How to preserve the full value of your estate for your heirs
According to today's tax laws, when an individuals' assets transfer to their children, a significant percentage of the assets could be subject to substantial capital gains taxes, and all registered assets could be taxed as income.
If there aren't enough cash assets in the estate and the heirs don't have enough money to pay these taxes, these heirs may have to obtain the money by selling off assets or dipping into the estate's investment portfolio at a time when they may not realize full potential market value.
There's a simple way to fund these future taxes and expenses, and do it in a way that costs only a fraction of what the taxes will be when they are due: A universal life insurance plan.
A universal life insurance plan lets one prepare in advance to fund the taxes due on their estate through a tax-free death benefit. It provides heirs with cash in hand for final taxes and expenses.
Here's how it works: An estimate of the final estate taxes and expenses can be made in a discussion with your financial advisor.
A universal life insurance policy on one’s life with his or her heirs as beneficiaries can be purchased with a death benefit equal to the estimated taxes and final debts owing on the individuals estate.
The tax-free death benefit, paid in one lump-sum directly to beneficiaries and bypassing probate, then provides your heirs with the immediate cash they need to cover the final taxes and expenses.
What's more, the policy's death benefit can be arranged to grow as the investors tax liability grows, so that the policy payout will always be equal to the expected tax debt at the time of death.
The heirs can then pay the taxes with the policy proceeds, and family assets can remain in the family for use by a new generation or until there is a favourable market in which to sell the asset.
In addition to the estate preservation benefit, the Cash Value of a universal life insurance plan can also serve as an emergency fund for individuals while they're alive. There are a number of ways to tap into the Cash Value – some of which are tax-free!
The Estate Preservation Solution Compared with Other Solutions
A retired couple both age 65 has a current estate value of $850,000, which is projected to grow to $1,328,000 in 22 years. After the estate passes to their three children, at a 26% marginal tax rate, the estate will incur taxes of $330,808.
There are a number of ways to deal with these taxes.
- Heirs can borrow the money they need, and pay the loan off over time. If the estate did not have the cash to pay the tax, the heirs would have the option of borrowing the money to pay the tax. Assuming a loan interest rate of 7.5%, and repayment over 10 years, this is a costly alternative, estimated at around $448,316.
- Heirs can sell estate assets. They can attempt to decide what would be the best estate assets to sell off at the time of the transfer. The projected cost of the tax bill is still $330,808.
- The retired couple themselves can put aside money over time to cover the projected expenses. There is no guarantee that the couple could save all the money needed, and they may die before saving enough. Also, the growth of their investments is unpredictable, and taxes must also be paid on the income. In order to accumulate $330,808 in 22 years, it's estimated that the couple would need to save $233,545 over ten years, assuming an annual interest rate of 4%.
- The universal life insurance solution. With the concept of "A Solution to Protect Your Estate," the couple pays predictable premiums of $8,925 a year. When paid over a 10 year period, that's $89,251 to cover more than $330,000 in taxes (or only 7% of the original estate value, versus a 26% loss due to taxes).
What's more, the estate's beneficiaries (children, loved ones, business partners, etc.) can help pay the premiums so that the cost of the solution is shared.
When compared with other options, this universal life insurance solution is a strategy every individual should consider for estate preservation purposes.
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