By Pieter Kark and Ken Yap
While asleep, Ginny dreamt many dreams, but the one she remembered when she awoke was a strange one: It was about life insurance. Wait… No… It was actually about leaving her home, savings and self-storage business to her daughter and granddaughter, and her fear the IRS would take too much of everything.
The storage business Ginny had started with a partner was beginning to grow faster and bigger than either had expected. Just a few months before, her daughter had given birth to a long-awaited granddaughter, the apple of Ginny’s eye. Fortunately, Ginny had lived long enough and traveled far enough to know that if she didn’t have a will and estate in good financial order, the financial success she worked so hard to achieve might never make it into little Cassie’s hands.
The nightmarish part of Ginny’s dream was not the fact of her demise, but the possibility that the IRS might take so much of her estate there would be nothing left. Also, though she had life insurance to offset the estate taxes, it wasn’t enough to cover the widening expanse of the business. In reality, even at its present rate of growth, the storage facility could break more than a million and a quarter in revenue in a couple of years, maybe sooner. If life insurance pushed her worth above a million and a half, the IRS might take 40 to 50 percent.
Ginny woke in a cold sweat and called her financial advisor, who told her the answer was simple: They would purchase some life insurance now and look at the business projections. Then they would set up an irrevocable trust that would buy her life insurance once her business and estate were big enough to make it worthwhile to do so.
“Irrevocable,” asked Ginny, “as in I can’t change it?”
“That’s why we need to talk in detail,” said her advisor, insisting he would give her materials to consider in building a good estate plan.
As it turns out, the final trust for the life insurance has to be irrevocable, but doesn’t have to tie up all of Ginny’s resources. If the insurance is enough to handle her estate taxes and other expenses, the IRS won’t include it when it adds up her estate. Of course, she’ll need to put in gifts of cash each year so the trustee can pay the premiums, but Ginny can pay for that from the profits of her business.
In addition, if Ginny leaves clear instructions, the trustee will pay the IRS and any other necessities out of the trust, and her family can inherit the estate without having to sell it for taxes. Ginny doesn’t need the trust right now, but she’ll need to have it in place when her storage business approaches the right size. Meanwhile, she has time to think things through and make a wise set of plans. No more nightmares!
If Ginny’s story sounds familiar, perhaps you should consider whether “to trust or not to trust” your estate plan with life insurance. And as with any important financial decision, consult a reputable advisor.
Pieter Kark was educated in England and Massachusetts and has worked as a teacher for nearly 40 years. He has written extensively on medical, scientific and ethical matters and currently writes creative nonfiction. Last winter, he closed his neurology practice to move to San Jose, Calif., and collaborate on a book about healthcare with his wife. He is also a licensed Avatar Master (www.avatarepc.com). Mr. Kark can be reached at firstname.lastname@example.org.
Ken Yap is a registered representative at World Group Securities and an associate at World Financial Group. He shows self-storage business owners and professionals how to potentially pay less taxes, plan for retirement with tax-deductible dollars, transfer ownerships, and protect the future of their companies. For more information, call 408.977.3408; e-mail kenyap@sbcglobal.