Survivor Life: a Face Lift for a Stodgy Estate Planning Dowager
| Publication year | 1991 |
| Pages | 1175 |
| Citation | Vol. 20 No. 6 Pg. 1175 |
1991, June, Pg. 1175. Survivor Life: A Face Lift for a Stodgy Estate Planning Dowager
Clients who have low-basis securities that generate low income long have been ideal candidates for estate planning involving the use of a charitable remainder trust in conjunction with an irrevocable life insurance trust. Although the combination of these two trusts could enable those clients to increase cash flow, decrease estate taxes and provide wealth replacement for the amount of property transferred to the charitable remainder trust, clients frequently declined to use it, perhaps because they would have to pay insurance premiums up front and realize net benefits later.
This article discusses the use of second-to-die life insurance as a way to give this estate planning dowager a face lift. It also examines some factors to consider in drafting an insurance trust to hold such insurance.
An example will be helpful in understanding the consequences of the often-used plan mentioned above. Assume that a sixty-year-old, nonsmoking woman wishes to transfer $1 million worth of securities producing $15,000 a year in dividends into a 9 percent charitable remainder annuity trust for the benefit of a public charity.(fn1) The client's charitable deduction would be $259,040(fn2) in the year in which the trust is funded. Because the limitation for deductibility of appreciated capital gain property is 30 percent of the client's adjusted gross income for the year of contribution,(fn3) the client might have to deduct part of the charitable deduction in the year of contribution and carry the balance forward for five years.(fn4)
If the client's income otherwise would be taxed at an average 31 percent bracket during the years in which the client utilizes the charitable deduction, the approximate cash benefit of the deduction would be $80,302 ($259,040 x 31 percent). In addition to this benefit, the client would manage, by stating the rate of return in the charitable remainder annuity trust at 9 percent, to increase her cash flow from $15,000 a year to $90,000. Assuming that the federal tax rates will not change in the near future, the client would increase her net cash flow by $51,750 each year(fn5) (after paying income tax at 31 percent on her additional income).
If the client also establishes an irrevocable life insurance trust that purchases a $1 million policy insuring her life, the single premium or vanishing premium on this policy easily could be paid from the increased, after-tax cash flow she would receive from and as a result of having created the charitable remainder annuity trust. A recent quote for a single premium policy (containing guarantees) on such a client was $165,167.(fn6)
The low cost of the second-to-die life insurance, particularly when it is written on the lives of members of the younger generation, gives this estate planning dowager a new look, which should make it more attractive to clients. For example, suppose that instead of purchasing a $1 million policy on her life, the client purchases a $1 million second-to-die life policy (with guarantees) on two of her sons, ages 39 and 38. The single premium cost would be $115,182. If she purchases such a policy on the lives of her son, age 36, and daughter, age 35, the single premium would be $61,628.
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