Tag Archives: Estate Planning

Estate Planning – Equitable Distribution

How to distribute business assets when only two of the three children work in the family business?  Here’s how we worked this one out…….

Situation:  A 62 yr-old owner of a medical supply company valued at $5 million is married with three children – two of whom work in the business.

Issue:  Upon death, the business will transfer to the two children.  However, the client wants to compensate fairly the child who does not work in the business.

Solution:  Since the first two children will inherit a $5 million business, we recommended that the third child become owner and beneficiary of a $2.5 million life insurance policy (with death benefit guarantee, of course).

Benefits:  The insurance is kept out of the client’s estate and will pass to the beneficiary tax-free.  In addition, the child outside of the business is satisfied and the other two children own the business with no contingencies or outside interference.

For more information. go to: http://www.thriftytermquote.com/contact-us/

Common Estate Planning Mistakes – Third in a Series

As you have seen from previous articles, Estate Planning is fraught with pitfalls.  Many times, people will attempt to build their own estate plan but, unfortunately, don’t know what questions to ask.  My goal is to help you understand the issues that face even modest estates.

A.  Improper Disposition of Assets.  This occurs whenever the wrong asset goes to the wrong person in the wrong manner or in the wrong time-frame.  For example, leaving an entire, complex estate to a spouse who is unprepared or unwilling to handle it.  Leaving a sizable estate to a teenage is another good example.  The solution is to consider a trust or custodial arrangement and to provide in the Will for young or legally incompetent people.  Also, an often overlooked consideration is a “common-disaster” provision so that assets can avoid needless second probates and double inheritance taxes.

B.  Ensuring that your business is a Going Concern.  What happens to your business if a key revenue-generating employee dies or is disabled unexpectedly?  Do you have a “shock absorber” in place?  Key employee life and disability insurance coupled with good business overhead coverage will certainly help.

C.  Buy-Sell Agreements are essential if your business is to survive the death or disability of one of the owners.  Unfortunately, many business: have no such agreement; or the agreement isn’t in writing; or the price doesn’t reflect the current value of the business; or the agreement isn’t properly funded.  The bottom line is that the heirs are not guaranteed the fair market value to which they are entitled.  If you think you’ll skate by giving a grieving widow a value for her share that “the accountant came up with,” think again.  I know of many cases in which that kind of “solution” wound up being settled by lawyers.

For more information, please contact us at:  http://www.thriftytermquote.com/contact-us/

Taxation and Your Life Insurance Policy

Question:  when are the proceeds from your life insurance policy taxable?  Answer: when you own your policy!  Okay, that was a bit of a trick question.  Life insurance proceeds are generally federal income tax free and, more often than not, are subject to federal estate taxes.  Today, we’re going to focus on avoiding federal estate taxes with your life insurance policy.

If you keep in mind one simple rule, you’ll go a long way to understanding why certain property is subject to federal estate taxes.  That is rule is that everything you own or control is subject to federal estate tax.  When considering life insurance, this means that, even though the proceeds from your life insurance policy go to your children, for example, those proceeds are included in your estate simply because your owned the life insurance policy!  Federal estate taxation is driven by ownership.  The good news is that the federal estate tax threshold is over $5 million; the bad news is that your life insurance policy can get you there pretty quickly.

So, what to do about it?  Fortunately, the answer is pretty easy:  in order to remove your life insurance policy from your estate, transfer the ownership, i.e., gift, your policy to a third party such as your child(ren).  Be aware that the “Three-Year Rule” applies and states that, if the transfer-or dies within three years of the transfer, the full amount of the proceeds is included in his or her estate as if the transfer was never made.

However, the execution of the above is a bit more complicated. When transferring the ownership of a life insurance policy, consider the following:

  • The new owners must pay the life insurance premiums.  You can gift the premiums to him or her and the recipient can then pay the premium.
  • You forfeit all rights to make any changes to the policy.  Remember: this is an irrevocable gift, and, as such, you lose all control over this property.

For more information, go to:  http://www.thriftytermquote.com/contact-us/

Common Estate Planning Mistakes – Second in a Series

As you’ve seen in previous discussions, Estate Planning can be very complicated and is not something that should be undertaken blindly. So, with that in mind, here are a few more common estate planning mistakes that can be easily avoided:

1. Improperly owned life insurance. Whenever life insurance proceeds are paid to the insured’s estate, these proceeds add to the value of the insured’s estate thereby compounding all sorts of problems. These include increased probate costs; in many states, increased inheritance taxes; and, quite possibly, increased federal estate taxes. All these problems could easily be avoided with a properly structured life insurance policy, i.e., one which is owned outside the estate.

2. When a husband is required by divorce decree to purchase a life insurance policy on his life, he receives no tax deduction for the premiums paid if he owns the policy. The best way to avoid this and to ensure a tax-deduction is for him to increase his tax-deductible alimony payments and to have his ex-wife purchase – and own – the policy on his life.

3. Lack of Liquidity. Most people don’t have the slightest idea of how much it will cost to settle their estate or, worse, how quickly taxes and other expenses need to be paid. Worse still is the “fire sale” of illiquid assets such as real estate or the family business resulting from an insufficiency of cash.

For more info, contact us: http://www.thriftytermquote.com/contact-us/

Common Estate Planning Mistakes – First in a Series

Estate Planning is especially complicated and, many times, mistakes can be quite costly both financially and emotionally.  I will discuss a number of common – and avoidable – estate planning mistakes over the next few posts.

Mistake #1:  Improper use of Jointly Held Property.

If excessively used or used by the wrong parties (especially by unmarried individuals), the “poor man’s will” becomes just a poor will.  For instance, double estate taxation is a distinct possibility if the joint ownership is between individuals other than spouses.  Also, in the case of a married couple, holding property jointly equates to a total loss of control at death since the surviving spouse can ignore the decedent’s wishes and dispose of the property any way the survivor chooses.  This is especially troublesome when the joint owners are in a second marriage.

Mistake #2:  Improperly Arranged Life Insurance.

Inadequate life insurance on the life of the breadwinner or on the “key-person” in a corporation can bring stinging financial hardship.  Many times, the proceeds of the policy is includable in the insured’s estate because he or she bought the policy and either never transferred the ownership to a third party (not the spouse) or remained in control (called “an incidence of control”) of the policy in some manner.

Mistake #3:  The Unholy Triangle.  This is really an offshoot of #2 but it deserves it’s own paragraph.  This occurs when three separate entities / people are party to a life insurance contract.  For example, if the wife is the owner of a life insurance policy on the husband (the insured) and the children are made the beneficiaries, then the proceeds are considered a taxable gift to the children.  We will cover more on this topic in a later post.

For more info, go to:  http://www.thriftytermquote.com/