Life Insurance SCAM??

[dgoldenz]

VUL is one of the worst products for estate tax planning with an ILIT.

 

[packrat44]

Tre2012,

Thanks for the detailed explanation.

 

[Nords]

VUL is one of the worst products for estate tax planning with an ILIT.

"Worst" for whom?

I love it when the insurance posters start lobbing hand grenades at each other on a discussion board of DIY investors.

 

[dgoldenz]

"Worst" for whom?

I love it when the insurance posters start lobbing hand grenades at each other on a discussion board of DIY investors.

For the person buying life insurance to provide liquidity and/or pay for estate taxes. VUL's do not have a guaranteed death benefit, the cash value is useless inside an ILIT, and the investments within the VUL would have to be kept up every year by the trustee. So there's 3 strikes...

 

[harley]

For the person buying life insurance to provide liquidity and/or pay for estate taxes. VUL's do not have a guaranteed death benefit, the cash value is useless inside an ILIT, and the investments within the VUL would have to be kept up every year by the trustee. So there's 3 strikes...

So, dgoldenz, what do you think of the original question about using whole life as a method of passing on an inheritence outside of estate taxes, the way Ed Slott proposes? I was hoping you'd weigh in. I know very little about insurance, and was wondering if I was missing something.

 

[dgoldenz]

So, dgoldenz, what do you think of the original question about using whole life as a method of passing on an inheritence outside of estate taxes, the way Ed Slott proposes? I was hoping you'd weigh in. I know very little about insurance, and was wondering if I was missing something.

Guaranteed universal life is the best way to minimize the cost of life insurance for estate tax planning. A GUL policy will generally cost 50-60% less than a whole life policy with the same death benefit and is still guaranteed for life. Since the cash value can't be taken out of the ILIT, the cash value is useless anyway. WL is designed to build cash value, while GUL is designed to minimize the premium and never build any significant cash value. Since the purpose of estate tax planning is getting the most guaranteed death benefit for the lowest price, GUL or survivorship GUL (if married/both spouses alive) is the best way to do it.

 

[brewer12345]

Guaranteed universal life is the best way to minimize the cost of life insurance for estate tax planning. A GUL policy will generally cost 50-60% less than a whole life policy with the same death benefit and is still guaranteed for life. Since the cash value can't be taken out of the ILIT, the cash value is useless anyway. WL is designed to build cash value, while GUL is designed to minimize the premium and never build any significant cash value. Since the purpose of estate tax planning is getting the most guaranteed death benefit for the lowest price, GUL or survivorship GUL (if married/both spouses alive) is the best way to do it.

Fully agree. GUL is what I would use in such instances.

 

[ducky911]

I do not buy into this estate planning. The biggest plus to his plan is to save on taxes. I have no idea what the changes to the tax code will be in thirty years and i do not care to guess now at a cost. These plans make life insurance look like a box that you can put alittle in and get alot out and that is so not true. The insurance companies make sure that more goes in than goes out.

 

[Independent]

Estate Tax Planning for the wealthy most often uses Variable Universal Life (VUL) which optimally is held in an Irrevocable Life Insurance Trust (ILIT). Once set up this trust cannot be changed; it is a legal entity unto itself. Everyone has to follow all the IRS rules to the letter, or the trust will be disallowed. The insured(s) are NOT the policyowners but they do pay the premium, which varies each year according to the fluctuating market value of the investible portion of the VUL.[/FONT][/COLOR]

This premium allows the payers to remove excess after-tax cash from their estate, every year. Given that they may live 10, 20 or more years after setting up the ILIT, the total estate-taxable cash eventually drained off can be very substantial!

If my goal is to slide money out of the potential estate before I die, couldn't I just set up a trust and put deposits into it, without any life insurance?

And, do gift taxes get involved here? It seems that money going into the trust is a gift to whomever the trust will pay eventually, so does that complicate the picture?

 

[dgoldenz]

If my goal is to slide money out of the potential estate before I die, couldn't I just set up a trust and put deposits into it, without any life insurance?

And, do gift taxes get involved here? It seems that money going into the trust is a gift to whomever the trust will pay eventually, so does that complicate the picture?

Moving money out of the estate can be difficult when it is comprised mostly of illiquid assets (usually real estate or a business ownership stake). Since the estate is taxed on its value, heirs will usually not want to liquidate the real estate/business in order to pay the tax, hence the life insurance need.

There is a gifting exemption of $13k/person per year for each spouse, so if you had three kids for example, a husband/wife could gift them up to $78k/year without eating into their lifetime gifting exemption. With an ILIT/life insurance setup, the gift is the premium for the policy, which goes into the trust and then from the trust to the insurance company. The heirs could take the gift, but then they wouldn't get the death benefit of the life insurance.

Ex: John and Susan have a $50M net worth with $45M of it in real estate holdings and a $10M combined exemption from the estate tax. If John and Susan died, the heirs would owe tax on $40M, but only have $5M in liquid assets to pay it with. To pay the tax, they would need to liquidate the real estate holdings and if they don't do it on their own, the IRS will do it for them, fire-sale style.

Instead of putting their heirs in this position, John and Susan could buy a $25M survivorship life insurance policy with a premium of $250k/year that pays the tax for them. Assuming they have 3 kids, the annual exemption would be $78k and the remaining $172k would be applied against their lifetime exemption of $10M. Instead of liquidating their entire legacy of real estate holdings, they can simply pay the premium each year and liquidate as they wish.

You get the idea.

 

[Independent]

Moving money out of the estate can be difficult when it is comprised mostly of illiquid assets (usually real estate or a business ownership stake). Since the estate is taxed on its value, heirs will usually not want to liquidate the real estate/business in order to pay the tax, hence the life insurance need.

There is a gifting exemption of $13k/person per year for each spouse, so if you had three kids for example, a husband/wife could gift them up to $78k/year without eating into their lifetime gifting exemption. With an ILIT/life insurance setup, the gift is the premium for the policy, which goes into the trust and then from the trust to the insurance company. The heirs could take the gift, but then they wouldn't get the death benefit of the life insurance.

Ex: John and Susan have a $50M net worth with $45M of it in real estate holdings and a $10M combined exemption from the estate tax. If John and Susan died, the heirs would owe tax on $40M, but only have $5M in liquid assets to pay it with. To pay the tax, they would need to liquidate the real estate holdings and if they don't do it on their own, the IRS will do it for them, fire-sale style.

Instead of putting their heirs in this position, John and Susan could buy a $25M survivorship life insurance policy with a premium of $250k/year that pays the tax for them. Assuming they have 3 kids, the annual exemption would be $78k and the remaining $172k would be applied against their lifetime exemption of $10M. Instead of liquidating their entire legacy of real estate holdings, they can simply pay the premium each year and liquidate as they wish.

You get the idea.

Thanks for the example. I'm sure that the liquidity is the issue.

Based on earlier posts, it looks like the $25 million life insurance policy increases the estate to $75 million (less the accumulated premium). Is that correct, and how many dollars of estate tax does that add?

 

[MichaelB]

Thanks for the example. I'm sure that the liquidity is the issue.

Based on earlier posts, it looks like the $25 million life insurance policy increases the estate to $75 million (less the accumulated premium). Is that correct, and how many dollars of estate tax does that add?

The proceeds are not part of the estate, they are direct to the beneficiaries. The cash is used to pay the estate tax on the $50M.

 

[dgoldenz]

Thanks for the example. I'm sure that the liquidity is the issue.

Based on earlier posts, it looks like the $25 million life insurance policy increases the estate to $75 million (less the accumulated premium). Is that correct, and how many dollars of estate tax does that add?

Using an ILIT as the owner and beneficiary exempts the value of the proceeds from being included as part of the estate, as long as the ILIT was the owner/beneficiary of the policy since its inception. If the original owner was a person and then changed to an ILIT after the policy was already in force, the proceeds would be included in the estate value if death occured in the first 3 years (3-year "contemplation of death" rule). If an ILIT is not used, the proceeds would also be included in the estate.

 

[Independent]

Using an ILIT as the owner and beneficiary exempts the value of the proceeds from being included as part of the estate, as long as the ILIT was the owner/beneficiary of the policy since its inception. If the original owner was a person and then changed to an ILIT after the policy was already in force, the proceeds would be included in the estate value if death occured in the first 3 years (3-year "contemplation of death" rule). If an ILIT is not used, the proceeds would also be included in the estate.

Okay, I think I'm getting it.
A regular insurance policy, owned by the deceased, would be included in the estate.
But, making the ILIT the owner, keeps the proceeds out of the estate (subject to original issue and 3 year rules).
And, there is no non-insurance trust which can provide the same tax treatment - i.e. any trust that simply held mutual funds would be subject to estate tax.

Am I getting close?

 

[dgoldenz]

Okay, I think I'm getting it.
A regular insurance policy, owned by the deceased, would be included in the estate.
But, making the ILIT the owner, keeps the proceeds out of the estate (subject to original issue and 3 year rules).
And, there is no non-insurance trust which can provide the same tax treatment - i.e. any trust that simply held mutual funds would be subject to estate tax.

Am I getting close?

Bingo.

 

[ERD50]

Okay, I think I'm getting it.

...

And, there is no non-insurance trust which can provide the same tax treatment - i.e. any trust that simply held mutual funds would be subject to estate tax.

Bingo.

I think some clarification might be in order for that last line.

If you gift as in the earlier example:

There is a gifting exemption of $13k/person per year for each spouse, so if you had three kids for example, a husband/wife could gift them up to $78k/year without eating into their lifetime gifting exemption.

all $78K annually could be put into mutual funds (by the receivers of the gift) and would NOT be subject to estate tax, since it was gifted out of the estate.

As far as I can see, the whole life insurance works the same as any other WL - if the insured dies relatively young, the ins pays more than what was put in, If the insured lives past their actuarial lifespan, you will probably put more into the insurance than you get out. Still seems like a bet with the ins co to me.

-ERD50

 

[FinanceDude]

I concur with GUL for the ILIT, the VUL idea is not good for anyone but the agent.........

 

[brewer12345]

Of course, GUL being what it is, the construction of the product raises issues with carrier stability over time. TANSTAAF, as always.