(Click here for Blog Archive)
(Click here for Blog Index)
(Presentations in this blog were created using the Premium Financing System and Wealthy and Wise®.)
|
-493x203.jpg)
|
This Blog describes combining our Premium Financing and Wealthy and Wise® Systems to produce a powerful wealth planning concept called “Zero Estate Tax,” Most clients prefer comparing their current plan to a new one with the recommended changes. We call it do-it-versus-don’t-do-it™, a critical component of our comparative analysis. |
Case Study
Arthur and Allison Baxter, ages 50 and 45, are considering a premium financing arrangement owned by an irrevocable trust formed on behalf of their four children.
Below are details of the data used in the evaluation:
Insured: Arthur Baxter.
Policy Type: Indexed Universal Life (IUL) illustrated at a conservative 6.20%. The IUL has a high first year cash value of $834,340.
Face Amount: $12,535,284.
Premiums: $1,000,000 for seven years.
Policy Owner: Baxter Irrevocable Family Trust (a grantor trust).
Bank Loans Funding the Policy: $700,000 in secured bank loans for seven years.
Gifts Funding the Policy: $300,000 in annual gifts by the Baxters to the trust for ten years to apply on the premiums for seven years and bank loan reduction in years 8 – 10. The gifts reduce the cumulative bank loan so a policy loan to repay the bank at the beginning of year 16 does not interfere with the continuance of the policy.
Security for the Bank Loan: Policy cash values.
Interest Rate Assumption for the Bank Loan: 3.00% increasing yearly to 5.00% in year 15.
Other Funding: $25,000 a year paid into an equity account in the trust for each of their four children.
Loan Interest due to the Bank: Accrued. (See Columns (6) and (7) below in Image 1.)
Loan Repayment: A participating policy loan of $6,804,730 repays the bank at the beginning of year 16.
Zero Estate Tax: This goal is achieved through a testamentary donation to a Baxter Family Charitable Foundation in their Wills at the second of their deaths, so their taxable estate is never higher in any year than their available unified credit. Regardless of how far the credit is reduced by politicians, this result is good news for clients wary of Joe Biden's desired estate tax adjustments. Wealthy and Wise is unique in providing this calculation.1
1Wealthy and Wise licensees can click here for simple instructions for generating a zero estate tax plan.
| Image 1 |
| Analysis of the Bank Loan |
Click here to review the entire premium financing illustration.
Net Worth, Retirement, and Wealth to Heirs
| Current Net Worth |
| Arthur and Allison Baxter |
Click here for comments regarding yields, sequence of returns, and Monte Carlo simulations.
Retirement Cash Flow
The Baxters want $500,000 in after tax, retirement cash flow indexed at 3.00% beginning at their ages 65/60. (This cash flow totals $30,231,043 over 35 years including the 3.00% indexing.)
Gifts
They also want to make gifts of $300,000 a year for ten years to the trust for the premium financing (totaling $3,000,000) plus the annual $25,000 for each of their four children, all funded from their assets.
Let’s measure the impact of their decisions on the wealth passed to their children and the Baxter Family Charitable Foundation. As you can see from the graphic below, the premium financing arrangement provides for a significant increase to heirs even after accounting for the Baxters’ cash flow requirements.
| Image 2 |
| Comparison of Alternatives at Ages 100/95 |
Strategy 2
Wealth to Heirs is increased by over 20% (from $150,706,375 to $181,648,350);
Transfer Taxes are reduced from $40,636,282 to $0;
Wealth to Baxter Charitable Foundation is increased from $0 to $46,953,350.
Several (perhaps all) of Arthur and Allison’s four adult children will likely become seriously involved with the Baxter Family Charitable Foundation. If so, the combination of their inherited wealth and their controlled wealth will exceed $180,000,000.
“Control of wealth is the virtual equal of ownership of wealth.”
Dr. John Rutledge, Chief Investment Strategist, Safanad
Net Worth Comparison
The Baxters’ premium financing arrangement produces a severe drop in the Baxters’ net worth. See the do-it-versus-don’t-do-it analysis below for the net worth comparison.
| Image 3 |
| Net Worth Comparison |
Strategy 2 produces a decrease of almost $55 million in net worth caused by the cash flow required for premium financing and gifts to their children. Note that there is no reduction in their spendable retirement cash flow. Let’s see what we can do to improve the net worth or at least the perception of net worth.
Forgotten Money
Have we overlooked anything? What about the cash value of the life insurance in the trust (net of the outstanding loan to the bank during the first 15 years)? So far, that net value does not appear anywhere as a component of net worth for anyone; however, it is part of Family Net Worth before the death of the Baxters.
Family Net Worth™
This strategy combines the net worth of more than one generation (i.e., a family group). It is not historically associated with wealth management and estate planning. Still, it is an important concept when assessing the short-, mid-, and long-term potential of wealth accumulation and asset transfer. It has a particular application when a significant portion of the parents’ wealth passes to children in trust during the parents’ lives.
The net worth reduction caused by such transfers is more easily evaluated when using an overall multi-generational Family Net Worth analysis. This approach is critical when considering changes to assets or the addition of new financial techniques in a do-it-versus-don’t-do-it scenario.
| Image 4 |
| Trust’s Life Insurance |
The trust’s net cash value appears nowhere in the illustrations or graphics. How should we account for it? I believe it is best understood as part of Family Net Worth. This designation works because it exists within a grantor trust. Based on the terms of the trust and subject to the trustee’s acceptance, Arthur and Allison can use it as collateral for secured personal loans with accrued loan interest.
This feature makes the forgotten money available to Arthur or Allison (or through them to their children), and the designation of Family Net Worth becomes even more appropriate.
Below is a graphic of the Baxters’ net worth. Assets outside the estate (the net cash value of the trust’s policy and the gift account established for their children) make up part of this new category called “Family Net Worth.”
| Image 5 |
| Family Net Worth Comparison |
The Family Net Worth designation adds no additional value to Strategy 1 as there are no assets outside the estate. Family Net Worth for Strategy 2 is almost $31 million greater than Strategy 1 due primarily to the presence of substantial life insurance cash values held in trust outside the estate.
See below in Images 6 and 7 for a comparison of the long-range makeup of Net Worth for Strategy 1 with the long-range make up of Family Net Worth for Strategy 2.
| Image 6 |
| Details of Family Net Worth – Strategy 1 |
| Image 7 |
| Details of Family Net Worth – Strategy 2 |
Note the difference in the Taxable Estate below.
| Image 8 |
| Taxable Estate |
The taxable estate in Strategy 2 is reduced by almost $102,000,000.
As you can see in Image 9 below, transfer taxes (estate taxes and income taxes on retirement plans) are eliminated for the Baxters—a true Zero Estate Tax plan.
| Image 9 |
| Transfer Taxes |
Strategy 2 reflects a long-range increase of more than $24 million in Wealth to Heirs over Strategy 1.
| Image 10 |
| Wealth to Heirs Comparison |
All this results in no additional out-of-pocket cost for the Baxters. Requirements for retirement cash flow plus loans and gifts to the trust have been funded by asset allocation, producing what is known as a cash flow neutral analysis.
One last Summary graphic:
| Image 11 |
Click here to view the 89-page Wealthy and Wise evaluation.
That is a lot of reports; however, with a Wealthy and Wise presentation, I recommend that you have all the pages for a given analysis with you when you are visiting with a client or client’s attorney or CPA. The system backs up every number shown, and you never know which report you’ll need to have handy to answer the inevitable question, “Where did this number come from?”
Most Wealthy and Wise users select a few key illustrations for the main report and put the balance in supplemental sections or an Appendix. More elaborate organization can be accomplished (Table of Contents and Section pages) through use of the following prompt which I used for this Blog—located on the bottom right of the Main Workbook Window:
Note: You can download the digital Workbook files below if you have licenses for the Premium Financing System and Wealthy and Wise and want to see exactly how I entered the data for this case study.
Conclusion
Integrating the Premium Financing into Wealthy and Wise provides a contextual analysis that reinforces the value of premium financing.
It makes little difference which estate planning technique you use. Premium financing, split-dollar, private split-dollar, GRAT, SCIN, private annuity, and family limited partnership all lend themselves to Family Net Worth as an innovative new tool for comparative evaluations.
It is challenging to present these alternatives as effective family planning devices for your clients without integrating the data within a do-it-versus-don’t-do-it Wealthy and Wise analysis. The stand-alone numbers of each option need an overall family wealth context to make the most sense and the most significant impression on your clients and their advisers.
Documentation
InsMark’s Cloud-Based Documents On A Disk™ (DOD) includes specimen documents for a Zero Estate Tax plan. These documents have provisions so a bequest to a charity of the taxable estate is never higher in any year than the available unified credit—even if the credit changes.
Click here for a Wealthy and Wise illustration showing how this works for the Baxters.
Click this image in the left-hand margin of the illustration for an explanation.
Click here to review the Highlights of our Zero Estate Tax plan from DOD.
If you are licensed for DOD, you can review all six of the documents for a Zero Estate Tax plan in the Wealth Transfer section of documents.
If you are not licensed for DOD or would like to be, this link will take you to the DOD product site for more information or licensing.
If you are not licensed for InsMark’s Wealthy and Wise or Premium Financing System, and would like to be, these links will take you to the appropriate website.
You can also contact Julie Nayeri at julien@insmark.com or 888-InsMark (467-6275). Institutional inquiries — contact David Grant, Senior Vice President — Sales, at dag@insmark.com or (925) 543-0513.
Other Illustration Systems
The InsMark Premium Financing System has a cousin available called Premium Financing Split-Dollar. It uses premium financing to provide the funds for an employer-sponsored split-dollar arrangement. An irrevocable life insurance trust owns the policy for estate planning purposes, or an executive owns the policy for death benefits and retirement income purposes. Options to include a deduction of the loan interest paid to the bank by the employer are also available. For more information about this variation, contact Don Prehn at 208-941-1700 or don@insmark.com.
Other InsMark Illustrations that coordinate with Wealthy and Wise are:
Executive Trifecta®
Executive Bonus
Executive Security
All Plans listed on the Split-Dollar tab
Loan-Based Split-Dollar System
Executive-Owned Split-Dollar
Trust-Owned Split-Dollar
Trust-Owned Private Split-Dollar
Leveraged Executive Bonus
Leveraged Deferred Compensation
Leveraged 401(k) Look-Alike
InsMark’s Digital Workbook Files
If you would like some help creating customized versions of the presentations in this Blog for your clients, watch the video below on how to download and use InsMark’s Digital Workbook Files.
If you are licensed for InsMark’s Wealthy and Wise and Premium Financing System and want to see exactly how I entered the data for this case study, import this Zip file which includes the two digital Workbooks I used for Blog #220:
|
Before importing either downloaded file into the appropriate InsMark System, be certain to update your InsMark Premium Financing System and your Wealthy and Wise System. Do this using Live Update available under Help on the main menu bar of either System or this icon on the main menu bar in either System:
Note: If you are viewing this on a cell phone or tablet, the downloaded Workbook file won’t launch in your InsMark Systems. Please forward the Workbook where you can launch it on your PC where your InsMark System(s) are installed. |
Click here for design directions for Zero Estate Tax Planning with Wealthy and Wise.
Click here to learn how to export data from the InsMark Premium Financing System to Wealthy and Wise.
For general help on how to use InsMark software, go to The Quickest Way To Learn InsMark.
Testimonials
“Standard premium financing illustrations produce much in the way of great data, but it takes the InsMark Premium Financing System to present compelling numbers. The integration of that data into InsMark’s comparative modules like Wealthy and Wise is what makes premium financing sizzle.”
Chris Jacob, CFP, SFI-Cadeau, St. Louis, MO, InsMark Platinum Power Producer®
“As with all of the InsMark software, InsMark’s Premium Financing System has proven to be an indispensable addition to my ability to show my clients the advantages of using a “Financed Premium” concept to solve their financial needs. Because of this, I could close three large financed premium cases easier and faster than ever before. As always, InsMark has delivered again. I encourage all who use Premium Finance to solve their clients’ needs to purchase this system.”
William Moates, Jr., Trilennium Financial Alliance LLC, Fort Smith, AR, InsMark Platinum Power Producer®
“InsMark has created without question the best suite of software for our industry that has ever existed. I have been using their software for almost 30 years, and it has changed my career. This unique and user-friendly software will add many thousands to your income for as long as you’re in business. InsMark makes me look good, and it will you as well.”
Simon Singer, CFP®, CAP®, RFC®, Past President International Forum, InsMark Platinum Power Producer®, Encino, CA
“Wealthy and Wise allows us to reflect on practically ANY planning scenario we have encountered with clients. The ability to flow data easily into the program (without being so granular as to be unwieldy) is, in my opinion, one of the core strengths of Wealthy and Wise. Modeling alternate planning scenarios and presenting the results in graphical and numerical formats is welcome, and I can’t imagine making cash flow and estate growth projections without Wealthy and Wise.”
Mark A. Trewitt, CLU, ChFC, CAP, CFP, AEP, InsMark Platinum Power Producer®, Plano, TX
InsMark, InsMark logo, Wealthy and Wise, and Executive Trifecta
are registered trademarks of InsMark, Inc.
Testing Financial Tolerance, do-it-vs.-don’t-do-it,
Family Net Worth, and Documents On A Disk
are trademarks of InsMark. Inc.
Copyright © 2024 InsMark LLC
All Rights Reserved
Important Note #1: The hypothetical life insurance illustrations and investments referred to in this Blog assume the nonguaranteed values shown continue in all years. This is not likely, and actual results may be more or less favorable. Actual illustrations of life insurance are not valid unless accompanied by a basic illustration from the issuing life insurance company.
Important Note #2: The information in this Blog is for educational purposes only. In all cases, the approval of a client’s legal and tax advisers must be secured regarding the implementation or modification of any planning technique and the applicability and consequences of new cases, rulings, or legislation upon existing or impending plans.
Important Note #3: Many of you are concerned about the potential tax bomb in life insurance that a careless policyowner can accidentally trigger. This problem can occur when policy loans are present, and net cash values are so low that the income tax on the gain on surrender (calculated using gross cash values less basis) is more than the net cash surrender value.
This lurking tax bomb can be present in all forms of whole life and universal life with policy loans of any type. It’s avoidable, and you, the producer, are crucial to ensuring your clients know how to sidestep it.
You can avoid the tax bomb if the policy is neither surrendered nor allowed to lapse since the policy death benefit wipes away the income tax liability. The foundation for this particular treatment is IRC Section 101. This statute provides that life insurance proceeds maturing as a death claim are exempt from federal income tax. This applies to the full death benefit, including any cash value component, whether loans exist or not.
Can your clients remember these facts years into the future? If they are incapacitated, will family members understand the issues? It is probably best to file a short note with the policy — something like this (although your compliance officer will likely have preferred language):
If/when you take policy loans on this policy, talk to your financial adviser before surrendering or lapsing the policy to anticipate unexpected tax consequences that may otherwise be avoided.
Some life insurance companies have concierge units that monitor loan status at the point of lapse or surrender. You would be well-advised to select an insurance company with this capacity. To be effective regarding the tax bomb, carriers need to be proactive in their client relationships, not merely reactive to client inquiries. I hope that, ultimately, the policyholder service division of all life insurance companies will bring this potential liability to the attention of those surrendering or lapsing policies. This suggestion applies to policies with 50% or more of the gross cash value subject to outstanding loans.
See Blog #51: Avoiding the Tax Bomb in Life Insurance.