Announcement

Collapse
No announcement yet.

permanent life insurance for estate planning

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • #16
    Originally posted by skindoc View Post
    I am doing some estate planning recently and come up with the possibility of adding a permanent life insurance as part of the plan. Would like to know whether it makes sense or I am missing something.

    I am a single 50+ healthy female with 3 children age 15-21. No special needs for children. Most assets in brokerage account and IRA, Roth IRA, 401k, defined benefit plan. Likely will hit estate tax. My 20 year term life insurance will end in 2-3 years.
    I think you are planning to buy insurance to try and avoid estate taxes in the future when you don't know what it will be. It was 500K limit or so for many years and then suddenly rose to 5M and with the last President it shot up to 11M. It probably will be cut to size but who knows what it might be in the future. I think you should let your investments grow and not get into permanent life insurance.

    Maybe one way would be to gift 15K per child every year gift tax free and still keep the maximum allowed lifetime exemption. Over 25 years you can git 45K per year or maybe more in the future and they should be set even if the estate taxes rise or limits fall in the far distant future.

    Comment


    • #17
      Originally posted by afan View Post
      You really need an expert estate planning attorney more than you need a CFP. How you manage this is exquisitely determined by the estate tax issues. An attorney who knows the field well should completely understand the financial implications. They probably will not give direct financial advice but they could tell you the estate tax consequences of one action vs another.
      I would like to know what you are basing your presumptions upon. The suggestion for a CFP with estate planning experience was not a default assumption. Where a CFP or any kind of financial planner with EP experience fits in is to provide projections for alternative scenarios, with and without life insurance (at least in the above fact pattern). Having that clarity helps anyone with a certain level of projected wealth make optimal decisions about the expected results that are then implemented into the estate plan. I have yet to review a draft estate plan that achieved exactly what the client wanted to accomplish, once we discussed the results and risks of the specific provisions of the plan. I'm not saying most estate planning documents are poorly written, just that many are poorly thought through because of lack of communication, understanding, and expectations of the roles of the different players in the process.

      One role of the financial planner is to educate, which often overlooked by the attorney, or the client is too intimidated or worried about cost to ask meaningful questions, if they even know what the right questions are. Estate plans vary from legal firm to legal firm but are typically fairly boilerplate within a specific firm. The financial planner with estate planning experience is familiar with a variety of estate plans from a variety of firms, along with often overlooked opportunities. For example, some attorneys set up a Revocable Living Trust (RLT) for every client and many leave it unfunded, some always allow for retirement accounts to go into trust at death (can have unintended consequences), some distribute all assets to children at the age of majority and shut the trust down (scary and a missed opportunity for lasting asset protection), most leave the investment choices entrusted to the trustee wide open which assumes the trustee is as financially astute as the decedent intended (also scary), etc.

      An experienced CPA can also serve in this capacity, but either the planner or the CPA should have years of experience in this area and most either don't and don't have the time to devote to it. But it can add a lot of value if you can find that person.
      Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

      Comment


      • #18
        Originally posted by Kamban View Post

        Maybe one way would be to gift 15K per child every year gift tax free and still keep the maximum allowed lifetime exemption. Over 25 years you can git 45K per year or maybe more in the future and they should be set even if the estate taxes rise or limits fall in the far distant future.
        I am already doing that

        Comment


        • #19
          Regarding the trust complexities:

          Managing a trust for your children is quite simple. You will not need to pay anyone to do it and you can do the tax returns yourself. If you do want someone else to run it, then you can shop for money managers and an enrolled agent or CPA to do the taxes. Both will be low costs compared to the insurance premiums.

          If you go the life insurance route, you CANNOT be the owner of the policy. If you are the owner, then the death benefit will be included in your estate. If you would be subject to estate tax without the insurance, then the entire death benefit will be taxed at the top estate tax rates.

          The alternatives will be holding the life insurance in a trust, same as if you funded a trust on their behalf but did not have the trustee buy life insurance, or having the kids be the owners.

          I think the reluctance you are hearing from many commenters about the life insurance is that you don't need the death benefit. If you go the insurance route, you will be paying for insurance you do not need. Seems waste of money. If you go with the insurance policy and live to life expectancy, then your kids would have been better off without it. If you were to die young, then your offspring would be better off with the insurance than with the investments.

          The insurance company is in the business of predicting life expectancy for customers. If they think you will die young they will not sell you a policy.

          It is true that the policy removes market risk from the outcome after you start paying premiums. If there were to be a deep and sustained drop in the market, then it would be possible for the investment to be less than the death benefit for a long time. Again, if your kids needed protection from loss of your income, then by all means buy insurance.

          Remember that is is far more likely that the market will generate positive returns over periods of 10 years or longer. The death benefit will be in nominal dollars and inflation will erode its value over the decades. Your investments, probably, will generate a positive real return. The value of the death benefit will decrease every year.

          Comparing the amount that goes to your kids, year-by-year, with the life insurance approach vs investing is something where a CFP could help.

          But first you need clarity as to why the attorney brought it up.

          Comment


          • #20
            Originally posted by skindoc View Post

            No it is not triple money in 15 years. It is death benefit with almost no cash value . It is basically a no lapse forever term (very basic guaranteed universal life policy without investment part). I just plan to pay off all the premiums in first 15 years . I understand it is not good ROI considering probably I will die in 30-40 years if not later.
            As you acknowledge, this is likely to be a money loser for you and a money maker for the insurance company; the insurance company isn't going to sell you a policy they plan to lose money on. Can you save enough in taxes to pay for the lower returns compared to just investing in global stocks?

            You might accomplish the same goal by creating an irrevocable trust and gifting the max to it each year. You'd have to run some numbers.

            An ILIT may have its place but I think it is often an inflexible, expensive, and burdensome albatross around your estate. Tax rates and exemptions are likely to change many times over the next 30-40 years, locking yourself into a structure now seems premature.

            Comment


            • #21
              Originally posted by skindoc View Post

              I am already doing that
              Because the exclusion amount is slated to go down in 2026, many people who anticipate having taxable estates are making gifts above the annual limit now. They have to file gift tax returns but do not have to pay any tax. They just start using up their lifetime limits.

              Doing that now gets the money and any growth out of the estate.

              Keeping gifts at the annual limit means losing the opportunity to reduce the amount subject to estate taxes in the future.

              The only questions for the OP are
              How much to give Whether to make the gifts outright or in trust
              Whether to use life insurance.

              Comment


              • #22
                Thanks for all the input and suggestions. After lots of reading, thinking , I decided to

                1) continue my direct $45k gift to 3 kids for now (UTMA for 2 minors). Then when the minors reach 21, based on how they spend the money, I can decide whether further gift should go to trust instead;
                2) meanwhile, explore more about irrevocable trust issue, maybe put an above limit large gift into a trust sooner
                3)permanent life insurance will not be in the picture for now.

                Comment


                • #23
                  Originally posted by skindoc View Post
                  2) meanwhile, explore more about irrevocable trust issue, maybe put an above limit large gift into a trust sooner
                  Look carefully at trust tax rates and ongoing maintenance costs for an irrevocable trust.

                  Comment


                  • #24
                    Yeah , Hank,

                    The details of the management and maintenance of Irrevocable trust is my concern -- I don't know whether I am allowed to manage the asset or it has to be a financial institute (like Schwab ,etc). Ideally if it is just capital gain and qualified dividend income , the tax rate is not terrible. And maybe just distribute the other income to beneficiary. Hopefully if mainly just buy and hold index, minimum income will be generated. So still trying to learn that part before jump into the irrevocable front.

                    Comment


                    • #25
                      As long as you are not a beneficiary of the trust, you can be the trustee. No fees. Leaving yourself as a beneficiary would defeat the whole purpose of the trust.

                      The trust will move through the tax brackets at lower income levels than would be the case if you kept the assets in your own name.
                      However, as you note, the taxes will be low. You should have little or no realized capital gain if your stock holdings are in Vanguard cap weighted etfs,
                      Those stocks would generate dividends but currently dividend rates are below 2%. So the trust would pay at most 23.8% of 2% of the value of the portfolio in federal taxes. Not that expensive.

                      Comment


                      • #26
                        Assume the children are the beneficiaries and have lower income tax bracket in the first several years. Isn't it better to distribute the income (dividend, capital gains) to them through K-1 and tax on them instead of the trust itself? As a trustee, can I change the distribution of the income to the beneficiary from year to year?

                        Comment


                        • #27
                          Originally posted by afan View Post
                          As long as you are not a beneficiary of the trust, you can be the trustee. No fees. Leaving yourself as a beneficiary would defeat the whole purpose of the trust.

                          The trust will move through the tax brackets at lower income levels than would be the case if you kept the assets in your own name.
                          However, as you note, the taxes will be low. You should have little or no realized capital gain if your stock holdings are in Vanguard cap weighted etfs,
                          Those stocks would generate dividends but currently dividend rates are below 2%. So the trust would pay at most 23.8% of 2% of the value of the portfolio in federal taxes. Not that expensive.
                          If the settlor names him- or herself the trustee of an IRR trust that s/he settles, the trust w/b pulled back into the settlor’s estate at death, which is not usually the result that the settlor wants. I believe the settlor can name a sibling as beneficiary when first settling but cannot change to a sibling later. Not positive and not looking up right now. IRR trusts are complicated and can easily create more problems than they resolve if not thought well through at creation. They are expensive on an ongoing basis and can be a huge headache.

                          >>Assume the children are the beneficiaries and have lower income tax bracket in the first several years. Isn't it better to distribute the income (dividend, capital gains) to them through K-1 and tax on them instead of the trust itself? As a trustee, can I change the distribution of the income to the beneficiary from year to year?<<

                          You can change the distribution of the income if the trust document allows it. Of course, you can distribute the income to the beneficiaries and let them pay the tax. But you need to consider this in the original trust document. There is no “better”, it depends on what you are trying to achieve. I had a client whose granddaughter was one of their trust bene’s and married someone without a job and they c/n change the terms of the trust document to prohibit some 6-figure annual distributions to them. Very important to think everything through when you are creating the trust - a good attorney matters. Fortunately, I had tried to talk him into putting some kind of restrictions on it so my hands were clean (the rest of the family never really cares about that side of it, though).

                          Of course, if the trust is not very high dollar, why go to the bother and expense, anyway?
                          Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087

                          Comment

                          Working...
                          X