Well, back from vacation and ready to talk about life insurance from every angle possible……..starting tomorrow.
Vacation was great. Time with just my wife and myself was awesome. Didn’t have to use our life insurance and that’s a good thing. But, we had it in force and that is also a good thing.
Bottom line. Took some time to smell the flowers. Life is good!
Add comment October 7th, 2007
I met a guy in Hatch, Ut the other day along our way to Bryce and Zion National Parks. He had a compelling story to tell about beating obesity and how it saved his life.
He had lived most of his life in Branson, MO and about five years ago had decided to end annual trips to Utah and go ahead and move. Jim had worked, fished and drank and ate whatever it took to keep his energy equivalent to the task at hand while living in Missouri. He wasn’t a big guy at 5’6…..unless you weighed him. He tipped the scales at 361# when he left Missouri.
He just walked up and started talking on the bank of the Sevier River in Hatch. There had been a big rain the day before and he was coming down to check how muddy the water was. He asked if I had been fishing, which I hadn’t.
The next thing out of his mouth was “moving here saved my life”. Jim had left Missouri at 361# and after 5 years of fishing every day and chopping all the wood the family needed…..at age 82, Jim weighed about 220#. Jim had been locked into a lifestyle thing in MO that had heaped obesity on him and until he left it, he had no idea that it was killing him.
Don’t think for a minute that Jim was any kind of an over consuming, out of the ordinary kind of guy. He was simply following the pattern of his family. He was no different than his dad or granddad. A chip off of the old block! The problem was that all of the old blocks were dying in their 60’s and 70’s due to diabetes, heart disease or cancer.
Jim got the chance to change all of that and did. He dumped 140 unneeded pounds and in the process, “saved his life”. Jim wasn’t any medical expert. He never really even consulted a doctor about losing weight. But when he started chopping wood and shoveling snow and walking the rivers of Utah fishing every day, he got a new lease on life. At 82, he feels as good as he did 30 or more years ago.
Bottom line. Jim has figured out, on his own, exactly what life insurance underwriters are looking at when they consider an application on someone who is overweight. Solid is healthy and obese isn’t. What a delightful guy!
1 comment October 7th, 2007
Most life insurance trusts are funded by permanent insurance, either universal life or whole life. This is generally not an inexpensive proposition, but compared to estate taxes, by far the smaller hit.
I mentioned in a previous post that the ownership of a policy for estate purposes really needs to be a trust. I also mentioned that there are policies that will double the amount of coverage for a long enough period to ensure that a trust is set up and that the IRS three year rule is put to rest.
Another way to accomplish the same thing would be to take an even less expensive route of securing your estate with term life insurance on you and your spouse. This does what I have always preached loudly, it puts the insurance in force. Something is always better than nothing.
Worry about the details later. Do you really think your heirs will care if you bought term insurance or universal life if you die six months from now. Considering the cost of a permanent second to die policy, you and your spouse will likely pay a lot less to carry double the amount of term insurance.
Once the trust is set up, apply for the permanent coverage through the trust, and replace the term policies once everything is approved. The IRS doesn’t have any problem with that plan of action.
Bottom line. Whether it is through an independent life insurance agent, an estate planner or estate tax attorney, learn the proper way to use life insurance to protect your estate. Once you understand how it should eventually be set up, don’t waste any time waiting for the attorney to set up a trust. Put adequate life insurance in force and make any changes you need down the road.
1 comment October 7th, 2007
As explained in a previous post, if the owner of a policy sets up a life insurance trust and changes the ownership and beneficiary to the trust, and a death occurs within three years of that change, the IRS will roll the clock back to original ownership and beneficiary. This could potentially put millions in estate value into a taxable situation.
So what if you are stuck? On the one hand you have an estate planner telling you need life insurance for estate tax protection. On the other hand you have an estate tax attorney working at a snail’s pace to put together an irrevocable life insurance trust, warning you not to buy life insurance until the trust is in place.
Well guys, let’s be real about the attorney. He is suggesting that you just chill until he gets around to your trust. If you happen to die next month, do you think he is going to step in and provide your heirs the millions they would have received if there was life insurance in force? I’m not thinking that’s not happening.
Several companies have provided a vehicle for this very issue. It is an estate protection policy that, for the first four years, has double the death benefit. This allows time for even the slowest attorney to set up a trust, a change of ownership to the trust to be accomplished, and the three year look back period to expire. During that period the policy has built in the additional insurance to cover the larger estate value due to improper ownership of the policy.
So, in real numbers, let’s assume you have a $5mm estate. There is a $2.5 exemption which leaves $2.5mm taxable at about 50%. Estate taxes due, about $1.25mm, so the person takes out a $1.25mm policy with himself as owner. Unfortunately, because of the ownership, the life insurance gets added to the total estate rather than being there to pay the taxes.
So, reality is that he has a $2.5mm taxable estate and his life insurance adds $1.25mm leaving a taxable estate of $3.75mm. Taxes due are about $1.8mm. He has left $1.25mm in life insurance to deal with that bill. That means the heirs are liquidating about $600k of the estate to pay the remaining taxes. Not a desirable outcome.
Scenario number two doubles the death benefit. He has $2.5mm taxable. He takes out a policy for $1.25mm with a double face amount for the first 4 years. Upon his death, the $2.5mm (double face amount) is added to his estate, making the taxable estate $5mm. Taxes due $2.5mm, but remember, he has $2.5mm in life insurance to pay the taxes. Let’s call that break even which is exactly the outcome you want.
Bottom line. If estate tax life insurance is needed, it is needed now, not when your attorney gets around to creating your trust. There is more than one way to shine that pair of boots. Check with an independent agent who will have access to the companies that have this benefit.
Add comment October 7th, 2007
Life insurance proceeds are about the only source of money that is income tax free. This gives added value to the benefit that you leave your beneficiaries.
There is one area that you need to be careful with beneficiary designations. The IRS has a three year look back rule whenever there has been a change of beneficiary, not for income tax, but for taxable estate value. What they are trying to prevent is someone changing beneficiaries when they know they don’t have long to live, to avoid estate taxes.
Life insurance, if owned by an individual, while not income taxable, is added to the value of the estate upon death. With proper estate planning, an irrevocable life insurance trust would be in place at the time the life insurance is purchased. The trust would own and be the beneficiary of the life insurance. Since the individual doesn’t own the policy, the IRS says it is not added to the value of the estate.
The problem comes when an individual owns a policy, his or her estate grows to the point of being taxable, and they decide to change ownership of the policy to remove it from the estate value. This triggers the 3 year look back. If the individual dies within 3 years of this change of ownership, the IRS will deem the original ownership takes precedence leaving it in the estate and added to the taxable estate value.
I have had clients on several occasions discover that they aren’t following their estate attorney’s orders after the policy is already applied for. Changing the beneficiary after the insurance is applied for falls within the same 3 year rule. When investigating ownership for estate tax purposes they will actually look back to the original application to see what changes were made by application amendment. The original intent stands.
Life insurance is set up incorrectly every day, usually due to the ignorance of the agent. We’ll look at a couple of viable options to deal with a poorly thought out purchase in a subsequent post.
Bottom line. Care needs to be taken. Advice from estate planners and estate tax attorneys should be sought. Whenever you are buying substantial amounts of life insurance, quiz your life insurance agent on estate tax consequences and how to structure ownership.
Add comment October 7th, 2007
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