LI/other options

[ValeRosso]

Trying to find a solution to this. Any help is appreciated:

Client (early 80's) has about $230k in annuities that just passed surrender charge period, doesn't know what to do with the money. Client met with an estate planning attorney and found out they will be paying 10.5% tax on all of their estate. Obviously, life insurance is exempt from this, and client wants to reduce estate taxes as much as possible.

I was thinking of possibly overfunding a LI policy, but I'm not sure if the amount of money ($230k) is even realistically possible to do this, or if there are any other strategies that could be used here?

 

[DHK]

ILIT funded with a non lapse GUL using the annuities to pay the premium.

 

[Allen Trent]

How much current taxable gain is there on the annuities? ( may cost him too much in federal & state & Medicare premiums if he cashed them out in lump sum)

Are they qualified or non qualified annuities?

Does he need this money to live on or pay for care if needed?

Is he insurable?

Could single fund a WL or a no lapse UL/IUL if he is insurable & willing to pay current taxes due on the annuity gains?

However, at his age & possible health, he may not get enough death benefit after paying taxes on the annuity gains to be better than owing $20k in inheritance tax at death.

He can take taxable distributions annually from annuity & gift $18k each year to as many people as ge wants.....maybe that will avoid that states inheritance tax as he wouldn't own it at death

 

[scagnt83]

Who will write an 80+ year old? Most carriers tap out at 80.

 

[DHK]

Excellent point. I missed that in my earlier response.

But keeping the annuities in the estate and just adding additional death benefit... just won't do much. Better than nothing, but it's not much of a solution.

And just to clarify for the OP: Life insurance owned by the insured is NOT exempt from estate taxes. Only when it's held outside the estate is it exempt from estate taxes.

With that large of an estate... just a guess here, but why not look at a single premium life policy held by an ILIT? It won't solve the estate tax, but on that asset it will limit it and may get approval at that age? If they want to pass it on, that might be the best way.

Something else that could be done is to annuitize the annuity for life-only income payments. It won't be included in the estate because the payments will cease.

 

[Allen Trent]

And just to clarify for the OP: Life insurance owned by the insured is NOT exempt from estate taxes. Only when it's held outside the estate is it exempt from estate taxes

Guessing he is not talking about federal estate tax, is talking about a State inheritance tax like Oregon, Washington, Illinois, Maine, etc. Plus, Illinois inheritance tax doesn't apply to life insurance paid directly to beneficiaries

 

[Allen Trent]

With that large of an estate... just a guess here, but why not look at a single premium life policy held by an ILIT? It won't solve the estate tax, but on that asset it will limit it and may get approval at that age? If they want to pass it on, that might be the best way

Hard to gift that much to am ilit under annual $18k gift exclusion. Would need 14 or more beneficiaries to gift that much to ilit in 1 year assuming no other gifts made. Sure, could take a hit against lifetime exemption, but that requires filing an estate tax return now & using up a portion of lifetime exemption, plus last I knew 100% of estate tax returns are audited.

Cost of ilit, lawyers to handle crummy letters, CPA to file estate tax return may exceed the gain in not paying the 10% state inheritance tax, plus owing IRS on taking money out of the Annuity & getting little to no leverage for someone 80+ years old

 

[DHK]

Guessing he is not talking about federal estate tax, is talking about a State inheritance tax like Oregon, Washington, Illinois, Maine, etc. Plus, Illinois inheritance tax doesn't apply to life insurance paid directly to beneficiaries

I often forget about that. Despite all of California's problems and taxes, we still don't have a state tax on social security or a state estate tax.

 

[Allen Trent]

I often forget about that. Despite all of California's problems and taxes, we still don't have a state tax on social security or a state estate tax.

See, you should be out there campaingning for Gavin Newsome

 

[ValeRosso]

How much current taxable gain is there on the annuities? ( may cost him too much in federal & state & Medicare premiums if he cashed them out in lump sum)

Are they qualified or non qualified annuities?

Does he need this money to live on or pay for care if needed?

Is he insurable?

Could single fund a WL or a no lapse UL/IUL if he is insurable & willing to pay current taxes due on the annuity gains?

However, at his age & possible health, he may not get enough death benefit after paying taxes on the annuity gains to be better than owing $20k in inheritance tax at death.

He can take taxable distributions annually from annuity & gift $18k each year to as many people as ge wants.....maybe that will avoid that states inheritance tax as he wouldn't own it at death

Taxable gain is roughly $85k, non-qualified. Does not need the money to live on, nor for care. Wants to leave money for his family, that's all.

He should pass UW, nothing bad in his medical history. On 3 medications, BP, Cholesterol, thyroid.

Thats what I was worried about, not getting anything near the annuity death benefit to make any sense. Good point about the gifting. Thanks for the input.