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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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At Virtus Wealth Management, we believe we can help you no matter what age you are, what life stage you are in, or how much money you are working with. We want you to feel educated, empowered, and involved in the planning of your financial future.

There is Much More to Financial Planning Part 2

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  • There is Much More to Financial Planning Part 2

by | May 1, 2021

There is Much More to Financial Planning Than Investing Part Two

As we mentioned in the previous article in this series, a key to the coordination and integration of a financial plan is ownership and transfer of your assets. Here we continue our “bullet” points to consider when discussing with your financial advisor, financial planner, wealth manager and ultimately an estate planning attorney.

Ownership and Beneficiary Arrangements (Part Two)

Life Insurance Issues

Life Insurance

  • Creates estate
  • Four parties to the contract
    • Insurer
    • Insured
    • Applicant-Policyowner
    • Beneficiary
  • Ownership may pass by stipulation, sale, or gift
  • Proceeds pass to beneficiary by contract not by will
  • Failure to co-ordinate may invalidate all plans

Beneficiary Arrangement Wrong

  • Proceeds of life policy payable to:
    • Wrong individual (spouse, but executor needs money)
    • Right individual, but wrong time (individual incapacitated, not ready to handle responsibility, too young)
    • Right individual, but wrong manner (paid in lump sum, but should have had monthly installments or vice versa)

Inadequate Coverage (the amount is more important than the kind of life insurance)

  • Not enough liquidity to replace breadwinner or keyman
  • Family needs underestimated
  • Corporate value or operating need underestimated

No Contingency Planning

  • No contingent owner named if insured is not owner (ownership reverts to insured)
  • No contingent beneficiary
  • Rule of Two: for every name in a dispositive document there should be at least two backups

Policy Included in Estate

  • Improper titling – existing policy never got changed
  • Gift within three years of death
  • No third-party ownership (e.g., children)

Gift of Policy Proceeds

  • If policyowner is not insured and beneficiary is neither policyowner or insured, at insured’s death, policyowner has made a gift to the beneficiary
  • Example: wife owns policy on husband with children as beneficiaries, at husband’s death, wife has made a gift of the proceeds to her children

Improper Corporate Beneficiary

  • Corp owns policy on employee, employee names wife as beneficiary
  • Either ordinary income or dividend (if insured shareholder) – now income
  • If plan caught in audit, it will be treated as split dollar
  • If insured owns over 50% of stock, proceeds includable in estate

Payment to Insured’s Estate

  • Subject to claims of creditors
  • Increases probate costs
  • Subject to attack if will disputed
  • Subject to state inheritance tax
  • May only be justified in UGMA and UTMA situations

Transfer for Value

  • Right to receive policy proceeds is transferred to another for valuable consideration
  • Child buys father’s $1,000,000 term policy from corporation, income tax treatment on death benefit

Life Insurance Ownership

Owner may:

  • Change the beneficiary
  • Surrender, cancel, or change ownership on the policy
  • Assign the policy cash value or death benefit
  • Revoke an assignment
  • Pledge the policy for a loan
  • Obtain a policy loan or withdrawal

Exceptions to Transfer for Value

  • Transfer to insured
  • Transfer to partner or partnership in which insured is partner
  • Transfer to corporation in which insured is stockholder or officer
  • Transfer where transferee maintains the transferor’s basis (policy transferred between spouses or transferred by gift)

Divorce and Remarriage

  • Failure to change beneficiaries
  • Failure to review wills, trusts, ownership and beneficiary arrangements
  • Planning point – if required to carry policy, may be best to increase alimony payments and have wife buy the policy

Leaving Everything to Spouse

  • Postpones estate tax to second death, but increases size of estate
  • May leave inexperienced person managing money

Simultaneous Death

  • Simultaneous death
    • State simultaneous death act
    • Insured presumed to outlive spouse
    • Proceeds pass in accordance with insured’s wishes
  • Delay Clause
    • Insured presumed to outlive spouse if spouse dies with x days of insured

Equal but Inequitable Distributions

  • One (or some) beneficiaries may need money more than others
  • Per stirpes designation (important when there are grandchildren)
  • Per capita designation

Settlement Options

  • Lump sum (seems the most logical, but may not be initially)
  • Interest only (could offer protection from potential creditors)
  • Annuity payout

We at Virtus Wealth Management are not attorneys, and do not practice law. That said, we are very comfortable discussing the various options and allowing our clients to think through the choices available to them and the expected result of their decisions. If you would like to discuss any of the above options with one of our experienced advisors, please call us at (817) 717-3812 to schedule a meeting.


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