The perfect life insurance product for dealing with estate tax obligations has always been the second to die or survivor-ship policy. Since the obligation to pay those taxes was transferred through an exemption to the surviving spouse, while there might have been a need for life insurance when the first spouse passed away, it was for some reason other than estate taxes.
Back when the estate tax exemption was $600,000 per couple a ravenous government left very few families alone that had done well during their working years. Estate taxes were the demise of many family owned businesses. Farmers and ranchers were especially hard hit because their estates were uniquely focused on the land they owned and not inventory like other businesses. We’ve all seen news stories on farms and ranches (that included their homes) auctioned off to pay taxes that were due to the government within 9 months of the death of the second spouse.
That number being taxed out of their homes plummeted when they raised that exemption to $10 million per couple, but life insurance was still the only prudent option for those who wanted to meet the ridiculous threshold of paying estate taxes within 9 months of death. Unless an estate was truly a cash cow with an abundance of very liquid assets, in the absence of life insurance the result was almost certainly an estate sale that would realize pennies on the dollar and end any meaningful inheritance. That exemption is now up to $22 million so only the ultra wealthy would pay taxes, but that is a political target than can change at the whim of a president and congress.
The future of estate tax? Who knows, but even if it goes away there are still situations where second to die life insurance policies are both appropriate and cost efficient. I am currently working with a couple who have an adult special needs child. The child will need some level of structured care giving their entire life, a need that has been and will be met by his parents while they are living. They have sufficient assets that if one of the parents passes away it won’t create an economic hardship for the other to continue to provide care. What they want to do with the second to die policy is fund a trust that will provide ongoing care for the rest of their child’s life when the second parent passes away.
Another creative use of second to die life insurance was brought up the other day by a client. In their state, under certain conditions which he and his wife met, property tax could be deferred until death or until the sale of the property. Since it is a property that they fully intend to keep and pass on to their children, they can defer the tax and the premium for the policy is significantly less per year than the annual property tax. A win/win for the family with the product making it realistic to take advantage of this tax offering without putting the heirs at risk of having to pay a lump sum cash property tax bill.
Bottom line. Second to die life insurance is limited in its’ use, but in some instances is absolutely the go to product. If you have questions about what life insurance product is appropriate for your situation, call or email me directly. My name is Ed Hinerman. Let’s talk.