Often, family members or close friends want to help you by gifting to your child or leaving an inheritance to them. Though this generosity may be appreciated, there can be unintended side effects of gifting outright to someone who has special needs. 

Outright gifts can affect your child’s eligibility for some government benefits if they are 18 or older. This is important to keep in mind because frequently an adult with special needs cannot earn enough income working to meet their own basic living expenses. Medicaid and Supplemental Security Income (SSI) are needs-based government programs designed to cover costs related to food, shelter, and medical care. 

These benefits can be valuable by alleviating some of the financial burden that falls on you as the parent. In turn, they allow you to focus your own financial planning around supporting your child with supplemental expenses not covered by these benefits, saving for your retirement or your future long-term care costs, or providing for your other children. 

Outright gifting also raises concerns about who will manage the assets that are given to the individual and how they will be protected from fraudulent attempts or creditor situations. There are planning strategies that can help with these areas. These strategies cover two categories: those gifts or inheritances that have already been completed, and future gifts and inheritances. 

Completed Gifts and Inheritances

With completed gifts and inheritances, different considerations apply depending on whether your child is a minor or an adult. If you have a minor child who has received gifts or inheritances in their name, the money might be held in a Uniform Gift to Minors Act (UGMA) account or Uniform Transfer to Minors Act (UTMA) account. Any money deposited into a UTMA is an irrevocable gift, which means, even though you’re the parent, you cannot simply transfer the assets into your own account. Instead, the strategy to consider is using these accounts to cover expenses before your child reaches the age of majority. The idea is to allow them to benefit from this money now, while it is shielded from the Medicaid and SSI asset tests. In order to qualify or to continue to qualify for these government benefits when your child reaches age 18, they typically cannot own more than $2,000 in assets. 

If your child received a larger windfall that will not be spent down in time, or if they are already close to adulthood, you may want to consider a “self-settled” special needs trust. This is a trust that is set up by a parent or grandparent where the child is the beneficiary. This trust is funded using your child’s own assets. 

An attorney can help you decide which type of self-settled special needs trust is best. There will be specific language written into the trust document that limits the use of the trust to those expenses not covered by government benefits. If there are any remaining assets in the trust after the life of the beneficiary, the money will first pay back the expenses covered by Medicaid before being disbursed to the remainder beneficiaries. 

Future Gifts and Inheritances

For those gifts or inheritances that have not yet been completed, you can plan in advance by establishing a “third party” special needs trust, where your child is the beneficiary. This trust is funded using assets that are not owned by your child. Like the self-settled trust described above, the attorney who is helping establish the third-party trust should include specific language limiting the use of the money to supplement, not replace, income provided by SSI or Medicaid. Unlike the self-settled trust, any money that remains in the trust will not be used to repay Medicaid. Other remainder beneficiaries are named to receive the leftover assets. 

The assets in both trusts will be protected against creditors should an issue arise with your child in the future. There will also be a trustee named who will oversee the money. This function protects your child if they are unable to manage their own finances or if they are susceptible to fraudulent phone or email attempts to obtain money. 

You will likely name yourself as the trustee so that you can manage the investments and make withdrawals to cover your child’s supplemental expenses. Keep in mind that any payments from the trust should be made for the benefit of your child only and should be paid directly to the service provider. 

You will also name a successor trustee to step in, if something were to happen to you. This person should be familiar with your child and have no conflicts of interest with the money. The person should be financially competent and agree to serve when the time comes. You may also want to consider a professional or corporate trustee as a co-trustee. This trustee can act as the investment manager of the assets or take over the administrative tasks surrounding the trust and help with the coordination of SSI and Medicaid benefits. 

Having a corporate trustee can provide some relief to the other trustee who may have other responsibilities to focus on. An alternative option is to name a “trust protector” who can advise the trustee on issues around investments and government benefits. The trust protector will not have any legal authority over the trust but can provide support when needed. 

Finally, the trust should be accompanied by a Letter of Intent, written by you. This is not a legal document, but it outlines, in specific detail, your wishes for your child when you pass away. This document will be helpful for your successor trustee and other family members who will be supporting your child. 

There are many complexities surrounding special needs trusts and special needs planning in general. Be sure to seek guidance from professionals who have expertise in this area. To learn more about how the advisers at Modera can help you, contact us at advice@moderawealth.com. 

Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. 

For additional information about Modera, including its registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money. 

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accountingrelated matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

Below I’ve outlined four main areas to focus on when assessing your tax situation. A Certified Public Accountant (CPA) or a tax adviser who is familiar with special needs planning is an important person to have on your financial team. This tax professional can help to ensure you’re taking advantage of all tax deductions that you are eligible for and that you maintain them in the future. 

Medical Expenses 

As of 2019, an itemized deduction is available for medical expenses greater than 10% of Adjusted Gross Income (AGI). For many this is a large hurdle to overcome, but for someone with costs related to a disability or special need, you may be spending double the amount of a typical taxpayer. The key is to be diligent in tracking your medical expenses, obtaining documentation of physician recommended expenses, and planning ahead with your CPA. 

Examples of deductible medical expenses are: prescription drugs, over the counter insulin and/or syringes, dental costs, psychological or psychiatric services, premiums paid for Medicare Part B, and the cost of guide dogs, wheelchairs, etc. Keep in mind that you cannot deduct expenses for non-prescribed medicines, drugs, vitamins, or health foods. 

Some medical expenses that are deductible are often overlooked. These include costs related to special schools and institutions, capital expenditures, medical conferences and seminars, nursing home expenses and long-term care costs, and medical travel and transportation. 

• Special schools and institutions: If your child attends a qualifying special school, you may deduct the entire unreimbursed cost as a medical expense. In addition to tuition, the costs can include lodging, meals, transportation, incidental education costs, supervision at the school, treatment, and training. Private tutoring expenses may also qualify. 
• Capital expenditures: If a physician recommends that a capital improvement should be made to your home for medical reasons, you may deduct the cost in excess of the increase in your home’s fair market value (FMV). If the recommendation is to remove structural barriers, the full cost may be deductible. An example is installing a lift for someone with a physical limitation. The full cost of the lift and installation may be deductible. The ongoing costs to maintain it may also be deductible in subsequent years, if a medical reason still exists. 
• Medical conferences and seminars: If your doctor recommends that you attend sessions to learn more about your dependent’s medical condition in order to assist them, the cost of attending these conferences and seminars, including transportation, is deductible. Lodging and meal costs are not. 
• Nursing home and long-term care: Expenses incurred in a nursing home or long-term care (LTC) facility are deductible if you are chronically ill or the facility is primarily for medical care. In most cases, facilities primarily provide custodial care. The medical care component specifically may be deductible if separately stated on the bill. You may also deduct a portion of the cost of LTC insurance premiums. 
• Medical travel and transportation: The cost of travel to a medical facility, not including trips to improve general health, is deductible. If you use your own personal automobile, you may deduct a certain amount based on miles traveled. Unlike for medical conferences and seminars, a portion of lodging costs for you and one other person may be deductible, if an overnight stay is required. The meals during your stay, though, are not. 

In addition to tracking expenses for a deduction, you should consider a Flexible Saving Account (FSA) to set aside pre-tax money to directly lower your taxable income. This account is used to cover medical expenses throughout the year. Keep in mind that the full account balance must be used by year end. 

Impairment Related Work Expenses (IRWEs) 

You may also deduct expenses that are necessary for you or your dependent with special needs to be able to work. Examples include attendant care services required to prepare for work or required while you work, a reader if you are blind, transportation costs, service animals, medical devices, medication, or other expenses that are necessary in order to do your work satisfactorily. This deduction is considered a business deduction and is not subject to the 10% of AGI limitation. 

Retirement Plan and IRA Distributions 

If you withdraw from a qualified retirement plan or Individual Retirement Account (IRA) before age 59 1/2, your distributions are subject to a 10% penalty. A penalty waiver may apply, if you meet the definition of disability from the Social Security Administration and are receiving Social Security Disability (SSDI). 

A penalty waiver may also apply if you have substantial medical expenses. If distributions are used for medical care, the penalty is waived on amounts less than or equal to your allowable medical expense deduction (excess of 10% of AGI). This holds true whether you are eligible to itemize your deductions or not. Before withdrawing from a retirement plan, you should speak with your CPA and financial planner to determine the best strategy. 

Refundable and Non-refundable Credits 

There are two refundable credits you may be able to take advantage of in 2019: The Earned Income Tax Credit (EITC) and the Child Tax Credit. Both are subject to income phaseouts. 

• The EITC amount depends on your earned income and the number of qualifying children you have. 
• The Child Tax Credit applies to each qualifying child, under age 17. There is also a nonrefundable credit for a qualifying dependent, such as a child over 17 years old or a parent. 

There are two non-refundable credits that may also benefit you in 2019: The Child and Dependent Care Credit and the Adoption Expense Credit. Again, both are subject to income phaseout. 

• The Child and Dependent Care Credit is designed to relieve the burden of two-earner families who incur dependent care expenses. A qualifying dependent is either under age 13, any age if the person is physically or mentally incapable of self-care and qualifies as a dependent, or a spouse who is physically or mentally incapable of caring for themselves. 
• The Adoption Expense Credit may be claimed per child. For a qualified adoption of a child under age 18, expenses related to legal fees, court costs, and other related costs may be eligible for the credit. For an adoption of a child with special needs, you may receive the full credit regardless of expenses. 

There are a few other items that are important to remember when reviewing your tax strategy. If you are elderly or blind, you may claim an additional amount for your standard deduction. If you have high investment income, such as a substantial realized capital gain, you may be subject to the Medicare Surtax. Though the threshold was increased, you may also be subject to Alternative Minimum Tax (AMT) after certain deductions are added back to your income. 

Working closely with your CPA and CERTIFIED FINANCIAL PLANNER™ can help you prepare in advance to create a tax strategy that accounts for all these factors, which may ultimately help to alleviate some of the high costs you may be incurring throughout the year. 

If you need help with tax planning for special needs, Modera advisers who specialize in this area are available to help you. To learn more, please contact us at advice@moderawealth.com. 

Modera Wealth Management., LLC is an SEC registered investment adviser with places of business in Massachusetts, New Jersey, Georgia, North Carolina and Florida. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. 

For additional information about Modera, including its registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov). A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money. 

This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

Did you finance your home, or did you purchase outright with cash? Leverage (loans) works best to purchase appreciating assets like houses or income producing business assets instead of paying cash. 

Do you realize that nearly all private equity and hedge funds use low cost leverage to increase investment returns? Would you like to get $3 to $1 match on your savings contributions? You can! We show you how to thoughtfully increase your retirement savings contributions! Thoughtful Advisors partners with a specialized provider for individuals or households earning $100,000 or more per year. We bring Wall Street finance ethically to Main Street USA. If you could create up to 60% - 100% more income (than you could save on your own) for retirement AND immediately improve the financial security of your family, would you want to learn how? 

What is TTFI? 

TTFI is available to individuals or as a non-qualified employee benefit. It allows clients to maximize their savings dollars with the opportunity for pension-like recurring tax-free cash flow in retirement. TTFI overcomes traditional retirement issues that limit successful savings:

1. Limits on annual contributions 
2. Large contributions are simply unmanageable for many successful earners until they reach their fifties or sixties 
3. Investment market corrections and crashes impair overall returns 

Our $3 to $1 match makes the most of your savings dollars. It creates a larger savings amount that compounds so you can make up for lost time. It provides market gains without market losses. Compounding rates of returns are more efficient with downside loss floor protection.

How It Works 

Client or employee funds five annual payments to their plan. Those payments are combined with low-cost non-recourse bank financing that adds approximately 75% more to the contributions. Low-cost overfunded life insurance policy is the sole security for the loan. Non-recourse loan means the client, employee or business does not sign loan documents and has no responsibility for the loan. Thoughtfully combining low-cost bank financing with top-rated low commission insurance companies and proprietary insurance contracts, provides a much higher probability of achieving savings goals ahead of schedule, while also protecting against the “what if’s” that happen in life. 

Bottom Line…TTFI Provides: 

• More Money - substantially more tax-advantaged income for retirement years 
• More Protection - if something happens unexpectedly to interrupt savings contributions 
• More Confidence - that your retirement cash flow survives economic downturns 

Next Steps 

Contact Gary LoDuca at Thoughtful Advisors by calling 813 251-2600 or email thinking@thoughtfuladvisors.com to learn how to improve the financial security of employees or individuals and how much tax-free income could be added to retirement cash flow using this unique non-qualified retirement plan solution.

This content and information was created by a third party and not The College. The College assumes no legal liability for the accuracy, completeness, or usefulness of any such content and information and the views expressed therein do not necessarily represent the views of The College.

Moreover, the profiles of Black and Brown difference-makers are becoming more and more known, with many standing as household names for communities of all backgrounds. 

In keeping with this wave of change, The American College of Financial Services is proud to announce our President and CEO George Nichols III has been named to Forbes’ inaugural issue of “The Culture 50 List” recognizing 50 Black and Brown champions making an impact on society through capital, creativity, and connections. 

As the State of Kentucky’s first Black insurance commissioner and the first Black president of the National Association of Insurance Commissioners, as well as the first Black president of The College, Nichols continues to use his platform and expertise to call for change in the financial services industry and sustainable, economic solutions that last through The College’s Center for Economic Empowerment and Equality. 

Nichols shares the company of other well-known public figures on the list, including star athletes Dwayne Wade and Colin Kaepernick, Hollywood producer Issa Rae, and more. Read more about George’s accomplishments in the full Culture 50 Champions listing, and get the story behind the recognition here.

College President and CEO George Nichols III spoke with Brad Smith on Yahoo Finance about The College’s efforts, including the progress of the Four Steps Forward initiative from the American College Center for Economic Empowerment and Equality® and Know Yourself, Grow Your Wealth–a new program running through HBCUs across the country.

Watch the full interview now on-demand!

The man who spoke those words, John “Jack” Bogle, founder of The Vanguard Group, and inventor of the index mutual fund, passed away on January 16, 2019, at the age of 89. 

Bogle, who served on the Board of Trustees of The American College of Financial Services from 1981-1987, revolutionized the investment industry and is among the most influential investors of the past century. 

His contributions to the financial services profession have deeply impacted the lives of investors, thought leaders, and countless families saving for their future.

Courtesy of The Institute for Fiduciary Standard via Wikimedia Commons.

With his passing, the faculty at The American College have shared some thoughts on the impact Bogle made on the profession and to them personally.

Dr. Benjamin Cummings, CFP®, Associate Professor of Behavioral Finance

"John Bogle was a visionary who saw a way to make investing more efficient by providing low-cost access to diversified investments. Then he took the risk to start a company built on that philosophy, and it worked, becoming one of the largest investment firms in the world. I made my first retirement investment in a Vanguard mutual fund when I was in college, and I’ve held Vanguard investments ever since. Thanks, John, for helping me and millions of others prepare for their financial future."

Dr. Michael Finke, CFP®, Chief Academic Officer

"The revolution in finance theory of the 1960s made it clear that individual investors needed a way to access the equity market using low cost, well diversified financial products. Bogle stuck with his vision despite adversity and created an institution that gave investors greater retirement security and a company they could trust. Bogle was a reminder that companies can do good and do well by providing consumers with the right investments and embracing transparency and quality."

Dr. Gerald Herbison, ChFC®, CASL®, CFP®, CLF®

"Assistant Professor of Management John Bogle created a way for self-directed investors to save without incurring the costs associated with full-service mutual funds. Vanguard continues to be a company that serves mass market investors in a true low-cost model, which takes discipline that most companies can’t maintain. John Bogle was a visionary."

Theodore Kurlowicz, JD, LLM, CAP®, ChFC®, CLU®, AEP®, Professor of Estate Planning and Taxation 

"The concept of low fee mutual fund investing brought participation in equity investing to the masses. And it certainly enhanced self-investing for the middle class. Accumulating for retirement is an essential step and I personally can appreciate the concept created by Mr. Bogle because of my own retirement planning."

David Littell, JD, ChFC® Professor of Taxation

"John Bogle and Vanguard made investing easy – I certainly appreciated this as a youngster looking to save for retirement. Today as I’m about to retire I certainly appreciate the advice. Contribute regularly, invest in low-cost equity-based mutual funds, don’t look at your statements, and your wealth really will add up over the years. Thanks John Bogle."

Kevin Lynch, MBA, CFP®, ChFC®, CLU®, RHU®, REBC®, CASL®, CAP®, CLF®, LUTCF, FSS, RICP®, Faculty Instructor

"My step father passed away July 24, 2018, just 38 days away from his 94th birthday. His legacy to my sisters and me, financially, included substantial holdings in mutual funds. His largest holding was his Vanguard account. My dad taught me many different things, but one of the most important lessons he taught me, he learned from John Bogle. 'Start early, save regularly, keep your costs low, and never react to market volatility.'"

Kirk Okumura, MSFS, ChFC®, Academic Director

"John Bogle may be the person single-most responsible for democratizing investing, and making investing in securities markets accessible to millions of Americans. He will forever be to me the father of indexing, providing a cost-effective alternative to active management to those of us who subscribe to some version of efficient markets. On behalf of the millions of investors impacted by his contributions to the industry: Thank you, John. You will be missed." 

Dr. Wade Pfau, CFA®, Professor of Retirement Income

"One of my career highlights was being able to award John Bogle with the Consumer Advocate Award from the Retirement Income Industry Association in 2014. Here is an excerpt from my introduction for him: As mutual funds are a dominant element of American retirement plans, the work of John Bogle to develop broadly diversified, low-cost indexed mutual funds at Vanguard has provided the tools used by millions of Americans to meet their retirement goals. John Bogle has played an instrumental role in educating the public about this, including writing one of the fundamental investor education books, his best-selling 'Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor.' John Bogle has dedicated his life and career to serving as a tireless advocate for greater ethical standards, trusteeship, and service from the financial industry. By placing the interests of clients first, John Bogle has demonstrated how to build trust and confidence in financial services. John Bogle reminds us that we are part of an industry designed to help people develop appropriate retirement income strategies by developing our specialized knowledge and skills, formulating best practices, and thinking outside the box."

Ross Riskin, CPA/PFS, CCFC Assistant Professor of Taxation 

"John Bogle truly personified the term 'vanguard.' Not only was he focused on the impact investing and investment costs have on the consumer over the long-run, he was focused on educating consumers and financial advisors, which really hits home for me given what I strive to do as an academic, and especially as I reflect on what The American College stands for. John’s book, 'The Little Book of Common Sense Investing,' has been on my bookshelf for many years as it has served as both a reminder for me of what he stood for and as a resource I have made a part of financial planning courses I have taught and currently teach. While John is no longer with us, his knowledge and wisdom will carry on and I won’t simply remember him as a pioneer in the financial services industry, but rather as an educator."

On behalf of The American College of Financial Services, we thank Jack Bogle for his contributions to The College’s Board of Trustees and the MDRT Foundation Hall. His vision will be missed, though his legacy and teachings will forever impact the financial services profession and investors alike.

In recent meetings, I’ve been discussing new dimensions in estate planning. Legal, tax, financial, and societal changes necessitate a fresh look at this planning, and a key new consideration is how we look at, and utilize, life insurance. I’ve posited the idea that we should stop talking about the irrevocable life insurance trust (ILIT) as an estate planning solution, and instead look at it as one of many ways of implementing a life insurance strategy. Instead of assuming the use of an ILIT, I suggest a new approach to life insurance planning I call the wealth conservation and protection plan (W-CAP). A W-CAP is a simple estate planning methodology designed to preserve the client’s estate both while alive and at death. Life insurance is the underlying product used in the W-CAP approach, but the policy can be used in a variety of ways. As will be discussed, an ILIT is certainly one strategy for owning the life insurance policy, but it’s not the only ownership approach. 

Estate Planning Challenges with ILITs 

In the estate planning community, there has been some hand-wringing over the wisdom of some life insurance policies that were placed in ILITs. The debate was brought to the fore by the estate tax changes encompassed in the Tax Cuts and Jobs Act of 2017 (TCJA). Now that the individual estate tax exemption is an inflation-adjusted $11.20 million (at least until 2026), clients are asking why they can’t access the life insurance policies trapped in their trusts, and why they even need the life insurance in the first place. This is leading to requests for judicial reform of trusts, trust decanting, and even lapsing of trust-owned policies. 

Even before the TCJA, there was grumbling about ILITs. What I refer to as the “TOLI terrors” have been afflicting estate planning attorneys and corporate trustees for years. These advisors are concerned that trust-owned life insurance policies (TOLIs) aren’t performing as advertised. The policies need either more premiums than illustrated, a reduction in death benefit, or a reallocation of the underlying investment portfolio. For some trustees and/or attorneys, these troubled policies represent a source of potential fiduciary liability. Compounding the challenge is that it is difficult to explain to the client why more premiums are needed, while at the same time, the values in the insurance policy aren’t available for retirement income or to help with long-term care (LTC) expenses. Under current circumstances, the client may be more concerned with lifetime liquidity than possible estate taxes. Simply put, some ILITs are under fire both as to their utility and their risk. 

While we can question some of the histrionics we’ve seen from ILIT detractors, the underlying causes are understandable. Politicians have made such a big issue out of the “death tax” that prosperous individuals and families have gone to extremes to avoid the federal estate tax. There is little doubt that when transfer taxes are involved, ILITs are one of the best tried-and-true techniques for lowering the financial sting of these taxes. But now that estate taxes threaten a significantly smaller slice of the population, people are asking “why bother with an ILIT?” The technique severely limits the use of the life insurance policy for anything other than post-mortem needs, and it takes away the flexibility that is an otherwise positive aspect of the life insurance contract. 

A Different Approach 

So let’s take the debate off the table by approaching the issue from a different perspective. Let’s instead agree that in the estate planning context, life insurance is primarily a wealth conservation and protection tool. First, it helps conserve an estate by providing liquidity to pay taxes, pay debts, and fulfill family and business needs of the insured. Second, it helps protect an estate by offering a predictable and liquid source of capital when needed. As a non-correlated asset, it is available to shelter the estate from losses due to morbidity, mortality, and down markets. Further, if the life insurance has cash values, it can conserve and protect wealth whether that need occurs during life or at death. 

The question is how to choose and position the life insurance so as to maximize the advantages of the product in the client’s particular planning context. A Ferrari is a great car, but not if the buyer wants to use it for off-roading. A car lease works well as a financing strategy for a business owner, but may not be a good fit for a family wanting to buy a car for the long term. Choosing and positioning the product makes a difference in the value-add of the purchase. 

Consider how a life insurance policy can be chosen. Just like a car purchase, the consumer expects standard features but may desire certain add-ons to fit his or her unique situation. What are the standard features that every life insurance policy should have? Presumably the policy should provide an income-tax-free, liquid death benefit that is issued by an insurer with a solid financial rating. The policy should comply with both state and federal laws, and include standard nonforfeiture provisions. There may also be an expectation that the policy has features commonly enjoyed in modern-day insurance contracts such as a terminal-illness provision. Beyond these standard features, the advisor can both help the customer choose additional options, and determine an appropriate ownership strategy. 

What add-on features apply? It depends on the customer. I recall a car salesperson who fixated on the maximum speed of a proposed car. She was oblivious to the fact that I did not have the need for speed. This same dealer also lauded the manufacturer’s financing discount, even though I had indicated I intended to pay in cash. Similarly, the life insurance purchaser may not need, or want to pay for, features in a policy that will likely never be utilized. And even though there is a special way to position ownership of the policy, it may be moot if that particular purchaser obtains no benefit from the technique. Life insurance policies offer a myriad of riders and features, but their value depends on the client’s planning requirements. Why pay for disability waiver-of-premium when the insured is retired? Why purchase a policy with a chronic illness rider when the policy is going to reside in an ILIT? Conversely, why put the policy in an ILIT if the likelihood of incurring an estate tax is nil? 

Sometimes features and techniques with life insurance are solutions looking for a problem to solve. It’s time to change the order of the process. Particularly in the fast-changing world of estate planning, it’s time to take a new approach to planning with life insurance. 

W-CAP 

The W-CAP concept is specifically focused on the use of life insurance in estate planning. It uses life insurance to conserve and protect family wealth, whether during life or at death. The key feature of the W-CAP concept is it recognizes multiple estate planning uses for life insurance. It’s not just about estate taxes. So, while an ILIT is the primary ownership approach for avoiding estate taxes, it is not a useful approach in, for example, providing lifetime access or liquidity. In these situations, there are other ownership approaches for life insurance, including having the policy owned by the insured, a revocable trust, the spouse, or the children. These approaches may be better ways to conserve and protect a particular estate. 

The W-CAP’s four-step process focuses on what are the most important uses for the life insurance in the estate plan, and then places the ownership of the policy accordingly. 

STEP 1 

What estate planning needs is the policy primarily intended to address? Recognizing that rarely can all needs be fulfilled with one policy, part of the W-CAP process is it prioritizes the top two or three needs. Below are some of the more common needs that a life insurance policy can address, although there are certainly others: 

• Liquidity at death to pay estate taxes 
• Liquidity at death for other needs, such as a buy-sell agreement, survivor income, etc. 
• Liquidity during life for events such as long-term care or chronic illness 
• Avoiding estate and gift taxes on the death benefit 
• Avoiding income taxes on distributions of wealth Inheritance equalization 
• Creditor protection 

STEP 2 

• Once the estate planning needs for a policy have been determined and prioritized, determine which life insurance policy features are most important for addressing these needs. Below are some sample policy features that may apply: 
• Survivor-life death benefit (versus a single life policy) 
• Policy cash values in a permanent life insurance policy LTC or chronic illness riders 
• Auto-loan, reduced paid-up riders, or other anti-lapse features 
• Fixed death benefit to provide an uncorrelated asset for the estate 
• A variable death benefit to reflect market changes 
• The ability to switch between an increasing death benefit and a level death benefit Insurance company one-year term rates to use in lieu of Table 2001 rates (to accommodate split-dollar funding) 

STEP 3 

Choose the life insurance policy that best matches up the policy features (Step 2) with the primary estate planning priorities (Step 1). In other words, select a policy with provisions that can most effectively fulfill the top estate planning goals for the life insurance. This is an area where the advice of a life insurance professional is particularly important. 

STEP 4

Determine the appropriate ownership structure for the policy that will most effectively conserve and protect the estate. In estate planning, the primary ownership structures for life insurance are the following: 

• Ownership by the insured or the insured’s living trust 
• Ownership by an ILIT 
• Ownership by family members, such as the spouse or children 

Two Examples

The point of the W-CAP approach is that life insurance in estate planning is focused on conserving and protecting an estate. An LTC rider may or may not be needed; a trust may or not be required—it all depends on the needs of the client. Using the four steps above will help both determine the appropriate insurance product, and select an ownership strategy to fulfill the primary planning needs. Consider the following two examples of the use of the W-CAP approach. One is in a high-net-worth family situation, and the other involves a more moderate estate. 

SCENARIO 1 

Ruby, a widow who has a $20 million estate, has three children and five grandchildren. She recently gifted her profitable business to her daughter, the one child who is active in the business. Ruby wants to make sure the other children are also provided for. Ruby’s advisor has warned her about the likelihood of estate taxes, and has suggested life insurance as a means of accomplishing her estate planning goals. Applying the W-CAP approach, she arrives at the following estate planning strategy: 

1. Ruby’s primary concern is being able to create inheritance equalization. Since she has given the business to her one daughter, she wants to provide a comparable inheritance to her other children. Because of her wealth, though, she has another pressing concern—having sufficient liquidity for her estate to pay an expected estate tax. 
2. In order to accomplish her two primary goals, Ruby needs a large life insurance policy. The death proceeds can provide both an inheritance to the two nonbusiness children and a fund to pay the estate tax. Since there’s no way to know when Ruby will die, a large, fixed-death-benefit life insurance policy will provide an uncorrelated asset that is available exactly when needed, irrespective of where the market is at that time. 
3. Ruby has significant wealth, and her need for life insurance is permanent. She chooses to utilize a single life universal life policy. The premium payments will be enough to guarantee a fixed death benefit. 
4. The policy will be applied for, and owned by, an ILIT. At Ruby’s death, the ILIT receives the proceeds, and uses them for two purposes. First, it will pay out inheritances to the two intended children; and second, it will provide liquidity to lend money to, or buy assets from, the estate. This will give the estate the liquidity it needs to pay the estate tax without having the policy proceeds included in the gross estate. 

SCENARIO 2 

Francie and Bob have a projected $3 million estate, and they want to make sure that if they’re not around, their special-needs adult child will be cared for. The couple has completed their financial planning in anticipation of an eventual retirement, and part of their plan has identified estate planning needs. An advisor has suggested life insurance to help with several of their planning needs. Applying the W-CAP approach, the life insurance strategy used for this couple is quite different than for Ruby.

1. Francie and Bob are primarily concerned with providing liquidity for their child, but they want to do it in a manner that qualifies their child for continued government programs and benefits. They are, however, also concerned with the possible adverse effect on their estate plan if one or both of them are confined to a long-term care facility for an extensive period. They do not want their estates exhausted by the expenses of a long-term care incident.
2. This couple’s liquidity need can occur at either death or upon a long-term care event. Further, because the policy will require cash values to accomplish their long-term care need, the insurance product should include features that provide both guarantees and upside potential. Cash value growth is a core consideration in choosing the policy. 
3. Francie and Bob decide to each purchase an individual indexed universal life policy with a long-term care rider. They will use some of their ongoing wages to “overfund” their policies, with the intent that policy premiums will no longer be required after they retire. These policies will provide liquidity in the event of either a death or long-term care event, thereby accomplishing both of their top priorities. 
4. In order to access the long-term care benefits that may be payable, they will own their life insurance policies individually. Since estate taxes are not likely an issue for them, the individual ownership strategy works better than an ILIT to conserve and protect their estates. The primary beneficiary of each policy will be the surviving spouse. If that spouse predeceases the insured, the proceeds will be payable to a special needs trust for the benefit of their child. 

The W-CAP,  Justified 

In both of the above scenarios, the W-CAP helped identify needs, create a solution, and apply a strategy for implementation. There is nothing magical about the W-CAP approach. It is simply a disciplined way to do life insurance planning in an estate planning environment. It puts the need before the solution, and the solution before the ownership strategy. 

An added advantage of a W-CAP is that where an ILIT is actually needed, the process helps justify the concept’s use. Those attorneys who have “TOLI terrors” will more likely buy in to an ILIT structure when they realize it addresses the client’s primary goals. Hence with Ruby from scenario 1, the W-CAP process helped position the legitimate need for an ILIT to own the policy. Conversely, a W-CAP helps avoid the overzealous use of the ILIT structure where estate taxes are not in play. With Francie and Bob in scenario 2, the process helped identify suitable products and then place them in an appropriate ownership position. 

This post was originally published in the Journal of Financial Service Professionals 73, No.2 (2019): 32-36, copyright 2019, Society of Financial Service Professionals. 

Steve Parrish, JD, RICP®, CLU®, ChFC®, RHU®, AEP®, is the co-director for the New York Life Center for Retirement Income Planning at The American College of Financial Services. He is also an adjunct professor at both The American College and Drake University Law School.

They’ve put me hand-in-hand, face-to-face, even heart-to-heart with the men and women of this great profession. I’ve met people from all colors and creeds, including those breaking through societal barriers; the veterans continuing their lives of service; the culture carriers of this profession’s long-standing organizations; and the next generation of advisors looking to make an impact in the communities they serve.

I helped cut the ribbon on The American College of Financial Services’ new home, the Cary Maguire Building – a modern, media-driven location that christened a new day in The College’s storied 93-year history. I spoke at events honoring veterans, industry heavyweights, and our 2019 designee and master’s degree recipients. Also, as the first African-American President in The College’s history, it was a profound honor to open our 14th annual Conference of African American Financial Professionals in Atlanta. 

I found its slogan a fitting facsimile to the message I continue to carry with me everywhere I go: lift as you climb. 

There’s a stark choice in this profession: get lost in the darkness of power and prestige or lift up others through a dedication to service. This is the financial services profession, where the ultimate benefit must be theirs, not ours. We must lift up our clients, our communities, and new advisors looking to do the same. Our profession will flourish in the years ahead if we follow the “we, not me” mentality. It’s been tested by crises of confidence that soured trust in our stewardship, by rapidly advancing technology that requires a shift to more holistic service offerings, and by a wave of Baby Boomers who are ready to retire even if their finances aren’t. 

Instead of sitting in a silo, I call on you to uplift our profession with your knowledge and your wisdom. Embrace the kinship of community, and become a financial mentor to your neighbors, colleagues, and career changers. A larger, more knowledgeable advisor community will benefit clients and improve public perceptions. A common fellowship will expand our professional networks and strengthen our ties to the communities we serve. 

Success isn’t about climbing the ladder then kicking it down so no one else can follow. It’s about climbing the ladder, getting to that next level, and looking back at where you started with an extended, helping hand. 

The American College of Financial Services is always looking to do its part. Our goal is to be your life-long learning partner – promoting financial literacy, engaging and educating society, and sharing our knowledge with all who need it. We believe that a rising tide lifts all boats; that an informed society asks the right questions, picks the right advisor, and has better financial outcomes. 

As I make my way through Year 2 at The College, I look forward to seeing many of you at industry events, hearing your stories, and collaborating with a growing, inclusive profession that is moving in the same direction. Together, we are stronger.

The College’s legacy is a virtue. Its 93-year history is one to embrace and leverage, but it certainly cannot impede progress. And that’s the intersection where I live – at the corner of celebrating history and making it. 

As The College’s 10th President and Chief Executive Officer, I wholeheartedly thank the over 170,000 alumni who at times have carried this institution with their time and charity. I revere Dr. Solomon Huebner’s vision, not just as this College’s founder, but as the architect of the modern financial services profession. Yet, I am also conscious of a 21st-century marketplace that looks different, works different, and demands different. 

Different means moving forward with a clear vision guided by strong values. Here are mine.