Tag Archives: estate planning

Using Home Equity to Fund Estate Planning

The pinnacle of the real estate market, of any market, is hard to predict, just as the precipice of a collapse in prices is real but unpredictable. About the sea below, red with debt and white with foam, about the flotsam from those houses underwater and too deep to raise, a reminder: We must sail to port, for we cannot afford to drift or drop anchor; we must sail toward safety, in safety, with the safety insurance provides; we must sail with the tide, allowing it to lift us without having it crash against us, so we may convert a rise in valuations into a plan that delivers everlasting value.

By using life insurance to create an estate plan, and funding the plan with cash from a home equity conversion mortgage (HECM), qualified borrowers (ages 62 and older) can turn rising house prices into tax-free income. Because the appraised value of a house determines the size of a loan, and because prices have risen at the fastest rate in more than 30 years, borrowers have more money to invest. How they choose to invest this money, whether they choose to guarantee a legacy for their loved ones or better themselves without relying on their loved ones, is their choice. 

More important is the fact that borrowers are free to choose, that they have the freedom to secure paper wealth with paper as secure as property. Because of what the law says, that life insurance is a form of property, and because of what life insurance offers, liquidity, borrowers are free to make real the promises of HECM: bestowing upon themselves, or bequeathing to posterity, the blessings of financial freedom.

Take, for instance, a 62-year-old woman with an average life expectancy of 84. If the appraised value of this woman’s house is $500,000, or 25% higher than a year ago, she can transfer the money from a HECM loan into a life insurance policy, safeguarding the principal while earning tax-free income from a diversified portfolio of investments. Or the beneficiaries of her estate can receive a cash payout, minus the balance and interest of the HECM loan, thanks to a life insurance policy.

See also: Where Does Life Insurance Go Now?

Thanks to the fact that life insurance is a lifeline, this woman has the power to avoid the shallows and miseries of the sea. Whether her voyage is long or short, whether her vessel is a sloop or a schooner, the sea—mysterious, wild and unrestrained—endures. To weather its storms and withstand its moods, to be like a rock of strength and prudence, able to rise from awful stirrings and right the course, to stir the course with apparent wind, requires the assurance of a wise captain.

The captain deserves insurance, too, so she may sail in peace, despite the conditions of the sea. Mindful of the direction, and peaceful because of her directives, life insurance guides this captain home. Life insurance guides her travels.

Directive Communication Systems’ Lee Poskanzer

Lee Poskanzer, CEO and Founder of Directive Communication Systems, talks with ITL CEO Wayne Allen about the growth of digital assets and why access to these are at risk of being lost in estate planning without specific legally compliant steps to protect them for heirs. DCS, he says, aims to make this process easier for individuals to decide which assets—from social media, cloud storage, bank accounts and more—should be passed on and to whom..before it’s too late.


View more Innovation Executive videos

Learn more about Innovator’s Edge

Captives: Congress Shoots, Misses

In late December, Congress put together a last-minute “tax extender” package that, among many other things, made some changes to section 831(b) of the Internal Revenue Code. That section allows “small” captive insurance companies to elect to exempt from income tax all of their insurance income.

These small captives have been widely used in recent years by owners of large, privately held businesses to allegedly add to their existing insurance coverages while enjoying immediate income tax reductions. Further tax benefits could include conversion of ordinary income to capital gains and a potential estate transfer benefit, depending on the ownership of the captive.

Congress has changed those benefits a bit, by eliminating any estate planning benefits, starting in 2017. But Congress failed to address the true levels of abuse that this code section has spawned and, indeed, may have made things worse.

These “enterprise risk” or “micro” captives are primarily used as a form of tax shelter, notwithstanding the pious claims of captive managers that they are meeting legitimate insurance needs. While such needs certainly may exist in some clear cases, the vast majority of entrepreneurs forming these captives care much more about the tax benefits than any increased insurance coverage.

The IRS knows this and has stepped up both audits of individual companies and larger, promoter audits of captive managers in an effort to crack down on captives that are being formed without the intent to form an insurance company. In addition, the IRS is well aware that unscrupulous captive managers create vastly inflated “premiums” payable by the operating company to the captive to maximize the tax benefits of owning such a small captive. These premiums often bear no relation to third-party market costs, nor can they be justified by a reasonable actuarial analysis of the actual risk being insured by the captive.

Another abuse is found in captive managers’ offering the new captive owner what the IRS would call a sham “pooling” arrangement, to comply with certain “risk distribution” requirements of court cases and revenue rulings.

There are many cases pending in the Tax Court that attempt to corral these abuses. Their outcome is, of course, uncertain.

So the Treasury Department went to the Senate Finance Committee in early 2015, hoping to obtain legislation that would gut section 831(b) (and put a lot of captive managers out of business).

Instead, the department got legislation that only stops these captives from being used as estate planning tools.

The legislation also increased the annual allowable premium paid to such captives, from $1.2 million to $2.2 million, indexed for inflation. The reasons for this failure have a lot to do with Sen. Chuck Grassley of Iowa, who has long wanted an increase in premium to benefit certain farm bureau captives in his state. He needed some revenue offset to allow for the increase, and, by closing this “estate planning loophole,” he can claim that tax revenues will increase.

That claim may be doubtful (only about 1% of taxpayers end up being subject to the estate tax), and captive managers now have a new, higher goal of $2.2 million for the “premiums” to be paid to these small captives.

It is also clear that this new legislation will have no effect on the current robust enforcement actions underway by the IRS. The issues of inflated premiums, sham pooling arrangements and lack of substance in the alleged insurance transaction remain in force and subject to serious scrutiny.

It is unlikely that Congress will bother to look at this code section again any time in the near future.

As a result of this new legislation, section 831(b) captives can generally no longer be owned by the entrepreneur’s spouse, children, grandchildren or trusts benefiting them. (Details about how the legislation achieves this change can be found in other sources).

Perhaps as many as half of all existing micro captives were formed with estate planning in mind. These captives will have to change their ownership or dissolve before the end of 2016. Tax professionals should review all captives owned by their clients to ensure that they remain complaint with the changes in the law. Relying on the captive managers may not be sufficient.

ID Theft: A Danger Even After Death

Take your driver’s license out of your wallet. Flip it over. Now look carefully at the back of it. There’s no box to check for “identity donor.” Yet when it comes to identity-related crimes, one of the greatest times of vulnerability is immediately after you die.

You can do everything right. You can use long and strong passwords and account-unique user names. You can check your financial accounts and monitor your credit on a regular basis, you can set up transaction alerts on your credit cards – even order a credit freeze – and then you die. Well, not entirely…

Include Identity in Your Estate Planning

A good identity thief can undo all your fraud precautions with a few phone calls. Most people don’t think about this, because it’s a wee bit late to refinance the family homestead – much less worry about interest rates – when you’re dead. Regardless, the recently deceased continue to exist on paper, and this may be the case for some time. Meanwhile, many bankable facts – key among them your Social Security number and personally identifiable information – are just sort of there in the form of “zombie” purchasing power. An identity thief can use that purchasing power to drain your bank accounts, open new credit in your name and perpetrate all sorts of fraud that can harm your family and heirs.

Think of your post-mortem identity as a would-be extra on “The Shopping Dead.” Now that you have that image in your head, take the time to arrange for the deactivation of your identity by making it part of your estate planning. This will mostly take the form of a to-do list for whomever will be handling your affairs, because nothing can be done till…well, you know, after the fact. There are many good resources, including this list from IDT911.

There are many different scams out there, ranging from the misappropriation of Social Security payments to the more old-fashioned practice of ghosting, whereby a person of approximately the same age assumes the identity of the deceased. In keeping with the proliferation of possible crimes, there are plenty of criminals out there who make a living in this post-mortem niche. They scan death notices in the local paper, read obituaries, even attend funerals and, make no mistake about it, can get a lot of shopping done with your available credit before the three credit reporting agencies and your current and future potential creditors are notified of your demise. Those same bad guys may also use your Social Security number to grab a big fat tax refund (if you’re lucky enough to pass away during tax filing season).

How will they get the information needed to commit fraud? Sometimes the perpetrator is a family member, so he already has access. But more often, family members are distracted and distraught. There are visitors who come and go, unchecked, and of course the numerous demands of making final arrangements and dealing with matters of the estate. If there was a long illness, unsupervised healthcare workers may have had the run of the deceased’s domicile – including the owner’s most sensitive information. Maybe the wake was at the deceased’s home, or people sat shiva there. The opportunities for fraud abound. Funerals, of course, provide a thief with a precise time to get what he or she wants. But instead of grabbing the television or the silver (too easy to miss), an envelope containing a financial statement or a copy of last year’s tax return might go walkabout. From there, it’s a race to apply for as much credit and buy as many pricy things for resale as possible before the money spigot coughs credit dust.

The Bigger Picture

Government agencies are famously slow to get the news of a person’s undoing.

An audit of the Social Security Administration conducted by the Office of the Inspector General found approximately 6.5 million Social Security numbers belonging to people aged 112 or older whose death information wasn’t in the system. Of those numberholders, only 13 people were still receiving payments; the rest consisted of “numberholders who exceeded maximum reasonable life expectancies and were likely deceased.” The fact that their deaths were not recorded in Numident (the SSA’s numerical identification system), and thus are also missing on the Master Death List, leaves plenty of runway for misconduct. According to the audit report, the “SSA received 4,024 E-Verify inquiries using the SSNs of 3,873 numberholders born before June 16, 1901.”

On the off chance you missed the memo while diving for sunken treasure at the bottom of Loon Lake: Identity theft is now the third certainty in life, right behind death and taxes. When a loved one passes, there is a trifecta, which is why it’s trebly important to protect against the threat of a different kind of life everlasting.

How to Reengage a Disengaged Spouse

My partners and I spend a lot of time writing about how difficult it is to be a family successor to-be or child working for a parent. We also have many articles detailing how business owners can communicate more effectively with employed family members so they can have positive working relationships while protecting their familial relationships. We’ve explained how important it is to establish boundaries so that work issues stay at the office to provide quality family time at home.

What we haven’t spent enough time on is recognizing how tough it is to be the spouse of an ambitious, successful and highly driven business owner. Typically, although not always, these roles are cast stereotypically, with the husband running the business while the wife holds their personal lives steady raising the children and managing the household. For the sake of simplicity, we’ll talk in terms of the stereotype, but the description works with the gender roles reversed.

The women are dynamic, intelligent, educated, assertive people – many left rewarding careers to care for their families so their husbands could fully concentrate on building a substantial family business. They have typically not been included in much of the financial and business-related decision making because they were not actively involved in the business. When families are young, this makes a lot of sense as each spouse is fulfilling a necessary role to provide and care for a growing family and business. The wife protects her husband from family distractions and worries so he can concentrate on building a business legacy and their financial security. The husband protects his wife from the day-to-day business challenges, makes sure there is enough money to run the household and generally learns it is easiest not to burden her with worrisome details of how he manages the business checkbook. However, when it comes to making the critical decisions that will provide for the financial stability of your children’s future and your financial security, you can bet it is important for both spouses to be involved and participate in the discussion if you want to maintain family harmony and have a smooth transition for the next generation.

The Disenfranchised Spouse

By the time we are engaged to develop and implement a business succession and estate plan, the business owner’s children are usually grown, working in the business and building their own families and the wife/mom is busy being a grandparent, participating in all kinds of civic/community/church activities and planning their next vacation trip. The husband/dad is still running the business and making all of the financial and business decisions.

On the surface, the couple is solid, dedicated to supporting each other, and wants to provide for each other in their declining years. But deep down, there is usually a woman who feels disenfranchised and fairly clueless as to how the business will provide for her personal financial security in the event she outlives her husband. When advisers bring documents for her signature, this is her one time to be able to voice her opinion, take a stand and even hold up progress if she feels uncomfortable with any aspect of the process. She is told not to worry, that she will be provided for – but how and who will she have to turn to after he’s gone? Her children? The managers? The family attorney? Not likely.

We have seen women known to be gentle, supportive and trusting change when it comes to protecting her financial security and whether she will have to rely on someone else running the business or get her monthly allowance from her children or, even worse, a banker.

me

Re-Engaging Your Spouse

If you haven’t both been involved with your estate and succession planning team, it is likely you may be experiencing some challenges — perhaps your progress has even come to a standstill, and there may need to be some discussion on this topic before you can proceed any further. What are some of the key factors to make sure that when you are ready to begin your estate or succession planning that you will be comfortable with the people and decisions that must be made? Here are some helpful tips to keep in mind:

  • Never think that protecting your spouse from the truth is being helpful. It indicates you don’t think she will understand, that she will overreact or that she is weak. None of these assumptions demonstrate an appreciation for her inner strength, intelligence and sensitivity to your concerns. Additionally, it prevents your closest, most trusted ally from being able to be part of the solution.
  • Make sure your spouse knows and appreciates the key players you depend on each day to run and care for the business. If all she ever hears is your grumbling about a family employee’s ineptitude, it is highly likely that she will not feel very good about that successor’s ability to manage the business in your absence. The same goes for complaints about any other manager or adviser who is critical to your business stability.
  • When putting together your adviser team (estate attorney, accountant, succession planner), make sure you do the choosing and subsequent meetings together. Interview prospective members of this team together — you both need to feel comfortable with people who are going to help secure your family’s legacy and financial future. There is nothing worse than a business owner who says his spouse doesn’t need to be included in the discussions because she isn’t involved in business operations. It is amazing what kind of insight we get from spouses — about family, employees and managers, and about how their husbands are being affected.
  • Just because your spouse is not an active employee in the business does not mean she is not your partner in every sense of the word. Every decision you make, every success or failure you experience, is shared by your spouse. When you are stressed, so is she; when you celebrate success, so does she. Why then, wouldn’t you consider involving her in decisions that will ultimately affect her, too? You don’t need to discuss every operational decision made each day, but it is important to share the strategically important ones that will affect her future, too.

When you reach an agreement that you have the right people facilitating your family’s future, certain that you will each will have equal input, be respected and listened to, you will have increased your odds for achieving succession success!