Accounting
Life insurance performance evaluation strategies for accountants and clients
Life insurance is an integral part of an overall financial plan. Regular reviews can determine whether the policy is performing according to expectations and meeting the client’s current financial objectives. Most importantly it will determine whether the client’s coverage will be in place when needed, at the insured’s passing. There are many factors to consider that will impact the performance of a life insurance policy. A periodic review of your client’s life insurance portfolio will determine that the product’s features, benefits and costs, as well as the client’s current planning objectives, are being met. One of the most significant reasons for doing so is to determine a life insurance policy’s current and all-important future cash value and how it’s being impacted by the policy’s cost of insurance.
Knowing the current accumulated cash value allows one to make several important assumptions, the most prominent being whether the cash value will be sufficient to prevent the policy’s coverage from expiring prematurely. Non-guaranteed universal life insurance is an asset class that must be actively managed in the same manner as a client would evaluate the performance of their stock, bond, or real estate portfolio.
During the past 30 years, many owners of life insurance policies have found and are continuing to discover that if they purchased life insurance between the early 1980s and early 2000s, there was a three out of four chance that their policy was of a non–guaranteed nature, meaning its duration of coverage was entirely dependent on the overall accumulated cash value based on the cumulative interest rate earned by their life insurance policy. For example, In the 1980s, when interest rates were 17 to 18% and many owners of these new non-guaranteed universal life insurance policies mistakenly assumed that the current interest rate would always remain in the vicinity of the initial 17 to 18%, over the next 20 to 30+ years. But as rates continuously declined, with the exception of the last two years, they in fact only earned an average of 4 to 5%. Unfortunately, the owners of these non- guaranteed policies have since found themselves in a situation where 30 to 35% of these existing non-guaranteed contracts have been and are continuing to expire prematurely at a steadily increasing rate. The accumulated cash value was simply insufficient to cover the policy’s annual costs when the insured was in their mid-80s
In the case of a lapsing policy with a loan, the policy owner is subject to income taxes, as a result of forgiveness of debt if the policy expires before the insured. Likewise, if a trustee or grantor forgets to pay the premium or assumes no premium is due when in fact it is, the insurance companies will at the broker’s initial request based on a checkmark on the application pay the premium to keep the policy in force. Further, it will consider those premiums as a loan and charge a cumulative 5 to 6% interest rate on the loan each year. The trustee and the grantor are often unaware that this loan and the accruing interest on that loan are draining the policy’s cash value, thus accelerating the policy’s premature expiration. It’s of paramount importance that the policy not be allowed to expire before the insured does.
My experience over the last 35 years has shown me that a typical unskilled trustee, usually the eldest son or daughter of the insured, was not given proper guidance that a non-guaranteed policy was no longer a “buy and hold” asset that could be placed in a drawer and forgotten and had instead become a “buy and manage” asset. As a result, there were no procedures in place to properly manage a personally owned or trust-owned life insurance policy. Further exacerbating the problem is the fact that the insurance agent/broker may no longer be involved, and the insurance company, contrary to popular belief, is not obligated, beyond sending an annual statement with important information about the fact that interest rates could adversely impact the duration of coverage, buried somewhere on page 4 of an eight-page report.
Here’s a little-known fact: It’s not in the insurance company’s best interest that one’s coverage remains in force. The reason being, they profit when policies expire prematurely. Consider the fact that after years of an insured paying their premiums, a death benefit is not required to ever be paid because the policy lapsed.
Such are the consequences of sustained reduced interest rates and years of in- attention on the part of the sons and daughters acting as the private owners or unskilled trustees of their parents’ life insurance policies. Sons and daughters that didn’t know that they were 100% responsible for the performance of their policies. Nor did they know they should have increased the premium they paid to the insurance company over the last 20 to 30 years as that would have been the only way they could have made up for the reduced earnings caused by falling interest rates. (with exception of the last two years)
As a result, an increasing number of trust beneficiaries and their families are finding themselves left without the life insurance proceeds they were otherwise expecting to receive. Many of those beneficiaries are now litigating against other family members and their advisors who didn’t know any better but should have. These situations leave owners in a position where they must decide whether it makes sense to continue their coverage so it lasts through their life expectancy at a significantly higher cost than their current premium, or to give up (lapse) all or part of the coverage.
So how can an attorney or accountant, acting as a trustee themselves or an advisor to the policy owner or trustee, know if the universal life policy they, or their clients, own has problems? The most reliable way to understand how a policy is performing is to order an in-force historic re-projection. This evaluation illustrates the policy from its inception until the present and contains all premiums paid to date and the policy’s current cash values. These values must now be projected into the future based on current guaranteed crediting rates and on the current increasing mortality costs and costs of insurance that the insurance company charges the insured each year. The tools to provide these analytical services are available; they just need to be used.
The best course of action for a son or daughter acting as an accommodation or unskilled trustee, or for their advisor attempting to maintain their client’s life insurance coverage, would be for them to engage an experienced independent life insurance consultant to conduct a performance evaluation to determine whether the policy funding their trust is one of the 70% of non-guaranteed policies that are most likely to be in danger of expiring prematurely. This is then followed by setting up a plan for corrective action with the objective of making changes in strategies meant to best remedy the current situation so as to maintain the policy’s coverage.
Should you come across a client in this position, consider an alternate exit strategy rather than merely surrendering the policy back to the insurer and instead engage a licensed life settlement broker to consider the sale of the policy in the secondary marketplace to an institutional investor. In doing, so you will find that it’s common for a client to receive an offer that’s two to three times higher than the cash surrender offered by the insurance company. The ideal candidate for such a transaction is an insured person over the age of 70 and ideally in poorer health than they were when they applied to the coverage. Basically, an older insured person in poor health will receive a better offer than a younger individual in good health.
Another important reason to consider a sale of a policy rather than allowing it to lapse is in the case of a lapsing policy with a loan, the policy owner can be subject to income taxes, as a result of forgiveness of debt if the policy expires before the insured. If the policy with the debt survives the insured, the debt is forgiven and no taxes are due. Likewise, if a trustee or grantor forgets to pay the premium or assumes no premium is due when in fact it is, most insurance companies — based on the agent or broker checking the box to prevent the policy from lapsing — will automatically pay the premium to keep the policy in force. Further, it will consider those premiums to be a loan and charge a cumulative 5% interest rate on the loan each year. The trustee and the grantor are often unaware that this loan and the accruing interest on that loan are draining the policy’s cash value, thus causing it to expire prematurely.
Many accountants and attorneys have suggested that their high-net-worth clients use an institutional trustee for their trust-owned life insurance policies, while others have chosen to serve as trustees of such trusts themselves. Since institutional trustees charge a fee for their services, only a small portion of trust-owned life insurance policies — less than 10% — use a corporate or institutional trustee to professionally manage a client’s irrevocable life insurance trust. The other 90% ask a family member or close friend or an advisor to act in the capacity of an accommodation or unskilled trustee.
Lastly, it’s important for any trustee to be aware that with the title and fee comes a significant amount of responsibility and fiduciary liability to evaluate the performance of a client’s portfolio. If they are not equipped to do so, it’s their duty to engage the services of a professional who can.
Final regulations now identify certain partnership related-party “basis shifting” transactions as “transactions of interest” subject to the rules for reportable transactions.
The final regs apply to related partners and partnerships that participated in the identified transactions through distributions of partnership property or the transfer of an interest in the partnership by a related partner to a related transferee. Affected taxpayers and their material advisors are subject to the disclosure requirements for reportable transactions.
During the proposal process, the Treasury and the Internal Revenue Service received comments that the
- Increased dollar threshold for basis increase in a TOI. The threshold amount for a basis increase in a TOI has been increased from $5 million to $25 million for tax years before 2025 and $10 million for tax years after.
- Limited retroactive reporting for open tax years. Reporting has been limited for open tax years to those that fall within a six-year lookback window. The six-year lookback is the 72-month period before the first month of a taxpayer’s most recent tax year that began before the publication of the final regulations (
slated for Jan. 14 in the Federal Register). Also, the threshold amount for a basis increase in a TOI during the six-year lookback is $25 million. - Additional time for reporting. Taxpayers have an additional 90 days from the final regulation’s publication to file disclosure statements for TOIs in open tax years for which a return has already been filed and that fall within the six-year lookback. Material advisors have an additional 90 days to file their disclosure statements for tax statements made before the final regulations.
- Publicly traded partnerships. Because PTPs are typically owned by a large number of unrelated owners, the final regulations exclude many owners of PTPs from the disclosure rules.
The identified transactions generally result from either a tax-free distribution of partnership property to a partner that is related to one or more partners of the partnership, or the tax-free transfer of a partnership interest by a related partner to a related transferee.
Bloomberg via Getty Images
The tax-free distribution or transfer generates an increase to the basis of the distributed property or partnership property of $10 million or more ($25 million or more in the case of a TOI undertaken in a tax year before 2025) under the rules of IRC Sections 732(b) or (d), 734(b) or 743(b), but for which no corresponding tax is paid.
The basis increase to the distributed or partnership property allows the related parties to decrease taxable income through increased cost recovery allowances or decrease taxable gain (or increase taxable loss) on the disposition of the property.
The Treasury Department and the Internal Revenue Service proposed new rules for the tax credit for qualified commercial clean vehicles, along with guidance on claiming tax credits for clean fuel under the Inflation Reduction Act.
The
The credit is the lesser amount of either 30% of the vehicle’s basis (15% for plug-in hybrid EVs) or the vehicle’s incremental cost in excess of a vehicle comparable in size or use powered solely by gasoline or diesel. A credit up to $7,500 can be claimed for a single qualified commercial clean vehicle for cars and light-duty trucks (with a Gross Vehicle Weight Rating of less than 14,000 pounds), or otherwise $40,000 for vehicles like electric buses and semi-trucks (with a GVWR equal to or greater than 14,000 pounds).
“The release of Treasury’s proposed rules for the commercial clean vehicle credit marks an important step forward in the Biden-Harris Administration’s work to lower transportation costs and strengthen U.S. energy security,” said U.S. Deputy Secretary of the Treasury Wally Adeyemo in a statement Friday. “Today’s guidance will provide the clarity and certainty needed to grow investment in clean vehicle manufacturing.”
The NPRM issued today proposes rules to implement the 45W credit, including proposing various pathways for taxpayers to determine the incremental cost of a qualifying commercial clean vehicle for purposes of calculating the amount of 45W credit. For example, the NPRM proposes that taxpayers can continue to use the incremental cost safe harbors such as those set out in Notice 2023-9 and Notice 2024-5, may rely on a manufacturer’s written cost determination to determine the incremental cost of a qualifying commercial clean vehicle, or may calculate the incremental cost of a qualifying clean vehicle versus an internal combustion engine (ICE) vehicle based on the differing costs of the vehicle powertrains.
The NPRM also proposes rules regarding the types of vehicles that qualify for the credit and aligns certain definitional concepts with those applicable to the 30D and 25E credits. In addition, the NPRM proposes that vehicles are only eligible if they are used 100% for trade or business, excepting de minimis personal use, and that the 45W credit is disallowed for qualified commercial clean vehicles that were previously allowed a clean vehicle credit under 30D or 45W.
The notice asks for comments over the next 60 days on the proposed regulations such as issues related to off-road mobile machinery, including approaches that might be adopted in applying the definition of mobile machinery to off-road vehicles and whether to create a product identification number system for such machinery in order to comply with statutory requirements. A public hearing is scheduled for April 28, 2025.
Clean Fuels Production Credit
The Treasury the IRS also released guidance Friday on the Clean Fuels Production Credit under Section 45Z of the Tax Code.
Section 45Z provides a tax credit for the production of transportation fuels with lifecycle greenhouse gas emissions below certain levels. The credit is in effect in 2025 and is for sustainable aviation fuel and non-SAF transportation fuels.
The guidance includes both a
“This guidance will help put America on the cutting-edge of future innovation in aviation and renewable fuel while also lowering transportation costs for consumers,” said Adeyemo in a statement. “Decarbonizing transportation and lowering costs is a win-win for America.”
Section 45Z provides a per-gallon (or gallon-equivalent) tax credit for producers of clean transportation fuels based on the carbon intensity of production. It consolidates and replaces pre-Inflation Reduction Act credits for biodiesel, renewable diesel, and alternative fuels, and an IRA credit for sustainable aviation fuel. Like several other IRA credits, Section 45Z requires the Treasury to establish rules for measuring carbon intensity of production, based on the Clean Air Act’s definition of “lifecycle greenhouse gas emissions.”
The guidance offers more clarity on various issues, including which entities and fuels are eligible for the credit, and how taxpayers determine lifecycle emissions. Specifically, the guidance outlines the Treasury and the IRS’s intent to define key concepts and provide certain rules in a future rulemaking, including clarifying who is eligible for a credit.
The Treasury and the IRS intend to provide that the producer of the eligible clean fuel is eligible to claim the 45Z credit. In keeping with the statute, compressors and blenders of fuel would not be eligible.
Under Section 45Z, a fuel must be “suitable for use” as a transportation fuel. The Treasury and the IRS intend to propose that 45Z-creditable transportation fuel must itself (or when blended into a fuel mixture) have either practical or commercial fitness for use as a fuel in a highway vehicle or aircraft. The guidance clarifies that marine fuels that are otherwise suitable for use in highway vehicles or aircraft, such as marine diesel and methanol, are also 45Z eligible.
Specifically, this would mean that neat SAF that is blended into a fuel mixture that has practical or commercial fitness for use as a fuel would be creditable. Additionally, natural gas alternatives such as renewable natural gas would be suitable for use if produced in a manner such that if it were further compressed it could be used as a transportation fuel.
Today’s guidance publishes the annual emissions rate table that directs taxpayers to the appropriate methodologies for calculating carbon intensities for types and categories of 45Z-eligible fuels.
The table directs taxpayers to use the 45ZCF-GREET model to determine the emissions rate of non-SAF transportation fuel, and either the 45ZCF-GREET model or methodologies from the International Civil Aviation Organization (“CORSIA Default” or “CORSIA Actual”) for SAF.
Taxpayers can use the Provisional Emissions Rate process to obtain an emissions rate for fuel pathway and feedstock combinations not specified in the emissions rate table when guidance is published for the PER process. Guidance for the PER process is expected at a later date.
Outlining climate smart agriculture practices
The guidance released Friday states that the Treasury intends to propose rules for incorporating the emissions benefits from climate-smart agriculture (CSA) practices for cultivating domestic corn, soybeans, and sorghum as feedstocks for SAF and non-SAF transportation fuels. These options would be available to taxpayers after Treasury and the IRS propose regulations for the section 45Z credit, including rules for CSA, and the 45ZCF-GREET model is updated to enable calculation of the lifecycle greenhouse gas emissions rates for CSA crops, taking into account one or more CSA practices.
CSA practices have multiple benefits, including lower overall GHG emissions associated with biofuels production and increased adoption of farming practices that are associated with other environmental benefits, such as improved water quality and soil health. Agencies across the Federal government have taken important steps to advance the adoption of CSA. In April, Treasury established a first-of-its-kind pilot program to encourage CSA practices within guidance on the section 40B SAF tax credit. Treasury has received and continues to consider substantial feedback from stakeholders on that pilot program. The U.S. Department of Agriculture invested more than $3 billion in 135 Partnerships for Climate-Smart Commodities projects. Combined with the historic investment of $19.5 billion in CSA from the Inflation Reduction Act, the department is estimated to support CSA implementation on over 225 million acres in the next 5 years as well as measurement, monitoring, reporting, and verification to better understand the climate impacts of these practices.
In addition, in June, the U.S. Department of Agriculture published a Request for Information requesting public input on procedures for reporting and verification of CSA practices and measurement of related emissions benefits, and received substantial input from a wide array of stakeholders. The USDA is currently developing voluntary technical guidelines for CSA reporting and verification. The Treasury and the IRS expect to consider those guidelines in proposing rules recognizing the benefits of CSA for purposes of the Section 45Z credit.
Accounting
IRS and Treasury propose regs on 401(k) and 403(b) automatic enrollment, Roth IRA catchup contributions
The Treasury Department and the Internal Revenue Service issued proposed regulations Friday for several provisions of the SECURE 2.0 Act, including ones related to automatic enrollment in 401(k) and 403(b) plans, and the Roth IRA catchup rule.
SECURE 2.0 Act passed at the end of 2022 and contained an
One set of
The proposed regulations include guidance to plan administrators for properly implementing this requirement and are proposed to apply to plan years that start more than six months after the date that final regulations are issued. Before the final regulations are applicable, plan administrators need to apply a reasonable, good faith interpretation of the statute.
Roth IRA catchup contributions
The Treasury and the IRS also issued
That includes proposed rules related to a provision requiring that catch-up contributions made by certain higher-income participants be designated as after-tax Roth contributions.
The proposed regulations provide guidance for plan administrators to implement and comply with the new Roth catch-up rule and reflect comments received in response to
The proposed regulations also provide guidance relating to the increased catch-up contribution limit under the SECURE 2.0 Act for certain retirement plan participants. Affected participants include employees between the ages of 60-63 and employees in newly established SIMPLE plans.
The IRS and the Treasury are asking for comments on both sets of proposed regulations.
New IRS regs put some partnership transactions under spotlight
Treasury, IRS propose rules on commercial clean vehicles, issue guidance on clean fuels
IRS and Treasury propose regs on 401(k) and 403(b) automatic enrollment, Roth IRA catchup contributions
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
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