Life Insurance in Estate Planning
Dear Michael: We have been working with our local property and casualty agent purchasing insurance to cover our estate tax issues. He told us to buy another seventy hundred and fifty thousand dollars of insurance, so we paid him the premium and he returned the policy to us a week or so ago. Do you think it’s the right thing to do – buying life insurance to cover estate tax issues? – Not Sure We Did Right
Dear Not Sure: When you have estate tax issues, you need to follow a list of possible solutions. Life insurance is the medicine you drink when you’ve exhausted all other possibilities.
Estate taxes are based on having more assets than the current five million four hundred and thirty thousand dollars per spouse as of 2016.
Some remedies just take time – such as owning a lot of machinery or grain that you intend to dispose of, transfer, or move during your lifetime. Having these type of assets disappear gradually from your estate may lower your estate values.
Depending on how long you think it might take you to move these items out of your estate, you can take a look at term insurance options to cover the estate tax issues while these assets drop in value to your estate occurs naturally. Most people feel ten to fifteen years would be sufficient.
The other item you can look at is gifting. Gifting is still at $14,000 per person per year (you and your spouse) to any number of people you desire. These can be gifts of cash, machinery, grain, land, or any other farm assets you might have. If you don’t have a sufficient list of people to give to, I can supply you with one.
Charitable contributions upon your death also reduce your estate tax liability. You’ve heard of the Buffets, the Gates and all the wealthy families gifting their vast estates to charities. A couple sometimes needs to decide if they’d rather give to a good cause then give it to the Federal and State governments.
I have had some people who were willing to give so much away to their children or to other sources that they actually impact their standard of living by gifting so much. If this is the case, then this is the perfect situation to use life insurance.
If a couple is gifting so much away today that it’s going to dramatically affect them in the future, then think about gifting to an irrevocable life insurance trust. Just two or three gifts add up to $28,000 to $42,000. That kind of money buys a lot of life insurance for the average couple.
For example, I can give away land to my children but along with this gift goes the income from the land. Now my children have the income and the land but my standard of living has been reduced. If the gift to the life insurance trust was less than the income I gave away from the land, why wouldn’t I take the least expensive and most cost effective route?
Last but not least, you either have to have your children or an irrevocable life insurance trust own, pay for and be the beneficiaries of the life insurance. If you have any incidence of ownership, you are just adding fuel to the fire. Estate taxes are due upon the death benefits – not income taxes but estate taxes – if you have paid for, own, or have any incidence of ownership in the policy.
You can gift the premiums to your children, but as beneficiaries, your children might not be obligated to pay the estate taxes on your estate. One of them might say “Thanks for the money” and leave their siblings hanging with the estate tax debt. That’s when people use a trust.
If you’ve already applied for this insurance, you still have some recourse. You can contact the agent and ask to get your money back. In most cases, you can get all your money back up until thirty days after the receipt of the policy – not the policy date but the day you received it.
Then you can find a qualified estate planning professional who can help you. Obviously your P&C man isn’t up to snuff although this is estate planning 101.
“Keeping the Family Farm in the Family”
Great Plains Diversified Services, Inc.
1424 W. Century Ave., Suite 208
Bismarck, ND 58503-0917
Toll Free: 1-800-373-4078