IRC Section 6166 and Life Insurance

The scene is familiar one. The client, seated at the head of his large conference room table, is the sole owner of a successful business that comprises a significant portion of his taxable estate. Joining him around the table are his estate planning and corporate attorneys, audit and tax partners from his accounting firm and his life insurance agent. Also sitting in, and leaning very close to the conversation, are two senior members of the client’s executive team.

A Very Taxing Situation

The subject of the meeting is how to deal with, meaning pay, the very considerable estate tax that will be due when the client dies. You see, the client is a widower, so there’s no marital deduction to defer the tax to the death of a surviving spouse.

The client established an irrevocable life insurance trust (ILIT) some years ago. The ILIT owns a policy that’s nowhere near sufficient to cover the estate tax. The beneficiaries of the ILIT were originally his wife and two, now usually adult, children, neither of whom are involved in the business. If you listen carefully to the banter among the professionals at the table, you’d hear them describing the ILIT as a grantor trust for income tax purposes. You’d also hear them point out that the ILIT has the usual provision about providing liquidity to the estate by way of loans or purchases of assets.

Discussions with this client about estate tax planning have never been fruitful. He has steadfastly refused to do any planning that would result in his having anything less than complete control of the enterprise. Even the acronyms for the various planning strategies are now crying out from the slide decks, “Hey, enough. He’s just not into us! Never was and never will

Read the rest Continue Reading

Is Life Insurance Part of My Estate?

Is Life Insurance Part of an Estate

Is Life Insurance Part of an Estate

Estate planning is one of the most difficult and important financial planning processes you’ll ever go through. It’s complex, and the bigger your estate, the tougher it gets. While creating your estate plan, you may find yourself wondering whether your life insurance policy will be part of it. Life insurance can be one way to pay off outstanding debts and financial burdens following your passing. However, many people want the proceeds to go to a loved one instead. In the end, your beneficiary designation determines where the funds go and how it will interact with your estate. Consider working with a financial advisor as you put together your estate plan.

Understanding Life Insurance and Estate Planning

When an individual purchases a life insurance policy, they essentially sign a contract with an insurance company. The policyholder who owns it can then use it to insure someone else or themselves. During the course of their life, the policy owner pays regular premiums to the company. Then, per the contract, once the insured person passes, the company pays out a lump sum of cash called the death benefit to the policy’s beneficiaries.

Policy owners may instead name their estate as the beneficiary of the life insurance. If so, the proceeds will likely pay for debts, like leftover bills or loans. This may also happen by default if the policyholder doesn’t name a beneficiary.

Regardless of whether it passes to a named beneficiary or to your estate, the insurance proceeds can face federal estate taxes. Rates vary from 18% to 40%, depending on your gross estate.

Usually, if the beneficiary on the policy is the estate, then the insurance company must directly pay the probate court. The court first uses said money

Read the rest Continue Reading

4 Types of People Who Should Definitely Have Life Insurance

Insider’s experts choose the best products and services to help make smart decisions with your money (here’s how). In some cases, we receive a commission from our our partners, however, our opinions are our own. Terms apply to offers listed on this page.

  • Life insurance is a contract between you and an insurance company, where the insurer promises to pay a beneficiary when you die.
  • Talking about what happens to your money after you die may seem morbid, but it’s worth it.
  • A financial planner recommends business owners and private student loan borrowers get life insurance.

Life insurance is a contract between a person and a life insurance company, where the life insurance company agrees to pay a beneficiary — typically someone’s family member — if the insured person dies. The contract specifies how much money your beneficiaries will receive.

It might feel morbid to talk through such details with a complete stranger at a life insurance company, but financial planner Spencer Betts says it’s worth having that protection in place if the worst happens, and it won’t cost much.

“Life insurance on somebody between 40 and 60 is very inexpensive because it’s a very small probability that you’re going to die,” he explains. 

Here are four types of people who should have life insurance, according to Betts.

1. People with private student loans

Federal student loans are discharged after the borrower dies, but borrowers with private student loan debt may face different circumstances.

Private student loan debt you took out on your own may be discharged without issue — though not always, each lender’s policy will differ — but private student loan

Read the rest Continue Reading

Why a Breakaway RIA Started a Life Insurance Advisory

In 2017, my partners and I left the private bank of a wirehouse to start our own RIA. Our goal was to make holistic wealth management a reality for our very wealthy clientele and we were determined to support that mission with the appropriate infrastructure.

Like most teams moving from a corporate environment to the independent RIA space, we needed exceptional partners to provide investment selection and access to estate planning, in addition to behind-the-scenes work in compliance, technology, and communications. In one area, however, we hit a snag. Our experience with billionaires and centimillionaires—some first-generation, others with inherited wealth—had taught us that life insurance was a critical tool in helping families reduce tax inefficiencies, grow portfolios, and pass on intact legacies to heirs.

The snags? Best-in-class partners who understand RIA culture and processes were hard to come by. In the private placement and traditional insurance space everything is a negotiation so active planning, research, sourcing, and management is required to get the right results. Tax planning, carrier sourcing, and medical underwriting are also required, not to mention the need for ongoing policy review and adjustment years after strategies are implemented. There were simply too many moving parts for a passive management approach.

Identifying this service gap in the independent space, and determined to make insurance strategies part of the wealth-management equation, we created a separate firm that works with advisors and family offices seeking to use life insurance as a non-correlated asset to hedge liquidity, income tax, wealth-transfer taxes, and investment risks for an ultrawealthy clientele. We tested our new service with our own RIA clients first and then offered it on a selective basis to other like-minded planners.

It was a highly unusual move. Today’s life insurance firms predate most wealth managers by over a century, yet the

Read the rest Continue Reading