How great would it be to get a call saying that Aunt Sara, who you haven’t spoken to in 20 years, just left you a $1 million inheritance? I’m sure you can think of a dozen different uses for the money.
But what if you then learned that, because you inherited the money through Sara’s will, you first have to navigate through a series of roadblocks, including probate court and an executor who is already fielding challenges to the will. Your excitement may quickly turn into doubt about whether you’ll get any inheritance at all. This can happen with a poorly designed estate plan.
A well-designed estate plan considers your executor, beneficiaries, and trustees, and the fact that they probably don’t want to spend an excessive amount of time in court. Fortunately, there are financial vehicles out there that allow you to pass money directly to your beneficiaries, so that they don’t have to prove their right to inherit assets in court.
Examples of that include trusts and IRAs, which allow for the naming of beneficiaries, and account registrations, such as transfer-on-death and joint tenancy, which simply pass ownership from one person to another.
Above all, there is one vehicle that dominates the others in terms of avoiding probate and seamlessly transferring wealth. That vehicle is life insurance.
Wealth Transfer with Life Insurance
Let’s compare the same inheritance passed through two different vehicles.
If you inherited your Uncle Jack’s brokerage account worth $10 million, that $10 million really wouldn’t be $10 million once you get past estate taxes depending on the sixe of his total estate. It may only be half that amount if you consider federal Estate taxes and state inheritance and estate taxes. You may also wait months, possibly years, to see that money if the estate is complex and thoroughly scrutinized by the court. Your inheritance would certainly lose some luster after going through the lengthy and expensive probate process.
You would be much better off if you inherited $10 million as the beneficiary of an irrevocable life insurance trust (ILIT). The money would pass outside of Jack’s estate, completely removing those proceeds from the nasty (40%) federal estate tax as well as any state death or inheritance taxes that may apply.
The trustee of the life insurance trust would also be able to pass that money along quickly and without the oversight of the probate court. Your inheritance would reach you faster and without the tax burden. In fact, most life insurance policy claims are settled within 30 days.
Discounting Your Estate Tax Costs
Let’s talk a little bit more about how life insurance can strategically discount your estate tax costs. As we’ve written about in the past, the use of an ILIT to pass money outside of your estate can take a $3.5 million tax bill on a $20 million individual estate, and effectively offset those costs so that the net cost is $0, simply through advance planning. The earlier you do this; the larger your potential cost savings may be. This basic example assumes a 40% Federal Estate Tax on the amount above the 2018 $11.2 million federal exemption for an individual.
Another popular Howard Kaye strategy can help you give your estate away twice by purchasing a life insurance policy equal to the value of your estate. You can do this using current estate planning rules to gift an amount up to your lifetime exemption into a life insurance trust. If you have the dual objective of giving money away to your family and charity, we can show you how to seamlessly achieve your goal.
The advisors at Howard Kaye want to see you pass as much wealth along to your heirs as possible. We also want to see you do it in a way that saves time, energy, and money, by avoiding probate and the related aggravation that shouldn’t follow the death of a loved one. Contact us today by calling 800-DIE-RICH and see how we can help rework your estate plan.