by Doug & Jessica Friedman, National Council for Estate and Business Planning for First Protective
October 24, 2018
Oftentimes, divorce is a fact of life – and an unpleasant stage of life that some clients experience. Nevertheless, it’s a phase of living where good advice is essential. Being knowledgeable about recent changes in the tax laws about divorce will increase your value to clients in need of this knowledge, and may, coincidentally, lead to sales. Here is how:
1. Change in Alimony Taxation:
Alimony will no longer be deductible—or reportable as income—after December 31, 2018. If you represent the payee, this change may mean that premium dollars for needed life insurance coverage are now available. For example, assume that a parent needs life insurance to protect minor children and not enough insurance is ordered by the divorce decree. In that case, if that parent has been receiving alimony, they may have been paying income taxes on it. The resulting tax savings from the new tax law may allow the parent to purchase the needed additional life insurance. If you have a prospect in this situation, the result may be finding the needed premium dollars.
2. Family Business Valuation:
The value of a family business is often the most important asset in a divorce. The new tax law provides additional deductions for business income. The deduction, under new section 199A, will be calculated in your client’s tax return. The deduction may increase the value of the business by increasing the profits. But, since tax returns are not due until later in 2019, a client contemplating a divorce may want to delay the proceedings until they see whether new section 199A will have an effect on business valuation. As an agent, you can encourage your client to seek a business valuation early on. The programs available through First Protective (ask Ronnie and Gail) may help to provide a framework to discuss business valuation and allow you to begin a discussion of business planning. Yes, it’s a difficult time to discuss such ideas, but the need at such times is great for good advice. The client should, of course, be advised to seek their own legal and tax counsel. But, again, you have added value by imparting your knowledge of these changes, and it may lead to buying/sell planning.
3. House vs. Retirement Plan:
In the past, the custodial parent most likely opted to keep the house, so that the children can stay in place there. But, now that state and local taxes are not deductible, the custodial parent may opt for a different asset, such as a retirement account. In so doing, that parent should review the allocation of the retirement account, and an agent can provide valuable advice as to where the money should be applied. It may be that a different strategy would be best, especially in view of the divorce.
U.S. Supreme Court Case. We often think that the U.S Supreme Court does not concern itself with beneficiary designation issues in a divorce, but that is exactly what it did in a case published June 11, 2018. (Sveen v. Melin). In this case, the court addressed the statutes in many states that cause the revocation of a life insurance beneficiary designation after a divorce if the beneficiary is the divorced spouse.
These statutes come into play more often than one would think. For example, a couple marries. One spouse purchases a life insurance policy and names the other as beneficiary. The couple then divorces and the divorce decree does not say anything about the life insurance. Later on, the insured dies.
Under a so-called divorce revocation statute, the named beneficiary is out of luck and may be considered as predeceasing the insured. In that case, usually, the contingent beneficiaries will receive the death benefit.
The theory behind these statutes is that the policy-owner would not want their former spouse to receive the proceeds. The Supreme Court held that these statutes are valid, and may apply to divorces that occurred even before the statutes were passed.
There may be exceptions, of course, under a particular state statute, such as whether the former spouse owned the policy or paid the premium; but the fact remains that during this stressful time in clients’ lives, it’s easy to forget about a policy. What we are seeing in our practice with insurers is that it’s not the big policies that clients may forget about, but smaller ones that, at the time of issue, may have seemed inconsequential. But, after a death, all of these policies are important.
If a client is contemplating divorce, the tax aspects are important, to be sure. In addition, you may want to remind clients to address all of their life insurance in a divorce decree. And, if they don’t, remind them to address beneficiary designations sooner than later, so that, if the Mack Truck theory applies to them (i.e., they step off the curb and get hit by one), the recipient of their life insurance is who they intended it to be.
Upon divorce, you can “add value” to the agent/client relationship by contacting the client and recommending a review of beneficiary designations, as many clients do not realize the effect that divorce may have on insurance planning.