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When is Life Insurance Like a Double-Breasted Suit??

When is Life Insurance Like a Double-Breasted Suit??

May 06, 2024

Some fashion trends cycle back to popularity over and over again. Take, for instance, the double-breasted suit.  Several websites indicate that the suit style really hit its zenith between WWI and WWII. When I think of suits during that era, classic leading men, such as Cary Grant or Humphrey Bogart, instantly come to mind.

Source: Pinterest

Double-breasted suit jackets became popular again from the mid-1980s to the early 2000s. When you think of men wearing suits during this era, we drift toward Roger Moore playing James Bond, even though he is nobody’s favorite Bond, or Jack Nicholson portraying Jack Napier, aka the Joker, in the 1989 Batman film.

Sources: Bond Suits & Villains Wiki

Well, don't look now, but the double-breasted suit is cycling back into fashion style once again. According to the fashion website Ed Ruiz, “Look no further than the double-breasted suit. This classic style, which fell out of favor for a few decades, is making a big comeback in recent years”. And wedding planning website The Knot states, “Double-breasted suits are here to stay. Folks are slowly coming around to the great big secret about double-breasted suits; the suit's structure plays up the proportions of the person wearing it”.

From a financial planning, tax planning, and estate planning standpoint, life insurance is coming back into style again after being largely relegated to the sideline for many emerging affluent families, those with net worths of $ 1M- $ 5M. To give you some context, I would like to return to the mid-90s, amid the double-breasted suits' last big hurrah. You see, in the pre-First Energy days, Ohio Edison hired me and my partners to teach retirement planning workshops to their salaried employees, aged 55 and over, who were being given early retirement buyouts. We conducted a series of three workshops covering various retirement, investment, and estate planning topics.

Source: Pinterest

At that time, our estate tax exemption amount was $600,000 per person. Above that dollar amount, the minimum federal estate tax bracket was 37%. As a result, we would partner with estate planning attorneys who would often create a revocable living trust, sometimes known as an A—B trust. We could utilize both spouses' $600,000 estate tax exemptions along with proper titling and beneficiary designations. This would allow us to pass up to $1.2M to the client’s heirs with no estate tax.

However, if a couple's estate was more than $1.2 million, our clients could still face sizable estate taxes. We would then often look to additional estate planning tools, such as an irrevocable life insurance trust (ILIT) funded with a survivorship life insurance policy, which would provide liquidity for the projected estate tax at the time.

Subsequently, President Bill Clinton signed the Taxpayer Relief Act of 1997 into law. The estate tax exemption gradually rose from $600,000 to $1 million by 2006. Under President George W. Bush, additional legislation increased the exemption to $3 million. When President Obama took office, many were surprised when this was increased to $5 million. The amount was doubled again under President Trump.

Provisions now include an automatic cost-of-living adjustment and portability between spouses, negating the need for trusts with A-B language for most estates. The current estate tax exemption amount is $13.61 million per person or more than $27.2 million for a married couple.

As a result, the need for and use of survivorship life insurance for emerging affluent people fell dramatically, as they no longer faced any estate tax liability. However, with the passage of the Secure Act and Secure Act 2.0, there are new reasons for people in this net worth range to once again consider using a survivorship life insurance policy to reduce the future income tax liability for their children and grandchildren who will inherit their retirement plan assets.

For three decades, I have specialized in helping corporate executives and professionals successfully transition from work life to a retirement of significance. Due to the compounded effect of good financial habits, it is common to that clients have accumulated a net worth of $2M-$5M or more. Many of them find that half or more of their net worth is in retirement plan accounts, IRAs and 401ks that have not been taxed (yet).

Prior to 2020, most clients were comfortable leaving these significant qualified plan assets to their children, who would roll them over to a beneficiary IRA at their passing. Their children would then take RMDs over their life expectancy, which could be 30 years or more. This allowed them to spread the tax liability over several decades.

With the passage of the Secure Act, their heirs are now required to distribute all taxable retirement plan assets within 10 years. This means that many of our client's children would have to take large taxable distributions of retirement plan assets during their peak earning years, creating large tax liabilities for them. This has led many of our clients to once again explore the use of survivorship life insurance to help manage and reduce the tax burden on these assets for their heirs.

Let me illustrate with a real-life example. The names have been changed to protect the innocent.

Tom and Karen have been my clients for many years. They are now ages 66 and 64. They have one daughter, a very successful salesperson in her late 30s. She is married to an attorney, who is also doing well in his career. Combined, they make more than $400,000 a year.

Tom and Karen’s estate is valued at $4 million. Approximately $2.4 million of it is in retirement plan assets. If Tom and Karen were to pass away under the current rules, this $2.4 million would have to be distributed to their daughter over the next 10 years. Assuming a 5% return on the inherited asset, the levelized payments to the daughter would exceed $300,000 annually. This, combined with their current earnings, would create a massive income tax liability for the couple.

To help solve this problem, they now plan to withdraw approximately 2% of the account value annually. They will pay tax on this $48,000 per year. Since they are debt-free and live a relatively conservative lifestyle, under current tax law, part of the distribution will be taxed at the 12% federal rate and the balance at 22%.  They will deposit the net amount into a survivorship life insurance policy, which has a face value of $1.5 million. This will allow them to create a pool of money that will go to their daughter upon the second spouse's passing. Under current law, this is income—and estate-tax-free, and we have removed the 10-year payout mandate to the daughter.

Utilizing this strategy, everyone wins. The clients get to see their hard-earned assets go to their daughter in a tax-efficient manner. On second thought, only some people win. The goofs on Capitol Hill, who are recklessly running up our federal debt, lose out by not receiving additional tax money from our clients.

We wanted to share this strategy with you, our trusted friends and clients. Just like the double-breasted suit, the use of survivorship life insurance to help our clients solve a tax problem has come back in vogue. It may be an appropriate strategy for some of you.

We hope that both the strategy and the history lesson provide context and value for you. As always, if you have questions or believe that this strategy could be helpful to you and your loved ones, please reach out to us. We are here for you as we continue “Moving Life Forward.”

© 2024 Jesse Hurst

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