creating liquidity from a non-liquid asset bill clark, director innovation & collaborative...
TRANSCRIPT
Creating Liquidity from a Non-liquid Asset
Bill Clark, DirectorInnovation & Collaborative StrategiesPortland Oregon - February 6, 2015
“Achieving Success in Any Economy”
What do these have in common?
Your house
A lottery ticket
Your life policy
Term life insurance - Life Settlement
Male age 74
• $2 million, 20-year term, ready to expire.
• Insurance carrier value if lapsed = ZERO
Term life insurance - Life Settlement
Male age 74
• $2 million, 20-year term, ready to expire.
• Insurance carrier value if lapsed = ZERO
Fair Market Value = $630K
Status Offer 1 Offer 2 Offer 3 Final Offer
Provider 1 Accepted 1,100,000 1,315,000 1,500,000 1,550,000Provider 2 Offer 900,000 1,100,000 1,320,000 1,320,000
Provider 3 Offer 480,000 497,500 502,500 502,500
Provider 4 Offer 1,000,000 1,250,000 1,255,000 1,255,000
Provider 5 Offer 850,000 950,000 1,025,000 1,120,000
Provider 6 Offer 875,000 900,000 900,000 900,000
Provider 7 Offer 1,040,000 1,050,000 1,065,000 1,065,000
Provider 8 Offer 725,000 890,000 920,000 920,000
Provider 9 Decline
Provider 10 Decline
Provider 11 Decline
Provider 12 Offer 411,000 411,000
Death Benefit $4,000,000 CSV = $109,088
Fair Market Value vs. Fair Value
Health
• Policy issued Standard or Preferred
• With a change in health since the issue date
• 15 year +/- projected life expectancy
DOWNLOAD OUR APPLIFE SETTLEMENT CALCULATOR AT YOUR FINGERTIPS
Quick Reference App Icon for Smartphones and Tablets
Progression in Accountability & Liability
Grigsby v. Russell (1911 Supreme Court Decision)
Uniform Prudent Investor Act
NCOIL Life Settlement Model Act
Larry Grill et al v. Lincoln National Life
Your clients are living longer
The economy has not been friendly to them
They’re worried about running out of money
80% of policy owners will lapse a life policy!
80% of policy owners will lapse a life policy!
90% of seniors who lapsed a life insurance policy
would have considered a life settlement had they
been aware of the possibility. Insurance Studies
Institute (ISI)
Term Insurance
Universal Life Insurance held in an ILIT
Pay Close Attention to…….
Clients often pay meticulous attention to
important TRADITIONAL ASSETS (businesses, securities, and real estate)
LIFE INSURANCE can equal or exceed the
value of these traditional assets
but may receive little or no attention and can be
left in an underperforming state for years.
Trust Owned Life Insurance
Female age 81• $3M UL policy purchased in 1988 • Underfunded, $48K cash value remaining• Premiums increased to $150K
Trust Owned Life Insurance
Female age 81• $3M UL policy purchased in 1988 • Underfunded, $48K cash value remaining• Premiums increased to $150K
Fair Market Value = $1.1 Million
Three Valuation Processes that Overlook
Life Insurance Fair Market Value
Business Valuations
ILIT Policy Reviews
Insurance Portfolio Review
M&A|Sell side overlooks $800K
Key-Person policy
76-year-old seller retained the $10M entity
owned policy and sold it for $800K
Two Unique Life Settlement Options
Long Term Care Benefit Trust Settlement
Retained Death Benefit Settlement
Long Term Care Benefit Settlement The ‘Gift of Dignity’
Adult children were funding 7K/mo. for skilled
nursing care for their 84-year-old mother.
Long Term Care Benefit Settlement The ‘Gift of Dignity’
Adult children were funding $7K/mo. for skilled
nursing care for their 84-year-old mother.
Mom sold her $500K UL policy for $150K
Proceeds were placed in an irrevocable trust
The trust then Paid Monthly LTC Expenses
99.8%
99.8%of all estates in 2013 were not expected to be subject to federal estate tax
(Benjamin H. Harris, “Estate Taxes after ATRA,” taxpolicycenter.org, February 2013)
Excess Coverage Dilemma resulting from ATRA 2012
Male 78
• $10M UL, CSV = $67K
• Appraised value = $697K lump sum
Excess Coverage Solution resulting from ATRA 2012
Male 78
• $10M UL, CSV = $67K
• Appraised value = $697K lump sum
Client retained $2.15M in coverage
No future premium payments
Take the Quiz, then give us a call
The Process
The Form 712 Value
may be a very expensive mistake for
Term & Universal Life policies.
Life Policy Valuations
Example of the Differences in Valuations
Company A issues a $10M policy with a $250K premium
Company B issues a $10M policy with a $250K premium
712 Values:• Company A 712 = $2.5M value• Company B 712 = $1M value
Which is accurate?
Example of the Differences in Valuations
Company A issues a $10M policy with a $250K premium
Company B issues a $10M policy with a $250K premium
712 Values:• Company A 712 = $2.5M value• Company B 712 = $1M value
Which is accurate? In the eyes of the IRS, they both are ?!
Actual 712 Value Report - $5M NLG
Base Reserve = 559,672.15Axxx Basic Reserve = 792,343.08Axxx Deficiency Reserve = 473,246.59
“……To date, the IRS has not issued guidance with respect to the valuation of the no lapse guarantee feature for estate and gift tax purposes…………
Actual 712 Value Report - $5M NLG
Base Reserve = 559,672.15Axxx Basic Reserve = 792,343.08Axxx Deficiency Reserve = 473,246.59
“……To date, the IRS has not issued guidance with respect to the valuation of the no lapse guarantee feature for estate and gift tax purposes…………
…………..Ultimately, the fair market value that
you report to the IRS is up to you.”
The Ashar SMV®
Fair Market Value
Revenue Ruling 59-60 – “…a sound
valuation will be based upon all the
relevant facts, but the elements of
common sense, informed judgment and
reasonableness must enter into the
process …”
