Posts Tagged ‘insurance agent’

Most Estate Plans Enrich The IRS, Not Your Family

Friday, April 17th, 2009

While scanning the pages of one of the trade journals that carries this tax column, a headline for an ad intrigued me: “We install 90 percent of what we sell. That’s one big advantage we have over (names one of the biggest square-footage discount chains).”

Here’s the sad routine when the gizmo doesn’t work:

“The manufacturers,” pleads the installer.

“Improperly installed,” counters the manufacturer.

Ultimately — after some grief and unnecessary dollars —the gizmo is fixed and it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life story of a tax disaster.

Joe died, survived by his wife Mary, four grown kids (one, Sam, managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $9.8 million at Joe’s death), Joe and Mary had $275,000 of spendable personal wealth. In addition, they owned various personal property and a nice summer home with a total value of $1.2 million.

About five years before he died, Joe had gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning, and his long-time friend, an insurance agent.

The professionals crafted a great traditional estate plan: no tax due at Joe’s death (the 100 percent marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives. The estate plan probably would get an A-plus in the classroom.

But here are the unfortunate little lifetime details — told to me by Sam in an urgent phone call the professional team missed:

Mary, a healthy age 65, did not have a flow of income or enough spendable assets to maintain her lifestyle. Joe’s $500,000 salary, plus generous perks from Success Co., stopped when he died. Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium. Also, she wanted to continue providing the college education for four of her grandchildren( the other three had completed their education, which was paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of spendable income. Worse yet, they had no suggestions to solve the problem.

First, the solution to Mary’s immediate problem: The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 85 percent of Success Co. (Mary owned the other 15 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co. The large corporate profit will easily provide the income stream-via S corporation dividends-she needs, as the beneficiary of the marital trust (85 percent) and as a direct owner (15 percent).

Now, what lesson should be learned from this sad tale?

The first lesson is that estate planning (as practiced all over the United States) is really death planning. Do the documents: a will and a trust or two, put ’em in the vault, and wait to die.

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board — loud and clear.

Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans: (1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live); (2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you and your spouse for as long as either one of you lives; and (3) a transfer/succession plan for your business. (Note: Not even one of these three was done by the typical traditional estate plan for Joe and Mary.)

If you have yet to do your master plan, make sure it includes the three plans listed above. If your master plan is done and does not include all three of the plans listed above, get a second opinion. And finally, make sure that the professionals who create your plan know in advance that they are responsible for all aspects; he who creates the plan should install it and monitor it to the day you (and your spouse) die.

Remember, just because your estate plan is done, does not mean it is done right. Wouldn’t you want your plan to be in the 10 percent that enriches your family, instead of the 90 percent with a plan that enriches the IRS?

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Why Your Estate Tax Plan Often Flunks The Real-Life Test

Wednesday, April 15th, 2009

While thumbing through the pages of a trade journal, I ran across this quote, “We install 90 percent of what we sell. That’s one big advantage we have over (names one of the biggest square-footage discount chains).”

You know the routine: the thing-a-ma-jig doesn’t work. “The manufacturer,” says the installer; “improperly installed,” counters the manufacturer.

Ultimately-after some grief and probably more dollars — and it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life tax horror story.

Joe died, survived by his wife, Mary, three grown kids (one managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $10.3 million at Joe’s death), before Joe died, he and Mary enjoyed about $350,000 of after-tax spendable personal income. In addition, they owned various personal property and a nice summer home with a total value of over $1 million.

About five years before he died, Joe gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning and his long-time friend, an insurance agent.

The professionals crafted a good traditional estate plan: no tax due at Joe’s death (the marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives.

The estate plan probably would get an “A” in the classroom. But here’s the unfortunate big lifetime detail the professional team missed:

Mary, a healthy age 64, did not have enough cash flow to maintain her lifestyle. Joe’s $550,000 salary, plus generous perks from Success Co., stopped when he died.

Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium. Also, she wanted to continue providing for the college education of three of her grandchildren (the other five had completed their education paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of necessary spendable income. Worse yet, they had no suggestions to solve the problem.

First, the solution to Mary’s immediate problem: the cash flow to maintain her lifestyle. The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 90 percent of Success Co. (Mary owned the other 10 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co.

Now the large corporate profit can provide the income stream Mary needs, as the beneficiary of the marital trust (90 percent) and as a direct owner (10 percent).

What lesson should be learned from this sad tale? The first lesson is that estate planning (as practiced all over the United States) is really death planning, put ’em in the vault and wait to die. Do the documents (a will and a trust or two).

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board — loud and clear.

Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans:

(1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live);

(2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you (and your spouse) for as long as you (or your spouse) live;

(3) a transfer/succession plan for your business (that gets the value of the business out of your estate tax-free) to your business kids (or other successor).

Whether your master plan is done or is yet to be done, make sure it includes the three plans listed above. And always get an independent second opinion.

Finally, make sure that the professionals who create your plan know in advance they are responsible for all aspects: he who creates the plan should install it and monitor it to the day you (and your spouse) die.

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Why Your Real Estate Plan Often Flunks The Real-Life Test

Monday, April 13th, 2009

While thumbing through the pages of a trade journal, I ran across this quote, “We install 90 percent of what we sell. That’s one big advantage we have over (names one of the biggest square-footage discount chains).”

You know the routine: the thing-a-ma-jig doesn’t work.

“The manufacturer,” says the installer.

“Improperly installed,” counters the manufacturer.

Ultimately — after some grief and probably more dollars — it works.

Now, there’s a game you don’t want to play with your estate plan. Try this real-life tax horror story.Joe died, survived by his wife Mary, three grown kids (one managed Joe’s family business, Success Co.) and seven grandchildren. Success Co. was a C corporation. Aside from owning their residence (worth $800,000) and Success Co. (valued at $10.3 million at Joe’s death), before Joe died, he and Mary enjoyed about $350,000 of after-tax spendable personal income.

In addition, they owned various personal property and a nice summer home with a total value of over $1 million.About five years before he died, Joe gathered a team of professionals to do his estate plan: his CPA, a lawyer who specialized in estate planning and his long-time friend, an insurance agent.

The professionals crafted a good traditional estate plan: no tax due at Joe’s death (the marital deduction) and enough insurance (second-to-die) to pay the projected estate tax at Mary’s death. An irrevocable life insurance trust owned the second-to-die policy on Joe’s and Mary’s lives.

The estate plan probably would get an “A” in the classroom.

But here’s the unfortunate big lifetime detail the professional team missed: Mary, a healthy age 64, did not have enough cash flow to maintain her lifestyle. Joe’s $550,000 salary, plus generous perks from Success Co., stopped when he died. Aside from the usual lifestyle cash needs, Mary needed $46,000 per year to pay the second-to-die insurance premium.

Also, she wanted to continue providing for the college education of three of her grandchildren (the other five had completed their education paid for by Joe and Mary).

None of the professionals accepted responsibility for Mary’s lack of necessary spendable income. Worse yet, they had no suggestions to solve the problem.First, the solution to Mary’s immediate problem: the cash flow to maintain her lifestyle. The marital trust (created in Joe’s revocable trust as part of his estate plan) owned 90 percent of Success Co. (Mary owned the other 10 percent). We simply had the stockholders (the marital trust and Mary) elect S Corporation status for Success Co. Now the large corporate profit can provide the income stream Mary needs, as the beneficiary of the marital trust (90 percent) and as a direct owner (10 percent).

What lesson should be learned from this sad tale?

The first lesson is that estate planning (as practiced all over the United States) is really death planning. Do the documents — a will and a trust or two, put ‘em in the vault, and wait to die.

Rather than rehash what should have been done for Joe and Mary, let’s get the first lesson up on the board — loud and clear:

Whether you call it estate planning, lifetime planning, wealth transfer planning or whatever, your master plan must include three separate plans: (1) a lifetime plan to transfer your wealth while you are alive (and, yes you can control your wealth for as long as you live); (2) a retirement plan that provides the after-tax cash flow needed to maintain your lifestyle for you (and your spouse) for as long as you (or your spouse) live; and (3) a transfer/succession plan for your business (that gets the value of the business out of your estate tax-free) to your business kids (or other successor).

Whether your master plan is done or is yet to be done, make sure it includes the three plans listed above. And always — I mean always — get an independent second opinion. And finally, make sure that the professionals who create your plan know in advance that they are responsible for all aspects: he who creates the plan should install it and monitor it to the day the you (and your spouse) die.

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The tax knight and his merry men rescue a distressed taxpayer…

Friday, March 27th, 2009

OK, so it’s a corny title. Yet it sure describes the economic and tax pain of Joe, a 79-year-old widower. Don’t feel sorry for Joe, he’s generally a healthy and happy guy. He hits golf balls, spends lots of time with the grandkids and still goes to work every morning at the successful business he started, which he transferred to his two sons, who now own and run it.

But you should hear Joe howl about the cost of paying the annual insurance premiums on his irrevocable life insurance trust. Joe’s trust owns a $4 million insurance policy on his life with annual payments of $87,000. Yes, he needs the insurance to cover a portion of his potential estate-tax liability. No, he couldn’t buy second-to-die — normally at substantially less premium cost — because his wife was uninsurable when the irrevocable trust bought his policy.

It should be noted that an irrevocable trust protects the death benefits of a life insurance policy from the clutches of the estate tax.

Now, stop for a moment and look at your insurance cost situation. Chances are you’ll find you have one or more of the same complaints as Joe. He’s got three:

• Every year when Joe wrote his check to the trust for $87,000, he got four exclusions of $11,000 each, or $44,000 annually, one for each of his two sons and two grandkids. That left a taxable gift of $43,000 ($87,000 minus $44,000), which eats away at his $1 million lifetime unified credit. No cash gift-tax now. Simply put, the first $1 million of taxable gifts do not require cash to pay the gift tax, but are paid by using your lifetime unified credit. When Joe gets hit by the final bus, those annual taxable gifts will turn into an estate-tax liability (most likely 55 percent of the total of all those annual taxable gifts for Joe). Starting in 2006 the $11,000 is raised to $12,000.

Joe fumes!

• Interest rates are much lower now than when Joe bought the policy. Result, the premiums are much more than the projections made by his insurance agent.

Joe’s expletives are not fit to repeat here.

• Joe’s smart. He figured out that in his tax bracket — state and federal combined — he must earn $145,000 and pay $58,000 in income tax in order to have the $87,000 needed to pay his insurance premium which is actually a gift to the trust. Joe fervently argues that life insurance premiums should be deductible. Good idea. But we need an act of Congress to change the Internal Revenue Code.

Now you know why Joe is a distressed taxpayer.

Readers of this column know I have a network of professionals to help me work my tax magic. So I, the tax knight, and my network of merry men, went to work.

We had Joe’s irrevocable trust restructured with his insurance using a strategy called “premium financing.” Essentially, premium financing is an economic concept where policy premiums are paid by a lending bank. Like before, Joe’s premium financing policy is owned by the trust. When Joe dies the bank loans and accrued interest on the loans will be paid out of the policy proceeds.

Joe’s premium financing is set up for $5 million — net proceeds after paying off the bank — to the trust, and the beneficiaries are his kids and grandkids. Joe’s only potential out-of-pocket costs are $60,000 to initiate the bank loan the year the premium financing is set up. If Joe lives to be 100, the total additional cost will be about $352,000, with varying small amounts to be paid each year to maintain the loan. Of course, if Joe dies sooner, these costs stop.

Now, what are the final results for Joe by using premium financing?

• To start, no more $87,000 annual premium payments — actually, no more premium payments. All three of his complaints disappeared.

• No out-of-pocket costs — not the $60,000 or any portion of the $352,000. Why? Because the cash surrender value of the original $4 million policy owned by his trust was more than enough to cover all of the premium financing costs. The old policy was canceled to free up the cash surrender value and put the premium financing strategy in place without any further out-of-pocket costs to Joe.

Even Joe is happy.

Premium financing is a relatively new concept — easy to understand, complex to implement. It really takes a network of experienced professionals working together. The results create an economic windfall — all tax-free.

But sorry, everyone cannot take advantage of premium financing. You must qualify by bringing two things to the table:

First, you must be insurable or if married, one spouse must be insurable, so your irrevocable trust can buy second-to-die coverage.

Next, you must be worth a minimum of $5 million. The more you are worth and the more investment-type assets such as stocks, bonds or even real estate you have, the more likely you will qualify for this strategy.

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Posted in Corporate Tax, Estate Tax, Family Tax Issues, Insurance | No Comments »