Posts filed under 'estate taxes'
I went for a drive yesterday. The mountains are all snow packed and it was just one of those wonderful post storm days when, well, you just feel blessed to live in the Rockies.
I sometimes (almost all of the time) get locked in my own little world in my office. Not being an “across the dinner table” kind of life insurance agent I don’t get to meet a lot of people face to face. A little unpractical anyway when you have clients in all 50 states. But yesterday was a rare treat. I got to meet with a client and a potential client at their office in Longmont, CO about 3 hours from where I live.
I was interested in meeting these two because of what they do. They are estate planning attorneys. They’ve been partners in their firm for about two years now and while they initially sought me out to help with life insurance needs of their own, I quickly found out that their was some definite depth to their knowledge on estate and asset protection. They were able to help me address questions that a client of mine had and like I always try to do, I turned around and shared my new found knowledge with anyone that wants to read it.
I was impressed with the thought that has gone into their business model. Like me, they have decided that trying to be all things to all people is not as important as being the best possible person for some people. Like me, they would rather refer someone to the right person than drag them through my learning curve just so I can make a buck. They seem to truly believe that service is the base of any good business.
Anyway, without getting too gushy, I believe they are genuine and conscientious and the success of their practice speaks to the quality of work they do. Estate or asset protection problems? Clear Wind Law.
Bottom line. I can’t even begin to count the number of times I’ve discussed how bad advice can ruin an attempt at getting life insurance protection at an affordable price. Wrong Agent! Wrong Company! The same goes for estate protection. While I can provide life insurance designed to help an estate defray taxes, that should always be the second step after a good plan is in place, a plan that will stand the test of time and if need be, a test in a court of law.
January 30th, 2010
With all of the focus on federal estate taxes and well, the fact that currently there isn’t one, before celebrating and canceling your life insurance, those with large estates might want to check and see how hard your state might bite into your estate through state death taxes.
While not as pervasive as FEDERAL, a number of states have death taxes. They come in all shapes and sizes but none of them are a good deal to your estate and in spite of the current tenuous moratorium on the federal tax, the state death taxes are not taking a break. In fact I would, considering the state of most states, be hard pressed to believe that they won’t move to fill the void left by the feds by either implementing a tax if they don’t have one or raising it if they do have one.
I ran into this double jeopardy issue with a client a few years ago in the state of Washington where they have the distinguished position of being the state with the highest death tax at 19%. And their estate exemption of only $2mm is a far cry below what the federal exemption was, $3.5mm or what it might be when it resurfaces, $5mm.
Bottom line. The absence of a federal estate tax, as temporary as it may or may not be, should not be any kind of a signal to quit estate management and planning. If the feds decide to get along without it
January 12th, 2010
The House of Representatives passed a bill extending the current estate tax levels and exemptions on December 3, a move to quash the impending 2010 complete repeal of estate taxes (at least for a year).
However, the Senate killed the bill, unable to garner enough support for a continuance of the $3.5mm exemption. Too many of them were in favor of raising the exemption to $5mm and in all the fuss and maneuvering they ended up not doing anything. Personally I think it made them look like Bozos because it was a simple easy fix, it kept in place a long overdue break that was started in 2001, and they weren’t locked into it. Isn’t politics just great?
So, does this mean that it is now open season on a good time to die? Remember that the way the law reads right now, estate taxes are repealed completely in 2010. If nothing changes and a person of substantial net worth dies next year, their family wins and the government loses.
One person I talked to today suggested that there are those that think they really have until September of next year to get something in place. This is a takeoff on the fact that the government allows up to 9 months to pay estate taxes after death. I’m not an attorney, but I know I would be hiring a very good one if a death in my family opened up the estate tax question and we did a timely filing for the estate showing no taxes due. Make reinstatement of those taxes retroactive and watch the tea partys go crazy.
I will be doing several posts and hope to have a guest post on this over the next several days. This is a big deal for those with taxable estates who have worked hard to make sure their estate remains solvent, generally with life insurance, to deal with the inevitable.
Bottom line. I think we will see a much quicker decision and resolution than 9/09. That’s just asking for more trouble than Congress really wants.
December 30th, 2009
For those who were really thinking that the government would allow the estate tax repeal to continue into 2010, the year that estate taxes would simply disappear, it’s time to exhale.
The House of Representatives has voted to keep the current estate tax exemption and taxation levels in place permanently. That bill has been forwarded to the Senate. While there isn’t a clear consensus in the Senate for keeping the proposed Congress parameters, there does seem to be a resolve to at least pass a band aid bill that would keep the current rates in place for another year, allowing time for debate.
With the current levels being a $3.5 million exemption and a 45% tax, there is a growing bipartisan support, since their fix will likely be at least called permanent, to raise the exemption to $5 million and lower the tax rate to 35%.
What would happen if the Senate didn’t act would be a complete repeal of estate taxes in 2010, making it as the financial adviser jokes goes, “a good year to die”. In 2011 the estate tax would return to 2001 levels with a $1 million exemption. You can rest assured that the government doesn’t want to let that happen.
Bottom line. With the repeal on its’ way out of the picture it is once again time for those with larger estates to evaluate the need for estate preservation 2nd to die life insurance. Given the brutal payment rules on estate taxes and the generally large amounts of tax to be paid it simply makes financial sense to have life insurance in force to pay the tax.
December 8th, 2009
As we crash toward the end of the year and one of the wackiest decades in a while, accountants for the high net worth and famous are all armed with the same good advice. 2010 is a good year to die, at least so far.
What started in 2001 as one of the best tax code changes in recent history, the incremental increase in the estate tax exemption from the anemic $600,000 in 2001 to the present estate saving $3.5 million, is set to unravel completely as 2010 dawns.
At that point, barring some move by Congress (which I’m betting on), there won’t be anymore exemption or tax. If you can manage to pass away that year you can pass your entire estate on to your heirs completely untouched by the Feds.
If that really does play out, 2011 is when we see the stupid stick knock the good idea out of the park. If Congress really does nothing the estate tax will come roaring back to life with a lowered exemption, back to $1 million and a higher tax rate. Everything gained in the last decade to make this tax more fair will be wiped and we will once again have a legacy eating monster on the loose.
Because of all of this uncertainty and the potential for even deeper estate gobbling, this is a good time to review your estate preserving second to die life insurance policy. If you have skipped through so far ignoring the impact of estate taxes on all that you spent your life building, it’s a very good time to consider how, for pennies on the dollar, your net worth can remain in your family and your estate can stand ready to meet the demands of the government whatever direction they might take.
Bottom line. We are at a juncture that shouldn’t be ignored or misread. Even though if nothing happens it will be a tax train wreck, all signs point to Congressional intervention to keep exemption and tax levels at $3.5 million and 45%. That’s good news from a couple of angles. It’s far more fair than the path that is in place and we have some of the best life insurance products (best guarantees and rates) in history to fund estate preservation trusts.
October 6th, 2009
In my mind the estate tax changes made in 2001 were a great idea with a great direction and one of the stupidest endings that could be thought up. Why would Congress and the President go so far to finally bring something out of the dark ages and make it fair, only to repeal it and put it right back where it was 10 years earlier.
In their infinite wisdom Congress has created a tremendous incentive for rich folks to die in 2010, the year that the estate tax per their current plan will disappear altogether. Kind of a new spin on the old native American movie line, “It’s a good day to die”. In this case you’ve been given a whole year to get er done.
I read a good article on estate tax myths yesterday that brought up some interesting points. Before the estate tax exemption limits were raised about 1 in 10 farming/ranching businesses were put at risk (the family losing the farm) by the estate tax system. For those that followed the debate and changes, small farms and ranches were front and center in that effort. Turns out that most of the 10% could have fallen back on tax relief measures specifically put in place to keep families from having to sell farmland.
The real interest should have been on the small business owners. About 1 in 3 of small business owner estates didn’t have enough liquid assets available to pay the taxes. Remember that these taxes are due within 9 months of the death of an individual estate owner or the second spouse that owns the estate. For small business, many of which have everything tied up in the business, the only way to meet the 9 month deadline is to sell off all the assets of the business in a hurry. Selling in a hurry, a fire sale so to speak, is not the way to get the most bang for your hard earned buck. It ends up chewing up large amounts, if not all, of the amount that should have been exempt from taxes.
So, where is estate tax headed? As the article points out there are really 4 proposals on the table right now.
* Make permanent the 2011 exemption, in which estates under $1 million escape taxation and the top tax rate is 55%.
* Make permanent this year’s $3.5 million exemption and 45% tax rate.
* Index the $3.5 million exemption to inflation and cap the tax rate at 45%, which is President Barack Obama’s proposal.
* Raise the exemption to $5 million and cap the tax rate at 35%, as proposed by Sens. Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz.
At this time I think the third option is the appropriate continuation of where Congress wanted to go when they started this back in 2001. The scary thing is that we are looking a huge new expenses and ballooning deficits and it can be argued that option 1 is where the law stands now and given the need for cash, it should be left where it is.
So the answer for those with estates in excess of current exemption limits and even those with estates that could be impacted by a reduction of those exemptions should be planning. Life insurance still remains the most viable and cost effective means of protecting your estate and with there still being great values available with 2nd to die or survivorship life insurance polices using universal life no lapse guarantees, planning ahead for the worst case is not such a bad idea.
Bottom line. Estate taxes are not going away, so if that is your plan remember the critical component. You need to die next year. 2010 is your window of opportunity….unless Congress acts before or during that year. Prudent planning with an estate planner and attorney, coupled with an independent life insurance agent who knows where the best deals are hidden is the call to action.
August 4th, 2009
While it certainly isn’t our duty to work our tails off all of our adult lives just so we can leave the legacy of an estate to our heirs, I saw a study a few years ago that indicated that it really was the goal, a desire, of the boomer generation and our parent’s generation.
One thing is almost a certainty. None of us work all of our lives so that we can build an estate in order to turn it over to the government. The way the estate tax system is set up, even though the estate tax exemptions are at least for now reasonably generous, because estate taxes are due and payable 9 months after death many estates lose all or at least part of the exempted amount due to the need to rapidly liquidate assets. 9 months may at first seem like plenty of time, but just appraising a large estate can take months.
Think about it. Estate tax exemptions are $3.5 million for an individual or $7 million for a couple. Say a couple has an $12 million net worth comprised mostly of real estate holdings. Upon the death of the second spouse there is a 45% tax due on $5 million above the exemption. So, the executor of the estate has to come up with $2.25 million to send to the government within 9 months.
In a market like today where none of the property is worth anything close to what it was a year ago and sales are slow, the executor will likely end up having to dump property at fire sale prices just to raise cash. If the property was highly leveraged, even that may not help meet the deadline. So, even though the taxes are only about 1/6 of the estate value in this case, it is not a stretch to see how 1/2 or more of the estate could potentially be liquidated just to pay the tax bill. There are plenty of examples out there where estates are wiped out just to pay the “death tax”.
I know I’ve been beating up on this issue a bit lately, but with Congress poised to suck the tax marrow out of everyone who has made something of themselves, life insurance is the only reasonable answer to keep them out of the legacy you’ve built. 2nd to die or survivorship life insurance policies coupled with an irrevocable life insurance trust are the vehicle that can, for pennies compared to an estate’s net worth, stand ready to pay that tax bill and do it in a timely fashion.
Bottom line. Estate taxes are a reality and it doesn’t appear they will go away or even become more favorable in the near future. Even if the doubtful happens and estate taxes are repealed at some point, you at least have the option then of dropping the insurance or keeping it and increasing the size of the estate. If you decide to go it without insurance, make sure you work closely with an estate planner to keep the proper amount of assets in a liquid position.
August 3rd, 2009
Estate preservation, as I’ve stated in several posts since the first of the year, is becoming more unstable due to a couple of factors. First, Congress has not shown their cards yet on how they expect to handle the estate tax exemption issue in 2010 and second, older universal life policies that carry most of the existing estate preservation coverage are collapsing left and right due to lower than assumed interest rates.
In a Wall Street Journal Article dated May 26 of this year by Arden Dale, he goes into quite a bit of detail about what’s happening to estate protection policies. To paraphrase, he says that people are going along assuming they have a paid up policy with nothing to worry about ever and suddenly they get a lapse notice or get a bill for a huge “catch up” amount to keep the policy in force.
I’ve been blowing this horn for years and I would just go a step further and say that it isn’t just those with survivorship life insurance policies that need to be concerned, but anyone who has a permanent policy in force, whether universal or whole life, unless it happens to have an external guarantee that doesn’t rely on assumed values.
Mr Dale suggests having your estate protection policy checked out by an attorney whom he admits will likely refer it to an independent life insurance agent for review. Let me be very clear. If you have a universal life, variable universal life or whole life policy that is dependent on cash value to keep it in force, you need to get off your duff and have a thorough policy review. Ignoring this whole thing and hoping it won’t impact you is an almost sure way to wake up some day soon having blown thousands or even hundreds of thousands of dollars for insurance you no longer have. And you won’t have any recourse other than to go out and hope you qualify for a new policy.
I’ve been beating this drum hard for years now. It is simply not a drill. Because of the sales tactics that have been used for years with cash value policies, the tendency to sell assumptions versus guarantees, without being overly dramatic, most of these policies will collapse, and given the last year’s economic adversity, sooner rather than later.
People are dependent on these policies for estate preservation, income protection, and family legacies and it could all go down the tubes with their next premium notice.
Bottom line. Ours is an industry that has its’ fair share of honorable, professional and honest agents who have set their customers up to be covered correctly, but it is also an industry that far too many people have jumped into as a way to make a quick buck. The second group far outnumbers the first and those dependent on the insurance are the unwitting victims.
July 23rd, 2009
If not, give this some thought!
Estate taxes come due nine months after the death of the sole surviving spouse or individual whose net worth comprises the estate. While nine months may seem like a long enough time to wrap up an estate and gather the money to pay the taxes, I suspect that would only be the opinion of someone who has never had to deal with the task before.
Keep in mind that in most cases a taxable estate is worth over $7 million, the amount reached after both spouses in a marriage use their full $3.5 million dollar estate tax exemption. Generally speaking high net worth individuals don’t have their money sitting in a checking account, but have it tied up in investments and property.
I worked with a couple last year who had a net worth in the $20 million range and admitted that they really only had about $1 million in truly liquid assets. Most of their worth was tied up in real estate development partnerships and other types of real estate contracts. Most of those contracts had no clear method spelled out for disposition on the death of a partner. As we discussed, in the event of their death, in order to meet the 9 month deadline for federal estate taxes the family would likely have to make some fire sale deals with at least some of the partnerships in order to raise the cash.
While this couple had an unusually large percentage of their net worth in a non liquid position, it is not unusual that the amount of taxes due is larger than the amount of cash on hand. This is precisely why life insurance is and has been used as a way to cover this expense. Generally the amount of the death benefit, which if planned properly will be very close to the amount of taxes due, can be in the hands of the executor of the estate within 2-4 weeks.
Timeliness is one of the primary reasons for covering estate taxes with life insurance. Another good reason is cost. In almost all cases the cost of life insurance will be far less than the cost of the taxes due, so with careful planning you get to pay the government in full for pennies on the dollar. Don’t we all wish that every April 15 we could just send the IRS our payment in full, but through some kind of insurance plan it would only cost a fraction of what we really owed?
There is no time like right now to consider replacing an old survivorship or 2nd to die policy, or if you don’t already have one in place, getting the job done. Unlike the old whole life and traditional universal life policies that use tons of extra premium to build unnecessary cash value, today a permanent estate protection plan can be put in place for far less with an external guarantee no lapse universal life policy. This is a product that is currently at an all time low price and all indications is that it has bottomed out. Now is the time to buy and lock in rates that will likely never be seen again.
Bottom line. Estates are what we work a lifetime to build for our family and poor planning can end up running it through a shredder upon our death. Don’t leave it to the government and don’t leave it vulnerable to a liquidation fire sale that could render it useless.
July 19th, 2009
Since the inception of 2nd to die or survivorship life insurance policies to protect estates from being pillaged by estate taxes, most of the policies were written as traditional universal life or whole life insurance. Cash value policies.
When the cashless universal life with an external no lapse guarantee came along people were able to secure this valuable estate preservation tool for a fraction of the cost of the traditional policies. Without the burden of funding unneeded pools of cash value coverage was literally available for new pennies on the old dollars.
An example of this was a client four years ago who replace their $5,000,000 Mass Mutual 2nd to die whole life policy that had an annual premium of $89,000 and was only guaranteed to age 94, with a $5,000,000 Protective Life policy for $32,000 annually with a guarantee to age 121.
Now with the external guarantee products being revisited due to current reserve requirements and a lot of companies either raising the rates or discontinuing new sales of the products, attorneys are encouraging clients with existing survivorship policies to review them now. Not later. Now.
We still don’t know what will happen with the estate tax laws next year, but with the current news out of Washington leaning toward higher taxes for the wealthy, I think we can assume that the estate tax exemption won’t get bigger than the current $3.5 million and the estate tax rate will likely not go lower than the current 45%. The need for 2nd to die life insurance and irrevocable life insurance trusts isn’t likely to go away anytime soon.
Bottom line. If you have an estate preservation policy chances are very good that you are paying too much for it. There is a window of opportunity to fix that and with keeping the money in the family being the common goal, it’s time to have that policy reviewed and for very good reasons it is prudent to have it reviewed by someone other than the original agent you bought from.
July 16th, 2009
Previous Posts
I went for a drive yesterday. The mountains are all snow packed and it was just one of those wonderful post storm days when, well, you just feel blessed to live in the Rockies.
