Page 26 - Investment Advisor April/May 2022

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In a presentation at the 2021 AICPA conference, I com- can structure the policy costs to increase competitiveness.
pared the relative benefit of investments held in various Junge notes that “fiduciary financial advisors who under-
product structures. At today’s favorable capital gains tax stand the benefits of permanent life insurance (PLI), how to
rates (which aren’t guaranteed to remain low), the optimal appropriately size the allocation to PLI relative to a tradi-
structure for investing in passive equities is generally an ETF. tional investment-only diversified stock and bond portfolio,
Stocks also benefit from favorable tax treatment on long-term and how to structure policies designed to reduce the cost
gains, a step-up in basis at death, and the ability to make gifts of insurance and maximize the tax-efficiency benefits, can
of appreciated assets. significantly improve the financial planning outcomes for
Income on bonds is taxed annually at ordinary income rates, clients. For HNW clients, the longer-term tax-advantaged
which can significantly reduce after-tax growth over time. accumulation and death benefit generally outweighs the early
This is particularly true for high-income investors. And higher- years cost of insurance.”
yielding fixed income invest-
ments held within ETFs and “A common criticism of whole Building a Plan to
mutual funds are particu- Transfer Wealth
larly inefficient when held life insurance policies is the high Most ultra-high-net-worth
within taxable accounts. upfront commission, but the present families have two primary
A famous ad notes that goals: lifestyle and legacy.
Guinness beer “only has 125 value of advisor compensation can An advisor’s job is to devel-
calories — not on purpose.” be lower for a commission product op a legacy plan that most
Similarly, life insurance efficiently transfers wealth
whose cash value is tied to than a fee product when held for a at death. Parrish recom-
the performance of the gen- mends taking advantage of
eral account is exactly the long period of time.” the historically high cur-
type of investment that ben- rent estate and generation-
efits the most from being held in an insurance wrapper. The skipping trust (GST) exemptions today to buy a life insurance
purpose of the general account portfolio is to provide the high- policy under the exemption limit.
est returns on safe investments used by insurance companies “If the wealthy individual has an unused $12 million estate
to fund intermediate- and long-term liabilities. In other words, and GST exemption, use it to pay a single premium for a life
the insurance company hires professional investors to build a insurance policy that may buy, say, a $28 million death benefit.
broadly diversified portfolio of bonds that capture both credit Put it in a GST trust, and you’ve already skipped a generation,
and mortality premiums for policyholders. perpetuating the dynasty trust. Add in more sophisticated
Ross Junge, a chartered financial analyst and partner at techniques like private split dollar and generational split dol-
McGill Junge Wealth Management in Des Moines, Iowa, is lar, and there is potential to further leverage up the gift. The
an expert in working with high-net-worth clients to leverage bottom line is that you avoid estate tax on two generations
the benefits of whole life insurance products that incorporate through an asset that also is income tax free,” he says.
a general account portfolio. Junge notes that whole life helps Both Parrish and Junge also recommend the use of life
“improve tax efficient accumulation, portfolio diversification, insurance within an irrevocable life insurance trust (ILIT) for
and multigenerational estate tax planning outcomes when wealthy clients. According to Parrish, “the good old fashioned
integrated with traditional investments for the benefit of ILIT with Crummey power gifts remains one of the most
HNW clients.” powerful estate planning tools for HNW individuals. Done
How does a whole life policy integrate with traditional properly, you completely avoid gift tax, estate tax and income
investment portfolios? Growth in the cash value of the policy tax on your bequest to future generations.”
rises over time but, unlike a bond mutual fund that holds simi- Junge sees the ILIT as a transition for an insurance policy
lar intermediate-term corporate bond-like assets, does not fall that initially serves the purpose of protecting against pre-
when interest rates or credit spreads rise. This steady growth mature death, but in the long term becomes a valuable part
can reduce the volatility of a client’s total wealth, allowing a of estate planning when HNW families shift their primary
higher optimal allocation of equities — particularly in taxable objective to estate planning. According to Junge, “if the irre-
investment accounts. vocable trust is properly structured as a Generation Skipping
A common criticism of whole life insurance policies is the Trust (GST) Trust, clients also can avoid estate tax on mul-
high upfront commission, but the present value of advisor tiple future generations thus perpetuating multi-generational
compensation can be lower for a commission product than a wealth transfer strategies.”
fee product when held for a long period of time. Agents also If estate planning strategies that involve the use of life

24 INVESTMENT ADVISOR APRIL/MAY 2022 | ThinkAdvisor.com