Navigating the New Tax Act


The Tax Cuts and Jobs Act of 2017 introduced some big changes in the tax law, creating both confusion and opportunity for financial planning professionals.  You will find links at the end of this blog to several excellent resources that will help you navigate through the three broad categories of life insurance planning that are most dramatically impacted by the new tax laws:

  • Personal insurance
  • Estate planning
  • Business-related insurance

But to begin, a review of important tax laws that didn’t change.

  1. Life insurance death benefits remain income tax-free, with rare exceptions (e.g. transfer for value).
  2. Life insurance cash values continue to accumulate income tax-deferred while the policy is in force.
  3. Non-MEC life insurance policy loans are generally not subject to income tax as long as the policy is in force.
  4. Non-MEC life insurance withdrawals are generally treated as basis first, earnings last.
  5. Annuity cash values continue to accumulate earnings income tax-deferred.
  6. Annuity payments benefit from being taxed using the exclusion ratio.
  7. Tax treatment of long-term care insurance and riders, as well as related coverages (e.g. chronic illness) is unchanged.
  8. Death benefits paid on life insurance policies owned by individuals or entities other than the insured are excluded from the insured’s estate tax bill.

Personal Insurance


While there was a head-spinning number of changes to the tax laws regarding individual income taxes, very few of those changes have much impact on the practice of personal life insurance planning.  Prudential’s Insights and Ideas publication sums it up by simply saying that the beat goes on –

‘Life insurance can provide the potential to accumulate cash value that can be used to supplement retirement income accumulation vehicles such as annuities and investments in the client’s portfolio.’

An excellent resource summarizing the individual tax law changes is Principal’s Individual Income Tax Provisions Highlights.

Estate Planning

Anyone acquainted with estate planning knows that one of the most changeable numbers in the US tax lexicon over the past century has been the amount of the estate tax exclusion.  Sure enough, that number has changed again.  Doubling the estate tax exclusion to $11.2 million per individual, $22.4 million per married couple, may seem to have a dramatic impact on the application of life insurance solutions to wealth transfer problems.  But, as the commentary below observes, the increase is temporary, casting yet another shadow of uncertainty on what exactly a client should do now.

‘Estate planning involves more than just planning for federal estate taxes. Even though the exemption is set at a relatively high level, many needs often addressed by estate planning remain. Life insurance, owned inside or outside of the estate (depending on your situation), may help solve many other wealth transfer problems.’ – Principal

‘For those clients with more than the federal estate tax exclusion amount ($11.2 million for single taxpayers, $22.4 million for married taxpayers), the additional amount that they are now allowed to gift provides many opportunities. Including . . . establishing new trusts to help accomplish their planning objectives.’ – Prudential

‘With the uncertainty in the estate tax environment, now might be an appropriate time to help clients engage in planning for any asset and estate transfer, aiming for flexibility. Planning with life insurance is still valuable to address possible state estate taxes, needed liquidity at death for business purposes, charitable giving and wealth transfer to family members. Knowing that these provisions sunset after 2025, care should be taken before reducing any death benefit face amounts or canceling any existing coverage.’ – AXA

Business-Related Planning


Both Corporations and Pass-Through Entities are likely to benefit substantially from the new tax laws, opening the door for increased uses of life insurance in business continuation planning, executive compensation, key employee insurance, and retirement planning.  The new tax bracket disparity between the highest individual and corporate rates will make business-funded arrangements, such as COLI and Split Dollar, more attractive.

‘For clients’ businesses that are incorporated with net income over $50,000, the new lower tax rate could offer tax relief – leaving more of their profits to be allocated to other assets such as Key Person and/or Executive Benefit programs such as Non-Qualified Executive Benefits and the permanent funding of buy-sell arrangements. The rate differentials may drive more interest into Split Dollar plans.’ – AXA

‘With a lower business tax bracket, some business owners may revisit their qualified plans if these plans are the primary vehicle for their retirement funds. With the sunset provision for lower individual income tax rates, business owners may be receiving qualified retirement distributions in a higher tax bracket. A simple nonqualified bonus plan funded with life insurance may be attractive as a supplement to qualified plan benefits.’ – Principal

Riding into the Next Sunset

We can think of no better way to sum up the opportunity at hand than this from Principal –

Life insurance, owned inside or outside of the estate (depending on your situation), may help solve these needs (among many others):

  • Creating liquidity for the payment of state estate and inheritance taxes
  • Providing for spouses, children and other loved ones
  • Addressing special needs planning
  • Protecting multi-generational planning
  • Providing liquidity planning for income taxes
  • Equalizing inheritances
  • Protecting assets in an estate
  • Navigating second marriages
  • Planning for same-sex couples
  • Protecting non-citizen spouses
  • Augmenting supplemental retirement income
  • Increasing charitable giving
  • Planning for education
  • Supporting healthcare planning (e.g., chronic illness)
  • Funding business protection and business succession planning

Stay tuned for more from Windsor, as we introduce a wealth of new marketing ideas and campaigns for 2018, centered on new opportunities and the enduring advantages of life insurance.

Prudential Advanced Markets Insights and Ideas – Congress Passes Tax Cut Act – Overview, Observations, Initial Action Steps

Lincoln Advanced Sales Overview – Tax Cuts and Jobs Act

AXA Final Tax Bill eNotice

Principal Individual Income Tax Provision Highlights

Principal Estate and Gift Tax Provision Highlights

Principal Business Tax Highlights


Moving the Ball

-by Woody Wodchis

American football game

I recently had a conversation with Dusty Farber regarding a business case – one that moved from being “stuck in the mud,” to being a bigger deal than originally anticipated. We talked about how so many routine cases could chew up time, often because all the necessary information isn’t readily available for clients and advisors to make an informed decision.  Dusty gave me an example of exactly this scenario, and the approach he took to get his clients to take action and move forward with not only their business planning but their personal planning as well.

Dusty was introduced to two partners who had started a clothing distribution business approximately eight years ago. They had implemented a buy-sell agreement a couple of years into the business, based on the estimated business value and a multiple of compensation. As a result, both partners (one in her thirties and the other in her fifties) purchased $1,000,000 of term insurance. As time passed and the business became more successful, the partners asked Dusty to review their buy-sell agreement and any other business protection needs.

Knowing that the business was on the small side, Dusty was prepared for the “valuation discussion,” one that he previously had hundreds of times in his career. “Business owners always overestimate the size of their business,” says Dusty, “and based on my gut instinct, I knew there was no way they would be willing to pay $10,000 – $15,000 for a proper valuation. But since the referral source was a good one, I wanted to help these clients.”  Still, it was difficult for Dusty to make recommendations without knowing more about the business, including how much it had grown over the past several years.

Having been in this situation before, Dusty pulled an arrow from his quiver that he had used several times previously – a business valuation/buy-sell review service, offered by a leading and highly respected life insurance company.  The clients agreed to do the review and Dusty was not only able to bring a valuable process to the table, but also a professionally done deliverable. Having used this service many time before, Dusty offered this: “My best guess is that these valuations are within 10-15% of the real value, and are light or heavy based on the industry and relevant expertise. The recommended death benefit can always be adjusted based on what we know about sales and revenue trends.” Both the clients and advisors were pleased with the report and, as a result, implemented $2,000,000 of term life insurance on each partner. Football Equipment and Chalk Board Play Strategy BackgroundThe business valuation/buy-sell review helped to quantify their protection needs and bring context to the planning process or as Dusty puts it, “The report moved the ball and the price was right.”

And there’s very good news about that price.  The Business Valuation/Buy-Sell Review is a complimentary no-cost service from the Principal Financial Group.  The process is easy as Dusty attests. “Everything is submitted electronically – you just need three years of financial statements or tax returns, and then press a button. Principal’s attorneys and CPAs in their Advanced Solutions department review and have an informal business valuation back to you in five to seven business days.” Dusty also added another important point.  “The cool thing is that, besides coming up with a valuation number, they also review the existing buy-sell documentation and recommend important updates and changes.  Those reviews take roughly 20 business days.”

There’s more to the story. The clients asked Dusty to review their personal and estate planning needs as well. The legal work to update the buy-sell agreement, and draft trusts and wills resulted in fees of $15,000, which went to the attorney who first brought Dusty into the case.  Additional life insurance  purchased by the clients and spouses brought total commissions earned on the case up to the $40,000 range. With a smile, Dusty reminded me that, “we haven’t put the DI in place yet.”

Dusty has used the Principal service six times and sold insurance to the respective clients five times – not a bad batting average.  Even though this professional service is at no cost, Dusty never felt pressured to sell Principal products. “I never felt any heat to recommend or sell Principal’s product – it just never came up in the process.”  In this case, because of competitive pricing combined with flexible underwriting, Principal did earn the bulk of the $40,000 in life premium and is looking good for capturing the Disability Income business as well.

Football Player

Need to move the ball on a business case?  Take advantage of the Business Valuation/Buy-Sell Review service from the Principal Financial Group. Let us know how we can help!


Navigating 101(j) – an ounce of prevention can avoid a ton of liability

-by Ron Bielefelt


I was very annoyed.  It was the first application that I took for a key-person life insurance policy after August 18, 2006.  The underwriter kicked the application back because the insured-employee did not sign the “Notice and Consent” form, acknowledging that the employer was both the owner and beneficiary of the policy. When I suggested to the underwriter that we get this signature at delivery, he informed me that the policy would not be issued until the signed “Notice and Consent” was received.  This was bull, I never had to get this form in the past.  So, what was the big deal?

It turns out that this is a very big deal.  The rules had changed, and a new subsection had been added to §101 of the Internal Revenue Code.  The general rule of that subsection is that employer-owned life insurance death proceeds are taxable to the beneficiary to the extent they exceed cost basis, unless the requirements of 101(j) are met.  So where did this subsection come from?  Previously, my knowledge of 101(j) was non-existent – I even thought it might be an off-ramp on the famous 101 freeway in Los Angeles.  Knowing that I couldn’t change the map, I needed to learn more and find a way to navigate my client through 101(j).

Pensive businessman with maze

Here is what I found out.  Congress adopted these rules to prevent the perceived abuses of what was sometimes referred to as “janitor life insurance,” issued  for windfall profits.  These plans proliferated in the 1980’s as a form of Corporate-Owned Life Insurance, or COLI.

In a typical broad-based leveraged COLI transaction, a corporate employer would purchase policies on masses of lower-level employees, sometimes without the employees’ knowledge or consent. When an insured employee died, the company received the death benefits, and the employee’s family typically received either a small portion of the proceeds or nothing. These policies could remain in place even after the employee quit or retired.

In 2006, this all changed.

The COLI Best Practices Provision within the Pension Protection Act of 2006 became law on August 17, 2006. This provision was designed to codify industry best practices regarding employer-owned life insurance and amend the Internal Revenue Code by introducing conditions that must be met in order to exclude from gross income the proceeds from business-owned life insurance. The Act amended Section 101 of the Internal Revenue Code by adding subsection (j), “Treatment of Certain Employer-Owned Life insurance Contracts.” Briefly, the new subsection treats all employer-owned life insurance death benefits as taxable income, to the extent the proceeds exceed the premiums paid.  It also provides for exceptions to this rule, most notably requiring that the insured-employee sign a “Notice and Consent” form acknowledging that the employer is the owner and beneficiary of the policy.

[Related: The New Law for Business Life Insurance: Understanding Section 101(j) and Repairing Noncompliance]

Because of that change, employers today who purchase key person insurance and other forms of employer-owned life insurance need to watch out for a potentially costly trap — if the proper forms aren’t completed before the policy is issued, the death benefit is taxable, when it would otherwise be tax-exempt.  “The result is draconian,” says Jonathan Forester, a tax lawyer with Greenberg & Traurig in McLean, VA.  “If you’re expecting a death benefit of $10,000,000 and the IRS says you owe taxes, giving up 50%, if you’re a widow counting on these proceeds, that’s devastating.”

In a recent conversation with a hedge fund manager who bought $100 million of corporate-owned life insurance on his partner, but hadn’t complied with the rules of §101(j), we mulled over the options available to remedy the problem:

  • Go back to the carrier to get the policy reissued – providing that the carrier is willing and able to do this.
  • Cancel the original policy and issue a new one hoping that the employee is still insurable.
  • Do nothing and hope for the best – a gamble you do not want to take.

As you can see, the options are limited, difficult and potentially downright dreadful.  Now, I am no longer annoyed and have accepted reality. IRC Section 101(j) is far more important than my original take, and compliance with its requirements before policy issue is imperative for both you and your client.

An ounce of prevention avoids a ton of liability.

An excellent resource on §101(j) is a “White Paper” from Principal Financial Group.  It is a comprehensive piece that covers most of the details of IRC Section 101(j) in a “Question and Answer” format.  For example:

  • If the general rule of Section 101(j) is that employer-owned life insurance death proceeds are taxable, then how do death proceeds payable to an employer, from employer-owned contracts, qualify as tax-free under the general rule of IRC Section 101(a)?
  • Are death benefits from employer –owned policies payable to an insured employee’s heirs eligible for tax-free treatment under 101(j)?
  • What information must be furnished to the IRS in order to meet the new information return requirements?

As you complete annual reviews for your business clients there may be opportunities where replacement of non-compliant policies could save your clients thousands if not millions in income-taxable death benefit.  It will be worth your time to know the rules.

Download the “White Paper” and become familiar with Section 101(j). There are opportunities waiting for you.


The State of Estate Planning – 2017

You probably feel as if the field of Estate Planning is in turmoil right now – uncertainty about income taxes, estate taxes and wealth transfer solutions seems so disruptive that Larry Brody, a widely respected estate planning practitioner, has titled an upcoming  presentation:  “What the Hell Do We Do Now?”confusion1

Is it really that bad?  Well, here are links to two excellent and recent AALU publications that may help answer that question.

The takeaways, first from the Survey: “Even in the face of major tax reform, clients and their advisors should remain optimistic and steadfast in their approach to implementing life insurance and legacy planning. Flexible, multi-faceted planning that can address both practical and tax issues is at a premium. Life insurance remains an ideal solution because of: (1) its unique attributes (instant, mortality-based liquidity and cash accumulation and death benefit payments on a tax sensitive basis) and (2) its ability to serve many critical objectives (tax, retirement, and liquidity planning, investment management and diversification, and family security).”

And from the Heckerling Institute: “Overall, Heckerling presenters were optimistic regarding the current planning environment, particularly as this is not the first time that the estate and life insurance industry has dealt with the prospect or passage of major tax changes (e.g., 2010 and 2012). Many planning approaches, like trusts, estate freezes, and life insurance, are inherently flexible and multi-faceted, and tax changes can actually enhance different structuring options and benefits. Accordingly, this environment should trigger thorough audits of client plans and open the door for a dialogue between allied professionals and clients, with interest in life insurance products continuing as both a solution to practical needs and as a complement to other planning approaches.”

We encourage you to read through both the Survey and the Heckerling Institute summary to help clear up some of the hyperbole and confusion that often arises when there’s talk of major tax policy changes.

Golden key and puzzle

If you’re like us, you’ll realize that 2017 will continue to offer plenty of new opportunities for planning and insurance professionals, no matter which way the wind blows.





A split dollar power play made Jim Harbaugh college football’s highest paid coach — what was that about?

– by Marc Schwartz

Last summer ran the headline: Michigan, Jim Harbaugh agree to increased compensation in form of life insurance loan.  We suspect that most sports fans just shrugged and moved on to see how the Cubs were doing, but those of us in the life insurance business sat up and took notice.  After all, we seldom get any press on the business page, let alone the sports page.  And this was indeed big news about a big compensation boost, using a relatively little-known but powerful combination:  Split Dollar and cash value life insurance.

Lightning dollar sign

(Related:  American Institute of CPA’s:  Split Dollar Insurance Plans)

ESPN’s article, though, did not use the words “split dollar” at all, and that was fine.  Sometimes we get  caught up in our own jargon and forget that people outside our industry – clients, CPAs, sports writers, for instance – only care about what the arrangement accomplishes.  Not only did this new agreement make Harbaugh the highest-paid head coach in college football, it left some other notable coaches in the dust.  (USA Today:  NCAA Football Coaches’ Salaries)  In this blog we’ll explain why both Michigan and coach Harbaugh found this unusual approach to be in their mutual best interest, regardless of what the plan is called.

At its simplest the arrangement looks like this:  the university loans $2 million a year to the coach for seven years in the form of premiums paid for a life insurance policy on the coach’s life.  The coach will pay no interest to the university, and will instead be required to pay tax on that unpaid interest as imputed income from the university.  The rate used to calculate that imputed income is determined in the Internal Revenue Code and published monthly by the Treasury Department as the Applicable Federal Rate (AFR).  In return, policy values secure the loan – both the cash values and the life insurance death benefit can be used to repay the loan, should the university and coach part ways, though there are additional strategies to exit the arrangement that might prove less painful.  For the coach, you can see the advantage to this right away:  life insurance payable to his spouse and children, cash value growing inside the policy tax-deferred, with the potential  to use that cash value in the future (preferably after several national championships).  All in return for the tax bill on the imputed income from foregone interest, based on what are currently very low interest rates (the February 2017 AFR for this kind of loan is a little over 1%).

So what’s in it for the university?  First, the arrangement ties the coach to the school for several years in order for all of the numbers to work to the coach’s full advantage.  The life insurance benefit is there from day one, but there is much more of a reward, in the form of potential equity available for tax-free policy loans when the coach retires, along with substantial long-term life insurance death benefits for the coach’s family.  Take a look at the sample presentation we have put together for a similar plan using an Index UL product to get an idea of how attractive this can be over the coach’s lifetime, and how much of an incentive it can be to keep the coach close to home.  Second, the university’s loans are secured.  The values in the policy provide the university with some assurance that its investment may be recovered if things don’t work out as planned.

While it may be a surprise to find this kind of insurance-based solution headlining the sports page, such plans have broad application in executive compensation arrangements for all kinds of businesses.  In fact, the more attractive it becomes to spend money at the corporate/business level (because of lower corporate tax brackets), the more effective such plans can be.  So, the next time you are looking for a life insurance solution that can strengthen the executive-employer relationship and provide an incentive for a valued employee to stay on until retirement, remember the University of Michigan, coach Harbaugh – and Windsor.








At Halftime, IRS Blanked on the (Tax) Court

– By Marc Schwartz J.D. CLU, and Marty Flaxman J.D.

A recent tax court case ruling in favor of the taxpayer in an intergenerational Split Dollar arrangement has propped open a “discounting” planning door that, up to now, the IRS had tried to slam shut.  In the Estate of Clara M. Morrissette et al v. Commissioner, the tax court ruled that an intergenerational Split Dollar arrangement is covered by Split Dollar Regulations Section 1.61.22.  In plain English, the ruling establishes that single-premium life insurance policies, held in irrevocable trusts, can be taxed under the Split Dollar Economic Benefit regime, and are not required to use the Loan regime, as the IRS had insisted.   For the taxpayer this was very good news.  Here are some of the facts, courtesy of AALU’s Washington Report (WRN 16.05.10_1) from 10 May, 2016.

Gavel With American Banknote And Book

“Three dynasty trusts were established on behalf of the decedent, one for each of her sons. In 2006, six non-equity economic benefit so-called intergenerational split-dollar arrangements were created between Clara Morrissette’s revocable trust and each of the dynasty trusts. Her revocable trust advanced a total of $29.9 million as one-time single premiums to the dynasty trusts to enable them to purchase insurance on the lives of each of her three sons.  Clara died in 2009 with the arrangements still in place.

“The estate valued the amounts receivable by the revocable trusts from the dynasty trusts at $7.497 million. The IRS argued the arrangement was a gift at inception for the full $29.9 million dollar amount of the advances. That determination resulted in a gift tax deficiency of $13.8 million and a penalty of $2.7 million. The estate disputed the deficiency by filing a petition in Tax Court.

“The estate filed a partial summary judgment motion with the Tax Court confirming that the arrangements were in fact economic benefit split-dollar arrangements under Treasury Regulations Section 1.61-22, and the court entered a summary judgment in favor of the estate.

The IRS’s argument was essentially preemptive.  “The IRS has been arguing for most of a decade that single premium split-dollar arrangements could not use the economic benefit regime of the Regulations, but instead had to use the loan regime, because they provided ‘other benefits,’ or alternatively that the single premium payments ‘prepaid’ all future economic benefits provided under the arrangement, or that since future premiums had been prepaid, the arrangements were, in effect, reverse split-dollar arrangements, and under Notice 2002-59, term costs could not be used to measure the benefit to the donee trust.

“If the loan regime applied, since no interest was provided, the arrangement was a gift term loan under the Regulations, with the discounted present value of all of the imputed interest treated as a gift in the first year of the arrangement; if the single premium prepaid future economic benefits, they were all gifts in the first year of the arrangement.”

The tax court disagreed with the Service’s position and ruled in favor of the taxpayer.  But the tax court pointed out very early in its opinion that it was ruling only on the applicability of the Split Dollar regulations to the arrangements, and not on the discounted gift valuation by the taxpayer’s estate.   The appropriateness of that discounted valuation, which is really at the heart of the dispute, has yet to be decided.  If, however, that future decision comes down in favor of the taxpayer, “this technique may become a major means of transferring significant amounts of family wealth at greatly reduced tax costs.” (op. cit. AALU Washington Report)

In the meantime, the Morrisette case, as it stands today, provides an effective way to pay substantial premiums using intergenerational Split Dollar arrangements without incurring large gift tax liabilities and is very likely something of interest you can discuss with your centers of influence.

We’ll keep you apprised of what happens next on the discounted valuation issue.  Stay tuned.