Subscribe
Share
Share
Embed
Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.
Welcome to How to Retire On Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, How to Retire On Time, which you can grab today by going to www.howtoretireontime.com, or if you wanna buy a physical copy, go to Amazon and search for the book, How to Retire On Time, and you can buy a copy there. My name is Mike Decker. I'm the author of the book, How to Retire On Time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can cover it all. Now that said, please remember this is just a show.
Mike:It's not financial advice. But if you want personalized financial advice, you can request your wealth analysis from my team today by going to www.yourwealthanalysis.com. With me in the studio today is mister David Franson. David, thanks for being here today. Yep.
Mike:Glad to be here. Now David's gonna be reading your questions, and I'm gonna do my best to answer them. You can always submit your questions by texting them either to (913) 363-1234. Again, that's (913) 363-1234, or you can email them to heyMike@howtoretireontime.com. Let's begin.
David:Hey, Mike. Why do people buy life insurance for estate planning? Don't they just pass on whatever is left over?
Mike:Yeah. So this is the opposite of what we've talked about.
David:Okay.
Mike:So life insurance for estate planning, half the time, I think is a joke, and the other half the time, I think it's a very advantageous tool. Now remember, there's no such thing as a perfect investment product or strategy. K? So if you're buying life insurance to boost your estate plan, that's kinda like saying, hey. I'm gonna buy this life insurance.
Mike:I'm not planning to die this year or next year, but I hope I die soon. I'm healthy now. I shouldn't die in the next ten to fifteen years, but I hope I do, because that's when it's gonna make sense. Yeah. The death benefit at some point is not it's not necessarily financially in your best interest if you were to pass when you're expected or later on.
Mike:You would have been better off just putting the assets in something like the market, and all things being equal, you'd probably have more money to pass in that situation. The way life insurance works for estate planning, in my opinion, is when you have illiquid assets that you wanna pass onto your kids that exceed the estate tax exemption.
David:Okay.
Mike:K? So if you have an estate let's say you're a business owner that you wanna pass on that's and your business is worth 5,000,000, and you've got $2,000,000 of net worth, and the estate tax exemption for federally is 12,000,000, and there's no state estate tax, you've got no estate issue.
David:Okay.
Mike:You can pass all that on without an estate tax issue to the kids.
David:Because it's under that $12,000,000
Mike:sort of line. Under the threshold. Okay? Now there might be some other tax issues to be aware of, but maybe you're passing on, and you get to step up in basis. So step up in basis, it's a fancy way of saying, hey.
Mike:Current price is what they're gonna get. So you know, think of what you bought your house for 200,000, it's not worth a million dollars. Uh-huh. If you were to inherit that house and sell it, you're selling it with a basis of a million dollars, not 200,000. So you sell it, you're not paying taxes on it.
David:Okay.
Mike:That makes sense?
David:Yeah. Yeah. I think so.
Mike:So if your date of death is in one year, you purchased a house for $200,000 years ago, it's now worth a million dollars.
David:Uh-huh.
Mike:If you sell it right before you die, you're gonna pay taxes on the growth. The 200,000 to a million dollars, that's 800,000 of growth. Uh-huh. Part of that's gonna get taxed.
David:Okay.
Mike:You just wait until you die, not to be morbid, but then on the date of death, your tax basis is now a million dollars. Oh. So then your kids sell it. They're selling that based on a million dollars. You're not paying taxes on that growth.
David:Oh, okay.
Mike:The capital gain changes. It just sort
David:of goes away, it sounds like.
Mike:So it's like, hey, grandma, grandpa, don't sell me your house.
David:Yeah.
Mike:Just gift it to me when you die.
David:Yes.
Mike:That's a more appropriate way to typically pass assets, including businesses, cars, watches, other investments Okay. Collectibles, products, whatever it is. Yeah. Okay?
David:Now The grandparents' basis was like 200 k, but then the the inheritor's basis is
Mike:The million dollars. The million.
David:Yeah. Okay. I get it now.
Mike:So when you have an estate now of 15,000,000, 20 million or so, you still don't need to be worried. If you're married, what you do is you do an AB credit shelter trust. Wow. So you work with a practice like us, or you get an attorney that says, hey, when the first spouse passes, cut the estate or the ownership of these different investments or assets in half. So now you have two estates under the estate tax limit.
Mike:Oh. So you can still pass things on. No problem.
David:Okay.
Mike:So again, do you need life insurance for this? No. But I mean, it's people get paid very, very well to sell very expensive life insurance policies. Uh-huh. Now here's the kicker.
Mike:If you're single and your estate is greater than 12,000,000, let's say it's 15,000,000 or 20,000,000, now you might hit an estate tax issue, and that's let's I think it's like 40%, if I remember right. 40% of your assets above the estate tax exemption is taxed at 40%.
David:Okay. Yeah. Big bill. If you're a couple,
Mike:k, let's say it's 12,000,000, so 24,000,000 or greater of total net worth, you're gonna roll over in your grave. So if you have a business, a very sophisticated portfolio, and it's difficult to sell let's say you've got a bunch of real estate properties. You don't wanna sell all the real estate properties. You wanna keep them in there, but passing them on, it's you're now crossing the state tax limit.
David:Okay.
Mike:You might get a step up in basis on the capital gains, but you're still passing on the value of the assets Oh. At a higher rate. Do you see how it's different?
David:Okay.
Mike:The capital gains is a tax. The estate tax, the value is different. Oh. So now you've got a different issue. So some people will pay for basically life insurance to cover the estate tax tax Oh.
Mike:So that they don't have to sell certain properties. You're kind of just funding it to basically take care of the tax issues.
David:So if you die, and then the death benefit covers the tax The
Mike:taxes that you would pay.
David:Passing it on. I see.
Mike:Yeah. So you want to keep the asset where it is. So you're trying to fund a life insurance policy, and you live to your full life expectancy, maybe the life insurance policy wasn't financially in your best interest, but if you were to die sooner, it hedged against that risk. So life insurance is not an investment, it is the transference of risk to an insurance company. Yeah.
Mike:And there's different ways you can do it. You can do a minimum funding, so basically if you were to pass earlier than expected, it was in your best interest, but if you live to your full life expectancy, you might need to make premiums to keep the policy alive. Mhmm. That's a risk you're gonna have to take. Life insurance does get really complicated, but you see how it's you're just trying to hedge against this tax bill, and how do you pay for it?
Mike:Yeah. That's really what it is. And you can do things like premium finance, and borrow money from bank, that's leverage, that can get risky. You can do things, and there's so many ways that you could utilize it. That's the general gist of when it makes sense, it's to hedge against the risk of a tax bill you don't wanna pay.
Mike:The other option is, let's say you do have a business, and you've got three kids. Two of the kids have no interest in supporting the business, maybe it's a farm. One kid, you want them to get the asset, the other kids you don't. You don't want the surviving kid that's gonna inherit the farm to have to cough up all the money. That would be rough.
Mike:Yeah. So you can basically pay for life insurance to buy out the other two kids, so that the surviving kid that's going to inherit the business isn't overwhelmed with debt or having to create this bill that all your kids get a equal dollar amount, but they don't walk away with burdens or benefits that are uneven. So again, you're using life insurance to equalize the playing field based on your specific situations. It's not an investment. You're transferring risk and leveraging things for certain narratives that need to happen.
David:And it sounds like this is all very complicated, and maybe reserved or better for really high net worth people.
Mike:Yeah. Most financial advisers will actually kick this stuff to a third party for them to run the numbers, because they really don't know how it works. Uh-huh. That's not to disparage anyone from it. It's just admitting this is complicated stuff.
David:Yeah. And we're one of
Mike:the few that we do do things in house. We quantify the numbers, we check, you know, dot the i's, cross the t's, and all that stuff. It is extremely complicated, because it's not only a legal matter, it's also a financial matter, it's also an insurance matter, it's also a tax matter. So you're hitting all four parts of the financial world, and most people may become one of those. Yeah.
Mike:So it is very complicated, but it's very, very important. So again, if you have a net worth of 10,000,000 or less, unless you want to pass sooner than expected, and you don't wanna tell insurance company, I don't wanna be morbid about it, but like, it's not an investment. It's transferring risk. And if you're willing to pay for that, that transferring risk, then maybe it's appropriate. But I think a lot of people are manipulated into buying life insurance with the death benefit to sell a policy when really it may not be appropriate, but for higher net worth people or people with illiquid assets, it might make sense.
Mike:Now all that said, maybe you think that the estate tax limit's gonna go down. There's talk of it going down to 6,000,000. That would change the game. Oh. The tax code's written in pencil.
Mike:It could go down to 3,000,000. It could go down to 1,000,000. No one really knows the future, so maybe that's a concern, and you wanna hedge against that risk. So Sure. Again, what is right for you is what you need to solve for, but it has to make financial sense.
Mike:That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast. Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility.
Mike:This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date. Go to www.yourwealthanalysis.com today to learn more and get started.