For those of you who are pleased that there may not be any estate tax on the estates of  decedents dying in 2010: don’t be.

As reported in one of my previous recent blog posts, not only did EGTRRA 2001 (George Bush’s tax bill) provide that there would be no estate tax on the estates of decedent dying in 2010, but it also provided that those estates would be subject to modified carry-over basis rules, which would (will) be a real calculation nightmare.

But that’s really the least of it, because the carry-over basis rules could lead to taxes on the estates of less affluent individuals than would not have been subject to estate tax under the law as in effect in 2009.

Let’s take a couple worth $6,000,000 that includes assets with significant built-in appreciation (perhaps they were smart enough to have gotten aboard the Google bandwagon when that stock first went public). With some simple basic planning, if death occurred in 2009, there would be no estate tax due on either spouse’s estate, and the Google stock would receive a step-up in basis to its value at death for the estate and for the couple’s family members who inherit the stock. But if death occurs in 2010, there could be significant potential capital gains taxes built into the Google stock.

In other words, the law that appeared to “giveth” only did so with one hand, because it also “taketh” with the other. With all of the lead time there was before 2010, no one I know thought it was possible that Congress would not take corrective action beforehand; yet that is exactly what has happened.

Most people still think that corrective action will be taken, and that it will be retroactive to January 1, 2010 (which the Supreme Court has ruled is perfectly legal), but these days, no one can be certain about anything that emanates from Washington DC!

All I can say is: stay tuned.

Happy Holidays to all!

Among many other tax law changes, EGTRRA 2001 (George Bush’s tax bill) provided that there would be no estate tax on the estates of decedent dying in 2010, but that those estates would be subject to modified carry-over basis rules (a real calculation nightmare!). That was effective only for 2010, however, and, starting in 2011, everything was to go back to the way it was before EGTRRA: the exemption would drop back to $1,000,000, the top estate tax rate would go back up to 55% (60% on certain large estates), and the “step-up in basis at death” rules would again apply.

This is clearly an untenable situation and makes intelligent estate tax planning next to impossible. Yet here it is about two weeks before 2010 is upon us, and we still don’t know what the law will be come January 1.

There have been innumerable prognostications about what Congress might or might not do, and various bills have been introduced in both the House and the Senate, but the first actual action in either chamber occurred a little over a week ago, when the House passed a bill extending permanently the estate tax law as it applies in 2009: a $3,500,000 per person exemption, a 45% top estate tax rate, and a step-up in basis for all assets included in the gross estate for tax purposes. The estimated tax cost of this bill would be $234 billion over 10 years, not exactly chump change, especially in light of current and future federal deficits and the huge total federal debt.

Despite its huge tax cost, this bill would still not do a lot of things that many consider to be important: fully unify gift, estate, and generation-skipping taxes; allow any unused exemption of the first spouse to die to be used by the surviving spouse; provide for indexing, etc. Its passage by the Senate without any changes is thus highly questionable, especially with the raging Health Care debate currently in high gear; and even if a similar bill were to pass in the Senate, the likelihood of a House-Senate conference committee producing a single final bill that could be signed into law this year seems miniscule at best.

However, just because no final bill may become law this year does not mean that decedents dying in 2010 are off the estate tax hook. The reason is that the U.S. Supreme Court has apparently ruled in the past that tax legislation can be made somewhat retroactive, meaning that a bill passed anytime in 2010 could be made effective as of January 1, 2010. (Now that would be a real post mortem tax!)

Is this any way to run a country? Of course not, but it is where we are right now. Keep tuned, because anything can happen at almost any time. As soon as the legislative jury comes back with an estate tax verdict, you’ll be among the first to hear about it.

If anyone has any questions about this tax mess, or for more information, please contact Bob Burton LLB CLU ChFC AEP at 415-369-9990 ext 116.

Here are two timely subjects that should enable you to contact your clients before year-end.

Required Minimum Distributions. Traditional IRAs are all subject to the Required Minimum Distribution (RMD) rules once the IRA owner reaches age 70½ … EXCEPT FOR THIS YEAR. DUE TO THE CURRENT ECONOMIC CLIMATE, RMDs HAVE BEEN SUSPENDED FOR THE YEAR 2009. Most of your clients probably know this, but a reminder from you could stand you in very good stead. Even if a client has already taken a RMD this year without knowing that the requirement has been suspended, it probably occurred fairly recently, so if the RMD was taken less than 60 days ago, it can easily be reversed if desired by rolling it over to a different IRA.

Conversions to Roth IRAs. There are basically only two types of IRAs: traditional IRAs (a tax-deferred environment) and Roth IRAs (a tax-free environment, provided certain rules are met). Beginning on January 1, 2010, the $100,000 “modified adjusted gross income” limitation on the ability to convert a traditional IRA to a Roth IRA will no longer apply. This opens up powerful new planning opportunities for anyone who has a traditional IRA.

The conversion of a traditional IRA to a Roth IRA is a taxable event, but thereafter everything in the Roth IRA, including distributions, will be income tax-free, provided some simple rules (discussion of which is beyond the scope of this blog post) are complied with. Although some clients may conclude that, because of the current income tax consequence, a conversion is not beneficial in their situation, we believe that every IRA holder should at least give it very serious consideration for the following reasons:

1. Timing of the tax payable. The automatic rule for paying income tax on a conversion made in 2010 is 1/2 payable for the tax year 2011 (which means as late as October 15, 2012, with a tax return filing extension) and 1/2 for the tax year 2012 (which means as late as October 15, 2013, with a tax return filing extension). The automatic rule can be altered by making an election on the 2010 return to pay the tax for the tax year 2010 — but both that election and the payment of the tax can be deferred to October 17, 2011 (October 15 is a Saturday), with a tax return filing extension. In other words, there is a large degree of flexibility here.

2. Ability to “recharacterize” (i.e., undo) the conversion. The law provides that a taxpayer who implements a conversion to a Roth IRA during 2010 has until the taxpayer’s 2010 return is due and timely filed (including extensions, i.e., as late as October 17, 2011) to change his or her mind and have the Roth IRA changed back to a traditional IRA. The decision whether or not to do this could well depend on whether the value of the converted assets has increased (probably stick with it) or decreased (reverse it).

The most likely sale that we can help you with in this area involves annuities, either deferred or immediate. Remember, in a Roth IRA, everything, including distributions, should be tax-free rather than just tax-deferred. Tax-free income is always welcomed with open arms!

For more information, please contact Provada at 415-369-9990.

Legacy Care^®

Legacy Care^® is a single premium deferred annuity that is available to clients up to age 99 and is offering 3.00% interest* - better than many CDs that your clients might have their money in today.

If you sell annuities and work in the senior market, you probably have clients who aren’t getting much return on their invested dollars. Perhaps now is a great time to discuss Legacy Care^®, which includes a interest rate bailout provision.
Legacy Care^® offers:

• 3.00%* current interest rate with interest rate bailout provision
• Issue ages through 99
• Five-year surrender schedule
• Competitive commissions even at higher ages

* Please note that this rate is only applicable to the state of California.

For more information on this exciting program, contact Provada at 415-369-9990.

Tax-Deferred to Tax-Free!

Beginning January 1, 2010, The Pension Protection Act will allow for specific Annuity contracts to pay qualifying long-term care expenses, INCOME TAX FREE!

Using cash value withdrawals from specific annuity contracts to pay for qualifying long-term care expenses or to pay qualified long-term care insurance premiums, will no longer be taxable income. Instead they will be considered a reduction of cost basis.  “A reduction of cost basis” means that distributions from the policy are non-taxable and reduce the owner’s cost basis in the contract (but not below zero).

Clients who have annuities as part of their investment portfolio today may also take advantage of this significant federal tax incentive that is just around the corner.

However, only certain annuities are ‘built’ to reap these benefits.  Annuity Care® from state Life is one of those annuities. As of Jan. 1, 2010, withdrawals from Annuity Care for qualifying long-term care expenses will be income tax-free! 

Now is a great time to discuss the importance of Annuity Care with your clients. With the advent of annuities with LTC benefits, your clients may start to look at preparing for retirement a little differently.

To learn more about Annuity Care’s other features, like optional lifetime coverage and protecting both spouses on one policy, contact Provada today at 415-369-9990.

"Create Financial Security with Predictable Cash Flows
… It’s More Important Today Than Ever Before "

CLICK HERE, to gain access to a recorded webinar.

Provada provides innovative sales ideas and case studies, on how to diversify your clients’ portfolios today, to provide dependable and guaranteed cash flow with flexibility in case things change tomorrow.

Take Advantage of These Four Sales Strategies: 

1. Cash Flow Diversification
2. Prospecting for 401K Roll-Overs
3. The Power of Tax Deferral
4. Fixed Annuities vs. Certificates of Deposit

Recognize the Need…. Provide a Solution

Need: Bridge the gap between now and retirement & guaranteed stream of income in the future.
Need: Stable growth rate and guaranteed retirement income.
Need: Looking for a "Safe Haven" for their savings

For more information, contact Provada at 415-369-9990

Oops! I Didn’t Think I’d Die So Soon.

It is not uncommon for clients to want their minor children (or grandchildren) to share in the death benefits under their life insurance policies or annuities, either as primary or contingent beneficiaries. Simply to name the minor children as direct beneficiaries, however, can cause nothing but problems … that is, if the insured or annuitant dies too soon, when the children are still under age. Why? Because minors are both legally and practically incapable of managing large sums of money, meaning that some responsible adult needs to be appointed to do that for them. This can be an expensive, cumbersome, restrictive, and time-consuming process.

There are right ways to accomplish a client’s objectives in this regard and there are wrong ways. Unfortunately, all too many policies are written with this accomplished the wrong way, with the minors simply named as direct beneficiaries. The best way to accomplish what the client wants here is for the client to have a living trust (or at least a will that creates a testamentary trust for minor children) that covers all of their estate assets, and to name the living trust (or testamentary trust) as the beneficiary of the death benefit proceeds for the children’s benefit.

I bet you’re saying to yourself, “He’s got to be kidding! Practically none of my clients have either a will or a living trust!” Well, you’re probably right, but there is another sound way to solve this problem, all the while encouraging your clients to do some real planning. I strongly urge you in these situations to name the minor children as beneficiaries (preferably as a group, not by individual names, in case another child comes along) and to use the following language:

“Children of the insured in equal shares per stirpes; provided, however, if any beneficiary is under age 25, that beneficiary’s share shall be paid to (name of desired responsible adult) as Custodian for that beneficiary until age 25 under the (name of state) Uniform Transfers to Minors Act; Successor Custodian: (name of alternate desired responsible adult).”

Comments: (1) “per stirpes” means that if a child has died leaving issue, those issue will take the deceased child’s share “by right of representation”. (2) For death-time transfers, most states’ laws permit the Custodianship to last until age 25, but your own state’s law should be checked in this regard; of course, an earlier age can always be specified if desired. (3) Most states have adopted the Uniform Transfers to Minors Act, but some may still have a Uniform Gifts to Minors Act, which would have slightly different provisions; again, your own state’s law should be checked. (4) Consider how important this suggestion is when the insured is divorced and in no way wants the ex-spouse to have any control of the policy death benefit proceeds.

Please contact Provada with any questions regarding these matters.

During the final morning session at the AALU meeting in May, Larry Brody and Steve Leimberg confirmed what many other leading commentators have been saying:

NOW IS THE PERFECT TIME TO BE DOING INTELLIGENT ESTATE PLANNING.

While this may seem counterintuitive in light of   (a) the increase in the estate tax exemption from $2,000,000 per person up to $3,500,000 per person as of 1/1/09, and (b) all of the uncertainties people are experiencing due to current economic conditions, for those estate owners whose estates will still be subject to substantial estate taxes, there are powerful reasons why this is the ideal time to be doing intelligent estate planning:

1. With significantly decreased asset values, a much larger proportion of one’s estate can be shifted out of the taxable estate without incurring any gift or other tax consequences.

2. With interest rates at historically low levels, many powerful estate planning tools and techniques, such as GRATs, Installment Sales to Grantor Trusts, Private Financing of Life Insurance in Grantor Trusts, and certain Philanthropic techniques, are much more effective in transferring property out of the taxable estate than when interest rates are higher.

3. All of the common planning techniques that result in significant valuation discounts for transfer tax purposes, such as discounts for minority interests and lack of marketability in connection with Family Limited Partnerships and Limited Liability Companies, are still available, but may well be curtailed under proposed estate tax reform legislation.

Fortunately, we here at Provada, with our expertise, experience, and available software programs, are in a perfect position to help you with all aspects of your estate planning cases (except, of course, for the actual preparation of legal documents). We also have contacts with top-level estate planning attorneys and valuation experts all around the country that we can refer to you and your clients.

Estate planning cases are large cases. Don’t let others corner this lucrative market. Start the ball rolling by calling on the wealthy estate owners and successful business men and women in your area.

Failing Life Insurance Policies

With the recent steep stock market decline and steadily reducing interest rates over the past 20-25 years, both variable and non-variable life insurance policies have been negatively impacted, and many are underperforming seriously enough to be on the road to an early demise.  This is  particularly true of those policies that were underfunded because the premiums were based on unrealistically high illustrated stock market rates of return or unrealistically high assumed ongoing interest rates.  Unfortunately, many, if not most, policyowners are totally unaware of this impending disaster.  This problem is highlighted in the Wall Street Journal article published on May 26^th titled “Keep Tabs on Insurance That Covers Estate Tax.”

To find the best solution for your clients to this serious situation, we urge you to use Provada’s comprehensive Personal Policy Review program.  Under this program, we carefully analyze inforce policies, look at alternatives, and make appropriate recommendations.  In some cases, often depending on the client’s current state of health, the client is better off keeping the inforce policy; in other situations, implementing a Section 1035 tax-free exchange to a new policy best serves the client’s objectives; and in still other situations, a life settlement may be in order, either because the insurance coverage is no longer needed or where the net proceeds serve as the seed money for a new policy.

Do not delay.  Look through your client base, select the clients who may be most in need of a Policy Review, and let us know if you have any questions. We’re here to help.

The final morning of the AALU meeting featured a “What’s Hot, What’s Not” presentation by two of the industry’s leading experts, Steve Leimberg and Larry Brody, who discussed three important subjects.  We will highlight these subjects in this and the next two posts.

Taxation of Life Settlements

Ever since the advent of life settlements, the tax consequences to the seller and to the purchaser have been the subject of conjecture, and while most agreed as to what those tax consequences were likely to be, there was never any authority for those conclusions.  We now have two IRS Revenue Rulings to guide us.

The first ruling, Rev. Rul. 2009-13, deals with the tax consequences to the seller (i.e., our client).  In most respects, it confirms what most had surmised would be the result, i.e., that gain over basis up to cash value would be taxed as ordinary income (the same as if the policy had been surrendered) and any gain above that amount would be taxed as capital gain.  The only surprise was the definition of “basis”, which, on a sale of the policy as distinguished from a surrender, is stated to be premiums paid minus the internal “cost of insurance” charges.  This adjustment to basis, however, serves only to increase the capital gain portion of the profit, not the ordinary income portion, which remains the same as if the policy had been surrendered.  While this basis adjustment increases somewhat the tax consequences of a life settlement, as long as the federal long-term capital gains tax rate remains at 15%, the additional tax will be relatively nominal.  Incidentally, the ruling also states that, if a term policy is sold, there is no basis other than unearned premium.

The second ruling, Rev. Rul. 2009-14, deals with the tax consequences to the buyer.  While this is not really of concern to us, here are the results in a nutshell:  (1) The buyer’s basis in the policy is the purchase price paid plus premiums subsequently paid.  (2) If the buyer re-sells the policy, the gain is capital gain.  (3) If the buyer collects the death proceeds, the gain is ordinary income.

Certainty in the tax law always stimulates interest in the underlying subject matter.  These rulings, therefore, can be expected to add even more life to the recovering life settlement marketplace.  Be sure to take advantage of this renewed interest.