" In traditional participating whole life policies, policyowner dividends were not affected by policy loans, but most participating whole life policies being sold today use what is called “direct recognition” to reduce dividends on policies with outstanding loans. This not only adjusts for the differential in earnings but also discourages policy loans. For universal life policies and other non-participating designs, there are no dividends to adjust; insurers compensate for lost earnings by reducing the earnings rate being credited directly to the cash value. " - Excerpt from McGill's Life Insurance - 9th Edition 

Does your life insurance have the Direct Recognition in your contract?  

If it does, are there alternatives?  

For a Policy Review or to discuss this more, please e-mail me at dkdowell@dkdcpa.com 

I am very pleased to announce that I have recently completed the Retirement Income Certified Professional Distinction (RICP) offered by The American College.  Attached is a Brochure that explains the program and the material covered.  

Five Questions and Answers about New Social Security Claiming Rules

When Congress unexpectedly eliminated two Social Security claiming strategies as part of  the Bipartisan Budget Act of 2015, retirement planning got a little more complicated for people who expected to use those strategies to boost their retirement income.  Here are some questions and answers that could help if you are wondering how the new rules might affect you.

What's changing?

The provision of the budget bill called "Closure of Unintended Loopholes" primarily addresses two Social Security claiming strategies that have become increasingly popular over the last several  years. These two strategies, known as "file and suspend" and "restricted application for a spousal benefit,"  have often been used  to increase cumulative Social Security income for married couples. The budget bill has eliminated those strategies for most future retirees, but you may still have time to take advantage of them, depending on your age.

File and suspend

Under the old rules, an individual who had reached full retirement age could file for retired worker benefits in order to allow a spouse or dependent child to file for a spousal or dependent benefit. The individual could then suspend the retired worker benefit in order to accrue delayed retirement credits  and claim an increased worker benefit at a later date, up to age 70. For some couples and families, this strategy increased their total lifetime combined benefit.

Under the new rules, effective for suspension requests submitted on or after April 30, 2016 (or later if the Social Security Administration provides additional guidance), the worker can file and suspend and accrue delayed retirement credits, but no one can collect benefits on the worker's earnings record during the suspension period, effectively ending the file-and-suspend strategy for couples and families. The new rules also mean that a worker who files and suspends can no longer request a lump-sum payment in lieu of receiving delayed retirement credits for the period during which benefits were suspended. (This previously available option was helpful to someone who faced a change of circumstances, such as  a serious illness.)

Restricted application

 Under the old rules, a married individual who had reached full retirement age could file a "restricted application" for spousal benefits after the other spouse had filed for retired

worker benefits. This allowed the individual to collect spousal benefits while delaying filing for his or her own benefit, in order to accrue delayed retirement credits.  

Under the new rules, an individual born in 1954 or later who files a benefit application will be deemed to have filed for both worker and spousal benefits, and will receive whichever benefit is higher. He or she will no longer be able to file only for spousal benefits.

The bottom line

A limited window still exists to take advantage of these two claiming strategies.  If you are currently at least age 66 or will be by April 30, 2016, you may be able to use the file-and-suspend strategy to allow your eligible spouse or dependent child to file for benefits, while also increasing your future benefit. To  file a   restricted application and claim only spousal benefits at age 66, you must be at least age 62 by the end of December 2015. At the time you file, your spouse must have already claimed Social Security retirement benefits or filed and suspended benefits before the effective date of the new rules.    

Why did Congress act now?

Both the file-and-suspend and the restricted application strategies were made possible by the Senior Citizens Freedom to Work Act of 2000. Part of this Act's original intent was to enable individuals to change their  minds  in the event they determined that they wanted to work longer but were already receiving Social Security retirement benefits. However, this opened up some claiming strategies, that while legal, went beyond the original intent of the legislation. Congress used the budget bill to close these loopholes in order to save money and slightly reduce  the long-range actuarial deficit faced by  the Social Security trust funds.

What if you're already using one of these strategies?

If you are already using the file-and-suspend or the restricted application strategy, you will not be affected by the new rules. You have already met the age requirements.

How are benefits for surviving spouses affected?

Rules affecting surviving spouses have not changed.   If you are eligible for both a  survivor benefit and  a  retirement benefit based on your own earnings record,  you can still opt to receive one benefit first, then switch to the other higher benefit later.

What planning opportunities still exist?

Even if you can no longer take advantage of the file-and-suspend and restricted application strategies, you may still benefit from considering your Social Security filing options. The age when you begin receiving Social Security benefits can significantly affect your retirement income and income that is available to your survivors.

Basic options for claiming Social Security remain unchanged. Currently, the earliest age at which you can receive Social Security retirement benefits is 62, but if you choose to take benefits before your full retirement age (66 to 67, depending on the year you were born), your benefit will be permanently reduced by as much as 30%. On the other hand, if you delay receiving Social Security benefits past your full retirement age, you'll receive delayed retirement credits, which will increase your benefit by 8% for each  year you delay, up to age 70.

Determining when to file for Social Security benefits is one of the biggest financial decisions you'll need to make as you approach retirement. There's no "one-size-fits-all" answer--it's an individual decision that must

be based on many factors, including other sources of

retirement income, whether you

plan to continue working, how many years you expect to spend in retirement, and

your income tax situation. It's especially complicated when you're married because you and your spouse will need to plan together, taking into account the Social Security benefits you each may be entitled to, including survivor benefits.

Although some claiming options are going away, plenty of planning opportunities remain, and you may benefit from taking the time to make an informed decision about when to file for  Social Security.

If you sign up for a my Social Security

account at the Social Security website, socialsecurity.gov,  you can view your Social Security Statement online. Your statement contains a detailed record of your earnings, as

well as estimates of retirement, survivors, and disability benefits, along

with other information about Social Security that will be very useful when

planning for retirement. If you're not registered for an online account and

are not yet receiving benefits, you'll receive a statement in the mail every

five years, from age 25 to age 60, and then annually thereafter.

One hundred and twenty Americans live with chronic illness. How can you tailor wealth management services to meet their needs?

Whether or not you realize it, a substantial portion of your clients are themselves living with chronic illness or have a loved one who is. The statistics are startling:

120 million Americans have a chronic illness, 22 percent of those have more than one chronic illness.

26 percent of those ages 65 to 74 have had their lives significantly impacted by chronic illness.You cannot effectively provide wealth management services, while ignoring this significant segment of your client base. 

Most advisors estimate much lower percentages of their affected clients. This is because many clients are not forthright with discussing personal health issues, although a significant cause is undoubtedly advisors not asking. Many hate to discuss illness because they do not understand how advisors can use that information to help them. But in fact, a reasonable understanding of the current status of a client’s chronic illness and the likely disease course can enable advisors to provide more tailored and beneficial financial planning and wealth management services. This article will provide an overview of some of the many considerations.

Budgeting

Budgets are part of the foundation of any comprehensive financial plan. Relying on standard assumptions could be dangerously inaccurate for the client. Many chronic illnesses are progressive so that the disease and its financial impact can worsen over time. Consider the following modifications:

Budget for large ticket items that can be estimated. These might include a handicapped accessible van, installation of an elevator and ramps in the client’s home, renovation of the kitchen and bathrooms to make them accessible and more.

Consider using a higher inflation rate for the medical costs component of the expenses.

Revise standard earning assumptions to reflect reasonable work-life expectancy for the client. Too often it is assumed that a client with a significant health issue cannot work at all. That is often not the case. But the impact will vary depending on the particular disease the client has and the client’s personal experience with that disease. The client’s neurologist and/or physician may be able to offer insight. Many disease organizations have a wealth of statistical data to offer.

Encourage the client to obtain an independent-needs analysis. These are often prepared by consultants referred to as “geriatric” consultants, although the work is not limited to the elderly. This type of analysis may provide useful specificity as to work career expectancy, special living expenses, when outside aides might become necessary, how many and for how long, so that costs can be estimated and more. This type of report can be useful to preparing a budget, setting time horizons for different investment objectives, etc. The language and recommendations might warrant incorporation by the client’s estate planning counsel into the provisions of a revocable living trust to set standards for care and provide a more detailed suggested framework for the trustee.

Having periodic meetings to review the above planning is more essential for a client with known health issues. If the disease progresses more slowly or perhaps not at all, budgets and time horizons can be revised accordingly. If the reverse occurs, the sooner in the process these developments are identified the more rapidly the client can be guided back to the revised planning goals. Significantly, for this group of clients, the advisor’s notes and calculations from the periodic meetings can be used to corroborate the lifestyle and other choices the client wishes in the event a time arrives when the client can no longer effectively communicate these wishes. The track record is essential.

Investment Plan and IPS

Too often advisors assume that if a client has a chronic illness that investment portfolios should be less risky, more liquid and so forth. This may be true in some situations is only coincidental. Assumptions and generalizations are no substitute for knowledge and planning.

The physical symptoms of Huntington's disease, for example, typically begin between ages 35 and 44 (although no assumptions should be made because they can begin in childhood or old age). Huntington’s disease is a chronic, progressive, neurodegenerative genetic disorder, which affects muscle coordination and leads to cognitive decline and dementia. Life expectancy has been estimated at approximately 20 years following the initial appearance of symptoms. A client in their early 40s, who has some significant savings and wealth from a career that could be nearly two decades long and a life expectancy of 20 years, may in fact be harmed by an excessively conservative, liquid short-term portfolio.

The prognosis for each disease varies substantially from other diseases. Even each client with a particular disease can face widely divergent prognosis. Advisors do not need to become experts in each potential disease, but rather open a dialogue with the client and, with the client’s permission the client’s family/loved ones and physicians (with appropriate HIPAA releases) to ascertain some of the anticipated major events. With that knowledge and a budget tailored to the client’s circumstances above, an appropriate investment plan may then be devised.

A few additional considerations:

Investment policy statements (“IPS”) should be prepared, tailored to reflect the clients particular circumstances and revised with thought (not the SALY — “same as last year” moniker that adorned so many audit work papers in the days of yore). As more scientific knowledge is obtained, as the clients situation unfolds, the underlying assumptions should be revised.

Who will sign the IPS? Initially the client will. But at some future date an agent under a durable power or a trustee of a revocable living trust, might execute the IPS. Plan in advance to create an historical record of the client’s decisions to provide a touchstone. Plan for a smooth transition.

Determine which documents will govern the succession if and when it occurs.

Clients living with a particular illness may be more inclined to provide charitable support or purchase charitable gift annuities, from the particular disease organization that serves people living with the illness the client has.

Ancillary Considerations

There are myriad of ancillary steps and considerations that might be relevant and helpful to clients with a particular illness. While many will be obvious, listing several might provide a useful starting point for advisers:

If a client has mental health or cognitive issues the definitions of “disability” used in standard documents and planning may be useless.

Each disease course can be quite different. Some clients might be largely incapacitated while undergoing medical treatments or experiencing an attack, but may recoup thereafter and be able to resume managing their financial affairs. The typical mechanisms for removing and replacing trustees incorporated into most legal documents are ineffective for dealing with these transitions.

Simple steps such as consolidating assets, assuring a trusted person receives duplicates of monthly statements, computerizing records so that large monitors or voice recognition software can be used, etc. can have a tremendous benefit for the client.

Some states are more well known as Asset Protection Friendly laws.  Below is come great information from  Alaska Trust Company 

http://www.alaskatrust.com/

Alaska Trust Company's mission is to provide reliable wealth management approaches and innovative trust and investment management services.

Alaska is the leader in updating its trust laws that provide all Americans the ability to access unique estate and financial planning options as well as providing the most comprehensive asset preservation statutes in the country.

We are committed to providing the finest services to our clients. With our unique philosophy of customizing solutions and internal and external expertise, we are able to "think outside the box" to provide strategies that will have a positive impact for our clients in meeting their financial and estate planning goals.

REASON ONE

PLR 200944002; IRS has agreed that the Grantor can be a Trust Beneficiary of an Alaska Self­Settled Spendthrift Trust and the assets of the trust will not be included in the Grantor's Estate. Alaska is the only state that has received a favorable ruling from IRS.

REASON TWO

Alaska Was the First State to Provide For Self­Settled Spendthrift Trusts

Alaska has the best trust spendthrift statutes for both the grantor and other trust beneficiaries. Alaska provides for "self­settled" spendthrift trusts which allows the grantor to set up an irrevocable trust, be a discretionary beneficiary and avoid having the assets be subject to creditor claims of either the grantor or any other beneficiary. Also, the assets in such a trust may be excluded from the grantor's taxable estate even though the grantor is a trust beneficiary. Therefore, there is no reason to go "offshore" (that is, to create a self­settled trust in a jurisdiction outside of the United States). Alaska has no special "class" of creditors which, unlike the laws of other states, would permit those creditors to attach the assets of the trust. Alaska allows creditors to attach trust assets in a self­ settled trust only upon proving by actual fraud (and not "constructive" fraud).

Property subject to the so called "Crummey" or "5 X 5" withdrawal powers is not subject to creditor claims of the beneficiaries who holds such powers. Courts cannot compel distributions or attach beneficial interest. A beneficiary may be given a special power of appointment and the trust assets will still be protected from creditor claims. Alaska is the only state that defines an "existing creditor" which effectively puts a defined limit on when a claim against a self­settled trust may be made.

REASON THREE

Alaska Has No State Income Tax on Trust Income

Therefore, trust beneficiaries can see the earnings in the trust compound free from state and local income taxes thereby providing extraordinary year­on­year returns. In addition, Alaska has no state gift tax and no intangibles tax.

REASON FOUR

Alaska Permits Perpetual (Dynasty) Trusts

Using perpetual trusts can significantly increase wealth passing from generation to generation by avoiding unnecessary estate, gift and generation­skipping transfer ("GST") taxes. In Alaska, trusts can last forever; however if a beneficiary exercises a special power of appointment the trust is limited to 1000 years. An Alaska Perpetual Trust is an excellent vehicle to enhance the benefits of the Federal exemption from the (the "GST" tax). If a family uses only $1 million of the "GST" exemption after 120 years with an after­tax return of 6%, the trust would be worth over $1 billion. If a trust was not used; the value of the property would be only about $68 million.

REASON FIVE

Additional Trusts with Creditor Protection

In Alaska the Grantor may retain an interest in the following types of trusts and have protection from creditor claims:

● Charitable Remainder Trust (CRT)

● Total Return Trust

● Grantor Retained Annuity Trust (GRAT)

● Grantor Retained Unitrust (GRUT)

● Qualified Personal Residence Trust (QPRT)

REASON SIX

Alaska Creditor Protected IRAs.

Alaska Law has a provision that the trust laws of no other state has: it permits an individual whose IRA is not protected from creditor claims under the law of his or her own state (such as California) to use Alaska law to provide that protection. The reason is that Alaska's self­settled trust law applies to any IRA that is in the form of a trust that is governed by Alaska law.

REASON SEVEN

Opt ­ In Community Property Trusts

Alaska is the only state that allows couples to opt into community property for some or all of its assets, by using an Alaska Community Property Trust. Community property can provide unique income tax and estate tax savings. For example, upon the death of one spouse, the entire community property asset is "stepped­up" in basis and not just the half of the asset included in the gross estate of the spouse dying first.

REASON EIGHT

Best Trust Decanting Statute

Alaska has the most powerful decanting law, which is the paying of trust assets from one trust to another. Alaska's decanting statute (paying trust property to another trust) is the broadest and most comprehensive of all decanting laws. Many times the terms of the trust do not permit the trustee and beneficiaries to take advantage of planning opportunities. The Alaska decanting provisions can be made to apply to a trust created outside of Alaska which can be used to provide significant advantages to the trust beneficiaries.

REASON NINE

Pre­Mortem Probate

Alaska has just adopted legislation that permits individuals to have their wills admitted to probate before they die essentially eliminating any risk of a will contest, which normally is an emotional and financial wreck for the family members involved. The reason, of course, is that the person who signed the will can testify before the court establishing the document is a valid will. Although three other states (Arkansas, Ohio and North Dakota) also permit such pre­death probate, Alaska has become the first state to permit nonresidents of its state to have their wills admitted to original probate procedures. Alaska, like New York, has long permitted non­residents of its state to have their wills admitted to original probate and several individuals have used this process. In addition, Alaska has become the first state to have an explicit procedure to allow individuals who have created trusts during their lifetimes to have the trusts "proved" before they die. This too reduces the risk of post­death squabbles over the spoils of an owner's death and ensures his or her wishes will be followed. Alaska also has one of the strongest "no contest" legislation for trusts­which essentially allows any beneficiary to be "disinherited" for taking action prohibited by the trust instrument.

REASON TEN

Trust Incontestability Clause

This provision provides that lifetime trust provisions that "penalize" (for example, "disinherits") a beneficiary for taking certain action, such as "contesting" the trust or the decedent's will or suing another family member will be enforced even if probable cause exists for the beneficiary to have instituted the proceeding.

REASON ELEVEN

Alaska's Unique and Flexible Trust Provisions

Grantors and beneficiaries may increase or decrease trustees duties and responsibilities providing for the most reliable ways to accomplish their goals.

Alaska law permits a grantor to separate the trust's investment duties, distribution duties and administrative duties by appointing different trustees for each area of those areas ofresponsibility. A trustee that has not been given a responsibility cannot be held liable under Alaska law for the other trustee's actions. Non­residents of Alaska can have their will probated under Alaska law. The advantages of this legislation are:

● It should allow the estate to avoid state and local income tax during the

 Probate administration

● It should avoid any statutory executor/personal representative fees and/or

  Attorney’s fees

● The probate process in Alaska is very simple and straightforward which

  should save time and money

● It seems that any trust that was created under the will would then have the

  Ability to qualify as an Alaska perpetual trust and the other protective

  Provisions of Alaska law

REASON TWELVE

Life Insurance Trusts

Alaska has one of the lowest life insurance premium taxes. With Alaska's low tax and Alaska Trust Company's experience in handling large life insurance policies make Alaska and Alaska Trust Company the only choice in setting up an Irrevocable Life Insurance Trust (ILIT).

REASON THIRTEEN

Total Return Trusts

In Alaska, traditional income trusts can be converted into "total return" trusts which means the trust will pay the "income" beneficiary a percentage of the annual value of the trust. This allows the trust to align the interests of all beneficiaries' whether income or remainder beneficiaries. In other words the trustee may invest the assets that will provide the best overall return (whether by current income or appreciation) for all beneficiaries, thus reducing tensions between current and future beneficiaries.

REASON FOURTEEN

Best Limited Partnership and Limited Liability Statutes

Alaska's laws give Limited Partnerships (LP's) and Limited Liability Companies (LLC's) maximum flexibility and asset protection. Courts cannot terminate Alaska LP's or LLC's thereby preventing creditors of the partners or member from attaching the assets of the LP or LLC. Unlike the default rules under most state laws, an Alaska LP or LLC does not go out of existence upon the death of a general partner of a limited partnership or the managing member of a limited liability company. Alaska has eliminated any right to demand to be bought out on 6 month or other notice. In fact, under default state law, a partner is entitled to distributions only as provided by the governing document. These provisions provide for optimal tax treatment and valuation discounts. In Alaska, LP's and LLC's can be set up "on­line" for immediate formation.

By statute, the only remedy for a creditor who attacks a partner's interest in an LP or

LLC is a "charging order", which is a court judgment against the LP or LLC.

REASON FIFTEEN

Confidentiality

Alaska provides the highest confidentially to grantors and beneficiaries because trust court filings generally are not required. Privacy and confidentiality are important concerns of Alaska Trust Company. If a court filing is needed, it can be done efficiently and in a cost efficient manner because of Alaska's flexible court processes.

REASON SIXTEEN

Customized and Innovative Investment Management

Alaska Trust Company provides a Unified Management Account approach. This allows for the best of two worlds: access to the expertise of the nation's finest money managers, yet still maintaining complete control over the investment process. This provides for

● a custom designed multimanager portfolio

● independent research and conflict­free advice

● tax efficient strategies that help clients keep more of what their investments earn.

REASON SEVENTEEN

Advantageous Charitable Remainder Unitrusts

Alaska law allows capital appreciation to be considered income. This allows for an attractive income tax deferral strategy when using Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT).

This is a great discussion of Alaska as an Asset Protection Location.  

 Please contact Dwayne K Dowell, CPA/PFS at dkdowell@dkdcpa.com or call (502) 271-8452 for Wealth Strategy and Asset Protection Planning.  

Life insurance has many uses, including income replacement, business continuation, and estate preservation. Long-term care insurance provides financial protection against the potentially high cost of long-term care. If you find yourself in need of both types of insurance, a life insurance policy that combines a death benefit with a long-term care benefit may appeal to you.

Here's how it works

Some life insurance issuers offer life insurance with a long-term care rider available for an additional charge. If you buy this type of policy, you can pay the premium in a single lump sum or by making periodic payments. In any case, the policy provides you with a death benefit that you can also use to pay for long-term care related expenses, should you incur them.

The amount of death benefit and long-term care allowance is based on your age, gender, and health at the time you buy the policy. The appeal of this combination policy lies in the fact that either you'll use the policy to pay for long-term care expenses or your beneficiaries will receive the insurance proceeds at your death. In either case, someone will benefit from the premiums you pay.

Long-term care riders

The long-term care benefit is added to the life insurance policy by either an accelerated benefits rider or an extension of benefits rider.

Accelerated benefits rider --An accelerated benefits rider makes it possible for you to access your death benefit to pay for expenses related to long-term care. The death benefit is reduced by the amount you use for long-term care expenses, plus a service charge. If you need long-term care for a lengthy period of time, the death benefit will eventually be depleted. This same rider also can be used if you have a terminal illness that may require payment of large medical bills. Because accelerating the death benefit can have unfavorable tax consequences, you may want to consult your tax professional before exercising this option.

Example: You pay a single premium of $50,000 for a universal life insurance policy with a long-term care accelerated benefits rider. The policy immediately provides approximately $87,000 in long-term care benefits or $87,000 as a death benefit. If you incur long-term care expenses, the accelerated benefits rider allows you to access a portion, such as 3% ($2,610), of the death benefit amount ($87,000) each month to reimburse you for some or all of your long-term care expenses. Long-term care payments are available until the total death benefit amount ($87,000) is exhausted (about 33.3 months). Whatever you don't use for long-term care will be left to your heirs as a death benefit.

(The hypothetical example is for illustration purposes only and does not reflect actual insurance products or performance. Guarantees are subject to the claims-paying ability of the issuer.)

Extension of benefits rider --An extension of benefits rider increases your long-term care coverage beyond your death benefit. This rider differs from company to company as to its specific application.

Depending on the issuer, the extension of benefits rider either increases the total amount available for long-term care (the death benefit remains the same) or extends the number of months over which long-term care benefits can be paid. In either case, long-term care payments will reduce the available death benefit of the policy. However, some companies still pay a minimum death benefit even if the total of all long-term care payments exceeds the policy's death benefit amount.

Continuing from the previous example, if the policy's extension of benefits rider increases the long-term care benefit (the death benefit--$87,000--remains the same) to three times the death benefit ($261,000), the monthly amount available for long-term care increases to $7,830. On the other hand, if the extension of benefits rider extends the length of time the monthly long-term care benefit is available, then the monthly payments ($2,610) are extended for an additional 24 to 36 months beyond the initial number of months (33.3) available.

Other provisions

Typically, qualifying for payments under a long-term care rider is similar to the requirements for most stand-alone long-term care policies. You must be unable to perform some of the activities of daily living (bathing, dressing, eating, getting in or out of a bed or chair, toilet use, or maintaining continence) or suffer from a severe cognitive impairment.

An elimination period may also apply: you pay for the initial cost of long-term care out-of-pocket for a specific number of days (usually 30 to 90) before you can apply for payments under the policy. As with all life and long-term care insurance, the insurance company will require you to answer some health-related questions and submit to a physical examination before issuing a combination policy to you.

Is a combination policy right for you?

Deciding whether a combination policy is right for you depends on a number of factors. Do you need life insurance and long-term care insurance? How much life and long-term care insurance will you need? How long will you need it? Will the long-term care part of a combination policy provide sufficient coverage?

A long-term care rider may not provide as many features as a stand-alone long-term care policy. For example, the combination policy may not cover assisted living or home health aides. It also may not provide an inflation adjustment, an important feature considering the rising cost of long-term care. The tax benefits offered by a qualified long-term care policy may not apply to the long-term care portion of combination policies, which could result in taxation of long-term care benefits received from the policy.

What if your life insurance needs change as you get older and you find that you no longer want life insurance protection? It's not uncommon for people to drop their life insurance in their later years if there's no compelling need for it, but if you surrender the combination policy, you're also forfeiting the long-term care benefit it provides, usually at a time when you are most likely to need it.

And keep in mind that as you use your long-term care benefits, you're depleting the death benefit--a death benefit you presumably wanted to pass on to your heirs or perhaps use to pay for estate taxes.

Finally, compare costs of combination policies to other forms of life insurance, such as term insurance, and stand-alone long-term care policies. Depending on your age and health, the cost for the combination life policy may actually be higher than the total premiums paid for separate life insurance and long-term care policies, especially if your life insurance need is temporary (such as income replacement during your working years) rather than permanent.

Please e-mail me at dkdowell@dkdcpa.com or call me at 502.271.8452 to discuss. 

Tax Tips for Tax-Free Life Insurance

With tax-saving planning, you can enjoy tax free life insurance policy benefits. However, wrong moves can make your benefit 100 percent taxable. This article will give you smart tax saving tips.

How Life Insurance Works for Estate Taxes 

There are a variety of reasons to buy life insurance such as, taking care of family, continuation of business, providing funds for paying estate taxes, etc. Generally, death-benefit payments are free of federal income taxes.

In the case of estate tax, the death benefit is included in taxable money in your estate for federal estate tax purposes. If the life insurance is paid to your surviving spouse, who has a U. S. citizenship, tax law offers you the unrestricted marital deduction. This allows the benefits to bypass your estate and go to your spouse. In such situation, tax law simply waits for a while for collecting estate taxes from your spouse.

In case if death benefits go to someone other than your citizen-spouse, the life insurance benefits become a taxable asset.

To Own or Not to Own Your Life Insurance Policy

Any incidents of ownership, for instance the power to change policy beneficiaries or coverage amounts, or cancelling the policy makes you considered as the owner of a life insurance policy. This means, the incident of ownership is much likely to occur. The death benefit including all other assets may easily surpass federal estate tax exemption of $5.12 million.

The existing estate tax is scheduled to expire on December 31, 2012. This triggers two big changes:

1. Exemption from estate tax drops to $1 million from the $5.12 million.

2. Estate tax rate increased to 55 percent from 35 percent.

You can’t count on lawmakers as the track record shows many drastic changes in tax policies every year. What you can do is taking control of your death benefit by not owning the policy.

Do This

Found an irrevocable life insurance trust, which will own the policy on your life. This will eliminate your incidents of ownership, and hence, bypass the estate tax hit.

With cash infusions from you, the trust pays premiums of life insurance policy. When you die, the death benefits of life insurance directly go to the trust’s beneficiaries you named.  This way, you will be able to eliminate income and estate tax as the legal owner of policies is trust, and furthermore, the money transfers are tax-free.

Caution

Avoid using the irrevocable life insurance trust for directly paying estate taxes. Using the death benefit to pay the estate taxes directly raises the taxable estate and results in avoidable estate taxes.  Make the trust purchase assets from the estate. You can also make a loan to address the need of liquidity with the estate.

Irrevocable life insurance trust gives you two great benefits that are exemption from income and estate taxes on the death benefit.

Generally, life insurance premiums are nondeductible, irrespective of the reason behind buying the coverage.

Mind the Details with Your Irrevocable Life Insurance Trust

Pay attention to these four details of your irrevocable life insurance trust:

• Transferring an existing policy to trust and dying within three years includes the insurance benefit in your taxable estate.

• The trust needs money to pay premium. You can plan yearly cash gifts to the insurance trust and exempt gift taxes. You can enjoy the gift and estate tax exemption by making yearly cash gifts to the insurance trust of maximum $13, 000, 9 and establishing the insurance trust. This will give the trust’s beneficiaries an authority to withdraw your cash gifts within a reasonable time you make them. Make sure you include the Crummey clause, which allows the withdrawal of gift. Without the clause, the gifts will not be qualified for the annual exclusions.

• The existing cash value of an existing policy can cut into your exclusions for estate and gift tax purposes and cause higher taxes. Making the trust buy a new policy can address this concern.

• Seek guidance of an estate planning professional to help you found your irrevocable life insurance trust. The money spent for this is money well spent.

Final Thoughts

With good planning, you can ensure that your death benefits are free of federal income and federal estate taxes. People generally buy life insurance with a thought of helping their children in the future. However, without planning, taxes can take away a major chunk of the death benefit, destroying policy’s primary objective of helping survivors. However, a proper planning and guidance of estate planning professional will give you tension-free life and a better sleep.

For further information, Please contact Dwayne K Dowell, CPA/PFS at dkdowell@dkdcpa.com or call (502) 271-8452.