by Eloise Glaspie Life Sales Relationship Manager
Did you know that one out of every 13 households in the U.S. has a net worth of $1,000,000 or more? Recently, AXA-Equitable released the results of a study done by the Joint Center for Housing Studies of Harvard University, Spectrem Group and BTN Research that revealed these somewhat surprising results. So just who are the people that make up these wealthy households?
According to “The Millionaire Next Door” by Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D., self-employed individuals account for two-thirds of the millionaires in the U.S. These millionaires are your neighbors, your auto mechanic, the local dry cleaner and maybe even the neighborhood handyman. You won’t necessarily recognize them right away, as most live well below their means in modest homes, driving modest cars and otherwise maintaining a low profile. In fact, most of the assets these individuals possess are tied up in their businesses and are generally not liquid. As their preferred local agent, you have the opportunity to position survivorship life insurance as an option for meeting more than just their estate tax needs.
ESTATE TAX IMPLICATIONS
Given the statistics above, what does that mean for your wealthy clients who fall into this category? Currently, as a result of the 2010 Tax Relief Act which applies a federal estate tax to estates valued at $5 million and above, the majority of these households won’t be subject to federal estate tax in 2011 or 2012. However, after these provisions expire on December 31, 2012, the fate of these individuals’ tax status will be up in the air, as no firm political decision has been made regarding what the future estate tax threshold may be. Bear in mind that many states have their own estate taxes, many with an exemption amount of $1 million or less that could still impact these clients.
As a result of the unlimited marital deduction, when one spouse dies, his or her entire estate passes to the surviving spouse without becoming subject to estate taxes. When the second spouse dies, federal estate taxes come due on whatever portion of the estate exceeds the prevailing exemption amount. These taxes are due within nine months of the surviving spouse’s death, which could force heirs to sell property, liquidate assets or take out a loan to make the payment on time. For “Joe the Plumber” and similar clients, this requirement could create a huge and unwelcome challenge for their heirs. Here, survivorship life owned by an irrevocable life insurance trust (ILIT) which is excluded from the estate could provide the heirs with a death benefit to help pay the estate tax bills.
BUSINESS OWNERSHIP EFFECTS
When two partners own a business and one dies, the estate of the deceased partner can claim his or her half of the business’ assets. This can render an incredible financial hardship, making it difficult for the business to continue operating. In these instances, life insurance on both partners in a cross purchase buy-sell arrangement can provide the heirs of the deceased partner with immediately available buy-out funds while simultaneously providing much needed additional capital for the remaining business partner to potentially bring a replacement on board. Keep in mind that this solution could be costly – especially if one partner is considerably older than the other.
On the other hand, a survivorship policy with a first to die rider would provide a tax-free death benefit payable to the surviving partner enabling him or her to buy out the deceased partner’s share of the business at a fair value and requiring less premium than the two individual policies. As in all business planning, a properly prepared legal document should be drafted to protect all parties involved and to make the partners’ intent perfectly clear.
FAMILY BUSINESS CONSIDERATIONS
Many small businesses are operated by husband and wife alone, and often their children are not interested in continuing the operation of the business after the parents pass. In these situations, the children would inherit a business they have no interest in running. With advance planning, a business succession plan could be designed to allow a longtime employee(s) or other key person(s) to buy the business from the kids, creating a win-win outcome. Again, a survivorship policy owned, paid for and held as beneficiary by the purchasing entity will ensure that, if the original owner were to pass, money would be immediately available to purchase the business from the heirs. The heirs would receive a full inheritance while the employee(s)/key person(s) becomes the new owner of the business he or she knows and cares for. If this buying entity is unable to pay the premiums, an IRS Section 162 Bonus Plan could be initiated in which the business would pay a bonus to the buying entity in the amount of the SUL premium or the SUL premium plus any anticipated income tax due on the bonused amount.
If a family business is the major part of an estate, there may be one child who is involved in the day-to-day operation while the others may have no interest whatsoever. In a circumstance like this, after the death of the parent, liquidating the business and distributing the proceeds might seem to be the only option if good sibling relations are to be maintained. However, with most businesses, this is not a smart financial decision. As an alternative, utilizing a survivorship life insurance policy will allow the parents to give the business to the involved child while equalizing the estate for the remaining children through a tax-free death benefit that would be the equivalent of equal shares of the business value, thus eliminating any conflict and possible envy.
Survivorship life insurance presents a host of opportunities for helping the unassuming millionaire clients in your community handle an array of needs. This product can open the door to new sales opportunities in the areas of multi-generation planning, first-death asset transfer, non-related business partner planning, business continuation, wealth transfer, same-gender insureds, blended families, supplemental retirement income and more. Call your Life Sales Relationship Manager for details on survivorship life policies from a variety of carriers.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12283 – 2012/4/30
Agents may not give tax, legal, accounting or investment advice. Individuals should consult with a professional specializing in these areas regarding the applicability of this information to his/her situation. Guarantees provided by life insurance and annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.