http://www.articletrader.com/ Articles at ArticleTrader en-us http://www.articletrader.com/finance/taxes/how-a-charitable-remainder-trust-avoids-capital-gains.html http://www.articletrader.com/finance/taxes/how-a-charitable-remainder-trust-avoids-capital-gains.html Tue, 12 Jun 2007 00:00:00 -0500
In the Path of Progress

Clarence and Mildred had a farm that has been in the family since 1930. They raised corn and had a few cattle. However, the farm has been inactive since Clarence died 10 years ago.

The farm used to be out in the country. Over the years, the neighboring city has expanded to the point that its boundaries have almost reached the farm.

A real estate development firm with an offer she finds difficult to believe has recently contacted Mildred. They want to build a giant shopping mall on her property. Moreover, they are willing to pay 14 million dollars for her 80 acres.

As much as Mildred is tied to her home of 40 years and the lifestyle, this is an easy decision. The farm was originally homesteaded and has no basis. How can she minimize the capital gain tax?

The procedure would call for her to gift the farm to a charitable remainder trust. The trust would then sell the property to the real estate developer. She should employ an estate planning attorney to assure that the gift to the trust and the subsequent sale to the real estate developer are not construed as a pre-arranged series of transactions.

Using a charitable remainder trust gives Mildred the following benefits:

1. She does more than minimize the capital gain tax; she avoids it altogether. If the capital gain rate is 15%, this saves $2,100,000 in capital gains taxes. Mary is frugal. She has saved every button that has ever come off a shirt, blouse or shirt. She is also leery. She figures she can put that $2,100,000 to better use than the people in Washington D.C.

2. A charitable remainder trust mandates an annual payout of at least 5%. That’s $700,000 a year. She is set for life and can take all the grandchildren to Disneyland every year.

3. She will get a huge tax deduction based on her charitable contribution to the trust. It will be so big that the IRS will let her carry the unused portion forward for a total of six years. It's a good bet she will pay no income tax for the next six years.

4. She can name any number of charities to receive the 14 million in the trust when she dies. Ultimately, she could have a new church building, a wing on the hospital or scholarships named after her and Clarence for her generosity. The number of people who would benefit in the future is too many to count.

5. If she is concerned about disinheriting her heirs, she can use some of the income to buy a life insurance policy and name her children and grandchildren beneficiaries. She could also gift up to (currently) $12,000 per year to as many people as she wants without any gift tax implications.

6. No estate tax will be due at her death.

7. The 14 million will be professionally managed inside the charitable remainder trust. She has no investment worries and can set the trust up so she has a guaranteed income. Downturns in the economy, weather catastrophes or world events will have no effect on her income.

It's true that Mildred could simply sell the farm and pay the capital gains tax. Aside from the capital gains tax, coming into this large sum of money could create more problems.

She would have to invest it while fending off suggestions from well-meaning relatives. She would have some estate planning to do to avoid half of her estate going to the government in taxes when she dies.

When you put the charitable remainder trust on the table as an option, most of these problems vanish and many additional benefits appear.




--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/insurance/new-kid-on-the-block-indexed-universal-life.html http://www.articletrader.com/finance/insurance/new-kid-on-the-block-indexed-universal-life.html Tue, 05 Jun 2007 00:00:00 -0500
Now there is a new kid on the block: Indexed Universal Life.

Here are the salient features:

1. Indexed Universal Life (IUL) is similar to Universal Life (UL); premiums and death benefits are flexible. You can increase or decrease premiums, or even stop them altogether. As your situation changes, you can decrease or increase (subject to insurability) the death benefit.

2. IUL is similar to Variable Life (VL) or Variable Universal Life (VUL) as the cash value is based on the increases of one or more stock indexes. The most common are the DJIA, NASDAQ 100 and the S & P 500.

Variable Life contracts allow direct investment in equities, much like a mutual fund. Indexed Universal Life policies do not invest directly in equities, so you do not have the same downside risk. The insurance company assumes all the risk.

If the index that you have chosen goes up over a given time frame (usually one year), your cash value goes up. However, if the index goes down, your cash value either stays the same or is credited with a minimum guaranteed interest rate, i.e. 2%.

3. How cool is that? If the market goes up, you get to participate in the growth. However, if the market goes down, your account doesn't go down; it stays the same. It gets even better. Any gains are locked in. They can never be taken away due to future decreases in the market. It's like walking up a flight of stairs. If the market goes up, you take a step up; if the market goes down, you stay where you are.

4. Indexed Universal Life has only been around for a few years. Only a few companies offer this contract. However, since 2000 the annual growth rate for this type of policy has been 24%.

When you speak with your life insurance agent about IUL, there are a few new terms you will need to understand:

1. Crediting Options

Crediting options are the math behind how the insurance company determines how much to credit your cash value at the end of each crediting period. The two most common are point to point and monthly average.

Point to point looks at the value of the stock index you chose at the beginning of each contract year and compares it to the value at the end of the point-to-point period. This is normally one year, but could be 2 or 5 years, depending on your contract choice.

Whatever happens in the interim doesn't matter. You could have a very high growth rate if the market and the corresponding index have a growth spurt during the last few months of the term. On the other hand, you could end up with a healthy loss if the index takes a dive during the latter part of your term with what to a regular investor would be a gain for the year.

The monthly average method takes a reading of the index each month. Then at the end of the year, adds them up and divides by twelve. This approach tends to smooth out the fluctuations.

Which one is better? It depends on your tolerance for risk and how the market performs during your policy's time frame. Since a life insurance policy is a long-term proposition, in the real world both should end up about the same over an extended period of time.

2. Participation Rate

Participation rate is the percentage of the increase in the index credited to your Indexed Universal Life policy each year. It could be, for example, 55%, 80%, 100% or 135%. Any given percentage rate is not necessarily better than another. It is simply the insurance company’s way of factoring in their downside risk and is a component that allows you to negate a cash value decrease if the market goes down.

3. Cap Rate

The cap rate is the maximum rate of return the insurance company will credit to your policy each year. For example, if the cap rate is 12% and the index you chose went up 10%, your policy is credited with a 10% gain. However, if the index increased 15%, your policy is credited with 12%, the cap. Not all Indexed Universal Life contracts have a cap. Participation rates and cap rates work in conjunction with each other.

Indexed Universal Life is an exciting new approach. If you are looking for a rate of return that is higher than traditional whole life or universal life, but don't want the market risk of variable life, indexed universal life may be for you. The fact that the cash values are based on the performance of the equity market, coupled with the feature that prevents loses and locks in gains should be enough to warrant further exploration.




--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/insurance/how-to-sell-your-life-insurance-policy-for-more-than-the-cash-value.html http://www.articletrader.com/finance/insurance/how-to-sell-your-life-insurance-policy-for-more-than-the-cash-value.html Tue, 29 May 2007 00:00:00 -0500
This transaction is called a life settlement. Life settlements have been on the scene since 1995; they are not new. While the purchase is facilitated by an insurance company, the buyers typically are pension and institutional funds which hold the policies in their investment portfolios.

Here are three common reasons why a person would sell their insurance policy…

1. The policy has outlived its usefulness.

78% of all insurance is purchased for family protection. Families with children insure the breadwinner(s) until they have had the time to build up an estate or an adequate 401(k) plan to provide for the family, pay off a mortgage and educate the children. Most people have been there and done that.

However, later in life these needs may have disappeared. The house is paid for, the kids have been to college and your 401(k) plan has a balance ten times greater than your life insurance face value.

Rather than continue to pay premiums, or surrender it for its cash value, you can sell it for more than the cash value. Buy a boat, take an extended vacation or go down to the dealership and plunk down cash for that car you have always wanted.

2. The policy has a large loan.

There are three common ways a policy can acquire a large loan.

First, at some point you simply took a maximum loan against your policy. It could have been to satisfy an emergency, take advantage of an investment opportunity—any number of things. But the loan was never repaid.

Second, you could have taken a modest loan years ago and never paid anything toward the principal. Every year, however, you received a bill for the interest due. If you are like many people, this goes in the round file and you never pay the interest. What happens is that the interest gets added to the loan. So what is originally simple interest turns into compound interest.

Over time, the loan and the unpaid interest can consume the entire cash value. That's when you get the letter from the insurance company telling you that to keep the policy in force, you need to come up with some astronomical amount of money.

But that's not the worst of it. When you call your agent to see what your other options might be, he or she informs you that if the policy lapses, there will be a gain (cash value less premiums paid) that the insurance company is required to report to the IRS. Worse yet is the fact that there is no money in the insurance policy to pay the tax (remember it lapsed for lack of premium payment and/or lack of any remaining values). So you are going to have to come up with the tax from someplace else. I don't think you would consider getting this information one of your better days.

3. You own Universal Life and interest rates have declined.

Getting this news is another bad day at the mail box. This time the letter from the insurance company says that in order to keep the policy in force, you have to come up with more than you could get for your first born.

How this occurs goes back to when you bought your policy. One of the major factors in determining the premium for a given face amount of Universal Life is the interest rate assumption made in the original proposal. Remember the double-digit interest rates? You could have bought your policy during this time frame. Most insurance agents would have suggested using a lower interest rate assumption to be conservative. However, interest rates have declined to even below these play-it-safe assumptions.

The sale of your insurance policy averts all three of these problems. In the first case, you don't have to pay any more premiums for coverage that is no longer needed. In the second, the problem you have with the loan disappears and is replaced by cash. And in the third, the probable lapse of the policy due to the fact that the premium to maintain the coverage is off the charts is offset by the cash received via a sale.




--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/insurance/hot-new-product-long-term-care-annuities.html http://www.articletrader.com/finance/insurance/hot-new-product-long-term-care-annuities.html Wed, 23 May 2007 00:00:00 -0500
Why Seniors Don't Buy Long Term Care

1. In my experience, over half the people who shun long term care insurance do so because they feel they will never need it. It is difficult to visualize going to a nursing home. Statistically, half of these people will be right.

However, there are a number of scenarios where the person may need some kind of assistance but never see the front door of a nursing home. In fact, most people who need long term care can receive care without ever leaving their home.

When you stop and think about it, the decision not to buy long term care insurance is a decision to self insure. This can be costly and possibly devastating.

The average cost of a nursing home today is $80,000 per year and rising. At that rate, it doesn't take but a few years to grind through a modest estate. If both the husband and wife need nursing home care, the time to dissipate an estate is cut in half.

A person can spend 40 years in a career building a retirement nest egg. They spend another 40+ years conservatively managing their money while trying to keep up with inflation. If they need to go into a nursing home during the last five years of their life, it all could be gone quickly.

It doesn't have to be that way as you will soon see.

2. Many people think long term care insurance is too expensive. They may be right.

If a person waits too long to apply, they may have sticker shock. The rates are based on age.

However, long term care comes with a lot of bells and whistles. When you strip away some of the options that may be nice to have, but not essential, the premium is a lot lower.

If a person looks at a plan that covers home health care only, the premium is lower yet. This takes care of the 50% who never will need to go into a nursing home.

The only thing better is coverage without a premium, which I will get to in a minute.

3. Most people react to a problem only when the problem surfaces. If a person waits to apply for long term care insurance until they are experiencing health problems, any long term care insurance plan may be prohibitively expensive or altogether unavailable.

The Solution: The Long Term Care Insurance That is Not a Policy

The insurance industry is very competitive. This very competition engenders new thinking and creative policies. Enter "Long Term Care Annuities."

There are only a few companies offering this product and the structure differs from company to company. To give you a general overview of the concept and mechanics, I am going to describe the main aspects of one carrier's contract. Check with your financial planner for all the options.

The underlying base of an "LTC annuity" is an annuity. Nothing new here; annuities have been around for a hundred years. They are safe, the funds accrue at a competitive interest rate, and the account grows tax-deferred.

To form an LTC annuity, the insurance company has built in a "long term care option." It is not a rider. There is no premium. It is simply an option you elect if long term care is ever needed. Sweet.

To qualify, a person only needs to lose two of six ADLs (activities of daily living). ADLs are insurance companies' method of determining the qualification for levels of care. They are eating, bathing, dressing, toileting, transferring (walking) and continence.

The person doesn't have to be in a nursing home. They simply need to have demonstrated the inability to perform two of the six ADLs to qualify to put the long term care option in their annuity in action.

An Example

If a male, age 60, places $200,000 into an LTC annuity, assuming a conservative interest rate, the policy would grow to $300,000 in ten years. If the $300,000 were converted into a life income, the person would receive $2,200 per month for the balance of their life. An 8.8% return. Not too bad, considering it is guaranteed no matter what.

If this person needs long term care at age 70 by virtue of losing two of six ADLs and elected the long term care option, the life income would jump to $4,500 a month.

Conclusion

These new products, long term care annuities, provide the option to receive long term care benefits only if they are needed. There is no separate long term care insurance policy, no premiums and generally little or no underwriting.

Now there are no excuses. Those who feel they will never need long term care will simply never exercise their LTC option. Those who find long term care too expensive have an alternative with no premiums. Moreover, those who have health issues can obtain long term care benefits, as underwriting is simplified or non-existent.




--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/a-fund-raising-idea-that-instantly-funds-any-special-project.html http://www.articletrader.com/finance/a-fund-raising-idea-that-instantly-funds-any-special-project.html Wed, 16 May 2007 00:00:00 -0500
Three Steps to Funding Your Project

1. Select an insurance agent

This fund raising idea involves annuities; annuities can only be placed by a licensed insurance agent. I would suggest selecting an insurance agent from outside the organization. Look for agents with the CLU, ChFC or CFP professional designations.

My experience is that you are asking for trouble if you try to use an insurance agent who is on your board or active in your cause. Chances are there are several insurance agents to choose from and you don't want to hurt anyone's feelings. Resist the temptation to spread the business among several agents, as you want to keep things simple.

Having been in the insurance business for 35 years, here is my rationale: If any agent within the organization expects to earn the commissions resulting from this fund raising idea, they should have brought the concept to the organization long ago.

2. Communicate the Fund Raising Idea

Prospects for this fund raising idea are senior members of your organization support group. They should be age 70 or older. The older the donor is, the greater their benefit.

Here is a simple outline of the fund raising technique.

a. A person donates cash or a highly appreciated asset.

b. If an asset is donated, your organization sells the property and pays no tax on the sale.

c. A portion of the sale proceeds purchases a single premium immediate annuity on the life of the donor.

d. Your organization keeps the difference and can immediately fund your need.

e. The donor receives an income tax deduction, which can be spread over 6 years if necessary.

f. The donor also receives a guaranteed life income. The rate of return that the income represents is normally much greater than they have been receiving.

g. The net result is that the donor receives an income tax deduction and increased income benefits. Your nonprofit receives immediate cash.

The agent can assist with presenting this fund raising idea to your constituents. That is his or her forte. Many types of media can be used to communicate the idea; for example, a mailing, a post on your web site, a seminar, or an audio CD outlining the benefits.

3. Set Up the Simple Administrative Procedure

Mechanically, this is how the entire fund raising idea flows:

a. Your organization uses the cash or the proceeds from the donated asset to buy a single premium immediate annuity on the donor. A simple letter is usually required, signed by the donor, to establish insurable interest. A one-page agreement, which complies with the laws of your state, outlines each party's obligations.

b. Each month your organization receives a check from the insurance company for each donor.

c. Your organization could endorse these checks over to each donor or you could issues separate checks. The process is very simple. It is just a couple of new line items in your accounting system.

Summary

You may recognize this fund raising idea as a charitable gift annuity. Many national nonprofits have gift annuity programs. However, most small nonprofits do not. This is the power and simplicity of this fund raising idea. It is simple, straightforward and your organization receives funds immediately upon the completion of each transaction.

National gift annuity programs do not fund your program immediately. Furthermore, national programs do not realize any gain until the person dies and then the gain goes into their coffers, not your organization's.

If you are involved in a charter school, a church or any nonprofit, here’s how the numbers could work out.

Let's assume there are 500 supporters and this fund raising idea applies to just 2%, or ten individuals. Further, assume that the range of donations is between $10,000 and $50,000, with the average being $25,000.

This would bring in $250,000. The cost of the immediate annuities will vary by age, but let's assume this cost is $125,000. That puts $125,000 in your organization's pocket.

This fund raising idea appeals to the average person. The donor benefits financially in two ways: a tax deduction and a guaranteed life income. Moreover, they get to see the end result of their gift. Your organization receives a large influx of cash quickly to fund a pressing need. This fund raising idea is a win-win for everyone.




--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/insurance/why-an-individual-disability-insurance-policy-is-better-than-group-ltd.html http://www.articletrader.com/finance/insurance/why-an-individual-disability-insurance-policy-is-better-than-group-ltd.html Tue, 08 May 2007 00:00:00 -0500
Let's contrast some of the more important contract provisions in a group LTD plan and an individual policy. You can come to your own conclusion.

Can the Coverage Be Cancelled?

Group LTD plans can be cancelled in two ways. First, the insurance company can cancel the plan if their claim experience is bad. Second, your employer could decide to terminate the plan at any time. If a company can downsize, it certainly can curtail benefits.

When you buy an individual disability insurance policy, the insurance company can never cancel the policy. You alone decide when you want to coverage to stop.

Can Premiums Be Increased?

If the insurer sees an increase in claims, it will raise the premium on a group LTD plan. Individual policy premiums are frozen for the duration.

Portability

What if you change employers? You cannot take your group plan with you. By contrast, your individual disability income plan is completely portable since it is not tied to any company employer.

Today, the average person will change jobs 7 times during their career. There is no assurance that each employer will offer a long term disability plan.

Taxation

Group long term disability benefits are taxable just like income. Individual policy benefits are 100% tax-free.

Offsets

Group LTD benefits are reduced by the amount of benefits received from Social Security, Workers Compensation, state cash sickness program, etc. Individual policies have no offsets.

Own Occupation

Individual policies have the ability to protect the individual in his or her "own occupation." Typical wording for the definition of disability for group LTD, as it pertains to occupation, goes something like this: "For the first two years, the inability to perform each and every duty of your occupation; after two years, the inability to engage in any gainful occupation."

This means you are covered in your occupation for two years. After that, if you can sell pencils on the street, the insurance company will not pay.

Certain occupations can be covered forever by individual policies. For example, if a urologist becomes disabled to the extent he or she cannot practice the specialty of urology, but could teach urology at a medical school, the individual policy would continue to pay the disability benefits. Moreover, the doctor would receive both the individual policy disability benefits and the medical school teaching salary.

Presumptive Disability

Disabilities that are "presumptive" are those where the insurance company will pay the full benefit even if the person is fully employed. Examples are the loss of use of two limbs, loss of sight, hearing or speech. A person who is in a wheel chair because they lost the use of their legs in a car accident is a typical example. This is a benefit provided by individual policies, but not by group LTD plans.

Partial Disability

This is the most important distinction because over 70% of the claims filed at insurance company home offices are for partial disability. The person is not completely unable to work. Their disability may only allow them to work a certain number of hours per day and their salary is adjusted downward accordingly.

An individual plan pays a percentage of the total benefit that represents the percentage of income lost. For example, if a person making $5,000 a month with a $3,000 a month individual policy benefit loses 60% of their income due to a disability, the policy would pay 60% of $3,000 or $1,800. Most group plans do not pay for a partial disability.

Conclusion

You have seen that group long term disability income plans can be cancelled, premiums waived and lack portability. Benefits are taxable and are offset by other plans. They posses no ability to protect an occupation and, most important, most do not pay for the type of claim most likely to occur: partial disability.

Individual disability insurance plans do not have these limitations. They cost more, but when it comes to disability coverage, you get what you pay for. If you get in an accident or develop a sickness that inhibits your ability to put food on the table, your thoughts are not focused on what the premium is for your disability income insurance coverage. You simply want to know when your disability check will arrive in the mail.





--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/business/small-business/the-buy-sell-agreement-why-it-is-the-simple-solution.html http://www.articletrader.com/business/small-business/the-buy-sell-agreement-why-it-is-the-simple-solution.html Tue, 01 May 2007 00:00:00 -0500
The most basic element of the plan involves the use of a buy-sell agreement. It is astounding how many business owners do not have a buy-sell agreement. Even more amazing is the numbers who have one, but have no method to fund it. Let's take a look at the rationale behind a funded buy-sell agreement.

Creates a Market

Most businesses are closely held. A person can't call their stockbroker and buy shares in the business. Essentially, there is no market for the business.

If the business is a sole proprietorship or one-man or one-woman corporation, who is going to buy the business when the owner dies? In rare cases, a family member may be able to step in and successfully continue the business. Most of the time, the businesses simply closes its doors.

If the business owner is a partner or minority shareholder in a corporation, where is the financial motivation for the other owners to buy a minority interest? A buy-sell agreement among the person's partners, or one involving one or more key employees for the sole owner, creates a market for the business.

Avoids a New Partnership With the Heirs

In my experience, there is no quicker way to get a male business owner's attention with respect to business succession planning than to ask two questions.

"Do you and your partner have a buy-sell agreement?"

"No."

"If your partner died, would you like to be in business with his wife?"

Silence.

When a partner dies, and the dust settles, generally one of two things happens. The wife calls up her husband's partner and asks where her paycheck has been for the last month. The partner has to explain that her husband's salary was a result of his active participation in the business, not tied simply to the fact that he owned stock in the business.

The second possibility is the wife, who has no experience or participation in the business, takes over her husband's position.

A buy-sell agreement avoids both of these scenarios.

Sets the Price

Assuming buyers surface, what is the value of the deceased owner's interest? If the seller is the deceased owner's family, they want as much as they can get. The remaining partners want to pay as little as possible. Oftentimes, the dollar amount is far apart.

By setting a price that everyone is happy with while living, there is no haggling over price at death. In addition, this "pegs" the value of the business for estate tax purposes. In the absence of an agreement, the estate lists a value on the estate tax return, if one is required. The IRS often comes back with their valuation opinion: a much higher amount. What ensues is a back and forth argument, involving attorney's fees and stress. Some of these cases have dragged on for as much as ten years.

Converts an Illiquid Asset to Cash

A properly funded buy-sell agreement instantly converts bricks, mortar and steel into cash. This provides funds for the heirs to pay obligations and taxes. Cash can be invested to generate an income; cash is easily divided among heirs.

Funded With Life Insurance

Assuming that a buy-sell agreement has been drafted, the next question becomes, "Where will the funds come from for the obligation now mandated by the buy-sell agreement?" There are three typical choices.

1. Pay cash. This is only an academic choice. Most businesses don't have cash in these amounts laying around.

2. Buy out over time. If the business interest is worth $500,000, the arrangement is to pay, for example, $50,000 plus interest over 10 years. Negotiations could be tough. The family wants their money as quickly as possible; the remaining owners want to string it out for as long as possible.

This option is expensive. It requires the survivors to pay principal plus interest. The payments put a mortgage on future earnings and have to go through the tax wringer. The result is paying much more than a dollar for each dollar of business interest purchased.

3. Fund the agreement with life insurance. This is the "discounted dollar" method. Money is available immediately to fund the agreement, and the total premiums on the policy will come nowhere near the amount received.

If you own a business and do not have a buy-sell agreement in effect, call your life insurance agent, attorney and accountant. Set up a meeting, come up with a value, have an agreement drafted, and fund it with life insurance. You have probably spent a lifetime putting your business together. Now allocate a couple of hours toward keeping it together for your heirs and circumventing a myriad of problems.





--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/investing/ten-things-the-average-person-does-not-know-about-annuities.html http://www.articletrader.com/finance/investing/ten-things-the-average-person-does-not-know-about-annuities.html Tue, 24 Apr 2007 00:00:00 -0500
Seniors hold billions of dollars in deferred annuities. However, my experience is that the average person knows little about the unique advantages of deferred annuities, much less the options they have during the holding period.

When you mention the term, "annuity", it typically conjures up thoughts of getting a small check in the mail every month from some insurance company. It is viewed as an income.

The vast majority, however, of annuities are of the "deferred annuity" variety. They are accounts designed to grow money over a period of time in a safe environment. Over 90% of deferred annuities are never "annuitized", that is, converted to that monthly check in the mail.

So let's take a look at some of the attributes of annuities and, in the process, clear up many misunderstandings about this vehicle.

Tax Deferred Earnings

Deferred annuities provide "triple compound interest." There is interest on principal, interest on interest and interest on the taxes you would have paid on an investment in a non-tax deferred environment.

For example, 6% which is taxable is equivalent to an 8% non-taxed return assuming a combined federal and state tax bracket of 25%.

Safety

While deferred annuities are not FDIC insured, like a CD with a bank, they are backed by the generally billions of dollars of the insurance company's assets. No big risks here.

A Competitive Interest Rate

Insurance companies normally set the interest rate for a deferred annuity contract annually. You will find that it is usually one to two points above CD rates. So not only do you get a higher rate but the interest is tax-deferred, unlike a CD where you pay taxes on the interest each year.

Some deferred annuities offer a rate that is guaranteed for a number of years, such as five. If you think interest rates will fall, you can lock in today's rate.

Minimum Interest Guarantee

When you get to the end of your annuity time frame, if your annuity has not given you at least a minimum of (generally) 3% interest per year, then the insurance company will apply their minimum guaranteed rate. Nothing to get excited about, but at least you know that you can't lose money and there is a minimum interest rate that is guaranteed no matter what.

No Sales Charges

When you move money into a deferred annuity, 100% of the money goes to work for you from day one. There are no sales charges subtracted from your initial deposit.

No Annual Administration Fees

Some places to park money, like mutual funds, may have fees attached to the administration of the fund. Not so with deferred annuities.

Withdrawal Privileges

This is a source of major misunderstanding. Many people do not realize that their money is not as tied up as they think; there are a number of ways to access funds without surrender charge penalties.

1. First, there is the 10% annual free withdrawal privilege. Each year you can take out up to 10% of your account value free of any penalties.
2. If you ever need to go into a nursing home, most insurance companies will allow you to take out whatever you need with no penalty.
3. If your doctor diagnoses you with a terminal illness, you typically can take out any amount penalty free.
4. You can convert all, or a portion, to a guaranteed income. This can be for your life, your life plus another (i.e. husband and wife) or for a set number of years.

5. There are a handful of new products on the market which will set you up with a pay out at a guaranteed interest rate for the rest of your life, but also allow you to retain control of the principal. In other words, the annuity is never "annuitized."

The interest rate is typically a function of your age. For example, if you are 65, the interest rate is 5%; 70 would be 6%; 75 pays 7%.

Free of Probate

This feature will vary by state, but in those states in which this feature is applied, an annuity is not included as a probate asset. Hence it is free of any probate fees or any delays in passing the funds to your beneficiaries. The normal requirement, however, is that the annuity must have a named beneficiary.

Free From Creditors

Again, this will vary from state to state. If you live in a state where this applies, this is added peace of mind that the money in your deferred annuity is safe in the event of a financial reversal.

Surrender Charges

Folks who object to deferred annuities usually bring up the fact that there are surrender charges that make getting their hands on the money costly. To a certain degree this is true. In order for the insurance company to go on the hook for the guarantees in the contract, they need to put some strings on accessing the funds.

However, these surrender charges decrease over time. Eventually they disappear altogether. In addition, after you have held your contract for a certain number of years (five is typical), you can take all or some of the money out over a five (sometimes ten) year period with no surrender charges.

The bottom line is that the surrender charge issue can be circumvented in a number of instances. Remember, deferred annuities are longer term scenarios. You certainly wouldn't want to put emergency fund money or money you are going to use to buy a new car in two years into a deferred annuity contract to begin with.

So there you have it. Ten features of a deferred annuity, which will add to your understanding of this product.




--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/investing/when-not-to-name-your-spouse-the-beneficiary-of-your-ira.html http://www.articletrader.com/finance/investing/when-not-to-name-your-spouse-the-beneficiary-of-your-ira.html Tue, 17 Apr 2007 00:00:00 -0500
First, let's take a quick look at the requirements and advantages of naming your spouse as the sole beneficiary of your IRA. Choosing another beneficiary will cause you to lose some of these advantages.

The first advantage allows the spouse to elect to treat the IRA as his or her own. When the objective is to delay the required minimum distributions (RMDs) for as long as possible, the spouse would generally elect this option. This election allows the spouse to postpone RMDs until they reach age 70 1/2 in the case of a traditional IRA or SEP. RMDs are deferred all the way to the death of the spouse if the IRA were a Roth. If the spouse is younger than the deceased IRA owner, this makes a lot of sense where deferral is desired.

Using the life expectancy of the spouse and a beneficiary is one of the spouse's options, thus potentially extending the payout period. If the spouse were not the sole beneficiary, the life expectancy of the IRA owner and beneficiary is the requirement. Given the fact that the IRA owner is older, this shortens the distribution period.

If the IRA owner dies before age 70 1/2, the spouse can defer the RMDs until the IRA owner would have reached age 70 1/2. If the IRA owner is younger than the spouse is, this could be an attractive option.

Despite these advantages and flexibilities, other beneficiary elections may make more sense.

Marital Deduction Trust

The use of a trust has many advantages such as the ability to "customize" the distribution of trust assets among beneficiaries, tax advantages and the ability to sprinkle income.

One main advantage of naming a marital trust as the beneficiary of your IRA is to include a QTIP provision (Qualified Terminal Interest Property). This allows the IRA owner to control where the property passes upon the death of the spouse. The most obvious use of a QTIP election is to make sure the children or a person are not disinherited due to the spouse's own subsequent beneficiary election or a second marriage.

Credit Shelter Bypass Trust

These trusts take advantage of the unified credit the law provides each person. In simple terms, a credit shelter bypass trust has two parts, Part A and Part B. It receives all the estate assets. The spouse typically receives income from both parts. However, at the death of the spouse, their part flows directly to (generally) the children, thus removing it from double taxation. Today, proper planning and the use of a credit bypass trust can move $4,000,000 to the children free of tax.

RMDs from the IRA are still required and based on the life expectancy of the oldest beneficiary of the trust (probably the spouse). The tax advantages of the Credit Shelter trust conflict with the ability to stretch the RMDs out for the long possible time.

Dynasty Planning

Here, the goal is to provide for as many generations of beneficiaries as possible, as opposed to planning solely for the spouse. Again, RMDs are still required. The name of the game is to spread the payouts over the longest period possible by using the youngest beneficiaries. The advantage is the IRA account continues to grow at interest. Under the right circumstances, a $100,000 IRA could pay out over 20 million dollars.

Traditionally, a dynasty trust is used. While "the rule against perpetuities" is not in effect in all states, generally a person can spread the payout over several generations. The maximum would be the life of anyone alive at the death of the creator of the trust, plus 21 years. However, as we have seen, for RMD purposes, the life expectancy of the oldest trust beneficiary is required when a trust is the beneficiary of an IRA.

One way to get around this is to establish a dynasty trust for each beneficiary. Alternatively, to keep it simple, just name each beneficiary separately (i.e. children, grandchildren) and forget about the trust.

While naming the spouse as the only beneficiary of an IRA has its advantages, do not just blindly make this election. The size of your estate, the situation of your beneficiaries and your goals are some of the factors that may require another choice. This is the time to sit down with your financial planner and an estate planning attorney and review all the options and their consequences.




--

Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate and to claim the free video, "How to Sell Your Life Insurance Policy for More than the Cash Value", go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]> http://www.articletrader.com/finance/insurance/ilit-the-irrevocable-life-insurance-trust.html http://www.articletrader.com/finance/insurance/ilit-the-irrevocable-life-insurance-trust.html Wed, 11 Apr 2007 00:00:00 -0500
For example, if a married couple has an estate of 6 million, they can pass 4 million to the next generation with no tax if they set up the proper trust arrangement to take advantage of the maximum lifetime unified credits. That leaves 2 million still subject to tax under the current law.

The logical thing to do is to purchase a survivorship life insurance policy for the projected tax. However, a policy purchased in the manner most people are familiar with, the problem is not solved; it is compounded.

If the couple has any "incidences of ownership" in the policy, it will be included in the estate. The purchase of a one million dollar policy increases the estate to 7 million. Four million passes tax-free, but now the taxable estate is 3 million. This increases the tax by some $225,000.

Enter the Irrevocable Life Insurance Trust.

Attorneys draft Irrevocable Life Insurance Trusts. The trust will apply for its own Federal Tax ID number. The trust will then apply for the survivorship life insurance policy. It will be the applicant, owner and beneficiary of the policy. Typical wording is "The John and Mary Smith Irrevocable Life Insurance Trust dated April 5, 2007, JPMorgan Chase Bank, trustee."

In this example, since neither John nor Mary has any "incidence of ownership" in the policy, it will not be part of their taxable estate.

The Owner and Beneficiary

As opposed to using an ILIT, I have worked with a few cases where the only child or children are the owner and beneficiary. This may work. However, each year the parents gift the money to pay the premium, there is no assurance that the money will be used to pay the premium. Furthermore, the children, as owners, have access to the cash values. An ILIT has much more assurance.

I have seen the trustee be a child, the couple's attorney, accountant or a long-time family friend. All of these will work, but an un-biased third party, such as a bank, is much better. If an individual is the trustee, name a bank as the successor trustee. Banks don't die.

The Crummey Letter

Typically, the life insurance premiums are paid by the parents in the form of annual gifts to the Irrevocable Life Insurance Trust. Currently (2007) a person can give up to $12,000 each year to as many people as they want without paying gift tax or having the amount subtracted from their lifetime exclusion. However, these gifts must be "present interest" gifts, which mean the recipient must have immediate rights to the gift.

Gifts to an ILIT, for paying premiums on a life insurance policy owned by the ILIT, are not "present interest" gifts. A "Crummey" letter qualifies the gift as a "present interest" gift. The letter is not crummy or poorly written; the letter takes its name from a court case initiated in 1968 by Clifford Crummey, who was trying to do this very same thing: make annual gifts present interest gifts. Ultimately, the outcome of the case required the use of a letter, now known as the "Crummey" letter.

A letter is sent every year to each of the beneficiaries of the ILIT. It simply states that a gift has been made to the ILIT and they can withdraw it if they want within a certain timeframe, usually 30 or 60 days. If they don't exercise this right, the gift becomes a present interest gift.

Obviously, there is an "understanding" between the parents and children to ignore these letters, as it is a part of the overall estate plan. The annual gifts and the ensuing yearly Crummey letters do not have to go to children with a legal capacity, such as age 18. I have seen letters written to 4-month-old babies. In this case, even though the baby was not able to read the letter or understand the estate planning rationale behind it, it did not exercise its right to the gift. Phew, another legal bullet dodged.

As you can see, it is very important to arrange for the annual drafting of these Crummey letters. Some banks' trust departments used to provide this service if they were the trustee of the trust. This was just a courtesy as they never would see or manage any of the life insurance proceeds.

The best bet is to have your attorney do the letters. I have one client whose law firm (under a written set of instructions) has the premium notice from the life insurance company sent to their firm, prepare and send the Crummey letters and then pay the premium. All the client has to do is open a letter each year from the law firm indicating a premium is due and send them a check. Other than that, they don't have to lift a finger. A nice service.

If you have an estate that will be subject to estate taxes and your advisors suggest a life insurance policy to pay the tax at a discount, make sure you evaluate the use of an Irrevocable Life Insurance Trust.






--
Robert D. Cavanaugh, CLU is a 36-year financial and estate planning veteran and author of the free newsletter, "The Estate Preservation Advisor". For cutting-edge, easy-to-understand financial planning resources and techniques to increase your income, reduce taxes and preserve your estate, go to http://theestatepreservationadvisor.com/rd/subscribe.htm

Source: http://www.articletrader.com ]]>