Posts filed under 'second to die insurance'
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 Even if the doubtful happens and estate taxes are repealed at some point, you at least have the option then of dropping the insurance or keeping it and increasing the size of the estate.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
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
Ok, I’m not really holding my breath, but you do realize that with 7 months left to go Congress needs to act or there will be a free estate tax ride in 2010. As the law now stands, the exemption has been rising steadily over the last 9 years from the malnourished $600,000 in 2000 to what many consider a pretty appropriate $3,500,000 in 2009.
So what’s the future of estate taxation and estate tax exemptions? If Congress snoozes there could be a lot of rich folks who seriously consider planned obsolescence next year. No action actually does away with the estate tax completely, as in well, completely in 2010. It’s only for that one year, but if it all came together for a family, that lack of a tax could leave millions or billions in their pockets rather than sharing the wealth with the government.
And for all of those families who have so prudently planned over the years by putting second to die insurance in place to pay taxes, ca-ching, bonus time. Instead of going to pay taxes, all of that life insurance money will be added to their non taxable estate. Kind of lends a new take on that old native American movie line, “it’s a good day to die”.
Then comes 2011 when the estate tax comes back with a vengeance. The tax rate goes from the 2009 45% up to 55% and the exemption goes down from the 2009 $3.5mm to $1mm. So what would that mean if for instance we were talking about a $5mm taxable estate. In 2009 that would leave $1.5mm taxable after the exemption and that would be taxed at 45%, so the government would get $675,000. In 2010 all $5mm stays in the family. In 2011 $4mm would be taxable after the exemption and at 55% the government would get $2.2mm. Hmmmm!
Personally I think the first nine years of the estate tax revision made sense. The exemption was long overdue for a serious increase and the tax rate really was too high. What I can’t figure is what bozo thought it was a good idea to make it temporary and actually have it disappear for a year and reappear at the levels that were grossly unfair to start with? So, what’s rally going to happen?
Of course it’s all speculation until the trigger is pulled, but a compilation of all the wild guesses floating around has Congress amending the current law to continue the exemption and tax rates at the 2009 level on into the future. That seems to be the middle of the road right now.
For planning purposes the best answer is still the tried and true 2nd to die universal life no lapse products. Cost effective. Great guarantee. Some still offer an increased death benefit during the first four years to offset lack of planning if you don’t have a life insurance trust.
Bottom line. We’ll know for sure what the future holds for estate taxes when it happens, but one thing is certain, today’s exemption and rate are far more fair than where we started and there is little to be gained by letting the current law run its’ course.
May 14th, 2009
I’ve been accused of recommending term life for every need and while I maintain that 95% of all needs for the average person are well served by term, there are valid reasons to consider permanent insurance in your portfolio.
Before any jumps on that statement and thinks I’ve change my mind about whole life, I haven’t. Whole life is still the wrong choice for permanent in my often argued with opinion. Why would anyone tied up excess cash when it buys less insurance and doesn’t have a better guarantee? Again, for those reasons I am about to concede are permanent, use a universal life with a no lapse guarantee. No whole life. No traditional universal life. No variable universal life.
Let’s start simple. Personally I think that a small final expense life insurance policy is a valid need and a valid use for permanent coverage. Simply put, unless you have, say, $25,000 lying around in your checking or savings account for the express purpose of taking care of final expenses such as medical bills, burial and legal fees for finalizing your estate, a $25,000 life insurance policy makes a lot of sense.
Since I mentioned finalizing estates, a policy for estate tax purposes is certainly not something that you would want to tackle with term insurance. With the rare exception of the recession we are currently experiencing, estates that are large enough to be taxed tend to continue to increase in value and never get to the point where term is the answer, a need that resolves itself with time.
Charitable giving is not a temporary need. A policy to leave a specified inheritance to grandchildren is not a temporary need.
Bottom line. Having admitted that there are permanent insurance needs, let me be very clear. The fact that a UL with a no lapse guarantee is the best product, whether an individual or second to die insurance, is without question. The fact that the product as we know it and love it is changing as we speak should be a concern to anyone considering adding or considering replacing a permanent product in your portfolio. What one of us has missed a chance to lock in a mortgage interest rate and over the ensuing years paid thousands or ten of thousands more than we needed to. Don’t make the same mistake with life insurance. It won’t come around again.
March 29th, 2009
Estate tax repeal, just like getting older, is gently creeping up on us at about the speed of a Lear Jet. In 2010, if congress doesn’t do anything the estate tax will disappear until, of course, reinstated by a congress and president of sound mind. Most of those with taxable size estates are still taking the prudent route of insuring the interest of whatever family business or fortune they have been blessed with.
There are a couple of reasons that I believe are valid to consider in favor of overturning the federal estate tax repeal, but first let’s talk about why it’s prudent to act as if it will never happen.
Probably the most compelling argument for not pulling the plug on estate tax protection, such as second to die universal life insurance, or not moving ahead with estate tax protection is that, in all likelihood it repeal will never happen. Change may occur but I am hard pressed to find anyone that believes it will be repealed. Under current law, in 2009 the estate tax exemption will raise from $2,000,000 this year to $3,500,000. Remember, this is up from the overbearing exemption of the year 2000 of just $600,000. We’ve come a long way. This has paved the way for especially small business owners to be able to pass on the fruit of their life long labor to their family without the government taking a giant bite out of that piece of fruit. So, reason number one, I just don’t see it actually happening.
Reason number two not to abandon estate planning is that if, for someone unfathomable reason, the federal government does allow estate tax to lapse to nothing, fully expect individual states to fill that void just as surely as one wave follows another on the beach. Many states, such as Washington with their 17% “death tax” have already jumped the gun in anticipation.
So, it likely won’t happen. Here’s a couple of practical reasons why it shouldn’t happen. Anyone that has been paying attention at all to the national debt and deficit knows that this past 8 years has been a bit like handing a teenager (the government) a limitless credit card with no guidance and expecting a good outcome. Repealing estate taxes would be a huge revenue hit at a time when they can ill afford it.
The other impact of estate tax repeal would be a drought in charitable giving that is so huge that it would seem almost un-American in its’ magnitude. Currently an overweight estate can be purged through charitable giving to avoid taxation. A good thing for the family and the charity. If there is no tax, there is no incentive to give prolifically. Now I know this crushes the idea that all charitable giving is heart driven. Well, it’s not really crushed. I happen to think it is a noble and heartfelt thing when a family or person happens to choose a charity over the federal government.
Bottom line. Rather than a time to give up on estate tax protection and sack any efforts at new planning, today is a time when well thought out estate planning is as important, if not more important, than at any time in our past. In another post I will cover current proposed estate tax bills floating around congress. It doesn’t appear as though anyone is waiting for 2010 to deal with the poorly thought out repeal issue.
May 27th, 2008
However the elections shake out, congress and the new president will be dealing with the estate tax issue over the next year. Already a myriad of options have been thrown into the hopper. Amost no one and none of the proposals point to the elimination of the federal estate tax.
The good news in all of this as I have discussed in previous posts is that in the past 10 years the law will have evolved from the estate battering $600,000 exemption that ruined the life’s work of so many hard working people. Where that evolution ends remains to be seen, but there is little doubt that it will be a far fairer treatment than where we started.
Here is a list of the current ideas floating about DC.
- Â HR 1929 and S 1994 introduced by the Salazar brothers of Colorado would exclude farms from estate taxes as long as the farms remain farms. This is my home state and personally I think these two need to recognize that only about 1% of those impacted by estate taxes are farmers and ranchers. Unfortunately for the rest of us they both wear cowboy hats and they can’t seem to see beyond that.
- HR 3170 comes from democrat Harry Mitchell of Arizona. It would raise the combined exclusion to $5mm from the 2009 limit of $3,5mm over a six year period.
- HR 3475 from democrat Michael Capuano of Massachusetts would increase the exclusion to $5mm in 2010. No phase in period.
- HR 4235 from democrat Nita Lowey of New York would change the exemption to $3mm immediately, bypassing the increasing to $3.5mm in 2009.
- HR 4042 from democrat Gerald McNerney of California would increase the exemption a year early to $3.5mm and establishes 45% as the maximum estate tax rate.
- HR 4172 from democrat Dennis Moore of Kansas again increases the exemption to $3.5mm a year early and indexes the exemption amount for inflation after that.
- HR 4242 from democrat Earl Pomeroy of North Dakota make the exemption $3mm for 2007 and 2008, $3.5mm for 2009 and beyond. It freezes the maximum tax at 47% for taxable amounts in excess of $2mm.
It seems to me there are a lot of very good options being considered. Obviously none of it will happen before the elections, but, with the exception of my two cowboy legislators from Colorado, all of the proposals are huge improvements over where we were 10 years ago. My personal opinion is that indexing for inflation will fix the problem for the future.
Will there still be a need for survivorship or second to die life insurance? I think it will still play a pivotal role, but most of these proposals would eliminate smaller estates from needing that kindof protection.
Bottom line. 2009 will be an interesting year. I personally am very optimistic and hopeful about the changes in estate tax law and I think the direction of the country in general.
March 8th, 2008
In a post not long ago I mentioned that New York was poised to approve the sale of indexed universal life, a form of universal life that uses market indexes to determine actual cash value above the guarantee.
Well, they’re off to the races. I ran a spreadsheet for both indexed universal life and second to die indexed universal life today and New York is on the map and Bankers Life of New York, part of the Aviva Group, is leading the way.
I’ve got to tell you that what I like most about the indexed universal life products, unlike variable universal life, is that they have a pretty nice potential upside in cash value, and the guarantees are great and there really is no downside as long as you pay the guaranteed level planned premium. Since all of my sales are based solidly on guarantees, my clients get the best of both worlds with this type of product.
I will, as I have all along, sell the guarantees and leave the assumptions alone. Maybe someone will make money there, but I want my customers to be happy about having the lowest cost guaranteed products. This is after all, a life insurance policy and the focus should be on providing a life insurance death benefit. If, 30 years down the road, there is cash value there, that’s ok with me. That cash value doesn’t add anything to the policy that is necessary to maintain the death benefit.
Bottom line. Hurray for New York and for Bankers Life leading the way.
December 18th, 2007
Currently the federal estate tax exemption, the amount of an estate that can pass on to a family without being taxed (at the federal level), is $2,000,000. This is up from an estate gobbling $600,000 just 7 years ago.
Remember that a persons entire estate can pass tax free to their spouse, no matter how large it is. Estate taxes come due upon the death of the second spouse. This is the point at which many families see much of what their parents have accumulated gobbled up by the government, in many cases trashing a lifetime’s worth of work.
In 2009 the estate tax exemption will increase to $3,500,000 and in theory, if the congress doesn’t do anything to change the course of events, the federal estate tax will be gone in 2010. Two scenarios will play out at that point.
First, if the federal goverment actually lets the estate tax disappear, state governments stand poised to fill that void by increasing their state death tax limits. Many states have been raising their taxes as the exemption has been increasing at the federal level. The states can already see the dollar signs. So, while the payee will have changed, the drain on estates will likely continue.
The other direction this could take, the more likely direction in my mind, is that congress will vote to leave the $3.5 million exemption in place, having accomplished what needed to be done, giving tremendous relief to mid sized estates.
Bottom line. Estate taxes, whether federal or state, will likely continue beyond the drop dead date of 2010. One of the most efficient and cost effective ways to leverage the pay off of those taxes is through a second to die life insurance policy owned by an irrevocable life insurance trust. Whether your estate is over the taxable limit, of headed for it, you should be looking at this tool.
November 26th, 2007
Is the need for second to die life insurance going to go away? Will the estate tax really disappear in 2010? Should you jump to decrease your life insurance because of the new exemption limits?
Well, in the world according to me the answers would be NO, NO and NO! The $3.5 million exemption that will go into effect in 2009 is, I believe, where congress will vote to keep it in 2010. They will have accomplished what the real objective was and that was to end the devastation of smaller estates, the areas that hit small business owners and agricultural families the hardest.
The Center on Budget and Policy Priorities released a “State of the Estate Tax” article recently that reviews in detail what has been accomplished. There isn’t any doubt left when you read the article that the increase in exemption limits was the right thing to do. Abolishing the tax altogether would, in my opinion, not be.
I believe that the life insurance survivorship policy, the long time estate preservation tool, will continue to be the choice in the future. Even if the federal government abolishes the tax (again, very doubtful), the missing funds will be made up by an increase in state death taxes. If you don’t believe that, look at how Washington state has poised themselves to fill the void. They’ve incrementally increased their death tax as the federal exemption has become more lenient.
Bottom line. As long as there are estate taxes, life insurance will be the most practical means of dealing with them.
August 23rd, 2007
Here’s where you can get a whole helping of my opinion that has grown and matured and reformed and settled since I sold my first whole life life policies in 1978.
Both whole life and universal life are meant to be permanent insurance. They are meant to be there until you die because they are covering a need that never goes away. A very simple example of a need that never goes away is burial insurance. It is almost always a whole life policy and should absolutely be guaranteed to be there when it is needed.
A larger example of the need for permanent insurance is an estate preservation policy, a policy designed to provide the money to pay estate taxes. That need is there until the death of the owner of the estate. In the case of a married couple the ownership passes to the surviving spouse when the first one dies. When the surviving spouse dies, taxes come due. This is generally covered by either a whole life or universal life second to die policy. In the absence of insurance, most of what a couple earned and worked for could go to the government and not their heirs.
Generally speaking I think universal life is the better product. It is more affordable and can be guaranteed to stay in force longer than anyone has ever lived. The thing I really like about it and the reason it is more affordable, is that it can be structured to accomplish it’s mission without massive amounts of cash value buildup.
Life insurance building cash value really catches a lot of attention. The instant image for most people is having your cake and eating it too. With very few exceptions, the cost of building that cash value is much too high. In a later blog I will provide some actual scenarios to back up my opinion.
I beleive everyone should have some amount of permanent insurance. Call it final expense money. Call it burial insurance. I carry $50,000 of permanent insurance so that, when all the term insurance is gone and we are living on our retirement, if I don’t wake up some morning my wife won’t need to borrow money or liquidate assets until she has had time to put together a plan. I call it bridge money. It builds a safe bridge from my passing to her plan.
I will cover this more later, but when you are looking at permanent insurance, always, always make the agent show you the guarantees in the policy. If it isn’t guaranteed past age 100, send the agent back to the drawing board or find another agent. The last thing you want is a permanent policy that wasn’t guaranteed and believe me, there are plenty of them out there. Millions of policies currently in force are not guaranteed to do what the agent said they would. Make them show you the guarantees.
July 18th, 2007
