Win the War for Money and Success

by Neil Jesani

  As I wrote about in the chapter five, there are three factors that affect investment returns during the accumulation stage of your money – asset allocation, taxation and expenses. The cash value life insurance creates the perfect storm by incorporating these benefits. Ultimately, isn’t the purpose of any long term savings and investment is to create retirement income, liquidity and an inheritance for the family?

  The cash value life insurance combines the second economic power of actuarial science to almost double retirement income distribution and create substantial tax-efficient legacy for the family. You will learn more about this in chapters twelve and fourteen. That being said, cash value life insurance is a long term investment vehicle, and proper care must be taken before you implement this strategy.

  For most individuals with financial means, large corporations and banks have understood the value of cash value life insurance. Recent industry surveys show that 75% of the Fortune 1000 companies have Corporate Owned Life Insurance (COLI) plans in place, and almost 3800 banks in the United States own $189 billion in bank owned life insurance (BOLI) policies using cash value life insurance primarily for their better rate of return and tax advantages, even though, corporations and banks have limited tax benefits compare to individual ownership.

  CHAPTER 11

  Estate Planning for All

  “Death is not the end. There remains the litigation over the estate.”

  Ambrose Bierce

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  et’s go back to that old saying that the only thing certain in life are death and taxes. The scary thing is that if you do not arrange your affairs in the correct way, those you leave behind may have to pay taxes after your death. While it is not something we will worry about when we move on from this life, most of us do not want our loved ones left with a financial burden to deal with.

  Your Will

  This is a topic many people want to avoid. I understand those feelings. But there are various reasons for having a last will and testament. Whatever your motivation, a will is the device that makes sure your final wishes and the distribution of your assets occur according to your desires. If you die without a will, what happens to your estate is subject to the laws of whatever state in which you reside. When I first heard that, I went out and had my first will prepared. I don’t know about the state you live in, but I don’t have a lot of confidence leaving those matters up to my state! After all, a state’s rules might designate that everything goes to your closest blood relative. It could be a person you choose not to have a relationship with for the past twenty-five years. Also, estate taxes tend to be a larger proportion of your remaining assets if you do not set up a will, and you are leaving a substantial inheritance.

  Before we get into the financial aspects of a will, I want to remind you that a will does more than ensure that the people you want to receive your assets actually receive them. If you have minor children, a will states your wishes of who should raise them. (It is always a good idea to clear this with the potential guardians first to make sure they are in a position to care for your minor children.) Many people now have a “living will” as a separate document. This is where you give instructions to medical personnel or designated individuals on what to do if you are on life support. It prevents people from pulling the plug, or leaving it in too long if you are in a condition where you cannot communicate.

  When you are ready to construct your will, look for an attorney experienced in this field. A will’s complexity is guided by your final wishes and the size of your estate. Some wills are fairly simple and inexpensive to write. There are web-based companies that specialize in legal documents that can help you complete a will for a modest fee. In other cases, the document might be very long and incorporate different financial vehicles you establish to make the transfer of your wealth easy for all concerned, and at a minimal tax rate. If you can take care of most contingencies while you are alive, the better it will be for your survivors.

  Choosing an executor for your will is a good start when you begin the process. This person is the manager of your will. He or she knows where to find the will, implements your final wishes, and makes sure distribution of your estate occurs according to your instructions. Just as in the case of choosing guardians for your children, discuss the topic with the person you want for your executor to make sure they are prepared to handle the responsibility before putting them in this role.

  I know that this is not a subject many of us want to spend a great deal of time talking about. However, a will provides you with a sense of peace knowing that you are taking care of some tough decisions. You are also taking care of your family. You can make an impact at your church or favorite charities. Many people wish to leave some type of legacy behind; this will be your last chance to do so.

  Your will can also leave instructions on how to pay any estate taxes and other debts you might leave behind. If constructed properly, your will can reduce taxes and costs. Quite often, other legal devices are established in conjunction with your will or developed ahead of time. This is where the “planning” of estate planning comes in. Often, it might mean the cooperation of several different types of experts working together to produce a blueprint of what you want to happen. Estate planners, attorneys, insurance and financial specialists, accountants, etc. could all have a part to play in setting up the estate you want to leave behind.

  Estate and Gift Taxes

  Planning is very important because the taxes that the government levies on your estate can be very high. You might think that you are leaving your heirs in good shape after you go, but if not planned out properly, you could leave them with a prohibitive financial burden. You would think that a logical consideration would be to give assets away while one is still alive, but then you have to deal with the restrictions of the gift tax. The government is exceedingly good at figuring out how to tax our assets to the very end!

  When you think of your estate, you have to include everything. This means your home and other properties, all bank accounts, business interests, pensions, jewelry, investments in any form, etc. The list is very extensive and many people are surprised at how much they are worth when they take the time to do the math of what they own.

  As for estate taxes, they can be applied to various assets. Federal estate taxes are computed on the gross amount of the estate. Real property, investments, savings, and business interests go into the total. If you own property jointly with a spouse or significant other, one-half interest in pensions, savings, and real property will be part of the estate total.

  If you decide to gift anything you own to family, friends, or an organization, be sure to double check what you want to give and how you plan on doing it. Taxes could fall on both the giver and the receiver if certain guidelines are not met. This book is not meant to be an exhaustive list on all the potential taxes you could encounter, but I certainly want to make sure you are aware of what you could face if you have a sizable estate. Find a professional you can trust to help you with these decisions.

  Just to give you an idea of how taxes can affect you, the estate and gift tax exemption for 2019 increased to $11,400,000 per individual and the tax rate fixed at 40%. This means that if you have an estate of $15 million without your spouse alive, your heirs are responsible for paying a substantial tax on the remaining amount after the exemption amount. Keep in mind that there is a good chance you already paid all other taxes on some or all of this amount while you were alive!

  Estate Planning Options

  As a person looks at their personal situation, some methods of planning for the distribution of the estate will make more sense than others. Here are a number of options to keep in mind when you look at your assets and how you want to take care of their distribution. You might want to include some of these in your planning. Some choices offer tax savings advantages while you are alive. Each of these topics could headline their own book, so do further research and ask questions of a professional for more details.

  1. Priv
ate Foundation – generally established by individuals and families with a high net worth to take advantage of charitable giving and subsequent tax savings while retaining partial control over the assets.

  2. Fractional Interest Gift – a person can utilize gift and estate tax rules to give an interest in real property to a designee.

  3. Charitable Remainder Interest Trust – allows an individual to move property to a trust that will go to a charity. It allows a person to take a charitable deduction on income taxes, bypass capital gains on transferred property, and keep a stream of revenue from the donated property.

  4. Children’s or Grandchildren’s Irrevocable Education Trust – established by parents or grandparents for the specific purpose of children’s education.

  5. Family Limited Partnership – protects partnership property from the creditors of a partner, allows gifts to parents and children, and lessens the amount of the transfer tax value of property.

  6. Irrevocable Life Insurance Trust – prevents estate taxes on insurance proceeds received at the death of an insured.

  7. Health Care Power of Attorney – this allows you to name the person who will make decisions related to your healthcare if you are unable to do so.

  8. Durable Power of Attorney – you name the person or firm to manage your money and property.

  9. Annual Gift Tax Exclusion – enables you to give gifts of money or property while avoiding estate and gift taxes.

  10. Revocable Living Trust – circumvents probate and allows a say in property management during life and after passing away.

  More about Trusts

  If you have a family and your net worth is substantial, setting up a trust is one of the most important things you can do for your loved ones. A trust is something that can help you accomplish your financial goals such as managing assets, controlling the distribution of your estate, minimizing estate tax, or protecting your property. As you can see in the list above, trusts can come in many forms and are designed for meeting specific goals.

  A trust is a legal entity that holds assets for the benefit of another. You can put almost anything in a trust, such as stocks, bonds, life insurance policies, real estate, valuable antiques, or even cash. As the grantor or creator of the trust, you can put whatever you want in it, and you can name whomever you please to have access to those assets in the case of your death. The different types of trusts help individuals meet different goals, such as generating income by putting bonds in a trust, or providing cash for beneficiaries to pay estate taxes by adding a life insurance policy in it. An appointed trustee can manage the assets and distribute them to the beneficiaries per your instructions.

  Besides utilizing a trust to leave your assets in the proper hands after you pass away, it can also be quite beneficial to reduce estate taxes, protect assets from potential creditors, circumvent the time and expense of probating your will, and preserve assets for minor children until they are grown. In addition, a trust can create investment pools that professional money managers can manage, support you if you are incapacitated, shift part of your income tax burden to beneficiaries in lower tax brackets, provide benefits for charity, and protect your assets.

  There are three main types of trusts: the living trust or the revocable trust, the irrevocable trust, and the testamentary trust. They each have specific characteristics and we will take a quick look at their highlights.

  The living trust or revocable trust is a legal entity that you create while you are alive to own property such as your house, a boat, a business, or your bank accounts. Property that passes through a living trust is not subject to probate; hence, the properties are transferred to your beneficiary immediately. The living trust is attractive because it is revocable. You maintain control over it, and you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.

  As the name implies, the person who establishes an irrevocable trust, unless the beneficiary of the trust grants permission, cannot change the trust. Minimizing estate taxes are the main reasons for starting such a trust. Anything placed in the irrevocable trust is removed from the grantor’s estate. By the same token, the grantor also does not receive any of the income generated from the trust while he or she is living. An irrevocable trust can hold a business, investments, life insurance, and other assets.

  The testamentary trusts are activated by the originator’s death under his or her will and trust provisions. A testamentary trust is a legal arrangement created to oversee any assets designated for the trust. This could be any investments, life insurance proceeds, or other sources of cash. The trust documents should name a trustee to direct its administration until a trust expires. At times, the deceased is allowed to leave a letter of instruction for the trustee. Unlike the other trusts, the motivation for setting up a testamentary trust is not primarily for estate tax purposes, but for the needs of the beneficiaries of the trust. Usually, such trusts are set up to provide an ongoing source of income for minor children or for their future education.

  These trusts all have variations to suit different needs. Since trusts are legal entities, a knowledgeable attorney in estate planning is necessary in setting one up. You can customize a trust to meet your desires, so be sure to have it set up properly right from the beginning.

  Life Insurance

  In the last chapter, I talked about life insurance primarily as an investment vehicle while you are alive. I need to point out that in certain cases, the estate tax can affect the proceeds from life insurance. If your estate is more than the current $11.4 million exemption amount, and you are the owner (rather than a trust owning it) of any insurance policies at the time of your death, the death proceeds of those policies can be part of the taxable amount of your estate.

  Life insurance plays a vital role in estate creation if you don’t have much in the estate. It also helps minimize the estate tax if you have a substantial estate. A permanent life insurance policy is also a great way to pay for any potential estate tax liability with the lowest cost compared to any other means. Potential estate tax needs to be paid within nine months of the death of the estate holder. Life insurance policy death benefits create instant liquidity to pay for estate taxes, alleviating your heirs from having to sell any other assets at a discount trying to quickly raise the necessary funds to pay the estate taxes.

  Summary

  Throughout this book, I advocate finding professionals who are successful in their field to help with your investment and tax planning. Arguably, estate planning is the most important area where this comes into play. This chapter lightly scratches the surface on the subject.

  What I do want to impart is that estate planning is a vital and complex component of your total financial planning. In some ways, it is an area where the more assets you accumulate, the more attention you have to pay to how you structure your will and financial plans. Because of the different aspects of estate taxes, individual state probate laws, and assorted other details, be sure to surround yourself with people who understand how it all works together. Keep in mind that a lawyer does not necessarily know everything about how life insurance works and vice versa. That’s why you need to bring in separate specialists to work on your entire estate planning picture.

  One more word here on estate planning. We as human beings are always reluctant to talk about death. However, we haven’t figured out a way to defeat Father Time yet, so don’t be afraid to discuss these matters with the people that count in your life. Your family is number one, but the discussion might also include business partners, charities you support, etc. It is important that, whatever you decide to do in your will, those you leave behind understand any trusts or other financial methods you utilize. When we die, we have nothing to worry about here anymore…they do. You will have peace that everything you worked for is in good hands, when those closest to you know how you are t
aking care of them and what they will have to do when the time comes.

  CHAPTER 12

  IRS Section 7702 Individual Private Pension Plan

  “The business schools reward difficult, complex behavior more than simple behavior, but simple behavior is more effective.”

  Warren Buffett

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  henever you look at ways to save money for your retirement, it’s important to be mindful of certain tax advantages, in addition to the rate of return you receive on your money. The three big benefits you would like to optimize are not paying taxes on the money you are saving, not having to pay taxes on any interest you earn on that money while it is in some type of plan, and not paying taxes when you take out that money to spend it. One of these would be nice, but if you can get two out of three, you are doing very well. If you can find any financial vehicle that does three out of three, let me know.

  When you invest your money that gives you at least two of these advantages, you often sacrifice ease of liquidity with whatever vehicle you choose. You can understand why they work that way. Retirement plans encourage savings for when your working days are over. If the cash were easy to get hold of, it would be too tempting to withdraw your money before retirement, and there might be nothing left for when you are no longer bringing home an income.