sense to give these assets to charity and give to your children or other beneficiaries assets that are not subject to income tax and which receive a step-up in basis to their date-of-death value at your death.

These are only a few of the more common planning solutions necessary irrespective of the state of the federal estate tax. The right solution for you will depend upon your particular goals and objectives as well as your particular circumstances.




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