IRA: PLR 200802008* Inadvertently almost caused the Termination of S Corporation

Background:

An S corporation is a regular corporation that has elected a special tax status for federal income tax purposes. Rather than being taxed at the entity level, all items of income and deduction of S corporation are taxed at the shareholder level. (In effect, these items “flow through” to the shareholders.) “S” status is a privilege, and in order to maintain it, the corporation and shareholders must continue to meet stringent requirements.

In the facts of PLR 200802008*, S corp shares were issued to an individual retirement account (IRA) for the benefit of shareholder A. While certain qualified plans are permissible shareholders of S corps, an IRA is not a permissible shareholder. After a period of time, the shareholder (A) and the corporation realized this error. (The shares were subsequently distributed from the IRA to A.) Technically, the S election was inadvertently terminated at the moment the IRA acquired the shares.

However, under IRC Section 1362(f), the IRS may waive this result if the termination is truly found to be inadvertent. The IRS was willing to treat the corporation as a valid S corp from a stated date going forward, but subject to certain conditions. Two of the conditions were as follows. For the years that the corporation generated a loss, the IRA would be deemed the shareholder. For the years where the corporation generated a gain, A (the individual) would be treated as the shareholder. In short, the IRS was able to impose a kind of “heads I win, tails you lose” tax treatment. The “loss” would not be of significant use to the IRA (because of its tax exempt status) and the “gain” would be attributable to taxable individual (A)!

Significance:

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The annual exclusion is, by law, calculated based on the $10,000 exclusion amount
in 1998, then adjusted annually for inflation (based on the federal inflation rate) in
$1,000 increments. For 2007, the annual gift tax exclusion amount was $12,000, but
the true underlying amount for 2007 was $12,660.

The federal inflation rate for the 2008 values was announced at 2.3%, which makes the underlying amount for 2008 equal to $12,951. Therefore, because the underlying amount is less than $13,000 the annual gift tax exclusion for 2008 will remain $12,000.

So thanks to low inflation and a mere $9 shortfall, the entire nation loses out on the
ability to make an additional $1,000 of allowable annual exclusion gifts per donee in
2008. This is a rare occasion where a low inflation environment is not a good thing!

Despite the likelihood of increased regulation of life settlements and of those who play a role in arranging for life settlements, as well as longer life expectancies potentially leading to lower offers, it is expected that the life settlement industry will continue to grow and flourish, especially with more and more institutional money entering the picture. This, coupled with the potential liability resulting from a failure to discuss a life settlement when it would clearly be in the best interest of a client, makes it important that each of us becomes familiar with those situations when a life settlement should at least be considered, including when the policy to be sold will be replaced with a better performing new policy.

Differentiating Your Business from Your Competition

Most businesses fail to differentiate themselves effectively from their competition. For those of us in the insurance industry, this means that we do not give prospective clients a truly compelling reason to do business with us rather than with someone else. Part of the reason is that our message is cluttered and conveys information rather than knowledge. For example, if you were to check your website and the websites of your competitors, they probably all say pretty much the same thing: what you do, rather than who you are and what you can do for your clients. Pick your best clients and prospects to work with and develop messages and techniques that clearly convey the value to them of doing business with you.

Join Bill Upson for an eye opening Webinar on how to utilize long term care as an advanced planning tool!

REGISTER TODAY: Click Here!       DATE: March 4, 2008         TIME: 11AM PST    

Drawing on his years of experience, Bill provides the "How To’s" on:

• Using LTC to open the door to larger opportunities, such as advanced planning and money management.
• Improving the financial lives of your clients by helping them deal with family and business issues that have been festering for many years.
• Increasing your case sizes and yearly fees.
• Using the book, "Long Term Care… Alternatives and Solutions", as a valuable resource.
• Designing a financial plan for your clients that will preserve the physical, emotional, and financial well-being of the clients and their families.

Bill Upson is an experienced Financial Advisor, author of the book Long Term Care…Alternatives and Solutions, and co-author of the recently published book, Orderly Affairs - Pathways to Financial Freedom for Everyone.  He is a member of the Million Dollar Round Table and a 10 year Top of the Table qualifier, and has provided insurance and investment solutions since 1982.

REGISTER TODAY AND RECEIVE:  A copy of Bill Upson’s Long Term Care…Alternatives and Solutions.  Click Here! To Register

WEBINAR INFORMATION

Go to the web address below 10 min prior to the webinar, then call the conference call number for audio. Next You will need to punch in the conference code after dialing in.

Web Address: https://www1.gotomeeting.com/register/730958445

Conference Call Number: (605) 772-3434
Conference Call code: 126-527-837

This web conference will be conducted by:   Bill Upson CLU ChFC

Moderating, is Bob Burton LLB CLU ChFC AEP, Provada’s Director of Advanced Planning

Alternatives to 401(k) Plans for Highly Compensated Employees (HCEs)

Almost all 401(k) plans discriminate heavily against HCEs and encounter qualification problems when the required anti-discrimination testing rules are applied. The typical solutions to solving these problems are both unfavorable and costly. Two interesting alternatives for HCEs are available for solving these problems more effectively, both involving the sale of life insurance: (1) Non-Qualified Deferred Compensation Plans (using COLI) and (2) A special proprietary "LBP 401(k) Plus" Plan (using individual non-variable policies).

In connection with Non-Qualified Deferred Compensation Plans, an effective approach that leads the client to choose COLI financing rather than having to be sold COLI is the consultative approach that presents the financial results of all approaches, from no financing (using current cash flow) to financing with mutual funds or other instruments; COLI then typically "sells itself".

Buy-Sell Agreements

We are all intimately familiar with the need for buy-sell agreements when dealing with closely-held private business interests, but how often are we aware of the typical problems and shortcomings encountered with most agreements? There are three important things to remember here: (1) Getting Agreement NOW when everyone’s interests are reasonably comparable; (2) Paying attention to the Six Defining Elements of a proper agreement (Standard of Value, Level of Value, the "As Of" Date, Qualification of Appraisers, Appraisal Standards, and Funding Mechanisms); and (3) Periodically applying a Buy-Sell Audit Checklist.

One of the key factors requiring particular attention here is the valuation methodology being employed. An interesting idea to suggest is the "1% Solution": having the parties devote 1% of the business value annually to hiring the expertise necessary to make sure that all aspects of the agreement are still relevant, up-to-date, and accomplishing the desired results.

21^st Century Estate Planning Is Like a Three-Legged Stool

The three legs are: (1) Zeroing Out Estate Taxes; (2) Perpetuating Family Values and Relationships; and (3) Charitable Planning (we call this "Planned Philanthropy").

Zeroing Out Estate Taxes: There are a multitude of planning tools that can be used to accomplish this result, all of which require the services of highly qualified advisors (you, of course, plus a highly qualified estate planning attorney and other high-level advisors). An interesting idea to implement when FLPs and/or LLCs are part of the planning package (both of these can be excellent asset protection vehicles when used creatively), involves the use of special planning techniques that call for first-to-Die (i.e., single life) policies rather than the usual approach that favors 2^ND-to-Die policies; the details of this idea are highly technical and complex and beyond the scope of this summary.

Perpetuating Family Values and Relationships: Since most inherited wealth disappears in two to three generations, often because the parents inadvertently fail to pass along their work ethic and family values, "Heir Conditioning" becomes an important component of effective estate planning. Family counseling has thus become common with wealthy families, and multi-generational trusts have become an extremely valuable planning tool for providing asset protection and protection against divorcing spouses, and for avoiding estate taxes in succeeding generations.

Charitable Planning ("Planned Philanthropy"). Most of us are at least somewhat familiar with the variety of tools that can be used here — Charitable Remainder Trusts, Pooled Income Funds, Charitable Gift Annuities, Charitable Lead Trusts (both Inter Vivos and Testamentary), Charitable Bailout Trusts, Family Charitable Foundations — not many of us are very effective in motivating our clients to incorporate these techniques into their estate plans. Perhaps by emphasizing Voluntary Philanthropy vs. the Involuntary Philanthropy automatically involved when paying estate taxes, and by performing appropriate financial modeling, we can overcome this shortcoming.

By the way, the seat of our three-legged stool is made up of the legal documents, accounting practices, and life insurance funding that holds it all in place.

Overall the new rates represent an average decrease of 3 percent - and that is significant in the term business! 

AIG has made significant decreases in some of the most common term periods and ages, but the most significant changes are in the double-digit decreases for 40-year-olds.

Check out the situations below where AIG’s lower rates have made a dramatic difference!

Male, Pref. NT, Age 40, $500,000 Face, 20-Year Plan:

The annual premium under Select-a-Term 2007 was $565.00. Under Select-a-Term 2008, the new premium will be $475.00 - a reduction of 15.9 percent!

Male, Pref. Plus, Age 40, $500,000 Face, 20-Year Plan:

The annual premium under Select-a-Term 2007 was $450.00. Under Select-a-Term 2008, the new premium will be $380.00 - a reduction of 15.6 percent!

Male, Pref. Plus, Age 40, $1,500,000 Face, 15-Year Plan:

The annual premium under Select-a-Term 2007 was $815.00. Under Select-a-Term 2008, the new premium will be $665.00 - a reduction of 18.4 percent!

Male, Pref. Plus, Age 40, $1,500,000 Face, 20-Year Plan:

The annual premium under Select-a-Term 2007 was $1,175.00. Under Select-a-Term 2008, the new premium will be $980.00 - a reduction of 16.6 percent!

Prudential’s repricing will make their term products more competitive in many key scenarios, such as:

Large Face Amounts - policies with face amount larger than $1 million;

15, 20, and 30-year level paying periods - will all see pricing improvements.

Transition Period Rules

There will be no preview period - normal 28-day Transition Period Rules apply. Unplaced cases may be eligible for new rates, subject to eligibility rules.

Age Last Birthday Advantage

And don’t forget Prudential’s Age Last Birthday advantage! Why should your clients be older than they actually are? With Prudential your clients are always their actual age, not age nearest.

If your clients are looking for a Term product - Think Prudential!