Two separate clients, each with similar net worth, recently met with us to discuss their estate plans. One of them had already incorporated life insurance into her plan, while the other had not yet considered it. After discussing the advantages of life insurance, the second client changed her mind and decided to add it to her plan. As a result, the first client was able to leave substantially more money to her heirs than the second client. This example shows how the strategies chosen to transfer wealth from one generation to the next can have a significant impact. Therefore, If you want create multi-generational wealth and pass along the most money possible, you may want to consider how using life insurance in estate planning can achieve that goal.
Incorporating life insurance into an estate plan can offer unmatched tax efficiency and help avoid the volatility and uncertainty of traditional stock and bond investing. We have developed several time-tested strategies to help create multi-generational wealth:
We’ve found that those who incorporate life insurance into their estate plans come away with a level of tax efficiency that is unmatched by the alternatives. They also avoid much of the volatility and overall uncertainty associated with traditional stock and bond investing.
Some of our time-tested strategies that can help you create multi-generational wealth:
Maximize your IRA, Social Security, pension, or annuity. Our strategies for each of these vehicles all have a similar goal: to accelerate your payments and fund life insurance instead.
If you do an analysis of how IRA accounts get taxed if left directly to your heirs, you’ll be amazed at the inefficiency. Not only are those account values includable in your estate tax calculations, but the eventual distributions are also subject to ordinary income tax.
If instead you start withdrawals from the account while you’re alive, pay the income tax as you go, and fund a life insurance policy with the proceeds, you can leave dramatically more money to your heirs. Why more people don’t do this is perplexing to us. It’s likely the result of widespread advice that everyone should be funding their tax-deferred plans without enough talk about the tax headache associated with those plans during the withdrawal phase.
Buy insurance for your kids. Along the lines of our 401-Kaye strategy, in which a child can help secure his or her retirement through the purchase of a life insurance policy on one or both parents, you can improve your ability to transfer wealth by gifting your children money to buy life insurance.
Doing so will free up the incredible leverage opportunity offered by life insurance, in which a relatively small premium — say $50,000 or $100,000 — can buy $1 million or more of insurance. At the same time, you are removing money from your taxable estate and improving your own estate plan as well. You will have a tough time finding a more cost effective way to transfer wealth to the next generation.
Dynasty trusts. A dynasty trust can help you create a legacy that stretches to your great-grandkids and beyond. Dynasty trusts differ from other vehicles in that they provide for multiple generations, with an impact that reaches many years into the future.
Rather than funding your dynasty trust with stocks and bonds, many people will have the trust own a life insurance policy instead. This helps avoid the annual taxation of income-producing assets within the trust. And, life insurance is an excellent tool for long-term wealth transfer.
Whether you fund the policy with annual gifts or with one lump sum transfer this year, it will provide a fixed, reliable death benefit that the trust will receive when the insured dies. The grantor can also choose to buy life insurance on multiple generations, which creates several points in time when the trust receives tax-free income.
Plan Carefully to Create a Legacy
Once again, the objectives here are clear: You are trying to take your hard-earned money and have it create as much generational wealth as possible. Doing that by simply passing away with money in your own name may subject those funds to astronomical tax rates that may limit your inheritance to just one or two generations. Why not plan a little more carefully to know that you’ve created a legacy that will stretch all the way down to your great-grandkids?
At Howard Kaye, we have been advising high-net-worth families on estate planning issues for decades. In fact, we’ve pioneered many of the strategies used by some of America’s wealthiest families. Contact us today at 800-DIE-RICH and let’s work on a custom solution for you.
