Leave Your Legacy with Your Fam and Not Uncle Sam

For those with significant wealth, planning for estate taxes is always an ongoing part of legacy planning. For cents on the dollar, and sometimes using leverage, life insurance policies can pay all or a large portion of the estate taxes due allowing a family to pass its legacy to the next generation intact.

At the time of this blog, most Americans do not have to worry about estate tax planning because the estate tax exemption per couple is $23.4 million. Only couples with estates in excess of that amount will be paying estate taxes at 40% on the excess—if the estate exemption does not change.

However, the estate tax exemption is on the chopping block in the upcoming push for tax reform. With the proposed changes, more Americans might see themselves above a new exemption limit. By some estimates the federal exemption per couple could be lowered from $23.4 million to as low as $3 million. Meaning, couples with estates more than $3 million could pass on a large tax liability to their children or grandchildren.

Boohoo, right? Passing on only a portion of your estate to the next generation isn’t such a sob story to outsiders, but to those in the family, it’s a big deal! You might not think that you’re at risk but read on for additional perspective.

First, wealth is not always liquid. A lot of wealth can be held in commercial real estate, business ownership, and other long-term investments. Liquidating such assets to pay the estate taxes due can result in fire-sale prices. Or, maybe you have a concentration in real estate and death happens during a market downturn; not a good time to sell! A business and real estate holdings may be part of the family’s identity and liquidating to pay taxes is not an acceptable alternative.

Second, illiquidity can cause family strife as the executor (often an adult child) must decide what to sell. And, the headache for person in this unenviable position might result in family dissention and potentially, could go to court to solve.

Third, these are your properties and if your goal is to pass them to your children and grandchildren, you’ll want to find a method of minimizing what goes to the government and ultimately have funds to pay Uncle Sam his legal share. Remember, when your children inherit this tax liability, the clock is ticking. They must pay estate taxes (or negotiate a payment plan with the IRS) within nine months after you die.

One of the most efficient ways to pay these taxes is to use tax-free proceeds of a life insurance policy. For couples, a terrific option is a survivorship product, also known as a Second-to-Die policy, to help with legacy planning. These policies have lower premiums and are easier to underwrite because the death benefit is paid out at the death of the surviving spouse. Potentially, the insurance company is collecting premiums for a longer period of time, and they can grow their investments before a deferred payout.

Legacy planning is just as it sounds: planning for the next generation (and possibly several after) to ensure family wealth beyond your lifetime. Planning ahead for the estate tax that is due after the second parent dies doesn’t ease the pain of that loss but it does help create the legacy you worked so hard to achieve over the years of your life.