InDesign: Pocket-folder and brochure for Guardian Life Insurance
As you can see, the tax return is a treasure trove of information that can help
you to identify issues for the prospect/client, and to recommend solutions.
With this information in hand, you can also leverage this data in relationship
building with the prospect/client’s attorney or accountant. Always ask for
and obtain the tax return. It should be one of the first steps in your client
The foregoing information regarding estate, charitable, retirement and/or
business planning techniques is not intended to be tax, legal or investment
advice and is provided for general educational purposes only. Neither
Guardian, nor its subsidiaries, agents or employees provide tax or legal advice.
Prospects and clients must consult with their own tax and legal advisor
regarding their individual situations.
FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC.
FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC.
Pub #### (MM/YY)
New York, NY 10004-4025
7 Hanover Square
Company of America
The Guardian Life Insurance
Reading Form 1040
Uncovering Insurance and Planning Opportunities from a Tax Return—
Uncovering Insurance and Planning
Opportunities from a Tax Return (Form 1040)
Obtaining a prospect’s or client’s federal income tax return (Form 1040) can be Lines 1 through 5: Filing Status
an extremely useful tool in uncovering financial needs and opportunities. While Basic to any type of planning is the determination of a prospect/client’s marital
the 1040 should not replace probing discovery sessions and comprehensive fact status. That would uncover basic planning opportunities such as:
finding, there is a wealth of information stored in the tax return that can be • Life and disability income insurance for income protection;
used as a starting point for a thorough discussion regarding financial issues and • The availability of the marital deduction for estate and gift tax planning;
• Cash flow concerns because of a divorce;
Agents and financial representatives should also consider how the following • Opportunities to shift assets to a spouse for asset protection purposes;
could be used with accountants and attorneys to uncover planning needs that • Long term care insurance; and
can be addressed only by the accountants or attorneys. Referring business to
• The need to review beneficiary designations on life insurance policies, qualified
these centers-of-influence is often a part of the relationship building process that retirement plans, IRAs and other financial assets to ensure that they are correct and
may yield referrals to you in the future. have been updated.
Building a relationship with an accountant or attorney, and obtaining referrals, Make sure to follow up the analysis by determining the citizenship of the
takes time. The 1040 can be a way to expedite this process. For example, you can prospect/client and spouse. Citizenship greatly impacts estate and gift tax
identify tax related issues and refer these prospects or clients to attorneys and planning concerns.
accountants that you have or are building a relationship with. Conversely, once
a relationship is established with an accountant or attorney, ask the advisor to Line 6: Exemptions
identify certain types of clients based on the tax return. This can be a form of This line provides information on whether or not the prospect/client has
“target marketing”. The advisor should be able to scan its database and identify someone that he or she provides for and cares about (e.g., a spouse, children, or
the type of prospect you want to meet. other family members).
• Clearly, the prospect/client’s life insurance coverage must be sufficient to provide
Examples: for his or her loved ones in the event of a death (i.e., human life value). This would
• Obtain a list of all taxpayers with taxable interest over $15,000 (line 8a). certainly be true for disability income insurance, as well.
• Identify all taxpayers who gave more than $5,000 to charity (line 40 and Schedule A). • The presence of minor children may yield opportunities to fund college costs through
• Names of business owners who contributed to qualified plans (line 28). 529 college savings plans, cash value life insurance or annuities.
• Names of taxpayers with business income over $50,000 (line 12). • Many prospect/clients are also responsible for their elderly parents and may claim
them as a dependent. As a result, a discussion with the prospect/client on long term
Let’s take a look at some of the information that can be discovered in the 1040 care insurance may be appropriate.
and the accompanying opportunities. • Also, having dependents reinforces the need to ensure that the prospect/client has
updated his or her estate plan regardless of wealth level.
1 FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. 2
Line 6c(4): Qualifying Child Line 8a (and Schedule B): Taxable Interest
A qualifying child listed on the return may be a special needs child. Checking This line provides you with a source for the prospect/client’s liquid wealth.
off this box on the tax return should be further explored with the prospect/ It can show the amount of money a prospect/client has in a savings account,
client. Parents of a special needs child are often concerned with making certificate of deposit or money market. For example, suppose a prospect/
arrangements to ensure the continuing care of that child when the parents are client declares $10,000 of interest income when bank rates are about 3%. The
gone. The parents will also be interested in protecting their wealth, ensuring prospect/client would own accounts valued at approximately $333,333. The
the financial security of their other children, while ensuring that the special prospect/client might be interested in ways of deferring taxable income on
needs child qualifies for government assistance. A Special Needs Trust funded this money such as purchasing a tax-deferred annuity or a high cash value life
with life insurance may be a solution for these concerns. insurance policy. The prospect/client may also be interested in an evaluation of
his or her investment portfolio for diversification or reallocation opportunities.
Line 7: Wages, Salaries, etc.
This line provides the total amount of earned compensation achieved during This may further lead into a discussion about utilizing whole life insurance
the previous year. If this income is representative of future income to be as part of the prospect/client’s asset allocation and avoid typical objections
received by the prospect/client, there may be opportunities to discuss qualified to insurance premiums based upon cash flow concerns. What’s more, unlike
plans and non-qualified deferred compensation arrangements to lower income growth in a CD that causes taxable income, cash value growth in a permanent
subject to income taxes, particularly if the prospect/client is a business owner, life insurance policy is tax-deferred.
professional or executive. Lowering income may also have the affect of moving
the prospect/client to a lower tax bracket. For high net worth individuals, Line 8b: Tax-Exempt Interest
there may be opportunities to discuss income and wealth shifting strategies in Prospect/clients are required to disclose the amount of tax-exempt interest
conjunction with their estate plan. they earn which is usually derived from municipal bonds. Again, that may
lead into a conversation around the prospect/client’s investment portfolio
Remember to follow up this analysis by determining the prospect/client’s and asset allocation, and whether or not this is the best investment for the
annual expenditures. This may provide you with investment management prospect/client given his or her goals. Older prospect/clients may be able to
opportunities, including 529 plans, annuities, IRAs and taxable accounts, generate a higher cash flow from an immediate annuity than from the bonds.
and uncover excess cash flow for insurance premiums. Also note that some Also, the bonds are included in the estate, but by combining the annuity with
business owners who own S corporations may have salaries that do not the purchase of life insurance to replace the principal at death, the client can
accurately reflect income. They may be taking S distributions that are not reduce his or her estate for estate tax purposes and still provide a financial
considered wages (see Line 17). legacy to his or her heirs. This may be a superior strategy than living off of
bond income or depleting the bonds.
3 FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. 4
Line 11: Alimony Received Line 13: Capital Gains and Losses
A divorced prospect/client may need financial advice regarding retirement, Gain realized from the sale of appreciated property is reportable as income.
cash flow and estate planning. Gain may be offset by losses so there is an opportunity to have an ongoing
• If he or she has minor children, college costs could be a prime concern. 529 plans and conversation about tax-loss harvesting, rebalancing investment portfolios, and
cash value buildup in permanent life insurance can help to supplement college savings. using permanent life insurance as an asset class. Annuities may be a more tax
• Investment of assets received from a divorce settlement may be an issue, particularly if efficient option for the prospect or client.
the spouse does not have a lot of experience in that area.
Prospect/clients with charitable intent and highly appreciated assets may
• Typically, in a divorce decree or settlement, a divorced spouse may be required to wish to explore giving these assets to charity either outright or through some
maintain life insurance for the benefit of the ex-spouse and children. Also, it is
sort of charitable vehicle such as a charitable remainder trust (CRT). A CRT
appropriate for the custodial parent or spouse receiving alimony, to purchase a life
insurance policy on the life of his or her ex-spouse if he or she is relying on the ex- allows assets to be sold without payment of capital gains tax and charitable
spouse financially. This is sometimes overlooked in a settlement. The premature deductions can be realized. Combining a charitable remainder trust with a
death of the spouse obligated to make payments could cause undue hardship for wealth replacement trust funded with life insurance will allow the asset to
both families. The same would also be true for a disability, requiring the purchase of satisfy multiple needs: (a) source of income; (b) significant gift to charity; and
disability income insurance. (c) replacement of the value of the asset gifted to keep the family’s financial
• Immediately upon completion of a divorce, a prospect/client should revise his or legacy whole.
her estate plan and change the beneficiary designations on life insurance, annuities,
qualified retirement plans, IRAs and other accounts that may have beneficiary Prospect/clients who are fairly aggressive in their investing, but who have a
designations or transfer-on-death instructions. need for life insurance, may wish to consider using whole life insurance as a
conservative part of their investment portfolio.
Line 12 (and Schedule C): Business Income or Loss
An entry on this line is indicative of a business owner operating an Lines 15 and 16: IRA and Pension Distributions
unincorporated business. This raises a host of issues, many solved by life If the prospect/client is taking distributions from an IRA, he or she will
insurance, including: report that on line 15. Inquire if it is a required minimum distribution (RMD)
• Is there a business succession plan in place? because of age or some other distribution. If an RMD, you can ascertain the
• Are there any key employees that need to be insured? approximate value of his or her IRA and qualified retirement accounts. For
instance, at age 72, the RMD factor is 25.6. A prospect/client reporting an
• Is the prospect/client interested in exploring employee benefits including qualified
RMD of about $117,000 would have an account balance of approximately $3
retirement plans as well as nonqualified executive benefit programs to recruit, retain
and reward the top executives and key employees? million. These line items may yield several opportunities:
• What has the business owner done for his or her own retirement? 1. There may be investment management opportunities with regard to the prospect/
client’s investment portfolio.
Also, be aware of opportunities for disability income insurance and business 2. Determine if a Roth conversion is appropriate for the client.
overhead expense insurance. 3. Beneficiary designations should be reviewed in order to properly reflect the prospect/
client’s intent and current financial and family situation.
4. Based upon the size of the IRA, you will have an indication of whether or not there
may be an estate tax issue. Does the prospect/client understand the potential estate
and income tax ramifications of having that IRA at death? Has the prospect/client
planned for those circumstances?
5 FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. 6
If the prospect/client does not need the RMD for retirement, these funds Line 26: Moving Expenses
can be used to: A prospect/client claiming moving expenses may have moved from another
• Purchase life insurance for estate liquidity needs; state. This is an opportunity to review the prospect/client’s estate plan with
• Purchase life insurance to replace wealth lost to income and estate taxes and to create a the prospect/client’s attorney, to ensure that the plan complies with the laws
tax-free legacy; of the new state of residence. Pay close attention to durable powers of attorney,
healthcare proxies and living wills, since the requirements vary from state-
• Set up a dynasty trust funded with insurance to create a perpetual family legacy;
to-state. While wills are generally designed to minimize federal estate tax
• Make a charitable bequest by leaving the IRA to charity at his or her death, and to consequences, note that many states have state estate or inheritance taxes and
reduce his or her estate tax exposure while using a wealth replacement trust to still
provide the value of that IRA to his or her heirs, estate tax free;
these rules vary widely. Also be aware of a prospect/client moving to or from a
community property state.
• Make lifetime charitable contributions using his or her RMDs and/or part of his or her
IRA via a charitable rollover; or Line 28: SEP, SIMPLE and Qualified Plans for
• Pay for long term care insurance. Self-Employed People
If the prospect/client owns a business, it may be worthwhile to explore higher
The prospect/client may also be a candidate for a Roth conversion of his or deductible contributions than can be realized through a different type of
her IRAs. qualified plan. If the business owner has employees, another type of plan
Line 17: Rental Real Estate, Royalties, Partnerships, may be more flexible and allow a greater allocation of the contribution to the
S Corporations, Trusts, etc. owner’s account. Profit sharing and defined benefit plans partially funded with
This line shows taxable income that is passed through to the prospect/client life insurance could be a more efficient alternative. For example, a 50-year-old
from rental real estate and business interests. For the real estate interests, make business owner earning at least $245,000 (for 2010) cannot contribute more
sure that the client’s property and casualty insurance coverages are aligned than $49,000 to a SEP, and cannot fund the plan with life insurance. However,
and sufficient. For entries from business interests, this may open up a host of in a defined benefit plan, the maximum deductible contribution is $195,000.
business planning issues and concerns that may be met by life and disability Line 32: IRA Deductions
insurance. If there is no deduction listed, you will have the opportunity to find out why. Is
• The prospect/client may be concerned with business succession planning. it because the prospect/client is a high income earner and not qualified to fund
• Life insurance may be needed to protect the estate from estate taxation or used to a deductible IRA, or did the client simply not do it? Even if the prospect/client
equalize the estate among family members. has been “phased out” from making a deductible IRA contribution, is he or she
• Life and disability insurance may be needed to fund buy-sell agreements. eligible for a Roth IRA or a nondeductible IRA? What other strategies, such
• Life and disability insurance may be needed for key person insurance and to fund as the purchase of permanent life insurance, can be introduced to supplement
nonqualified executive benefits. retirement income? If the prospect/client is an executive or business owner,
can non-qualified deferred compensation or executive bonus plans be a
The presence of an ownership interest in a business may also open up potential solution to supplement retirement income?
opportunities to consider wealth shifting strategies, if the business is a family
owned business. The estate plan should be reviewed to ensure that it is
integrated with the business succession plan.
Trust income may be an opening to review a prospect/client’s estate plan.
Depending upon the type and purpose of the trust, the trust may be a source
of insurance premiums to complement wealth shifting solutions and estate
tax liquidity needs. It may also be an opportunity to review the investment
strategy for the trust.
7 FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. 8
Line 40 (and Schedule A): Itemized Deductions
Charitable contributions are reported on Schedule A. Prospect/clients who
make consistent contributions to favorite charities may wish to consider
leveraging their gifts into life insurance on their lives that would be owned
and payable to the charity. For example, a donor who annually makes a $5,000
gift to his favorite charity could create a much larger deferred gift by using the
same money to have the charity purchase a policy on his or her life and/or the
spouse. Alternatively, the donor can purchase the policy but name the charity
as the beneficiary of the death proceeds.
Prospect/clients who make large contributions to charity should make sure
they are giving away money or property in the manner most appropriate for
their situations. Charitable remainder trusts, charitable lead trusts, donor
advised funds and private foundations are techniques that can provide valuable
benefits to a high net worth donor.
Mortgage interest deductions are also reported on Schedule A. Is the prospect/
client using a lot of his or her cash flow to pay down a mortgage? Does the
prospect/client have the right type of mortgage? Is there an opportunity to
refinance the mortgage for better terms? Can debts be consolidated into a
refinanced mortgage? Reducing cash flow for the payment of debt may free
cash flow for the payment of insurance premiums or to increase savings.
Lines 61 and 72: Federal Income Tax Withheld and Refund
Many prospect/clients withhold too much federal income taxes throughout the
year, resulting in a tax refund. Working with the prospect/client’s accountant,
this is an opportunity to help the prospect/client to adjust withholding to free
up cash flow for other purposes such as investment opportunities or for use on
9 FOR PRODUCER and PROFESSIONAL ADVISOR USE ONLY. NOT FOR USE BY THE GENERAL PUBLIC. 10