Financial Goal: Generational Wealth

[mjanderson972]

I know not everyone agrees about giving your kids kids kids kids $$$ for tutition, business loans, etc etc (Millionaire Next Door-type of thing). But, I do have that as one of my financial goals and was wondering others thoughts on developing the most generational wealth possible. My wife and I would be the starting blocks. We are both physicians that together will make 750-100k per year (we are just getting out of fellowship now). Generational wealth is one of our top 3 financial goals and barring any tragedies in our lives we can live easily/happily with the money we will make over the course of our careers.

My question is about using life insurance (specifically WL) to get to that goal? I have a couple of dividend WL policies now that if illustrations play out right would end up with about 20 mil at me and my wifes death at 80yo or so. I'm planning to get some more term that can convert to WL as well. I was wondering if anyone else uses or plans to use WL or other investment venues to reach this type of goal (ie if you have this goal-haven't heard many people talk about this in forums/WCI site so interested to see if anyone thinks like me as well). I understand that I may make more money in my 'alive' lifetime using other investment vehicles but as an investment (with my death of course) I see using life insurance as a vehicle to accomplish this goal? Love to hear others thoughts or plans if they have similar goals/legacy plans.

[The White Coat Investor]

Whole life works well for intergenerational giving if your goal is to leave a specific amount of money to your kids whenever you die, knowing that in exchange you will probably leave them less money than if you invested that money in stocks or real estate for the long term and benefitted from the step-up in basis at death.

It can be useful to put in an irrevocable trust, and thus get the premiums out of your estate if you're going to have an estate tax problem, but you are allowed to put other things in an irrevocable trust. These posts may be helpful:

https://www.whitecoatinvestor.com/building-wealth-across-the-generations/

https://www.whitecoatinvestor.com/you-dont-have-to-buy-life-insurance-with-your-irrevocable-trust/

https://www.whitecoatinvestor.com/irrevocable-life-insurance-trusts/

[mjanderson972]

My wife and I are planning on starting a trust once we get a bit established to start planning for this in the future.

About the first point and investing it in stocks/real estate (which I could do thru my WL policy if right opportunity came along), if I'm doing the calc right on excel - my premium $16k/yr invested every year for 50y at real retrun 5% (which I think is reasonable though likely a bit lower- 5-8% possible; 8%+ seems optimistic in my opinion) = $3.35mil (plus any fees/expenses I lose along the way in investment accounts). My policy guarenteed is $2.11mil and with dividends 'illusion' = $5.95mil at year 50 of my policy (80yo for me). I get this is an illusion- but I'm estimating that my death benefit will be somewhere around the middle at $4mil. Correct my calcs but taxes likely $1.2-1.4mil on $3.35 = $1.95-2.15mil. Seems like a wash when I do the numbers for even my guarenteed money. Now if I 6-8% or 8%+ 'real return' then non-WL investment would make out better with the caveat that no significant loses occur at years 40-50 in the investment process (which I don't have to worry about in a WL vehicle--unless of course the 200yo company goes under which I feel like as a country if that happens--my policy is going to be the least of my family's worries). So, I might argue that WL making less with the 'death benefit' may not be entirely accurate. Though it would definitely be accurate if looking at 'cash value' prior to death in which investments outside of a WL policy would be greater than the cash value of policy prior to death.

Wondering about how the process of passing on retirement accounts work, as well? How are they taxed, how long can they be passed on, etc?

[mjanderson972]

Rex,

'Using insurance is a way to very likely give less wealth to the next generation' -- I'm trying to make my decisions as calculated as possible. I have guarenteed numbers on my policy that would be about 2% for cash value through-out my life but I don't really care about that given that I'm talking about the investment at the time of my death. My policy guarentees me ~2mil at my death (without dividends) which, again, unless my excel function is working incorrectly isn't that different than 5% annual returns for x50y. Maybe my calcs are wrong in which case please correct me. Calcs make it look like a wash between 5% real return and my guarenteed death benefit. My estimated between 'illusion' and guarenteed would be ~$4mil, which is what I'm estimating it to be at when I actually die at age 80 . I don't doubt that I would have more money 'alive' but 'from my calcs' unless I get 8%+ (minus ~40% in taxes), my est $4mil would be about 7% real return in other investments. So, I'm not sure where you are getting that I will undoubtedly end up behind at my death. I think it depends... Moreover, my goal is to develop generational wealth (not as much money as I can while alive--luckily my wife and I are well-paid; hopefully I'll be able to cont my hobby in medicine until I start using a walker--I love what I do and have no plan to stop unless my body or brain say otherwise and we will be just fine financially during our lives) thus I don't care if I come out ahead or behind with respect to cash value -- I only care about the amount of money I pass on, which again per my calcs, seems to be in line with my goal. I'm planning to buy more term and WL to get to my goal number that I want to be passed on to my family at my death.

[mjanderson972]

Here is the excel function I'm using--please correct me if it needs to be changed--- =FV(5%, 50,-16000, 0, 0) -- Changing the 5% to 6-8%+ to estimate growth at 50y. used policy guarenteed at 80yo of $2.1mil death benefit with $4mil est via 'illusion' death benefit of $5.95mil and guarenteed benefit average = $4mil. Given gross family wage above $400k, I used 40% est tax could be lower but I'm not quite sure how to estimate but assume that it will be close to that number. thanks.

[jfoxcpacfp]

matt anderson wrote:

My wife and I are planning on starting a trust once we get a bit established to start planning for this in the future.

About the first point and investing it in stocks/real estate (which I could do thru my WL policy if right opportunity came along), if I’m doing the calc right on excel – my premium $16k/yr invested every year for 50y at real retrun 5% (which I think is reasonable though likely a bit lower- 5-8% possible; 8%+ seems optimistic in my opinion) = $3.35mil (plus any fees/expenses I lose along the way in investment accounts). My policy guarenteed is $2.11mil and with dividends ‘illusion’ = $5.95mil at year 50 of my policy (80yo for me). I get this is an illusion- but I’m estimating that my death benefit will be somewhere around the middle at $4mil. Correct my calcs but taxes likely $1.2-1.4mil on $3.35 = $1.95-2.15mil. Seems like a wash when I do the numbers for even my guarenteed money. Now if I 6-8% or 8%+ ‘real return’ then non-WL investment would make out better with the caveat that no significant loses occur at years 40-50 in the investment process (which I don’t have to worry about in a WL vehicle–unless of course the 200yo company goes under which I feel like as a country if that happens–my policy is going to be the least of my family’s worries). So, I might argue that WL making less with the ‘death benefit’ may not be entirely accurate. Though it would definitely be accurate if looking at ‘cash value’ prior to death in which investments outside of a WL policy would be greater than the cash value of policy prior to death.

Wondering about how the process of passing on retirement accounts work, as well? How are they taxed, how long can they be passed on, etc?

Click to expand...

Passing on retirement accounts for optimum long-term results is a very complicated area of financial planning. This is an area you definitely need to work with an experienced team (attorney and CPA/planner) because a wrong word or phrase could easily derail your well-planned goals. I will try to help if you have specific questions, though.

[LBKCLU]

If you are looking for legacy planning and are not really concerned about cash value and only want to pass assets along to your children after you and your spouse are deceased, you might want to consider a Survivorship Guaranteed Universal Life Insurance policy (essentially, permanent term insurance that pays upon the second death). These types of policies are typically used to pay for estate taxes and/or provide for legacy planning. This is not a recommendation but something to at least consider if you are thinking about going down the insurance path.

[Bob K]

MJ, you have a very long time horizon.  You also can be on aggressive side of asset allocation.  So, why do you think you will be money ahead paying an insurance company to "invest" your money for you?

That is what Rex is trying to tell you.  There is no magic.  Every layer of people between you and your savings will need to get paid.  YOU are paying them.

Invest the money yourself in very low expense funds or ETFs, across multiple asset classes.  Use tax conscious funds where possible.

[G]

Agree with all above saying to put in low cost index funds.  So the heirs will have to pay taxes on it -- this is forest for the trees stuff...they still will get a nice chunk of change to make a bigger chunk of change for the next generation.  IDEALLY, plow money into Roth IRAs before you start making that $1M/yr...pass that on to your great grandkids and that is some real money (tax free)!

[jfoxcpacfp]

G wrote:

IDEALLY, plow money into Roth IRAs before you start making that $1M/yr…pass that on to your great grandkids and that is some real money (tax free)!

Click to expand...

True, and a great way to pass wealth to future generations. Just a side note - only a spousal beneficiary can continue to let the Roth grow after the death of the owner. Non-spouse beneficiaries must begin taking RMDs by 12/31 of the year following death, based upon their life expectancy. Of course, great grandkids will likely be at the perfect age to "need" to empty the account immediately  

[NJDoc]

As mentioned above by WCI, WL can be a valuable estate planning tool. For what it's worth we have WL policies, in an Irrevocable Life Insurance Trust, and worked carefully with an Estate Attorney to establish that and other aspects of planning. IMHO, it's worth the $ to hire someone well versed in these matters in your home state. I realize there are pros and cons to putting money into WL , vs the equity market, but I also feel it provides some diversification across the risk spectrum. Could I have a bit more money at the end in a diversified taxable account in the broad market...most likely yes.

And yes, the step up in basis does apply to investment accounts and real estate for now. Tax laws are always changing and you never know what could happen, as this has been a topic of discussion for the last several years, and was mentioned by President Obama last year. Congress could change the Estate planning landscape easily, so keep your eyes open.

 

 

[jfoxcpacfp]

NJDoc wrote:

Tax laws are always changing and you never know what could happen,

Click to expand...

Speaking of which, your whole life policy proceeds might become taxable in the future.