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Journal of Financial Service Professionals - Current Issue

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Vol. 71, No. 4, July 2017

DEPARTMENTS Insurance & Financial Planning

Editor’s View
Understanding the 72(t) 10 Percent Penalty
Kenn Beam Tacchino, JD, LLM, RICP
To discourage the use of retirement funds for purposes other than retirement, Congress has enacted an extra tax that will apply to a premature retirement distribution. However, the additional tax does not apply to specified distributions that meet statutory guidelines. Most financial service professionals are familiar with the fundamental rules. However, a review is certainly in order. This column provides the ground rules and then delves into some important but lesser-known applications of the law by looking at a variety of mini-case studies and examples.

Accounting & Taxation
IRS Issues Positive Ruling on Trust Decanting
Thomas F. Commito, JD, LLM, CLU, ChFC, AEP
A new IRS ruling is positive in that it gives the strongest green light to the concept of decanting a trust. However, a key component of the ruling (not imposing any taxes) relates to the similarity between the old and new trusts, so it remains to be seen how the IRS will treat a decanting in which the two trusts are markedly different. Also, don’t expect a lot of future guidance from the IRS. Thus, this ruling may constitute practitioners guidance for a while.

Advice for the New Planner
Advising Clients about Longevity Risk
Sarah D. Asebedo, PhD, CFP
This column provides the new planner with a basic technical and communication skill framework that can be used when advising older clients about longevity risk. When technical and communication skills are strong, age disparity no longer matters, and the planner and client can focus on the issue at hand—managing longevity risk.

Estate Planning
Estate Tax Repeal: How Might It Happen, and 12 Actions Clients Can Take
Mark R. Parthemer, Esq.
Sasha A. Klein, Esq., LLM
With the outcome of the election on November 8, 2016, estate tax planning considerations for clients changed overnight. Transfer taxes (estate, gift, and generation-skipping transfer taxes) are arguably third in priority after corporate and individual income taxes, so uncertainty abounds for clients—and planners. This column focuses solely on the transfer taxes, attempting to give some clarity as to what might get repealed, how it may come to pass, and what clients can do.

Ethics & Regulation
The Fiduciary Standard Has Gone Mainstream
James Pasztor, MSF, MPAS, CFP
News surrounding the fiduciary standard has become mainstream. Tony Robbins is just the latest in a long line of well-known and respected voices who have joined the chorus espousing the idea that financial services providers need to be held to the fiduciary standard. Regardless of what happens in the short run with the new Department of Labor rules, the marketplace is clearly moving toward the expectation of fiduciary advice.

Executive Compensation
Supplementing Retirement Income with Life Insurance
April Caudill, JD, CLU, ChFC, AEP
When it comes to putting aside funds for a business owner’s retirement, the options beyond qualified plans are limited. Cash value life insurance as an accumulation tool for retirement income can offer many benefits, including income tax savings, death benefit protection, and steady growth potential. But it is important to understand and explain the income tax implications of using a life insurance accumulation product to meet this need. While the ultimate tax implications are consistent regardless of the product or carrier, the likelihood of adverse results can be reduced through certain product design features and provider services.

Financial Gerontology
Long-Term Care Insurance for the Caregivers: A Financial Gerontology Proposal
John N. Migliaccio, PhD, RFG, FGSA, MEd
It may be time to reexamine the proposition that insuring a family member for the direct cost of long-term care is the only goal of long-term care insurance (LTCI). Instead, considering LTCI as the first layer of long-term care provides an opportunity to broaden the market and to provide innovative combination products and financial support that would reflect the full spectrum of care needed for both recipient and caregiver.

Insurance & Risk Management
Life Insurance Advanced Markets—What Keeps Us Awake at Night?
Steve Parrish, JD, CLU, ChFC, RHU
So what’s keeping life insurance advanced marketers awake at night? The overall categories of concern break into markets, tax, the economy, and legal/regulatory. For example, there is universal agreement that many advanced sales are being delayed by the prospect of tax law change and that the persistent low-interest-rate environment has been a drag on the life insurance industry. However, the predominant regulatory concern in advanced markets is the applicability of a fiduciary standard to life insurance sales.

Social Security Planning
Are Major Social Security Changes Coming Soon?
Bruce D. Schobel, FSA, MAAA, CLU, CEBS
Putting things in context often helps to provide a greater understanding. This column, written by somebody who was there in 1983 when Social Security was last reformed, provides that context. A peek is taken at both the historical changes and also possible future changes to Social Security. A timeline for reform is also hinted at.

Going Forward to a New Medical Model
Richard M. Weber, MBA, CLU, AEP (Distinguished)
The “medical-industrial complex”—the network of corporations that supply health care services and products for a profit—is expected over the next few years to become the largest industry in America and already represents almost 18 percent of the nation’s gross domestic product. Our medical services are also the costliest among peer countries. As new models are sought to reduce the growth in costs, create better outcomes, and employ high-tech to that end, one San Francisco startup has created a technology-inspired, patient-centric model with a great deal of promise. That 1960s TV icon, physician Marcus Welby, MD, would be proud, but he wouldn’t have any concept or understanding of the startup’s technology.

The Home Equity Conversion Mortgage as a Long-Term Care Insurance Alternative for Financing In-Home Care
Stephen R. Pepe, JD
The majority of older Americans lack long-term care insurance policies that can finance a long-term care event, which means their retirement savings are exposed to premature and devastating erosion. The $6.1 trillion in home equity owned by households aged 62 and older can serve as a viable in-home care funding source if it is accessed properly. This article explains how the Home Equity Conversion Mortgage (HECM), more commonly known as a reverse mortgage, is an effective tool that enables older homeowners to access home equity to finance in-home care, and why advisors should include HECMs in every long-term care discussion they lead.

Beyond Illustrations—The Importance of Contract Language
Tom Love, CLU, FLMI
Tom Trowbridge
There is a footnote on every life insurance illustration ledger that states in some manner, “The illustration is not the contract.” It is there for a reason, but few people (neither agents nor consumers) bother to read and understand the life insurance contract. This article delves into why the contract language matters, how it differentiates products, restrictions that may be invoked, potential problem areas, and the leeway for carriers contained within the wording.

Trust Reduces Costs Associated with Consumer-Financial Planner Relationship
Danielle Winchester, PhD
Sandra Huston, PhD
Using an integrative approach combining economic theory with psychological constructs, this study examines the impact of trust on the perceived value of a consumer-financial service provider relationship. This study is one of the first to explicitly investigate the value of financial advice by testing the moderating effect of trust on the conditional effect of agency cost, more specifically monitoring cost, on the overall value of the relationship. Findings suggest that trust, as well as risk-sharing and increased consumer satisfaction, reduces agency cost and subsequently increases the value of a consumer-financial service professional relationship.

Basis of Property—When the Estate and Beneficiary Do Not Agree
Mark Lee Levine, CLU, ChFC, LLM, PhD
Libbi Levine Segev, JD, LLM
The basis of property is crucial, since gain or loss is determined by subtracting the basis from the sales price—the higher the basis, the lower the gain. Thus, for federal income tax purposes, sellers prefer to have a higher basis, reducing their future gain. However, where property passes from the estate of the decedent, the basis of property flowing to a beneficiary is normally determined to be the fair market value of the property in question on the date of the death of the decedent. The property of the decedent is normally included in the assets of the decedent to determine any estate tax that may be owed.

The result is that the beneficiary favors a position where the basis of property flowing to the beneficiary has a higher fair market value. The estate favors a lower fair market value to lower the estate tax, if applicable. These conflicting positions have been recently addressed by the government in an IRS Notice that will require—in some circumstances—that both the beneficiary and the estate use the same fair market value. This article examines the implications of this new notice.

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