This week LIMRA held its Annual Advanced Sales Forum in San Diego. The title of the event was “Forecast: Bright and Sunny Sales Ideas”. The event was well attended by executives of advanced markets groups for life insurance companies, distribution channels and other associated with the organization.

“Our expectations were well met”, said John Frey, Director of Corporate Sales, National Underwriter Advanced Markets. NU’s Advanced Market team was well represented. Accompanying Mr. Frey at the conference was Dean William Byrnes of the International Tax & Financial Services Program, Thomas Jefferson School of Law & Benjamin Terner, Author & Editor, Advanced Markets.

Forum sessions presentations included:

“What’s Hot…What’s Not 2011 Edition” by Lawrence Brody, J.D., LL.M. & Thomas Commito, J.D., LL.M, CLU, CHFC, AEP. This topic examined recent developments affecting life insurance, estate and tax planning. Specifically the presenters focused on planning after the 2010 Tax Relief Act, recent decisions on policy valuations and recent decisions affecting estate planning.

“Yesterday, Today and Tomorrow: An Economic Update” by Dr. Robert T. LeClair, Associate Professor of Finance, Villanova University. Dr. LeClair’s talk focused on the current economic conditions both domestically and globally. He examined past data in connection with present day national fiscal position as well as discussing future implications and projections. His research focused on the major challenges the U.S. faces going forward in the years to come. His timely presentation was complemented by very volatile markets recently.

“Uncovering the Secrets of Social Security” by Frank Rainaldi, CLU, CHFC, DAEP, Chief Executive Officer, The Kugler Company. Mr. Rainaldi’s discussion focused on the misinformation surrounding social security. Particularly, many recipients don’t understand how to maximize spousal benefits. He noted in his discussion how one spouse can receive spousal benefits while both spouses receive the eight percent per year Deferred Retirement Credits from age 66 to 70. He also discussed how a worker or spouse can receive reduced early retirement benefits and subsequently qualify for the eight percent delayed retirement credit, as well as, the advantage of a spouse receiving spousal benefits that are based solely on the other spouse’s work record rather than a combination of both spouses’ work record.

“Standards of Care: How Consumers, Advisors and Producers Perceive ‘Fudicary’” by Maribel Gerstner, J.D., CFP, CLU, ChFC, CRCP, and Richard Weber, CLU, AEP. The discussion was focused around the Dodd-Frank’s implication on the financial services industry. Specifically, the harmonizing of standards of care was front and center to the discussion topic.

The breakout session discussions included topics such as:

“Sun or Rain? Flexible ILITs Have you Covered!”

“Advanced Planning Opportunities with Annuities”

“LTC Solutions for Families, Business Owners, and Affluent Clients”

“409A, Bonus Plans, Sec. 79 – An Advisor Guide”

Tomorrow’s blogticle will continue to discuss advanced planning regarding year-end considerations.

Think that the rising stake of e-commerce in retail sales isn’t a threat to insurance agents and investment professionals?

Think again. Although the old maxim that “life insurance is sold, not bought” still holds, an increasing number of customers are doing the research and making purchasing decisions without the assistance of a professional. For those customers, carrier marketing materials are a dominant source of information instead of an in person agent.

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 insurance and advisory business in Advisor’s Journal, see Can Typecasting Your Clients Grow Your Advisory Business? (CC 11-64) & Are Portfolios-To-Go Threatening Your Business? (CC 11-77).

Split Dollar Plans—Who’s Paying for that Life Insurance?

Why is This Topic Important to Wealth Managers? This blogticle discusses the general properties as well as taxation of the traditional split dollar plan. It is intended to provide both a review of concepts and refresher of a planning opportunity.

Split dollar insurance is an arrangement generally between an employer and an employee under which the policy benefits are split, and the costs (premiums) may be split. Split dollar plans can also be set up between corporations and shareholders (“shareholder split dollar”) or between parents and their children (“private split dollar”).

Under the traditional plan, the employer pays part of the annual premium equal to the current year’s increase in the cash surrender value of the policy and the employee pays the balance, if any, of the premium. From this basic concept, hybrid plans have evolved; for example, “employer pay all” plans under which the employer pays the entire premium, and level contribution plans under which the employee pays a level amount each year.

If the employee dies while the split dollar plan is in effect, the employer receives from the proceeds an amount equal to the cash value of the policy or at least its premium payments (under a basic plan), and the employee’s beneficiary receives the balance of the proceeds.

It is no secret to wealth managers that split-dollar life insurance arrangements can be a key feature incorporated into executive compensation packages. Beginning in 2001, transitional guidance on the valuation of split-dollar life insurance arrangements was provided in the form of notices and proposed regulations in anticipation of final regulations which were adopted in 2003.

How are the current regulations applied regarding this arrangement?

Under the final regulations issued September 17, 2003, the tax treatment turns on who owns the split-dollar policy.  If the executive owns the policy, the employer’s premium payments are treated as loans to the executive.  Consequently, unless the executive is required to pay the employer interest on the loan at or above the applicable Federal rate (AFR), the executive will be taxed on the difference between the AFR interest and the actual interest.  Verify that the rate of interest being charged is at least AFR.

If the employer is the owner of the split-dollar policy, the employer’s premium payments are treated as providing taxable economic benefits to the executive.   The economic benefits include the executive’s interest in the policy’s accessible cash value and current life insurance protection.

The final split-dollar regulations apply to any split-dollar life insurance arrangement “entered into” after September 17, 2003.  The term “entered into” is defined in 1.61-22(j)(1)(ii) of the regulations.  Under section 1.61-22(j)(2) of the regulations, an arrangement entered into on or before September 17, 2003 that is materially modified after September 17, 2003 is treated as a new arrangement entered into on the date of the modification, and is subject to the final regulations.

Section 1.61-22(j)(2)(ii) of the regulations provides a non-exclusive list of changes that are NOT considered material modifications.

See Tax Facts Q 3793 What is reverse split dollar and how is it taxed? for a discussion of reverse split dollar plans.

Tomorrow’s blogticle will discuss issues surrounding year-end planning preparation.

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

Author: Jesse Mackey

This article represents part 2 of 3 in this series. Please see yesterday’s post as well as tomorrow’s for the full article.

In the event that assets cannot be invested in an account/plan that allows for tax deductions, tax deferral, or tax elimination, the following seven techniques are excellent ways to reduce the tax burdens associated with investing in currently taxable accounts, such as jointly titled, trust-owned or individual accounts, which may come in the form of brokerage accounts, fee-based managed advisory accounts, or direct subscription investment vehicles.

Municipal Fixed Income – Possibly the most traditional method of tax minimization for high income tax bracket investors is the use of bonds issued by government municipalities, which are typically free of income taxation if purchased by an investor that resides in the state in which the security is issued, even if purchased within a currently taxable account. Muni’s are useful both for tax minimization purposes and for portfolio diversification purposes, but may not be beneficial in large quantities for all investors.

Low Turnover Managers – When purchasing mutual funds or hiring individual security Separately Managed Account (SMA) managers, it is useful to consider the amount of active trading that will occur in the fund/account during the course of the year, as this will often be indicative of the amount of capital gains taxes (short term and long term) that will be realized in an up-market scenario. Lower portfolio turnover often indicates lower realized (as opposed to unrealized) capital gains, whereas higher turnover managers may indicate a higher propensity to generate tax liabilities for the investor.

Separately Managed Accounts (SMA) and Individual Stocks – It is often cited that the use of individual securities (stocks and bonds) in a brokerage account or SMA will, all things being equal, generate lower current tax liabilities for investors than the use of mutual funds. This is because mutual funds, as pooled investment company vehicles, may distribute capital gains and dividends to all investors regardless of whether the individual investor was able to participate in the full benefit of the appreciation in value of the underlying holdings of the portfolio (because the fund may have been purchased after the majority of the price appreciation, but before distribution of the full capital gain liability by the fund). SMAs are not pooled investment vehicles, and therefore holdings purchases/sales are specific to the individual investor, allowing managers to actively customize the transactions in the portfolio to the tax situation of the individual, thus reducing unwarranted tax liabilities.

Fund Dividend and Capital Gains Distribution Awareness- The flipside of the above argument regarding the tax-efficiency of individual securities is that a portfolio composed of mutual funds, if managed properly, may be just as tax efficient as an individual-securities-only portfolio while also providing the investor with the full investment diversification necessary to reduce long term portfolio volatility. If this is to be accomplished, the mutual fund portfolio manager must make purchases and sales of the component mutual funds with an awareness of any upcoming fund dividend or capital gains distributions in order to avoid these if unwarranted for the investor, and to avoid “selling dividends” which is a prohibited practice. The mutual funds may also be selected based on the manager’s professed tax-efficient style of investment, or based on a history of asset type tax efficiency.

The series concludes tomorrow…to be continued…

Jesse Mackey is a partner and Investment Officer of 4Thought Financial Group Inc. 4Thought was created with the base vision of advancing individual freedoms and the human quality of life through economic means. This vision is pursued by applying the firm’s four specialties – Economic Theory and Research; Multi-Contingency Investment Management; Financial Planning for Business Owners and Individuals; and Support for Partner Firms and Advisors.

Contact:

Jesse Mackey

4Thought Financial Group Inc.

www.4TFG.com

jmackey@4TFG.com

As corporate employers shift from defined benefit to defined contribution plans, the burden of ensuring retirement income sufficiency has shifted from employer to employee—and most employees are ill-equipped to handle the responsibility.

About 50% of private-sector employees have access to a retirement plan; but access to defined benefit plans has dropped off significantly. In 1980, 83% of those employees were covered by a defined contribution plan. But by 2008, that number had dropped to 31%, leaving about 85% of employees fending for their own retirement security.

In response to employees’ increasing retirement worries, insurance companies and financial services firms have developed new financial products and plan features providing income sufficiency for participants in defined contribution plans.

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 retirement studies in Advisor’s Journal, see How Much to Allocate to Annuities: A Critical Analysis (CC 11-109) & How Are IRA Owners Investing Their Money? (CC 11-112).

For in-depth analysis of qualified plans, see Advisor’s Main Library: A—General Introduction to Qualified Plans.

Last month, we talked about how cash value is influenced by the different cash value investment options, the historical performance of such cash value investment options, and cost-effectiveness of the various cash value allocation options.

This month we talk about using the most advantageous and consistent rate of return. There are different ways that companies publish rates of return depending on the type of life insurance.

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 cash valuation in Advisor’s Journal, see Historical Performance of Underlying Cash Value of Life Insurance (CC 11-82).

Why is This Topic Important to Wealth Managers? This blogticle discusses the Value Added Tax or VAT. As our debt limit debate continues, we examine one avenue the government may consider to close the deficit.

General dissatisfaction with the federal tax system by the taxpayers  has contributed to a debate about U.S. tax reform, including proposals for a national consumption tax. One type of proposed consumption tax is a value added tax (VAT), widely used around the world.

A VAT is levied on the difference between a business’s sales and its purchases of goods and services. Typically, a business calculates the tax due on its sales, subtracts a credit for taxes paid on its purchases, and remits the difference to the government.  VAT liability is typically calculated in industrialized countries using what is known as the credit invoice method. Under this method, businesses apply the VAT rate to their sales but claim a credit for VAT paid on purchases of inputs from other businesses (shown on purchase invoices). The difference between the VAT collected on sales and the credit for VAT paid on input purchases is remitted to the government.

Example: VAT with a 10 percent rate. A lumber company cuts and mills trees and has sales of $50 to a furniture maker. Assuming no input purchases from other businesses, to keep the illustration simple, the company adds the tax to the price of the goods sold and remits $5 in tax to the government. The purchase invoice received by the furniture maker would list $50 in purchases plus $5 in VAT paid.

If the furniture maker has sales of $120 to a retail store, $12 of VAT would be added to the sales price but the furniture maker could subtract a credit for the $5 VAT paid on purchases and remit $7 to the government. The retailer would receive an invoice showing purchases of $120 and $12 of VAT. Similarly, if the retailer then has sales of $150, $15 of VAT would be added but the retailer could subtract a credit for the $12 paid on purchases and remit $3 to the government.

Yes, there is revenue for the government in the VAT tax, but what will the costs of administration be?  A VAT, like any tax system, will require government resources to administer. The drivers of administrative costs in many tax systems  include the number of taxpayers (businesses, individuals, or both) subject to the tax, how often they file returns, and the percentage of taxpayers audited. In the case of a VAT, administration requires the government to process tax returns and provide certain services to businesses.

Even a simple VAT warrants education and assistance services, in part to address compliance risks. Tax administrators also need to spend significant resources on audit and enforcement activities.

Some available data from the Government Accountability Office indicate a VAT may be less expensive and easier to administer than an income tax. In 2006, the tax administration agency in the United Kingdom measured administrative costs for the VAT to be approximately half a percent of revenue collected compared to over one and a quarter percent for the income tax.

Tomorrow’s blogticle will discuss issues related to regulation.

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

Why is This Topic Important to Wealth Managers? Today We Continue with our Casual Friday Series with a Blogticle on Noteworthy Convictions and Arrests Regarding Recent Insurance Fraud and Scams in New York. Don’t let your name appear next.

Kelly Woods, an upstate New York woman who had relocated to Utah, was sentenced in June to 1-to-3 years in prison and ordered to pay $42,000 in restitution to the New York State Insurance Fund. She was extradited and arrested in March or faking a work injury in order to collect workers’ compensation benefits. She pleaded guilty to insurance fraud in April. On numerous occasions between July 2008 and November 2010, she reported that she suffered from permanent fixed torticollis, a condition that kept her head at a 90-degree angle at all times. However, she was observed on video moving her head and neck freely. As a result of the fraud, she collected $42,000 in benefits to which she was not entitled. She also signed a Workers’ Compensation Agreement waiving future claims to benefits, thereby freeing up nearly $600,000 in reserves that the State Insurance Fund had put aside for her fraudulent claim.

A Syracuse carpenter, Paul J. Keyes, who was originally charged with insurance fraud, violation of the Workers’ Compensation Law and offering a false instrument for filing at his arrest on 12/21/10, pleaded guilty to a lesser charge of disorderly conduct in June of this year in satisfaction of all charges. An investigation revealed that from 2006 to 2010 he underreported the number of employees on his payroll as well as his income in order to reduce his workers’ comp premiums. As a result, he underpaid the State Insurance Fund by $31,744. He was sentenced to one year conditional discharge and was ordered to pay the State Fund the full $31,744 in restitution.

Sixteen individuals were arrested in connection with a systematic scheme to steal hundreds of thousands of dollars from five insurance companies: Allstate, GEICO, GMAC, Liberty Mutual and Progressive. Additional arrests are expected in this continuing investigation. Evidence was uncovered indicating that the defendants submitted more than 100 fraudulent claims for vehicles allegedly involved in phantom accidents, costing the insurance companies almost $300,000 in payments for property damage claims in the Bronx. The ringleader of the scheme allegedly recruited most of the other defendants to file fraudulent claims, cash the checks issued by the insurers and turn over most of the proceeds to the ringleader, who pocketed more than $100,000. He allegedly allowed them to keep between $50 and $400 for each claim. It is alleged that in each case, an individual would pose as an actual customer of one of the insurance companies and ask to have an additional vehicle added to an existing policy. Once coverage was extended to the additional vehicle, a defendant would call the insurance carrier and report that the vehicle had been involved in an accident causing damage to another car. A defendant, purporting to be the owner of the allegedly damaged car, would then place a call to the insurance carrier and arrange to have the damage inspected, appraised and photographed by an insurance adjuster. Once the adjuster completed the inspection and appraisal, the insurance company would issue a check payable to the individual filing the claim. All of the defendants have been charged with grand larceny. Some also face charges of money laundering and scheme to defraud.

An investigation by the Frauds Bureau resulted in the arrest of a former New York State-licensed insurance agent. He formed three allegedly bogus business groups and then submitted 35 applications for supplemental hospital insurance policies for 19 applicants through Aflac Insurance Company. However, the investigation found evidence that the policies were written for persons who were either fictitious or were unaware that the policies existed. His actions allowed him to fraudulently collect $4,768 in advanced commissions from Aflac.

Next week’s Blogticles will start to discuss issues regarding year end planning.

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

Why is This Topic Important To Wealth Managers? Today’s Blogticle discusses issues surrounding international money transfers. The information serves as a discussion point for those wealth managers with, or who are considering working with, international clients.

A report recently released by the Consumer Financial Protection Bureau (CFPB) recommends principles for maximizing consumers’ ability to receive and use exchange rate information when making remittance transfers, and examines the incentives and challenges related to using remittance data in credit scores.

Each year, consumers in the United States send tens of billions of dollars to family members, friends, businesses, and others abroad through remittance transfers – electronic transfers from U.S. senders to recipients in foreign countries. The report, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), analyzes two subjects related to remittance transfers: the transparency and disclosure to consumers of exchange rates used in remittance transfers, and the potential for using remittance histories to enhance the credit scores of consumers.

Remittance Transfers and Exchange Rates

The Dodd-Frank Act will require remittance transfer providers to disclose, in most circumstances, the exchange rates they use and other information at the time that consumers request remittance transfers and when they pay for those transactions. The Board of Governors of the Federal Reserve System has proposed rules to implement those and other new requirements related to remittance transfers. The CFPB will assume responsibility for issuing final disclosure rules and will review comments received by the Board following the close of the comment period on July 22.

The CFPB’s report  recommends that, with respect to exchange rates, policymakers and other stakeholders observe four principles for enhancing consumers’ ability to receive and use exchange rate information:  (1) design, test, and use disclosures to maximize consumer comprehension; (2) facilitate consumers’ comparisons of remittance offerings; (3) adapt disclosures to the growing variety of channels that consumers use to initiate remittance transfers; and (4) couple information about exchange rates with an indication or estimate of the combined effects of fees and the exchange rate.

Remittance Transfers and Credit Scores

Credit files do not routinely include remittance data. If remittance histories can help assess or predict the credit risk that consumers pose to lenders, adding such data to credit files could produce a change in the credit scores of some remittance senders.

If remittance histories are predictive of credit risk, the addition of remittance data might also allow credit scores to be generated for some consumers who are otherwise unscorable.

To use remittance histories in credit scores, market participants would need to adjust their business systems and processes to adapt to and make use of the new data. If remittance histories are predictive, then any remittance-based credit scores that were developed might have particularly positive implications for some consumers born outside of the United States. These consumers send a large proportion of remittance transfers. Earlier research suggests that certain foreign-born individuals may be disproportionately likely to have credit histories that are insufficient to generate credit scores. In other cases, existing credit data may overestimate the credit risk such individuals pose to lenders. But the actual impact of any remittance-based credit score would depend on the business model, the scoring model, the data used, and the individual. In some cases, credit scores might increase; in other cases, they might remain the same or decrease.

Tomorrow’s Blogticle continues our Casual Friday series.

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

Looking to recapture its prior competitiveness in the domestic captive insurance business, Nevada passed Assembly Bill 74 (AB 74), which amends the state’s captive insurance law. Nevada Governor Brian Sandoval recently praised the amendment, saying it that “will make Nevada a more attractive place to do business for captive insurers.”

A captive insurance company is usually formed as a subsidiary of a company to cover the risks of the parent company and its other subsidiaries. A captive insurance company typically doesn’t insure risks of unrelated third parties—although some will insure their customers’ risks. Other captive insurers insure the risks of members of a trade association or group.

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 application of the Health Care law to captive provided health insurance, see Tax Facts, see 252. What nondiscrimination requirements apply to employer provided health benefits?.

Questions about Captives? Contact our Panel of Experts. Benjamin Terner is our “Captive Expert” and can answer your questions relating to domestic and offshore arrangements.