VALUING POLICIES FOR TAX PURPOSES Massive Mistakes: Big Opportunities RJ Starr, ASA (BV) Neil Finestone, CFP, CLU, ChFC
A POLICY S VALUE Surprisingly to most people, a policy s value is NOT necessarily: The policy s cash value Interpolated Terminal Reserve (ITR) form 712 supplied by the insurance company PERC value (Premium + Earnings - Reasonable Charges) A secondary market quote
AND FOR ANY PARTICULAR TAXPAYER, THE DIFFERENCES MAY BE STRIKING AND COSTLY.
SOLUTION: A QUALIFIED APPRAISAL
OUR QUALIFICATIONS Andersen Tax Andersen Tax is one of the nation s largest tax and valuation services firms. The valuation group is recognized as a Qualified Appraiser and has decades of experience supporting their appraisals with the IRS. Policy Guard Policy Guard provides the analysis of the appraised life policy. Policy Guard holds an elite Life & Disability Insurance Analyst license (one of fewer than 50) to perform such analyses.
OUR QUALIFICATIONS Life & Disability Insurance Analyst Under the California Insurance Code Section 32.5 a "Life & Disability Insurance Analyst" means a person who, for a fee or compensation of any kind, paid by or derived from any person or source other than an insurer, advises, purports to advise, or offers to advise any person insured under, named as beneficiary of, or having any interest in, a life or disability insurance contract, in any manner concerning that contract or his or her rights in respect thereto. Acting as an analyst without a license is potentially a misdemeanor (jail time). Section 1844.
WHEN DO YOU NEED A POLICY APPRAISAL? An appraisal is needed whenever a policy is transferred. Transfers between trusts, individuals, and entities Pension rescue programs Pension distribution Split dollar (both for income and estate tax purposes) Gifts of policies to charity Audits or arguments
ISN T A POLICY S VALUE SIMPLE? No. The question what is the value of a life insurance policy can result in complex and inconsistent answers. - John Hancock, Valuation of Life Insurance Policies, LIFE-5726 01/16
REAL CASE EXAMPLE 1. A policy needs to be distributed from a trust 2. Advisor requests policy s value from carrier for reporting 3. Carrier provides an estimated value (form 712) of $2,000,000 4. Client gets sticker shock. The strategy fails. 1. Solution: Qualified appraisal value = $400,000 2. Client saves tax on $1,600,000
DON T REQUEST A VALUE FROM THE INSURANCE COMPANY Insurance companies are required to provide what is called the Interpolated Terminal Reserve (ITR) via IRS Form 712.
CARRIERS ARE FRUSTRATED BY TREASURY REGULATIONS THAT DON T RELATE TO CURRENT POLICY TYPES OR RESERVING METHODS. Insurance companies have advised against requesting a 712. John Hancock recently issued an 11 page white paper detailing the complexity a carrier faces assigning a value. (Valuation of Life Insurance Policies, LIFE-5726 01/16) AXA s value report includes a caveat to the value given. Interpolated Terminal Reserve is generally understood to be applicable to whole life contracts, and has not historically been used for variable life or universal life contracts.
ONCE A 712 IS ISSUED THAT VALUE IS MEMORIALIZED Insurance companies are required to provide what is called the Interpolated Terminal Reserve (ITR) via IRS Form 712.
SOLUTION: A QUALIFIED APPRAISAL An appraisal considers all the circumstances of the asset and the transaction. Examples: Insured s current health Carrier s reserving method Future cash flows A professional appraisal avoids constraints from applying outdated regulations that do not relate to current policies.
KEY CONSIDERATIONS A proper appraisal is based on a robust analysis the policy. A Life & Disability Analyst like Policy Guard LLC has the expertise and credentials to analyze the policy. If you go to the wrong source, requesting a value can result in complex and inconsistent answers. The best solution is to seek a value from a licensed appraiser. They consider all the circumstances of the asset and the transaction A licensed appraiser is your best line of defense.
KEY CONSIDERATIONS Proper documentation for valuation positions at the outset is critical because: The valuation filed with the tax return is an "admission" of value by the taxpayer. A contemporaneous valuation will always be more credible than a retrospective analysis. A qualified appraisal serves as evidence of reasonable cause to rebut penalties. A good valuation should focus on the particular and unique circumstances of the interests transferred.
CIRCUMSTANCES REQUIRING AN APPRAISAL Transfers between trusts, individuals, and entities. Pension rescue programs. Pension distribution. Split dollar (both for income and estate tax purposes.) Gifts of policies to charities. Audits or arguments.
Email: r.j.starr@andersentax.com Office: 213.593.2328 Fax: 213.784.7051 Education: University of California at Davis, BS (Managerial Economics) Affiliations: American Society of Appraisers (ASA BV) Association for Corporate Growth (ACG) R.J. Starr Managing Director Los Angeles and Orange County R.J. Starr has over 15 years of experience in delivering valuation analyses to both individuals and to corporate enterprises. As a member of Andersen Tax s Valuation Services Group, R.J. has specialized in the valuation of closely held businesses, business interests, intangible assets, intellectual property, debt instruments, derivatives (including stock options and option-embedded securities), and capital equipment assets. These engagements were conducted for a variety of purposes, including financial reporting; tax planning and reporting; strategic planning; mergers and acquisitions; litigation support; restructuring; and bankruptcy. Before joining Andersen Tax, R.J. was with Arthur Andersen, and then was a manager with Huron Consulting Group where he focused primarily on corporate valuation issues related to mergers and acquisitions, litigation, and strategic consulting. R.J. holds the Accredited Senior Appraiser (ASA-BV) designation. Services provided on recent engagements include: Purchase price allocations and impairment analyses related to FASB ASC Topic 805: Business Combinations and FASB ASC Topic 350: Intangibles Goodwill and Other, including preparation of responses related to comments from the SEC Valuation consulting related to tax planning and compliance, including appraisals performed for estate and gift tax reporting, and domestic and international tax planning (including reorganizations, restructuring, and ownership/control changes) Common stock valuations for tax and financial reporting to comply with Section 409A of the Internal Revenue Code and FASB ASC Topic 718: Compensation Stock Compensation Performance of financial advisory services related to companies in bankruptcy (development of reorganization values; appraisal work for fresh start accounting) Financial analysis to assist with business planning, acquisitions, and joint venture formation Valuation of stock options and complex optionembedded securities for dispute and litigation purposes Valuation of life insurance policies for tax planning and reporting purposes
Life Insurance Analysis PolicyGuardLLC.com Neil R. Finestone, CFP, CLU, ChFC Email: neil@policyguardllc.com Office: (310) 432-7020 Fax: (310) 432-7029 Neil R. Finestone is originally from Montreal, Canada. He earned a Bachelor of Commerce degree in Economics from Concordia University Business School, Montreal, Canada, where he was admitted to the Concordia University Garnet Key Honors Society. He earned his certificate in Financial Planning from the University of Southern California (CCE) Financial Planning Program. Mr. Finestone is one of fewer than 50 life insurance professionals in the State of California who have been granted the Life & Disability Insurance Analyst license from the California Department of Insurance indicating fiduciary and recognized expert status, and provides fee based Life and Disability Insurance analysis through Policy Guard LLC and Life Insurance Analysts, Inc. exclusively for attorneys, trustees and their clients. He has been designated as a trial expert in both Los Angeles Superior Court and Santa Barbara Superior Court. Mr. Finestone has been awarded the professional designations of Certified Financial Planner (CFP ) from the College for Financial Planning, Denver, Colorado, and Chartered Life Underwriter (CLU) & Chartered Financial Consultant (ChFC) from the American College, Bryn Mawr, Pennsylvania, an accredited institution for professional studies in financial sciences. He has also successfully completed the FI360 examinations from the Center of Fiduciary Studies and holds the Accredited Investment Fiduciary (AIF ) designation. Mr. Finestone holds licenses for Variable Annuities, Life & Health & Disability Insurance in approximately 25 states as well as FINRA licenses as; General Securities Registered Representative (Series 7), General Securities Principal (Series 24), Uniform Securities Agent State Law / Multistate (Series 63) Uniform Investment Advisor Law (Series 65). National Commodities Futures (Series 3). Mr. Finestone teaches and lectures on Financial Planning, Insurance, and Investments and provides consulting and expert testimony in the areas of Insurance, Investment, Financial and Benefit Planning. He has taught the Pension, Risk Management and Investment sections of the CFP designation for the College for Financial Planning (Denver, Colorado) and has taught financial planning for California Lutheran University, Loyola Marymount University and California State University at Northridge (CSUN). Mr. Finestone has been quoted, published articles, and addressed numerous professional organizations on the subjects of and related to Financial, Insurance and Benefit Planning.