Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Estate Question
Old 11-06-2010, 10:44 AM   #1
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 993
Estate Question

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?
__________________

__________________
Proverbs 15:22 Designs are brought to nothing where there is no counsel: but where there are many counsellors, they are established.
rec7 is online now   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-06-2010, 10:49 AM   #2
Thinks s/he gets paid by the post
Nodak's Avatar
 
Join Date: Feb 2010
Location: Cavalier
Posts: 2,317
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.
__________________

__________________
Nodak is offline   Reply With Quote
Old 11-06-2010, 10:51 AM   #3
Thinks s/he gets paid by the post
grumpy's Avatar
 
Join Date: Jul 2004
Posts: 1,321
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.
__________________
grumpy is offline   Reply With Quote
Old 11-06-2010, 10:55 AM   #4
Administrator
W2R's Avatar
 
Join Date: Jan 2007
Location: New Orleans
Posts: 38,850
Quote:
Originally Posted by rec7 View Post
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.
__________________
Already we are boldly launched upon the deep; but soon we shall be lost in its unshored, harbourless immensities.

- - H. Melville, 1851
W2R is online now   Reply With Quote
Old 11-06-2010, 10:58 AM   #5
gone traveling
 
Join Date: Apr 2009
Location: Eastern PA
Posts: 3,851
Quote:
Originally Posted by Nodak View Post
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).
__________________
rescueme is offline   Reply With Quote
Old 11-06-2010, 11:03 AM   #6
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 993
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.
__________________
Proverbs 15:22 Designs are brought to nothing where there is no counsel: but where there are many counsellors, they are established.
rec7 is online now   Reply With Quote
Old 11-06-2010, 11:15 AM   #7
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
Brat's Avatar
 
Join Date: Feb 2004
Location: Portland, Oregon
Posts: 5,913
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.
__________________
Duck bjorn.
Brat is offline   Reply With Quote
Old 11-06-2010, 11:19 AM   #8
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 993
No business just cash and several homes.
__________________
Proverbs 15:22 Designs are brought to nothing where there is no counsel: but where there are many counsellors, they are established.
rec7 is online now   Reply With Quote
Old 11-06-2010, 11:32 AM   #9
Moderator Emeritus
Bestwifeever's Avatar
 
Join Date: Sep 2007
Posts: 16,373
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?
__________________
“Would you like an adventure now, or would you like to have your tea first?” J.M. Barrie, Peter Pan
Bestwifeever is offline   Reply With Quote
Old 11-06-2010, 12:12 PM   #10
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jun 2005
Posts: 8,609
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.
__________________
LOL! is offline   Reply With Quote
Old 11-06-2010, 12:18 PM   #11
Full time employment: Posting here.
 
Join Date: Jan 2004
Posts: 844
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.
__________________
farmerEd is offline   Reply With Quote
Old 11-06-2010, 12:22 PM   #12
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,925
Quote:
Originally Posted by Nodak View Post
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.
__________________
kaneohe is offline   Reply With Quote
Old 11-06-2010, 12:43 PM   #13
Full time employment: Posting here.
 
Join Date: Jul 2007
Location: ST LOUIS
Posts: 993
Thanks everyone he will use the pros but at least some good ideas have been thrown around.
__________________
Proverbs 15:22 Designs are brought to nothing where there is no counsel: but where there are many counsellors, they are established.
rec7 is online now   Reply With Quote
Old 11-06-2010, 04:04 PM   #14
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
harley's Avatar
 
Join Date: May 2008
Location: Following the nice weather
Posts: 6,422
Quote:
Originally Posted by kaneohe View Post
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.
__________________
"Good judgment comes from experience. Experience comes from bad judgement." - Will Rogers, or maybe Sam Clemens
DW and I - FIREd at 50 (7/06), living off assets
harley is offline   Reply With Quote
Old 11-06-2010, 04:17 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Jan 2006
Posts: 2,925
Quote:
Originally Posted by harley View Post
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......
__________________
kaneohe is offline   Reply With Quote
Old 11-06-2010, 10:15 PM   #16
Full time employment: Posting here.
 
Join Date: Nov 2009
Location: VA
Posts: 923
Quote:
Originally Posted by kaneohe View Post
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.
__________________
Disclaimer - I am an independent insurance agent. If the above message contains insurance-related content, it is NOT intended as advice, and may not be accurate, applicable or sufficient depending on specific circumstances. Don't rely on it for any purpose. I do encourage you to consult an independent agent for insurance-related advice if you have a question that is specific in nature.
dgoldenz is offline   Reply With Quote
Old 11-06-2010, 11:49 PM   #17
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,272
Quote:
Originally Posted by harley View Post
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
__________________
ERD50 is online now   Reply With Quote
Old 11-07-2010, 12:09 AM   #18
Full time employment: Posting here.
 
Join Date: Nov 2009
Location: VA
Posts: 923
Quote:
Originally Posted by ERD50 View Post
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.
__________________
Disclaimer - I am an independent insurance agent. If the above message contains insurance-related content, it is NOT intended as advice, and may not be accurate, applicable or sufficient depending on specific circumstances. Don't rely on it for any purpose. I do encourage you to consult an independent agent for insurance-related advice if you have a question that is specific in nature.
dgoldenz is offline   Reply With Quote
Old 11-07-2010, 12:42 AM   #19
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Sep 2005
Location: Northern IL
Posts: 18,272
Quote:
Originally Posted by dgoldenz View Post
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.


Quote:
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.

Quote:
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.


Quote:
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
__________________
ERD50 is online now   Reply With Quote
Old 11-07-2010, 12:49 AM   #20
Full time employment: Posting here.
 
Join Date: Nov 2009
Location: VA
Posts: 923
Quote:
Originally Posted by ERD50 View Post
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?
__________________

__________________
Disclaimer - I am an independent insurance agent. If the above message contains insurance-related content, it is NOT intended as advice, and may not be accurate, applicable or sufficient depending on specific circumstances. Don't rely on it for any purpose. I do encourage you to consult an independent agent for insurance-related advice if you have a question that is specific in nature.
dgoldenz is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Estate Question FurBall Other topics 1 03-11-2009 06:45 PM
Estate Trust question Ziggy FIRE and Money 6 04-14-2007 10:14 PM
Estate Question TromboneAl Other topics 21 08-01-2006 06:30 PM
Estate Question Trace Other topics 2 10-05-2004 09:21 PM
New with Real Estate question trumpeting_angel Hi, I am... 25 08-10-2004 06:51 AM

 

 
All times are GMT -6. The time now is 01:01 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.