A charitable freeze technique that used a complex contribution formula was considered by the Ninth Circuit Court of Appeals in Petter v. Commissioner, No. 10-71854 (2011). The charitable freeze is a technique that readjusts a simultaneous gift/charitable contribution combo if the IRS successfully challenges a valuation of the gift, shifting additional value from the gift component to the charitable contribution component to eliminate any gift taxation resulting from the challenge.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of estate planning in Advisor’s Journal, see What Next? ILITs and Estates under 5MM (CC 11-114).

For in-depth analysis of estate freeze techniques, see Advisor’s Main Library: E—Estate Planning For The Family Business.

Author: James Lavorgna, J.D., LL.M., CFP®

It was amazing to me when last Saturday, American investors woke up to realize that the economy was not doing well, unemployment and underemployment was around 17%, newscasters were reporting 15% of the American public was receiving food stamps, and people were horrified that, Standard and Poor’s, one of the premier rating agencies in the country and the folks who helped bring us the crash of 2008, downgraded the credit rating of the United States of America’s debt to AA+.

Then, a funny thing happened on the way to the country’s economic graveyard. People were fleeing the world’s stock markets for safety to where? The same U.S. Government Securities that were just downgraded. Go figure, Standard and Poor’s. So much for becoming a third world country this year.

Now don’t get me wrong; the credit downgrade was real, but hardly a surprise unless you have not listened to the news in the last six months. The credit agencies have been threatening to lower the country’s credit rating unless they reduced the federal deficit. And as everyone knows, Congress decided to reduce the amount of growth in the deficit instead of actually reducing the deficit.

But yet, there are still people out there who are crying for more stimulus money (translation: another credit card for the U.S. to give away meaningless, small amounts of money that really won’t make a difference to millions of Americans). Really?

Here is the real danger with these people. They may think that since many investors were fleeing to the U.S. securities markets after a downgrade, how far of a downgrade can we take before investors stop seeking out our government securities market for safety. That’s a lot of stimulus.

Here is my opinion. Last week, the Dow Jones Industrial Average on average reversed direction 150 times every 15 minutes and closed down 699 points or a drop of 5.75%.

Much of the volatility in a market like this is due to uncertainty about this government’s policies (however, some of the volatility in the market is consistently the professionals taking advantage of the fearful and uninformed amateurs).

Clearly, Washington does not get it, or if they do, then they are deliberately trying to ruin this country and it’s markets from within. It would not be the first time this has been done Mr. Soros . . . I mean Mr. Obama. Unfortunately, the country and the administration are being run by the largest group of inept people ever gathered in one place. I believe the administration will continue to blame everyone (George Bush, Sarah Palin, Sean Hannity) and everything (the Tea Party, talk radio, the media) else as the reason for the current economic conditions and do nothing to improve the situation.

Therefore, I am expecting this volatility to continue until it becomes clear who will win the next election. For these reasons, I urge everyone to take the time and review your portfolios and your objectives for them.

To say the least, the last ten days have been exciting. Profits galore have prevailed in our bond portfolios, while properly allocated equity accounts have shown slightly on the negative side. Relative return accounts have been down in line with the market.

For those of you who have come in for a portfolio meeting in the last six months, your portfolios should be where they need to be.

For those of you who have not realigned your portfolios and would like to, please call us.  For those clients on our Genworth platform, you should be looking at our Rowing strategies (tactical constrained, tactical unconstrained or absolute retains) to reduce volatility.

Those of clients on our Edelman platform, you can move to a more conservative model (i.e.: more cash) since the Edelman platform only does Strategic Management (i.e.: our equivalent to Sailing strategies).

About the Author:

Forsyth Wealth Management, Inc.

James Lavorgna, J.D., LL.M., CFP®
22 East Church Street
Martinsville, VA 24112
276-252-0633
jlavorgna@forsythwms.com
www.forsythwms.com

CLICK HERE TO REGISTER

Please join us next month as we discuss the modern trends surrounding captive insurance. Wealth managers who have an interest in captives will likely find the information and presentation useful. CLICK HERE TO REGISTER

For additional information on captives see, Advisorfyi.com–States Competing for Captives Insurance Business, Alternative Risk Transfer Revisited, Captive Market Continues to Grow, LLC Series and Cell Companies, Group Captive Insurance Companies and Year End Tax Considerations, and A Dollar Saved…Captive Insurance Company Costs

CLICK HERE TO REGISTER

Estates of decedents who died in 2010 finally have guidance from the IRS on how to opt out of estate tax treatment and allocate carryover basis to estate property. The guidance is long overdue, and leaves little time for estates to make decisions that could have a massive tax impact.

Under the guidance, Notice 2011-66, to opt out of the estate tax and apply the new carryover basis rules, an executor must file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. The due date for the form is November 15, 2011. But despite the November deadline, Form 8939 and its instructions will not be available until early this fall. The IRS has, however, released a draft version of the form.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the new estate tax in Advisor’s Journal, see What Next? ILITs and Estates under 5MM (CC 11-114), Does the New Estate Tax Make the Bypass Trust Obsolete? (CC-10-122), 2010 Estates: To Elect or Not to Elect (CC 10-124) & Obama Tax Agreement Passed by House (CC 10-117).

For in-depth analysis of the estate tax, see Advisor’s Main Library: Estate, Gift and GST Taxes.

Agent’s Sales Journal and Agent Media, products of Summit Business Media’s Life and Health Insurance Network, announced the results of the 2011 Life Insurance Market Study in the July issue of Agent’s Sales Journal. This year’s study is a result of a collaborative effort between Agent’s Sales Journal, Agent Media, and the LIFE Foundation.

The annual Life Insurance Market Study asks agents nationwide about their experiences in the life insurance market. Producers were randomly selected from Agent Media’s database of 1.8 million life, health and annuity agents, and were asked about their challenges in the market, their most valuable lead resource for new prospects, the type of life insurance they sell the most, and more.

“As the results show, agents are looking forward to a significant rebound in the life insurance market in 2011, and say they’re feeling good about the year ahead, especially when it comes to sales of term life,” explained Andy Stonehouse, editor of Agent’s Sales Journal. “The survey also demonstrates the importance of educating clients on their potential life insurance needs, and to prompt them to act earlier, rather than later.”

Highlights of the 2011 Life Insurance Market Study include:

• 53% of agents say Term Life is their top selling product, making it the bestseller
• Despite studies showing that active life insurance policies had reached new lows, 2010 was a strong sales year, with 38% of agents saying their sales increased last year.
• 76% of agents expect sales to increase in the coming year

The top challenges facing the industry involve consumer awareness. These challenges include:

• 56% say their clients procrastinate
• 36% agree that clients don’t recognize the need for life insurance
• 38% say their biggest challenge is prospecting/finding new clients.

Results were featured in the July issue of Agent’s Sales Journal, and complete survey results are available online at ASJOnline.com.

ABOUT ADVANCED MARKETS

If higher closing ratios are your goal, access to current, on-target information is the key to reaching it. FX has a 55 year history of helping the best in the business become even better.

FX will help you deliver better service, increase new business and develop relationships with clients built on trust that will lead to referrals.

Click here for a no-risk free trial.

Information is delivered via print weeklies and monthlies; via electronic newsletters and blogs updated daily, and websites updated with news as it happens; via live events, including trade shows, conferences, classroom-type seminars and web seminars; via reference materials, disseminated in both book and electronic formats; and financial and marketing databases. The markets we provide information to covers a wide and interlocking array of professional services, including the needs of the insurance, financial, investment and corporate management markets.

ABOUT AGENT’S SALES JOURNAL
Agent’s Sales Journal provides sales-oriented how-to information to help independent insurance advisors expand their life, health, and annuity practices. The magazine’s ongoing market research program allows the editors to quickly identify and respond to readers’ needs and challenges in a rapidly changing marketplace. Comprehensive selling guides, unbiased insight from industry experts, timely feature stories, and a dynamic online presence give readers the information and ideas they need to grow their practices.

ABOUT AGENT MEDIA
Twenty years ago, Agent Media set out to build a reliable database and marketing solutions company to serve the life, health, and annuity segments of the insurance industry. Today, the database has grown to over 1.8 million producers, representing nearly every licensed agent and registered representative in the U.S. Agent Media is now the industry leader — a one-stop marketing resource for a wide range of direct marketing needs.

ABOUT SUMMIT BUSINESS MEDIA
Summit Business Media is the leading B2B media and information company serving the insurance, financial services, legal and investment advisory markets. Summit strives to be “The Next Generation of Business Information” for executives and practitioners by providing breaking news and analysis, in-depth practice management strategies, business-building techniques and actionable data. Summit services the information needs of its customers through numerous channels, including digital, print, and live events. For more information, please visit SBMedia.com.

Last week, Standard and Poor’s (S&P’s) downgraded the U.S.’s credit rating for the first time in history, moving the US from AAA to AA+. Although Moody’s and Fitch have not followed the S&P’s lead, both agencies indicated that their prime rating is contingent on future U.S. debt reduction.

The debt ceiling agreement reached two weeks ago included a pledge to cut spending by $2.4 trillion over the next 10 years; but the rating agencies have said that the reduction was insufficient, hinting that cuts of $4 trillion or more are necessary.

Although the downgrade could have significant long-term detrimental effects on the U.S. and world economies, it certainly isn’t the economic Armageddon that a U.S. default would have been. In other words, it could have been worse.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the U.S. debt crisis in Advisor’s Journal, see Debt Limit Deal Leaves Unfinished Business (CC 11-154), Democrats Call Debt Limit Unconstitutional (CC 11-134), & Debt Deal Talks Down to the Wire (CC 11-139).

The United States recession has forced service providers to look across the ocean for new clientele. We see markets emerging abroad selling premiums once only offered to the Western World. With less money invested in U.S. business, a recession still underfoot, massive layoffs across the nation and continued outsourcing; citizens of the U.S. just don’t have the money to invest in these premiums.

Life insurance is an optional premium, and with any optional purchase it needs to attract to those who can afford the non essential.  According to a study by LIMRA in 2010,“[T]he percentage of U.S. households with life insurance coverage is at its lowest in 50 years. Only 44% of households have an individualized life insurance policy.”^[1] In the business of life insurance, markets with excess income are attractive. Increased population creates more clients, equates to more business, and increases profit. Ipso facto new market growth.

A quick glance at Bloomberg and one can track the new business model. U.S. stocks have fallen significantly. “[T]he 9.4 percent [drop] since July 22 dragged the S&P 500’s valuation to 13.4 times reported earnings, the cheapest level since April 2009”. ^[2] As for the Asian market, “the yuan strengthened beyond 6.4 per dollar for the first time in 17 years”.^[3]

When it comes to life insurance premiums, the wealth managers production relies on his/her ability to find new clients and place new business. The trend for business to move overseas is underway within the life insurance policy market.^[4] India is one of the newer markets selling life insurance. As of June 30, 2011 there are presently 24 life insurers registered to sell policies in India.^[5] Within the U.S. there has been a decline of agents. ”[I]n 2010, there were 184,873 “affiliated agents”, down from more than 246,000 two decades ago”.^[6]

In India, insurers provide somewhat of a hybrid to their policy holders. Current trends provide sales of a combination coverage called unit linked insurance policies, ulips. An almost mirror image to the variable universal life insurance policy, existing in the U.S. Both allow for flexible terms, however differ in that the ulips allow for the combination of risk cover and investment.^[7]

There is also the magic word consumers love to hear, a guarantee. Lest the insured have an issue with the insurers policies, the Indian Insurance Regulatory and Development Authority (IRDA), provides an ombudsman to mediate grievances.^[8] (Different from the standards in the United States). Strict guidelines are followed to appoint each ombudsman, and in office an ombudsman will be forced to leave if found partaking in any misconduct pursuant to the rules set forth by IRDA.

So, what say for the U.S. life insurance market? Will the U.S. begin offering services similar to those in the new foreign markets? Will the recession affect the U.S. life insurance market so much that it becomes obsolete? One thing is for certain, insurers fortify their continued dominance in the U.S. market with confidence, “…uncertain economic conditions continue to play to [our] greatest strengths.”^[9]

Contribution by: Morrissa Handy, J.D. Candidate, Thomas Jefferson School of Law

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

^[2] Rita Nazareth, BLOOMBERG, U.S. Stocks Fall as S&P 500 Posts Worst Slump Since March 2009, http://www.bloomberg.com/news/2011-08-04/u-s-stock-index-futures-decline-s-p-500-may-fall-for-eighth-day-in-nine.html (posted Aug. 04, 2011, 11:39 a.m. PT).

^[3] Fion Li, BLOOMBERG,China’s Yuan Strengthens Beyond 6.40 Per Dollar for First Time Since 1993, http://www.bloomberg.com/news/2011-08-11/china-s-yuan-strengthens-beyond-6-40-per-dollar-for-first-time-since-1993.html (posted August 11, 2011, 2:17 a.m. PT).

^[4] HSBC,Ins., http://www.hsbc.co.in/1/2/personal/insurance (accessed Aug. 10, 2011, 4:59 p.m. PST).

^[5] Ins. Reg. & Dev. Auth., Life Insurers, http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_NoYearList.aspx?DF=RL&mid=3.1.1 (updated 20, June 2011).

^[6] USATODAY, Households With Life Insurance Hits Lowest Level in 50 Years, http://www.usatoday.com/money/perfi/insurance/2010-12-03-1Alifeinsurance03_ST_N.htm (updated Dec. 03, 2010, 2:21 p.m.).

^[7] Id. at, Frequently Asked Questions, http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.aspx?page=PageNo261&flag=1&mid=FAQs (accessed Aug.11, 2011, 8:51 a.m. PST).

^[8] Id. at Functions of Ombudsmen, http://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo233&mid=7.1 (date 11, Aug. 2003).

^[9] Aurthur Postal, Natl. Underwriter, U.S. Rating Downgrade: Insurers Emphasize Continued Strength, http://www.lifeandhealthinsurancenews.com/News/2011/8/Pages/US-Rating-Downgrade-Insurers-Emphasize-Continued-Strength.aspx?k=life+insurance (published Aug. 9, 2011).

The Texas state securities board is the latest government agency to pile onto Life Partners Holdings, with Texas Securities Commissioner Benette L. Zivley suing the life settlement provider for failing to respond to subpoenas issued by the State Securities Board.

The life settlement provider is suspected of misleading investors who invested in life insurance policies and not individuals who sold their life insurance policies to Life Partners.

The lawsuit asks the Travis County state district court to force Life Partners to respond to the subpoenas, which would require the company to divulge records of its marketing and sale of investments in life settlements.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Life Partners Holdings mess in Advisor’s Journal, see Life Partners Holdings Hit with Class-Action Lawsuit (CC 11-36), Life Settlement Provider Accused of Falsifying Life Span Reports (CC 11-23), & Life Settlements Funds Performance Fees under Scrutiny (CC 10-116).

For in-depth analysis of life settlements, see Advisor’s Main Library: A—Life Settlements—Introduction.

Why is This Topic Important to Wealth Managers? This blogticle serves as a reminder and review of the treatment of deceased estates from 2010 (making an a section 1022 election).

Estate Tax

The IRS recently published guidance [1] with regard to the time and manner in which the executor of the estate of a decedent who died in 2010 elects, pursuant to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, [2] (TRA), to have the estate tax not apply and to have the carryover basis rules in section 1022 apply to property transferred as a result of the decedent’s death.

Generally, subtitle A of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001, [3] (EGTRRA) enacted section 2210, which made chapter 11 (the estate tax) inapplicable to the estate of any decedent who died in 2010 and chapter 13 (the GST tax) inapplicable to generation-skipping transfers made in 2010.

On December 17, 2010, TRA became law, which reinstated the estate and GST taxes.  However, section 301(c) of TRA allows the executor of the estate of a decedent who died in 2010 to elect to apply the Internal Revenue Code (IRC) as though section 301(a) of TRA did not apply with respect to chapter 11 and with respect to property acquired or passing from the decedent (within the meaning of IRC section 1014(b)).  Thus, TRA allows the executor of the estate of a decedent who died in 2010 to elect not to have the provisions of chapter 11 apply to the decedent’s estate, but rather, to have the provisions of section 1022 apply (Section 1022 Election).

Even though an executor may elect out of the estate tax under TRA, the provisions of chapter 13 (GST tax) nonetheless continue to apply.  Nevertheless, TRA, provides that the applicable tax rate for each GST occurring during 2010 is zero.  [4]

TRA also retroactively repealed section 2511(c), which treated each transfer in trust during 2010 as a gift unless the trust was treated as wholly owned by the donor or the donor’s spouse.  Because of this retroactive repeal, this section does not apply even if a Section 1022 Election is made.

GST

The GST tax was retroactively reinstated by TRA and applies to the estates of all decedents who died after December 31, 2009, regardless of whether a Section 1022 Election is made.  The GST tax is computed by multiplying the taxable amount by the applicable rate. [5]

Under the TRA the maximum federal estate tax rate for purposes of computing the GST tax on such a transfer is deemed to be zero which, when multiplied by any inclusion ratio, will result in an applicable rate of zero.  As under the law applicable to GSTs occurring prior to 2010, the only way to achieve a zero inclusion ratio for the transfer is to make a timely allocation of GST exemption to the transfer.

Next week’s blogticles will discuss planning opportunities.

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

[2] See section 301(c) TRA, P.L. 111-312 (124 Stat. 3296)

[3] P.L. 107-16.

[4] Section 302(c) of TRA.

[5] IRC Section 2602.

A growing number of registered investment advisors flirt with social media as a client communication tool, but less than half of firms using social media retain all their social media content or even have a record retention policy.

The federal government and its agencies have yet to take a solid position on social media use by investment professionals. But despite the fact that the SEC and FINRA have not enunciated rules or regulations specifically targeting social media use by RIA and brokerage firms, general advertising, solicitation and communication rules undoubtedly apply to new media—FINRA issued guidance last year saying as much.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of social media in Advisor’s Journal, see Getting Your Feet Wet in the Social Media Market (CC 11-79), Advisors’ Stairsteps of Influence (CC 11-49) & SEC Says “Not So Fast” to Advisor Social Media Marketing (CC-11-40).