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Old 11-07-2010, 10:46 AM   #41
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Originally Posted by ERD50 View Post
Granted, there can be other, entirely valid factors/concerns outside a straight analysis of the numbers - just like make/buy, rent/own, etc. But, let's deal with those separately, and first determine the numbers. After that, an individual can look at whether those other considerations (which are subjective and will vary for each situation) outweigh the numbers for their case. Just like I do when I buy any insurance product.

Throwing them together clouds the issue. When I see an issue being clouded, I've learned there is usually a reason (agenda) for it.

Well, you started with the number examples, so I do feel it is in your court to defend them. I don't need numerous examples, lets just take one. Can you provide numbers and sources for:

65 YO male, average health.

Cost for a $1M policy from a highly rated insurer.

Actuary numbers for Life Expectancy for said 65 YO male, average health.

That should be easy for someone with your experience and resources.

Oh, and those practical matters can work the other way also. What if the beneficiary has a legitimate and real need for the money now rather than some uncertain date of death of the insured? Take a loan out against the policy - gets complicated, no?

-ERD50
Age 65 isn't the time to be buying a single life UL policy, and a loan should never be taken on a no-lapse UL policy. You also can't take a loan on a policy held within an ILIT. To answer your questions:

Standard rates - $24,482 per year
Preferred rates - $19,872 per year
Preferred Plus rates - $18,724 per year

I don't know what the life expectancy is since I'm not an actuary, but I'd guess around 20 years (~age 85). Maybe age 90 if they could qualify for P+ rates.

A second-to-die policy will be much cheaper, see my post above. That only works if they are married though.

If the beneficiary has a real need for the money now, that's their problem. They are the beneficiary, remember?
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Old 11-07-2010, 10:52 AM   #42
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Originally Posted by dgoldenz View Post
Ask the government. The life insurance proceeds are considered part of the estate of the insured unless it is placed in an ILIT.
No. The key issue is transfer of the policy. There are other reasons to do a trust but a trust is not necessary to avoid estate taxes.


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For someone with $10 million in assets, better to spend $5k and have a top estate planning attorney draw up an ILIT and estate plan than to be cheap and screw things up for the kids.
Abosolutely.
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Old 11-07-2010, 10:57 AM   #43
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Then it's considered part of the estate. Think about it this way - when the insured dies, money is being transferred to the children with life insurance proceeds. That money is transferred along with all other provisions of the will/trust/etc. Most people don't worry about it because they will never exceed the threshold for having to pay an estate tax, but if they were to exceed it when the life insurance is included, then it would be taxable.
Kaneohe is talking about when the policy itself if owned by the kids. Either the kids purchased it outright or it was given or sold them them. This does in fact take the policy out of the estate. (with a possible three year look back for transfers). The kids will have the pay the premium but mommy or daddy can gift money to the kids to make the premium payment.
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Old 11-07-2010, 11:07 AM   #44
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Kaneohe is talking about when the policy itself if owned by the kids. Either the kids purchased it outright or it was given or sold them them. This does in fact take the policy out of the estate. (with a possible three year look back for transfers). The kids will have the pay the premium but mommy or daddy can gift money to the kids to make the premium payment.
I'm not an estate planning attorney, do you have a reference for this? In any case, it would not be a smart move to have your kids own a policy on your life of that size. Again, what happens when one of the kids gets divorced? The ex-spouse is going to want a piece of that life insurance policy. Do you now want your now-divorced daughter or son in law with a stake in your death worth millions of dollars? There's just no good reason to not put the policy in an ILIT if estate preservation is the end goal.
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Old 11-07-2010, 11:13 AM   #45
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Originally Posted by dgoldenz View Post
Age 65 isn't the time to be buying a single life UL policy...
OK, so you seem to be cherry-picking your examples. What if I AM a 65 YO single?

Quote:
To answer your questions:

Standard rates - $24,482 per year

...

I don't know what the life expectancy is since I'm not an actuary, but I'd guess around 20 years (~age 85).
I'm not an actuary either, but I have a web browser. Vanguard says 83 YO average LE.

https://personal.vanguard.com/us/ins...etirement-tool
NOTE: Calculations are based on mortality data from the Society of Actuaries Retirement Participant 2000 Table.

You are also totally (conveniently?) ignoring the time value of money. For apples-apples, you need to add some real rate of return to the accumulated amount.

I don't know how much fine print and ifs/and/buts are in those policies, the numbers you present look fairly attractive - but that leads to a real world question. If the returns are so good, why are there not numerous threads on this board with people recc taking out LI policies on all the old people that they know? Sounds like a real financial winner. You don't need an Estate Tax issue to take advantage of that straight financial analysis.

Quote:
If the beneficiary has a real need for the money now, that's their problem. They are the beneficiary, remember?
Again, this is a factor outside of whether ins will provide a monetary benefit. The answer will be different for different people. Some people wish to gift while they are alive - no right/wrong.

(just saw your latest post before hitting submit):

Quote:
In any case, it would not be a smart move to have your kids own a policy on your life of that size.
One step at a time. It either can be done or it cannot. Determine THAT, and then talk about if it is suitable in a particular case or not. Again, all these outside circumstances cloud the issue. Get the facts straight first.

-ERD50
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Old 11-07-2010, 11:22 AM   #46
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OK, so you seem to be cherry-picking your examples. What if I AM a 65 YO single?
Then you will pay the price for not having bought the policy earlier and not being married. What do you want me to say to that? Maybe said person bought term and invested the difference, and now they will pay a substantial price for needing a new policy at an older age. On the other hand, they also didn't pay premiums for the first 65 years on this hypothetical policy.

Quote:
I'm not an actuary either, but I have a web browser. Vanguard says 83 YO average LE.

https://personal.vanguard.com/us/ins...etirement-tool
NOTE: Calculations are based on mortality data from the Society of Actuaries Retirement Participant 2000 Table.
I said about 20 years for a 65 year old, so I guess I was pretty close there.


Quote:
You are also totally (conveniently?) ignoring the time value of money. For apples-apples, you need to add some real rate of return to the accumulated amount.

I don't know how much fine print and ifs/and/buts are in those policies, the numbers you present look fairly attractive - but that leads to a real world question. If the returns are so good, why are there not numerous threads on this board with people recc taking out LI policies on all the old people that they know? Sounds like a real financial winner. You don't need an Estate Tax issue to take advantage of that straight financial analysis.
I understand there is a time value of money, but as with all life insurance there's also the possibility that you kick the bucket tomorrow. That's why insurance is for insurance and investments are for investments. Regardless, do you know of any safe investments at 73 year old couple can make which will net their kids $1 million tax free for only $17k per year? Probably not.

There are no fine print/ifs/ands/buts (there are, but it's just policy jargon on how the rates are calculated) - you pay the premium and don't touch the cash value, the policy stays in force for life. Think of it as term insurance that is guaranteed for life. You can't take a loan on a term policy and you can't have late payments, same deal here.

Your second statement is a bit out there. If your neighbor came over to your house and asked if he could buy a $1 million policy so he gets paid when you croak, what would you say? I'm sure you know what "insurable interest" is. There's an industry for life settlements, but that's a whole different ballgame.
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Old 11-07-2010, 11:33 AM   #47
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I'm not an estate planning attorney, do you have a reference for this?
OK, Martha may be busy, she usually comes back with the exact statute (that no one but lawyers can understand ). So a quick google of the terms: "estate tax insurance beneficiary" brought up this:

Life Insurance Ownership - Federal estate taxes

Quote:
There are a few basic ways to prevent life insurance proceeds from being included in your estate for purposes of the federal estate tax. The easiest and most practical way is to never own it in the first place. That is, the insured party should not be the owner of the policy, but rather, the beneficiary should purchase and own the policy. If your beneficiary (such as your spouse or children) purchases the policy and pays the premiums, the death benefit should not be included in your federal estate. If your beneficiary cannot afford to make the premium payments, you may be able to give him the premium money. If you choose this route, make sure the premium money is placed in an unrestricted bank account titled in the beneficiary's name; for if you pay the premium directly, the IRS will claim that you were the actual owner of the policy and, therefore, will include insurance proceeds in your estate
And to be honest, I'm surprised that someone in the industry (even though they are not an attorney) and making these general comments is unaware of this. It strikes me as pretty basic to the whole situation.


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Originally Posted by dgoldenz View Post
Then you will pay the price for not having bought the policy earlier and not being married. What do you want me to say to that?
Maybe not, but I don't expect you to say things like:

"dgoldenz: A guaranteed universal life or second-to-die universal life (if he's married) is the lowest cost way to pay the tax." without a reasonable qualifier, like "in some situations...."

Quote:
Your second statement is a bit out there. If your neighbor came over to your house and asked if he could buy a $1 million policy so he gets paid when you croak, what would you say?
Actually, I'm thinking of saying" Hey, why don't we take out policies on each other? Look at these great benefits to our families! Ins cos are giving away money, let's get some!".

-ERD50
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Old 11-07-2010, 11:44 AM   #48
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OK, Martha may be busy, she usually comes back with the exact statute (that no one but lawyers can understand ). So a quick google of the terms: "estate tax insurance beneficiary" brought up this:

Life Insurance Ownership - Federal estate taxes
Thanks, good information. It also says the proceeds "should" not be considered part of your estate, not that it "will" not be considered. I'm sure there's a qualifier in that statement and there may be exceptions. When it's owned by an ILIT, you don't have to worry about that.

Quote:
And to be honest, I'm surprised that someone in the industry (even though they are not an attorney) and making these general comments is unaware of this. It strikes me as pretty basic to the whole situation.
Like I said, I am not an attorney and there is always one involved on these types of cases that knows the laws and specifics.


Quote:
Maybe not, but I don't expect you to say things like:

"dgoldenz: A guaranteed universal life or second-to-die universal life (if he's married) is the lowest cost way to pay the tax." without a reasonable qualifier, like "in some situations...."
See my signature for a reasonable qualifier. You could add "in some situations" to just about any statement relating to insurance.
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Old 11-07-2010, 12:05 PM   #49
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I'm not an estate planning attorney, do you have a reference for this? In any case, it would not be a smart move to have your kids own a policy on your life of that size. Again, what happens when one of the kids gets divorced? The ex-spouse is going to want a piece of that life insurance policy. Do you now want your now-divorced daughter or son in law with a stake in your death worth millions of dollars? There's just no good reason to not put the policy in an ILIT if estate preservation is the end goal.
I agree that there are other reasons one might want to have a trust, which I alluded to above. I just wanted to correct the idea that a trust is necessary.

Here you go: United States Code: Title 26,2042. Proceeds of life insurance | LII / Legal Information Institute


So, if you give your entire interest in an insurance policy away to someone (like your adult kids) or some entity (like a charity) and you retain no control whatsoever, it is not going to be part of your estate. The owner of the policy pays the premiums. The owner decides on the beneficiary. You can't have any control. It would not be part of the estate at all if not for the three year look back period.
26 U.S.C. 2035 : US Code - Section 2035: Adjustments for certain gifts made within 3 years of decedent's death
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Old 11-07-2010, 02:25 PM   #50
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Man, I step away from the computer for 18 hours and the thread goes berserk!

Dgoldenz, I see that ERD50 and Martha have already supplied references, so no need for me to. But I read and watch Ed Slott a lot, and he recommends the "kids own the policy and you gift them the premiums" process as a way to pay the estate taxes. It's not foolproof, obviously, but in a lot of cases it works well. As you and Martha said, a trust has it's place in estate planning. But it's not the only way to minimize the tax impact on estates.

As far as an ILIT being a way to avoid having an ex-spouse having a claim, I don't see a difference. If they can claim ownership of a life insurance policy that hasn't paid off yet, I imagine they can do the same for an unfulfilled trust. For that matter, if I was going through a divorce and was worried about it, I'd just miss a few premiums, have the policy cancelled, and pick it up again when the divorce was finalized. The premiums would increase due to increased age, but it would be a lot cheaper than losing half of the inheritance.

Now, let it be known that I am not a lawyer, a CPA, or an insurance agent. I'm merely a guy who has made a hobby of trying to keep my money out of the hands of the gov't, through whatever legal means I can find.
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Old 11-07-2010, 05:50 PM   #51
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Man, I step away from the computer for 18 hours and the thread goes berserk!
If you want to see berserk, you should just start questioning if the Estate Tax (call it Death Tax for extra special 'fun') should be eliminated because we ought to get to keep the money we earned in our lifetime that was already taxed and we should be able do with it what we wish, without 'penalty'.

Oh my, I think Martha swore off those discussions a while back, and I'm not up to the task right now either. But it would certainly add some 'berserk-edness' to the thread!


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Old 11-07-2010, 11:12 PM   #52
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I am just trying to get him some basic advice. Before he goes to the pros. He will not be going to heaven this year I am guessing so 2010 it out. If the estate tax goes back to 1 million and a tax of 55% will a trust help him any? The insurance idea is a good one.
Could this perhaps be above your pay grade?
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Old 11-07-2010, 11:24 PM   #53
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One question are any of the kids still in college, one can pay tuition directly to the school in addition to the gift limits. So some kids could go to Harvard or other top private school if qualified, and it would get around the gift limit.
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Old 11-08-2010, 09:16 AM   #54
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Could this perhaps be above your pay grade?
Sure it is but I love helping people. I have also learned a lot. This forum and Bogleheads are the best forums on the net. My pay grade is 0 so I guess I am a bargain.
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