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A second to die life insurance policy, also known as survivorship life, is a joint life policy that covers two lives. Normally it covers a husband and wife or two business owners with common financial interests in a business. This type of policy is primarily used in estate planning situations – where an affluent couple would rather leave their wealth to their children and not to the IRS.
Who Needs A Second To Die Policy?
Estate Planning Basics
Let’s start with the basics of estate planning. Estate planning is a strategy to transfer all or most of your wealth to your children or your heirs when you die. A person’s estate consists of everything they own. Real estate, investments, retirement accounts, fine art, jewelry and so on.
The simple formula used to calculate one’s total net worth is: Assets – Liabilities = Total Net worth.
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If your net worth is more than 10 Million dollars, you have an estate planning problem and a second to die insurance policy is one way to help solve the problem.
Most people who have created wealth, want to keep their wealth in their family and when they die, pass their fortune to their family or heirs. But some people fail to make a plan to pass their wealth down to the next generation. For those who fail to plan, the IRS has another plan.
The IRS wants to tax that wealth and take all or part of it. Federal estate tax rates start at 40% and can go upwards to 80% and this does not include your state estate taxes which could be an additional 10 – 20%. This is called distribution of wealth which came about in the early 1900’s to keep the mega rich folks like the Vanderbilts, the Rockefellers, the JP Morgans and others from keeping most of the country’s wealth in their families.
Since then the transfer of wealth has become creative for the affluent to make certain their fortunes are passed down to generation after generation.
“The estate of Prince, the rock star could lose
more than $150 million to the IRS”
This is estate planning and consists of transferring assets ie: real estate and using life insurance as leverage to pay estate taxes which are levied by the IRS.
There are numerous examples of rich and famous people such as Elvis and Michael Jackson just to name a few, who failed to plan their estate. Most notable recently is Prince, the rock star, who’s estate was worth more than $300 million dollars. The IRS stands to grab 45% of everything over his $5.4-million-dollar exemption. State taxes will take another 16% leaving his heirs with less than 50% of Prince’s net worth.
For those who don’t plan to protect their assets, the IRS will get what they want. For those who make an estate plan to pass their wealth to their heirs, the IRS cannot get their hands on your money.
The Federal Estate Tax Exemption
Sometimes referred to a Credit Shelter Trust or Bypass Trust, allows people to transfer assets and take advantage of the federal estate tax exemption. Every American has an estate tax exemption. Currently for 2016 the exemption is $5.4 million per person. For married couples the exemption is $10.8 million. For married couples with a net worth over $10 million, they have an estate planning problem.
The credit shelter trust may be funded during the lifetime of each spouse, or at the time of death of the first spouse to die. Any asset such as a home, investment property or stock portfolio can be transferred to the surviving spouse’s trust reducing the family estate tax obligations up to the Federal tax exemption of 5.4 million dollars (2016).
A surviving spouse may be given restrictive access and control over the assets in the credit shelter trust. The trust can provide income that is earned by the trust to the surviving spouse and withdrawing funds to provide normal living expenses such as health, maintenance support, or education.
Life Insurance As Estate Planning Leverage
One of the most common and easiest ways for people to solve their estate planning problem is by using life insurance. Estate planning attorneys often recommend second to die life insurance policies to create liquidity, a legacy and reduce estate tax obligations.
If structured properly, life insurance can reduce or totally eliminate estate taxes that are due. For most affluent couples, Second to Die Life Insurance is what is used in estate planning situations because the policy pays on the second death when the IRS sends the estate tax bill.
A married couple can leave their entire estate to the surviving spouse without any tax consequences what so ever. This is called the unlimited marital deduction. But when the second spouse dies, the assets are taxed and they can either go to the IRS or to the family heirs. This is where life insurance is used as leverage.
Who Owns The Policy?
In most every estate planning case, the husband and wife are the insured and the policy is owned by a trust – a Irrevocable Life Insurance Trust (ILIT). For instance: “The John and Mary Doe Irrevocable Life Insurance Trust dated November 11, 2016, John Doe Jr. and Jane Doe, trustees.”
Irrevocable means the assets are given away and cannot be taken back. Thus the asset is not included in the estate. If the couple has any “incidences of ownership” in the policy, it will be included in the estate. Important: The trust must be set up before the death of the second spouse.
Who Pays The Insurance Premium?
Typically, the life insurance premiums are paid by the parents in the form of annual gifts (up to $14,000 per person – 2016) to the Irrevocable Life Insurance Trust. The “gifts” are normally paid to the trustee(s) who then pay the trust for the annual insurance premium. It is not unusual for the children to be trustees of the trust but it could be a bank, an attorney or another custodian.
The payments are made through a Crummey Letter which states that a gift has been made to the trust. A Crummey Letter is a very important part of validating the authenticity of the trust and must be sent each year to the trustee, otherwise the validity or the trust could be questioned.
Advantages of 2nd to Die Life Insurance
1. Provides Estate Liquidity: One of the most important advantages of a second to die policy for estate planning is that it creates immediate cash to pay off taxes due at the second death. It also creates liquidity to pay off other expenses such as administration charges, probate fees and so on
2. Affordable: The policy premium is based on two lives and since the policy doesn’t pay until the second death, a second to die policy is cheaper compared to individual life policies.
3. Preserve a Family Business: The policy’s death benefit can help having a family member not have to sell business assets to pay expenses, loans or estate taxes
4. Care for a Loved One with Special Needs: A policy can help fund a strategy to provide for continued care or housing of a child or loved on with special needs.
Second To Die Life Insurance Quotes
Just like getting a quote for any life insurance policy, you should seek the advice of an agent or agency that is familiar with joint life insurance and estate planning. An independent agent can search the marketplace and get quotes from several insurance companies.
Compared to finding quotes on a traditional policy, second to die life insurance quotes can be a bit more difficult since many agents do not specialize in this field. But our agency can help you with every step of the process from gathering quotes to submitting in an application.
The application process for a second-to-die insurance policy is the same as if you would buy an individual life insurance policy for your wife or a policy for your husband except this type of policy covers two lives (usually a husband and wife).
An application is completed and signed by the two lives who are being insured and the insurance company will require a medical exam for you and your spouse/partner. They will also require medical records from your personal physician, motor vehicle reports, trust documents and a financial statement. Once the underwriting process is reviewed a policy will be issued.
Final Thoughts
Please note: Estate Planning is Complicated. It is not our intention to dispense any type of legal advice and you should always consult your attorney before setting up your estate plan. We are available to work with your attorney if you require advice on setting up a life insurance trust or need help getting a policy. Just contact us at: 914-633-1717
