I must share my experience from the junket I took to Texas last month; it’s too good of a story to keep to myself.
One of our portfolio investments has been involved in substantial litigation (as the plaintiff) and the case ultimately wound its way to the Texas Supreme Court.
We have a material amount of money in this investment, so I wanted to get a first-hand, eyewitness account of the court proceedings. The fact that the venue was Texas in January worked to get my travel request approved by Carrie and we shuffled off to Austin in early January so I could sit in the courtroom and experience a live court case for the first time - and what an interesting experience!
Similar to other appellate courts, the Texas Supreme Court allotted each side twenty minutes to present a case brief summary and then ten minutes for questions, which made for an action packed fifty minutes. The judges didn’t let either side’s legal counsel speak very long before interrupting to pepper them with questions.
With hundreds of million of dollars at stake, you could cut the tension in the courtroom with a knife. It felt like a sporting event and the high-priced attorneys put on a captivating performance worthy of an LA Law episode.
The defendant had been found guilty of real estate appraisal fraud and was trying to reverse several lower court losses focusing on red herring issues, but the Supremes were having none of it and peppered their counsel with pointed questions about his client’s fraud act. All he could do was bob and weave, to mixed success.
I left the courthouse feeling rather good about the potential legal outcome, but also richer for the experience.
I felt even better after a mouth-watering lunch at Terry Black’s Texas BBQ joint in Austin. We really liked Austin, looking forward to a return visit.
A footnote: we squeezed in the FCS National Championship football game and watched our JMU Dukes lose a tight game to powerhouse North Dakota State in Dallas. I’m still feeling the effects of nearly one-thousand rental car miles and four hotels in four cities.
During my recovery, I’m still coming to grips with the consequences of the major new tax law that went live in 2020 and killed the Stretch IRA.
My deep concern with the loss of the Stretch IRA is that future heirs of IRA and Roth IRA accounts will now have to empty the contents of the retirement accounts within ten years of taking ownership. In the case of an IRA, all distributions are taxable as ordinary income. For Roth IRAs the forced distributions are tax-exempt, but not any future investment income / gains from their reinvestment.
Inherited IRA account values have always been overstated because of the deferred tax liability embedded in them. With the loss of the Stretch IRA, the embedded tax liability has now grown geometrically.
For 401K and other retirement plans, the inherited distributions rules didn’t change and remain severe. Most plans require the entire retirement account to be emptied in just five years with income taxes are due. Estate planning 101 is to move your old 401K investments to a rollover IRA after retirement.
The reality is that inherited retirement accounts have now become a central tax planning issue for Baby Boomers and many folks will have to tear up their estate plan and start over.
A surprising source of tax planning relief for “stretching” (IRA) discomfort could be life insurance.
The obvious benefit associated with life insurance is the tax-exemption of death benefit proceeds. If you’re a charitable-minded soul with a large IRA, why not leave your IRA assets to your favorite charities and replace the inheritance asset with tax-free life insurance?
Furthermore, under current federal tax law, custodial expenses for elder care are deductible medical expenses. A superior elder-care plan would have you spend down your IRA assets on elder care expenses, offsetting the taxable income with deductible medical expenses and then leave tax-free life insurance death benefit to your heirs.
And modern life insurance policies have built-in long-term care insurance benefits at no cost (unless you use it).
Finally, life insurance is a superior asset to leave in a testamentary (after-death) irrevocable trust than an IRA now that the stretch IRA is dead and buried.
I’m getting re-enthused about life insurance as both an investment and estate planning vehicle. It has become a nice complimentary dimension to our wealth management practice.
Many life insurance carriers have been modernizing their cash value life insurance products by lowering expenses, improving underwriting practices and adding new product features.
Our newest team member, Shae specializes in life insurance analysis and planning. We were fortunate to snatch him away from a large life insurance carrier agency last year.
Alas, Shae’s shared experience validated my understanding of the boiler room sales culture that permeates many large life insurance carriers. You know the ones to which I’m referring, you see their high-priced TV commercials during football games and their names on sports stadiums. These “advisors” are employees with nice pensions plans, funded in part from high-commission, proprietary policy sales.
Worse yet, these firms conduct role play sessions to hone their agent’s skills to sell maximum premium to the masses. Affordability is a secondary concern.
I don’t intend to sound self-righteous, but our practice is just different: we’re independent financial planners, investment advisors and life insurance specialists, in that order. In other words, we’re not a life insurance hammer on the prowl for raised nails.
The point is that you should apply the same rigorous approach to purchasing life insurance that you do when purchasing a car or a big screen TV. Compare and contrast several carriers and focus on the expected return on premium invested, both from a cash value and death benefit perspective.
Don’t make a lazy life insurance purchase decision because of a brand name carrier with heart-tugging TV commercial ads.
Until next time, be well…..Tim