The "C" of Estate Planning

Posted by Bob Burton on Fri, Sep 7, 2007 @ 12:20 PM

“C” Stands for Conserving One’s Assets for Oneself and One’s Family

Conserving one’s assets for oneself obviously must occur during lifetime (which clearly also serves to Conserve those assets for one’s family at death). Conserving assets during lifetime will be covered in detail in this newsletter.

Assuming one has done a good job of Conserving assets during lifetime, Conserving those assets for one’s family at death requires careful and thorough lifetime planning, even though this planning may not take full effect until death. This subject will be covered in detail in our next newsletter.

Conserving assets during lifetime - general considerations

One of the major problems facing all of us during our entire adult lifetimes is the possibility of some adverse, or even catastrophic, event occurring that could wipe out all, or a significant portion, of our assets. This is why almost all of us carry homeowner’s (or renter’s) insurance, automobile insurance, and liability insurance. Some of us in earthquake country also carry earthquake insurance, and some of us in low-lying areas also carry flood insurance. But all of these types of coverage protect only our hard assets. They overlook what are really our most valuable assets: ourselves and our future income-producing capacity. Those of us who work in the financial services field are in a unique position to help our clients correct this typical deficiency in their planning.

Products for Conserving assets during lifetime

The three types of products that immediately come to mind for Conserving assets during lifetime are disability insurance, long-term care insurance, and critical illness insurance.

DISABILITY INSURANCE. Some of us are covered by state-mandated disability income plans and/or employer-sponsored group disability income plans, but these are usually limited in amount and duration and should be supplemented with individual coverage. The rest of us, of course, have to fend entirely for ourselves. Of all types of coverages available during our working years, individual disability insurance (IDI) is perhaps the most overlooked. Yet the chance of a disability occurring during our working years is perhaps three times as great as the chance of dying during that same time period.

There are two primary ways of writing IDI: (1) One way is to pay for it yourself (non-tax-deductible), in which event any disability benefits received will be 100% income tax-free. If your employer pays the premium (deductible) and reports it to you as taxable income, that is the equivalent of paying for it yourself. (2) The other way is for your employer to pay the premium (deductible) as part of an accident and health plan for employees, in which event the premium will not be taxable to you, but all benefits received will be 100% taxable. We believe that most people, given the choice, will opt for the former approach if the employer is willing to pay the premium. Note that with three or more covered individuals on a list bill sent to an employer, typically the business owner(s) plus some employees, there will almost always be a multi-life discount. Note also that employer-sponsored IDI plans can be discriminatory.

Currently, Provada offers excellent IDI products from two strong carriers: Principal and MetLife. Be sure to ask us for proposals and information. (A future newsletter will discuss IDI in more detail.)

LONG-TERM CARE INSURANCE. With dramatic medical advances and increased life expectancies, interest in this type of coverage is literally exploding. The reason for this is clear: the cost of providing long-term care, whether at home or in a facility, can wipe out a lifetime of asset accumulation. This is why the federal government offers a program for federal employees, many states offer programs for their employees, and many trade organizations sponsor programs for their members. In most cases, however, these plans are not nearly as comprehensive as individual long-term care insurance (LTCI), and yet are often just as expensive. If you have clients that are eligible for one of these programs, let us help you compare them to individual LTCI.

LTCI policies and programs vary from state-to-state, with some states sponsoring a highly advantageous program known as the Partnership for Long-Term Care, which typically results in better policies and more secure rates. Whether writing Partnership policies or not, however, the four key factors to consider in designing LTCI (in addition to cost, of course), are: the initial daily benefit, the waiting or elimination period, the duration of benefits, and an inflation factor. The best plan will have a 5% compound inflation increase factor, unlimited benefits, and an attractive elimination period. Almost all policies will have a waiver of premium provision that kicks in when benefits begin. Note that with IDI, inflation factors take effect only when benefits begin, while with LTCI, the inflation factor increases potential benefits from the outset.

There is a possible limited federal income-tax deduction for personally paid LTCI premiums (it depends on one’s other medical expenses), but the most advantageous arrangement is for premiums to be paid by an employer for its employees, including by a “C” corporation for its stockholder-employees: these premiums are 100% tax-deductible by the employer and non-taxable to the covered employees, yet the LTC benefits received remain 100% income tax-free. If you have a client with a “C” corporation, individual LTCI premiums can thus be made 100% tax-deductible. In fact, even with pass-through tax entities (“S” corporations, partnerships, sole proprietorships, and LLCs), if a client’s spouse can legitimately be put on the payroll, the policies for both spouses can be written as a benefit for the spouse, which should make them 100% tax-deductible and non-taxable. As with IDI, employer-sponsored LTCI can be discriminatory.

Provada offers LTCI products from almost all of the major carriers. Be sure to ask us for proposals and information. (A future newsletter will discuss LTCI in more detail.)

CRITICAL ILLNESS INSURANCE. This is a very “new kid on the block”, with only a few carriers offering coverage. It is an interesting type of coverage, however, and we believe it will become increasingly popular in the months and years ahead. Provada is just beginning to develop expertise in this area, and we expect to have more information available to our clients in the near future.

Other techniques for Conserving assets during lifetime

In addition to those techniques that directly involve the sale of insurance products, discussed above, there are other legal arrangements that can be implemented to help Conserve assets during lifetime, such as irrevocable trusts (including special needs trusts in appropriate situations), GRATs, other gifts with valuation discounts, etc. A detailed discussion of these techniques is beyond the scope of this newsletter.

Working with other professional

Some of the plans and programs referred to in this newsletter require the services of our clients’ other professional advisors. By establishing close working relationships with these other professional advisors, we can be of greater service to our clients and can personally benefit as well from additional referrals.

Look for a future post on Conserving assets at death ...

We will follow up shortly with the balance of our discussion on the "C" of Estate Planning, the third component of the A-B-C-Ds...