POLICY GUARDPOLICY GUARD

VALUING POLICIES FOR TAX PURPOSES

Massive Mistakes: Big OpportunitiesRJ Starr, ASA (BV)

Neil Finestone, CFP, CLU, ChFC

POLICY GUARD

A POLICY’S VALUE

Surprisingly to most people, a policy’s value is NOT necessarily:

The policy’s cash value

Interpolated Terminal Reserve (ITR)form 712 supplied by the insurance company

PERC value(Premium + Earnings - Reasonable Charges)

A secondary market quote

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AND FOR ANY PARTICULAR

TAXPAYER,

THE DIFFERENCES MAY BE STRIKING

AND COSTLY.

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SOLUTION:

A QUALIFIED APPRAISAL

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OUR QUALIFICATIONS

Andersen Tax

Andersen Tax is one of the nation’s largest tax and valuation

services firms. The valuation group is recognized as a “Qualified

Appraiser” and has decades of experience supporting their

appraisals with the IRS.

Policy Guard

Policy Guard provides the analysis of the appraised life policy.

Policy Guard holds an elite Life & Disability Insurance Analyst

license (one of fewer than 50) to perform such analyses.

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OUR QUALIFICATIONS

Life & Disability Insurance Analyst

Under the California Insurance Code Section 32.5 a "Life &

Disability Insurance Analyst" means a person who, for a fee or

compensation of any kind, paid by or derived from any person or

source other than an insurer, advises, purports to advise, or offers

to advise any person insured under, named as beneficiary of, or

having any interest in, a life or disability insurance contract, in

any manner concerning that contract or his or her rights in

respect thereto.” Acting as an analyst without a license is

potentially a misdemeanor (jail time). Section 1844.

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WHEN DO YOU NEED

A POLICY APPRAISAL?An appraisal is needed whenever a policy is transferred.

Transfers between trusts, individuals, and entities

Pension “rescue” programs

Pension distribution

Split dollar (both for income and estate tax purposes)

Gifts of policies to charity

Audits or arguments

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ISN’T A POLICY’S VALUE SIMPLE?

No.

The question “what is the value of a life insurance policy” can result in

complex and inconsistent answers.

- John Hancock, Valuation of Life Insurance Policies, LIFE-5726 01/16

POLICY GUARD

REAL CASE EXAMPLE

1. A policy needs to be distributed from a trust

2. Advisor requests policy’s value from carrier for reporting

3. Carrier provides an estimated value (form 712) of $2,000,000

4. Client gets sticker shock. The strategy fails.

1. Solution: Qualified appraisal value = $400,000

2. Client saves tax on $1,600,000

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DON’T REQUEST A VALUE FROM

THE INSURANCE COMPANY

Insurance companies

are required to

provide what is called

the Interpolated

Terminal Reserve (ITR)

via IRS Form 712.

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Insurance companies have advised against requesting a 712.

John Hancock recently issued an 11 page white paper detailing the

complexity a carrier faces assigning a value. (Valuation of Life Insurance

Policies, LIFE-5726 01/16)

AXA’s value report includes a caveat to the value given.

“Interpolated Terminal Reserve is generally understood to be applicable to whole life contracts, and has not historically been used for variable life or universal life contracts.”

CARRIERS ARE FRUSTRATED BY TREASURY

REGULATIONS THAT DON’T RELATE TO CURRENT

POLICY TYPES OR RESERVING METHODS.

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Insurance companies

are required to

provide what is called

the Interpolated

Terminal Reserve (ITR)

via IRS Form 712.

ONCE A 712 IS ISSUED

THAT VALUE IS MEMORIALIZED

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SOLUTION:

A QUALIFIED APPRAISAL

An appraisal considers all the circumstances of the asset and

the transaction.

Examples:

Insured’s current health

Carrier’s reserving method

Future cash flows

A professional appraisal avoids constraints from applying

outdated regulations that do not relate to current policies.

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KEY CONSIDERATIONS

A proper appraisal is based on a robust analysis the policy.

A Life & Disability Analyst like Policy Guard LLC has the

expertise and credentials to analyze the policy.

If you go to the wrong source, requesting a value can result in

complex and inconsistent answers.

The best solution is to seek a value from a licensed appraiser.

They consider all the circumstances of the asset and the

transaction

A licensed appraiser is your best line of defense.

POLICY GUARD

KEY CONSIDERATIONS

Proper documentation for valuation positions at the outset is

critical because:

The valuation filed with the tax return is an "admission" of value by the taxpayer.

A contemporaneous valuation will always be more credible

than a retrospective analysis.

A qualified appraisal serves as evidence of reasonable

cause to rebut penalties.

A good valuation should focus on the particular and unique

circumstances of the interests transferred.

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CIRCUMSTANCES REQUIRING

AN APPRAISAL

Transfers between trusts, individuals, and entities.

Pension “rescue” programs.

Pension distribution.

Split dollar (both for income and estate tax purposes.)

Gifts of policies to charities.

Audits or arguments.

Email: r.j.starr@AndersenTax.com

Office: 213.593.2328

Fax: 213.784.7051

Education:

• University of California at Davis, BS (Managerial

Economics)

Affiliations:

• American Society of Appraisers (ASA –BV)

• Association for Corporate Growth (ACG)

R.J. StarrManaging Director – Los Angeles and

Orange County

R.J. Starr has over 15 years of experience in

delivering valuation analyses to both individuals and

to corporate enterprises. As a member of Andersen

Tax’s Valuation Services Group, R.J. has specialized

in the valuation of closely held businesses, business

interests, intangible assets, intellectual property, debt

instruments, derivatives (including stock options and

option-embedded securities), and capital equipment

assets. These engagements were conducted for a

variety of purposes, including financial reporting; tax

planning and reporting; strategic planning; mergers

and acquisitions; litigation support; restructuring; and

bankruptcy.

Before joining Andersen Tax, R.J. was with Arthur

Andersen, and then was a manager with Huron

Consulting Group where he focused primarily on

corporate valuation issues related to mergers and

acquisitions, litigation, and strategic consulting. R.J.

holds the Accredited Senior Appraiser (ASA-BV)

designation.

Services provided on recent engagements include:

• Purchase price allocations and impairment

analyses related to FASB ASC Topic 805:

Business Combinations and FASB ASC Topic

350: Intangibles – Goodwill and Other, including

preparation of responses related to comments

from the SEC

• Valuation consulting related to tax planning and

compliance, including appraisals performed for

estate and gift tax reporting, and domestic and

international tax planning (including

reorganizations, restructuring, and

ownership/control changes)

• Common stock valuations for tax and financial

reporting to comply with Section 409A of the Internal

Revenue Code and FASB ASC Topic 718:

Compensation – Stock Compensation

• Performance of financial advisory services related to

companies in bankruptcy (development of

reorganization values; appraisal work for fresh start

accounting)

• Financial analysis to assist with business planning,

acquisitions, and joint venture formation

• Valuation of stock options and complex option-

embedded securities for dispute and litigation purposes

• Valuation of life insurance policies for tax planning and

reporting purposes

POLICY GUARDLife Insurance Analysis PolicyGuardLLC.com

Neil R. Finestone is originally from Montreal,

Canada. He earned a Bachelor of Commerce

degree in Economics from Concordia University

Business School, Montreal, Canada, where he

was admitted to the Concordia University

Garnet Key Honors Society. He earned his

certificate in Financial Planning from the

University of Southern California (CCE) Financial

Planning Program.

Mr. Finestone is one of fewer than 50 life

insurance professionals in the State of California

who have been granted the Life & Disability

Insurance Analyst license from the California

Department of Insurance indicating fiduciary

and recognized expert status, and provides fee

based Life and Disability Insurance analysis

through Policy Guard LLC and Life Insurance

Analysts, Inc. exclusively for attorneys, trustees

and their clients. He has been designated as a

trial expert in both Los Angeles Superior Court

and Santa Barbara Superior Court.

Mr. Finestone has been awarded the

professional designations of Certified Financial

Planner™ (CFP®) from the College for Financial

Planning, Denver, Colorado, and Chartered Life

Underwriter (CLU) & Chartered Financial

Consultant (ChFC) from the American College,

Bryn Mawr, Pennsylvania, an accredited

institution for professional studies in financial

sciences.

He has also successfully completed the FI360®

examinations from the Center of Fiduciary

Studies and holds the Accredited Investment

Fiduciary (AIF®) designation.

Mr. Finestone holds licenses for Variable

Annuities, Life & Health & Disability Insurance in

approximately 25 states as well as FINRA licenses

as; General Securities Registered Representative

(Series 7), General Securities Principal (Series 24),

Uniform Securities Agent State Law / Multistate

(Series 63) Uniform Investment Advisor Law

(Series 65). National Commodities Futures (Series

3).

Mr. Finestone teaches and lectures on Financial

Planning, Insurance, and Investments and

provides consulting and expert testimony in the

areas of Insurance, Investment, Financial and

Benefit Planning. He has taught the Pension, Risk

Management and Investment sections of the

CFP designation for the College for Financial

Planning (Denver, Colorado) and has taught

financial planning for California Lutheran

University, Loyola Marymount University and

California State University at Northridge (CSUN).

Mr. Finestone has been quoted, published

articles, and addressed numerous professional

organizations on the subjects of and related to

Financial, Insurance and Benefit Planning.

Neil R. Finestone, CFP, CLU, ChFC

Email: neil@policyguardllc.com

Office: (310) 432-7020

Fax: (310) 432-7029