estate planning / life insurance resources

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drew
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estate planning / life insurance resources

Post by drew » Tue Mar 27, 2007 12:51 pm

My parents have been attending a number of seminars concerning estate tax planning and are wondering whether the life insurance products being peddled are reasonable vehicles. I am rather unfamiliar with the details of estate planning but have skimmed over the Vanguard information on the topic available on their web site.

Although Vanguard mentions life insurance trusts, one of the vehicles recommended by many of these planners, as a possible strategy, I don't have a good feel for what to look for in these products to analyze whether or not they make sense for my parents' situation. Does anyone here have any suggestions for where I might start an education into this topic?

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dm200
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If these are being presented

Post by dm200 » Tue Mar 27, 2007 2:14 pm

by an insurance salesperson, they are probably a bad idea, IMO.

The FIRST place to start and question to ask is what are the needs/desires that they wish to address? Are the "tax planning" issues income tax or estate tax?

Then, the next question might be "So what if there are taxes due? The kids each get a millionand that should be enough." Perhaps, "The taxes might or will wipe out the family business. We need to address this"

Life insurance trusts, that will pay estate taxes, can cost a fair amount to set up, and might not be needed. Or, might be the way to prevent losing a family business. And/or make the insurance guy/gal wealthy :)

An unbiased estate planning attorney might be a reasonable place to start.

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hollowcave2
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life insurance can be a good vehicle, but.....

Post by hollowcave2 » Tue Mar 27, 2007 2:42 pm

Life insurance products can be good vehicles, but IMHO, only for people who can fund it generously and do not have other tax-free or tax-deferred options available.

Both annuities and permanent life insurance have very high fees and loads, in general. The only low-load company I'm familiar with is Ameritas.

Most of the advantages of life insurance products can be accomplished through Roth and Traditional IRA's, company 401k plans, and formation of trusts which avoid probate. Before considering any life insurance product as an investment vehicle, I'd totally max out your other options, such as all IRA's and 401k plans.

Even then, you need to fund the life insurance products adequately. So it seems like these products work best for the wealthy in high tax brackets.

If you need life insurance, buy term and invest the difference in a Roth. That's the best strategy.

There are pitfalls in life insurance products that are not easy to see. For instance, one of the most popular life insurance plans is Variable universal life (VUL). It's often touted as a great investment vehicle. But what they don't tell you is that if the plan is not funded adequately from the start and you don't achieve a relatively high rate of return in the investment portion (at least 8% annualized), then it's possible that the policy will lapse unless you pay a sizable premium making up the shortfall. If you can't afford the extra premium, then you lose ALL of your money that you ever put into the policy. Ask your agent about that nightmare, if he even wants to talk about it.

What if you just put all of your money in a safe bond fund within the VUL? At current rates, the policy WILL fail and you WILL lose everything. So what the company is asking YOU to do is take ALL of the risk of avoiding policy lapse in the years that you'll need it most. So why not just buy term and invest the difference? At least you're guaranteed the bond portion of the money when the term expires. That's a lot better than losing it all.

OK, my rant is over.

Steve

chaz
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Re: If these are being presented

Post by chaz » Tue Mar 27, 2007 2:46 pm

First read up on what is involved in estate planning. Then visit a specialist lawyer, because then you will have some ideas and can ask some questions.
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prh2s
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Life insurance trust?

Post by prh2s » Tue Mar 27, 2007 2:57 pm

I agree with Dan that your parents should consult an experienced attorney who specializes in trusts and estates--someone who will offer unbiased, personalized advice. Irrevocable life insurance trusts have their place, but they are not the answer to everyone's estate tax planning needs.

I don't know of any good primers on ILITs specifically, but they are covered (along with many other things) in Dennis Clifford and Nora Jordan's excellent book Plan Your Estate, published by Nolo Press.

Patrick

drew
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Post by drew » Tue Mar 27, 2007 3:32 pm

Thank you for your replies.

I agree that it makes sense for them to consult with an unbiased attorney specializing in this area. However, in the financial planning arena, after having read some books, I feel that, were I interested in going this route, I'd have a better idea of what sorts of things to look for and ask about in order to determine if the prospective planner had a philosophy in line with my own. In this area, I really wouldn't know where to start. Patrick, thanks for the book recommendation. I'll check into it, and hopefully that will give me a good start.

In regards to some of the other comments...

Their issues are regarding estate tax. Sure, they may be able to leave "enough" without doing any planning. However, just as we all try to design a tax-efficient portfolio in order to minimize taxes within the guidelines of the tax law, surely it makes sense to do the same with respect to estate tax planning.

The life insurance products they are looking at -- and I'm not sure exactly if this is a life insurance trust or what type of policy it is -- requires a fixed annual payment and pays out a fixed dollar amount upon the passing of both husband and wife. Neither the annual payment nor the final pay out have any inflation adjustment. It seems that I should be able to look at a few scenarios comparing investment of the annual payment at a certain rate of return with the 46% estate tax cut at the end for different periods of time. That will probably be my next step, and hopefully one I can get done accurately!

FWIW, I believe that two of the companies from which they've gotten quotes are Jefferson and AIG.

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hollowcave2
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drew

Post by hollowcave2 » Tue Mar 27, 2007 4:03 pm

I was curious as to what type of life insurance product we're talking about.

Can you specify what the product is? For example, is it permanent life insurance, and if so, what type? Is it an annuity?

If you can't answer this question, you're not ready to make a decision.

Sorry if I'm blunt, but I've seen people get into a financial trap with these because they didn't understand the risks at the outset. I don't want that to happen to you.

Steve

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dm200
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Regarding the estate tax -

Post by dm200 » Tue Mar 27, 2007 4:28 pm

I am not in that position where I need to worry about that now, but the CURRENT thresshold before having to pay federal estate tax is now $2 MILLION. For a married couple, using some basic bypass trusts, etc. this can be easily incressed to $4 MILLION.

There are some other techniques, such as leaving money to charity that can increase a gross estate to an even higher figure.

My attitude, I I have over $4 million, is that I would not spend one PENNY to give my heirs any more than the $4 MILLION. Let the government take it. Not my problem - I am dead.

A spouse can leave an unlimited amount to the surviving spouse (with some rare exceptions, for example, if the spouse is not a resident). So, one parent could leave $1 BILLION or more to the other.

At what point do peoiple with many, many MILLIONS of dollars (and that is who we are talking about here) say "enough".

Just me, but I would tell the insurance salesman to take a hike; he/she is NOT getting a dime from me.

dan

drew
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Re: drew

Post by drew » Tue Mar 27, 2007 5:03 pm

hollowcave2 wrote:Can you specify what the product is? For example, is it permanent life insurance, and if so, what type? Is it an annuity?

If you can't answer this question, you're not ready to make a decision.
I can't, and I'm not. I realize this. All I know of the product so far is that it would cost them on the order of $22K-$25K per year per $1M payout at the end. They are in their mid 70s.

On to do some reading! Thank you all again for your input.

Andrew

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paulob
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Post by paulob » Wed Mar 28, 2007 7:44 am

Drew,
I found this via Google search:
http://www.quickquote.com/liestate.html

The exemption amounts are dated (600k is an old #), but you can see by the examples why life insurance is critical to estate planning.

My father-in-law died a month ago so I am trying to assist my MIL with estate issues. I would be interested in keeping this thread active to see what you find in your research.
Paul

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mephistophles
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Hello Drew

Post by mephistophles » Wed Mar 28, 2007 11:35 pm

Life insurance can be an extremely cost effective way to pay federal estate and state inheritance taxes on large estates. People with multimillion dollar estates often use a combination of trusts, permanent life insurance, gifting and similar techniques to minimize these taxes.

First, do not put the cart before the horse. Life insurance is one of a number of possible "solutions" to estate planning problems and may or may not be necessary or advisable.

The first step should be for your parents to define what "their" estate planning objectives are.

The second step I would recommend would be to go online under the subject of estate planning and read up on the subject.

Enough for now.

Regards,

ole meph (Chartered Life Underwriter)

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Barry Barnitz
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Estate Planning for Persons with Less Than $5 Million

Post by Barry Barnitz » Thu Mar 29, 2007 4:01 am

Estate Planning for Persons with Less Than $5 Million by Blattmachr, Jonathan G., Slade, Georgiana J. and Crawford, Bridget J (March 2007)
Financial concerns may preclude people of modest wealth (defined for purposes of this article as those having a net worth between $1 million and $5 million) from making significant lifetime transfers to achieve estate planning goals. Yet lifetime transfers are among the most effective ways to reduce estate taxes. Individuals of modest wealth may experience a tension between the desire to take advantage of opportunities to reduce taxes and protect assets from other claims which may arise, on the one hand, and the need to preserve an adequate base of wealth to ensure the maintenance of a current standard of living, on the other. The advisor to these individuals carefully should consider what estate planning steps are most appropriate and what level of transfers, if any, the individual reasonably can afford to make. This article details and evaluates eleven strategies that may apply to clients in the modest wealth category: (1) inter vivos transfers of life insurance and other non-income producing assets; (2) estate building and income tax sheltering with life insurance; (3) qualified personal residence trusts; (4) effective use of annual exclusions; (5) self-settled trusts; (6) potential use of the gift tax exemption and the GST exemption; (7) assessing income tax-free states; [8] using a charitable remainder trust to build wealth and generate income; (9) medical care and tuition payments; (10) limited liability entities for asset protection and tax planning; and (11) special care in handling interests in qualified plans, IRAs and other IRD.
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dm200
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While life insurance can often be

Post by dm200 » Thu Mar 29, 2007 9:43 am

a very worthwhile purchase, I seriously question its use (in many situations) for paying estate taxes. It seems to me that a married couple would need to have in the $5 million and over net assets before there would be a serious estate tax (federal) issue to address (and there might not be one even at that level).

At $5 million for heirs, I really wonder why most folks would want to spend money on insurance premiums so their heirs could get even more money. I would lean towards spending that money on helping need folks in various places in this world.

dan

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paulob
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Post by paulob » Thu Mar 29, 2007 10:23 am

Dan,
I understand your point. But, unless one does some Estate Planning, then the government may in charge of a large portion of the estate. If your wishes are to assist needy folks, then that priority falls in line with other government expenditures.

Based on your expressed wishes, you could consider a charitable remainder trust, rather than life insurance. Its possible that would better serve your intentions.

While the future of estate taxes is unknown, existing law provides that the exemption reverts to $1million in 2011. So, if the projected net estate value was $5 million, then $2.2 million in taxes would be due.

Also, life insurance can name a charity as a beneficary or allow it to purchase the policy. So, life insurance would still be very useful for someone who intends for the balance of their estate to go to charitable purposes.
Paul

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mephistophles
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Individual Estate Planning goals

Post by mephistophles » Thu Mar 29, 2007 1:56 pm

Dan--Estate planning goals and objectives are based on each individual or familys' unique situation and what they desire to happen to their estate after they die. Passing on a large estate to your heirs is not one of your objectives so life insurance certainly would not be appropriate in your situation.

Many of the truly wealthy do want to maximize the amount of their estates that go to their heirs or charities and minimize the amount the government takes in taxes. For these people life insurance can be an extremely cost efficient way to pay taxes and rich people frequently use permanent life insurance to do this.

Regards,

ole meph

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dm200
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Meph - Yes, I agree that

Post by dm200 » Thu Mar 29, 2007 2:24 pm

different folks have different priorities.

Sometimes, though, folks are so focused on a "narrow" objective (like saving taxes) that they don't even consider the bigger picture. I actually know people who will spend more than a dollar to save a dollar in taxes.

My point was that, using a married couple, and today's tax laws (who knows about tomorrow), federal estate tax doesn't seriously become a factor until the $5 million plus estate value.

Folks looking at spending money to buy life insurance, and set up Life insurance trusts (and the associated expenses to do that) may want to just be aware of where they pay taxes and where they don't, as well as the amounts involved.

dan

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paulob
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Re: Meph - Yes, I agree that

Post by paulob » Thu Mar 29, 2007 2:39 pm

dm200 wrote:different folks have different priorities.

My point was that, using a married couple, and today's tax laws (who knows about tomorrow), federal estate tax doesn't seriously become a factor until the $5 million plus estate value.
As I pointed out above, if you know you are going to die before 2011, you are correct. But if you are still here in 2011, under today's tax laws, it reverts back to 1 million.
Paul

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mephistophles
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Dan, sorry to disagree again, but

Post by mephistophles » Thu Mar 29, 2007 4:20 pm

First, reducing estate taxes is generally not considered a "narrow" viewpoint by the wealthy as the governments can take nearly half of your money in the end. Most people don't want their wealth effectively confiscated by the government.

Second, the present estate and gift tax laws are due to expire in a few years. Of course, something new will take their place, but with the government's voracious appetite for monies funded by various taxes it is probably a pretty safe bet that death taxes will not go away.

I agree with your point that if one is not concerned with paying estate taxes then it is unnecessary to use trusts, gifting, life insurance or any other method of similar planning.

Regards,

ole meph

Randy
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Re: Regarding the estate tax -

Post by Randy » Fri Mar 30, 2007 4:40 pm

dm200 wrote: My attitude, I I have over $4 million, is that I would not spend one PENNY to give my heirs any more than the $4 MILLION. Let the government take it. Not my problem - I am dead.
dan
Gee, you like your heirs even less than the IRS? :o
Randy

prh2s
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Estate planning paper

Post by prh2s » Fri Mar 30, 2007 6:52 pm

That's an excellent paper, Barry. Thanks for sharing it.

Patrick

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