Importance of Policy Analysis

Importance of Policy Analysis

3 Reasons to Do A Policy Analysis

That You Likely Have Never Been Told

1. Almost 2 in 5 policies are “orphaned”. This means they have no one watching over their performance. This is dangerous because life insurance is an asset that needs managing, just like any other asset. Without proper management a policy could lapse, wiping away thousands of dollars of cash value and possibly millions in coverage for loved ones.

2. 1 in 5 policies is on “automatic premium loan”.
What is that? That’s a feature ostensibly designed to be helpful but can inadvertently cause a taxable event for your client. If a client misses a premium payment on a policy with the automatic premium loan, it will kick in taking a loan for the premium due from the cash value. This is fine until the policy lapses and the entire loan amount becomes taxable to the client. OUCH!

The potential liability that the Policy is either underwater or due to lapse: studies show as many as 45% of policies are underperforming or scheduled to lapse. This could be a huge problem for your clients and they don’t even know.


But don’t fret. We can help you and your clients. However, the key is to act NOW vs. waiting. A troubled policy doesn’t get better, it only gets worse. Give us a call to discuss how we can help analyze your client’s coverage to ensure they’re on solid ground.

Are you ready to discuss solutions and re-engage your clients? Fill out our contact form.

Mercury Financial Group does not provide tax or legal advice. All clients are urged to seek counsel on such matters.



And now we take action, right?  What am I talking about?   I’m talking about (finally) taking action on your planning.
For the past 2 years we’ve heard countless clients say, “Hey, I get it. I know I need to do my estate planning but I’m not doing anything until I see what the tax law will be.”  Well, now we know.

What we know is:  the estate tax did not go away. 

So, even with a Republican-controlled House, Senate, and White House the estate tax still did not get repealed.  Most experts agree, given those circumstances, that this was the best chance of ever getting it repealed.  These same experts now agree, that the tax is HIGHLY likely to be with us for a long time given the above.

So, what does this all mean?

Most estate planning attorneys agree that life insurance is an effective part of any quality estate plan.  Generally, the insurance is used as a very efficient means to pay the estate tax.  Think, paying it with pennies, not dollars.  Clients who have been presented insurance as part of their plan, but who held off waiting out the tax law change, now need to move forward.  As we all know, insurance does not get cheaper as you age.  So, the time to act on this really is now.

Some good news: although the estate tax did not go away, we were given a window to do some very exciting things that we won’t be able to do in just a few short years.  The tax act gave us double the gift exemption.  So, instead of $5.49 million to gift per person, we now have close to $11 million to gift.  However, this window closes in 8 years, if not sooner.  Therefore, most planners, attorneys, and ourselves included are urging clients to take advantage of this incredible gifting opportunity by taking action now!

On top of that, the rates the IRS publishes for planners to use with various trusts, GRATS, CRT’s etc. are slowly rising.  These rates have been at historic lows for almost a decade.  That window seems to be closing as the experts predicted and these interest rates will continue to rise making planning strategies that use these rates less attractive.  Said another way:  Time is running out.

Next Steps? 

Your next step is to go back to every client who has been sitting on their hands these past 2 years and re-engage them.  Your Mercury Planning Specialist is here, as your go-to planning partner, to help guide you and your clients on the proper path to accomplish all their goals.

Further Reading – The Power of Life Insurance: The Impact of a Tax-free Death Benefit

Are you ready to discuss solutions and re-engage your clients? Fill out our contact form.

Mercury Financial Group does not provide tax or legal advice. All clients are urged to seek counsel on such matters.

Legacy Plan Assets in Today’s Investment Environment

Legacy Plan Assets in Today’s Investment Environment

Expert Dan Mythen, CEP, offers considerations for Legacy Plan Assets in today’s investment environment

What are the considerations in choosing an asset to pass on to heirs in today’s environment?
High net worth clients that plan to leave a legacy should consider how assets perform in terms of taxes, liquidity, market risk, leverage, and guaranteed values.  Below, I discuss the pros and cons of stocks, Funds/ETFs, Municipal Bonds, Partnership, REITs, LLC shares, Annuities, and Life insurance.  I will not address qualified plan assets or IRAs as they are generally not allowed to be owned within an irrevocable trust.  I have also left out real estate as a standalone asset but it might be part of an LLC, REIT or Partnership share.

First off, let’s assume that the client has done some advanced estate planning and that the assets we discuss below may be gifted into an irrevocable trust.  This trust structure currently avoids state and federal estate tax at the time of the grantor’s death along with asset protection.

Liquidity within the trust may or may not be important.  The trust might also have the capability to make distributions or loans to the beneficiaries for certain circumstances.  Liquidity may also come into play, such as in a trust, where the grantor would be the husband and the non-grantor wife could receive distributions for health, education, maintenance, and support for her ascertainable standard of living while the husband/grantor is still alive.  This is sometimes known as a spousal lifetime access trust or S.L.A.T.

Several high net worth clients have enjoyed recent record gains in their stock positions.  Is this a favorable asset to pass on wealth?
As most advisors are aware, stocks enjoy a stepped-up cost basis upon passing to the next generation so there is no capital gains tax upon sale of that asset when sold by the beneficiary.  Many high net worth clients have low-cost basis highly appreciated concentrated stock positions that may have been stock awards from their employers.  (See case study comparison at the bottom of the article)

  • Taxes – Enjoys stepped up cost basis at death
  • Liquidity – Very good unless no market exists to sell
  • Market Risk – Variable
  • Leverage – Generally accepted as collateral for securities based lending
  • Guaranteed Values – None

Would Mutual Funds or ETFs work well as a legacy asset?
They provide professional management and diversification.  The same “Tax Drag” on capital gains and income apply to funds and ETFs.  Some ETFs, Mutual Funds, and Managed Accounts intend to be “tax-managed” so as to not generate a large 1099 of reportable income to the trust.

  • Taxes – Enjoys stepped up cost basis at death, may have high annual income and capital gains
  • Liquidity – Very good unless restricted
  • Market Risk – Variable. Diversified as they typically manage a basket of stocks or/and bonds
  • Leverage – Generally accepted as collateral for securities based lending
  • Guaranteed Values – None except possibly index option protection strategies

What about Partnership, REITs or LLC shares?
These may be popular assets to gift into an irrevocable trust.  If it is a family-owned business (entity), the shares may be highly illiquid and might qualify for a discount against gifting limits for lack of marketability (liquidity), and entity controlling shares.

  • Taxes – Enjoys stepped up cost basis at death if able to be sold. Qualified distributions treated currently at the same rate as capital gains which is 20%
  • Liquidity – Poor unless entity is sold and shares become liquid. REIT has more liquidity
  • Market Risk – Variable, dependent on performance of entity or real estate
  • Leverage – Difficult to get loan on a non-traded share
  • Guaranteed Values – None

How do taxes effect the decision on which type of asset is placed within a trust?
Currently, all income from trust assets is at the highest rate of 39.6% income tax after only $12,500 of income.  So owning assets that generate a lot of current income would probably not be the best choice.   Assets may also be exposed to capital gains tax of 20% after $12,500 of income if sold before transferred to the next generation.

If I want to avoid taxes, what about owning Municipal Bonds?
Municipal bonds have always been a popular planning asset for clients wanting to avoid income taxes.  As we have been in extended low-interest rate environment, the current yields on all bonds are historically quite low.  A 20 year AA-rated municipal bond has an average yield of about 3.5% today. Widely traded bonds are liquid if there may be a need for the trust to disperse cash during the life of the grantor/client.   Any gain would be subject to capital gains tax.  There may also be more interest rate risk in owning bonds in today’s environment.  A common rule of thumb is for every 1% rise in interest rates, a 20-year bond loses about 15% in market value if sold.  Is this an acceptable risk for a low yield/return?

  • Taxes – Enjoys stepped up cost basis at death
  • Liquidity – Very good unless restricted
  • Market Risk – Variable with interest rates or creditor default
  • Leverage – Generally accepted as collateral
  • Guaranteed Values – Depends on Municipalities ability to service debt /pay interest on bond

Okay, then what about Annuities?
Annuities are great vehicles for accumulating tax-deferred wealth that is meant to be spent during one’s lifetime.  They are generally poor wealth transfer vehicles and rarely if ever owned by an irrevocable trust.

  • Taxes – No stepped up cost basis upon death. Income from annuities is taxable at ordinary income rates unless annuitized.
  • Liquidity – Good unless restricted
  • Market Risk – Variable or Fixed dependent on underlying investment. Diversification in subaccounts
  • Leverage – Might be accepted as loan collateral
  • Guaranteed Values – Possibly

What about Life Insurance?
Life insurance has always been a popular vehicle for wealth transfer.  It provides liquidity shortly after the time of death which can meet monetary demands or help the family business continue without financial stress.  It helps avoid a “fire sale” of other assets.  As mentioned above, if held within an irrevocable trust it escapes all income and estate tax.

  • Taxes – Death benefit is always income tax-free and if in an irrevocable trust, is also estate tax-free. Withdrawals from policy cash values are generally tax-free.
  • Liquidity – Generally cash values as withdrawal of basis or/and loans.
  • Market Risk – Variable or guaranteed values available.
  • Leverage – Very high for death benefit in early years and reducing as time goes on.
  • Guaranteed Values – Guarantees on cash value but more importantly guaranteed death benefits now available up to age 120.

Example of comparing two assets for efficient wealth transfer:

Bob and Linda

  • Married, Good Health.
  • Both age 60 with two adult kids.
  • Current annual income over $470,070.
  • They are at the highest current income and capital gain tax rates apply.  39.6% income and 20% capital gain.  (At 35% bracket and below, capital gain tax would be 15%.)
  • Net Worth over $10 million.
  • $1 million position in Apple.  Assume a zero cost basis.
  • 5/30/17 price of Apple was $153. 5 year high is $156.

Option A:
They sell their Apple position and pay a 20% capital gain tax to net $800,000.  They then gift that amount to the Bob and Linda irrevocable trust.  The trust purchases a survivor universal life policy with a guaranteed death benefit of $3,387,926.

  • Taxes – $200,000 at highest capital gain rate of 20%. Death benefit is entirely tax-free
  • Liquidity – Little as this policy design favors a higher death benefit versus a liquid cash value
  • Market Risk – Guaranteed by the carrier
  • Leverage – 4.23 to 1 return leverage on inception. (3,387,926/800,000) May be acceptable loan collateral
  • Guaranteed Values – Guaranteed death benefit to age 120

Option B:
Gift the $1 million Apple position to the revocable trust.

  • Taxes – Annual dividends taxed at 20% No estate or capital gain taxes if held to death of grantors
  • Liquidity – Very good
  • Market Risk – Variable / Non-Diversified
  • Leverage – Typically accepted as loan collateral
  • Guaranteed Values – None

To equal the guaranteed amount provided by the insurance from day one, the Apple stock price must go from the current price of $153 to $518.  Is that realistic?  Option “A” retains another $200,000 of gifting ability.  If trust liquidity is not a goal, the insurance looks to be the better option.  With a single policy on Bob and Linda in similar trusts, there would be more liquidity at the first death.  A combination of both asset types may be appropriate.

As tax laws, life situations, market conditions, and family dynamics are ever-changing, it makes sense to tailor an efficient wealth transfer strategy that provides the right balance of flexibility, tax protection and asset protection.  The assets earmarked for wealth transfer should be analyzed based upon tax treatment, need for liquidity, potential market risk, leverage and available guarantees.

About the Author:
Dan Mythen has been securities licensed since 1984 and has spent the first half of his career wholesaling equity and bond funds through top financial advisers.  He brought to market the first Washington-only municipal bond mutual fund while at MFS.  The latter half of Dan’s career has been concentrated on planning options for efficient wealth transfer of assets for high net worth and ultra high net worth clients.  Dan has been associated with Mercury Financial Group for the past four years and is available for consultation with advisors and their high net worth and ultra high net worth clients.  Dan makes his home in Redmond Washington with his teenage son Kellan and enjoys fishing, hiking, flying his pet drone and yoga.

Ready to learn more? Fill out our contact form.

Mercury Financial Group does not provide tax or legal advice. All clients are urged to seek counsel on such matters.

Q&A: Life Insurance and Estate Planning

Q&A: Life Insurance and Estate Planning

Expert Bruce Rothbard, CLU®, ChFC® answers questions on incorporating life insurance into estate plans

How is life insurance utilized as an estate planning tool?
Because both federal and state estate tax laws are ever-changing, liquidity is essential for HNW clients. Life insurance provides instant liquidity for estate plans and also provides the best leverage of annual exclusion gifting (currently $14,000 per individual). Estate tax bills are due within 9 months of death. Avoiding a fire sale of assets to come up with the liquidity necessary to pay for estate taxes, along with the extra income tax burden, is easily accomplished with life insurance.

Who should incorporate life insurance into their estate plan?
Ironically, life insurance makes sense for any individual, whether they have an estate tax issue or not. Life insurance is incorporated for the sole purpose of leaving a legacy for loved ones. Its many uses such as business succession planning, legacy planning, charitable planning, supplemental retirement income, asset protection and many others make it a very good alternate asset class for consideration.

What are some of the risks involved and how can they be avoided?
The life insurance industry and its products have evolved. There have been many recent changes in internal costs associated with declining interest rates and other internal factors. You must do periodic reviews to ensure policies issued years ago are still on track to perform as anticipated. Another looming problem can be the individuals acting as fiduciaries (trustees, attorneys, accountants, etc.) who rarely review policy specifications to ensure they are on track with the policy owner’s original assumptions. Utilizing an advanced life insurance planning specialist helps avoid and sometimes completely eliminates any potential risks associated. An objective specialist stays up-to-date on the latest life insurance products and strategies and will properly perform periodic policy review for clients.

How can advisors provide life insurance solutions to their high-net-worth clients for estate planning?
Each client is different and requires their own customized strategy such as premium financing, private financing, charitable planning, legacy planning, income replacement or business succession planning. A quality life insurance specialist can implement different techniques based on each individual client’s goals to avoid tax ramifications.


What are the most common misconceptions you see about life insurance and estate planning?
One of the most common misconceptions is that life insurance is difficult to understand when it is simply another class of asset. In estate planning, life insurance is the equivalent to a stock or bond. However, it has significant tax advantages such as tax deferral, asset protection and creditor protection that other assets do not. Another common misconception is that life insurance is somewhat complex, but in the hands of an expert is can be as simplistic as other asset classes.

How should advisors address client life insurance policies if estate tax laws change?
As indicated previously, ongoing policy reviews are imperative to keep in line with the ever-changing estate tax laws, both state and federal. Under the worst-case scenario, all estate tax laws are repealed. That simply means your heirs will not need the liquidity to pay taxes, they will simply receive more inheritance estate tax-free. Even the worst-case scenario is still a positive.

If estate tax laws change, does it mean that life insurance will no longer provide tax efficiency and immediate leverage?
No, life insurance is still an extremely effective asset for the benefit of heirs. Hence, the reason so many estate planning attorneys recommend life insurance in a quality estate plan. The general characteristics of life insurance, regardless of possible tax law changes, still make it a very viable asset class to have in your portfolio.

Ready to learn more? Fill out our contact form.

Advanced Strategy Spotlight: Leveraged B Trust

Advanced Strategy Spotlight: Leveraged B Trust

How life insurance can help increase value and allow more assets to pass to heirs

What is a B Trust?
A “B Trust” (or Credit Shelter Trust) is a common estate planning technique describing a trust designed to make maximum use of the estate tax exemption available. It is a trust established at the death of the first spouse funded with the exemption amount allowed under current tax law. A B Trust is typically used as a strategy for clients with primary goals of ultimately passing assets to their children or heirs while allowing the surviving spouse and/or trustee use of the trust income for lifestyle purposes if needed.

See the Advantages of a Leveraged B Trust vs. a Regular B Trust

Although using a B Trust is an effective strategy for clients, it does come with some key disadvantages. Trust assets are subject to various taxes on income the trust receives, there is no step-up in basis at the death of the surviving spouse and assets can be subject to fluctuations in value due to market volatility.  Is there a better way to pass these assets on to the heirs, shut off the tax problem and get a step-up in basis on the assets? All it takes is repositioning of the assets (or part of the assets) into life insurance inside the trust. By doing so, the client can achieve possible benefits such as:

  • Shutting off all taxation as the insurance is a tax deferred asset
  • A step-up in basis at death
  • Significantly more proceeds to the heirs through the leverage of the assets via the insurance death benefit
  • Stability from market fluctuations
  • A guaranteed amount of proceeds at death

Typically, when an advisor shows a high-net-worth client the option of doing nothing and continuing down their same path versus the leveraged B Trust strategy, the answer is obvious. Most affluent clients see the B Trust assets as money for their children because the surviving spouse has plenty of other assets to cover living and lifestyle expenses. This concept can be an ideal solution to maximize what a couple’s heirs receive while providing extra assets if needed to the surviving spouse and minimizing taxes.

Are you ready to get started with this solution? Fill out our contact form.

Success Story: Split Funded Defined Benefit Plans

Success Story: Split Funded Defined Benefit Plans

SFDB Plan Success Story Highlights

  • The clients made a $641,000 contribution gaining a $289,000 tax savings (45% tax bracket).
  • The plan added $1.5 million of life insurance coverage.
  • The financial advisor will receive at least $381,000 of new AUM each year for the life of the plan, in addition to the life insurance sale.

A few months ago, we discussed split funded defined benefit plans. These plans (also known as SFDB plans or cash balance plans) are possible solutions for successful small business owners or partners looking for large tax deductions and ways to boost retirement savings. When George and Susan needed a retirement and tax strategy, their financial advisor looked to their Mercury Financial Group Planning Specialist who suggested a split funded defined benefit plan.

Understanding Split Funded Defined Benefit Plans

The Clients

Husband and wife, George and Susan (ages 63 and 62), own a successful family business which employs 14 staff including their son and daughter. George and Susan began thinking about retiring in five years and passing the business to their son and daughter.


While George and Susan were eager to retire, they realized that they had reinvested much of the company profits. Because the business was quite profitable, and George and Susan had contributed approximately $600,000 pre-tax per year for 5 years to a custom pension plan, they needed to accomplish the following:

  1. Contributions must be income-tax deductible
  2. Accumulate as much retirement income as possible
  3. Include life insurance as one of the assets to protect the wealth transfer

The Solution

To address their goals, the couple’s financial advisor contacted his Mercury Financial Group Planning Specialist to develop the right solution. The advisor arranged a meeting with George, Susan and the planning specialist to secure an employee census of the couple’s business.

Using the census information, the planning specialist researched options and recommended a split funded defined benefit plan. The specialist and advisor worked closely with a third-party administrator (TPA) to perform the actuarial testing and designed a custom plan which addressed George and Susan’s challenges and concerns.

Custom SFDB Plan Details

The advisor, planning specialist and TPA set up a split funded defined benefit plan add-on to the current 401(k)/profit sharing plan already in place.

An example of how a slit funded defined benefit plan worked for small business owners


George and Susan now look forward to a comfortable retirement, confident they can pass the business on to their children under favorable financial terms, while ensuring sufficient retirement income for themselves.

Benefits Recap

  • In a 45% tax bracket, the $641,000 represented a tax savings of about $289,000 with George and Susan realizing about 94% of the contribution for themselves.
  • The SFDB plan provided George and Susan with approximately $1.5 million of life insurance coverage.
  • In addition to the life insurance sale, the Financial Advisor will receive at least $381,000 of new AUM each year for the life of the plan.

Do you think split funded defined benefit plans might be right for some of your high-net-worth clients? Download this SFDB Plan Client Profile Sheet to find out.