In a series of articles that includes “The Advanced Life Insurance Markets May Soon Be in Retreat” and “The No-Sunset Life Insurance Paradigm May be Accelerating,” I suggested that life insurance agents anticipating a surge in estate tax liquidity sales due to the sunset of the tax laws after 2025 should hedge their bets. How agents choose to hedge will be a function of the markets they’re in and the estate tax orientation of the practices they run. For some, the primary hedge will be to assure that their sales process addresses the non-tax needs for capital and liquidity of whatever type of individual they find themselves sitting across from. For others, the priority might be to reassess the breadth and effectiveness of their referral network, especially beyond estate planners and tax advisors. Yet another way to hedge is have a handle on life settlements, which could emerge as a sensible and economical exit strategy from moribund leveraged transactions that will come under even more pressure if the tax laws don’t sunset. In other words, it depends.
While a subject for another day, I’d advise agents not to count on sunset being a tail wind for cash value life insurance as a tax-advantaged investment for retirement or “tax diversification.” For reasons having nothing to do with sunset but having everything to do with the suitability, best interest, product complexity and policyholder service issues that I discuss in “Life Insurance Policy Themes for 2023,” I believe that this sales concept could be in for rough sledding in the days ahead.
For Whom the Polls Toll
I’m not basing my suggestions on a prediction that the tax laws won’t sunset after 2025. That would be foolish. Rather, they’re based on my sense that more and more individuals who follow the polls and read the press will conclude that the tax laws will stay just as they are after 2025, though indexed of course. Agents and other advisors swept up in sunset-driven marketing hype will obviously scoff at that notion and, accordingly, dismiss my suggestions. But that too could be foolish. That’s because those who sell against the grain make less dough. And, pushing sunset-driven marketing to people who remember how a similarly hyped fiscal cliff of 2012 turned into a plateau will be selling against the grain.
Case Study: From Unhedged to Unhinged
Aaron is the 65-year-old founder, chief executive officer and sole shareholder of a successful business. His wife Brigette is a retired executive who doesn’t work in the business. They have two children. One works in the business and will assume the mantle of CEO and owner, unfettered by any obligation to her brother, who apparently couldn’t find the business with a GPS, However, he and his wife fully expect that he’ll share the estate equally with his sister. How’s that for some plot thickening?
In a recent meeting with an estate-planning attorney and a life insurance agent, Aaron and his chief financial officer (CFO) got an earful about the sunset. “There’s no time like the present to batten down the tax and liquidity hatches,” said those advisors. The estate planner proposed a sale to a defective grantor trust. The agent followed with a proposal for a second-to-die policy that would be owned by an irrevocable life insurance trust and funded by a split-dollar plan with Aaron’s company. The proposals were technically flawless. They were also summarily rejected. The two advisors had climbed the ladder of technical precision but had put it against the wrong wall.
What went wrong? After the meeting, the CFO said to Aaron, “I read somewhere that advisors should address people like you as an individual first, spouse second, parent third and taxpayer fourth. These guys addressed you in exactly the reverse order. Had they asked instead of told, they’d have understood that estate taxes are the least of your concerns. But they didn’t ask. Instead, their whole pitch was geared to make you see your problems in their terms. Worse, they weren’t even on the same page about how to coordinate the estate planning with the life insurance. Wouldn’t you have to consider one to plan intelligently with the other? But for whatever reason, they didn’t.”
‘And, how can they be so sure the tax laws will sunset? Do they think we forgot the fire drill they put us through a few years ago for what turned out to be a false alarm? What do you think?”
Aaron responds. “I think they just learned that the sunset-hyped estate tax route they were on is a cul-de-sac or worse, a dead end. More to the point, I have no interest in that sale idea or doing anything irrevocable right now. I mean, what part about I don’t want another stockholder don’t they understand? Maybe someday I will, but not now. But they didn’t ask. And that second-to-die policy? As far as I know, Brigette and I have a joint life expectancy north of 30 years, which means there’s no estate tax for another 30 years. And that’s if there’s even an estate tax then and our estate is taxable under those rules. Why would I buy a policy that addresses the one single need I don’t think I have? And you know what else? Maybe one day I’ll decide to sell the business, That will take care of any liquidity issue. But they just didn’t get into that. It was all about that sunset business. Meanwhile, I have some real concerns. And they all come down to money.”
It’s not the taxes. It’s the tension.
“I’m worried that, if as they so sheepishly say, ‘Something happens to me,” Brigette won’t have enough money to live on nicely. The estate planner blithely tells me to part with a good chunk of my stock, which is a major source of our income and would certainly be a major source of Brigette’s income if ‘something happens to me’. The point is that all that so-called ‘wealth transfer planning’ could be hazardous to our cash flow and, eventually, a source of tension with our daughter.’
‘And how am I going to deal with my son and his family? Right now, my estate plan may as well start with, ‘Sorry son, I had to give the business to your sister and didn’t have much left to leave you. But, hey, I know you always enjoyed looking at these photo albums.’
‘The truth is, life insurance is the easiest way I can think of to address my concerns. We know other estate planners and agents, don’t we? Let’s get somebody else in here. And this time, I’d like our corporate attorney and accountant in here too. They see things strategically first and tactically second, which is exactly what I need.”
New meeting agenda. Second verse, quite unlike the first .
When the “new” agent gets the CFO’s call, she seizes the initiative to learn about Aaron’s priorities and concerns. She then arranges a conference call among the advisors and circulates a rough agenda for the meeting with Aaron and the CFO. The agenda tracks the priorities and concerns that she heard from the CFO. Now, with all assembled, here are some highlights from the “transcript” of the meeting.
- The CFO, “Aaron would like to be sure that Brigette will have enough money to live on without having to defend on the company for cash. Why shouldn’t he just take out a policy and name her or his trust as beneficiary? Simple, quick, easy!”
- The accountant sees that and raises him one, “Good start, but doesn’t that leave some issues on the table?”
- The agent, “What if the attorneys could set things up so that his daughter owns the policy and uses the proceeds to buy the stock for cash, which Brigette can invest for income free and clear of the business? Would that address some of the issues you see are still on the table?”
- The (new) estate planner, “I like it. Brigette will have a stepped-up basis in the business so she won’t pay tax on the sale. The business will be out of her estate, removing growth in the value of the business above the growth on the portfolio, which she may deplete during her lifetime anyway.”
- The corporate attorney, “Makes sense. And, by accelerating the daughter’s ownership of the company, she’ll avoid having to report to her mother’s corporate trustee for the rest of her mother’s life. That should be great news for the daughter.”
- The estate planner, “And when and if she’s ready, Brigette can gradually give money or other assets to the son.”
- The accountant to the agent, “We’re going to have to run some numbers. But in the meantime, we should see some ideas for what the insurance plan would look like. You know, what kind of policy would make sense, how it would be designed and funded, etc. OK?” The agent says, “Sure.” You would too.
- The CFO, “A slight detail. His daughter will want to know where she’ll get the money to pay the premium. I assume that she’ll assume that the company will assume that responsibility. Agent, can you send us some material on the ways to do this, including the tax implications?” Of course, the agent had already composed the message to her advanced salespeople asking for that material.
Aaron brings the meeting to a close, “Great meeting! I know there are things to work out, but I feel that we’re on track now. Meanwhile, I’d like to get the insurance going right away. You know, before something happens to me. In fact, while everyone is working on that approach with my daughter owning the policy, maybe I can get some coverage in place to protect Brigette in the interim.”
No Sunset, No Problem
This is an agent who knows her business. This is an agent who has the skill sets and network to be a valued member of a high-level planning team. And, to the point of this article, this is an agent who’s well hedged and secure, sunset or no-sunset. Agents who are relying on sunset and couldn’t replicate her performance in this case have some work on the horizon.