President Obama signed the Small Business Jobs and Credit Act of 2010, H.R. 5297, on Monday, September 27, establishing an allowance for partial annuitizations of annuity contracts from January 1, 2011.  In the coming weeks, the Advisor’s Journal will include in-depth examinations of the provisions of the Small Business Act that are of the most interest to advisors and insurance producers, such as the partial annuitization of annuity contracts and the Roth Conversion Extension to Employer Accounts.

In this AdvisorFX exclusive analysis, the Panel of Experts summarize the impact of the Act’s other major provisions.   Please read the article via your AdvisorFX subscription at AdvisorFX (or sign up for a free 30 day trial).

Why is this Topic Important to Wealth Managers?  Provides critical information in regards to who will be the subjects of new reports going to the IRS beginning in January.  Chances are, a significant portion of clients accept credit and debit cards in transactional exchanges.  The new law applies, and has ramifications, directly related to these merchants and services providers.

The same legislation that brought us the first time homebuyer’s credit, the “Housing Assistance Tax Act of 2008”, is back again, this time in the form of additional reporting for those who accept credit or debit cards in consideration for goods or services. [1] The act requires return reporting to the Internal Revenue Service, “relating to payments made in settlement of payment card and third party network transactions.”  [2]

The requirements establish that “banks or other organizations that have contractual obligation to make payment to participating payees in settlement of payment card transactions” [3], are required to return to the Service, “(1) the name, address, and [Taxpayer Identification Number] of each participating payee to whom one or more payments in settlement of reportable payment transactions are made, and (2) the gross amount of the reportable payment transactions with respect to each such participating payee.” [4]

“Participating payee” means, “any person who accepts a payment card as payment.” [5] A “payment card”, generally a credit or debit card, literally means “any card which is issued pursuant to an agreement or arrangement which provides for…issuers of such cards, a network of persons unrelated to each other, and to the issuer, who agree to accept such cards as payment, and standards and mechanisms for settling the transactions …” [6]

This means that a merchant or service provider who accepts credit or debit card payments is subject to general information reporting, as well as the gross amount of card transactions, being provided annually to the Internal Revenue Service, with a copy to the merchant. [7] There are two notable exceptions to the general rule.  The first is known as de minimis payments. When the gross amount of all transactions, processed through a “third-party network transaction” throughout one year are less than $20,000 for one taxpayer, or if the merchant or service provider accrues less than 200 transactions with the “third-party network”, reporting is not required. [8]

Secondly, law does not apply when a payee has a foreign address, [9] and “upon which the payment settlement entity may rely to treat the payment as made to a foreign person.” [10]

The law is essentially the first step in an effort to accumulate raw transactional data relating to U.S. taxpayers. [11] The requirements create a “paper trail” previously “unavailable to the IRS except on a case-by-case basis.” The Treasury Department plans to “compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported”. [12] “The new reporting is estimated to raise more than $9.5 billion.”  [13]

In an already tight economy, and highly competitive industry, some small businesses are reasonably concerned that “expanded pay­ment card information reporting,” will only add to the already high cost of credit and debit card transactions, in turn, “driving many merchants away from these transactions.” [14]

The new requirements become “effective for information returns for reportable payment transactions for calendar years beginning after December 31, 2010.” [15]

Tomorrow’s blogticle will resume back on course with our adventure of the high seas and offshore planning.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] “Federal Housing Finance Regulatory Reform Act of 2008.”  122 Stat 2654, 2908 -2910.  (2008).  Westlaw.  (also avaialbe at GovTrak: http://www.govtrack.us/congress/billtext.xpd?bill=h110-3221.  Last Accessed 9/23/2010.)

[2] Id.  at 2908.

[3] 26 C.F.R. § 1.6050W-1 (b)(2).  (2010).

[4] 26 U.S.C. § 6050W (a).  (2008).

[5] 26 U.S.C. § 6050W (d)(1)(a).

[6] 26 U.S.C § 6050W (d)(2)

[7] 13 Mertens Law of Fed. Income Tax’n § 48:213.70. Citing 26 U.S.C. §  5060W.

[8] 26 U.S.C. §  6050W (e).

[9] 26 U.S.C. §  6050W (d)(1)(B)

[10] 26 C.F.R. § 1.6050W-1 (a)(5)(ii) noting the requirements of 26 U.S.C § 1441-1443.

[11] See generally: “The Patient Protection and Affordable Care Act.”  Pub. L. No. 111-148.  “Title IX, Subtitle A, § 9006”.  (2010).

[12] CCH Tax Briefing.  “Housing Assistance Tax Act of 2008-Special Report.” Pg 6. Jul 30, 2008.

[13] Id.

[14] Id.

[15] “Technical Explanation of Division C Of H.R. 3221, The ‘Housing Assistance Tax Act Of 2008’ ”.  Joint Committee on Taxation. JCX-63-08.  Pg. 62.  July 23, 2008.  Download available: http://www.jct.gov/publications.html?func=startdown&id=1276.  Last Accessed 9/23/2010.

President Obama signed the Small Business Jobs and Credit Act of 2010, H.R. 5297, on Monday, September 27, establishing an allowance for partial annuitizations of annuity contracts from January 1, 2011.  In the coming weeks, the Advisors Journal will include in-depth examinations of the provisions of the Small Business Act that are of the most interest to advisors and insurance producers, such as the partial annuitization of annuity contracts and the Roth Conversion Extension to Employer Accounts.

In this AdvisorFX exclusive analysis, we summarize the impact of the Act’s other major provisions.  Please read the article via your AdvisorFX subscription at AdvisorFX

Why is this Topic Important to Wealth Managers? Discusses how offshore LLCs are being used in conjunction with clients’ estate plans to maximize protection and efficiency.  Discusses one jurisdiction in particular, Nevis, which provides for beneficial company laws, similar to statutes of certain domestic jurisdictions.  .

One new and emerging area in offshore planning is the use of Limited Liability Companies or LLCs.  “Like its domestic counterpart, the offshore LLC is designed to bring together in a single business organization the best features of all other business forms…owners obtain both a corporate styled liability shield for its members and the pass through tax benefits of a partnership.”[1] Additionally, the “offshore LLC [is] a very valuable asset protection tool when structuring a family wealth preservation plan.”[2]

Asset Protection

One attorney notes the successful use of LLCs in the estate planning arena, by stating, “[i]t would be hard enough for a creditor to invade a U.S. formed Limited [Liability Company], but what about a [one] formed in a country that does not even recognize U.S. judgments!”[3]

When assets are transferred, assuming the transfer is valid in time under state law, to an LLC, the assets are “protected from member’s creditors.”  “Members of an LLC are neither co-owners of nor have a transferable interest in, property of an LLC.”[4] It is therefore the case that, “assets transferred to an LLC become the property of the LLC and not subject to the creditor claims of its individual members.”[5] And, since “a creditor’s recourse against a member is limited to a charging order, assets transferred to an LLC can be effectively protected against levy and seizure by a creditor.”[6]

Many sophisticated wealth managers agree that, “Nevis is an example of a jurisdiction that has excellent asset protection features incorporated into its LLC legislation.”  [7] Nevis in particular can provide for a number of jurisdictional advantages.  First, The Nevis LLC law is “modeled after the Delaware Limited Liability Company Act and is considered by many practitioners as the most modern offshore limited liability legislation of its kind.”  [8] Secondly, Nevis laws present for an optimal tax structure for LLCs, in that organizations “are tax-exempt so long as they transact no business on the island.”  [9]

Nevis also “offer[s] the protection normally accorded to…Limited Liability Company structures,” and “Nevis law would require independent litigation in Nevis to disband or impose judicial control over the entity, and Nevis legislation in this regard is extremely debtor friendly.”  [10]

Tomorrow’s blogticle will close the week’s discussion of offshore planning.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] ALI-ABA Course of Study Materials. “Estate Planning for the Family Business Owner”.  Volume 2.  Mario A. Mata.  July 2004.; See also, generally, 26 U.S.C. § 1362.

[2] Estate Planning for the Family Business Owner.

[3] ALI-ABA Course of Study Materials “Sophisticated Estate Planning Techniques”.  Volume II.  Alan S. Gassman.  September 1999.

[4] Estate Planning for the Family Business Owner.

[5] Id.

[6] Id.

[7] Id.

[8] Id.

[9] 3 Asset Protection: Dom. & Int’l L. & Tactics § 44:17 (2010), citing Nevis International Exempt Trust Ordinance, 1994, as amended, § 43; Nevis Business Corporation Ordinance, 1984, as amended, § 123(1); Nevis Limited Liability Company Ordinance, 1995, as amended, § 83(1).

[10] Id. citing Using the New Isle of Man Limited Liability Company”, Charles A. Cane, Journal of Asset Protection, May/June 1997.

An insurer recently won a major victory when the U.S. District Court for Delaware voided a life insurance policy that was purchased as part of a STOLI transaction. The case—Principal Life Insurance Co. v. Lawrence Rucker 2007 Insurance Trust—is significant because the court voided the policy for lack of an insurable interest based on the finding of insured’s intent to sell, even though the insured had not identified a particular purchaser for the policy at the time it was issued.

For the complete analysis of this development by our Experts Robert Bloink and William Byrnes, please read the article via your AdvisorFX subscription at Recent STOLI Case Is a Big Win for Insurers

For in-depth analysis of STOLIs, see Advisor’s Main Library Section 19.6 Life Settlements B—The Life Settlement Industry: Stranger-Originated Life Insurance (STOLI).

For in-depth analysis of the topic of insurable interest, see Advisor’s Main Library Section 20 Beneficiaries And Settlement Options B—Insurable Interest: New York Insurance Department Invalidates STOLI Scheme For Lack of Insurable Interest

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

Author: Benjamin S. Terner

Why is this Topic Important to Wealth Managers?   Provides an overview of one useful tool for affluent clients.  Presents offshore private placement life insurance considerations wealth managers may consider when discussing this topic with clients.   

As a brief review, private placement variable universal life insurance may allow individuals “the ability to select asset management beyond the limited asset-management choices offered in retail variable life insurance products.”[1]

Generally speaking, one benefit derived from the use of private placement policies “in the high-net-worth market” is that the policy is essentially an “investment vehicle, optimally used for the most tax-inefficient asset classes in an investor’s portfolio.”  Therefore, some common goals for wealth managers structuring transactions as private placement life contracts: “are to take advantage of the income tax and possible estate tax savings, to maximize investment choices, and to incur as little cost as possible in doing so.”[2]

However, “[b]ecause of the expense associated with regulatory pressures imposed by federal and state securities laws and by state insurance boards, some domestic companies have more limited investment platforms than their offshore counterparts.” [3]  Many jurisdictions have fewer “limitations on investments underlying [private placement] variable life.”  Those products, “allow for a wider selection of international investment options than are available with domestic products.” [4]

Although a number of private placement products are available domestically, “many domestic carriers will agree to engage a policy owner’s pre-selected investment manager only with a premium commitment of $ 20,000,000 or more at a significant out-of-pocket cost to the purchaser.”[5]  However, transactions offshore commonly require lower out-of-pocket expenses and anywhere from $1,000,000 to $ 5,000,000 as a minimum premium, which in essence “offers a cost-efficient alternative to the domestic market.”

Asset Protection Hurdles

Private placement policies are commonly purchased by a trust, “[p]rotecting assets from future creditors, claimants and restitutionees.” [6]  This is because, “United States judgments will often not be recognized in these jurisdictions, creditors and claimants are forced to initiate proceedings in the jurisdiction in which the assets are located.”   Additionally, “many jurisdictions have short statutes of limitation,” [7] and “[l]itigation abroad is expensive and difficult.”  The combination of these factors “sufficiently deter[s] some creditors and claimants from pursuing legal action in foreign jurisdictions. [8]

Tax Treatment

To close, as a general rule life insurance policies are treated, for federal income tax purposes, the same. [9]  Which means generally, “earnings on policy cash values, including dividends, interest and capital gains, are not taxable to the policy owner as they accumulate within the policy . . . .” [10]  The face value of the contract is also afforded similar treatment as domestic policies.  [11] “Finally, if properly constructed, the insured may withdraw and borrow against the policy without realizing taxable income.[12]  Naturally, as with all planning, there are issues to be addressed, in this case to  properly construct the policy.

Tomorrow’s blogticle will discuss more offshore planning considerations.    

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] ALI-ABA Estate Planning Course Materials Journal June 2006. “Private Planning Life Insurance Part I.”  Leslie C. Giordani and Michael H. Ripp, Jr.  http://files.ali-aba.org/thumbs/datastorage/lacidoirep/articles/EPCMJ_EPCMJ0606_giordani_thumb.pdf. Pg 46.   Last Accessed 9/2/12010. 

[2] Id. 

[3] Id.

[4]  Life Insurance and Modified Endowments under Internal Revenue Code Sections 7702 and 7702A.  Desrochers.  http://books.google.com/books?id=X94g1ABbTj0C&pg=PA131&lpg=PA131&dq=benefits+offshore+private+placement+life+insurance+law&source=bl&ots=P3A-Q38C8X&sig=fQVJYGLCLTT0YTQPFeo9QVhZ6VY&hl=en&ei=pDmaTLWiC4WasAO6nfieDA&sa=X&oi=book_result&ct=result&resnum=6&ved=0CCQQ6AEwBTgU#v=onepage&q&f=false.    PG 132.  2004.  Last Accessed 9/21/2010. 

[5] 9 Conn. Ins. L.J. 613, 621. Richard Lewis. (2002/2003) citing, Leslie C. Giordani, Foreign Life Insurance Strategies, in 2 Int’l Trust & Estate Planning 536 (ALI-ABA ed., 2002). (Lexis Nexis). 

[6] 9 Conn. Ins. L.J. 613, 628  citing Barry S. Engel, Eric D. Sanderson and Edward D. Brown, Asset Prot. Plan. and Contempt of Court, Asset Prot. Strategies 347, 627 (Alexander A. Bove, Jr. ed., 2002). (Lexis Nexis). 

[7] Id. citing, Denis Kleinfeld, Choosing an Offshore Jurisdiction, Asset Protection Strategies 74-85 (Alexander A. Bove, Jr., ed. 2002).

[8] 9 Conn. Ins. L.J. 613, 628 

[9]  Id. at 635

[10] Id. citing Citing, Leslie C. Giordani, Foreign Life Insurance Strategies, in 2 Int’l Trust & Estate Planning 539 (ALI-ABA ed., 2002. 

[11] 9 Conn. Ins. L.J. 635 Citing I.R.C. § 101(a) (West 2002).

[12] 9 Conn. Ins. L.J. at 635 citing, Gary S. Lesser, Lawrence C. Starr, Life Ins. Answer Book, For Qualified Plans and Est. Plan. 2-21 (1998)., at 2-1.

Why is this Topic Important to Wealth Managers?  Provides an overview of private annuities in relation to financial planning.  Examines a new concept wealth managers are employing for their clients with regards to private annuities and trusts. 

The traditional private annuity is a transaction used by some wealth managers for clients whose circumstances permit. Generally a private annuity transaction occurs where the grantor transfers assets to a third party who pays the grantor an annuity, usually for the life of the grantor.[1]

When a trust is involved with a traditional private annuity, the common transaction may look like this:  “The owner of highly appreciated commercial real estate transfers the property to an irrevocable trust in exchange for the trust’s promise to pay an annuity for life. The present value of the annuity equals the fair market value (‘FMV‘) of the property. The trust then sells the property to a third party for a sale price equal to its FMV.” [2]  For additional introductory discussion on private annuity contracts see AUS Main Private Annuity.  [3]

The idea behind wealth managers suggesting similar transactions “is that the original transferor can spread his large capital gain over life expectancy by using the irrevocable trust as an intermediary rather than selling directly to the third party (who is presumably unwilling to do a private annuity).” [4] 

There are considerations wealth managers must take into account when discussing private annuities with their clients. These may include valuation methods, arms-length transaction consideration, and incidents of ownership. For a detailed discussion of the tax implications of private annuities, please see Tax Facts Q 41. How are payments received under a private annuity Taxed? [5]

It is often the case that a trustee, although not necessarily, will use “the sale proceeds to insure its annuity obligation by purchasing a commercial immediate annuity.” [6]

Planning Concept:  Some wealth managers have recently begun to structure private annuities for their clients slightly differently than the traditional method discussed above.  Here the idea is a private annuity contract issued from the trust to the grantor who pays valuable consideration for the annuity which carries with it a condition precedent or “contingency”.  The condition on the annuity could be the death of the grantor’s spouse.  The trustee may “reinsure” the risk with the purchase of life insurance from payment of the annuity in the event the condition takes place.[7]  Similar considerations with regards to private annuities should also be considered with private annuities that carry a condition.

In the event the grantor’s spouse does not die in the near future, the premiums paid for the private annuity could generally be considered income to the trust, which may be owned by a second generation.  If the spouse does die in the near future, payment of the annuity would create general gain taxation with a tax-free redemption up to basis. [8]

Tomorrow’s blogticle discusses more life insurance planning ideas.       

 We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Manning on Estate Planning. PLIREF-ESTPLN s 5:9, 5-30.  “§ 5:9 The Private Annuity”.  Westlaw.

[2] New York Estate Planning. 33 ESTPLN 13.  “Maximizing The Planning Opportunities Of Private Annuities”. 2006. Westlaw. 

[3] AUS Main Libraries, Section 2. The Federal Estate Tax, D—Annuities In The Gross Estate.   Last Accessed 9/19/2010. 

[4] Id.

[5] Tax Facts Q 41. How are payments received under a private annuity taxed? Last Accessed 9/19/2010. 

[6] Id. 

[7] 33 ESTPLN 13

[8] PLIREF-ESTPLN s 5:9, 5-30; 26 U.S.C.A. § 1001.

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A recent IRS Chief Counsel Advice addressed the importance of making adequate disclosures to the IRS when filing a gift tax return, demonstrating the dangers of a tight lip. There, a taxpayer failed to disclose the method and valuation discounts used to value gifted stock.  As a result, the taxpayer was unable to seek the protection from gift tax changes based upon the three year statute of limitations.

The statute of limitations for the IRS to question an item on a gift tax return is essentially unlimited if a gift is not “adequately disclosed” on the return, so taxes—and fees and interest—can be imposed on the inadequately disclosed gift any time after the return is filed.

For the complete analysis of this development regarding the disclosures required on a gift tax return by our Experts Robert Bloink and William Byrnes, please read the article via your AdvisorFX subscription at Gift Tax Return Disclosures—Adequate or Else?

For in-depth analysis of this topic, see Advisor’s Main Library Section 7. Gift Taxes D—Valuation For Gift Tax Purposes and from a tax perspective see Tax Facts Q 1534 What are the requirements for filing the gift tax return and paying the tax?

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

The Automatic IRA Act of 2010 (S. 3760) would require smaller employers to open automatically funded IRAs for their employees, a business opportunity for some advisors and a competitor for advisors to other retirement plans. In addition to its effect on advisors, the automatic IRA program may also benefit the insurance industry by allowing investment in insurance and annuity products, a blessing for insurers when life insurance coverage is at a fifty-year low.

For the complete analysis by our Experts Robert Bloink and William Byrnes, please read the article via your AdvisorFX subscription at The Automatic IRA Act of 2010: Boon for Advisors?

After reading the analysis, we invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers?   Discusses estate tax considerations in regards to life insurance policies.  Also, includes a detailed dialogue of the incidents of ownership concept. 

What do most wealth managers try to avoid when planning with life insurance and trusts?

That the Gross Estate for Estate Tax calculations would include the death benefit from the policy in the estate.[1]

What are some common ways to avoid this dilemma when using a trust and life insurance in regards to estate planning?[2]

The insured should never own the policy; “it should be owned from inception” by the trust or third party. 

• A trustee takes “all the actions to purchase the policy on the life of the insured”. 
• The trustee should be “authorized but not required to purchase insurance on the life of anyone whose life the trust’s beneficiaries have an insurable interest.”
• The trust explicitly prohibits the insured from obtaining any interest whatsoever that the trust may purchase on the insured’s life. 
• The trust does not require, but rather permits the premium payments.
• Trust is well funded, beyond that of one year of premium payments. 
• The trustee acts in the best interest of the beneficiaries. 

A revisionary interest will give rise to incidence of ownership [3], which could include the insured’s right to; [4] 

• Cancel, assign or surrender the policy.
• Obtain a loan on the cash value of the policy or pledge the policy as collateral for a loan. 
• Change the beneficiary, change contingent beneficiaries, change beneficiaries share of the proceeds.

When discussing incidents of ownership, naturally the 3 year rule should be further expounded.[5] “The 3-year ‘bring-back’ rule” is applicable, “with respect to dispositions of retained interests in property which otherwise would have been includable in the gross estate”.[6]  As discussed in AUS Main Libraries Section 8, C—Lifetime Gifts Of Insurance And Annuities-“Gifts Within Three Years Of Death”, essentially, the rule as it applies to life insurance means that any policy transferred out of the estate of the insured within 3 years of his/her death, the policy proceeds are brought back into the gross estate for estate tax calculations. 

It is generally accepted that “the trust should be established first, with a transfer of cash from the grantor to be used to pay the initial premium” or a few years of premiums.  “The trustee would then submit the formal application, with the trust as the original applicant and owner.”  Generally, the insured will “participate only to the extent of executing required health questionnaires and submitting to any required physical examination.”  Again the key is that the, “grantor/insured not have possessed at any time anything that might be deemed an incident of ownership with respect to the policy.” [7]

Tomorrow’s blogticle will discuss planning ideas related to life insurance, trusts, and estate planning.     

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] 26 U.S.C. § 2035 (a).  

[2] Life Insurance Planning 4^th Edition (2007).  346-347. Leimberg and Doyle. The National Underwriter Company. 

[3] 26 U.S.C. § 2042 (2). 

[4] Life Insurance Planning at 351. 

[5] 26 U.S.C. § 2035 (d). 

[6]AUS Main Libraries, Section 8. Lifetime Gifts, C—Lifetime Gifts Of Insurance And Annuities, Subsection 6. Insurance Gifts Within Three Years Of Death.  Last Accessed 9/17/2010. 

[7] Id. citing, In Estate of Joseph Leder, 893 F.2d 237 (10th Cir. 1989), Internal Revenue Service, Actions On Decisions 1991-012.

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