Offset tax liabilities
Life insurance remains an important financial tool for the super rich like Lebron James.the secret to use life insurance as a tool for the sure rich is to help offset tax liabilities upon the holder’s death, such as on capital gains.
So while it may seem like an innocuous purchase, for the ultra-wealthy life insurance is a key business investment.
There’s wealthy — and then there’s really wealthy. The insurance needs of those who are really wealthy are different from those of the typical high-net-worth. How so? It’s mostly a matter of priorities. A person with a net worth of $100 million or more would purchase life insurance for reasons such as wealth transfer.
Like people with estate planning needs, those with a high level of wealth typically want to provide for their heirs. However, the ultra-wealthy want to provide for charity, as well — most often by funding a private family foundation.
To show how life insurance can help achieve either or both goals, there are several possible estate disposition scenarios, which typically include the following:
- Life insurance is not used.
- The entire estate is left to the family.
- The estate is left to charity and the family receives a specified amount, which in some cases is only the death benefit from life insurance held in an irrevocable life insurance trust outside of the taxable estate.
Assuming the family has an estate worth $100 million, consider the first option. If a client has no life insurance outside of the estate and also leaves nothing to charity, approximately half of the $100 million estate will go to taxes, and half will be left to the heirs.
Conversely, an ultra-wealthy individual could purchase trust-owned life insurance with a $50 million death benefit, increasing total family assets to $150 million when the person dies. Taxes would remain at $50 million, but heirs would receive $100 million after taxes, since the $50 million death benefit would not be subject to taxes. In this example, life insurance would double the amount left to heirs without increasing taxes.
You must also take into account the funding strategy for premiums. If the insured lives to life expectancy and pays premiums as planned, the insurance will likely provide an investment return comparable to a high-quality corporate bond, but with special tax treatment. However, life insurance also adds significant value to the estate in case the insured dies before reaching life expectancy.
At the other end of the spectrum, you can eliminate estate taxes entirely by using a “zero-out” strategy; the $100 million inside the estate can be left to charity and the family can still receive $50 million estate-tax-free as beneficiaries of trust-owned life insurance.
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