Everyone who owns significant wealth owns assets that will end up in their estate.
They may organize them that way to deal with liabilities and cash bequests, or it may just happen. They did not spend it all. They had not yet given it away. They didn’t lose it.
When you assess estate planning you soon find those three methods are the only ways there are to dispense with wealth.
The key to being efficient is to find a vehicle that will take the wealth and move it to the estate. For the vast majority of people that vehicle is poorly chosen.
Take an easy situation. You are 55and have decided to freeze the share value in your business and allow future growth to pass to the children. You have two variables to consider.
Most people get 1) right and 2) wrong.
You could set aside $1.5 million if you have it and life would go on. You would, of course be forced to invest it so that market fluctuations would not imperil the estate’s ability to write the cheque to the government. You probably end up with a bond fund with short duration.
You might not want to tie up that much capital to provide you with less than $20,000 a year of spendable income. Instead you decide to set half of it aside and let it grow to be $1.5 million. Assuming a yield pre-tax of 4% and taxes at the top rate, you’ll be there in 43 years. Might need it before that.
Assuming good health, the $750,000 is enough to pay the premiums on a policy that will pay $1.5 million at death no matter when it occurs. You would pay $81,000 a year for 10 years and that will pay the government off.
If you die in year 1 the coverage would pay $1.5 million and you would have most of your initial capital too.
If you died at the end of year 10 there would be none of your initial capital left but the policy would pay a little over $2.1 million
The $2.1 would gradually shrink over the rest of your life. If you died at 80 it would have gone down to a bit under $2 million but it would begin to grow again and at 100 it would be $2.5 million. Have your capital and spend it too.
And don’t forget you paid no premiums after year 10.
A thought from Malcolm Forbes, the late owner and publisher of Forbes magazine. Bear in mind he could have gotten financial insights from anyone in the world. He owned more than $70 million of coverage at his death.
“Life insurance is an efficient way to transfer money to your heirs.”
If you qualify, look at Participating Life Insurance as a way to put liquid assets into your estate for any of the reasons you may need them.
I help people have more income and larger, more liquid estates.
Call or email email@example.com or in Canada 705-927-4770