William H. Black Jr., CLU, Winter Park, Fla., is the president of both W.H. Black and Company and PensionSite.org. He has been in the pension administration business for more than 30 years. He is a a life and qualifying member of the Million Dollar Round Table (MDRT), and a 13-time Court of the Table and Top of the Table qualifier. Having spoken nationally and internationally on the topic of qualified plans, Black is a sought-after speaker. He is certified to teach continuing education to CPAs and insurance professionals. Additionally, he has been quoted in USA Today and had numerous articles published in industry journals.
Douglas R. Peete, CLU, ChFC, Overland Park, Kan., has been an MDRT member for 24 years, serving on multiple committees. He is a life member of Top of the Table as well as a past chairman. His practice, Douglas R. Peete & Associates, focuses on qualified retirement plans, business continuation, employee benefits, investments and estate planning. Peete has been a member of the Kansas City Ronald McDonald House board for the past 10 years. He’s also a member and past president of House of Hope Kansas City and a member of the Kansas City Estate Planning Society.
William M. Upson, CLU, ChFC, Walnut Creek, Calif., is a financial advisor and, separately, a registered representative of Royal Alliance. He is a member of the MDRT and has provided insurance and investment solutions since 1982. Upson has been a Top of the Table producer for the past consecutive 14 years and has been a featured speaker at TOT conferences. In 1986, he founded Strategic Asset Management Group, which focuses on the areas of income and estate tax planning for high-net-worth individuals, successful professionals, business owners and retirees.
Benjamin Franklin wrote, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” This statement, in its shortened version of course, has now achieved a familiar spot in our cultural lexicon.
I would suppose that all producers understand to one degree or another that death and taxes are crucial to our business. But for many of the nation’s producers, the link between the two certainties is a factor so crucial that, in some cases, it almost drives their business.
In this month’s discussion, I posed questions regarding some of the practicalities and issues surrounding the use of life insurance in tax planning. Fielding those questions are the following top producers, who clearly understand the ins and outs of the often complicated issues involved in the interplay between life insurance and tax planning: William H. Black Jr., CLU; Douglas R. Peete, CLU, ChFC; and William M. Upson, CLU, ChFC.
Building tax planning knowledge and confidence
Charles K. Hirsch, CLU: The tax ramifications of life insurance can be extremely complex, and, as such, it can be a fairly intimidating issue for some producers to address. Can you talk a little bit about the steps you took in your own career to become both more knowledgeable regarding life insurance in tax planning and more confident in sharing that knowledge and advice with prospects and clients?
William H. Black Jr., CLU: I was fortunate in that the individuals I worked with when first entering the business focused on the tax implications of life insurance. Qualified plans were the main focus of the practice, and, as such, the tax ramifications of the plan had to be communicated to the client and the client’s advisors — that is, the CPA and local counsel. How did I learn the complex income tax issues? I learned in several ways: in consultation with those I worked with, as they would explain it to me in the normal course of on-the-job training; by reading industry publications and periodicals; and by reading National Underwriter’s fantastic resource, “Tax Facts.”
As advisors, we must understand the client’s needs and the tax implications of our recommendations. The recommendations we make should be vetted by the client’s tax advisors. I insist on it. Therefore, it is imperative that I can communicate intelligently with the client’s CPA, so as to explain the reasoning for the recommendation, the tax benefits and, if necessary, the cites to back up my points.
Douglas R. Peete, CLU, ChFC: I spent a great deal of time early in the morning and at night, reading and learning. I rarely used selling time for technical learning if at all possible. ChFC courses, MDRT, newsletters, CCH — Commerce Clearing House — and many publications got me up to speed technically. Also, the International Forum meetings and recordings were critical.
William M. Upson, CLU, ChFC: I came into the insurance industry with a background in tax planning for high net-worth individuals and corporations. My early interest in the industry centered on how these entities could use the tax code to their respective benefit or benefits, as well as honor charitable needs. I found upon entry, earning an insurance agent license, I was just scratching the surface of the complexity of the products offered and how to best use them for the entities I mentioned earlier. I became fascinated with seminars I could attend dealing with these types of issues and got excited about taking additional courses with The American College on the complex subjects of taxation regarding insurance products and the respective benefits they could provide if used properly.
I also found I was being brought into meetings to explain these topics for interested prospects. At first, I demurred at the request, but I quickly realized I was not willing to test my knowledge so early in my career in these areas. I was wisely advised to bring in expert talent to handle these complex meetings, so they could “win the day,” and the sale, while I could listen and absorb the information for future reference. In short order, I did not need the assistance, but did establish the counsel of these individuals with which I had shared commissions in the past. The process helped me ramp up quickly from those humble beginnings. I now train CPAs, CFPs and attorneys, as well as insurance agents, on the proper planning for long-term care coverage, as well as estate planning and IRA distribution planning.
Understanding tax planning’s relevance
Hirsch: Some producers feel that the only areas where life insurance and taxes cross paths with any degree of significance are in the more advanced planning areas, like wealth transfer planning, executive benefits, pension planning and estate planning. Do you agree with that assumption, or are there other markets or other situations in which life insurance is particularly relevant to tax planning?
Peete: I would agree that the areas you mentioned account for the majority of tax planning.
Upson: I do not agree at all that tax planning with insurance products is only for the advanced planning markets. The need for proper tax planning covers all spectrums of the life planning universe. As advisors, we are constantly seeking to use our time to its highest and best purposes. If we do not educate and teach those consumers aspiring to be financially independent, then who will the next generation of agents assist? The market for our services can only expand as we reach and teach more of the working population of this country. Without our help, there will be no middle class, and the upper class will be paying far more tax than they should legally need to pay.
Black: Life insurance has tax implications whether one is aware of those implications or not. Being unaware can cause the policy owner or beneficiary to pay unnecessary income, estate or gift tax. For example, an advisor can create transfer-for-value problems to the client without the case being one of “advanced planning.” Changing a beneficiary designation improperly can create gift taxes. Improper policy ownership can create estate tax issues, as can improper ownership changes. None of these examples are necessarily involved with “advanced planning.”
Threats to the tax treatment of life insurance
Hirsch: What do you view as the most significant threats to the way life insurance is currently treated and to the use of life insurance in tax planning? Further, what steps are you taking to help ensure that the threats are minimized?
Upson: I think the greatest concern I have today is the cavalier attitude the Congress and the respective legislative bodies of the respective states have, where they’ve been so paralyzed with politics, they have not given the public any clear agenda for proper investing, necessary insurance coverage and estate planning. We are looking at a very uncomfortable future if we do not address the need for a consistent tax program the public can understand and embrace. The last four years showed us how minimally educated working adults could lose everything because they were not dealing with true investment advisors in the process. Education is the only solution that will help all of us — the advisors and the public — do better in the future.
Black: The first thing that comes to mind is the relentless attack on the inside buildup of the policy cash value. There are reasons cash value growth is untaxed, and it deals historically with public policy and the basic reason for the life insurance: providing the beneficiary with monies to assist in the financial implications of the loss of the insured. However, some will position this untaxed buildup of cash value as a loophole. How do I ensure the threats are minimized? That’s very difficult to do out here by oneself in the wilderness. That is why I belong to NAIFA and joined MDRT many years ago. There is strength in numbers.
Peete: I am mostly concerned with the no-load offshore-type of insurance planning, which is obviously designed to avoid taxation. To minimize the concerns, we don’t sell edgy concepts that would potentially put our clients at risk.
The best tax planning opportunities today
Hirsch: On the flip side, what do you view as today’s best opportunities in the area of life insurance in tax planning and what practical steps are you using to maximize those opportunities?
Black: The best opportunities for life insurance in tax planning today, in my opinion, are within defined benefit plans. First, the life insurance in a DB plan allows the client to deduct the cost of the premium. Second, the death benefit remains income tax-free to the beneficiary. Third, spousal beneficiaries receive the insured benefit estate tax-free. And fourth, irrespective of the beneficiary, the life insurance proceeds are outside of probate.
Of course, this is considered an advanced planning tool, and not all advisors deal with business clients. Outside of the DB plan, other opportunities abound. For example, consider these four opportunities: first, fixed annuities as an alternative to CDs. Second, income annuities to guarantee a client an income he or she cannot outlive. Third, term life insurance can be a means of providing affordable coverage when a client’s cash flow may be impaired in these times of economic turmoil. And fourth, use life insurance as a separate asset class. When the client wishes to provide a certain benefit to an heir, charity, etc., show the IRR — the internal rate of return — report generated by most carrier software. These IRRs are almost impossible to beat in an alternative investment. That’s a strong selling point.
Peete: The best opportunities lie in the area of private split-dollar planning to minimize the imputed gift tax while maximizing the transfer of assets through the death proceeds to the trust or family.
Upson: I believe the best opportunities lie in the areas of long-term care planning, since this is the area of specialty I have chosen. It also happens to be one of the largest growth markets in existence, with the 10,000-plus people per day who are retiring in the U.S. alone over the next 25 years. We can provide the underpinnings of a very successful insurance career by taking the time to understand the importance of all forms of insurance in long-term planning. Some life policies even have life coverage with long-term care riders as one of the options. I am using this knowledge base, plus the information provided in my two books, to provide robust website information on seven different sites, which in turn drive very significant business to our firm 24/7. Usually the cases are quite large and complex, but we will endeavor to assist any prospects in solving their problems. I have not advertised in 15 years, do no cold calling and do not have an outbound calling service generating prospects. 100% of our business comes from referrals from satisfied clients; other financial advisors, such as CPAs, attorneys and agents; and the growing connections created by the use of web technology, such as YouTube, our websites and websites where we are listed as experts in these areas of insurance and retirement planning.
Bring solutions to the table
Hirsch: Any further thoughts?
Peete: Much has changed throughout the past 10 years. Nonetheless, preserving the tax-free death proceeds and cash values is critical to the well-being of the American public.
Upson: I would strongly encourage anyone seeking to be successful in this field in the years ahead to fully understand the concept of the “client does not care how much you know until they know how much you care.” If you can provide solutions, but they do not address human interactive needs, then your solutions will fall on deaf ears. You must come to the table with empathy, a willingness to lose the sale because of your honesty as to what is best for the client, and your willingness to work with other advisors in the best interest of the clients with whom you meet.
Black: Most high net-worth clients, most business clients and almost anyone who is aware consider the tax implications on any purchase, investment or item of importance. To think otherwise is folly. One recurring event in my years in the business continues to astound me: watching advisors make recommendations to a client that will adversely impact the client due to the tax ramifications. The client’s CPA rightly quashes the recommendation, and the advisor comes away thinking the CPA is a “deal killer.” Nothing could be further from the truth. If an advisor wants to be more productive, more credible, and more respected, understand the tax implications of the offered advice. It will increase production, increase referrals and benefit the client and his or her beneficiaries.