Estate Question

[FANOFJESUS]

I friend of mine has 10 children and is worth 10 million. He is married. I guess they can give 26k a year to each child. But I don't think there is enough time to do more than about 2 million that way. Still leaving him about 8 million. Will he pay estate taxes or can this be avoided by using a trust?

 

[Nodak]

I am told that there was a wealthy farmer here that bought massive amounts of life insurance with his heirs as beneficiaries. Supposedly proceeds from insurance are not taxable. I don't know how true that is but it may be an option.

 

[grumpy]

If he were to die this year he can avoid federal estate taxes altogether. It is not yet clear what the estate tax exemption will be in 2011 and forward. I believe that when one spouse dies, the other spouse inherits with no federal estate tax due. When the second spouse dies, the federal tax kicks in (someone correct me if this is wrong).

State inheritance taxes are a whole separate issue depending on the state of domicile at the time of death and if property is owned in other states. For example, when my FIL passed away earlier this year his estate owed Pennsylvania a tax of 4.5% of the gross estate even though there was no federal estate tax due.

 

[W2R]

I friend of mine has 10 children and is worth 10 million. He is married. I guess they can give 26k a year to each child. But I don't think there is enough time to do more than about 2 million that way. Still leaving him about 8 million. Will he pay estate taxes or can this be avoided by using a trust?

He needs to use some of that $10,000,000 to hire a CPA and a lawyer. They can answer such questions for him and help him to plan his estate.

 

[rescueme]

I am told that there was a wealthy farmer here that bought massive amounts of life insurance with his heirs as beneficiaries. Supposedly proceeds from insurance are not taxable. I don't know how true that is but it may be an option.

That is correct (we did it, in order to pay for the anticipated taxes due) ....

Insurance proceeds are non-taxable (at this point in time).

You should check with your own elder law attorney from a state perspective, since every state has their own set of rules (in addition to the federal rules).

 

[FANOFJESUS]

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.

 

[Brat]

There are all kinds of ways to manage the inheritance of a large estate and if it involves a business care must be taken because with even fractional ownership by heir can cause grief. His estate planning is a job for a specialist in the field.

BTW, none of us knows the date of our demise. Your friend could suffer an unexpected event tomorrow. Worse yet, he could suffer a stroke or brain injury and not be able to do his estate planning. This is not a issue to postpone.

 

[FANOFJESUS]

No business just cash and several homes.

 

[Bestwifeever]

Yes, your wealthy friend needs professional advice for that large of an estate imho.

We won't have that problem but a friend pays for all their kids/grandkids' medical expenses (they have to be billed to our friend) and it doesn't count as part of the gift limits:

Gift Tax - Gift Taxes - What Gifts Are Not Subject to the Gift Tax?

 

[LOL!]

There are many kinds of trust. Yes, a trust will help him. But which one? Perhaps a trust that owns the life insurance. As mentioned over and over, seek professional advice.

 

[farmerEd]

Are any of the kids married? and/or does he have grandchildren? As a couple they can give away $26K per receipient, and reciepients don't have to be limited to just the children; if every kid was married, and each had one child, each of the 10 families could get $78K per year... ($26K x 3)...I also recommend that he hire some expert advice...he can certainly afford it.

 

[kaneohe]

I am told that there was a wealthy farmer here that bought massive amounts of life insurance with his heirs as beneficiaries. Supposedly proceeds from insurance are not taxable. I don't know how true that is but it may be an option.

I don't think that's quite the whole picture. My understanding is that while it is true that proceeds from life insurance are not income taxable to the heirs,
that life insurance is still part of the deceased estate and subject to estate taxes unless the life insurance is held by an ILIT (irrevocable life insurance trust). This costs $$$ and knowledge to set up but in this case could be worthwhile. Echoing others who say see a pro.

 

[FANOFJESUS]

Thanks everyone he will use the pros but at least some good ideas have been thrown around.

 

[harley]

I don't think that's quite the whole picture. My understanding is that while it is true that proceeds from life insurance are not income taxable to the heirs,
that life insurance is still part of the deceased estate and subject to estate taxes unless the life insurance is held by an ILIT (irrevocable life insurance trust). This costs $$$ and knowledge to set up but in this case could be worthwhile. Echoing others who say see a pro.

Actually, the usual tax dodge for this is to have the kids (or whoever) own the policy, and the parent gifts them enough each year to pay the premiums. If the insurance is owned by the parent or his estate, it is still taxable. But if it is owned by a relative it goes directly to them without becoming part of the estate.

All this is just conversation, though. Tell him to call Ed Slott or one of his estate and tax planning peers. This stuff is far too complex for Average Joe Decamillionaire.

 

[kaneohe]

Actually, the usual tax dodge for this is to have the kids (or whoever) own the policy, and the parent gifts them enough each year to pay the premiums. If the insurance is owned by the parent or his estate, it is still taxable. But if it is owned by a relative it goes directly to them without becoming part of the estate.

Harley, you are correct in that this would be a cheaper way to do it. I should have said if the ILIT or someone other than the parents owned the policy......

 

[dgoldenz]

Harley, you are correct in that this would be a cheaper way to do it. I should have said if the ILIT or someone other than the parents owned the policy......

It has to be an ILIT otherwise it will still be taxable as part of the estate calculation. A guaranteed universal life or second-to-die universal life (if he's married) is the lowest cost way to pay the tax. Instead of paying the estate tax purely out of his own pocket (or the kids out of the inheritance), he can pay for the life insurance each year by gifting money to the trust and having the trust pay the premiums. When he dies (or both husband/wife die if married), the money gets paid to the trust and distributed according to the ILIT document.

If he is not married, he can only gift $13k per child per year. $26k would apply when there is both a husband and wife to gift $13k each ($13k x 2 = $26k).

He needs the help of an experienced life insurance agent that is independent with a good background in estate planning, the help of a CPA, and the help of an estate planning attorney.

If he's worth $10 million today, what will that money be worth when he dies? $15 million? $25 million? $50 million? Of course, he still has to pay the premium, but a lot of people simply think in terms of how much the tax would be if they died sooner rather than later and don't plan accordingly.

 

[ERD50]

Actually, the usual tax dodge for this is to have the kids (or whoever) own the policy, and the parent gifts them enough each year to pay the premiums. ... if it is owned by a relative it goes directly to them without becoming part of the estate.

That is how it works from what I understand. What people forget (and insurance salespeople never point out) is that the insurance doesn't really provide the tax benefit - it was the gifting which was used to buy the insurance that provides the tax benefit.

The gifting (kept under $13K per person per donor) is Estate Tax free. Now, if the person receiving the gift buys insurance with it, they are now treating the insurance as an 'investment', and few people on this board would do that. Like any Life Insurance, if the insured dies early, it will likely be a good financial move. If not, it will likely be a bad financial move.

Even if you are generous and assume that on average the people buying that insurance break even on their payments (leaving no profit or way to pay expenses for the ins co), that means all they did was take money that was exempt from Estate Taxes (the gifted money), and turn into money that is exempt from Estate Taxes (insurance payout money). IOW, nothing was gained. Now, throw in the fact that ins cos have expenses and need to make a profit, it can't be a win, on average. Or as it has been said many times, LI can be useful for managing risk, but not as an investment.

-ERD50

 

[dgoldenz]

That is how it works from what I understand. What people forget (and insurance salespeople never point out) is that the insurance doesn't really provide the tax benefit - it was the gifting which was used to buy the insurance that provides the tax benefit.

The gifting (kept under $13K per person per donor) is Estate Tax free. Now, if the person receiving the gift buys insurance with it, they are now treating the insurance as an 'investment', and few people on this board would do that. Like any Life Insurance, if the insured dies early, it will likely be a good financial move. If not, it will likely be a bad financial move.

Even if you are generous and assume that on average the people buying that insurance break even on their payments (leaving no profit or way to pay expenses for the ins co), that means all they did was take money that was exempt from Estate Taxes (the gifted money), and turn into money that is exempt from Estate Taxes (insurance payout money). IOW, nothing was gained. Now, throw in the fact that ins cos have expenses and need to make a profit, it can't be a win, on average. Or as it has been said many times, LI can be useful for managing risk, but not as an investment.

-ERD50

With respect, I have to say that you are totally wrong in your assumptions. Any insurance agent worth their salt will tell you that the insurance doesn't provide a tax benefit. An agent that specializes in estate planning will point out that it is the insurance benefit which is used to PAY the tax that is owed. Life insurance is income tax free, it is not exempt from the estate tax calculation unless paid to an ILIT as the beneficiary.

You are also mis-reading the gifting exemptions. The exemption is $13k per beneficiary per year, for each a husband and wife. There is also a $1 million lifetime gifting exemption if the gifts to the trust are in excess of the total per-person exemption amount. As an example, if there are two children and two parents, $52k can be gifted to the ILIT to pay the premium each year. If $100k is gifted to cover a $100k premium, $48k of it would be counted against the lifetime exemption of $1 million. If the $1 million exemption is exceeded, taxes are owed on all futures gifts in excess of the annual limit.

The children are not treating the insurance as an investment, they are treating it as the purposes that it is used for - to pay the estate tax which they will owe at some point and owe within 9 months of the second parent's death. The beneficiaries must be presented the option every year of either taking the gift money and not paying the premium (through the use of what is called a Crummy letter), or leaving the money in the trust and allowing it to be used to pay the premium. Most people are smart enough to realize that $100k offered to them today is not as beneficial to them as $10 million left to them upon a parent's death. I am just making up numbers here, but you get the concept.

One of our clients was 72 years old, his wife was 68, they bought a $3 million policy, both were in below-average health. The premium effectively equaled one cent on the dollar for each year they lived. It was a $3 million policy with a $37,000 per year premium. This was about five years ago, and the husband has since passed. The wife now pays $37k per year for a $3 million policy on her life. How many years will it take to pay $3 million in total premiums with a $37k per year cost? You tell me. I don't think she will live to age 160, but I could be wrong. If she had waited until his passing to buy a single-life policy on herself, the premium would have been in excess of $100k per year. This is not an investment, it is a preparation for the inevitable tax bill that is to come.

 

[ERD50]

With respect, I have to say that you are totally wrong in your assumptions. Any insurance agent worth their salt will tell you that the insurance doesn't provide a tax benefit.

Now you're putting restrictions in there (my bold) . Seriously, insurance agents do use this sales pitch, maybe w/o saying it directly, but certainly leaving that impression.

You are also mis-reading the gifting exemptions. The exemption is $13k per beneficiary per year, for each a husband and wife.

I thought that's what I said, but it's late - anyhow, that is what I meant.

The children are not treating the insurance as an investment, they are treating it as the purposes that it is used for - to pay the estate tax which they will owe at some point and owe within 9 months of the second parent's death.

I agree that it can be used for liquidity. But there are probably other, cheaper options available to most people, IF that is even an issue for them.

The wife now pays $37k per year for a $3 million policy on her life. How many years will it take to pay $3 million in total premiums with a $37k per year cost? You tell me.

Makes no difference what I think, but I'm pretty sure the insurance companies are pretty good at coming up with the right answer on average that will allow them to be profitable. If it was such a great deal (on average), you'd see more talk of it as an investment here.

-ERD50

 

[dgoldenz]

Now you're putting restrictions in there (my bold) .
I agree that it can be used for liquidity. But there are probably other, cheaper options available to most people, IF that is even an issue for them.

Makes no difference what I think, but I'm pretty sure the insurance companies are pretty good at coming up with the right answer on average that will allow them to be profitable. If it was such a great deal (on average), you'd see more talk of it as an investment here.

-ERD50

If you know of a "cheaper" option than paying somewhere between 0.5 and 3 cents on the dollar each year to pay the tax, I'd be curious to know what they are.

Again, it's not an investment. It will not help the insured person in any way, shape, or form. It will only allow that person to share their accumulated wealth with their family, rather than 300 million wonderful Americans. If said person prefers to be generous and share it with all of America, they can simply not buy a policy and let the kids pay the tax out of the inheritance.

I'm presenting you with facts and premiums that are real and tangible. You are giving me back the same old tired line that insurance companies win and people lose. You know of anywhere else you can put in $37k per year at 70 years old and get back $3 million tax free?

 

[kaneohe]

It has to be an ILIT otherwise it will still be taxable as part of the estate calculation. .

If the kids own the policy on the deceased, why wouldn't it be part of their estate and not the deceased.

 

[chinaco]

Life insurance and the IRS provision for (no tax) is under scrutiny. As congress looks for tax revenue this loophole is likely to be capped or have a qualifier to be tax free.

Shift to Wealthier Clientele Puts Life Insurers in a Bind - WSJ.com

In the past Life Insurance was used to provide family income/needs if the bread winner died and the income was lost. However, in the last 2 decades, an increasing amount of life insurance is being used mainly for tax avoidance purposes. Less is providing family income needs.


If the tax treatment changes (on life insurance) and they purchased a large life policy (to pay the tax), it may not solve the problem... in other words, the cost of the insurance dollar for dollar might wind up covering much less of the tax bill for the overall estate.

Issues around taxes may be more clear when congress works out what they are going to do with taxes in the next session of congress (so call Bush tax cuts).

To mitigate the risk of rule changes (as the Fed, State, and Local govts look for tax revenue), they might consider splitting it up several ways just in case IRS Rules/Laws change.

1. Gift as much as allowed
2. Some form of Irrevocable Trust that provides tax protection (If it fits the overall plan)
3. Life Insurance.
4. Move tax qualified money into a Roth IRA

Talk to an attorney that specializes in estate planning... many team up with a CPA to work through the details.

 

[sheehs1]

With your friends assets he really needs a top notch Estate Attorney and CPA. When one spouse dies, the assets do not necessarily flow to the other spouse. It depends on how things are titled and if trusts have been set up. A few things for your friend to consider:

1. The Unified Tax Credit (UTC) amount is currently either 3 or 3.5 million. Your friend should use the full amount of his UTC immediately and give that much to his children. It will put those assets in the hands of his children, reduce his estate keeping those assets from growing inside his estate creating an even bigger "estate" issue for him down the road. He doesn't have to do this all at one time...but this is the way to "give" more than the $13K/person per year. The risk to not doing it now...is that the UTC reverts back to 1 million. I think this is unlikely...as Congress understands the burden this puts on those inheriting small businesses and farms.
If he does the above his assets will be down to 6.5 million.
and if he successfuly "gifts" the $26K a year on top of this......his assets will be eventually be down to 4 million (theoretically - because his assets are growing while he's shoveling it out).
Any amount over the Unified Tax Credit amount at the time of his death is taxable at a Federal rate of 45%. State taxes may also apply.

Notes: If he doesn't want to put that much money into the hands of his children now...he could set up trusts for them, fund the trust...and put age limits on when the trust is dissolved..etc...etc. But with 10 children he may not want this headache. Can you imagine keeping up with 10 separate trust each year, each needing it's own bank accounts and tax return etc.

2. He needs to go to an attorney and either fine tune his will or rewrite it...using what is called a "pour over" will....where all his assets at the time of his demise...pour into a Revocable Trust, a Marital Trust or both.
His wife needs a will also. Is her name on anything? How much will get pulled into her estate if she were to go first?

3. Insurance proceeds are taxable unless they are put into an Irrevocable Life Insurance trust. If used, it is smarter for the kids to be the owners...I think others have posted about this.
But if he doesn't have a small business or some other entity to protect not sure I understand why he would buy insurance....when there are ways to get his assets down...

4. One other thing to check on is Annuities with the children as owners or his estate as the owner. There might be creative ways for the attorney to use annuities inside some of these instruments..... ex: Setting up annuties for the children...rather than gifting outright. It can grow....without creating a yearly tax situation....(until money is pulled out)....

 

[sheehs1]

For the record, I don't normally suggest Annuities but...did use one inside the marital trust my mom created for my Dad when she passed. I came to view them as "a great wealth transfer tool" if you get one with the right features.

.

 

[Martha]

If the kids own the policy on the deceased, why wouldn't it be part of their estate and not the deceased.

Yup, same for gifts to kids as gifts to the trust.

Of course, if the policy was given to the children then then you have to value the policy at the time of the gift for gift tax/return purposes. This is also true if the policy is given to a trust. The policy may or may not have value at the time of the gift. Of course, the premiums also given to the kids or the trust also are gifts for gift tax purposes.

IIRC there is a three year look back on gifts of life insurance policies, whether to another person or to a trust, and the policy will be part of your estate if you die in that three year period.

(see my signature)