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| Your Life Link
3rd Quarter 2008 |
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Greg Hoernschemeyer
Vice President
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For more information about these topics, please contact
Greg Hoernschemeyer
at 513.745.0707.
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Greetings!
Thank you for your continued business. If you know of anyone that could benefit from my services, please feel free to forward this newsletter on to them.
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Long-Term Care Insurance Carve-Outs Offer Mutual Benefit 401(k) plans help employees save for retirement and many executives have deferred compensation programs and other plans in place to help build their retirement funds. Since significant long-term incidents can be a major threat to that wealth, long-term care insurance (LTCI) can help complete a comprehensive executive benefit offering.
In addition to wealth protection, there are several reasons to offer LTCI as a benefit through an employer:
- C-Corporation premiums for executives and spouses are deductible. Additionally, premiums paid on behalf of the executive are not considered income, benefits are tax-free and companies can specifically class groups of executives.
- S-Corporation owners and members of LLCs also can deduct premiums up to certain limits.
- Carriers offer premium discounts for as few as three applications.
- Simplified underwriting may be available.
- Plans are portable, allowing employees to keep LTCI policies upon retirement or if they change jobs.
- Product offerings can be expanded to all employees, and those employees with Health Savings Accounts may use these funds to pay premiums up to certain limits.
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Stranger Owned Life Insurance
Stranger or Investor Owned Life Insurance (STOLI) is defined as an ownership scheme in which a life insurance policy is owned by an investor group unrelated to the insured, where the insured (or someone with an insurable interest) pays little or nothing for the life insurance, and where someone other than the insured (or someone without an insurable interest) pays for the insurance. Further, in a STOLI transaction the purpose of the insurance is not for protection against premature death or as a wealth accumulation vehicle, but rather for a profit on the future trading of a life insurance contract. | |
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With increasing attention on STOLI, including a recent lawsuit involving STOLI filed by CNN talk-show host Larry King, the National Association of Insurance Commissioners (NAIC) approved amendments to the Viatical Settlements Model Act that address STOLI.
Its proposed five-year moratorium on settlements is designed specifically to curtail settlements of investor-initiated insurance purchases. By prohibiting policy settlements for five years from issue, it will be extremely difficult (for tax and other reasons) to complete cases in which the policy is originally purchased with the intent of selling it in the secondary market.
At the same time, there is no detriment to the legitimate settlement marketplace (a secondary market for policies clients no longer want or need-due to changing circumstances-that were not initiated for the sole purpose of selling them at a later date). The NAIC amendments include adequate exceptions to the moratorium for insureds who use their own premium funding dollars, or who experience specified post-purchase changes in circumstances.
Going forward, specific legislation must be adopted by the various states in order to implement these NAIC-sponsored principles. Already there is significant activity among state legislatures, providing encouragement that actual STOLI-related state law will become a reality.
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Buy-Sell Planning with Life Insurance
Business exit planning is the culmination of estate planning, financial planning, retirement planning, tax planning and business succession planning. One main focus of the many steps of business exit planning is the use of a buy-sell agreement. Buy-sell agreements are created because the business may be the most valuable asset of the client, and possibly the client's most important source of income. The future business sale will be the source of the client's retirement funds.
Businesses are usually not liquid and they are usually estate-taxable. But the owners see the business as the security and stability for the future of their families and future income possibly for generations to come. As a result, proper planning to create liquidity and minimize tax implications is essential to business owners and their families.
A recent IRS Private Letter Ruling approved the use of a Limited Liability Corporation (LLC) formed specifically for the purpose of holding life insurance policies to fund a buy-sell arrangement. With this new ruling, the LLC has become a platform that can be used effectively to solve the ongoing dilemma of choosing between a stock redemption or cross-purchase agreement.
Here's how structuring an LLC for a buy-sell arrangrement works:
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Shareholders execute a cross-purchase agreement, generally using a "wait and see" aproach with first the shareholders having an option to purchase and then the corporation having a binding obligation to purchase, creating the optimum income tax benefit. If not structured this way, it is possible if the shareholders are the last required purchasers, the IRS would consider this a dividend.
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In the agreement, it is specified that an LLC be formed to hold the policies required under the buy-sell agreement to facilitate the orderly transition of ownership without a need to liquidate.
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The cross-purchase agreement and LLC operating agreement have provisions that reference each other so the buy-sell agreement can be enforced and there are no issues with the application of the proceeds.
The use of a limited liability structure eliminates negative consequences and tax inefficiencies that will normally be present with a redemption agreement. It also eliminates the administrative problems often associated with the cross-purchase agreement. |
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Horan Securities, Inc., doing business since 1996.
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