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Vol. 72, No. 4, July 2018
FOCUS ON Insurance, Tax, & Financial Planning
Annuities and Moral Hazard: Can Longevity Insurance Increase Longevity?
Patrick C. Tricker, JD, MSF
Unlike its commonly negative connotation, moral hazard is a neutral idea in economics and refers simply to the incentive effects created by insurance. Life annuities make payments as long as the annuitant stays alive. Economic theory suggests that a rational individual who owns an annuity should invest more in his or her longevity in order to receive more payments and thereby extend his or her life expectancy. The article reviews this theory and a growing body of empirical evidence supporting it.
Buy-Sell Arrangements in Light of the Tax Cuts and Jobs Act
Steve Parrish, JD, RICP, CLU, ChFC, RHU
Buy-sell arrangements are the lubricant for transfers of business interests. Business owners also use buy-sell arrangements to grow their companies, incentivize key employees, leverage wealth, retire, maintain family ownership, and pass on legacies.
The Tax Cuts and Jobs Act of 2017 (PL 115-97) is having a dramatic effect on all these planning areas, and advisors need to look at their clients’ buy-sell arrangements in a new light. Specifically, advisors should review buy-sell arrangements in the areas of exit, retirement, and estate planning.
The Tax Cuts and Jobs Act: Implications for Financial Professionals
Anthony P. Curatola, PhD
J. William Harden, PhD, CPA, ChFC
David R. Upton, PhD
The Tax Cuts and Jobs Act of 2017 (PL 115–97) was signed into law on December 22, 2017, and implements many significant tax changes that will affect all taxpayers. For individual taxpayers, the new law reduces tax rates, broadens tax rate brackets, increases the standard deduction, and modifies or eliminates a number of itemized deductions, including the personal and dependent exemption. For corporate taxpayers, the new law reduces the tax rate to 21 percent and modifies a number of tax provisions. Finally, a deduction for tax years 2018 through 2025 for qualified business income (for pass-through entities) is added by the act. This paper details these tax changes and discusses some related planning opportunities that are most likely to affect financial service professionals’ clients.
Defined-Benefit Plans Remain a Planning Opportunity
Ernest Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, RICP, CPFA
Jamie Hopkins, Esq., MBA, LLM, CFP, ChFC, CLU, RICP
Tax planning is changing, but with most of the recent attention focused squarely on the newly passed Tax Cuts and Jobs Act of 2017 (TCJA) [Tax Cuts and Jobs Act of 2017, PL 115-97 (2017)] and the resulting tax reductions at the federal level, planning opportunities at the state level and with retirement plans have been a bit neglected. Most state governments in the United States also collect state sales, income, and property tax (being as high as 13.3 percent), which is different and separate from what must be filed with the federal income tax.
While many clients will benefit from a reduction of taxes due to the TCJA, many will be losing valuable deductions, which could actually result in a tax increase. For business owners using a pass-through entity, continued planning with an employer-sponsored retirement plan could help offset the tax burden of some lost deductions. The good news is there were no major changes to the general structure of qualified plans, including defined-benefit plans. As such, small-business owners operating an existing plan should feel safe in the continued value of utilizing these retirement savings vehicles. But the recent tax changes have heightened the value of adopting employer-sponsored retirement plans for some small-business employers. This paper will focus on the impact of TCJA on utilizing defined-benefit plans with small employers [IRC Sec. 414(j); ERISA Sec. 3(35)].
Accounting & Taxation
The Tax Cuts and Jobs Act: Viatical Settlements, and the Transfer-for-Value Rules
Thomas F. Commito, JD, LLM, CLU, ChFC, AEP
Sales of life insurance policies to individuals or entities with no relationship to the insured have always been subject to special scrutiny. Recognizing this, the Tax Cuts and Jobs Act of 2017 (PL 115-97) codifies the rules established by various IRS pronouncements, that in these transactions, the purchaser is not entitled to receive the death proceeds on a tax-free basis. It also establishes a comprehensive reporting regime informing the IRS of these transactions.
Advice for the New Planner
A New Look at Advisor Introductions and Value Propositions
David F. Pierce, MSFS, MSM, MA, CLF, ChFC, CLU
Advisors have developed countless ways to introduce themselves to prospective clients and describe what professional services they offer. Some introductions work well while others do not. For those advisors who are able cultivate a prospect’s interest, the next step is to explain the advisor value proposition: how the work is done and what the process includes. This column provides a discussion of some newer concepts that some advisors may want to consider to help improve client acquisition and retention skills.
The New Tax Act: Why Clients Need to Review Their Estate Plan Today
Mark R. Parthemer, Esq., AEP
With the Tax Cuts and Jobs Act of 2017 (PL 115–97) now in effect, estate tax planning has become more complicated. Some parts of the tax code related to estate planning have remained the same, but others have changed (temporarily), creating issues that need to be addressed and opportunities to be pursued. To ensure clients are on track to meet their goals and take advantage of new planning opportunities, it is imperative they review their estate plan as soon as possible.
Ethics & Regulation
Securities and Exchange Commission Proposals—The Same Old Thing in a Different Wrapper
James Pasztor, MS, MPAS, CFP
The Securities and Exchange Commission (SEC) has finally released its proposals in response to the Dodd-Frank Wall Street Reform and Consumer Protection Act (PL 111-203), which in 2010 tasked the SEC with determining whether there should be a “harmonized” fiduciary standard for both investment advisors and broker-dealers. If these proposals are any indication, it’s abundantly clear there will be no harmonized fiduciary standard, and the SEC clearly wants to continue offering consumers two choices. Unfortunately, the needle doesn’t move much, and while some aspects might provide a bit more clarity (such as restrictions on the use of the title “adviser” or “advisor”), other recommendations might just generate more confusion (such as repackaging the suitability standard as a “best interest” standard).
Call Me Anything You Want…Just Don’t Call Me a Millennial
John N. Migliaccio, PhD, RFG, FGSA, MEd
The challenge for financial professionals is to understand more about demographic dynamics in order to work with millennial clients and their baby boomer parents. For example, the information available about millennial clients can help create more emphasis on important life events deferred or delayed because of financial circumstances and how to improve the process of attaining them. This would include helping them with planning for debt reduction rather than asset accumulation alone.
Insurance & Risk Management
Risk Management for Business Owners: How to Deal with the Uncertainties of the Tax Cuts and Jobs Act of 2017
Steve Parrish, JD, RICP, CLU, ChFC, RHU
When sweeping new tax legislation arrives, risk is not far on its heels. There is the risk that the client ignores the law, missing out on short-term opportunities. There is the risk that the client, armed with incomplete information, moves too quickly, paying at leisure for mistakes made in haste. And there are risks for the advisor.
With the Tax Cuts and Jobs Act of 2017 (PL 115–97), we’re seeing another risk—the risk of continued uncertainty. Particularly in the business tax sections, this law still has unclear terminology, creates unintended consequences, and has purposely included sunset provisions. This column discusses how an advisor can help business owners manage the risks of uncertainty the legislation creates.
Social Security Planning
Social Security Risks
Bruce D. Schobel, FSA, MAAA, CLU, CEBS
Many people are unfamiliar with Social Security’s unique risks and how to deal with them. We examine what makes the Social Security environment so different from other areas in which financial planners work. A quick summary of the main risks facing private-sector pension plans is provided as a helpful basis, and then unique Social Security risks are explored.
23andMe—and You, and You, and You, and You…
Richard M. Weber, MBA, CLU, AEP (Distinguished)
You’ve probably seen the commercials—the guy who celebrates Oktoberfest each year in recognition of his supposed German ancestry discovers he should have been wearing a kilt rather than lederhosen. DNA analysis has expanded from tracing our oldest ancestors and their global areas of origin to assessing the potential we might develop Alzheimer’s, Parkinson’s, or a host of other scary diseases. With this fascination comes questions of how this information might be used to our advantage or disadvantage, and it is subject to ethical and, potentially, legal controversy.