The unlimited marital deduction is good news. It lets you defer estate taxes until both you and your spouse have died. However, that still leaves a problem. Within nine months of the second spouse's death your heirs have to pay an estate tax that can add up to 50 percent or more of their inheritance. If your estate's assets are not liquid but in property like real estate or a family business, there may be little or no cash to pay those taxes. And this cash shortage can lead to the forced sale of assets at greatly reduced prices.
Americans increasingly are turning to survivor life insurance, which eliminates the problem by providing a benefit only after both spouses have died.
There's no such thing as a riskless society, but survivor life insurance goes a long way toward reducing the risk in estate planning. The survivor life policy ensures that the cash will be there when it is needed. It was introduced less than a decade ago, says the American Council of Life Insurance.
"Because the policy pays a benefit only after both spouses have died, the premiums can be less than half the cost of a single life policy," says Robert Stuchiner, an executive of Mayer & Meyer Associates, a large New York insurance and estate-planning firm. "The cost of the policy can be as little as 10 percent of the benefit that is paid -- leverage that is one of the great attractions of survivor life insurance in estate planning."
For example, a couple in their mid-50s could purchase a $1 million survivor life policy with an annual vanishing premium of $7,000. Based on current dividend projections the premium would be paid only for the next 14 years. After both spouses have died, which the actuaries expect to be about 30 years, the insurance company would pay the $1 million. The death benefit under this or any life insurance policy is paid free of income taxes and, if properly structured, can escape estate taxes as well. The result is that this couple would have had to invest the premiums at an annual interest rate of 14 percent compounded over 30 years to equal the performance of the survivor life policy, according to the calculations of Mayer & Meyer Associates.
Due to the low cost, their value in estate planning and the favorable tax treatment accorded life insurance, these policies are becoming more and more popular. The American Bar Association recently published instructions for estate lawyers to help them evaluate individual policies. With more than $7 trillion in the hands of senior citizens, the market is huge and the insurance industry has developed a broad range of policies to tap it.
"With the newest policies, the premiums can be tailored to fit most budgets (though policies with lower premiums may hold the risk of higher premiums or reduced benefits later on). The benefits can be increased or decreased as the individual estate tax needs change, and the policy can even be split into two separate policies if the spouses divorce," Stuchiner points out.
"Survivor life policies also are used for estate equalization and charitable gifts," he says. "In situations involving estate equalization, a valued asset such as the family home or business may have been left to one child and a survivor life policy of equal value is left to another child."
The experts agree that buying a survivor life policy is a major decision and a complex one. Here are some suggestions from Mayer & Meyer Associates:
* Know the company. Look for a highly rated insurance carrier. The leading rating services of life insurance companies are A.M. Best, Moody's and Standard & Poors. All review a carrier's financial stability.
* Deal only with an agent you know and trust. Ask your insurance agent about these ratings. Further, the agent should explain the factors that could affect the policy and lead to performance less favorable than illustrated in the sales proposal.
* Shop around and ask to see the variety of policies on the market.
"With an exposure to the various survivor life policy designs, an understanding of how the policies work and a properly conceived estate plan, you will be able to pass on your estate to your children without it being diminished by taxes," says Stuchiner.
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