The Zero Estate Tax Plan: The Cure For Planning Fatigue

Life insurance is the bedrock of a plan to provide funds to charity while giving cash to clients’ beneficiaries.

By James Cassidy and Ron Sussman

Afamous quote says: “The definition of insanity is doing the same thing over and over again and expecting different results.” If this is true, and we do believe it is, then the ever-changing estate planning landscape for high net worth clients is insane.

Estate planning is, by definition, a long bet with an uncertain outcome, made riskier by employing tax strategies that work only if today’s laws remain unchanged. Which, in itself, is a rarity.

Planning for the disposition of your client’s highly appreciated assets is really more of an exercise in futility, since there is no way to know when or whether the tax laws will change or be abolished. This is convenient if you charge for advice, since there is very rarely a time when the tax laws are not in flux. But it can be very frustrating to clients who are trying to achieve a specific outcome.

Take, for example, the rules under Internal Revenue Code Section 1031. If your tax planning involves serial 1031 tax-free exchanges, you may be in the crosshairs of the Biden administration’s efforts to curb perceived “abuses” of this perfectly legal tax benefit. And although it’s usually the abusers of any strategy that draw the most attention, everyone else who attempted to follow the rules will likely suffer.

Just look at this abbreviated list of solutions offered by creative estate planning practitioners: CRUT, CLAT, GRAT, GRUT, CLT, CRT, FLP, QPRT, QTIP, QDOT, SCINS, SLAT, etc. I’m sure you’ll find one or more that your clients are using.

These are just a few of the creative acronyms used to describe sometimes wildly complicated tax strategies that may or may not ultimately provide shelter from what many advisors perceive as avoidable taxation. Also, most high net worth clients will cycle through many iterations of these over their lifetime, always trying to stay one step ahead of the IRS.

It is not unusual to find clients who are trying to use or terminate trusts that were drafted decades ago, and cannot find the trust deed or it’s drafter, leaving them in limbo with assets that may be owned by an obsolete trust. It is equally common to find that the initial trustee is not a person with whom the grantor currently has a relationship — or even worse, has fallen out with. How do you solve some of these issues with trusts that are, in many cases, deemed “irrevocable”?

What we are noticing is that this endless cycle of chasing the tax law has become exhausting for clients who are lately becoming all too aware of the fees associated with maintaining them.

Clients are exhibiting planning fatigue, the result of which is frozen indecision, the worst of all decisions.

What if you could solve most of these issues with one extremely simple strategy that relies on only two of the most sacrosanct of all tax laws: The deductibility of contributions to a qualified charity and the tax-free receipt of life insurance death proceeds?

This strategy is one of the most underutilized, simple and efficient of all, and has been effective for as long as our tax code has been in existence. It can serve as a place holder for future planning, or function as the entire estate plan. It requires only a minimal amount of “planning” and can, when implemented correctly, eliminate all estate taxes and leave heirs with a pre-determined tax-free gift of cash.

The Zero Estate Tax Plan is something that dovetails nicely with an idea that was pioneered decades ago by a firm specializing in charitable planning. That idea, referred to as social engineering, assumes that families with significant wealth should be able to direct their tax dollars to causes they support and want to foster, rather than allow the government to make that decision for them. Essentially, by leaving your estate to charity you deny the government the estate tax (and other taxes that could be due) by leaving 100% of the estate to qualified 501(c)(3) charities.

Of course, the idea of leaving your entire estate to charity is a tough one to sell. Most families want their heirs to

Properly Structured Life Insurance Is The Glue That Holds The Plan Together

We understand everyone’s reluctance toward life insurance. Some clients only see life insurance as an unwanted expense. Others see it as a poor investment.

But what life insurance lacks in public perception, it more than makes up for in practical tax planning applications. A properly structured variable life insurance policy, private placement variable life insurance policy or whole life can be a fantastic investment if used and managed properly. Consider the

benefits of an asset that can:

» Be liquid immediately after the death of the insured(s): In effect a death put. » Delivers tax-free dollars to the named recipient: No basis or step-up issues. » Allows the owner to specify the investment allocation. » Allows the owner to accumulate value tax-deferred during their lifetime. » Allows the owner to borrow against their asset at a cost of 1% or less. » Allows the owner to select a structure that meets their risk tolerance.

No need to be lured into risky life insurance products. Products like indexed life create more risk than necessary without commensurate reward. But a

variable life insurance product (commercial or private placement), allows the client to make his or her own investment allocations, or even select specific hedge funds, making the policy(ies) just another well-performing and manageable asset in their portfolio.

The only real cost to these products is the mortality and expense component, which can be minimized by proper funding. The correct way to help clients assess these costs is to compare them to the tax that would have been paid during the accumulation and distribution phases of the plan. Here again, life insurance’s inherent costs are trumped by the tax benefits and investment return possibilities.

inherit the majority of their assets with minimal tax exposure, but they realize they might need to jump through some very difficult hoops to make that happen with minimal tax exposure.

The Zero Estate Tax Plan solves this problem in the most advantageous way by using life insurance as the asset that heirs receive. At the death of the second spouse, the entire estate is contributed to charity, eliminating all taxes. The heirs receive the death proceeds of life insurance tax free.

In the process of discussing estate planning with high net worth clients, we always ask, “How much would you like each child to receive when both of you are gone?” Lately, the response we hear the most is, “enough so that he or she will never want for anything, but not so much that they become unproductive citizens.” This implies that there is an amount that would satisfy this wish, and in fact, most clients have a fairly easy time identifying that number. Maybe it’s a set amount to each beneficiary, maybe the amounts are different based on the beneficiary’s relationship to the family business, or maybe it’s just the current value of the estate with all of the future growth going to charity.

The biggest benefit of this plan is its simplicity.

If the owner of the plan were to die one day after completing it, the plan would work beautifully. If they were to live longer than anticipated, none of their assets are tied up in complicated tax structures, so they can spend all they want. There is no need to specify the amounts going to charity; therefore they have full control of their assets to the end. In addition, the beneficiary’s bequests can be structured such that the amounts they receive will grow over time based on the insurance policy’s returns.

The Zero Estate Tax Plan is a fantastic place holder.

All estate planning changes as the tax laws evolve and as grantors and their ultimate beneficiaries age. Maybe the grantors want to be more charitable when they are alive. Maybe they want the beneficiaries to have access to assets before they die. All of this is possible. There is virtually no downside to using this plan as a place holder for future planning.

Time Really Is Money

One of the real difficulties with structuring a sophisticated estate plan is the time it takes to make it happen. Here again, we acknowledge that accountants and attorneys make a living by the hour, and that is not a bad thing. But, generally speaking, the fees associated with high-level tax planning tend to get onerous. And clients tend to experience planning fatigue rather early in the process.

Anyone who has tried to organize their estate planning, and has had to do the hard work of deciding who gets what and how, knows that the process is fraught with landmines. This is particularly true of people with very large and complicated estates. These projects always turn out to take huge amounts of time, often to no avail, as clients lose interest, change their minds or get lost in tax minutiae.

This where a responsible advisor comes in. Instead of throwing out the Zero Estate Tax Plan idea at the end of a fully fleshed out estate planning project as a sort of Hail Mary pass, make it the star attraction. Maybe it’s a great place holder for future planning, or maybe it’s the whole plan. Either way, the client will require wills and trusts (such as an irrevocable life insurance trust) and accounting, which provide the framework for whatever may come later.

James Cassidy is a certified public accountant with Schulman, Lobel. He has more than 30 years’ experience providing tax consulting to high net worth individuals. He may be contacted at james.cassidy@innfeedback.com.

Ron Sussman is CEO of CPI Companies. He may be contacted at ron.sussman@innfeedback.com.

2Q Annuity Sales Climb Higher And Higher

Coming out of the pandemic, annuity sales were expected to be strong in the second quarter. Turns out they were so strong, Todd Giesing had to triple-check the numbers. Variable annuity sales Fixed indexed annuity sales Deferred annuity sales 55%

28%

52%

Total annuity sales were $67.9 billion in the second quarter, up 39% from second-quarter 2020. First-half annuity sales were $129

billion, 23% higher than the prior year, according to preliminary results from the Secure Retirement Institute U.S. Individual Annuity Sales Survey.

“We’d have to go all the way back to the fourth quarter of 2008 to see better overall individual annuity sales than we saw here in the second quarter,” said Giesing, assistant vice president, SRI Annuity Research. “We looked at it really closely. All categories are up double digits, except for structured settlements.”

A significant factor was the lifting of restrictions for social distancing as vaccinations became widely available. Other factors Giesing cited were general improvements in economic conditions and a slight increase in bond interest rates with the expectation of slow, steady growth in the future.

But the biggest factor was the unleashing of pent-up demand in the first half of this year, he said.

ANNUITY GROUP SPONSORING ROLLING STONES’ TOUR

The Rolling Stones have been rocking out for more than 50 years and long past the time when most of their earliest fans have retired. So it makes sense that an annuity group would want to advertise with the band.

The annuity-focused Alliance for Lifetime Income is the sole sponsor of the band’s 2021 “No Filter” U.S. stadium tour.

The band’s new tour has been rescheduled from 2020. It will start on Sept. 26 in St. Louis and will travel to Charlotte, Pittsburgh, Nashville, New Orleans, Los Angeles, Minneapolis, Tampa, Dallas, Las Vegas, Atlanta and Detroit before concluding Nov. 20 in Austin, Texas.

“With the country opening up again, we’re excited to be a part of this iconic tour and one-of-a-kind show as we educate millions of Stones fans, now more than ever, about the need for protected income in retirement,” said Jean Statler, CEO of the ALI.

‘ANNUITY KING’ PARTNER TAKES PLEA DEAL IN FLORIDA FRAUD CASE

Kenneth Murry Rossman, 63, accepted a July plea deal in a federal fraud case that includes co-defendant and prolific annuity seller Phillip Roy Wasserman.

The self-described “Annuity King” in marketing materials, Wasserman, 64, maintains his innocence and is expected to go to trial in the fall in a Florida court.

If convicted, he faces up to 20 years in prison on mail fraud, wire fraud and tax evasion charges.

Phillip Roy Wasserman

The government seeks a money judgment of at least $6.3 million, court documents say, the proceeds of the charged criminal conduct.

An initial indictment unsealed in June 2020 charged Wasserman and Rossman with conspiracy to commit wire fraud and mail fraud, as well as substantive counts of wire fraud and mail fraud. A superseding indictment in November 2020 tacked on charges of filing false income tax returns to the wire fraud and mail fraud charges.

According to court documents, Rossman pleaded guilty to one count of conspiracy to commit mail fraud and wire fraud, and one count of “aiding and assisting the preparation and filing of fraud and false tax returns.”

QUOTABLE

AIG is “likely to buy other insurance companies” with the “substantial capital” raised from its deal with Blackstone.

— Charles Roame, managing partner of Tiburon Strategic Advisors

The two counts carry a maximum of eight years behind bars.

Wasserman maintained his innocence and said he plans to call hundreds of witnesses at trial.

NAIC COMMITTEE PASSES ANNUITY SALES FAQS

In order to update annuity sales rules, you have to know what they are. That’s the idea behind a new set of Frequently Asked Questions being finalized by the National Association of Insurance Commissioners.

The Life Insurance and Annuities Committee, a group within the NAIC, adopted the FAQs in July. A working group spent much of the past year creating the informational questions and answers.

In February 2020, the NAIC adopted an update to the Suitability in Annuity Transactions rule that articulates a best-interest standard through the following four obligations: care, disclosure, conflict of

interest and documentation. In the months that followed the outbreak of COVID-19, states were slow to adopt the update.

More than two dozen states have adopted the new rules so far, said Iowa Insurance Commissioner Doug Ommen.

DID YOU KNOW ?

31% of baby boomers say that they have accelerated their retirement plans because “life is too short.” Source: MetLife