A Primer on Irrevocable Life Insurance Trusts

“I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.”
Entertainer Arthur Godfrey

The irrevocable life insurance trust (ILIT) can be an important estate strategy tool that may accomplish a number of estate objectives; however, it may not be appropriate for every individual.^1,2

What Is an ILIT?

An ILIT is created by an individual (the grantor) during his or her lifetime. The ILIT owns a life insurance policy on the grantor’s life via the transfer of ownership of an existing policy or through the grantor’s annual contribution of cash to pay the premiums on a policy purchased by the trust.³

The grantor designates beneficiaries, usually family members, who will typically receive the proceeds upon the death of the grantor.

The trust is irrevocable, meaning that the grantor forfeits all rights to the property contained in the trust. Its irrevocable nature is integral to accomplishing the ILIT’s objectives.

What Can an ILIT Accomplish?

The ILIT may be able to accomplish several estate objectives, including:

1. Meeting liquidity needs;
2. Managing estate taxation on the policy proceeds;
3. Providing income to survivors.

How Does an ILIT Work?

When you die, the trust is designed to receive a payment equal to the policy coverage amount, e.g., $500,000. Since the trust’s ownership of the policy is irrevocable, the proceeds are not considered your property. Consequently, they do not fall into your estate, thus potentially avoiding estate taxation. (Remember, generally no income tax is due on such life insurance proceeds.)⁴

The trust provisions should be set up to provide direction about how and to whom payments may be made. You may direct that the trust pay out cash to cover certain expenses, e.g., funeral costs, probate, taxes, final medical expenses, and debts.

This may obviate the need to sell less liquid assets at an inopportune time to cover such costs.

The trust’s beneficiaries may receive the proceeds (after any payments are made to satisfy liquidity needs), creating an inheritance free of estate taxes. Finally, creditors should not be able to attack these assets since they belong to the trust, not you.

Creating an ILIT should be done only with the assistance of a qualified estate planning attorney. It is a complicated exercise in which mistakes may result in losing the benefits ILITs offer.

Age My Way in May

May is a month to celebrate the older Americans in our country and honor their lives and the accomplishments they still have ahead of them.

Older Americans Month was established in 1963 by President John F. Kennedy to bring awareness to the types of programs and support older Americans need to succeed. The Administration of Community Living sets a theme for Older Americans Month every year. This year’s theme is “Age My Way.” Community support, participation, and accessibility are essential for people of all ages, especially for older Americans.

If you identify as an older American, we have some tips to help you take care of your mind, body, and finances:

• Stay Active: Physical activity is important for people of all ages, but it’s vital for older Americans. If you don’t have complete mobility, you may still want to add some gentle physical activity to your routine.
• Grow Your Community: Socialization helps keep your mind sharp as you age but making new friends can seem daunting. If you have a passion, it’s likely that someone else shares that passion, too.
• Refresh Your Estate Strategy: As you age and life continues to change, it’s a good idea to revisit your estate strategy to make certain it still reflects your goals. Now’s a great time to have those conversations with your family members to make sure everyone knows what your wishes are.

Retirement Seen Through Your Eyes

How do you picture your future? Some see retirement as a time to start a new career. Others see it as a time to travel. Still others plan to spend more time with family and friends. With that in mind, here are some things to consider.

What do you absolutely need to accomplish? If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to pursuing them.

What would revitalize you? Some people retire with no particular goals at all. After weeks or months of respite, ambition may return. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they will follow … and yet, when the time to follow them arrives, those dreams may unfold differently than anticipated and may even be supplanted by new ones.

In retirement, time is really your most valuable asset. With more free time and opportunity for reflection, you might find your old dreams giving way to new ones.

Who should you share your time with? Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be “family.” Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family.

How much do you anticipate spending? We can’t control all retirement expenses, but we can manage some of them. The thought of downsizing your home may have crossed your mind. One benefit of downsizing is that it can potentially lead to no mortgage or a more manageable mortgage payment.

Could you leave a legacy? Many of us would like to give our kids or grandkids a good start in life, but leaving an inheritance can be trickier than many realize. Tax laws are constantly changing, and the strategies that worked years ago may have more limited benefits today.

Keep in mind this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax or legal professional before modifying any part of your overall estate strategy.

How are you preparing for retirement? This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing strategy in light of recent changes in your life, conferring with a financial professional experienced in retirement approaches may offer some guidance.

Optimistic Sign In a Fear-Filled Market?

“Be fearful when others are greedy and greedy when others are fearful,” according to legendary investor Warren Buffett.

It’s a great quote but complex advice to follow, especially in 2022 when stock prices are down double-digits. It seems like company after company is telling shareholders it will be a challenging year.

But has fearful sentiment reached an extreme? According to an April survey by the American Association of Individual Investors, nearly 60% of individual investors describe their six-month outlook for stocks as “bearish”–the highest level since March 2009. A.A.I.I. has been surveying investors since 1987, and the April bearish figure is the 10th highest in history.

The A.A.I.I. has a lot of research into what happens when sentiment gets stretched on bullish and bearish sides. But the most important research takes into account your specific goals, time horizon, and risk tolerance. Please reach out if you feel a bit queasy about today’s markets. The best medicine may be a dose of reassurance.

Breaking Down the Great Resignation

Lately, the “Great Resignation” has led many Americans to leave their jobs for other opportunities, while others have chosen a different path: early retirement. We can all understand looking for a more suitable place of work, but some might ask, “Why now?”

The Great Retirement Boom
In 2008, the oldest baby boomers reached age 62. This coincided with the “Great Recession,” which contributed to a slowed economy. Jump to 2021 when the economy had distanced itself from those events and just over half of adults aged 55 or older had exited the workforce and retired. For adult Americans aged 65 to 74, the percentage who had left the workforce was 66.9 percent. In short, many people decided to hold off on retiring and wait a few years, meaning it’s not an early retirement so much as a delayed one.¹

Covid Catchup
Another reason is that the pandemic created a period of flux in which people decided it was natural to work less, transition to new things, or retire altogether. The pandemic has undoubtedly gone on much longer than any could have imagined. It’s understandable that someone reaching the end of a long and rewarding career may choose to exit their job during COVID-19 and parachute into a less stressful, more enjoyable career.

Looking Ahead
Let’s chat if you’re thinking about making a change to your time horizon or retirement goals. We’d love to discuss where you stand and the drawbacks and advantages of retiring in the current environment.

Three Key Questions to Answer Before Taking Social Security

Social Security is a critical component of the retirement financial strategy for many Americans, so before you begin taking it, you should consider three important questions. The answers may affect whether you make the most of this retirement income source.

1. When to Start? You have the choice of 1) starting benefits at age 62, 2) claiming them at your full retirement age, or 3) delaying payments until age 70. If you claim early, you can expect to receive a monthly benefit that will be lower than what you would have earned at full retirement. If you wait until age 70, you can expect to receive an even higher monthly benefit than you would have received if you had begun taking payments at your full retirement age. The decision of when to begin taking benefits may hinge on whether you need the income now or can wait, and whether you think your lifespan will be shorter or longer than the average American.
2. Should I Continue to Work? Work provides income, and personal satisfaction, and may increase your Social Security benefits. However, if you begin taking benefits prior to your full retirement age and continue to work, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit ($18,960 in 2021). If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit ($50,520 in 2021) until the month you reach full retirement age. After you attain your full retirement age, earned income no longer reduces benefit payments.¹
3. How Can I Maximize My Benefit? The easiest way to maximize your monthly Social Security benefit is to simply wait until you turn age 70 before receiving payments.

Will Power

Only one-third of adults have a will in place, which may not be entirely surprising. No one wants to be reminded of their own mortality or spend too much time thinking about what might happen once they’re gone.¹

But a will is an instrument of power. Creating one gives you control over the distribution of your assets. If you die without one, the state decides what becomes of your property without regard to your priorities.

A will is a legal document by which an individual or a couple (known as “testator”) identifies their wishes regarding the distribution of their assets after death. A will can typically be broken down into four main parts.

1. Executors – Most wills begin by naming an executor. Executors are responsible for carrying out the wishes outlined in a will. This involves assessing the value of the estate, gathering the assets, paying inheritance tax and other debts (if necessary), and distributing assets among beneficiaries. It’s recommended that you name at least two executors, in case your first choice is unable to fulfill the obligation.

2. Guardians – A will allows you to designate a guardian for your minor children. Whomever you appoint, you will want to make sure beforehand that the individual is able and willing to assume the responsibility. For many people, this is the most important part of a will since, if you die without naming a guardian, the court will decide who takes care of your children.

3. Gifts – This section enables you to identify people or organizations to whom you wish to give gifts of money or specific possessions, such as jewelry or a car. You can also specify conditional gifts, such as a sum of money to a young daughter, but only when she reaches a certain age.

4. Estate – Your estate encompasses everything you own, including real property, financial investments, cash, and personal possessions. Once you have identified specific gifts you would like to distribute, you can apportion the rest of your estate in equal shares among your heirs, or you can split it into percentages. For example, you may decide to give 45 percent each to two children and the remaining 10 percent to a sibling.

The law does not require that a will be drawn up by a professional, and some people choose to create their own wills at home. But where wills are concerned, there is little room for error. You will not be around when the will is read to correct technical errors or clear up confusion. When you draft a will, consider enlisting the help of a legal or financial professional, especially if you have a large estate or complex family situation.

Preparing for the eventual distribution of your assets may not sound enticing. But remember, a will puts the power in your hands. You have worked hard to create a legacy for your loved ones. You deserve to decide what becomes of it.

If you would like more insight into issues to consider in making out a will we invite you to check out AQuest Wealth Advisor Bob Stockoski’s video as he discusses how to control your assets following your passing away, and the downside of adding your kids to your house and accounts. And please subscribe to our YouTube channel for more valuable videos

Twitter Takes The Poison Pill

Recently, you might have heard about Twitter using a “poison pill” option to fend off a hostile takeover. While it sounds like something a Wicked Queen would use in a fairy tale, the poison pill is not uncommon.

A hostile takeover happens when a company doesn’t want to change hands and takes measures to prevent it. The defensive move is the poison pill, a business strategy that makes the takeover more difficult or expensive. Such a move is usually part of a shareholder rights plan.

In the case of Twitter, the company plans to offer shareholders a discounted price on stock should a single entity purchase more than a 15% stake.

Questions about the poison pill practice? There’s no need to get “twitterpated.” We’d love to discuss it with you.

Inflation Creeping Into Personal Finance

If you have a balance on a credit card or an adjustable rate mortgage, you might be noticing changes in your payments. Higher interest rates are starting to ripple through the personal finance landscape, and it doesn’t look like that trend will change anytime soon.

The Federal Reserve has indicated it plans to keep raising short-term interest rates to help manage inflation, which is at its highest level in 40 years. You’re likely seeing the effects of inflation when buying gas or groceries, and you’ll notice it if you are shopping for a new or used car.

The Federal Reserve’s job is to control inflation. By raising interest rates, the Fed hopes to slow spending, bringing down consumer prices.

Time will tell whether higher interest rates will prompt us to consider changes to your portfolio. Remember, your overall strategy considers that there will be transition periods in the economy.

In the meantime, you may want to look at I Bonds, which are issued by the U.S. government and earn a fixed interest rate plus a variable interest inflation rate that’s adjusted twice a year. I Bonds have certain purchase limits, restrictions, and tax treatments, so they generally play a limited role in your financial picture.

If you have any questions about inflation or interest rates, please reach out. We’re always here to help put things into perspective.

Your Changing Definition of Risk in Retirement

During your accumulation years, you may have categorized your risk as “conservative,” “moderate,” or “aggressive” and that guided how your portfolio was built. Maybe you concerned yourself with finding the “best-performing funds,” even though you knew past performance does not guarantee future results.

What occurs with many retirees is a change in mindset—it’s less about finding the “best-performing fund” and more about consistent performance. It may be less about a risk continuum—that stretches from conservative to aggressive—and more about balancing the objectives of maximizing your income and sustaining it for a lifetime.

You may even find yourself willing to forego return potential for steady income.

A change in your mindset may drive changes in how you shape your portfolio and the investments you choose to fill it.

Let’s examine how this might look at an individual level.

Still Believe

During your working years, you understood the short-term volatility of the stock market but accepted it for its growth potential over longer time periods. You’re now in retirement and still believe in that concept. In fact, you know stocks remain important to your financial strategy over a 30-year or more retirement period.¹

But you’ve also come to understand that withdrawals from your investment portfolio have the potential to accelerate the depletion of your assets when investment values are declining. How you define your risk tolerance may not have changed, but you understand the new risks introduced by retirement. Consequently, it’s not so much about managing your exposure to stocks, but considering new strategies that adapt to this new landscape.¹

Shift the Risk

For instance, it may mean that you hold more cash than you ever did when you were earning a paycheck. It also may mean that you consider investments that shift the risk of market uncertainty to another party, such as an insurance company. Many retirees choose annuities for just that reason.

The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

The march of time affords us ever-changing perspectives on life, and that is never more true than during retirement.