AMA Insurance Agency, Inc.

John D. Straley, Senior Partner
Infinity Wealth Management, LLC
South Barrington, IL

"And to My Beloved Government, for Years of Devoted Service, I Hereby Bequeath..."

These words are probably not the ones that you will likely have drafted into your will. However, too often it is the inevitable outcome of a failure to plan or to even secure a second opinion.

You've worked hard to accumulate wealth and preserve it over the years. The last thing you want to do is leave those assets to the government after you die! With proper estate planning you can insure your accumulated assets are distributed to your heirs as intended. Some assets can be transferred to a surviving spouse upon the first death without triggering tax. Upon the death of the second spouse, the estate is subject to taxation and your heirs are often left with significantly less wealth than you intended. Your heirs may find themselves in a position that requires them to sell the assets often at discounted values due to poor timing or market conditions.

For almost two decades Mark J. Strefner, Senior Partner at Infinity Wealth Management, LLC and I have been working with physicians, business owners, executives and their families to help navigate the sometimes difficult waters of financial and estate planning. We are not surprised that there is a disconnect between what people think will happen and what is actually in store for them upon their demise. Far too often it is a debate of liquid versus illiquid estates.

People with liquid estates often assume that their financial assets will be sufficient to pay estate taxes that are due nine months after their death. As a result, these people often feel that life insurance has little to no value. Or they may feel that their age and health may preclude them from qualifying. This is simply not true. Today, with quality field underwriting and a strong knowledge of the marketplace, most people are accepted for life insurance. On the other hand, people with illiquid estates frequently view life insurance as a viable solution. Now the attention turns toward whether the policy is properly structured. Questions like: which company, what type of policy, who should own the policy, who should pay for the policy and who should be the beneficiary are too often overlooked. It may seem simple at first thought, but we have discovered many mistakes in this area. Many times people are not aware that the face value of life insurance gets added to their gross estate if not properly owned. That is why it is so important to find a trusted source to receive good and independent counsel.

Let's look at a simple example of illiquid & liquid estates:

The illiquid estate:

In our example a couple age 60 has a net worth of $12 million. Much of their assets are illiquid. They decide to protect their estate and purchase a $5 million life insurance policy in a properly structured estate planning entity for about $50,000. Upon the death of this couple, the federal and state government assesses a death tax on excess over the exemption amount at a rate of approximately 50%. As it stands today the exemption in 2011 will be dialed back to $1 million per person. In our scenario that means that our couple would be taxed on about $5 million.

Due to the $5 million life insurance policy, their heirs will not have to borrow money against the estate or sell assets, often at fire sale prices, to pay the taxes due. Their heirs will inherit the entire $12 million estate. This is a win-win scenario. The government gets the tax and the heirs get the full $12 million.

The liquid estate:

Now let's assume our couple has $12 millions in liquid assets. Things like cash, treasury bills, municipal bonds, certificate of deposits etc. They feel that they have enough cash so they put off purchasing life insurance. They do not see the value in paying $50,000 for life insurance to protect their estate when it is already protected by their liquid assets.

When this couple dies, the excess over the exemption amount will also be subject to combined Federal and State estate tax at a rate of approximately 50%. In our scenario,
the government would assess approximately $5 million in estate taxes. The heirs have enough cash on hand to pay the taxes, but are left with only $7 million. The liquid couple saved $50,000 only to cost their loved ones $5 million.

Conclusion:

The result is that the illiquid couple left their family the full $12 million while the liquid couple left their family only $7 million. The liquid couple could have easily transferred $50,000 from their savings to pay the premiums on the life insurance policy. Another way to look at it would have been the true opportunity cost of moving $50,000 from savings earning 4% to purchase the life insurance. It would have cost $2,000 per year in interest that the $50,000 would have earned before taxes. This is definitely a win- lose scenario. The government gets the taxes and the heirs get $5 million less than they should have received.

Funding the Estate Tax burden is not something most people like to dwell on too much. Very often it takes less than 1% of the estate to protect the other 99%. And with some quality planning with trusted advisors, getting the government out of your will so your heirs can enjoy all that you worked hard to build will be the end result. Proper planning is the key. The sooner the better!

John D. Straley is a Senior Partner with Infinity Wealth Management, LLC. Securities offered through World Equity Group, Inc. Member of FINRA/SIPC 1650 North Arlington Heights Rd., Suite 100, Arlington Heights, IL 60004.

Infinity Wealth Management is a member of the AMA Insurance Agency's Trusted Source Network. The views expressed herein are those of the author and do not necessarily reflect the views of AMA Insurance Agency, Inc.

June, 2009