Most of us who are looking to create a legacy have the same basic goal: transfer as much money as possible to the next generation without too many headaches or delays. What sort of headaches or delays might you encounter? It could be dealing with probate, excessive or unexpected taxation, business succession issues, or IRA distribution rules. The list goes on and on. This article highlights the importance of efficient wealth transfer strategies. It compares life insurance and stocks vs bonds, showcasing benefits like tax efficiency, avoiding market volatility, and leveraging life insurance for guaranteed payouts.
Keep reading to discover how these strategies impact your legacy planning and how you can maximize the transfer of your wealth, you’ll be astounded at the efficiencies one solution offers over the other.
Wealth Transfer Strategies using Stocks and Bonds
Let’s start with an example of the use of stocks and bonds. Harry dies with $15 million in a brokerage account consisting of stocks and bonds. After taking advantage of his $11.7 million estate and gift tax exemption, Harry still has nearly $3.3 million of his estate assets subject to taxation, creating a $1.32 million tax bill and wiping out nearly one-third of the money going to his kids, grandkids, and charity. If we assume $2 million of Harry’s money was held in an IRA, that creates another layer of taxation and burdensome rules regarding when and how those IRA beneficiaries can take their money.
Transferring Wealth with Life Insurance
Now let’s assume Harry funded an irrevocable life insurance trust (ILIT) instead. Why a life insurance trust? Well, if the policy is owned directly by Harry and not by a third party, the proceeds of the policy would be included in Harry’s taxable estate. No thanks.
We use the trust vehicle to remove the asset from Harry’s estate but still provide specific instructions to the trustee about how and when to distribute the proceeds of the policy. Further, if Harry set up the ILIT 20 or 30 years before his death, he was able to continuously remove assets from his estate each year as he continued to fund the trust to pay the life insurance premiums.
Are any Wealth Transfer Strategies Free from Market Volatility?
Yes, certain wealth transfer strategies are designed to be relatively free from market volatility. Life insurance, particularly whole life or permanent life insurance, is one such strategy. Unlike investments in stocks and bonds, the cash value of a whole life insurance policy is not directly tied to market fluctuations. The insurance company guarantees a minimum rate of return on the cash value, providing a level of stability and protection against market volatility.
Additionally, annuities, especially fixed and fixed-indexed annuities, offer another avenue for wealth transfer with reduced exposure to market volatility. These annuities provide a guaranteed minimum interest rate or participation in market gains without the risk of losses due to market downturns.
Let’s see how using life insurance to transfer wealth has distinct benefits, such as leverage and avoiding market volatility. Say Harry died in 2009 after funding only 10 premium payments of $200,000 on his $10 million policy. The life insurance benefit is a fixed, guaranteed amount, so his beneficiaries would receive the full $10 million even though he only paid a fraction of that amount in premiums. This is a huge advantage of funding life insurance: You always know what the payout will be.
Life Insurance a Guaranteed Payout
With regard to market volatility, 2009 would have been a rough year for Harry to pass away with a portfolio of stocks and bonds. It was the immediate aftermath of the real estate crisis and the Dow Jones dropped all the way down below 7,000. If Harry died when the market was in flux, his beneficiaries might only have received a mere fraction of $10 million. When you invest in stocks and bonds, you always need to consider the risk that stocks can go to zero and bonds can default. With life insurance, you don’t have any volatility risk at all.
Can you imagine if one conversation with an experienced life insurance advisor could save your heirs millions of dollars? We’ve been down this road countless times and have seen the shock and regret people face when they pay a 50% estate tax rate or suffer massive market losses at older ages. Building an estate plan with Howard Kaye will maximize the transfer of your wealth and ensure that no stones go unturned when it comes to your money. Contact us today at 800-DIE-RICH to learn more.
