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Understanding Medicaid Planning Opportunities

Volume 2, Issue 6

The last issue of our newsletter addressed the significant need for clients to plan for the possibility of disability, and how proper disability planning more often than not involves the coordination of financial and legal solutions. This issue addresses a related and often misunderstood topic, Medicaid planning.

What is Medicaid?

Medicaid is a federal government program that provides financial assistance to persons age 65 and over, or those under 65 who are disabled and who are in need of substantial medical assistance. Medicaid is a needs-based program – a person must have a medical need for the assistance and must be of limited financial means before he or she may qualify.

Planning Tip:  Medicaid is very different from Medicare. Medicare is health insurance available to all persons over age 65 who qualify for Social Security, as well as those who are under 65 and who the Social Security Administration determines to be disabled. Medicare will not pay for nursing home, assisted living or home health care on a long-term basis. Medicare will only pay for this type of care for up to 100 days, and only for the purpose of providing rehabilitation following a three-day or longer hospital stay.

Unfortunately, with the rising costs of long-term care, many people cannot afford to pay privately for home health care, assisted living, or nursing home care. According to the 2006 Study of the MetLife Mature Market Institute, the national average cost for a private room in a nursing home is over $75,000 annually. The national average cost of in-home care is between $17 and $19 per hour. As noted in a recent Harvard University Study, 69% of single people and 34% of married couples would exhaust their assets after 13 weeks in a nursing home. For those whose assets won’t last 13 weeks – much less the rest of their lives – Medicaid planning becomes an important consideration.

Planning Tip:  Most people do not have sufficient assets to pay privately for long-term care. Medicaid planning is most appropriate for these individuals, a growing segment of the population.

What is Medicaid Planning?

The term “Medicaid planning” involves either spending down or otherwise protecting a person’s assets so that he or she has minimal assets and can meet the financial criteria for Medicaid qualification (which can be as low as $2,000 for a single person). Although based on federal law, Medicaid rules are different from state to state, and even county to county, and therefore it is important to consult with a legal expert in the field of Medicaid. Furthermore, the transfer of assets, purchase of financial products, or otherwise disposing of assets has tax implications for the transferor as well as the recipient, necessitating the advice of a tax advisor. Finally, a financial advisor is a necessity to help clients choose the correct financial products as part of an overall Medicaid planning strategy.

Planning Tip:  Medicaid planning requires input and a coordinated effort from the client’s legal, financial and tax advisors, all of whom should be knowledgeable in Medicaid planning.

Medicaid Pre-Planning

Medicaid planning can be divided into two types: pre-planning and crisis planning. Pre-planning is for those individuals who have not yet begun to spend their assets on private care, but may need to in the coming years. Crisis planning is for those individuals using their life savings for long-term care (either at home or in a facility) with a substantial risk that they will run out of money.

In pre-planning cases, life insurance can provide tremendous planning benefits when implemented correctly. The purchase of a single premium life insurance policy by an irrevocable trust, or subsequent transfer to such a trust, will not only replace a couple’s net worth, it will protect the cash value of that policy from Medicaid. Alternatively, if not owned by an irrevocable trust, the cash value of any life insurance policy will count against the amount of assets a person can keep and still qualify for Medicaid.

For example, assume Mr. and Mrs. Jones, both age 65 and in good health, have $450,000 of assets. At their age, a single premium of $100,000 would buy a second-to-die death benefit of nearly $450,000. If an irrevocable trust owns the policy and neither Mr. or Mrs. Jones have access to the trust assets, after a certain period (most likely 5 years), their entire net worth would be protected from Medicaid, and Mr. and Mrs. Jones would still have $350,000 left to live on. Mr. and Mrs. Jones could transfer more assets to the irrevocable trust, if they desire. In fact, if the couple also purchased a five-year long-term care policy (or a life insurance policy with a long-term care rider), they could protect all of their assets from Medicaid, even with a 5 year look-back period.

Planning Tip:  With pre-planning clients, life insurance owned by an irrevocable trust, perhaps combined with long-term care insurance or a long-term care rider, can provide significant Medicaid planning benefits.

For those who choose to plan early, the use of an irrevocable trust combined with life insurance and/or long-term care insurance can provide optimum asset protection for an aging client. When gifting is used as a planning strategy, the person receiving the gift often needs advice on how to invest the money they receive. Thus, Medicaid planning also opens the door for the financial advisor to converse with younger family members about the need for proper planning, including the need for disability insurance and long-term care insurance.

Planning Tip:  Medicaid planning can open the door for the financial advisor to begin working with and planning for younger generations, while establishing the need for disability insurance and long-term care insurance.

Medicaid Crisis Planning

Even with crisis planning there are significant planning opportunities for our clients. While transfers either outright to a family member or to an irrevocable trust create a penalty period for the person making the gift, sometimes a planned strategy involving gifting and the use of an annuity can provide a valuable crisis planning tool. For example, assume Mr. Jones suffers a stroke and ends up in a nursing home, and his cost of care exceeds the couple’s monthly income by $4,500 per moth. Since the couple has assets of $450,000, they are $346,360 over the allowable limit of $101,640 for a married couple. One under-utilized but very effective strategy is for the couple to purchase a Medicaid Qualifying Annuity (MQA) in favor of the healthy community spouse, Mrs. Jones. By converting the excess assets into an income stream, Mr. Jones can now qualify for Medicaid and the MQA provides Mrs. Jones with extra income to supplement the loss of her husband’s income (which must be paid to the facility).

For a single person in crisis planning, a plan of partial gifting plus the purchase of a single premium immediate annuity may be appropriate. Keep in mind that any time a Medicaid applicant makes a gift, whether it is to another person or to a trust, Medicaid will impose a penalty based on the size of the gift. The penalty is the equivalent of a waiting period – the larger the gift, the longer a Medicaid applicant must wait to obtain eligibility. Because of the severe penalties for gifting, clients should not undertake this type of strategy without the legal advice of a Medicaid planning attorney.

Planning Tip:  Annuities play a crucial role in Medicaid planning, particularly with crisis planning.

Identifying Possible Medicaid Clients

In determining which clients are appropriate for Medicaid planning, it is important to consider the client’s age and life expectancy, monthly income, monthly medical expenses and other assets. Take Anna, a 72 year-old woman residing in an assisted living facility costing $3,500 per month. She has other medical expenses, including prescriptions, of $300 per month. Her only income is from social security, which amounts to $1,200 per month. Anna is depleting her savings at a rate of $2,600 per month, just for medical expenses. Anna has $450,000 in a brokerage account, which on its face sounds like a lot of money, given she is only spending approximately $36,000 per year on her care. But when we take into consideration the fact that Anna may very well need more care in the future, which could cost as much as $10,000 per month, and given her life expectancy of 13.96 years, it is clear that Anna’s assets may not be sufficient to cover her long-term care expenses for the rest of her life. Anna is not only an appropriate client for Medicaid planning, she is a crisis planning client.

Planning Tip:  It is important to take a client’s age, medical needs, monthly expenses and income into consideration to determine whether Medicaid planning is necessary or appropriate.


Due in part to the rising costs of long-term care and the fact that we are an aging population, Medicaid planning is a growing area of practice for attorneys, CPAs, financial planners and insurance professionals. However, as evidenced by the content of this newsletter, Medicaid planning requires that these disciplines work together collaboratively to ensure that the client avoids the numerous pitfalls that exist in this area.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Planning for Disability

Volume 2, Issue 5

No one likes to think about the possibility of their own disability or the disability of a loved one. However, as we’ll see below, the statistics are clear that we should all plan for at least a temporary disability. This issue of our newsletter examines the eye-opening statistics surrounding disability and some of the common disability planning options. Disability planning is one area where we can give each and every one of our clients great comfort in knowing that, if the day comes for themselves or a loved one, they will be prepared.

Most Clients Will Face At Least a Temporary Disability

Study after study confirms that nearly everyone will face at least a temporary disability sometime during their lifetime. More specifically, one in three Americans will face at least a 90-day disability before reaching age 65 and, as the following graph depicts, depending upon their ages, up to 44% of Americans will face a disability of up to 4.7 years. On the whole, Americans are up to 3.5 times more likely to become disabled than die in any given year.

Most Clients Will Face At Least a Temporary Disability

Planning Tip:  Many clients fear what will happen to them if they become disabled. Advisors who can help allay these fears will have more satisfied clients who move forward with their planning recommendations.

Many Clients Will Face a Long-Term Disability

Unfortunately, for many of our clients the disability will not be short-lived. According to the 2000 National Home and Hospice Care Survey, conducted by the Centers for Disease Control’s National Center for Health Statistics, over 1.3 million Americans received long-term home health care services during 2000 (the most recent year this information is available). Three-fourths of these patients received skilled care, the highest level of in-home care, and 51% percent needed help with at least one “activity of daily living” (such as eating, bathing, getting dressed, or the kind of care needed for a severe cognitive impairment like Alzheimer’s disease).

The average length of service was 312 days, and 70% of in-home patients were 65 years of age or older. Patient age is particularly important as more Americans live past age 65. The U.S. Department of Health and Human Services Administration on Aging tells us that Americans over 65 are increasing at an impressive rate:

Many Clients Will Face a Long-Term Disability

Nursing home statistics are equally alarming. According to the 1999 National Nursing Home Survey, the national average length of stay for nursing home residents is 892 days, with over 50% of nursing home residents staying at least one year. Significantly, only 18% are discharged in less than three months.

While a relatively small number (1.56 million) and percentage (4.5%) of the 65+ population lived in nursing homes in 2000, the percentage increased dramatically with age, ranging from 1.1% for persons 65-74 years to 4.7% for persons 75-84 years and 18.2% for persons 85+.

Planning Tip:  Many clients will require significant in-home care lasting, on average, close to a year. For clients requiring nursing home care, that care lasts, on average, nearly 2 years! Not surprising, the older the client or loved one, the more likely he or she will need long-term care – which is significant given that Americans are living longer.

Long-Term Care Costs Can be Staggering

Not only will many of our clients face prolonged long-term care, in-home care and nursing home costs continue to rise. According to the 2006 Study of the MetLife Mature Market Institute, national averages for long-term care costs are as follows:

  1. Hourly rate for home health aides is $19, higher than in 2004.
  2. Hourly rate for homemakers/companions is $17, higher than in 2004.
  3. Daily rate for a private room in a nursing home is $206, or $75,190 annually, a 1.5% increase over the 2005 rate.
  4. Daily rate for a semi-private room in a nursing home is $183, or $66,795 annually, a 3.9% increase over the 2005 rate.

These costs vary significantly by region, and thus it is critical that we know the costs where the client or his or her loved one will receive care. For example, the average cost for a private room in a nursing home is much higher in the Northeast ($346 per day, or $126,290 annually, in New York City) than in the Midwest (only $143 per day, or $52,195 annually, in Chicago) or the West ($199 per day, or $72,635 annually, in Los Angeles).

Planning Tip:  Nursing home costs will consume many Americans’ assets. A recent Harvard University study indicates that 69% of single people and 34% of married couples would exhaust their assets after 13 weeks (i.e., 91 days) in a nursing home!

Clients Should Consider Long-Term Care Insurance to Cover these Costs

As the Harvard University study demonstrates, if a client, client’s spouse, or family member needs long-term care, the cost could easily deplete and/or extinguish the family’s hard-earned assets. Alternatively, clients (or their families) can pay for long-term care completely or in part through long-term care insurance.

Most long-term care insurance plans let the client choose the amount of the coverage she wants, as well as how and where she can use her benefits. A comprehensive plan includes benefits for all levels of care, custodial to skilled. Clients can receive care in a variety of settings, including the client’s home, assisted living facilities, adult day care centers or hospice facilities.

Planning Tip:  Absent financial insolvency, government benefits for long-term costs are extremely limited, typically only for skilled care and only for a short duration. Given the costs of long-term care, clients should consider a long-term care insurance policy that meets their unique planning objectives.
Planning Tip:  Income-earning clients should also consider disability insurance to cover lost income as a result of a long-term disability. While long-term care insurance will cover in-home or nursing home costs, it will not replace the income lost due to the client’s inability to work.

Clients’ Estate Planning Should Thoroughly Address Disability

When a client becomes disabled, he or she is often unable to make personal and/or financial decisions. If the client cannot make these decisions, someone must have the legal authority to do so. Otherwise, the family must apply to the court for appointment of a guardian for either the client’s person or property, or both. Clients who are old enough to remember the public guardianship proceedings for Groucho Marx recognize the need to avoid a guardianship proceeding if at all possible.

At a minimum, clients need broad powers of attorney that will allow agents to handle all of their property upon disability, as well as the appointment of a decision-maker for health care decisions (the name of the legal document varies by state, but all accomplish the same thing). Alternatively, a fully funded revocable trust can ensure that the client’s person and property will be cared for as the client desires, pursuant to the highest duty under the law – that of a trustee.

Planning Tip:  Clients need properly drafted and well thought-out estate planning documents that address both their property and their person in the event of disability.
Planning Tip:  An estate plan that utilizes a revocable trust as its foundation not only helps ensure that the client will be cared for as he or she desires, but it can ensure consistent asset management through the continued use of the client’s existing financial advisors.

Clients Should Also Add HIPAA Language and Authorizations

Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), absent a written authorization from the patient, a health care provider or health care clearinghouse cannot disclose medical information to anyone other than the patient or the person appointed under state law to make health care decisions for the patient. The penalty for failure to comply with these rules is severe: civil penalties plus a criminal fine of $50,000 and up to one year of imprisonment per occurrence, and worse if the disclosure involves the intent to use the information for commercial advantage, personal gain, or malicious harm.

These HIPAA rules became effective only recently. As a result, doctors, hospitals and other health care providers now refuse to release any information absent a release from the patient. For example, hospital staff will go so far as to refuse to disclose whether one’s spouse or parent has been admitted to the hospital. The inability to receive information about a loved one could become very troubling when the information concerns treatment as part of long-term care.

Planning Tip:  A client’s “personal representative” for health care decisions has the same rights to receive information as the client. While it is arguably unnecessary, the safest approach to ensure release of information to a personal representative is to modify the document appointing him or her so that it expressly authorizes the release of HIPAA-protected information on behalf of the client.

The Regulations promulgated under HIPAA specifically authorize a HIPAA Authorization for release of this information to persons other than the patient or his or her personal representative. Thus, clients should consider creating such Authorizations so that loved ones and others can access this information in addition to the personal representative.

Planning Tip:  Clients should prepare HIPAA Authorizations for loved ones and others who potentially need access to their medical information during a time of disability.


The above discussion outlines the minimum planning clients should consider in preparation for a possible disability. It is imperative that clients work with you and their team of professional advisors to ensure that, in light of their unique goals and objectives, their planning addresses all aspects of a potential disability.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Planning for Tax-Qualified Plans

Volume 2, Issue 4

Planning for tax-qualified plans, which includes IRAs, 401(k)s and qualified retirement plans, requires a careful examination of the potential taxes that impact these assets. Unlike most other assets that receive a “basis step-up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value.

Therefore, beneficiaries who receive these assets do so subject to income tax. If the estate is subject to estate tax, the value of these assets may be further reduced by federal and perhaps state estate tax. And if your clients name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax – at the highest federal estate tax rate. All told, these assets may be subject to 70% tax or more.

There are several strategies available to your clients to help reduce the impact of these taxes and to ensure that these assets meet each client’s unique planning objectives. This issue of our newsletter examines some of the more common planning alternatives for tax-qualified plans, as well as the advantages and disadvantages of each.

Structure Accounts to Provide the Longest Term Payout Possible

Structuring tax-qualified plans to provide the longest term payout possible is the most common option. With this strategy your clients name beneficiaries in a way that requires the beneficiaries to withdraw the least amount possible as required minimum distributions (those distributions that the beneficiaries must take in order to avoid a 50% penalty).

Frequently, married clients name the surviving spouse as the primary beneficiary so that the survivor may roll over the account into his or her name and treat the account as his or her own. The surviving spouse then names younger beneficiaries for stretch-out purposes.

To achieve the maximum “stretch-out,” your clients should name beneficiaries who are young (e.g., children or grandchildren, although there are special considerations when naming grandchildren or younger generations). The younger the beneficiary, the smaller the required minimum distributions. To achieve maximum income tax deferral, beneficiaries should take only their required minimum distributions.

Your clients can accomplish this strategy by naming the beneficiaries individually. Alternatively, if your clients are concerned about the loss of creditor or divorce protection that occurs when they name beneficiaries outright, they can name a beneficiary’s share of a trust as the designated beneficiary of their tax-qualified plans.

Planning Tip:  Structuring tax-qualified accounts for maximum “stretch-out” makes sense from an income tax perspective. However, naming a beneficiary outright may subject the account to the beneficiary’s creditors or former spouse upon divorce. Consider naming a trust as designated beneficiary to ensure that the account passes to the client’s intended beneficiaries – and in the manner intended by the client.

Name a Retirement Trust as Beneficiary to Ensure the Longest Term Payout Possible

Naming a beneficiary outright to accomplish tax deferral with a tax-qualified plan has several disadvantages. First, if the beneficiary is very young, the distributions must be paid to a guardian; if the beneficiary has no guardian, a court must appoint one. Another disadvantage is the potential loss of creditor protection or bloodline protection, particularly where the named beneficiary is the surviving spouse.

A third, practical disadvantage is that many beneficiaries take distributions much larger than the required minimum distributions. In fact, studies show that beneficiaries consistently consume this “found money” in only a couple of years – regardless of the amount in the account or the age of the beneficiary.

However, by naming a trust as the beneficiary of tax-qualified plans, your client can ensure that the beneficiary defers the income and that these assets remain protected from creditors or a former son- or daughter-in-law. A stand-alone retirement trust (separate from a revocable living trust and other trusts) can further help ensure that it accomplishes your client’s objectives while also ensuring the maximum tax deferral permitted under the law. This trust can either pay out the required minimum distribution to the beneficiary or it can accumulate these distributions and pay out trust assets pursuant to the standards your clients set in advance (e.g., for higher education, to start a business, etc.)

Planning Tip:  Consider naming a stand-alone retirement trust as beneficiary of tax-qualified plans to ensure that the account passes not only in the manner intended by the client, but while achieving maximum stretch-out if that is the client’s objective.
Planning Tip:  Naming a trust as beneficiary also ensures consistent account management – in the manner desired by the client, using the client’s advisors – oftentimes over generations.

Give the Accounts to Charity at Death

Another relatively simple option is for your clients to name a charity as a designated beneficiary at their death or at the death of their survivor, if married. This strategy is particularly attractive for those clients who intend to make gifts to charity at death and the question is simply what assets should they select. As a tax exempt entity, a qualified charity does not pay income tax and therefore receives the full value of tax-qualified plans.

In other words, if the client’s beneficiary is in a 35% tax bracket, a $100,000 IRA is worth only $65,000 in his or her hands, but is worth the full $100,000 if given to charity. Therefore, it makes economic sense for clients to give these assets to charity and give to their beneficiaries assets that are not subject to income tax after death.

Planning Tip:  Naming a charity as beneficiary of a tax-qualified plan is particularly attractive for clients who intend to make gifts to charity at death and the question is simply what assets should they select.
Planning Tip:  By purchasing life insurance owned by a Wealth Replacement Trust, clients can give beneficiaries the full value of a tax-qualified plan in a manner that is free from income and estate tax, and protected from creditors and predators.

Take Lifetime Withdrawals, Buy an Immediate Annuity (plus Wealth Replacement Insurance)

Another option is for your clients to withdraw their IRA or qualified plan and purchase an immediate annuity, which will generate a guaranteed income stream during their lives (or during their joint lives if married). Your clients can use this income stream to pay the income tax caused by the withdrawal, and also pay the premiums on life insurance owned by a Wealth Replacement Trust.

This strategy makes the most sense if your clients are in good health and are able to obtain life insurance at reasonable rates. Unlike with an IRA or retirement plan, the beneficiaries will receive the life insurance proceeds from the Wealth Replacement Trust free of income and estate tax and, under certain circumstances, free of generation-skipping transfer tax.

Alternatively, it may make sense to use other assets to purchase the immediate annuity, saving the IRA for family members. This alternative strategy makes the most sense when your clients can name a very young beneficiary, thereby deferring the income tax on the IRA or qualified plan for many years.

Planning Tip:  For clients who desire a steady and known income stream, an annuity purchased with a lump-sum withdrawal from a tax-qualified plan can meet those objectives.
Planning Tip:  In many instances, the annuity income will provide additional cash flow sufficient to purchase life insurance that can replace or increase what would have passed to the beneficiaries.

Take Lifetime Withdrawals, Gift Remaining Cash through Life Insurance Trust

Another option for your clients is to take the money out during their lifetime and pay the income tax, then gift the remaining cash either outright via lifetime giving or, better yet, through an Irrevocable Life Insurance Trust. If your clients desire to make the gifts through an Irrevocable Life Insurance Trust, this strategy makes the most sense when they are in good health and able to obtain life insurance at reasonable rates. Unlike the IRA or retirement plan, the beneficiaries will receive the life insurance proceeds free of income and estate tax and, under certain circumstances, free of generation-skipping transfer tax.

Planning Tip:  By using withdrawals from a tax-qualified plan to purchase life insurance owned by a Wealth Replacement Trust, clients can pass the full value of the assets to their beneficiaries in a protected manner – undiminished by income tax.

Name a Charitable Remainder Trust as Beneficiary

Yet another option is for your clients to name as beneficiary of the accounts a Charitable Remainder Trust, a type of trust specifically authorized by the IRS. These irrevocable trusts permit your clients to transfer ownership of assets to the charitable trust in exchange for an income stream to the person or persons of their choice, typically the client’s spouse with tax-qualified plans. The term can be for life or for a specified term of up to 20 years.

The survivor receives income that will help maintain his or her lifestyle should the income stream from other assets be insufficient. At the survivor’s death, the property passes to charity.

This strategy defers income tax until the survivor receives each income payment; there is no tax at the initial transfer to the trust. This strategy can also help reduce estate taxes for those clients subject to the estate tax.

With this option, your clients fund the Charitable Remainder Trust upon death. Therefore, it is only at death or incompetency that this aspect of the estate plan becomes irrevocable, giving clients the option to make changes in the future if their circumstances change.

Planning Tip:  Naming a Charitable Remainder Trust as beneficiary of a tax-qualified plan can provide a steady income stream to a surviving spouse in a tax-deferred manner. Since the assets ultimately transfer to charity, this strategy also provides a charitable deduction for those clients subject to estate tax.

Give Up to $100,000 from IRAs Directly to Charity in 2007

For clients who are at least 70 1/2 years of age, it may also make sense for them to transfer up to $100,000 from IRAs to charity in 2007 to satisfy their charitable contributions. If the contribution is made by direct transfer from the IRA custodian to a public charity (for example, religious organizations, colleges and universities, etc.), the client need not report the distribution as taxable income. In other words, unlike a typical IRA distribution, the distribution will not appear as taxable income on the client’s income tax return. However, because the distribution does not appear as income, the client will not get an offsetting charitable income tax deduction to reduce the income created by the IRA distribution.

Planning Tip:  Giving up to $100,000 from IRAs directly to charity is particularly attractive for clients who intend to make gifts to charity in 2007 and the question is simply what assets should they select.


These are only a few of the more common planning solutions for tax-qualified plans. The right solution for your clients will depend upon their particular goals and objectives as well as their particular circumstances.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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Policy Reviews of Trust Owned Life Insurance: Why you should make it part of your standard estate planning process

Volume 2, Issue 3

This issue of our newsletter explores many of the common misperceptions about trust owned life insurance – plus a process for you to add significant value for your clients by incorporating policy reviews of trust owned life insurance.

Although trust owned life insurance (TOLI) is a common planning vehicle for high net worth individuals and families, relatively few TOLI policies ever meet their initial projections. Industry studies reveal that TOLI portfolios rarely receive the required vigilant fiduciary oversight routinely associated with other assets held in trust, such as equities, real estate, etc.

Seven Common Client Misconceptions – and Facts – about Life Insurance

Misconception #1: Unlike other assets, life insurance policies do not need management and regular review to avoid risk and optimize performance.
Fact: Policy performance can change dramatically over time. Without regular review by an insurance expert, policies – especially older ones – can pose very significant risk or not achieve their original goals.

Misconception #2: If the client pays premiums according to the schedule in the original insurance illustration, the policy will pay at death.
Fact: Even with regular payment of premiums projected from the original policy illustration, policies can fail if not monitored properly.

Misconception #3: If the policy was in jeopardy, the carrier would notify the client in advance.
Fact: Carriers will not necessarily provide advance notice of policy problems to trustee owners of TOLI policies.

Misconception #4: If one carrier has turned down the client for insurance, it is not possible to get adequate coverage from another carrier.
Fact: The competitive nature of the insurance industry means that it is often possible to secure appropriate coverage from a highly rated carrier even if another carrier has already rejected the client.

Misconception #5: Premiums will remain level for the life of the policy regardless of economic conditions or interest rates.
Fact: Premiums are always a reflection of the insurance carrier’s cost of providing coverage, current interest rates, and other economic conditions. Any of these changing factors can cause the premium rates to change.

Misconception #6: Policies purchased many years ago are cheaper than current policies because the insured is older.
Fact: Improved mortality rates as well as better underwriting and policy features created by industry competition often produce less expensive coverage on new policies (or increased coverage for the same premium).

Misconception #7: If the client no longer needs the insurance coverage provided by a policy, the only option is to surrender it to the carrier for relatively little value.
Fact: A variety of alternatives, including improved life settlement opportunities, make it possible to gain substantially greater value than that provided by cash surrender to the carrier.

What is a Trust Owned Life Insurance Review?

A TOLI review is an objective review of the policies owned by a trust to ensure that those policies perform as the client intended. A TOLI review also examines options for reducing premiums or selling policies that the client may no longer need because of changed circumstances, increased exemptions, etc.

Why should advisors tell their clients about TOLI review?

Advising your clients of a TOLI review will give immediate value during your interview. Few clients get excited about spending time or money on estate planning. By incorporating a “Life Insurance Policy Review,” the estate planning advisor can now create opportunities for immediate cash savings or profits for clients in addition to the standard planning and “projected estate tax savings at death.”

Planning Tip:  A TOLI policy review not only benefits the client, it also makes good business sense for the advisor. Such a review generates good will, gives the client a real appreciation of the advisor’s concern for the client, and frequently generates more than enough savings to pay for the advisor’s fees.

Why do the clients like the idea of a TOLI Review?

Nobody likes paying premiums and very few clients understand life insurance. When their advisor suggests an objective “audit” of insurance policies to determine if they could reduce their premiums, clients are receptive. They appreciate that you are trying to help them and that you are not selling them anything.

Why are trust companies rushing to implement TOLI Reviews?

Nearly every week banking journals publish articles on the fiduciary issues related to Trust Owned Life Insurance as institutional trust companies develop “best practices” to manage and monitor trust owned policies. Over 40% of institutionally trusteed policies reviewed have serious deficiencies or problems. Few institutional trustees have the necessary level of insurance expertise for proper policy review. Trust companies fear a lawsuit for improper management of their trust owned insurance policies.

Planning Tip:  Your clients need their advisors’ guidance to better understand both the risks and the improved opportunities from TOLI. The potential risk for your clients is substantial. Policy grantors and trustees need to recognize that life insurance is an asset that must be periodically reviewed by an independent expert to avoid risk and to optimize asset performance.

What are the results of reviewing Trust Owned Life Insurance policies?

Facts about TOLI policy reviews – there is a high likelihood that:

  1. The TOLI policy represents a considerable percentage of the client’s total estate.
  2. The TOLI policy has not been reviewed or managed since purchase.
  3. The TOLI policy is not performing as originally projected.
  4. The client must pay additional (unexpected) premiums before death.
  5. The client can get more insurance for the same premium (despite being older).
  6. The client can get the same insurance coverage for less premium outlay.
  7. The trustee has never reviewed the policy.
  8. The agent who sold the policy is no longer in touch with the client.
  9. The insurance coverage is no longer appropriate for the client.
  10. The policy provisions and guarantees are obsolete.
  11. The client and the trustee do not really understand the impact of falling interest rates since policy inception.
Planning Tip:  The average non-institutional trustee (for example, brother-in-law, friend, etc.) is even less informed than is an institutional trustee – and even less likely to audit policy performance. Therefore, the insurance risk is even greater with non-institutional trustees, but they may be less likely to act upon that risk.

What features are important in a reliable provider of TOLI review service?

  • Insurance expertise
  • Independence
  • Objective advice
Planning Tip:  Look for a turnkey TOLI review service that can offer not only an expert policy review and a clear comparison of all policy solutions, but also a cost-effective, comprehensive program to manage client policies.


Offering your clients an objective TOLI review provides them with significant value added and peace of mind as to their wealth planning; specifically, it increases the likelihood that their planning will achieve their stated objectives. Consider working with an advisor who can perform an objective TOLI review to accomplish this much needed – and often overlooked – analysis.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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10 Tips for Helping Families with Special Needs

Volume 2, Issue 2

This issue of our newsletter examines the unique planning requirements of families with children, grandchildren or other family members (such as parents) with special needs. There are many misconceptions in this area that result in costly mistakes in planning for special needs beneficiaries. There are many misconceptions in this area that result in costly mistakes in planning for special needs beneficiaries. It is, therefore, incumbent upon us – our clients’ advisors – to ensure that clients understand all of their options.

Costly Mistake #1: Disinheriting the special needs beneficiary.

Many disabled people rely on SSI, Medicaid or other government benefits to provide food and shelter. Your clients may have been advised to disinherit their special needs beneficiaries – beneficiaries who need their help most – to protect those beneficiaries’ public benefits. But these benefits rarely provide more than basic needs. And this “solution” does not allow your clients to help their special needs beneficiaries after the clients become incapacitated or are gone. When a loved one requires, or is likely to require, governmental assistance to meet his or her basic needs, parents, grandparents and others should consider establishing a Special Needs Trust.

Planning Tip:  It is unnecessary and in fact poor planning to disinherit special needs beneficiaries. Clients with special needs beneficiaries should consider a Special Needs Trust to protect public benefits and care for those beneficiaries during their own incapacity or after their death.

Costly Mistake #2: Procrastinating.

Because none of us knows when we may die or become incapacitated, it is important that your clients plan for a beneficiary with special needs early, just as they should for other dependents such as minor children. However, unlike most other beneficiaries, special needs beneficiaries may never be able to compensate for a failure to plan. Minor beneficiaries without special needs can obtain more resources as they reach adulthood and can work to meet essential needs, but special needs beneficiaries may never have that ability.

Planning Tip:  Parents, grandparents, or any other loved ones of a special needs beneficiary face unique planning challenges when it comes to that child. This is one area where clients simply cannot afford to wait to plan.

Costly Mistake #3: Failing to coordinate a planning team effort.

It is critical that advisors assisting with special needs planning include in the planning team: an attorney who is experienced in this planning area; a life insurance agent who can ensure that there will be enough money to maintain the benefits for the special needs child; a CPA who can advise on the Special Needs Trust’s tax return; an investment advisor who can help ensure that the trust fund’s resources will last for the special needs beneficiary’s lifetime; and any other key advisors that may support the goals of the trust going forward.

Planning Tip:  Special needs planning dictates that clients’ advisors work together to ensure that there are sufficient trust assets to care for special needs beneficiaries throughout their lifetime.

Costly Mistake #4: Ignoring the special needs when planning for a special needs beneficiary.

Planning that is not designed with the beneficiary’s special needs in mind will probably render the beneficiary ineligible for essential government benefits. A properly designed Special Needs Trust promotes the special needs person’s comfort and happiness without sacrificing eligibility.

Special needs can include medical and dental expenses, annual independent check-ups, necessary or desirable equipment (for example, a specially equipped van), training and education, insurance, transportation and essential dietary needs. If the trust is sufficiently funded, the disabled person can also receive spending money, electronic equipment & appliances, computers, vacations, movies, payments for a companion, and other self-esteem and quality-of-life enhancing expenses: the sorts of things your clients now provide to their child or other special needs beneficiary.

Planning Tip:  When planning for a beneficiary with special needs, it is critical that clients utilize a Special Needs Trust as the vehicle to pass assets to that beneficiary. Otherwise, those assets may disqualify the beneficiary from public benefits and may be available to repay the state for the assistance provided.

Costly Mistake #5: Creating a “generic” special needs trust that doesn’t fit.

Even some “special needs trusts”” are unnecessarily inflexible and generic. Although an attorney with some knowledge of the area can protect almost any trust from invalidating the beneficiary’s public benefits, many trusts are not customized to the particular beneficiary’s needs. Thus the beneficiary fails to receive the benefits that the parents or others provided when they were alive.

Another frequent mistake occurs when the Special Needs Trust includes a “pay-back” provision rather than allowing the remainder of the trust to go to others upon the death of the special needs beneficiary. While these “pay-back” provisions are necessary in certain types of special needs trusts, an attorney who knows the difference can save your clients hundreds of thousand of dollars, or more.

Planning Tip:  A Special Needs Trust should be customized to meet the unique circumstances of the special needs beneficiary and should be drafted by a lawyer familiar with this area of the law.

Costly Mistake #6: Failing to properly “fund” and maintain the plan.

When planning for a beneficiary with special needs, it is absolutely critical that there are sufficient assets available for the special needs beneficiary throughout his or her lifetime. In many instances, this requires utilization of a funding vehicle that can ensure liquidity when necessary. Oftentimes permanent life insurance is the perfect vehicle for this purpose, particularly for young and healthy clients while insurance rates are low.

Also, because this is an ever-changing area, it is imperative that clients revisit their plan frequently to ensure that it continues to meet the needs of the special needs beneficiary.

Planning Tip:  Clients should consider permanent life insurance as the funding vehicle for special needs beneficiaries, particularly with young beneficiaries given the often staggering costs anticipated over their lifetime.

For clients subject to estate tax, consider having an Irrevocable Life Insurance Trust own and be the beneficiary of the policy, naming the Special Needs Trust as a beneficiary. Alternatively, in a non-taxable situation, consider naming their revocable trust as the beneficiary to help equalize inheritances.

Costly Mistake #7: Choosing the wrong trustee.

Clients can manage the trust while alive and well. Once they are no longer able to serve as trustee, clients can choose who will serve according to the instructions they provide. Clients may choose a team of advisors and/or a professional trustee. Whomever they choose, it is crucial that the trustee is financially savvy, well-organized and of course, ethical.

Planning Tip:  The trustee of a Special Needs Trust should understand the client objectives and be qualified to invest the assets in a manner most likely to meet those objectives.

Costly Mistake #8: Failing to invite contributions from others to the trust.

A key benefit of creating a Special Needs Trust now is that the beneficiary’s extended family and friends can make gifts to the trust or remember the trust as they plan their own estates. For example, these family members and friends can name the Special Needs Trust as the beneficiary of their own assets in their revocable trust or will, and they can also name the Special Needs Trust as a beneficiary of life insurance or retirement benefits.

Planning Tip:  Creating a Special Needs Trust now allows others, such as grandparents and other family members, to name the trust as the beneficiary of their own estate planning.

Costly Mistake #9: Relying on siblings to use their money for the benefit of a special needs child.

Many clients rely on their other children to provide, from their own inheritances, for a child with special needs. This can be a temporary solution for a brief time, such as during a brief incapacity if their other children are financially secure and have money to spare. However, it is not a solution that will protect a child with special needs after your clients have died or when siblings have their own expenses and financial priorities.

What if an inheriting sibling divorces or loses a lawsuit? His or her spouse (or a judgment creditor) may be entitled to half of it and will likely not care for the child with special needs. What if the sibling dies or becomes incapacitated while the child with special needs is still living? Will his or her heirs care for the child with special needs as thoughtfully and completely as the sibling did?

Siblings of a child with special needs often feel a great responsibility for that child and have felt so all of their lives. When clients provide clear instructions and a helpful structure, they lessen the burden on all their children and support a loving and involved relationship among them.

Planning Tip:  Relying on siblings to care for a special needs beneficiary is a short-term solution at best. A Special Needs Trust ensures that the assets are available for the special needs beneficiary (and not the former spouse or judgment creditor of a sibling) in a manner intended by the client.

Costly Mistake #10: Failing to protect the special needs beneficiary from predators.

An inheritance that funds a special needs trust by will rather than by revocable living trust is in the public record. Predators are particularly attracted to vulnerable beneficiaries, such as the young and those with limited self-protective capacities. By planning with trusts rather than a will, clients decide who has access to the information about the transfer of their property. This protects their special needs child and other family members, who may be serving as trustees, from predators.

Planning Tip:  A Special Needs Trust created outside of a will ensures that information about the inheritance is not in the public record, protecting the special needs beneficiary from predators.


Planning for special needs beneficiaries requires particular care and the participation of all of the clients’ wealth planning advisors. A properly drafted and funded Special Needs Trust can ensure that special needs beneficiaries have sufficient assets to care for them, in a manner intended by their loved ones, throughout the beneficiaries’ lifetime.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

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