Laurence Williams

In the current economic climate, characterized by significant challenges in government spending and mounting debt, financial advisors play a critical role in guiding high-net-worth individuals toward sound financial decisions. Recent reports from the U.S. Department of Treasury emphasize the urgent need for strategic planning and shed light on the nation’s alarming financial health and the imperative need for diversifying financial portfolios.

The February 2024 Treasury Statement reveals a stark reality: U.S. government spending has soared to unprecedented levels, far surpassing revenue intake. Shockingly, the IRS has allocated a substantial 63 percent of the individual income taxes collected this past month toward servicing the national debt interest. This trend is alarming. Projections indicate a staggering $350 billion solely for debt servicing through fiscal year 2024, surpassing the collective vital expenditures for veteran benefits, education, commerce, and housing.¹

Financial advisors must equip high-net-worth individuals with the necessary tools and strategies to shield them from financial devastation from potential future tax liability. It is indisputable that these considerations are critical for providing clients with the best service. However, there is a noticeable deficit of financial professionals who offer services to their affluent clients for strategically alleviating future tax liability.

We must fill this critical gap by implementing beneficial strategies tailored to the unique needs and objectives of the clients with future tax threats in mind. While there are many strategies financial professionals can consider, I believe these three are worth considering: Estate Planning, Qualified Charitable Distributions (QCDs), and Charitable Bequests.

My goal in this article is to provide the foundational springboard to launch your services to new heights by highlighting the benefits of offering estate planning, presenting solutions to looming tax threats, and providing alternatives for a range of clients since nothing in financial planning is one size fits all.

Many financial advisors overlook estate planning despite acknowledging it as a crucial aspect of financial management, particularly for high-net-worth individuals. As a cornerstone of their financial strategy, estate planning entails a holistic approach to wealth management, tax mitigation, and ensuring the smooth transfer of assets to chosen heirs or beneficiaries. Utilizing trusts, wills, and various legal instruments, estate planning empowers individuals to safeguard their legacy, secure provisions for their loved ones, and contribute to charitable endeavors aligned with their values.

For instance, estate planning can be advantageous for high-net-worth individuals in many vital aspects of their financial well-being:

• Tax Efficiency: Properly structured estate plans can minimize estate taxes, preserving the wealth for future generations.
• Asset Protection: Trusts and other estate planning tools shield assets from creditors and potential threats, safeguarding wealth for heirs.
• Control and Flexibility: estate planning enables individuals to dictate asset distribution, ensuring their wishes are honored even after they are gone.

By incorporating comprehensive estate planning into financial strategies, advisors can help high-net-worth clients secure their legacies, protect assets, and confidently navigate complex tax landscapes. Now that we have highlighted the benefits of offering estate planning, the next step is to consider the solutions to looming tax threats.

One question to ask is how our high-net-worth clients plan on paying for that looming tax bill. The government will inevitably want their money, and their sights are on the top income earners in the country. With the target on their backs, it is vital to consider how these clients are expected to pay those taxes so you can develop the best course of action.

Essentially, there are three popular ways for these clients to pay estate taxes:

• Pay cash: This may not be possible for many families, but once that money is gone, it is gone.
• Sell assets: Homes, businesses, equipment, or other assets may need to be sold to gain liquidity for tax purposes. (Not ideal for family businesses.)
• Purchase life insurance: In most cases, the least expensive of these three options is to take advantage of life insurance proceeds. Additionally, with a properly designed estate plan, beneficiaries will receive a tax-free death benefit from the policy. It might make sense in some cases to create an irrevocable life insurance trust (ILIT) depending on the estate’s value, creating an exemption that removes the insurance policy from being counted as an estate asset.

Furthermore, should the estate beneficiaries lack sufficient liquidity, they might explore borrowing options to cover estate taxes, such as utilizing Graegin loans or section 6166 election.

A Graegin loan offers the chance to utilize an external lender, rather than relying on the IRS, to finance the estate tax loan. This lender can be an outside bank or a related party, such as a family limited partnership or irrevocable gift trust, provided that the loan is genuine.

A Graegin loan has the following requirements:

• The estate must be illiquid;
• The loan must be at a fixed rate; and,
• The loan must prohibit prepayment.

Section 6166 allows an executor to defer the payment of federal estate tax associated with owning a closely held business. These postponed payments can be extended for up to fourteen years and nine months following the business owner’s passing.

Section 6166 deferral is available if the estate meets the following requirements:

• The decedent must have been, at death, a citizen or resident of the United States.
• The estate holds an interest in a closely held business.
• The interest constitutes more than 35 percent of the adjusted gross estate (AGE) and certain other requirements are met.
• The executor elects, on a timely filed estate tax return, to pay a portion of the estate tax and generation skipping transfer tax attributable to the closely held business resulting from direct skips.

For individuals engaged in estate planning, life insurance shields against the threat of potential lifestyle setbacks and is especially crucial when assessing the adequacy of assets to sustain the accustomed lifestyle of surviving family members. Furthermore, considerations extend to covering long term care and end-of-life healthcare on top of other potential curveballs in their financial plan.

Additionally, future earnings represent a substantial asset for those still actively earning income. For example, projecting future earnings of $1 million annually over 25 years until retirement yields a significant value of $25 million, even without factoring in potential income increases. Ensuring adequate life insurance coverage to replace this income secures the family’s future lifestyle and generational wealth, enabling clients to maintain their current residence, fund their children’s education, cover medical expenses, and enjoy life without financial strain.

Now that we have established the benefits of estate planning and the advantages of life insurance, the pivotal question arises: What type of insurance and how much do you need? These are the primary considerations for individuals considering the purchase of life insurance.

There are two popular types of life insurance:

1. Term Life Insurance: This covers an individual for a specified number of years. Term life insurance solely offers a death benefit without cash value accumulation. It is often more affordable than permanent life insurance, making it a budget-friendly option. While premiums remain consistent throughout the policy’s duration, costs may rise in later years. Term is a temporary product for a potentially permanent problem.
2. Permanent Life Insurance: This is a type of life insurance that provides coverage for the insured’s entire lifetime, as long as premiums are paid as specified in the policy. There are several types of permanent life insurance, including whole life insurance, universal life insurance, and variable life insurance, each with its own features and benefits. This provides a permanent solution for a permanent problem. For many high-net-worth (HNW) individuals, the consideration of a survivorship policy may be advantageous. These policies are typically preferred for healthy couples due to their lower insurance costs and the protection they afford to both individuals. Moreover, the life insurance need is fulfilled through the tax-free death benefit upon the passing of the second or surviving spouse.

Finally, there is Permanent Financed Life Insurance. Despite sharing the characteristics of permanent life insurance, the financing aspect allows participants to purchase more death benefits and living benefits than they could afford independently. By injecting additional cash into the policy through financing, the cash accumulation within the policy can reach substantially higher levels. With the advent of the greatest wealth transfer in history, premium financing emerges as an exceptional choice for clients with significant assets through gifting insurance to their children and grandchildren.

It’s crucial to acknowledge that premium finance introduces additional risk, particularly if lending rates remain elevated over an extended period and the underlying policy yields fall short of expectations. However, there are advantages to premium finance: The grantor often allocates interest to the trust instead of funding the entire premium, potentially leading to greater tax efficiency. Additionally, the overall outflow to the trust may be reduced compared to a non-financed policy, enabling them to preserve more capital that could generate higher returns elsewhere.

While the insurance policies mentioned are valuable assets in estate planning, it’s essential to recognize that some clients may not meet the qualifications for these policies. For our high-net-worth clients, we often suggest utilizing gifts to acquire ILIT-owned life insurance, which proves sufficient for many. Nevertheless, individuals with significant estates may find that the $18,000 (2024 limit) annual gift per estate beneficiary does not effectively reduce their estate values. In essence, attempting to reduce their estate by $18,000 multiplied by two spouses in the form of annual gifts out of the estate is like facing off with a freight train armed with a BB gun.

Moreover, certain families believe that their heirs will inherit ample wealth but are hesitant to allocate a significant portion of their estate to the IRS. For individuals in this situation, charitable planning becomes a viable option, encompassing various strategies such as Charitable Remainder Trusts (CRTs), Qualified Charitable Distributions (QCDs), and Charitable Bequests.

Qualified charitable distributions (QCDs) and charitable bequests could be attractive solutions for these clients. QCDs enable individuals aged 70½ or older to donate up to $100,0000 directly from their IRAs to qualified charities without incurring income tax on distributions.
Benefits of QCDs for high-net-worth individuals include:

• Tax Savings: QCDs allow individuals to fulfill required minimum distributions (RMDs) while reducing taxable income, potentially resulting in significant tax savings.
• Charitable Impact: QCDs empower individuals to support causes they care about, making a positive difference in communities.
• Simplicity and Efficiency: QCDs offer a straightforward way to donate to charity, benefiting clients and designated charitable organizations directly.

The second alternative worth considering is strategically taking advantage of charitable bequests for clients who want to ensure that future generations are cared for. Charitable bequests offer a powerful means of supporting beneficial causes while preserving family wealth. A charitable bequest designates a portion of an individual’s estate as a donation to charitable organizations of their choice upon their passing. As it stands today, individuals have the option to elect a one-time distribution of up to $50,000 from an individual retirement account to charities through a charitable remainder annuity trust, a charitable remainder unitrust, or a charitable gift annuity. Each of these options is funded exclusively by qualified charitable distributions.²

Benefits of Charitable Bequests for high-net-worth individuals include:

• Legacy Preservation: Charitable bequests enable individuals to leave a lasting impact on causes they care about, ensuring their values endure for generations.
• Tax Advantages: Charitable bequests can reduce estate taxes, resulting in significant tax savings for clients and their heirs.
• Flexibility and Control: Charitable bequests allow clients to retain control over asset distribution, ensuring the achievement of philanthropic goals while honoring personal wishes.

By integrating QCDs and charitable bequests into financial planning discussions, advisors can help high-net-worth clients maximize charitable contributions while minimizing tax burdens and creating legacies of generosity, aligning financial goals with philanthropic values. Implementing QCDs, charitable bequests, and strategic insurance vehicles can considerably expand the value you offer to clients in their estate plans.

At this precarious and volatile point in our economic state, the call to diversify financial portfolios grows louder and more urgent. Now, more than ever, proactive financial planning provides resiliency in the face of threat, security in the face of risk, and peace of mind in the face of the unknown. I hope this article inspires you to consider furthering the solutions and stability you provide clients through the strategic use of estate planning, qualified charitable distributions, and charitable bequests.

Reference:

1. https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0224.pdf.
2. https://www.irs.gov/publications/p526.

Businesses serve as the lifeblood of our economy, driving innovation and progress. In the intricate landscape of business, cultivating and retaining top-level executives is pivotal for sustained growth and success. As a financial advisor, you’re well aware of the multifaceted challenges businesses face in attracting and keeping valuable talent. In this article we’ll delve into a strategic approach that combines the power of life insurance with executive retention, offering you a dynamic tool to enhance your client’s corporate structure.

For business owners, fostering an environment that attracts, retains, and empowers top executives is a cornerstone of success. Traditional benefits like 401k plans, healthcare, and remote work options are common incentives. However, the integration of indexed universal life insurance (IUL) introduces a novel dimension to the spectrum of executive benefits. Recent studies¹ by the Life Insurance Marketing Research Association (LIMRA) reveal that 29 percent of Americans with life insurance felt underinsured, while a staggering 59 percent lacked any insurance coverage altogether. This indicates a growing awareness of the value of life insurance in today’s ever-evolving economic landscape. While conventional policies such as term insurance are familiar, our focus rests on the dynamic potential of IUL.

Indexed universal life policies offer more than just a death benefit. They serve as a robust platform for retirement planning and house a range of tax advantages, including tax-deferred growth, tax-free distributions, and even provisions for long term care benefits. These features set the stage for our strategic framework, known as the Executive Bonus 162 plan.

The term “162 bonus plan” derives from IRS guidelines that permits employers to provide employees with bonuses in the form of life insurance policies. This innovative approach presents a winning formula for both employers and executives. Imagine a graph titled “Never Lose Another Employee.” It’s as straightforward as it sounds—an employer identifies a top executive for insurance coverage and, once approved, premium payments flow from the employer. In the event of the executive’s passing, the death benefit seamlessly transfers to beneficiaries free from income tax implications. The beauty of an IUL lies in its multifaceted utility. Executives can access the accumulated cash value and tax advantages, creating a comprehensive financial solution tailored to their needs.

Employers stand to benefit significantly from integrating the Executive Bonus 162 plan. Notably, this strategy serves as a powerful retention tool. By offering a comprehensive benefits package that includes tax advantages, retirement income planning, and a death benefit for their families, employers demonstrate a genuine commitment to their executives’ well-being. This personalized approach differentiates them from competitors and showcases their dedication to fostering a nurturing work environment. Moreover, the premiums paid into the policy are fully tax-deductible for the employer, creating a mutually beneficial arrangement. The plan’s implementation is streamlined, particularly in today’s climate. With accelerated underwriting programs, clients can secure substantial coverage without cumbersome medical exams or extensive documentation.

One of the most striking advantages of the Executive Bonus 162 plan is its customization potential. Unlike the blanket insurance advice often associated with group insurance, IUL policies can be meticulously tailored to suit each executive’s unique needs. This approach recognizes the individuality of each executive and resonates with the overarching philosophy of providing personalized financial solutions. One of the most compelling aspects of the Executive Bonus 162 plan is its pre-approval by the IRS. This solidifies its legitimacy and effectiveness, assuring employers of a strategically sound approach. While employers stand to gain substantially, let’s not overlook the advantages for the executives themselves. Executives can enjoy customized plans that can include grossed-up bonus payments to offset potential tax liabilities. Owning their policies provides them with control and flexibility, enabling them to harness the benefits of cash value growth, death benefits, and even optional long term care coverage.

As a financial advisor, you have a unique opportunity to guide businesses toward enhanced executive retention strategies. The Executive 162 Business plan, coupled with the dynamic capabilities of IUL, can reshape corporate dynamics by empowering businesses to attract, retain, and reward their top talent while securing the future financial well-being of their executives.

I encourage you to reach out to business owners to connect and explore the potential of integrating the Executive Bonus 162 plan into their corporate structure. By fostering collaboration and steering businesses toward strategic innovation, you play a pivotal role in shaping the landscape of executive benefits and ensuring enduring success.
Reference:
Life Insurance Sales To Match Pre-Pandemic Growth By 2022: LIMRA – Insurance News | InsuranceNewsNet.

Business owners have long been considered by most to be the lifeblood of the American economy. They are what drive our economic growth. Successful business owners really embody three traits:

• Business owners value the importance of protecting their assets.
• Business owners value the importance of mitigating tax exposure and paying unnecessary taxes.
• Business owners understand and value the importance of having access and use to liquidity and capital.

The good news is, although not every one of us may be a business owner we all have access to these principles and strategies within our own portfolio to create our own private reserves of wealth. One just so happens to be properly structured cash-value life insurance. Properly structured cash-value life insurance, when leveraged as your own private reserve strategy, can allow you the ability to make major purchases for big events in your life. It can also allow clients to have access to that cash if needed for unforeseen circumstances. Lastly, it allows clients to have access to position this as supplemental retirement income.

Now, one may ask, “What is needed for this strategy? Or is this a strategy for me?”

The first requirement is the need for life insurance. The second is that you must value the importance of financial protection. There are several benefits of owning a cash-value life insurance plan for your private reserve of wealth. The chart shows of the most common uses.

But what does it look like in action? We’re going to look at a client here by the name of Tom.

• Tom is 35 years old.
• He’s in great health.
• He’s married with two young children.
• Tom maxes out his contributions to his Roth IRA and 401(k) up to the four percent match.

Tom also understands that his 401(k) cannot be accessed until he is 59 1/2 and there could be times in his life that he may need access to capital right away. So, Tom decides to purchase a properly structured indexed universal life (IUL) policy. A properly structured indexed universal life policy allows the contributions to grow on a tax deferred basis, while allowing clients to access that cash on a tax-free basis. If a client were to pass away prematurely, the beneficiaries will have access to the death benefit tax-free.

In this example, Tom chooses to contribute $10,000 per year to his policy for 30 years. He decides to take out a $40,000 loan at the age of 45 to start a small business. After that loan, you can see that the cash value in the policy is still $68,000. Ten years later, at the age of 55, he takes out a $50,000 loan because he intends to put a downpayment on a vacation home. It is not until the age of 65 that there is enough cash value in this policy for him to now turn on his tax-free retirement income that runs to the age 100. If we now review the values at age 85, which is life expectancy, we can see the following:

• At 85, Tom has contributed $300,000 over the life of this policy.
• At 85, Tom has received $842,700 in tax-free income benefits.
• At 85, Tom has a death benefit of $436,929.
  • Total Value of potential $1,279,629 tax free benefits.

There are some considerations with an indexed universal life policy. These policies are tied to an index and policy performance is important. In addition to policy performance, it is important that clients work with their trusted advisor to set realistic expectations in the form of illustrated rates and work to ensure that the policy remains on track each year by conducting annual reviews. There are an infinite number of ways to fund and structure these policies. However, it is advised to maximum fund an IUL policy, which means purchasing the minimum amount of death benefit and putting in the most amount of premiums that the policy will allow to avoid a Modified Endowment Contract (MEC).

If your clients value family protection, mitigating taxes, and having access to liquidity and capital, I encourage you to reach out to them to see if a private reserve wealth strategy is right for them so they can experience a similar success as Tom did in this example.

How would your clients finish the sentence, “Retirement to me is like…”? Is retirement like a death sentence or is it more like winning the lottery? How do you think these responses will impact someone who is considering retirement? We often use metaphors with our clients as they can be a powerful tool for empowering new and soon-to-be retirees to view their life after work under a new lens.

I’d like for us to take a moment to picture your retirement as your dream home. As you are considering building your perfect dream home, I’d like to take a step back and consider of all the steps that are involved in this extensive process.

Before any of the construction can take place, you need to identify where you want to live, including which states and cities you are considering. Do you want to be near the countryside with an open-range view, or do you desire being near the water? You can think of retirement in a similar way. Like a dream home, everyone’s view of retirement is a little different. It’s important to identify what you want your retirement to look like based on your ideal lifestyle. Most people, when asked, really want to be able to spend comfortably in retirement without running out of money. Success in retirement isn’t about the amount of assets you’ve accumulated, but rather the most efficient way to generate as much income as possible.

For now, let’s revisit our dream home.

Protect
The first step to building any home is to lay the foundation. The contractor and his team will prepare the ground, build the flooring, and start mixing the concrete. This is arguably the most important step to building any home. Without a solid foundation, the home will crumble.

In retirement, we often refer to the foundation as the protection phase. We want to maximize the number of guaranteed sources of protected income so that you set your retirement up with a solid foundation. Protected income is defined as:

• Being guaranteed for life;
• Backed by the government or financial institution;
• Increases over time with inflation; and,
• Increases each year you choose to start income.

Time Magazine was quoted as saying, “Securing at least a base level of lifetime income should be every retiree’s priority—at least if they want to live happily ever after.” (Kadlec, 2012)¹

These 3 sources would be:

• Pensions (which are backed by your employer);
• Social Security (which is backed by the government); and,
• Annuities (which are backed by a financial institution).

I want to take some time to focus on annuities. An annuity is a personal “Social Security-like” stream of guaranteed lifetime income from a top-rated insurance company. The reason it’s similar to Social Security is because you put money in—whether that’s in a lump sum or over a period—and in return, the insurance company sends you a steady paycheck every month for the rest of your life. Guaranteed. Similar to the government with Social Security, annuities are paid out through a financial institution that’s obligated—and regulated—to deliver on their promise to you.

Save
The next step in building our dream home is to secure the walls which will be the frame that will stabilize the house. With our solid foundation, we have secured and maximized our guaranteed income streams that are needed for essential needs such as living expenses, family support, and healthcare. Next, we want to look at how we can save and minimize taxation on our portfolio. Did you know that if you make $83,682 per year that you are responsible for paying 86 percent of the taxes in this country? (York, 2021)2 Once you enter retirement, your three biggest deductions will be eliminated:

Mortgage Interest;
Child Exemptions; and,
Qualified Contributions.

Let’s consider the three types of money, which are taxable, tax-deferred, and tax-free. Since we are looking to minimize our taxation in retirement, we are going to focus on tax-free money, which can be broken down into two popular strategies:

• Roth IRA: The limitations that are in place for this year are $6,000. There’s also what they call a “catch-up contribution” for anyone 50 and older, which is $7,000. Another drawback to a Roth IRA is if your household makes more than $206,000 of combined income per year, you’re not even eligible for a Roth IRA! That’s right–you cannot contribute to this account! Why do you think that is? Well, if we think about it, the IRS makes their revenue from taxes. If you make that amount of income, you’re likely paying a fair amount of taxes and Uncle Sam wants to make sure the government gets that money! So, the people with the tax problem aren’t able to contribute to this tax-free account.
• Indexed Universal Life: A “Roth-IRA-like” account with a unique combination of tax-deferred growth, tax-free distribution, and tax-free wealth transfer. What is great about indexed universal life is that when properly structured it doesn’t have any government restrictions!

Grow
The last step, but certainly not the least, is accounting for the time it’s going to take to properly put on and secure the roof. The grow phase. Similarly, the last step in retirement is that once we have taken care of our essential needs, identified potential taxation concerns, and minimized our taxes, it is now time to invest any surplus of assets we have and review the plan on an annual basis. Diversification is important regarding the amount of your total portfolio that is designated for growth as there is a “risk-reward element.” While it’s great to take advantage of a rising market, this portion will vary based on age and risk tolerance. Your growth assets likely should be balanced with options that may not have the same upside, but are less likely to be impacted by a market collapse.

In closing, proper prior planning prevents poor performance. The only way for a successful retirement or to build that perfect dream home is to follow the blueprint in these stages:

• Protect (Lay the Foundation): By securing a base line of guaranteed lifetime income you can ensure that your essential needs will be met in retirement.
• Save (Secure the Walls): Minimizing your taxation in retirement and contributing to tax free vehicles allows you to reduce the tax pressure on your overall portfolio.
• Grow (Secure the Roof): Invest any surplus assets and review and manage your plan on an annual basis ensures that changes can be made if needed and your plan can remain on track.

If you want to take control of your retirement, I encourage you to reach out to your trusted financial advisor or strategic consultant to learn more about these financial strategies we discussed today.

Sources:

1. Kadlec, D., 2022. Lifetime Income Stream Key to Retirement Happiness. [online] TIME.com. Available at: https://business.time.com/2012/07/30/lifetime-income-stream-key-to-retirement-happiness/ [Accessed 12 August 2022].
2. York, E. (2021, June 9). Summary of the Latest Federal Income Tax Data, 2020 Update. Tax Foundation. https://taxfoundation.org/summary-of-the-latest-federal-income-tax-data-2020-update/.