Estate Taxes & Whole Life?

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Jul 20, 2005 11:35 pm

Could someone with knowledge in estate taxes please help me with the following?  I have always heard from ins. agents that many people use whole life or other cash value policies to help pay estate taxes.  What are some other ways to establish a trust that will help with paying estate taxes without using a cash value policy?  What are your thoughts on using a cash value policy such as whole life, in an estate plan?  Look forward to your replies.   

Jul 21, 2005 2:37 am

This is a question best asked of someone that does estate planning, such as a good life insurance agent and estate planning attorney.

Jul 21, 2005 6:51 am
Top Guns Rock:

This is a question best asked of someone that does estate planning, such as a good life insurance agent and estate planning attorney.



Are you saying that he should talk to a life insurance agent who practices law?

Jul 21, 2005 9:01 am

You have a client who has a possible estate tax problem.  An attorney can draft an ILIT (Irrivocable Life Insurance Trsut) that will own an insurance policy on the life of the individual or couple (couple the policy would be "second to die" policy).  The client makes "gifts" by paying the premiums on the polciy annually.  When the final death occurs, the death benefit is used to purchase assets from the estate (in essence paying the estate tax).  So you may have a situation where $2 million is due in estate tax, and $250,000 was paid in insurance premiums.  The $250K saved the family $1,750,000. Usually Term insurance is not used because we never know what term of our death will be, so perm insurance is more appropriate. 


Important note- you must have a proper trust owning the polciy, otherwise the death benefit is part of the estate, just inlfating the estate tax due. 


Other ways to avoid the tax is to have an attorney draft a trust to get assets out of the estate, yet provide for benefit to the clients during their lifetime:  CRT (Charitable Remainder Trust- Annuity or Uni-) if they want a charity to get money upon their death (immediate tax deduction too!) or a GRAT/GRUT(Grantor Annuity Trust/Grantor Uni-Trust) if they want the money going to a family member or other non charitable figure. 


Jul 21, 2005 9:18 am
Top Guns Rock:

This is a question best asked of someone that does estate planning, such as a good life insurance agent and estate planning attorney.



Why on Earth would you want to bring an insurance salesman into this? If you don't have one, get your own insurance license and use your company's internal experts.

Jul 21, 2005 9:51 am

Rightway is right, again.  However, you do not have to set up an ILIT.  You can have the individual beneficiaries own the policy as well.  Both my family and my wife's family have gone this route.  In my case, my siblings and I own the policy on our parents.  I think the orginal poster was kind of asking the logic behind using insurance to pay the taxes.  The answer is in the question, "How else will you leverage that amount of money?"  Also, do not bring an insurance salesman into the picture.  Many of them are captive agents who have a limited product offering.  Use a true broker who will "shop" the case to several insurance companies, finding the best fit for the situation.


A final thought on VUL.  When you are hypothesizing 7, 8, and 9 percent returns, make sure the policy has quality mutual funds and money managers who may actually get those numbers.  The policy I own 1/4 of is with the Hartford.  It has American Funds, a few Franklin Templeton Funds, Hartford MidCap, Hartford Small Company, and (my favorite) Hartford Capital Appreciation.  To date we are well ahead of the benchmarks set for the policy.  My in-laws policy is with Pacific Life.

Jul 21, 2005 10:11 am

I rarely use Life Insurance! To expensive! I usually Set up entities and layer in discounts in a Family Limited Partnership. The larger the estate the more and entities. I try to keep the discounts under 30%.


Do the 706 and see how it turns out! Keep layering until you get what you need.


Jul 21, 2005 12:26 pm

Rightway is right, again.  However, you do not have to set up an ILIT.  You can have the individual beneficiaries own the policy as well


Depending on the size of the policy premiums and how the policy is structured, there may be some gift tax issues with this scenario.  Also not all siblings are as trustworthy as your family.  I have seen instances when the entire plan fell apart because the "kids" decided to or accidently let the policy lapse.  It is much safer and cleaner to have an ILIT.


I would not use whole life in this instance, instead a plain vanilla UL second to die works best.  You don't want to gamble with someone's life insurance and estate tax needs.

Jul 21, 2005 5:08 pm

Looney--


My siblings and my wife's siblings are not idiots.  We know what's at stake.  And, a married couple can gift up to 22K per person, or 44K per married couple for the sake of premiums.  That had better be a pretty helatious policy if 176K per year doesn't pay the premium.  My point is that ILITs are overdone, and represent an excuse for estate attorneys to extract substantial fees from clients.  They are not always necessary when dealing with adults.  Spendthrifts and other knuckleheads is a different story.  Then, you may need the added protection of the ILIT.


P.S.  Isn't it nice to be having a productive chat again these days?

Jul 21, 2005 6:56 pm

Life insurance sucks!


You should buy puts on Berkshire Hathaway A shares...let Warren be your guide.  If the man continues his lucky streak your ride up with him.  If he falls...and he will...you excersise the puts and make out like a bandit.


Oops...my bad.  I was channeling Put Trader for a few seconds.

Jul 21, 2005 9:45 pm

My siblings and my wife's siblings are not idiots.


Wow. way to extrapolate.  I never said you and your family are idiots.  Yes, it would have to be a large premium on JUST the ILIT to go over the lifetime gifiting cap, however, many of my clients make other gifts from their assets and not everyone has a large family where the gift allowances can add up.   Maybe your clients are more sophisticated adults in general, but I have seen some bad things happen to unsuspecting clients so I would rather err on the side of caution.  My clients are normally big people who can make their own decisions (with my guidance of course ) and if they feel that they don't need an ILIT, so be it. I document their decision against my recommendations.  CYOA.


P.S.  Isn't it nice to be having a productive chat again these days.  


Yes it is.

Jul 21, 2005 9:47 pm

Low ball agents like babbler here are what creates more opportunity for "Top Guns: that know how to sell the right product.


They're baaaaack. 

Jul 21, 2005 10:34 pm

We were here long before you, and we'll be here long after you're gone.


Roaches can make the same claim.

Jul 22, 2005 1:30 am
babbling looney:

We were here long before you, and we'll be here long after you're gone.


Roaches can make the same claim.





good one babs!

Jul 22, 2005 1:37 am
NeverShort:
Top Guns Rock:

This is a question best asked of someone that does estate planning,
such as a good life insurance agent and estate planning attorney.


Why on Earth would you want to bring an insurance salesman into
this? If you don't have one, get your own insurance license and use
your company's internal experts.





Theoretically that sounds like a great idea.  However, I've
observed most of the 'internal experts' at the big firms are fellas and
gals who couldn't make it selling insurance on their own(where they
would make more money, by the way)  So, instead they've taken a
salary plus bonus position(read-useless overhead) at a wirehouse
helping 'design policies' for the brokers who end up doing most of the
selling work anyway.



Just my 2 cents.

Jul 22, 2005 9:22 am
joedabrkr:
NeverShort:

Why on Earth would you want to bring an insurance salesman into this? If you don't have one, get your own insurance license and use your company's internal experts.




Theoretically that sounds like a great idea.  However, I've observed most of the 'internal experts' at the big firms are fellas and gals who couldn't make it selling insurance on their own(where they would make more money, by the way)  So, instead they've taken a salary plus bonus position(read-useless overhead) at a wirehouse helping 'design policies' for the brokers who end up doing most of the selling work anyway.

Just my 2 cents.


As an independent broker do you not have access to home office experts who will come help you close a deal that is outside of your area of expertise?


If no, would it not be good if you did?  After all isn't it better to have a chance of closing a deal, even if the chance is small, rather than having no chance at all?


If yes, are your home office experts useless overhead like that same person would be if they worked for another home office?

Jul 22, 2005 10:06 am

Theoretically that sounds like a great idea.  However, I've observed most of the 'internal experts' at the big firms are fellas and gals who couldn't make it selling insurance on their own(where they would make more money, by the way) 


Rightway is correct and that is one of the reasons that I left Jones.  They don't understand insurance and look at it as some sort of underhanded type of investment.  Everything was forced to go through their limited product line and the internal experts were less than helpful.    It was almost as if the purposely put up road blocks to selling insurance.


As an independent, what I do on the fixed insurance side, is entirely my own choices.  And since I am not a big "top gun" egocentric know-it-all and realize that on more difficult cases it is good to bring in a second opinion, I now am able to consult again with an agent, and his agency, that I have had a working relationship with for about 20 years.   Because I know this guy, trust that he isn't going to ooze snake oil all over my clients, and is going to recommend the best products and strategies to me, I have no compuctions on introducing him to my clients.  Since I run all of my fixed business through his firm and he gets override on my business, he referrs many of his securities clients to me as well.    Everyone wins.

Jul 22, 2005 10:36 am

oops.   I mean that joedabroker is correct.