401(k) Rollovers: A Legal Liability?

Did you know that, as a licensed insurance agent, you could be breaking the law by transferring funds from a 401(k) into a fixed or fixed-index annuity?

If the 401(k) was invested in securities, you could potentially be in hot water because the SEC prohibits unregistered individuals from giving investment advice. In practice, however, the SEC rarely pursues unregistered individuals. FINRA, with its focus on broker/dealers and their registered reps, has little time to oversee insurance-only agents. This type of enforcement tends to be left up to each individual state’s insurance department.

Several states have laid out specific regulations as to what advice can be provided by an insurance-only individual. Conversations around risk tolerance, goals, and general asset allocation are fine. But making recommendation to liquidate securities or which specific security to liquidate are considered investment advice and are illegal unless you are appropriately licensed.

The same rules apply to any other qualified plan rollover, annuity replacement, or brokerage account/mutual fund liquidation.


A $5 Million Tax-Free Birthday Gift of a Lifetime

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After a lifetime of hard work, George Jackson recently sold his business for $100 million. George wanted to celebrate by giving each of his 19-year-old twin grandsons (Jack and John) a special $5 million birthday gift. George has asked his son, Mark, to reach out to their financial advisor for help in structuring the arrangement. Their goal: to minimize the tax implications and ensure Jack and John use the money wisely over their respective lifetimes.


Backstage at Highland: Peg Michails, Director, Policy Review

Highland Capital Brokerage provides superior client service through a vast network of business and underwriting experts. Each of our team members has longstanding experience and is committed to helping you serve clients. BACKSTAGE, our new blogpost series, takes you behind the scenes so you can learn more about your dedicated professionals.

Peg Michails
Director, Policy Review
Highland Capital Brokerage

In her work as a policy review specialist for Highland Capital Brokerage and Premier Trust, a dedicated Nevada-based trust administrator, Peg Michails resolves orphan individual life (no agent of record) and trust-based policies. Her goal: to ensure clients and their beneficiaries get what they were promised.

The passage of time often makes it difficult to understand these cases. Even when brokers of record can be found, they often did not service their old accounts, so there is no track record of beneficiaries, changes of address, policy loans and lapse probability.


‘Wait & See’ ILITs Offer Hedge Against Legislative Risk

retired couple

Recent passage of The Tax Cuts and Jobs Act of 2017 (TCJA) increased the federal unified estate and gift tax basic exclusion amount from $5.49 million in 2017 to $11.4 million per individual and $22.8 million per married couple for 2019.

While this change has been celebrated in many quarters, it has created for clients a false sense of security. The higher exclusion will sunset and revert to $5 million (adjusted for inflation) after December 31, 2025, absent future legislation. The probability is growing more likely Congress will allow the doubled lifetime exemption to sunset, as polls show growing bipartisan support for higher taxes on wealthy individuals.

Federal Estate Tax


Changing the Irrevocable Trust

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Our two prior blogposts explored the need for regular and ongoing trust-owned policy reviews and examined methods of valuing underperforming, at-risk policies. This third post explores a potential option when a policy review uncovers a poorly drafted or obsolete irrevocable trust.

“Predictions are hard,” said former NY Yankee Hall of Famer Yogi Berra. “Especially about the future.”

Yet somehow clients, their financial advisors and estate attorneys are supposed to gaze into the future and know how newborns will turn out, what legislative, tax and carrier changes will take place, and whether a couple will stay together or divorce, remarry and potentially start second or third families. Based on this perfect seer-like wisdom, all-knowing advisors must create Irrevocable Life Insurance Trusts (ILITs) that can never be altered in any way, shape or form. Challenging? Certainly. But it’s been the status quo for years. Until now.

Twenty-eight states have either passed or are considering legislation that would allow clients to revoke (“decant”) an irrevocable trust. Even California recently conceded the wisdom of former Carmel resident Doris Day’s 1956 hit song “Que Sera Sera”1 and passed the Uniform Trust Decanting Act in 2018.

California’s new law allows trustees to modify the terms of a trust (with some limitations) without court approval or the consent of beneficiaries’ non-judicial modification). In addition, trustees can always go to court to modify an existing agreement (non-judicial modification).

Policy Reviews and the Irrevocable Trust

Trustees have a fiduciary responsibility to manage assets for the benefit of trust beneficiaries. Yet life insurance is often viewed as a passive asset by trustees. ILITs, in fact, need constant performance monitoring to ensure sufficiency of current premium payments and whether any withdrawals or loans outstanding have affected the policy over time. Failure to do so could subject trustees to an unintended breach of fiduciary duties and legal liability.


What’s that Life Insurance Policy Worth?

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Life is change. That’s why as life goals change, life insurance needs change as well.

Over time, the original need for coverage — like having young children or providing for income replacement — may no longer matter to clients after retirement. They may own policies they no longer need or can afford, especially if one of the policyholders is in poor health. What’s more, sustained low interest rates and the volatility of equity markets may have drastically affected older policies so that original premium funding levels cannot sustain coverage.

The best way to keep track of these changing client situations is through a regular policy audit or policy review, as discussed in our prior blogpost.

During the past several years, our Policy Analysis & Comparative Evaluation (PACE) report has uncovered many underperforming policies. However, before considering a reduction in face amount, surrendering coverage or transferring ownership, a serious effort should be made to determine the contract’s true value.

At first glance, the value would appear to be the policy’s surrender value. Yet that may be the worst way to determine valuation. Nor does it provide a method to assess a term life policy. In fact, our research indicates that most valuation methods are inadequate and outdated, use inconsistent data, and fail to consider the health of the insured(s).

So how should a life insurance policy be valued?


Robert W. Finnegan, J.D., CLU®, AEP®, Published in June 2019 Estate Planning Magazine

Robert Finnegan Published in June 2019 Estate Planning Magazine

We are pleased to announce that the following article by Robert W. Finnegan, J.D., CLU®, AEP®, was recently published in the June 2019 Estate Planning magazine.

Generational Split-Dollar Plans
and Sections 2036 and 2038

An analysis of recent court decisions provides insights for structuring generational split-dollar arrangements to withstand IRS challenges.

The Internal Revenue Service continues to litigate generational split dollar plans (GSD plan) arguing that Code secs. 2036(a)(2) and 2038(a)(1) require inclusion of the full face value of G1’s split dollar receivable. This article provides compelling arguments that a compliant GSD plan is not subject to those Code sections and that the plans should be entitled to a reasonable discount (similar to family limited partnerships). It also recommends that, until the law is more settled in this area, that plans be promoted assuming no discount.

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Bob Finnegan is the Senior Vice President, Advanced Planning Attorney for Highland Capital Brokerage and a member of the Trusts & Estates magazine Insurance Committee. At Highland, Bob specializes in advanced planning for high net worth and ultra-high net worth clients. Bob can be reached at 518.424.8928 or bfinnegan@highland.com.


Why Trust-Owned Life Insurance Policies Need a Periodic Health Checkup

Floppy Disk with Life InsuranceIf you’ve had a physical exam or dental checkup recently, you know how important periodic evaluations can be in preventing small problems from turning into bigger ones.

Health and life changes, such as marriage, divorce, retirement, arrival of a new baby, or the purchase and sale of a home, can affect our financial health, too. That’s why it’s important to periodically check and update customer accounts and other financial documents.

This is especially true when it comes to life insurance coverage. Over time policies can become outdated and rife with simple errors — such as having an incorrect permanent address or phone number for the policyholder. Or referencing one or more deceased beneficiaries. In some cases, medical advances and the entry of new competitors could enable policyholders to obtain better coverage at a lower cost. On the other hand, some policies may be close to lapsing because of outstanding policy loans or failure to maintain premium payments.


The Top 5 Questions to Ask About a Living Benefit Rider

Annuities have always been the only financial instruments that can provide an income that cannot be outlived. Historically, this meant annuitizing the contract — exchanging the lump sum account value for a guaranteed series of payments for a specified period or life.  The thought of forfeiting principal for income, however, was unpleasant to most consumers and therefore annuitization was rarely used.

Living benefits — often called income riders — first appeared on variable annuity contracts to provide a “safety net” in the event the underlying accounts did not perform as hoped. Today, living benefits are available on all types of annuities.


Robert W. Finnegan Published in April 2019 Trusts & Estates

We are pleased to announce that the following article by Robert W. Finnegan, J.D., CLU®, AEP®, was recently published in the April Trusts & Estates.

 IRC Section 6166 Revisited
A way to avoid a forced or fire sale of a closely held business to pay taxes

Code §6166 allows a decedent who was a US citizen or resident at the time of death to defer estate taxes attributable to a closely held business.  This article takes an objective look at the requirements, limitations and pros and cons of Code §6166 as well as how life insurance can complement its use.

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Trusts & Estates is the pre-eminent, peer review journal and website for wealth management professionals serving the needs of high-net-worth clients, family business owners, family offices, charitably inclined donors and non-profit corporations. Click here to learn more about Trusts & Estates.

Bob Finnegan is the Senior Vice President, Advanced Planning Attorney for Highland Capital Brokerage and a member of the Trusts & Estates magazine Insurance Committee. At Highland, Bob specializes in advanced planning for high net worth and ultra-high net worth clients. Bob can be reached at 518.424.8928 or bfinnegan@highland.com.


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