Blog

February 22, 2021

10 Most Common Mistakes – Fiscal Fitness

Mistake 1: Who is the beneficiary of your existing policy(ies)?

Mistake 2: Are any contingent beneficiaries named?

Mistake 3: When was the last time you reviewed your policies?

Mistake 4: Is the problem we are trying to solve with life insurance temporary or permanent?

Mistake 5: What assets would you like to protect?

Mistake 6: Are the policy proceeds payable outright to minor children or grandchildren or to handicapped or emotionally immature or financially irresponsible individuals?

Mistake 7: Who is the current owner of your policy(ies)?

Mistake 8: Can your business or practice provide insurance on a more cost- or tax-efficient basis?

Mistake 9: How long will your term coverage last and at what cost?

Mistake 10: Are you getting the best value for the current cost of your life insurance?

download

Male hand putting coins with money stack step growing growth sav

February 22, 2021

An Overlooked Source of Capital

Business Planning Opportunities

Most Business owners put their maximum efforts into creating and running their businesses. But additional planning must be done to insure that the business can survive the death, disability or retirement of an owner or key employee.

The unique issues related to succession planning, risk mitigation and family income planning present unique challenges and considerations that are related to the running of a business:

Some of those challenges and considerations include:

Is there access to liquidity to take advantage of growth opportunities, or to supplement business income in tough economic times?
Retention of key employees is integral to the success and growth of the business.
Continued income for family members in the event of premature death or disability of the business owner and/or their partners.
The transfer of business interests to a family member or trusted employee/partner to ensure that the business is a going concern and continues to provide income during retirement of the primary partner.
A formalization of the business owner’s wishes and intent to surviving partners and family members
The strategies and techniques available to small business owners for retirement planning.

Results of Failing to Plan

Running a business is challenging enough … and the time and monetary resources required to create succession plans seems like time off task. But the reality of failing to plan creates this:

Lack of liquidity to facilitate the purchase of business interests by surviving or remaining partners, leaving family members with an unmarketable interest in the business.
Confusion and disagreements as to deceased partner’s intent for successors and other family members involved in the business and their ongoing roles.
Loss of control of the business upon premature death of the owner.
Inability to retire comfortably when desired.
Loss of tax-advantageous transfer techniques that require advanced planning and structure…prior to the death of the owner.

Creating a Legacy

What do you want to happen regarding the future of your business?

While you’re still an active part of the business
When you decide to retire
If something happens to you (your death or disability)

Q. What would be the impact on your family of this business failing on your death or disability?

Q. What is your business worth? How do you arrive at that amount?

Q. What would happen to your business if Key Person or Key Persons were suddenly gone? Are you insured against that loss

Q. How would the current debt of the business be paid if you are not around?

Q. Is your current retirement plan up to date and is it performing the way you intended?

Q. Do you need additional tax deductions related to your business?

Q. Are you rewarding and motivating your employees so that the business is able to retain them long-term?

Q. How many family members are currently involved in the business? Will this change in the future?

Q. Loss Protection: what techniques are in place now, above and beyond the replacement of the physical property, inventory and location of the business?

Q. What estate planning have you done in regards to your personal or business assets?

Q. Have special provisions with specific regard to your business been made in your legacy planning?

download

February 22, 2021

2021 Long Term Care Tax Deductibility

Article Updated: January 7th, 2021

2021 IRS Tax Deductibility Amounts Announced

As a way to encourage more people to plan for the financial costs and burdens of aging, the federal government has made several tax benefits available. The Internal Revenue Service (IRS) announced its annual inflation adjustments for the tax year 2021 for taxpayers eligible to deduct the cost of qualified Long-Term Care Insurance policies. These numbers also apply to the eligible amount of an LTC Insurance premium reimbursable by Health Savings Accounts or an employer-funded Health Reimbursement Account (HRA). Long-Term Care Insurance has attractive tax treatment under IRC 7702(b). Premiums can be tax deductible if you have enough medical related deductions, you are self-employed or own an LLC, S-Corporation, or C-Corporation. Individual taxpayers are allowed to deduct the cost of their policy (and that of a spouse) as part of their medical expense tax deduction. Medical expenses that exceed 10 percent of adjusted gross income are eligible.

Tax Incentives for Self-Employed and Businesses Available

Those who are self-employed (file a schedule C) or own an LLC, S-Corporation, or C-Corporation have more extensive deductions. This also applies to eligible spouses. Regular C-Corporations can deduct 100% of the premium. Otherwise, the IRS publishes a chart each year that shows the amount deductible based on age.

This chart will apply to all other corporations, self-employed individuals, and individual taxpayers as part of their eligible medical expenses. If you own a business and have employees, you do not have to offer this benefit to anyone other than yourself, unlike other insurance benefits. However, you can elect to offer Long-Term Care Insurance to certain individual employees as a “golden parachute” benefit.

The IRS has Increased These Amounts for 2021

Age at end of 2021	2021 Limit	2020 Limit
40 or less	$450	$430
41 – 50	$850	$810
51 – 60	$1,690	$1,630
61 – 70	$4,520	$4,350
More than 70	$5,640	$5,430

Benefits Generally Tax-Free

Tax-Qualified Long-Term Care Insurance benefits are generally tax-free. However, some policies pay a cash amount or indemnity once you qualify for benefits. The tax-free maximum allowable amount for 2020 is $400 a day, or the actual cost of care, whichever is higher.

Health Savings Accounts

Many employers are offering Health Savings Accounts as a way to lower the cost of health insurance. Many people are unaware that the pre-tax money in a Health Savings Account can be used to pay for qualified Long-Term Care Insurance premiums. The amount that is reimbursable through your HSA is based on the IRS chart depending on your age. The IRS also announced new, higher HSA contribution limits for 2021. You can contribute $3,600 for individual coverage for 2021, up from $3,550 for 2020, or $7,200 for family coverage, up from $7,100 for 2020.

Employer HSA contributions are not treated as taxable income but do count toward employees’ annual contribution limit.

What Happens After Age 65?

Once you turn age 65, you can use the funds in the HSA in any way you wish. While you are no longer required to use the HSA funds only for qualified health care expenses and Long-Term Care Insurance premiums, many people will often continue to do so since the money comes out tax-free. Plus, you get to use the pre-tax money in the account to also pay for your Medicare Supplement.

Some Hybrid Policies Have Additional Tax Advantages

Other types of policies exist which have more limited tax advantages, including asset-based or “hybrid” policies. These plans are life insurance policies or annuities with riders for long-term care. In addition to the long-term care benefit, there is a death benefit. Since these plans follow federal tax guidelines (IRC 7702(b), a portion of the premium dedicated to long-term care may be deductible. The benefits from hybrid policies, like traditional Long-Term Care Insurance, come tax-free. However, life insurance policies which have a chronic illness rider (IRC 101(g), just accelerate the death benefit when a person meets the benefit trigger. IRC Section 101(g) riders will sometimes provide accelerated death benefits upon either terminal illness or chronic illness. In some cases, they require a chronic illness to be terminal or with zero chance of recovery. Some of these policies also exclude benefits for cognitive supervision. These plans would not be eligible for tax deductions. Limited duration, or short-term plans, which provide a one or two-year long-term care benefit, also are not generally deductible. Still, their benefits remain tax-free based on actual expenses being incurred.

Always consult a professional tax advisor to review your specific situation.

Rate Stabilization Rules for Today’s LTC Insurance

Today’s Long-Term Care Insurance is not only affordable but is rate stable. Rate stabilization rules are in place in most states. Today’s policies are priced based on the extreme low-interest-rate environment that adds additional rate stability. The chance of future premium increases in the future is small. Without Long-Term Care Insurance, you will pay for future long-term health care from income and savings, or your family will become caregivers. In some situations, you may have both paid care and family caregivers. Neither option is ideal, and the consequences on family and finances can be enormous. Affordable Long-Term Care Insurance safeguards your retirement accounts (401(k) IRA SEP) and other assets as it reduces the stress otherwise placed on your family members.

Cost of Long-Term Health Care Depends on Where You Live

The cost of long-term health care is very expensive but varies depending on the type of care and where you live. The best time to obtain coverage is well before your retirement, ideally in your 40s or 50s, to take advantage of low premiums and the most affordable options. Since there are many options and types of available plans, you should seek a qualified Long-Term Care Insurance specialist to help you navigate these options and help you find the best coverage at the best value.

download

February 22, 2021

When Golden Handcuffs Makes Sense

What Is Nonqualified Deferred Compensation?

Nonqualified deferred compensation is an arrangement established by employers to provide retirement income and often death and/or disability benefits to selected managers or highly compensated employees. When it’s properly arranged, the employee can defer income taxation until the benefits are paid.

Deferred compensation arrangements are “nonqualified,” which means they don’t have to be preapproved by the IRS, and employers can favor selected employees without risking claims of discrimination. Also, when properly arranged, they are exempt from nearly all of ERISA’s regulatory requirements.

How Does It Work?

A nonqualified deferred compensation arrangement typically provides that an employee will receive a stipulated sum for a fixed period of time—or for life—beginning at a future date, such as the employee’s retirement. If an employee dies after payments have begun, the arrangement may direct that the remaining benefits be paid to the employee’s beneficiary.

The arrangement may provide that the employee will receive future compensation as a result of a current salary reduction or in lieu of a bonus or salary increase. This is sometimes called a “true deferral arrangement.”

An alternative is a “salary continuation arrangement.” Here, the employer commits to pay future compensation to the employee in addition to current earnings, which aren’t reduced by participation in the arrangement.

What’s the Tax Picture?

Generally speaking, the deferred amounts in an unfunded plan are includible in the employee’s gross income when they are actually or constructively received. The deferred amounts in a funded plan are currently includible in the employee’s gross income unless they are subject to a substantial risk of forfeiture.

The employee can lose income tax deferral if the arrangement doesn’t follow the rules of IRC §409A (for example, if an employee has control over deferred amounts or has early access to them).

Amounts deferred under a deferred compensation plan will be includible in the employee’s gross income for all tax years in which such amounts are not subject to a substantial risk of forfeiture if the plan fails to meet (1) distribution requirements, (2) no-acceleration-of-benefit requirements, and (3) election requirements.

The rules only permit distributions upon separation from service, death, disability, a fixed time specified in the plan, a change in ownership or control of the employer, or an unforeseeable emergency such as a severe financial hardship. Distributions at any other time will result in loss of income tax deferral.

The plan must not permit a prohibited acceleration of any payment or schedule of payments. Therefore, the plan administrator may not be given discretion over the timing of benefit payments that could result in an acceleration of payments

When Should the Deferral Election Take Place?

To achieve income tax deferral, the employee must generally make the election to defer compensation no later than the end of the preceding tax year.

In the first year of eligibility, the employee can make the initial deferral election within 30 days of becoming eligible and it will apply to compensation for services subsequently performed.

What’s the Conclusion?

Even with the tax law placing restrictions on the distribution of benefits, nonqualified deferred compensation arrangements remain an effective way to reward and retain valuable, highly compensated employees on a selective basis.

full article