“B” stands for Benefiting from ones asset accumulation efforts

This is perhaps the one component of estate planning that many estate owners and estate planners tend to overlook. This is surprising since Benefiting from the fruits of one’s labors during lifetime is the one component that has a selfish motive rather than a generous or loving motive, and it is undoubtedly the main reason that most of us work so hard to build our net worths.

Planning for retirement

The need for retirement planning is certainly well recognized in the United States these days, especially with the future viability of Social Security being at least somewhat in doubt and in light of the recent trend of reduced tax-qualified pension plan benefits being provided by most employers. Nevertheless, too many of us defer this important task because of the other pressing priorities we face during our working years. This presents those of us who are in the financial services industry with both a challenge and an exciting opportunity.

Tax-qualified retirement plans

One of the ways we can help fill the retirement planning void is by becoming proficient in the area of tax-qualified retirement plans, both employer sponsored plans such as pension and profit-sharing plans, 401(k) plans, and sometimes even ESOPs, and individually initiated plans such as IRAs, SEPs, and Roth IRAs. Many pension and profit-sharing plans incorporate life insurance into the asset mix. In addition, 412(i) plans in particular (plans fully insured with life insurance and annuity contracts) have become especially popular in the life insurance industry because of the large premiums they can generate. 412(i) plans are also of significant benefit to those clients, primarily small companies, that are in need of a large current income tax deduction. This large deduction occurs because of the conservative assumptions built into the policies that are specifically designed for these plans as well as the generally compressed premium payment schedule. Detailed discussions of these techniques is beyond the scope of this newsletter, but materials and courses are available from many sources, and we here at Provada can certainly be helpful in the product area and with certain design features.

Non-tax-qualified retirement plans

In addition to tax-qualified retirement plans, non-tax-qualified plans offer many fruitful possibilities. For discussion purposes, these plans can be broken down into two primary categories — employer-sponsored plans (SERPs and Deferral Plans) and individually implemented plans — but the “funding” considerations are much the same. All of these plans can be effectively “funded” with individual life insurance policies, but these policies should be specially designed to maximize the cash accumulation by minimizing the mortality costs. Whole Life policies have their own special design considerations, such as the availability of paid-up additions purchased both with policy dividends and with outside funds, but for Universal Life policies, be they Variable ULs, Indexed ULs, or Traditional ULs, the design structure is generally (1) to have the lowest possible face amount in all years, (2) to avoid creating a Modified Endowment Contract (MEC), (3) to use the “Face Amount Plus Cash Value” death benefit option while funds are being contributed to the policy, and (4) to switch to the “Level” death benefit option in all years thereafter, especially during the years when funds are being withdrawn from the policy. Regarding the withdrawal of funds, they are typically straight withdrawals up to cost basis and policy loans thereafter so as to make them all income tax-free. A key objective here is making sure that the policy stays in force until the insured dies so as avoid creating a significant income taxable event on phantom income.

Working with other professionals

Many of the plans referred to in this post require the services of our clients’ other professional advisors, especially those plans that involve ERISA considerations. By establishing close working relationships with these other professional advisors, we can be of greater service to our clients and can personally benefit as well from additional referrals.