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Life Insurance review- Non Medical professional.

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  • Avatar InvisiBill 
    Participant
    Status: Small Business Owner
    Posts: 3
    Joined: 04/28/2019

    Note: I’m not in the medical field at all, but am posting this to WCI because I feel it has a superior review of life insurance issues.

    I’ve been born lucky: the family has two successful businesses (one real estate, one manufacturing). I am third generation. Some of this is owned by my brother and I, some by our father, and a small percentage by a few cousins. In the course of time, about 45%+ will go to me, 45%+ to my brother, and the other 10% or less will go to the children of our cousins. Some of the valuations are tricky based on stock valuation vs the underlying real estate asset valuations on the open market. Let’s say the valuation of the real estate company is about $5M on the books, but if the properties were sold on the open market, maybe about $50M. The manufacturing company is harder to value (few real assets, just cash flow valuation any given year from product sold and inventory), but lets call it $5M.

    My father (80) has a whole life policy valued at about $4M, with a cash value of about $2M. No point in cashing it out at his age. The policy was purchased several decades ago, with the intention of being used for estate tax payments. My brother and I are the owners of, and beneficiaries of, the policy. My mother is 75, and based on family history, will probably live for another 15 years. The current arrangement of company stock, used for 1st and 2nd generations (my father’s father and his siblings) was for current investors to buy the stock of the deceased, so the policies on my father will be used to buy his company stock, and my mother will have the cash, and then we wait a decade or so, and use the cash to pay the estate tax. Including the market value of the company’s real estate, my parents have enough assets to be way above the estate tax threshold.

    Our insurance salesman would like my brother and I to buy more insurance on ourselves. Shocking! However, I think we may be the rare case where a permanent policy is appropriate. Assuming that property in urban California continues to appreciate, and that I have a few decades of life ahead of me, my eventual estate will probably be above estate tax cut exemption level. Of course, the salesman talks about it as an investment, and I like to think that I know better, it’s an insurance product for the time estate taxes are due on me!

    I currently have enough term life insurance to cover our lifestyle needs in case something happened to me, and my *current* estate is small enough not to need a permanent policy to cover estate taxes. This is a planning exercise for when other assets are inherited by me. If I was just an employee, our family plans (401k, house, term insurance, etc) are suitable and correct. Even having the family assets doesn’t change that on a day to day basis, because they are not just assets, but also a career.

    Planning options available to me:

    1) Guess the right amount of estate tax to be owed in the future, which is very uncertain due to changes in estate tax level, property valuations, company valuations, etc; and buy a permanent insurance policy. At some point figure out gifting the insurance policy to my children, so they can be the owners of it.

    2) Keep enough in liquid assets to cover the potential estate tax. This could even be done by liquidating the companies or assets of the companies. Which might be done if my children and their cousins do not go into the family business.

    3) The company could always sell or mortgage various assets, and use that to pay for the estate tax bill.

    4) ??

    My primary goal is not to end up in the “Inappropriate Whole Life Policy of the Week” thread. I’m very much opposed to whole life insurance as a matter of course. However, I do want to consider the fact that I might be the rare duck who it can be useful for. That being said, please tell me I’m wrong, and that I can save lots of money by not doing Whole Life, and instead plan for estate taxes in another way.

    #214711 Reply
    Avatar ITEngineer 
    Participant
    Status: Other Professional
    Posts: 302
    Joined: 05/09/2017
    Let’s say the valuation of the real estate company is about $5M on the books, but if the properties were sold on the open market, maybe about $50M.

    Click to expand…

    This doesn’t make sense to me. If the properties are worth $50M, I would hope the underlying company is worth a lot more than $5M. Otherwise I would tell you to sell the properties and invest elsewhere. Unless you have $50M in debt behind those assets, but I read this as the real estate company has $50M in equity behind it. Plus, if the company is only worth $5M, no Estate taxes will be owed. You are well under the $11.2M Federal limit.

    First Thoughts – Is a $4M policy enough to cover your estate taxes here? It doesn’t sound like enough.

    Scenario 1: An Estate has $50M in stock. Estate taxes of $10M are due. I wouldn’t carry any insurance, I would just sell $10M in stock, pay taxes, and leave the $40M to the beneficiaries.

    Scenario 2: A family owned manufacturing company is worth $50M. The company cannot be broken up and $10M of insurance (or some other liquid asset) would be needed to keep the business intact if no advanced planning was enacted.

    I get the feeling that you don’t need insurance, you need some sort of estate transition plan for the business. Remember – your parents can pass you $15k each (mom and dad separately) every year to you and your brother, tax free. They can start transferring these companies to you long before you pass. That’s $60k a year and more if there are spouses to transfer assets too as well (up to $120k). If you assume your father lives another decade, that’s $1.2M in wealth that can be transferred long before any Estate comes into play.

    I would focus on this generational transfer before I worried about the next one (passing it along to your children) It doesn’t sound like there is a good plan in place (I could be very wrong here) and it’s not clear to me who’s running the business now, or if your father will run it until he dies (which is probably too late)
    I’m glad to hear that it has already survived multi-generation transfers but it might have been a lot smaller and easier to move in the past.

    #214736 Reply
    hatton1 hatton1 
    Participant
    Status: Physician
    Posts: 2919
    Joined: 01/11/2016

    Have you spoken to a tax attorney?  You have the most complicated situation that I have read about.

    #214737 Reply
    Scott at MD Financial Services Scott at MD Financial Services 
    Participant
    Status: Website Sponsor, Insurance Agent, Small Business Owner
    Posts: 399
    Joined: 01/14/2016
    Disability Insurance

    Note: I’m not in the medical field at all, but am posting this to WCI because I feel it has a superior review of life insurance issues.

    I’ve been born lucky: the family has two successful businesses (one real estate, one manufacturing). I am third generation. Some of this is owned by my brother and I, some by our father, and a small percentage by a few cousins. In the course of time, about 45%+ will go to me, 45%+ to my brother, and the other 10% or less will go to the children of our cousins. Some of the valuations are tricky based on stock valuation vs the underlying real estate asset valuations on the open market. Let’s say the valuation of the real estate company is about $5M on the books, but if the properties were sold on the open market, maybe about $50M. The manufacturing company is harder to value (few real assets, just cash flow valuation any given year from product sold and inventory), but lets call it $5M.

    My father (80) has a whole life policy valued at about $4M, with a cash value of about $2M. No point in cashing it out at his age. The policy was purchased several decades ago, with the intention of being used for estate tax payments. My brother and I are the owners of, and beneficiaries of, the policy. My mother is 75, and based on family history, will probably live for another 15 years. The current arrangement of company stock, used for 1st and 2nd generations (my father’s father and his siblings) was for current investors to buy the stock of the deceased, so the policies on my father will be used to buy his company stock, and my mother will have the cash, and then we wait a decade or so, and use the cash to pay the estate tax. Including the market value of the company’s real estate, my parents have enough assets to be way above the estate tax threshold.

    Our insurance salesman would like my brother and I to buy more insurance on ourselves. Shocking! However, I think we may be the rare case where a permanent policy is appropriate. Assuming that property in urban California continues to appreciate, and that I have a few decades of life ahead of me, my eventual estate will probably be above estate tax cut exemption level. Of course, the salesman talks about it as an investment, and I like to think that I know better, it’s an insurance product for the time estate taxes are due on me!

    I currently have enough term life insurance to cover our lifestyle needs in case something happened to me, and my *current* estate is small enough not to need a permanent policy to cover estate taxes. This is a planning exercise for when other assets are inherited by me. If I was just an employee, our family plans (401k, house, term insurance, etc) are suitable and correct. Even having the family assets doesn’t change that on a day to day basis, because they are not just assets, but also a career.

    Planning options available to me:

    1) Guess the right amount of estate tax to be owed in the future, which is very uncertain due to changes in estate tax level, property valuations, company valuations, etc; and buy a permanent insurance policy. At some point figure out gifting the insurance policy to my children, so they can be the owners of it.

    2) Keep enough in liquid assets to cover the potential estate tax. This could even be done by liquidating the companies or assets of the companies. Which might be done if my children and their cousins do not go into the family business.

    3) The company could always sell or mortgage various assets, and use that to pay for the estate tax bill.

    4) ??

    My primary goal is not to end up in the “Inappropriate Whole Life Policy of the Week” thread. I’m very much opposed to whole life insurance as a matter of course. However, I do want to consider the fact that I might be the rare duck who it can be useful for. That being said, please tell me I’m wrong, and that I can save lots of money by not doing Whole Life, and instead plan for estate taxes in another way.

    Click to expand…

    “IF” you want / need life insurance you can buy a Term with a 40 year rate lock depending on your age, you can even buy ‘look-a-like’ products that are to age 85, 90, 95, or 100 guaranteed.  You don’t have to buy cash value building product if you don’t want to.  Not knowing age or health but as an example a 45 year old super healthy male (best rate class) can buy a 40 year term (taking you to age 85) policy in the amount of $2 million for $734 a month, about 1/3 maybe 1/4 of what the whole life would cost.  I am not saying life insurance is your solution but if it is then there are different options to your problem potentially.

    S. Scott Nelson-Archer, CLU, ChFC with M. D. Financial Services, Inc.
    Direct Phone 713-966-3932, Email [email protected]

    #214740 Reply
    Avatar InvisiBill 
    Participant
    Status: Small Business Owner
    Posts: 3
    Joined: 04/28/2019
    Let’s say the valuation of the real estate company is about $5M on the books, but if the properties were sold on the open market, maybe about $50M. 

    Click to expand…

    This doesn’t make sense to me. If the properties are worth $50M, I would hope the underlying company is worth a lot more than $5M. Otherwise I would tell you to sell the properties and invest elsewhere. Unless you have $50M in debt behind those assets, but I read this as the real estate company has $50M in equity behind it. Plus, if the company is only worth $5M, no Estate taxes will be owed. You are well under the $11.2M Federal limit.

    I’m referring to a cash flow and book value situation, rather than a sale on the open market. For a variety of reasons, we have wanted to keep that value low over the decades, since our manufacturing business is also on the property owned by the land holding company.

     

     

    First Thoughts – Is a $4M policy enough to cover your estate taxes here? It doesn’t sound like enough.

    Regardless of if the $4M policy is enough to cover estate taxes, it is what we have now. It was enough a few decades ago when valuations were much lower!

    Scenario 1: An Estate has $50M in stock. Estate taxes of $10M are due. I wouldn’t carry any insurance, I would just sell $10M in stock, pay taxes, and leave the $40M to the beneficiaries.

    Scenario 2: A family owned manufacturing company is worth $50M. The company cannot be broken up and $10M of insurance (or some other liquid asset) would be needed to keep the business intact if no advanced planning was enacted.

    I get the feeling that you don’t need insurance, you need some sort of estate transition plan for the business. Remember – your parents can pass you $15k each (mom and dad separately) every year to you and your brother, tax free. They can start transferring these companies to you long before you pass. That’s $60k a year and more if there are spouses to transfer assets too as well (up to $120k). If you assume your father lives another decade, that’s $1.2M in wealth that can be transferred long before any Estate comes into play.

    I would focus on this generational transfer before I worried about the next one (passing it along to your children) It doesn’t sound like there is a good plan in place (I could be very wrong here) and it’s not clear to me who’s running the business now, or if your father will run it until he dies (which is probably too late)
    I’m glad to hear that it has already survived multi-generation transfers but it might have been a lot smaller and easier to move in the past.

    Click to expand…

    I feel comfortable with the estate transition plan from my father to my brother and I. What I’m more interested in is the planning I should be doing for my (currently minor) children.

    #214755 Reply
    Avatar InvisiBill 
    Participant
    Status: Small Business Owner
    Posts: 3
    Joined: 04/28/2019

    “IF” you want / need life insurance you can buy a Term with a 40 year rate lock depending on your age, you can even buy ‘look-a-like’ products that are to age 85, 90, 95, or 100 guaranteed.  You don’t have to buy cash value building product if you don’t want to.  Not knowing age or health but as an example a 45 year old super healthy male (best rate class) can buy a 40 year term (taking you to age 85) policy in the amount of $2 million for $734 a month, about 1/3 maybe 1/4 of what the whole life would cost.  I am not saying life insurance is your solution but if it is then there are different options to your problem potentially.

    Click to expand…

    I have a good Term policy that covers my immediate needs (spouse, kids, mortgage, etc), from a financial planning stand point. I realize that my situation is very fortunate, and yes, we could just sell assets as need be.

    I haven’t heard of the “look-a-like” product, I’ll investigate that.

    My insurance salesman did offer a term that converted to whole life, while keeping my current (age 40, very good but not excellent health) levels in the future.

    #214756 Reply
    Avatar Insurancepro 
    Participant
    Status: Financial Advisor, Insurance Agent
    Posts: 26
    Joined: 03/26/2019

    Are you dealing with an attorney who specializes in planning for closely held businesses?

    #214757 Reply
    Avatar Tim 
    Participant
    Status: Accountant
    Posts: 2123
    Joined: 09/18/2018

    “What I’m more interested in is the planning I should be doing for my (currently minor) children.”

    Then this isn’t an insurance question. The estate planning for your brother AND you needs to be coordinated. Your children and his heirs let alone the spouses are involved. The ownership retention and disposition in closely held business and real estate can end up forcing liquidation or preventing liquidation.
    Valuation of “partial” ownership is also much different than a complete sale. Operationally what is your desire and then get advice how to structure it. Life insurance simply provides the cash injection to accomplish that.
    The more flexibility the more potential for conflict.
    Solve that piece first with favorable tax consequences.

    #214763 Reply

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