Allstate/Suntrust

[2B]

Also, if you decide to take the risk on yourself and invest the money (earning 6% after tax) you would wind up with $327,391.

If you don't die, what do you end up with? At that point your inheritance tax issue will be larger and your protection gone.

If you are really wanting to protect an estate from taxes, I would still lean towards single premium despite my deep hatred mistrust of all insurance products. You have to make sure what you buy will give you the protection you are looking for.

 

[ERD50]

I even understated my point. By going to quickquote, I see that a healthy 65 year old male can buy a 20 year term policy for $8900/year. So if I'm looking at paying $1M in estate taxes I can lay off that risk for .0089% per year. That is a VERY cheap option.
.......

Also, if you decide to take the risk on yourself and invest the money (earning 6% after tax) you would wind up with $327,391.

If you don't die, what do you end up with? At that point your inheritance tax issue will be larger and your protection gone.

Exactly - if you live to 86, it was a lousy investment - the worst, a 100% loss. The current average life expectancy for a 65 yo is another 21 years ( http://www.irs.gov/pub/irs-pdf/p590.pdf), more than half will live longer than 85, so a 'healthy' 65 yo would live longer on average.

To put in another way - how many here would consider an 'investment' that has over a 50% chance of a complete loss?

I'm not saying the insurance isn't a useful strategy - but I still say it is *protection* you are buying, not an investment.

-ERD50

PS - typo in your math. It is .0089 as a fraction, throw in the '%' sign and it is 0.89% per year (for 20 years).

 

[spideyrdpd]

Not everyone is a lawyer or engineer.
I think that if you estate is big enough then you need to have a tax specialist look at ways to lower the tax bite
Simple things like where the money goes when the first spouse dies
How the beneficiary of your ira money receives the money.
what items get transfered with the step up tax treatments
etc
Again I think that most people would of been better off with a plan inacted sooner.
Then the lunp sum insurance

 

[saluki9]

Exactly - if you live to 86, it was a lousy investment - the worst, a 100% loss. The current average life expectancy for a 65 yo is another 21 years ( http://www.irs.gov/pub/irs-pdf/p590.pdf), more than half will live longer than 85, so a 'healthy' 65 yo would live longer on average.

To put in another way - how many here would consider an 'investment' that has over a 50% chance of a complete loss?

I'm not saying the insurance isn't a useful strategy - but I still say it is *protection* you are buying, not an investment.

-ERD50

PS - typo in your math. It is .0089 as a fraction, throw in the '%' sign and it is 0.89% per year (for 20 years).

Well you are buying protection, I don't think anybody said otherwise. I said it was similar to an option premium, which is... well.... protection.

Sorry that I had to use term, I don't have access to illustration software for insurance. For not too much more (probably 15% or so) you can buy a type of universal life with a no lapse guarantee. IF you keep paying the premium it will stay in force no matter what happens to rates. Even at twice the price it's still a steal in my book. I just worked on a case here at work where a guy in his late 50's just bought $40,000,000 of it to pay his future estate taxes.

I'll bet the agent was happy about that!

 

[ERD50]

Well you are buying protection, I don't think anybody said otherwise.

Well, it seemed to me you implied it was also a good 'investment' when you said that for 1.5% a year it would return $1M (in reduced estate taxes). Maybe I am misunderstanding you.

Even at twice the price it's still a steal in my book. I just worked on a case here at work where a guy in his late 50's just bought $40,000,000 of it to pay his future estate taxes.

I guess I'd need to see the numbers before I would agree it is a 'steal'. $40M is going to carry a hefty premium. To get that policy out of the estate, the premiums must be paid from outside the estate - right? AFAIK, the only way to get that out of the estate each year, would be through a charitable trust. The money that comes out of the CRT is not considered a 'charitable contribution' since it is benefiting individuals outside the charity. So, it turns into a pretty complex circle/shell game. IIRC, the contribution gets 'derated' by the amount of money that would be flowing back out of the charity. I don't think anyone ends up avoiding as much estate tax as they first think - it gets taxed one way or the other.

I actually met with a CRT rep (back when the exlc was $675K) - 3/4 of the way through the presentation (I was asking a lot of questions), he said to me (in a low voice), 'well, the best way to get the most tax benefit is to simply give the money to charity'.

Pls correct me if I'm wrong, but I don't think that $40M policy means that $40M will be protected form estate taxes - there are other taxes involved.

-ERD50

 

[FinanceDude]

Pls correct me if I'm wrong, but I don't think that $40M policy means that $40M will be protected form estate taxes - there are other taxes involved.
-ERD50

It could very well be that his TAX on the estate would be $40 million, which is rare but not unheard of. A guy facing a $40 million taxable event probably can afford the premium............

I must use that worn out phrase "it depends". Just because Warren Buffett and Bill Gates have decided to give away 95% of their wealth, doesn't mean every else should...........

I have personally seen UGLY things happen when the beneficiaries have to sell assets to pay estate taxes to the IRS. It's not always as simple as getting the old "run-up in basis" and moving on..............

 

[saluki9]

It could very well be that his TAX on the estate would be $40 million, which is rare but not unheard of. A guy facing a $40 million taxable event probably can afford the premium............

I must use that worn out phrase "it depends". Just because Warren Buffett and Bill Gates have decided to give away 95% of their wealth, doesn't mean every else should...........

I have personally seen UGLY things happen when the beneficiaries have to sell assets to pay estate taxes to the IRS. It's not always as simple as getting the old "run-up in basis" and moving on..............

In this situation, the client's estate tax will be well in excess of $40M, and yes he can certainly afford the premium. I'm not going to go into details, but they used a pretty cool method on getting enough income earning assets into the children's trusts to pay the premiums.

 

[ERD50]

In this situation, the client's estate tax will be well in excess of $40M, and yes he can certainly afford the premium. ....

I don't doubt that he can 'afford the premiums'. But that does not mean it is a good financial move.

What's the payoff vs investing those premiums?

-ERD50

 

[FinanceDude]

I don't doubt that he can 'afford the premiums'. But that does not mean it is a good financial move.

What's the payoff vs investing those premiums?

-ERD50

Let's say this guy has about $500-$600 million dollars, which could result in an income tax liability of $40-$50 million, even with proper planning..........

In that case, he probably doesn't really care about more growth, he's looking at how to create multi-generational wealth, and if he has good advice, he knows how "nice" Uncle Sam is about making sure your wealth is preserved to future generations, and is looking for ways to transfer risk to other parties...like BIG insurance companies............

 

[saluki9]

I don't doubt that he can 'afford the premiums'. But that does not mean it is a good financial move.

What's the payoff vs investing those premiums?

-ERD50

I'm not on the planning side of this, my only job was to structure the portfolio to pay the premiums.

However, from what I understand he wants to pass on his business to his kids tax free. His business has very hot and cold years because of the industry they are in so he doesn't want to risk paying on installment.

He also hates the idea of what he built going to taxes. Also, I doubt he cares what happens if he invests the premiums because if he dies next near, or in 15 yeear, or even in 30 years that still would not solve his problem of moving $40M out of his estate to pay the taxes.

 

[FinanceDude]

I'm not on the planning side of this, my only job was to structure the portfolio to pay the premiums.

However, from what I understand he wants to pass on his business to his kids tax free. His business has very hot and cold years because of the industry they are in so he doesn't want to risk paying on installment.

He also hates the idea of what he built going to taxes. Also, I doubt he cares what happens if he invests the premiums because if he dies next near, or in 15 yeear, or even in 30 years that still would not solve his problem of moving $40M out of his estate to pay the taxes.

He's doing what he can to avoid taxes, sounds like a good plan to me. I