Charity Begins At Home, Not At The Carrier

Director Francis Ford Coppola leaves us with a cold and calculating Michael Corleone looking out the windows of his lake house over the water that would prove to be the River Styx for his brother.  What is to be a day of relaxation and fishing for Fredo will end in the fulfillment of Michael’s directive for the execution of a sibling who he deems unfaithful to him and the family.

In audience time it is 16 years before we meet the Don again in the opening scene of The Godfather: Part III.  In contrast to the sordid power-brokering that goes on in the initial wedding and baptism sequences of the first two films, we find an older, reflective Michael on a path for respectability, legitimacy and eventually some sort of moral absolution.

In a grand ceremony at St. Patrick’s Cathedral he is being inducted as a Commander in the Order of St. Sebastian and viewers soon learn that there is probably a connection between that honor and a $100 million gift to the Church from the Vito Corleone Foundation, a charity run by Michael’s daughter.

The film only serves to fuel the suspicion we often have of those who seem too charitably minded; a suspicion that is understandably shared by insurance carriers.

Back in the olden times as states began passing laws giving charities an insurable interest in the lives of donors, it wasn’t much trouble getting a significant amount of charity-owned coverage on the life of a person who intended to donate the premiums each year to the organization.

The problem arose when an invigorated life settlement marketplace created an attractive non-correlated asset class and groups of independent investors arranged for charities to buy coverage on donors paying the premiums and anticipating returns for all involved when the policy was sold later on in the secondary market.

Once everybody figured out what was going on a couple things occurred

First, applications began containing questions addressing intended use of coverage, particularly regarding possible transfer of interests in the contract after the sale.  And, second, the liberality of financial underwriting for charitably-owned coverage was dramatically proscribed.

A recent survey we conducted of major carriers revealed that the starting point, and often the finish line, for the amount of death benefit they would entertain was only ten times the annual donation pattern the insured had with the charity; i.e. if Benjamin Bear has been giving $5,000 a year to the Bruin Varsity Club, he is only good for $50,000 coverage to leverage his legacy – hardly a gold mine for some insurance advisor alumni trolling the membership list.

One carrier would allow twenty times.  Another permitted the projected value of the pattern of giving for 75% of the donor’s life expectancy.

The fields are hardly white for harvest if an insurance advisor intends to get rich selling charitable-owned coverage.  Nonetheless, there are circumstances where carriers may look beyond the donation-multiple standard.

By the way, both The Godfather and The Godfather: Part II won the Academy Award for Best Picture.  The Godfather: Part III was nominated, but denied, the award going instead to the Kevin Cosner film Dances with Wolves.  The American Film Institute ranks The Godfather #2 among the best motion pictures in American cinema, second only to Citizen Kane.  Also, UCLA has won more NCAA championships than any other school.  You can look it up!

Incompetency Planning

When the fat lady sings… As they say, “It’s not over until then.”

There is a comedian who likes to inform his audience that it is his goal to live forever.  Looking out into the crowd he adds, “So far, so good!”  But the fact is that death is the one contingency everyone can be pretty sure will occur at some point.

There is a tendency in the planning process to focus on the matters of final arrangements, like wills and life insurance, and not give proper attention to the possibility of incapacity prior to death.

Different Types of Incapacity

The inability to handle affairs may be caused by something other than mental incompetency.  Conducting business or carrying out activities may be impractical because of the onset of temporary or permanent physical infirmities, or geographic absence due to travel or distant residence.

Give thought to delegation of authority in circumstances other than those involving mental incapacity.

Financial Concerns

The document for delegating authority in financial matters is a power-of-attorney.  It can be as narrow or as broad as needed.  It can in force until revoked, or it can take effect under particular circumstances and can remain valid even into a period mental incompetency.

Revocable living trusts, often used to keep assets out of the probate court, can also give authority over property in the trust to a co-trustee or contingent trustee.

Beware of joint ownership as a solution!  The responsibilities of joint owners is undefined and transactions with certain assets, such as real estate, may not be possible without agreement of all owners.  Also, creation of joint ownership may create gifting concerns.

Medical Concerns

Planning documentation will go under various forms and names in different states (e.g. health-care directives, living wills, health proxies, medical power-of-attorney), but if properly drafted should address three items:

  • Direct who will make health care decisions when needed for the principal.
  • Indicate who will make any life-sustaining or life-ending decisions necessary.
  • Grant HIPAA authorization for decision-makers to receive all medical information necessary without the consent of the principal.

The process should also include proper risk management planning giving consideration to the advisability and feasibility of long-term care and disability insurance options available.

Whom Do You Trust?

All the documentation is fine, but it is only as good as the qualifications and reliability of the attorney-in-fact, trustee, or other fiduciary chosen to carry out the terms.

Good starting points for candidates include:

  • Their geographic location – Will they be on-site when needed?
  • The intensity of their lifestyle – Will they have time to attend to their responsibilities?
  • Experience – Do they have the background and skills to handle the affairs they will oversee?

All this, of course, in addition to whether they have proven trustworthy and dependable in the past.

The importance point to impress upon a client regarding incompetency planning is that if they don’t make a plan the State will make one for them.  Through tedious, drawn-out and expensive guardianship or conservatorship hearings a court of law will set a course that may or may not achieve what the client might have desired, administered by people the client may or may not have preferred.

Call with basic questions and concerns that each client should consider taking to their legal advisors, as well as for information on the long-term care and disability insurance options that can assure that proper funding is available to carry out the intentions of your clients in the unfortunate event of incompetency.

Buy-Sell Planning While Generation Straddling

Two of the top ten reasons that younger women say that they marry older men are, first, they have a better read on those with a more promising future, even if it is shorter; and second, if they sprain their ankle they can use their husband’s cane.

Pretty funny, but not unlike a couple of the underlying reasons it might make sense for a young entrepreneur to associate with an older colleague in a business venture.

The “kid” has the track record of the potential partner to serve as a good indicator how much the codger will bring to the table in the time remaining in his or her active work life. And the older businessperson has picked up things along the way that may come in handy to overcome unexpected hurdles (the cane, just in case you aren’t following the analogy).

But a disparity in age always seems to create a fly in the ointment when it comes time to do some business transition planning.

When insurance ledgers are run in anticipation of insuring for a buy-out in the event of death there is often sticker shock over the difference in cost between coverage for the young ‘un and the old fogie.

Clients expect some spread in cost due to age, but not that much – and it doesn’t help that the older proposed insured’s medical history isn’t as positive as it used to be (after all, you generally don’t use a cane because there has been an improvement in health).

If properly addressed this bump in the road shouldn’t be a problem. Assume a case where the partners will buy each other out with policies they own on each other on which each will pay the premium.

Consider:
  • Because the need for coverage is a measurable period of time that is less than life expectancy, term insurance can be used to considerably lower cost up front.  And it is usually eligible for conversion if the policy is needed longer for any reason.
  • The higher premium burden of the younger partner can be neutralized by double-bonusing the cost of coverage to both.  This equalizes the expense by creating a zero after-tax outlay and the business is now seen bearing the overall cost of the transition plan.
  • After that, focus on the benefits each is to derive from the agreement: either a) the assurance that their heirs will receive a fair price in the form of cash for the business interest, or b) the assurance of funds to buy out a deceased partner and future full ownership of the business.  What each partner derives from the buy-sell is exactly the same, exactly what they want, and exactly what they need.

An uninsurable partner creates different problems, but policy cost due to mere differences in age or insurable health should not be an objection.

Two other reasons in younger women’s top ten are that an older husband will introduce them to a whole previous generation of chick flicks (Thelma and Louise, Steel Magnolias and Breakfast at Tiffany’s), and he can help with homework.

Contact us with any and all questions that come up in buy-sell planning for clients of any age.

Properly Documenting Your Clients Intentions

In the most important episode of his life Paul Revere did not fire a shot.  But his willingness to spread the alarm averted what could have been an early military disaster for the revolutionists of Massachusetts Bay.

Planners, too, in addition to fulfillment of their usual responsibilities must fill the role of an alarmist if they are to keep their clientele financially whole.

The sad truth is that if your clients do not take the time to plan correctly the government is poised to do it for them poorly when the need arises.

State laws allows for a citizens to assure that their affairs are handled according to their wishes, but they must takes steps to document their intentions properly.

Proper documentation can be achieved through the execution of these three basic planning documents:
  •  A durable Power of Attorney that permits an appointed agent (attorney-in-fact) to conduct financial transactions for your client under the terms expressed.
  • A Health Care Directive (a/k/a – healthcare proxy, living will, durable power of attorney for health care) that appoints an agent to make health care decisions if the client becomes unable to do so.
  • A Last Will & Testament that, upon death, allows the client to a) decide who will receive the assets owned by the client, b) appoint who will manage those assets, c) state preferences for the guardian of the client’s minor children, and d) appoint trustees of trusts created by the Will.

If these are not in place a client must understand that there is legislation in every state that will make these decisions for them.

Broaden the influence you have with and the comprehensiveness of the service you provide to your clients by asking them if they have taken the time have drafted at least the three fundamental planning documents listed above.

We do not practice law or offer legal advice (nor do you), but will look at a client’s planning documents to direct them better when they have them reviewed by legal counsel.  Give us a call.

“If It Isn’t Written Down, It Didn’t Happen” – Wills, Powers-of-Attorney & Health Proxies

Any fan of the novelist Tom Clancy is probably familiar with these words uttered by the wife of his chief protagonist, Jack Ryan.  Ryan is constantly needling Dr. Caroline “Cathy” Ryan about her compulsive habit of making notes about everything as a method for reminder and also a simple record of events.

She defends the practice as the best way to keep track of everyone’s commitments and intentions, especially given their hectic lifestyle – in that book he happens to be Vice President and she a busy physician, both with young children in tow.

Creative marketers and seminar sales-folk have built and sold entire programs of self-discipline and personal organization around the concept.

But the government of the state in which you live is far ahead of both.

Regarding your client’s planning intentions and goals; all 50 states have legislation in effect that effectively says, “If they aren’t written down, then they didn’t happen!”

Who Needs Estate Planning?

The fact is that everyone needs estate planning, not just the wealthy.  Everyone has concerns about what will happen to themselves, their survivors and their belongings in the event of any number of life-changing events.

Critical to the assurance that all will go as desired in each circumstance is the execution of at least three written planning documents.  If they don’t exist then the State will do your clients’ planning for them.

Contact us to discusses these documents in further detail so you can better encourage every client to take necessary steps for their completion in conjunction with their advisors.