Too often, we view estate planning as a visit to the lawyer's office to sign a new will once every 15 years or so. It is important to keep in mind that, not only are there other documents which are crucial to a comprehensive estate plan, but also that a wide variety of other products and assets should be reviewed as part of any updated estate strategy.
Life insurance is one of those additional components to many estate plans that can be beneficial or necessary in a wide range of family and financial circumstances. The most common use for life insurance is for risk management purposes used as income replacement in event of an untimely death of a family member. Parents of young children need to ensure that funds will be available for the remaining family members should a sad and unexpected event occur.
There are many other creative ways to use life insurance as a positive force in your estate plan. Since life insurance is paid to beneficiaries on a tax free basis, it presents an excellent opportunity to create an asset which will not be diminished by tax obligations upon your death. In fact, life insurance can often be used to fund the tax liability owing as a result of the other assets owned by the deceased at the time of his death. In Canada, an estate's tax liability is assessed as if the deceased person sold all of his assets in the moment before he passed away. Therefore, in addition to income taxes, the estate will also owe capital gains on any applicable property such as shares in privately held corporations, investment accounts, and recreational or revenue property. The estate's tax liability can be significant, even if the deceased always kept his personal taxes up-to-date. Many people purchase a life insurance policy payable to their estate in order to cover the taxes that will ultimately be owing.
This is an important step if one of the testator's goals is to protect legacy assets, such as a family cottage, from having to be sold in order to satisfy the outstanding taxes . The value of a family cottage can have grown exponentially between the time when it was acquired by the testator, perhaps decades earlier, to the time of the testator's death. Half of that growth is taxable from the estate and one can see how the taxes owing on such a piece of property could easily become too significant for the estate or the beneficiaries to bear. A life insurance policy, naming the estate as the beneficiary, will provide a tax-free sum to the estate to cover the taxes and allow the beneficiaries to use and enjoy the property as the testator had intended.
Another way in which a testator can use life insurance to preserve a legacy is to benefit a charity or community organization. The testator or donor can purchase a life insurance policy naming the charity as beneficiary, and that charity will receive the gift tax-free upon the donor's death. Charitable organizations generally prefer to receive an insurance policy instead of a specified gift in a will, because the life insurance policy can be paid out much faster and ensures that the charity does not need to become involved in any disputes among the beneficiaries in the estate administration process. Likewise, the charity will not have to deal with or supervise the executor. Another significant benefit to establishing a charitable donation in this fashion is that, if set up properly, the donor can claim the annual insurance premium payments as a charitable contribution and therefore; can receive the benefit of the tax credit while they are still living. This is an efficient and effective way to leave a legacy in the community and support the organizations that were important to the donor during their lifetime.
Life insurance is often a crucial component of succession planning for entrepreneurs. Many of us are familiar with insurance policies on "key people" in the organization, which will provide funds to stabilize and support the corporation in the event of the untimely passing of one of the principles. Life insurance is also a central element of many shareholders' agreements, in which the corporation is named as the beneficiary on life insurance which is placed on shareholders. When the shareholder dies, the proceeds from the life insurance policy allow the corporation to purchase his or her shares from the estate.
Finally, life insurance can be a very effective way to facilitate the transfer of a small or family-owned business from one generation to the next. Business owners will often use an estate freeze, which "freezes" the value of the parent's interest in the business by converting the parent's common shares into preferred shares which have a fixed value. Any future growth in the business will accrue to the next generation of owners, who have the new common shares. Generally, an estate freeze will set out a timeline or schedule for the corporation to redeem the preferred shares, therefore providing retirement funds or a continuing income stream to the first generation. However, an insurance policy on the life of the parent shareholder, naming the corporation as a beneficiary, is often required, as well. In the event of the unexpected and untimely death of the parent shareholder, the corporation will have to ensure that it has access to sufficient funds to purchase the remaining preferred shares from the parent's estate. Insurance proceeds can also pay out those family members who are not intended to remain involved in the business operations, but were still intended to receive a benefit from their parents' estate.
Estate planning involves not only your will, but also a review of the other components of your financial planning and future goals. In conjunction with legal advice, properly placed life insurance can be an essential tool to help you achieve your goals and plan for the future efficiently and effectively.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Learning From Gandolfini's Estate Plan 'Disaster'
Tony Soprano may have been an expert at hiding his money from the feds, but actor James Gandolfini, the recently deceased actor who portrayed the fictional New Jersey mob boss on TV, apparently was not.
Moreover, advisors say that wealthy families can take some lessons from the mistakes the award-winning actor made in mapping out his estate plan.
Federal and state tax collectors will take more than $30 million of Gandolfini’s estimated $70 million estate, according to published reports. Gandolfini, who starred in the acclaimed HBO series The Sopranos from 1999 to 2007, died of a heart attack while vacationing in Rome last month at age 51. Estate attorney William Zabel, who reviewed Gandolfini’s will for the New York Daily News, called it “a disaster.”
Wealthy individuals and families looking to protect their estates from the heavy tax burden Gandolfini’s is facing should employ the right estate planning strategies early and update those plans as their circumstances change, experts say.
“Gandolfini passing away at age 51 reminds everyone that we’re not immortal and everybody should make sure they stay on top of their estate planning documents,” said Michael A. James, managing director of family wealth at Glenmede in Philadelphia, who recommends clients review their estate plans annually.
“One of the biggest challenges of estate planning is to get people motivated to do it,” said Stephen Breitstone, head of the tax law group and an estate strategist at Meltzer, Lippe, Goldstein & Breitstone in Mineola, N.Y. “If they don’t think they’re going to die, they’re going to put it off for another day.”
Trust Solutions
One of the most effective ways to protect estate assets is through the establishment of various trust vehicles. Under current U.S. estate and gift tax law, an individual is permitted to transfer $5.25 million into an irrevocable trust free of gift tax; married couples may put in $10.5 million.
While married couples may transfer unlimited amounts to each other outright or in trust without paying any federal estate or gift tax (as long as the recipient is a U.S. citizen), a marital trust may be right for many wealthy couples, according to estate planners. When the first spouse dies, estate assets are placed in the marital trust. The surviving spouse is provided for by the income the trust generates, but does not have access to assets intended for children or other heirs. This is especially important when children from different marriages are inheriting.
Establishing an irrevocable life insurance trust provides powerful estate tax advantages for wealthy individuals and families, according to Gary S. Wolfe, who leads the Los Angeles-based network of independent attorneys and consultants at Wolfe Law Group.
“If you spend $5 million for a life insurance premium and you get a $30 million death benefit, you just went six to one on your money and could have paid the entire estate tax out of that money,” Wolfe said.
Creating an offshore irrevocable life insurance trust delivers even greater tax advantages and more flexibility, according to Wolfe. For U.S. taxpayers, Puerto Rico offers the best of both worlds. The island is a U.S. territory and considered part of the U.S. for many practical purposes, but with the design and investment flexibility typically found in other offshore financial centers.
“The reason to do it offshore is that there is no restricted menu of investments,” said David E. Richardson, CEO of Mid-Ocean Consulting in Nassau, Bahamas. “You can invest the cash-value premiums in any investments you want, including hedge funds. Onshore, you’re restricted to a menu of investments that is determined by state insurance regulations, which often limit you to mutual funds or bond funds and which often underperform other investments.”
The strategy requires that the investments of U.S. taxpayers be held by a Puerto Rico-issued life insurance policy. Doing so will streamline tax reporting for U.S. citizens by eliminating the need to file a Foreign Bank and Financial Account (FBAR) disclosure form, which is required for investments in other offshore locations, and minimizing the likelihood of an Internal Revenue Service audit, according to Richardson.
Estate Modeling
James at Glenmede helps ultra-rich clients develop their estate plans by creating a financial model that shows them what will happen to their estates after they die.
“I take a client’s balance sheet and pretend that they’ve passed away,” said James. “I show them that this is how much is going to your family or friends, this is how much is going to taxes, and this is how much is going to charity.”
This type of financial model simplifies complex legal documents that many of his clients either do not have the time or inclination to digest completely. Most clients look at the financial model and “usually have very strong feelings” about the amount of tax their estates may be subject to, how much is being left to different heirs and their access to various assets, he said. The financial model helps them to make adjustments accordingly.
Privacy Concerns
The law requires that an individual’s last will and testament be filed with a local probate court. That makes those documents public and available to anyone, as Gandolfini’s death illustrated. Within a few hours of his passing, Gandolfini’s estate documents were filed with the New York Surrogate Court. His will was posted on the Internet soon after and became the focus of media attention and public discussion.
Wealthy individuals and families who wish to maintain the privacy of their estates should consider a revocable living trust, which does not get filed with any court, said Alan Kufeld, tax principal in the Rothstein Kass Family Office Group in New York.
The firm recommends revocable living trusts for many of its high-profile clients in the entertainment industry and professional sports. “A revocable trust will avoid probate. It’s a private document. It helps prevent [details of an estate] from hitting the Internet,” and keeps the public from finding out what assets are part of the estate and who is inheriting those assets, Kufeld said.
Beyond the nitty gritty details, estate planners say the key to minimizing taxes on a wealthy estate like Gandolfini’s is to develop a strategic plan as soon as possible and update that plan regularly.
A study by Rothstein Kass published in September found that more than three quarters of the estate plans of a majority of families wealthy enough to have their own financial offices were at least three years old, even though nearly 95% of them had experienced significant life changes during that time. That is not consistent with proper strategic estate planning, according to Kufeld.
“The estate plan is a living, breathing plan that needs to be looked at any time there is a significant change in one’s life, whether it’s a new income-producing job, divorce, or a new child coming into the picture,” said Kufeld. Such reviews ensure that an estate’s assets will be distributed according to a client’s most up-to-date wishes.
“You have to do various types of estate planning transactions early and often to create trusts and fund those trusts in ways that generate wealth,” said Breitstone. “You want to transfer the tree, not just the fruit. If you transfer assets that are likely to appreciate in value and earn income early on, you can transfer a lot of your wealth over time, but it’s really a lifelong process."
Source:
http://www.fa-mag.com/news/learning-from-gandolfini-s-estate-plan--disaster-14922.html?section=75&page=2
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