When advisors work with married clients on estate planning, the product of choice is often a survivorship life insurance policy. The contract offers coverage on both lives at a lower cost than owning two separate policies.
And if estate taxes are the reason for the planning, survivorship policies pay the proceeds when they are needed–at the death of the second individual. However, a single life policy lends itself to other estate planning situations of married clients.
Paying estate taxes at the first death
Suppose your clients’ estate plan calls for the payment of estate taxes upon the death of the first spouse because this is the most cost-efficient tactic. Using this strategy, your clients will create two trusts for the distribution of their estate: A family trust and a marital exemption trust.
Instead of funding the family trust with only the maximum allowable estate tax credit ($2 million in 2007), the will provides that any residual estate assets above the estate tax exemption goes to the family trust, too. The estate pays estate taxes due on assets in the family trust over the exemption amount. Additionally, the trustee may be able to leverage the family trust’s assets by purchasing a life insurance policy on the surviving spouse to generate an even larger inheritance for heirs.
Paying estate taxes on the death of the first spouse is not discussed routinely in estate planning but can be advantageous to couples with specific goals. Spouses may use this tactic, for example, to remove a high growth asset from their estate as soon as possible. If this asset is transferred to heirs in a family trust at the first death, then the surviving spouse will not have the high growth asset in his or her estate.
A smaller estate tax bill may result for the surviving spouse, depending on how long he or she lives. Because it is not known which spouse will die first, the strategy requires two single life policies, one on each spouse.
The technique in action
To illustrate this planning technique, assume your clients have a $4 million estate. The husband is the sole owner of a fast growing business valued at $3 million. His daughter is engrossed in the business with him and would like to take it over.
The father has no intention of transferring ownership during his lifetime–he wants to work until he dies. If the couple transfers the business to the daughter at the death of the father, then the growth of the business will occur in the next generation.
The wife has not been involved in the business so there is no need for her to retain ownership. This strategy gives the business to the person who is keeping it going.