Ch 6 Financial Underwriting: Planning for Personal Needs Flashcards
estate planning
lifelong process dealing w/ accumulation, conservation and distribution of an estate
-acquisition of wealth and estate maintenance, delivery of estate assets upon death to benes
advantages to well planned estate
- maximized wealth
- efficient use of estate capital
- tax savings
- appropriate asset ownership
- assurance estate property will be distributed according to decedent’s wishes
- adequate estate liquidity
estate tax exclusion amount
allows small estates below certain amount to be exempt from estate tax
2020 rate 40% exclusion $11.58M
arguments for estate tax
- assists in redistribution of wealth from rich to poor via govt programs, providing assistance and opportunities not normally available to economically deprived
- provides financial support for American democratic institutions of govt and national programs
- encourages support for charitable giving to reduce taxable estate
arguments against estate tax
- affects society’s most successful
- money and financial resources removed from general economy via estate tax cause job loss
- tax-supported govt institutions generally less effective at promoting economic prosperity than free-market economy
valuing taxable estate
-net worth used as basis to estimate if subject to estate tax
-computed on taxable estate, determined by subtracting certain allowable deductions from gross estate
gross estate
value of all property interests, real or personal, tangible or intangible, of an individual on the date of death to the extent of his interest in the property
exceptions when fair market value is not general rule for asset valuation
- real property, land and permanent attachments, may not always have ready market from which to estimate fair market value. can be valued at higher of highest price available or salvage value
- some real property subject to special use valuation. designed to value property according to its current use, not potential value if it were used for other purposes. ex. family farm fit property for mall
special valuation situations
-real property
-publicly traded stock, corporate bonds
-US govt bonds
-closely held corporation stock not subject to special use valued at adjusted book value method
-life insurance proceeds set aside for benefit of estate or proceeds from policies owned by decedent
fair market value
price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts
-general rule for asset valuation
allowable deductions from gross estate
- allowable debts - mortgage
- funeral expenses
- medical expenses
- administrative expenses
- losses during estate administration (decline in value of asset while estate was being settled)
marital deduction
-property passing to spouse of decedent can be deducted from estate. postpones estate tax till death of surviving spouse.
-survivor joint life insurance to offset impact of estate tax due at second death
pros/cons of marital deduction
-avoid estate tax by passing estate but no guarantee spouse will manage assets wisely
-spouse can remarry and exclude children of decedent
prudent use depends on:
1. value of property rights (power of appointment): right reserved by donor to control who receives property
2. partial interests in property: property owned or controlled by 2 or more people
3. charitable remainder trusts: bene receives income but charity gets property upon death of bene
4. guaranteed annuity interests: charity gets income for term, then property passes to bene
5. split gifts: partial to charity and remainder to bene
opponents to charitable
attempting to replace property in which no longer have interest
proper amount of insurance should reflect needs generated by reduced estate
proponents of charitable
public charity worthy of support by insurance industry
serves to benefit society at large
supplies valuable estate planning tool
estimating estate growth
time and interest
-interest rates fluctuate, base projections on:
1. reasonable rate of return commensurate with avg return on assets in estate
2. type of investments that make up estate
3. adjust to age of estate owner
4. assume some investment income will be consumed and not reinvested
Canadian Income Tax Act
deceased taxpayer is considered to have sold all capital property at fair market value immediately before death. any capital gains realized will be subject to tax on terminal income tax return of deceased
depreciable capital property
value declines over time.
buildings/furniture/machinery
non-depreciable capital property
land, stock, mutual funds
Canada estate taxation
-capital gains tax incurred where fair market value exceeds owner’s adjusted cost basis of property (original cost)
-50% of gain included on deceased’s estate terminal income tax return
-if property worth more than depreciated value, some or all depreciation can be added back to value of property through tax provision, recapture of capital cost allowance
recaptured depreciation
taxable as income on terminal return
ex. vacation home bought for $60K, depreciated value $30K, fair market value $70K. pay tax on $40K difference as if it were regular income
Canadian martial deduction
property rolled over directly to spouse or through spousal trust does not incur capital gains tax until death of second spouse. property held jointly between spouses will pass to remaining survivor owner w/o taxes
citizenship taxation
IRS states: tax is hereby imposed on the transfer of taxable estate of every decedent who is citizen or resident of US. taxed on estate assets worldwide regardless of where assets located
citizen
- all native born, includes children born in US of non-US parents visiting or staying illegally
- naturalized citizens
- citizens living abroad - still liable for estate tax
- individuals w/ multiple citizenship status
- former citizens/expatriates - estate tax for 10 yrs after citizenship is renounced
proof of residency or domicile
- physical presence
- intention to remain in country
situs of estate assets
assets owned by foreign decedents are subject to estate tax even if never visited US and has no residence in US.
ex. land, homes, tangible property, corporate stock, bank accts
Special tax treatment of foreigners
- estate tax exclusion amount for non-resident aliens $60K due when estate transfers US situs assets above $160K
- charitable deduction, US charities only
- no marital deduction for non US spouse
- foreign death tax credits can be applied
income w/ respect of a decedent (IRD)
income earned but did not receive before death. double taxation: estate tax and income tax of decedent or bene
ex. uncollected salaries, wages, bonuses, commissions, vacation pay, sick pay, interest, dividends, uncollected lottery winnings, deferred compensation benefits, outstanding stock dividends, accounts receivable, rents, royalties, unreceived gain from sale of property
-IRD deduction allows bene to deduct that portion of federal estate tax paid on his income tax
-purchase life insurance to offset
trusts
legal arrangement whereby property is held and managed for welfare of bene
-main advantage: competent asset management
-independent taxpayer
-reduces estate tax liabilities
Revocable trust (intervivos) - US
living trust set up before death of grantor
no estate tax savings
grantor liable for income tax due on generated income
assets vulnerable to creditors
grantor in control
Irrevocable trust - US
trust assets removed completely from grantor’s control
no ownership
assets removed from estate to reduce estate size and taxes
income generated taxed to trust
assets not vulnerable to creditors
Irrevocable Life Insurance Trust - US
policy on grantor comprises trust asset
removed from estate of grantor and bene
bene/spouse receives death benefit during lifetime
can loan money to estate to pay estate taxes
at death of bene, assets pass to children w/o tax consequences.
rules against perpetuities
private trusts can exist for period of time not to exceed 21 years after creation of trust
charitable trust - US
irrevocable
assets managed on behalf of charity
policy on grantor can be asset of trust
not subject to rules against perpetuities
charitable remainder trust
type of charitable trust
% of assets paid out annually to non-charitable bene
policy can be purchased on grantor w/ trust’s annual payment
when grantor dies, charity receives assets, policy proceeds given to non-charitable policy bene
Generation skipping trusts - US
multi-generational planning allows for use of estate assets by grandchildren and further generations
-assets equal to GST exemption amount $15K/donee/yr
-assets can purchase policy on grantor
-policy proceeds fund trust at grantor death
-subject to rule against perpetuities
Dynasty Trust - US
private trust not subject to rule against perpetuities
-funded like GST w/ exemption amount
-purchase and benefit from policy on grantor
-not available in all states
Special Needs trust - US
irrevocable, supplemental needs trust
-funded by assets or income belonging to special needs person or someone other
-benefits received from trust do not replace bene’s govt benefits nor disqualify from qualifying for such benefits
Spousal limited access trust - US
irrevocable
allows grantor control of assets for heirs/benes
provides access to policy’s CV for variety of supplemental needs
outside taxable estate
Testamentary Trust - US
irrevocable contained in will
upon grantor’s death
can be more than 1 trust per will
requires probate
Inter vivos trust - Canada
set up and funded during lifetime of grantor
trust pays taxes on retained earnings at highest rate
subject to 21 year rule, except when trust purchases life insurance
Spousal trust - canada
inter vivos
ultimate benes often offspring of previous marriage
joint life insurance to offset taxes due upon death of second spouse
alter-ego trust - canada
inter vivos
65 or older
1 grantor
income given to grantor until death, assets go to bene
life insurance may be needed by contig. bene to pay death taxes
joint partner trust - canada
inter vivos, age 65 or older
1 grantor
used by spouses, common law, same sex couples
income given to grantor until death, assets inherited by contig bene
policy may be needed to pay death taxes
testamentary trust - canada
used for minors or permanently disabled children
activated at time of grantor death
receives favorable tax treatment
wholly or partially funded w/ life insurance
Family limited partnership - US
modified business partnerships comprised solely of family members
general partners - responsible for daily management of partnership, often elderly who contribute property
limited partners - play more passive role and have no daily management responsibilities, often children, younger members of family
-also used by same sex couples
-protection from creditors
separate from estate
justifiable needs for elderly financial underwriting
estate transfer
continuing income
funds for final expenses
stock repurchase
management/protection of accumulated assets
changing investment from growth to quality
long term care needs
concept of attainability
determine if desired objective can be accomplished in remaining normal life span of elderly PI
estate creation
use of insurance as sole means of providing an inheritance received by heirs where none would otherwise exist or using insurance to allow heirs to inherit considerably more than would normally pass to them
premium financing
obtaining loan to finance policy, useful for those w/ substantial assets but little liquid cash
STOLI or IOLI
considerations for elderly financial UW
appropriateness of plan
PI’s health status
medical problems affecting financial objectives
medical expenses impacting ability to pay premiums
