Solving A Major “Minor” Problem

In the 2000 comedy flick Family Man, the investment guru played by Nicolas Cage is asked if he likes kids.  His response:  “On a case-by-case basis!”

But when minors are to be a party to a life insurance policy we can’t be so selective.  Every case is a potential problem and contracts must be implemented accordingly.

Minors are not legally competent (as in not allowed under the law) to own a policy or take possession of the death benefit, so… the easiest solution is to always use a state’s Uniform Transfer to Minors Act (UTMA) when drafting a beneficiary designation for a minor child.

A few basics:
  • The device is created in the beneficiary designation and operates like a “poor-person’s trust” when a separate formal trust is too expensive or too complicated to use.
  • A custodian-beneficiary is appointed to watch over the policy and proceeds for the benefit of the minor according to the directives in the state’s UTMA.
  • A successor custodian should always be appointed, since there is a good chance the custodian may pass away before the minor.
  • When the minor reaches the age of majority (which can differ with each state) the policy or proceeds must be turned over to him/her “lock, stock and barrel” – unlike a trust where control can be delayed well into adulthood.
  • The wording must comply with state law.  In addition, always check with the carrier Claims Department for its approval.
  • There must be a full and separate designation for each minor beneficiary.

The most important thing on a life insurance policy is the beneficiary designation.  But you’d never know it by the small amount of space given for it on the application – space that is especially inadequate if a minor is involved.  A UTMA designation will always take a separate page to be appended to the application.

You probably know that Cage’s real name is Nicolas Coppola.  He changed it for the screen because he didn’t want to appear to be cashing in on the reputation of his uncle, director Francis Ford Coppola.

Death Is More Taxing After 2025

Much is made of how few taxpayers will pay federal estate taxes since the lifetime exemption was increased by the Tax Cut and Jobs Act of 2017.

But there may be more prospects than you think.  In any case, here is all you need to know to get the ball rolling in a discussion with any client:

  • Each taxpayer has a current lifetime exemption that protects the first $11,580,000 of their taxable estate (roughly his or her net worth).
  • With proper planning a married couple can 1) defer any taxation to the second death and then 2) protect their combined exemptions of $23,160,000.  Hokie smokes, Bullwinkle! 
  • Any excess is taxed at a flat 40%. 
  • But (and this is a big but!), on January 1, 2026, the exemptions will be reduced by 50% (currently to $5,790,000 per taxpayer and to $11,580,000 combined per married couple).
  • And even more, the 2026 levels are not guaranteed.  The government can do anything it wants to change the tax law any time it wants – even eliminating the exemptions altogether and raising the tax rate.
  • States of confusion – Don’t forget that about half the states have a death tax that can affect clients who are residents or hold property in the state.  A quick check for state laws is

When A Policy Owner Dies

The circumstances surrounding the case weren’t unusual.  A single grandparent wanted to purchase coverage on his five year-old grandchild.  He loved his son and daughter-in-law, the parents of the proposed insured, but felt they might be tempted to access the cash values during tough times if they were given control of the policy.

The agent involved suggested creating a trust for the contract, but the country-time lawyer involved didn’t like living trusts (because, he said, “Nobody ever takes care of them!”) so he drafted a new will for the grandfather with a testamentary trust that could accept the policy on his death and directed that the grandfather be made the policy owner.

Two immediate potential problems should have been considered by the trust-resistant attorney:

First, if the insured child died first then the proceeds would become part of the grandfather’s estate.  Second, if the grandfather died first the policy would be subject to the unnecessary rigors of the probate court before settling into the trust created by the will – perhaps then only to be managed as poorly as all those living trusts the lawyer had experienced.

There’s an old proverb somewhere that says if something can even be worse than anticipated, it probably will.

In this case the policy language had a little surprise for all involved that rendered what would play out even more undesirable and more unmanageable than any imagined!

The grandfather did die first.  His will was submitted to probate and the agent and the executor took steps to have ownership of the policy transferred to the newly activated testamentary trust under the will.

The carrier title department responded [underscoring added]:

We understand that [policy owner] may have provided for these policies in his will, however, the ownership of the policies as stated on the application automatically reverts to the individual insured [the still living minor grandchild].  We must adhere to what the contract states and not what was indicated in his will.  In the alternative, if they want the ownership to change to the parent [of the insured minor] as indicated in the email below, we would need documentation from the court proving who is the legal guardian of the minor’s property which is different than being the legal guardian.  This is something they would have to go to court for and once they obtain the court order, the legal guardian of the property can change the ownership of the policy.  Otherwise, we cannot allow any transactions on the policy until the child is at least 15 years old.

A response like that will tend to take the ginger out of one’s step!  Not only is control of the policy for the next ten years attainable only through a laborious court process, but even then the result would probably be exactly what the grandfather was attempting to avoid – ownership of the policy by the parents of the insured child.

Policy provisions that appoint an insured as a default owner are more common than most agents would think.  The issue doesn’t arise often because the policy owner is commonly 1) the same as the insured, or 2) a party who cannot die, e.g. a trust, or 3) a person younger than the insured who usually doesn’t die first.  But it occurs enough that at least one major carrier has an appointed person who does little more than handle the “Dead Owner” cases.

We rightfully agonize much over the choice of contingent beneficiaries.  The same attention should be given to the need for and choice of contingent owners when needed.  Call with any questions regarding this issue on potential or existing cases.

162 Executive Bonus – The Biggest Drawback Solved?

What’s the best way to attract and retain key people in the face of a government that does, and continues to do, all it can to proscribe or eliminate the advantages of selective benefits?  The non-discrimination and other limitations on qualified plans often make them ineffective for the purpose.

Deferred compensation (or SERPs) and split dollar plans have become too regulation-laden and require too much administration, record-keeping and reporting to jingle any bells amongst most prospects.

What to do?

Among other things, because of its simplicity and its potential flexibility throughout the life of the benefit plan, the section 162 executive bonus arrangement is deservedly getting new levels of attention.  It’s design might be an almost a one-size-fits-all answer to executive benefit needs, but for one concern:  How do the employers truly “handcuff” an executive if they can’t maintain control over and retrieve employer funds paid into the plan?

In its most basic form, an executive bonus plan involves the employee buying and owning a policy on his or her life.  The employer pays the premium, takes a deduction, and reports it to the executive as income, but if the employee walks the policy then the employer investment goes out the door as well.

The “loss of control” problem can be mitigated, if not eliminated, by appending two simple features to the plan:

First, the agreement can include a repayment obligation on the part of the key person under terms spelled out.  The obligation is often phased out over time, giving the arrangement a vesting-like feel to the deal.  This is similar to the conditions often applied to moving expenses paid on behalf of a re-located executive.  Because the employer doesn’t have an interest in the policy, the plan does not unintentionally wander into split dollar territory.  Furthermore, because there is no delayed income being paid, the deferred compensation regulations do not apply.

Second, a simple restriction on policy owner’s rights to policy access can be filed with the carrier.  For the agreed upon period of time, the key person cannot alter, change or benefit from the policy without the permission of the employer – except for the designated beneficiary.  Again, without giving the employer an ownership interest in the policy, it locks down the policy and allows an employer time to exercise the legally enforceable right to recover premiums, if needed.

If this method satisfies a business prospect’s concern for the security of an investment that’s desired under a benefit plan, then an executive bonus arrangement could be the easy answer to attract and keep select employees.

We provide sales and advisor support, documentation, product design, and we can answer your questions related to the presentation and implementation of executive bonus plans.  Give your sales desk a call to discuss the full width and breadth of the often overlooked advantages of this concept.

Comparing Apples To Oranges? Almost!

A man in Clearwater, FL, claimed to have grown a grapefruit that looked exactly like an orange – except that it was bigger and yellow.  The attempt at comparison is understandable given other features characteristic of both.

What If Clients:

1) Don’t have access to a qualified retirement plan, or
2) Have maxed out on the qualified plan they have, or
3) Are looking for a non-qualified benefit plan for themselves, key employees or others.

Although qualified plans and universal life policies are fruits of a different color, they still look a lot alike when used to provide funds for retirement.

Compare And Consider:
Standard Qualified Plan Universal Life Insurance
Unrestricted Contributions No Yes
Contributions Deductible Yes No
Tax-Deferred Growth Within Yes Yes
Nontaxable “Cost of Insurance”

No (Must report economic benefit for coverage under the plan)

Yes (COIs are paid internally with untaxed returns on the cash value)

Uninterrupted Accumulation After Age 70-1/2 No Yes
Non-Taxable Withdrawal of Funds No Yes (Non-MEC FIFO withdrawals and loans)
Early Withdrawals Free of Penalties No

Yes (Assuming a non-MEC contract outside the surrender charge period)

Call today for a ledger illustrating an over-funded UL product that demonstrates an attractive withdrawal strategy during your client’s retirement years to supplement their retirement income from other sources.

Remember:  The biggest asset your clients may have available for their retirement planning could be their insurability!