planning and, respecting income tax
considerations, estate planning.
priority in advisor-client discussions.
But the same cannot be said of other
wealth transfer planning goals that
are more sensitive to macroeconomic
and tax considerations.
Case in point: estate planning for individuals and married couples who are
no longer subject to estate tax due to
the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act
of 2010. Section 301 of the act sets the
federal estate exemption at $5 million
per person and $10 million per couple—
levels that advisors say needn’t concern
all but their wealthiest clients.
Turning to business planning,
sources disagree as to the outlook.
Repya expects, as in 2011,
a “small uptick” in life-insurance funded exit planning, buy-sell planning and
planning, notably for Section 162 bonus arrangements and non-qualified
deferred comp plans.
However, Herb Daroff,
a partner at Boston-based Baystate
Financial Planning, insists that many
small businesses are deferring
planning because of concerns about
the tepid recovery, cash flow issues,
rising healthcare costs, stagnant or
declining business valuations, plus
a potential slowdown of the world
economy stemming from Europe’s
sovereign debt crisis.
Common lifetime gifting techniques
that use life insurance to replace assets intended for charities, adds Daroff,
should be less robust than in years
past. The increased estate tax exemptions are a contributing factor, but
Daroff also cites current low interest
rates, which makes certain techniques,
including charitable remainder trusts
(CRTs) and qualified personal residence trusts (QPRTs) less attractive
than when rates are high.
But whether life insurance will help
fund these and other financial objectives, sources caution, will hinge in
some measure on how interest rates
impact insurers’ financial condition—
and ultimately their products.
“The most valuable asset now in people’s estates is not
their home, but their retirement account. This technique
lets clients preserve that asset for heirs by funding a Roth
conversation using cheap dollars—life insurance premiums.”
Doug French, a managing principal
of insurance and actuarial advisory
services at London, U.K.-based Ernst
& Young, says interest rates are likely
to remain low for at least another two
years. Also, rates are straining insurers’
balance sheets because of contractual
obligations to honor interest rate guarantees on in-force policies that exceed
the prevailing market rates.
Upshot: the companies can choose
from among three “unpalatable”
choices: ( 1) take less profit; ( 2) cut
commissions to producers; or ( 3) raise
“What insurers are likely to do is a
combination of all three,” says French.
FUNDING A ROTH CONVERSION
Among the most promising solutions:
using life insurance to maximize
IRA assets intended for a surviving
spouse when funding an IRA-to-Roth
IRA conversion in advance of a client’s death. Baystate’s Daroff says
the insurance can both pay income
tax incurred on the conversion and
replace assets needed for retirement
income before converting.
In Daroff’s example, $600,000 of
a $1 million IRA is set aside for a
surviving spouse after the IRA account
“But to minimize the impact on the
bottom line, the companies are getting
ruthless about cutting expenses by
redesigning the products. All the big
insurers now have product redesigns
on the drawing board.”
That is likely to translate to fewer or
less generous guarantees on product
offerings, he adds, because cash-
strapped consumers won’t be as willing
as in years past to pay for higher premi-
ums and benefits. Still other consumers
won’t be buying the products.