Let Your Clients Test Drive Retirement

Let Your Clients Test Drive Retirement

Every retiree would like to know how their plans will work. If they could take a retirement test drive of their plans, they could have more confidence in the future. Retirement Test Drive is one of PlanLab®’s programs for just that purpose. It performs a detailed cash flow analysis incorporating expected incomes and expenditures and uses assets as you designate, for some of the expenditures as part of your plans. No software can accurately predict the future, but Retirement Test Drive lets you see how your plans, including your best assumptions and your objectives, might work.

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Estate Tax Certainty with PlanLab

Washington is adding yet another layer of uncertainty to estate taxes with the lack of action in the Senate. But on January 1, 2010 all of your PlanLab® applications showing death in 2010 or later will reflect all of the estate tax provisions according to the current laws!

You don’t need to do a thing.

PlanLab® was previously programmed to illustrate the laws as written for 2010, 2011 and beyond:

  • No federal estate tax in 2010
  • Limited step-up in basis for 2010 deaths
    • Step-up of $1.3 million in property from a decedent
    • Step-up of certain transfers to spouse up to $3 million but not available for all assets
  • Gift tax maximum no greater than income tax highest rate
  • Reversion to pre-2001 Tax Act in 2011
  • These are just the main points, but all provisions are included.

If the first death occurs in 2010 and the spouse sells inherited property later, PlanLab® with its true cash flow calculations will reflect the capital gains and subsequent estate taxes correctly. You can show the effects of the current legislation. PlanLab® Analysis programs all illustrate true cash flow, including:

  • Estate Tax Analysis
  • Wealth Distribution Analysis
  • Retirement Test Drive
  • Financial Needs Analysis
  • Financial Strategies
  • Wealth Strategies

PlanLab® Conceptual programs like Estate Tax Concepts and Family Limited Partnership illustrate the estate tax rates correctly but do not provide cash flow details.

You can count on your PlanLab® illustrations to provide the proper estate taxes with certainty, even as Congress continues their uncertainty! And when new laws are signed, PlanLab® will be among the first to provide updated illustrations.

Life Insurance as a Senior Asset

You have finally retired. Your children are secure. Your grandchildren are your greatest joys. You have some funds that you don’t think you will have to use for your retirement that you would love to leave to your grandchildren. But, in today’s volatile economy, where is a safe place to put it? Is there a safe place that can hedge against market fluctuations?

In considering the answers to these questions, don’t overlook one of the safest and simplest tools, life insurance. Many people overlook life insurance because they are in good health and feel that they can invest the money elsewhere for larger returns. However, if the senior does not anticipate needing the money for a number of years, but wants to be able to easily access it should it become necessary, and safety and simplicity are their goals, then life insurance should definitely be considered. Life insurance looks even better if there is a strong likelihood that the senior will not use the money.

Mr. Singleton is 60 years old, a standard non-smoker and has a substantial sum to invest. Currently, he is in a 35% tax bracket. He has sought advice because he wants to hedge all of the current market fluctuations, but still have a good return. He hopes that he can leave it to his grandchildren.

He finds that he can use the lump sum available for investing as a single premium for a whole life policy. The life insurance would have a face amount of approximately two times the single premium for a whole life (permanent) life insurance contract.

Graph 1

Graph 1

In Graph 1, the blue line represents the death benefit of the new life insurance policy. The graph compares an alternative savings program earning 5% before taxes every year. At life expectancy, 18.2 years for a male age 60, the life insurance death proceeds would be about 25% greater than that of the alternative savings plan. The breakeven point would be after 24 years – if death occurred prior to age 84, the life insurance would have the greater gains. If death occurs after age 84, the alternative savings would have the larger gain.

The life insurance values and gains are very attractive if death occurs in the next 24 years. But what if Mr. Singleton needs the money for an emergency, or whatever? Although some values could be obtained from the permanent life insurance, the values would be less than those of the alternate savings program, as seen in Graph 2.

Graph 2

Graph 2

Even though Mr. Singleton thinks he will hold this investment until death, he must consider the values available for an emergency.

Of course, the rate of return for the life insurance is very high if death occurs in an earlier year. The alternative savings has been assumed to earn 5% before taxes throughout.

Graph 3

Graph 3

Graph 3 shows the life insurance returns will be quite high if death occurs sooner than life expectancy, but only slightly lower if death occurs after life expectancy.

Life insurance that has almost no market fluctuations is a very good long-term asset, especially if it is anticipated that it will be held until death.

PlanLab News provides no investment advice nor does it offer any opinion with respect to the suitability of any transaction. Clients should consult their legal, tax, and/or financial advisor before taking actions based on this information.

Based on a major US life company’s policy illustration for a standard male non-smoker with a one-time premium payment of $100,000.

The 5% return is hypothetical earnings for purposes of this illustration. It is assumed that 35% of the earnings each year are used to pay the taxes on the earnings.

Distributions Your Way or Their Way

Why create a will?

Perhaps the first question should be, “What does a will do?” Your will determines how any property you own at death will be distributed to your heirs – provided you have not made other arrangements.

What other arrangements would you have made? In some cases, you bought property that the deed states who gets it at death. For example, the deed to your home probably lists you and your spouse as joint tenant with right of survivorship – which simply means that if either of you die, the survivor owns it all. Ownership transferred by deed is not affected by the will. Contracts you have made usually state who the subsequent owner will be if the owner dies. An example of this type of contract is a life insurance policy. Also, a business owner may have agreed to a “Buy and Sell Agreement” with a partner or co-owner. If the contract provides for the successor owner, then it is not affected by the will.

Your will expresses how you want your remaining property to pass. But did you know that if you have not written a will, your state government has done it for you? If you die without a valid will, your assets will pass to your heirs according to state law. Each state writes its own intestacy laws that serve as a “generic will” for its residents. Without even knowing what the state will (intestacy law) says, you probably find it offensive to think the state will decide who gets your properties. Creating your own will allows you to express how you want your remaining properties to pass.

Law—Their Way

Lawmakers design the intestacy laws based on what they think you would want to happen. These laws vary from state to state.

Usually, the distributions occur as follows:

  • If your spouse survives you, and you have no children, your spouse inherits the estate. However, in some states, your parents and your spouse split the estate or any real estate.
  • If your spouse and children survive you, each inherits a portion of the estate, even if the children are minors.
  • If only your children survive you, they inherit the estate, and if they are minors, the court appoints a guardian for them.
  • If you have no surviving spouse or descendants, your parents inherit the estate. If your parents are deceased, your siblings inherit the estate. If you have no surviving siblings, your next of kin inherits the estate.
  • If you have no next of kin, your state of residence takes over possession of your estate.

Will—Your Way

Creating a will allows you to express how you want your probate property to pass. Probate property consists of any assets not contractually promised or jointly owned.

Advantages of a Will:

  • You choose who gets your remaining property.
  • You designate an executor of your choice to carry out your intentions.
  • You can design your will so that you actually reduce estate taxes.
  • You can appoint a trustee and/or guardian to manage your assets for your minor children.
  • You can amend or revoke the will at any time.

Why create a will? A will allows you to distribute the property you worked a lifetime to accumulate to whomever you choose. A will must meet certain requirements to be valid in your state. Always seek legal advice in creating or changing your will. To be sure your will works as you intend, always consult your legal counsel before signing any contracts or deeds, as they can undermine or contradict your will.

Why create a will? It’s as simple as making distributions at death your way, or their way.

Selling Disability Income to the Ones Who Can Get It

The people who need disability income insurance come in two forms: the ones whose lifestyle would be almost immediately affected if their source of monthly income suddenly stopped, and those who could endure the financial hardships caused by a sudden stop of salaried income.

It is easy to help those in the first group see the need for protection against the sudden loss of their salary due to an illness or accident. Often people in this first group are on such a tight budget, which in part causes them to be in this first group, that they have trouble adding disability income insurance premiums to already stretched budgets. For this group, selling the need is easy, while selling the cost is difficult. Often, this group contains workers whose occupations make it difficult to obtain coverage at desired rates or for desired coverage periods.

The second group, often professionals, executives, or business owners, have sufficient assets and other sources of income, that a loss of salaried income is seen more as an “inconvenience.” By inconvenience it means plenty of adjustments, giving up some luxuries and some desired discretionary expenditures, but it would not be the financial disaster similar to those of the first group. It is very difficult to convince this group of the need for disability income insurance with an urgency to take action. However, if this group were convinced of the need, allocating additional dollars for premiums would not be seen as a big obstacle. For this second group, selling the cost is easy, while selling the need is difficult.

Ironically, disability income insurance is often easier to obtain for the second group since their occupations are usually less hazardous with preferred occupational classes. It is much easier for this group to get the disability income coverage they desire. Since the second group generally has larger salaries, the amount of disability income needed is larger resulting in larger sales. Many times, the same sales presentations used to sell the needs for the first group are used, often unsuccessfully, with the second group.

PlanLab’s Financial Needs Analysis has the needs presentation pages to sell the need to the first group. But, it also has a unique sales presentation page designed to show the need of disability Income insurance to the second group. Since Financial Needs Analysis has true monthly cash flow calculations, the effects of various periods of disability can be calculated. By showing the effects of being disabled for just two years, five years, or from now until retirement, it is easy to see the “overall” effects of a loss of salaried income. The full impact of the lost salary is calculated including the missed 401(k) contributions. The cash flow calculations use the appropriate assets to pay ongoing expenses and illustrate the long-term effects of using those assets. To make it easy for the client to understand, the effects of various periods of disability are illustrated by the estimated net worth at retirement.

A sample of this unique presentation page shows that the client should have a net worth at retirement, age 65, of $5,321,674 if no periods of disability are assumed and everything goes as planned. However, just missing the next two years due to a disability, would reduce his net worth at retirement by 9.39% or almost half a million dollars. Missing the next five years would reduce the retirement net worth by 23.57% or approximately $1.25 million. If he were disabled from now until retirement, his retirement net worth would be reduced by two-thirds—about $3.5 million!

The emphasis of this page is to point out that the disability income insurance is not just providing funds to replace missed paychecks; it is maintaining his standard of living for the rest of his life and retirement. This page also shows the likelihood of a long-term disability for a person his age as compared to dying before retirement. In this example for a man age 50, he is almost three times (2.93) more likely to suffer a long-term disability than die before age 65.

The second group needs disability income insurance, just as much as the first group. By showing the long-term effects on retirement and long-term standard of living, with the likelihood of a disability occurring, you have the tool that makes selling the need of disability income easy. Now, you can sell disability income to the group that needs it and can get it.

Financial Decisions by Sound Bites

“Yes we can.” “The change we need.” “Too liberal.” “Spread the wealth.” “Lower taxes.” “Drill, baby, drill.” All of these were “sound bites” from the 2008 elections. People make very important decisions, decisions that should require cognitive research and careful deliberations, (like choosing a President) based on easily recalled “sound bites” such as these. Have we become a nation too busy to take the necessary time to make our life changing decisions? Do we make our financial decisions the same way – based on “sound bites”? Read more »

Proactive But Not Stupid: Fixing Your 401k Plan

Your 401(k) plan is your primary source of retirement savings. In the past year, particularly the past few months, it has dropped in value almost 50%. Everything you read or hear tells you to “sit tight.” Almost every source of financial advice recommends not cashing out, and not replacing your equity assets with fixed income assets. Only those that must have the money now should cash out. You’re told again and again that you always want to buy low and sell high – never sell low. You understand that if you switch to fixed returns, you cannot experience any market recovery. But, how can you just stand by and watch your savings shrink?

What can you do with your 401(k) plan? A prior article has already discussed the advantages of continuing your contributions and taking advantage of the concept of “dollar cost averaging.” (“What Should I Do with My 401K?” October 11, 2008.) This article will consider the investments already in your plan. How can you be proactive with your 401(k) plan and still follow the current recommendations:

•    Always have a strategy that results in buying low and selling high
•    As long as time permits, sit tight on your plan so that you can experience the market recovery

First and foremost, continue making contributions. The tax advantages and any employer match allow you to acquire more low cost shares that can accelerate your plan’s recovery. The next step requires work on your part; after all, you wanted to be proactive. This proactive adjustment to your plan requires five steps.

1. Look at each asset class of investments allowed in your plan, and determine the dollar value you have in each class.

Hopefully, you have some diversification in your plan, perhaps having followed an asset allocation model based on your risk tolerances. Even if you have all your eggs in one basket and only have one investment, these steps may still be applied. Asset classes are nothing more than a grouping of investments with similar risks and expected returns. Some examples are fixed income, large company equities, small-cap or mid-cap equities, balanced funds, and international equities.

2. For each asset class in which you have some money, research all available investment choices in that class.

  • Use all information provided by your plan
  • Use on-line information available from mutual funds, Morningstar or other fund evaluation sources
  • Compare the performances for the past 1 month, 3 months, 1 year, and 3 years as well as internal fees and expenses

3. Of the available choices in each asset class, decide which fund you would rank number 1 and number 2. Also, determine which fund you determine to be the most volatile – biggest swings over the same periods.

4. Using just the dollars already in an asset class, reallocate half of that amount to the fund you ranked number 1 in that class.

  • If you are within 10 years of retirement, put the other half in the fund you ranked number 2 in that asset class.
  • If you are 10 or more years from retirement, then put the other half in the fund you determined to be the most volatile in that asset class.

(Note: even though we may be changing investments, we are just shifting to a similar investment that probably has a better chance of recovering faster. We are not being stupid by selling low and buying high – we’re selling low and buying low.)

5. Determine the percentage of your investment in each fund, and reallocate to this percentage at least every three months.

  • Be sure to check your plan’s rules for reallocating as sometimes fees may be charged. You want to be sure that the fees do not offset the gains in reallocating.
  • Reallocating is nothing more than taking gains from the better performing funds whose prices are up, and shifting it to lesser performing funds whose prices are low. (A fancy process for continually buying low and selling high.)

What do these five steps accomplish? You have stayed within our rules: your strategy assures that you buy low and sell high, and that you give your investment the best chance possible of recovering. Although this may seem like a lot of work for just a little change, it is a strategy that combines almost all of the current financial advice in a proactive manner. You have the satisfaction of doing something about your retirement plan, and the confidence that you are not doing something stupid.

PlanLab News provides no investment advice nor does it offer any opinion with respect to the suitability of any transaction. Clients should consult their legal, tax, and/or financial advisor before taking actions based on this information.

The Value of a Business is Its People

Today we see many businesses with economic problems. They can be placed in two groups: those we think will make it, and those we don’t. Do these groups have any common denominators? I think the group that may not make it, seems to have valued its things above everything else – its products, its markets, its equipment, its sales, and its profits. The ones that appear to be able to survive these hard economic times are the ones who seem to value its people above everything else. If the businesses have confidence in its people, you seem to have confidence that somehow, those people will lead the businesses through these difficult times.

The fact that businesses are built on people, has been recognized throughout America’s history.
Andrew Carnegie, who in the late 1800s was considered one of the richest industrialists in the world and creator of the first business valued over $1 billion, once said: “Take away my factories, my plants; take away my railroads, my ships, my transportation; take away my money; strip me of all of these, but leave me my people, and in two or three years I will have them all back again.” He knew that it is not the things that a business has that counted; it is its people that count.

A successful business often has many key people. Although the owners of a business are usually key individuals, many non-owners may also be a key person. Exactly who is a key person?

The business owner can usually identify a key person by considering a few questions. If an employee was suddenly lost due to death or disability, would there be a hard adjustment period? Would sales be disrupted significantly? Would creditors have less confidence in the business? Would productivity be adversely affected? When the names of employees come to the owner’s mind when asked these questions, those employees are the key people.

Identifying a key person is only part of the problem: the tough problem is determining the dollar value that would be lost if the key person were lost. When an economic value can be placed on the loss of a key person, then insurance and other arrangements can be made to protect the business.

Unlike a machine, people have unique qualities and abilities that make valuing their services difficult. The only right way to value a key person is to consider all areas where the employee affects the business.

Twelve Factors for Considering the Impact of a Key Person

1. Impact on Profits

Impact on profits is very subjective, but when a key person would have a significant impact on profits, the employer knows it. It’s easy to see that a person is responsible for half or three-quarters of the profit; it is very difficult to see that someone is responsible for 5% or 10% of profits.

2. Impact on Sales

The percent of total sales is usually known when the key person is directly involved in sales. When considering the impact on sales, the indirect effects must be considered. Often the key person’s role in the community and relationship with customers impact sales. Non-sales personnel may have a major impact on sales.

3. Unique Qualities

How difficult would it be to find another person with the unique qualities of the key person being considered? How important are those qualities to the success of the business? Answering these two questions helps to determine the impact of the key person.

4. Relationship with Other Employees

Some employees are responsible for the morale of the entire staff. Would the loss of the key person affect morale of the other employees to the extent of lost productivity? This is an often overlooked trait in measuring the impact of a key person.

5. Impact on Company Credit

A key person often is responsible for obtaining credit for the company. The more dependent the business is on its credit lines, the more valuable this relationship. The key person may not be the direct contact with creditors. If creditors see the key person as being essential to continued profits, then the key person could have a major impact on credit.

6. Impact on Future Business Plans

Is the key person being counted on for the continuation of the business when an existing owner retires? Is he or she part of a business succession plan? What is the impact of this key person on the future plans of the business and of the owners of the business?

7. What Is Owed the Key Person

If the business has any accrued payments or debts owed the key person, that amount will probably be due at the key person’s death. The impact of any type of deferred compensation, incentives, bonuses, or debts must be considered when measuring the key person’s impact.

8. Training of Key Person’s Replacement

How long would it take to train the key person’s replacement? When considering the training, you must be sure to consider the time and loss of productivity of those doing the training. In addition, the loss productivity during the training period must be considered.

9. Documentation of Duties

The better the duties of the key person are documented, the quicker a replacement will be up to speed. Often, a combination of existing staff can divide these documented duties to minimize the loss of productivity. However, usually the more valuable the key person, the less the duties are documented. The lack of knowing how the key person functioned day-to-day should be considered in estimating the effects of losing him or her.

10. Impact of Ownership Succession Plans

When the key person is also an owner, are all business continuation and succession plans in order? If not, additional costs may occur in legal settlements or a succession that is not productive.

11. Expectations of Key Person’s Survivors

Although there may not be a legal obligation to provide for the family of the key person, what are the expectations of the family and other long-term employees? Nothing can affect employee morale any more than what appears to them as the employer’s unconcern for a long-time valued key person.

12. Opinion of Owners

There is no one who has a better idea of intuitive value of the key person than the other owners. Their opinion is invaluable in determining the impact of the key person. It is helpful to review all of these factors with the owners, but the owners’ opinions should always be a major consideration.

After determining the impact of the key person for each of these factors, a value of the key person to the business can be derived. There are several methods for determining a value. Often the best method is a function of which of the twelve factors above are the most significant.

There are six basic methods for determining the key person’s value.

1. Business Value Method

The key person’s value to the business is estimated by applying the percentage that represents the portion of profits for which the key person is responsible times the estimated value of the business.

2. Multiple of Salary Method

One of the most common methods for valuing a key person is to use a multiple of salary. Usually a multiple of 3 to 10 is used.

3. Sales Replacement Method

This method tries to amortize the sales loss due to the key person over the period required for the replacement to duplicate sales. Each year fewer sales are considered lost. The present value of the potential lost sales revenue is a good estimate of the key person’s value.

4. Training Cost Method

This method tries to amortize the lost earnings while the replacement for the key person is being trained. Excess earnings are calculated by the adjusted average annual earnings (earnings plus any excess owner salary) less the fair rate of return on the book value. These excess earnings are amortized over the years to train the replacement, assuming that each year has less impact than the previous. The present value determines the cost of training the replacement.

5. Business Life Value Method

For a very valuable key person, the effects could be over the anticipated working lifetime of the employee. The present value of the excess earnings between now and when the key person would have retired is used to estimate the key person’s loss to the business.

6. Owners’ Estimate Method

The other owners’ have a vested interest in their estimate of the value of the key person.

There are many ways to value a key person, and in many cases, it is a combination of these methods that best represents the total value of the key person.

PlanLab’s Key Person Presentation helps determine the value of each impact factor. By combining those values with the six methods described above, Key Person provides a quantitative approach to valuing a key person.

Picking an Estate Planning Attorney

How should your clients pick an attorney to be their estate planning attorney? The first question the client probably has is whether or not a separate estate planning attorney is necessary. Many clients feel quite comfortable, and more importantly, trust the attorney they have used in the past—although it may have only been for real estate transactions, traffic violations, business related issues, or a simple will. There are many aspects of estate planning that only an attorney can perform. However, like almost all professionals, sometimes the skills of a specialist are required. The clients probably would not have their family doctor attempt heart surgery, and they probably would choose a specialist attorney when it comes to their estate planning. So, back to the initial question: How should your clients pick an attorney to be their estate planning attorney? There are five areas of questions that the client should have answers to before selecting his or her estate planning attorney.


How long has the attorney been doing estate plans? It normally takes years to become proficient in estate planning as there are a number of specialties within the estate planning field such as probate, related litigation, trust administration, valuations, taxation and tax appeals, insurance arrangements, business succession, and more. It is also very important that the estate attorney know what they don’t know! Only years of experience allows an attorney to spot those areas where further expertise may be needed.

Does the attorney have ample and available resources and expertise to handle any complex issues that may arise? No one attorney is expected to know all the answers, but experience is the best way for an attorney to learn where and how to obtain any needed answer. Remember, experience is not always measured in length of time.

Understanding Clients’ Needs

Can the attorney relate to the client? If the attorney does not have the same values and similar life experiences as the clients, it is difficult for them to understand the needs and feelings of the clients. Estate planning is a very personal, feelings-based process, but uses complex and detailed techniques and approaches. For the attorney to get the complex stuff right, they must understand the underlying emotions with which these techniques handle. If the attorney’s real life situation mirrors yours, have they done what they are asking you to do? Do they practice what they preach? The client should always feel that if the estate planning attorney were in the identical situation, he would take the same advice he is giving the client.


How is the attorney paid? There is not a standard arrangement or fee, but the client needs to know how, when, and how much before starting the process. A clear understanding at the beginning assures no later surprises. The fee may be only a small fraction of the savings afforded the client’s family, which can still be a sizable dollar amount. Questions clients should ask:

  • Is there an initial consultation fee? Often there is a charge made for the first meeting in which both the clients and the attorney are determining if they want to continue the estate planning process with each other. If the client cannot relate with the attorney, or the attorney realizes that he cannot fulfill the needs of the clients, this minimizes everyone’s time and costs.
  • Is the initial fee waived if the estate planning services of the firm are retained? Often, the initial fee is applied to the overall cost.
  • Is there a flat fee if the estate planning services are retained? And, what exactly does it cover? Are telephone or email inquiries included? Many estate attorneys charge a basic flat fee that includes the entire process. Some charge for the initial consultation, and an hourly charge thereafter, as well as any special services such as appraisals, etc.Special rates when referred by specific financial advisors are often quoted. Based on the completeness and quality of the advice the client may have already, or is in the process of receiving, from a financial advisor, allows the estate planning attorney to reduce the normal fee. As the legal partner within an estate planning team, the attorney knows that they will be primarily responsible for the legal work, but will not need to take the primary role in all aspects.
  • What additional charges may be expected? Special legal work or research may be required that will require special attention and additional fees or hourly charges. These matters and rates should also be disclosed when rates are being discussed.
  • When are any fees payable? Are the fees payable in advance, monthly throughout the process, or half now and half upon completion? A clear understanding at the start of the process prevents the costs or billings from distracting from the planning process. Experienced estate planning attorneys welcome these inquires.

Taxes and Trust Administration

What experience does the attorney have with trust administration at a client’s death? An attorney who has administered trusts at death is better able to draft the clients’ trusts so that they are easily administered. Estate taxes, state inheritance taxes, probate, income taxes for the estate, gift taxes, and trust taxation are not your ordinary taxes. The estate planning attorney must be knowledgeable with all of these taxes as the drafting and execution of many legal documents will affect these directly. Also, they must be able to explain the tax issues and their effects on various planning strategies techniques. However, most attorneys don’t offer specific tax advice and refer that to certified public accountants.

Will the estate planning attorney be available and able to help with any trust administration at death? Many strategies and techniques involve the creation of trusts at the client’s death. Will the estate planning attorney be there to help the beneficiaries of the trust and the trustee make the strategies work? The experienced estate planning attorney has helped with trust administration many times and is better able to draft trust documents that work as planned.

Be There for You

Will the estate attorney be there for you, your family, and your business? The client needs to be able to answer this question, “Yes.” The best one to administer an estate plan at death is the one who helped create it. If the attorney is not there, will the firm be there? The estate plan represents a lifetime of work and love for his or her family. The client should always have the trust and confidence that his or her wishes will be carried out in the manner they have chosen.

By getting these questions answered, and finding an estate attorney they can trusts, clients can have the confidence that their wishes will be the result of their planning.

Hidden Planning Opportunity in the Current Economic Crisis

The economy has gone as sour as a lemon. Investments are severely depressed. Is there anything good about the current Wall Street melt-down? Anne Tergesen thinks there is, as she wrote in an article in the Wall Street Journal:

“Yes, your finances are likely taking a beating this year. Which means it’s the perfect moment to transfer as many assets as you can.”

Stock values are depressed. Interest rates continue at historic low rates. Transfers are generally valued based on their market values – values that are very low today. For many types of transfers, especially those that delay the recipients’ use of the gift use prescribed IRS rates to determine the value and taxation. These IRS rates are adjusted monthly to reflect the current economic conditions – conditions today that produce very low rates.

Read more »

Protecting Client’s Business Credit Lines

Businesses need their credit lines to do business. The current credit crunch resulting from the economic crisis of 2008 has made many businesses appreciate this business essential. The limitation of credit during this crisis was due to the banking problems. However, this credit crunch has been a awake-up call to all businesses. Credit is an integral part of day-to-day operations.

Other than these unusual times, what could cause a credit crunch for businesses? Often, available credit is based on personal relationships between an employee and the creditor. The creditor may consider an employee to be responsible for the profits that will enable the business to repay any loans. Although this personal relationship is often with an owner or senior executive, it is sometimes based on others – a star salesperson, an organized and efficient office manager, an inspiring supervisor or foreman, or an employee who is a respected community worker. Various employees may provide that key relationship that reassure the creditors of a business.

When valuing key employees, employers sometimes take the employee’s contribution to business credit for granted. As today’s crisis is teaching everyone the necessity of good and available credit, the value of an employee to business credit lines must be considered. If a key employee suddenly died or became disabled, would the business’s creditors hesitate to continue credit? How much cash would be needed to bridge the difficult time following the employee’s loss to reassure creditors?

One of the first principles of financial planning for both individuals and businesses is to protect your existing assets and newly acquired assets. Credit relationships are a valuable asset. They are difficult to acquire, and when acquired, should be protected. Key person insurance can protect businesses from the loss of a key person. Businesses usually consider the effects of a key person on sales or profits, but often neglect to consider the key person’s loss on the business’s credit availability.

PlanLab has a Key Person module that helps to guide business owners through the process of considering the impact and value of a key person to the business. It helps the business owners consider all aspects of the employee’s effect on the business, including the relationship with creditors. 2008 has been a difficult year for businesses, and everyone needs to learn from the experience. One lesson is the value of available credit and the necessity to protect the business’s credit by considering a key person’s effect on the business’s credit.

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