Next year (2011), the estate tax returns for individuals who pass away with an estate valued at more than $1 Million dollars, in most cases.  For every dollar you leave to your heirs over $1 Million, the IRS will impose a 55% estate tax on that asset, which includes cash, savings accounts and CD’s, investments, real estate holdings, life insurance and annuities, and business interests.  While effective estate planning can be done, for some affluent families, even the most elaborate strategies aren’t enough to wipe out future estate taxes completely.

Might I suggest paying pennies on the dollar for current life insurance premiums, in order to leave the necessary death benefit, which can be used to wipe out your estate tax, rather than leaving the problem to your estate and estate administrator/s?  Consider the following premiums for guaranteed universal life insurance policies for $1 Million and $2 Million dollars.

Guaranteed Universal Life Premiums for Ages 40-65 Years Old
$1 Million and $2 Million Dollars Face Value

Net Worth         $1.8 Million      $3.6 Million
Life Insurance Need – $1,000,000    $2,000,000
AGE                               Monthly Premium
40 Year Old Male           $438.92        $867.42
45 Year Old Male           $523.67        $1,036.92
50 Year Old Male           $646.58        $1,282.67
55 Year Old Male           $894.42        $1,778.33
60 Year Old Male           $1,177.17     $2,343.83
65 Year Old Male           $1,616.23     $3,227.44

(Quotes above are for Guaranteed Universal Life for Non-Smoking male in excellent health, as of 7/19/2010, and are subject to change)

The Lesser of Two Evils (Estate Tax or Life Insurance Premiums) – What costs less?  Paying the tax out of pocket once you’re gone, or purchasing a life insurance policy and paying a fraction of the cost while you’re alive, to generate a tax-free death benefit that will pay the estate tax bill?  Well, it depends on your health, but in most cases, the life insurance option is the hands-down winner.

Let’s take an example from the chart above.  Take a 60 Year Old Male in good health, who doesn’t smoke.  After meeting with his CPA and estate planning attorney, he has calculated his net worth at $3.6 Million, an estate which will generate a $2 Million dollar tax liability (3.6M X 55% = 2M).  From the chart above, we see his monthly premium is $2343.83, or $27,570 Annually.  He has two options:

1. Pay $27,570 annually in life insurance premium, and have his estate tax problem immediately solved, and even will even do better than that, as his estate will be decreasing in size by paying the annual life insurance premium.
2. Set aside funds in a separate account to pay for the tax.  Option 2 has some drawbacks.  Of course, it’s impossible to know how much to set aside on an annual basis, since no one knows the year he’ll die.

Evaluating the Two Options – Assuming he lives for 20 Years, his proper life expectancy, he will have paid $551,400 in cumulative premiums.  This pencils out to a 12.1% annual rate of return on his money over a 20 year period, on a tax-free basis.  Or in other words, if he chose to invest his money in a side fund rather than pay $27,570 in life insurance premiums, he would have had to earn a 12.1% after-tax annual yield every year for 20 years, for that money to grow to $2 Million dollars.

If he did well and lived 10 years past his life expectancy, his equivalent rate of return on the life insurance would still be 5.5%, again after-tax.  So in a taxable investment, he’d have to earn around 7% to 8% to equal 5.5% tax-free.  I’d like someone to show me where you can earn a 5.5% guaranteed, tax-free rate of return equal to 5.5%.  No where.

Life Insurance for Estate Liquidity – In many cases, when an affluent individual dies with his/her assets tied up in real estate or business interests, there is insignificant cash on hand to pay the estate tax, forcing the administrator to liquidate an asset, at the risk of selling at the wrong time, or simply not getting true market value of the asset due to the need to sell quickly.  When estate taxes return on Jan. 1st 2011, the tax will be due 9 months from the decedent’s date of death, which doesn’t give the administrator much time to get a large amount of cash together if needed.

In the end, even with gifting, estate discounting strategies, and leveraging your tax credit with with trusts, you may still have an estate tax liability upon your death.  If you’ve spent time and money with an estate planning attorney to have your assets held properly upon your death, why not take one last step to have your estate taxes paid in the most cost-effective, prudent way… with life insurance?  There are even strategies to remove the insurance proceeds from your estate.  Call for help at 877-44-EZ-INS. (877-443-9467)

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