Planning for Tomorrow: Importance of Proper Estate Preparation

Wealth Management | Marc Specht | Nov 03, 2017

One of our accounting partners has a client whose father (in his late 80s) owned Manhattan real estate with an approximate value of $18M. Nearly all of his net worth was tied up in this property, which therefore presented the issue of how to cover the estate tax due upon death without having to liquidate the property.

We discussed options of how to reduce the father’s taxable estate, by gifting and transferring assets while living, but he had already taken advantage of his lifetime exclusion in a previous property gift to his children.

The conversation turned to life insurance, which we knew at his age would be very expensive.  It turned out that we received a quote of $155,000/year/million dollars of coverage.  Assuming a need of about $6M to cover taxes, that would be a cost of $930,000/year. We explained to the client that this was clearly a very expensive route, but that they should consider at least insuring the father for a few million as they would be getting that money back and then some upon the father’s death. If the father lived for 5 years and they fully insured him for the $6M, the cost would be $4.65M (which they would get back) and they would still receive an additional $1.35M from the insurance company.

We explained the idea to the father, who recommended that his children find a way to pay for the coverage.

Unfortunately, the children decided not to move forward and just 1 year later, the father has passed away.

The children are now left with an illiquid property to be liquidated to cover the hefty estate tax (assuming the estate tax is not repealed retroactive to 2017). Had they opted for the $6M of coverage as discussed earlier, they would have likely only paid $930,000 premium in exchange for a $6M tax free death benefit. They would also likely have covered the tax due and held on to the property.

We can help protect clients to prevent this situation from happening. It’s easy to understand why someone wouldn’t want to pay such a large life insurance premium, but subtly explaining the cost/benefit of the protection can help our clients make the informed and prudent financial decisions.

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