Posted by Katie Hadland on Tue, Sep 4, 2012 @ 08:53 AM

September is Life Insurance Awareness Month!  Buddy Valastro, also known as “The Cake Boss”, understands the needs that life insurance fulfills first hand.

Read his story to learn why he has partnered with the Life and Health Insurance Foundation for Education (LIFE) to become the spokesperson for Life Insurance Awareness Month.

Posted by Mike McNelley on Thu, Aug 16, 2012 @ 10:05 AM

Beginning in 2013, certain investment income will be subject to an additional 3.8% surtax, enacted as part of the Patient Protection and Affordable Care Act [P.L. 111-148], March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 [P.L. 111-152].

This is sometimes referred to as the “Medicare” surtax because the legislation enacting this tax created a new section of the tax code:  Chapter 2A – Unearned Income Medicare Contribution.  However, this was simply a revenue-raiser enacted to offset the cost of health care legislation; there does not appear to be any reason this surtax must be used for Medicare.

For an individual, the 3.8% surtax is imposed on the lesser of:  (i) “net investment income” [NII], or (ii) the excess of “modified adjusted gross income” [MAGI] over a certain threshold amount.

"Net investment income” is defined to consist of three categories of gross income:

1. Gross income from interest, dividends, royalties and rents.
2. Gross income from a passive activity, or a trade or business of trading in financial instruments or commodities.
3. Net gain ‘to the extent taken into account in computing taxable income’.

Why is the 3.8% Surtax important to affected clients?  Considering current income tax rates, which expire on 12/31/2012, if these rates are extended, then this surtax amounts to a 25% tax increase for both dividends and long-term capital gains.  If current rates are not extended, then the tax amounts to at least a 10% tax increase on dividends and a 19% tax increase on long-term capital gains.

One way to plan for the surtax is to consider reducing income subject to the surtax by converting into income not subject to the tax, and making it non-taxable regardless of the amount received.

Exclusions from taxable income include, among others:

• gain on the tax-free exchange of insurance policies;
• the internal ‘build up’ of value inside a life insurance policy;
• tax-free withdrawal/loans from life insurance policies;
• death benefit paid to beneficiary of a life insurance policy;

With Index Universal Life, you can

• have the reassurance of a death benefit for your loved ones;
• get potential tax-deferred  cash value accumulation;
• maximize cash premium payments – within IRS limitations;
• access your cash value through loans or withdrawals; and
• customize your policy with riders and options.

And, because the cash accumulation value of an Index Life policy is not invested in any stocks, bonds, or equity investments, the interest rate credited to the policy’s index account value is linked to the performance of the index or indices chosen and will never be less than zero percent.  This gives greater cash accumulation potential than traditional universal life insurance, and the annual floor ensures that the cash value will not decrease due to market volatility.

Posted by Mike McNelley on Tue, Jul 10, 2012 @ 01:08 PM

Inherited individual retirement accounts made news earlier this year when the Senate Finance Committee proposed to make heirs cash them out within five years of the benefactor's death.

The measure, which has been abandoned at this time, would have upended a system that is highly advantageous to families.  Under current rules, heirs get to stretch withdrawals from an inherited IRA across their own life expectancies, meaning the assets could potentially increase in value, tax-deferred, for decades.

Unknowingly, families sometime cash out the account, losing the possibility of a life-expectancy payout.  That is a problem because there is no way to get the money back into the IRA after it has been cashed out.

And, even when the heir is aware of the opportunity to keep the inherited IRA in tax-deferred investments, mistakes in the paperwork disqualify the inherited IRA.

Here are 5 areas where problems can result:

1.Trusts:

One of the most common problems involves how they intersect with trusts.  Many people who set up plain-vanilla living trusts, name the trust as the IRA beneficiary.

But a trust isn't a person, and has no life expectancy, so it can't take advantage of the opportunity to stretch withdrawals.

There is a potential fix:  Demonstrating that a trust qualifies as a "conduit," or "see-through" trust, meaning its purpose is to get the IRA distributions to a trust's beneficiaries.  Doing so, however, could require winning a private-letter ruling from the Internal Revenue Service, which can cost $4,000 for filing (plus the accountant or attorney fees).

It is preferable to keep the IRA out of the trust unless your heir’s situation is so egregious that there isn't any alternative.

2.Titling problems:

When you inherit an IRA, you should re-title the account so it reads like this:

"John Doe, Deceased (date of death), IRA, FBO (for benefit of) James Doe, Beneficiary"

Check forms from the custodian of the account to be sure they spell out that your client had inherited the account.

3.Paying the tax twice:

If the benefactor's estate was large enough to be subject to federal estate tax, and a federal estate tax was paid, then the IRA beneficiary can get a tax deduction for the estate tax paid on the IRA's value.  That is the case even if someone else paid the tax.  Estates worth up to $5.12 million are exempt from estate tax this year, but the exemption reverts to $1 million in 2013 unless Congress acts.

For example:  a mother leaves a $1 million IRA to her son and the rest of the estate to her daughter.  The daughter ends up paying the federal estate tax on the entire estate, including the IRA, the taxes on which were $350,000.  The son cashes out the $1 million IRA.  He now has $1 million in gross income and a $350,000 deduction for the estate tax.

Heirs often don't realize they are entitled to this "income in respect of a decedent" deduction.  Estate administrators typically don't tell beneficiaries about their future tax situations.  And many times, the beneficiary's tax preparer might have no idea that estate tax has been paid on the IRA.

4.Failing to pass it on:

Many wealthier adult children forget they can disclaim an inherited IRA and pass it along to their children—possibly creating tax-deferred growth for decades.

There are two things to keep in mind:

A. The IRA owner has to fill out the beneficiary designation form in a way that will allow it.  The best way is to leave the account "to my then-living descendants, per stirpes," which means the account goes equally to your children, or, if they have died, to their children.

B. Disclaimers must be completed within nine months of the benefactor's date of death.

5.Failing to take RMDs:

The designated beneficiary takes RMDs based on their own single life expectancy and must begin by December 31 of the year following the IRA holder’s death.

The 10% penalty associated with IRA distributions to those under 59½ years of age is not applicable for inherited IRA distributions.

Failure to take an RMD from an inherited IRA will result in a 50% excise penalty tax on the undistributed amount.

Form 1099, which reports distributions, should include “Code 4” – the code used to show that it is a distribution on account of death.