#insuranceplanning

If you are in the minority of Americans who are contemplating purchasing another home as a rental property or already own a rental property, you are probably doing fairly well in life to be in that position. Without running the numbers on your financial situation, the main question that we hope that you have the answer to is, “What happens to me financially if someone sues me?”. If your answer is anything other than “My household and personal assets are protected and I will be fine”, you hold your financial plan under the microscope and find out where the gaps in your financial plan are. Asset protection strategies like purchasing an umbrella insurance policy or putting your current or future rental property(ies) in an Limited Liability Company (LLC) can help fill in those holes in your financial plan. I’m sure that you worked hard to be in the position financially you are in today and would hate to see your success derailed by a car accident that was your fault or a tenant slipped and fell in your rental home and sued for damages. Let’s walk through a summary of how an umbrella policy and an LLC are used and how they can benefit you.

Umbrella Insurance

An umbrella policy is a type of insurance that is sold in increments of $1 million of coverage and is relatively inexpensive at around $20-40 per month per $1 million of coverage. If we take the example of a car accident that was your fault, the person you hit may not have good health insurance and may require substantial medical bills. If your auto insurance coverage is only good for $500,000, you are personally on the hook for the remainder. Think of auto insurance as a bucket, the money needed to pay the injured person’s medical bills as water, and umbrella insurance as an upside-down umbrella underneath the bucket. Assume that the total cost to make the injured party whole is $750,000. Let’s assume that your auto insurance coverage is only good for $500,000 and in one scenario you have a $1 million umbrella insurance policy and in the other scenario, you do not have umbrella insurance. The diagram below illustrates what happens to you in each case.

I assume that if this was you, you would rather be the person on the left who is dry, thanks to the umbrella policy stepping in and paying the additional $250,000 than having to come out of pocket personally for the $250,000. The person on the right may not have $250,000 in cash to be able to account for this cost and may have to sell stocks in investment accounts, take out a personal loan, or sell a rental property to cover the cost and could end up owing more than $250,000 in the long run due to taxes or loan repayments. This can be costly to your long-term financial goals and could have been resolved with a relatively inexpensive insurance policy.

Limited Liability Company (LLC)

A Limited Liability Company (LLC) is an entity that you can establish to allow you to have your rental property(ies) transferred to the LLC to separate your personal property from your rental property(ies). Assume that you have a tenant who slips and falls down your staircase because you didn’t repair the railing after an inspection. The tenant can then sue you for negligence. If that tenant decides to sue you and you have an LLC set up, the tenant is only suing the LLC and cannot go after your personal property. If you do not have an LLC set up, the tenant can also go after your personal property.

Another nice thing about umbrella insurance is that it can also be used to help cover legal damages incurred from a lawsuit at a rental property up to the coverage limits of the umbrella policy. Unlike umbrella insurance, setting up an LLC or multiple LLCs can be expensive to establish and administer. In California, there is an annual $800 fee that must be paid each year until you cancel your LLC. We also recommend that you go to a reputable attorney to establish the LLC and attorney fees can range from a few hundred dollars to a few thousand dollars. Properties owned outside your state of domicile might also require a separate LLC for each state you own real estate in.

Summary

The exact amount of umbrella coverage and whether or not an LLC is appropriate in your situation depends on your unique financial situation and if you are unsure of how to implement these asset protection strategies, our team of CFP® professionals at BFSG can diagnose your financial plan to help determine what asset protection strategies are appropriate for you. Please feel free to reach out to us at financialplanning@bfsg.com or give us a call at 714-282-1566.

Sources:

1. https://www.bankrate.com/insurance/homeowners-insurance/home-ownership-statistics/#stats
2. https://www.ace.aaa.com/insurance/personal-umbrella-insurance.html
3. https://www.investopedia.com/articles/investing/121015/real-estate-trust-or-llc-helping-landlords-choose.asp

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

(This is part 2 of a four-part estate planning series)

In our previous installment in this series, we discussed what Estate and Gift Taxes are and why they exist.  In this installment, we will discuss strategies that can help reduce your overall income tax burden from the estate tax. 

The most logical way to lower your taxable estate is to get assets out of your estate while you are alive so that they aren’t there when you pass for estate tax purposes. As mentioned in the previous blog, you can’t just gift assets away since you would be lowering your lifetime federal estate tax exemption by the amount you gifted over the annual exclusion of $16,000 per year (or $32,000 per year for married couples) and call it an effective strategy. Some strategies allow you to potentially get millions out of your estate and avoid future estate and gift tax liability, all while maintaining your lifetime federal estate tax exemption. If you have concerns regarding how these strategies could affect certain estate and gift planning transactions in which you intend to engage or have previously engaged, please contact your tax advisor and estate planning attorney to further discuss your estate and gift planning inquiries. Our firm is happy to work with you and your estate planning attorney on your unique situation and we can work together to help you achieve your estate planning goals.

Two strategies that I would like to discuss today are the ILIT (Irrevocable Life Insurance Trust) and the QPRT (Qualified Personal Residence Trust).

Irrevocable Life Insurance Trust

The Irrevocable Life Insurance Trust (ILIT) is where you set up a trust that will own and be the beneficiary of a life insurance policy on the grantor (the person or persons that created this trust). The trustee(s) (the person or persons that are given the legal authority to administer the trust as written) can be anyone except the grantor. An ILIT is irrevocable, meaning it cannot be changed after it has been executed. The ILIT allows the life insurance policy to be removed from the estate and the death benefit to be paid out to the beneficiaries directly, avoiding estate taxes. One important thing to note, is that the grantors that are insured by the life insurance policy must live at least 3 years past the funding of the ILIT, otherwise the life insurance policy will still be part of the estate. Therefore, many life insurance policies that are in a married couple’s ILIT are structured as a second-to-die policy, which means that the death benefit would only pay out upon the surviving spouse’s passing. Many life insurance companies that offer second-to-die policies also include a rider (an additional feature that is added to the policy, normally with an additional cost) to pay out an additional death benefit in the first three years of the policy. This is so that if the policy were to be included in the estate, the policy would also pay off the estate taxes due for having it be included in the estate if the grantor or grantors pass during the first three years of the ILIT.

ILIT example:  The Jones Family has an estate of $50,000,000 and they are concerned about their estate tax liability that their heirs would have to deal with at the time of their passing.  Therefore, Mr. and Mrs. Jones set up an ILIT and purchase a life insurance policy for $8 million and start paying annual premiums on the policy. Mr. Jones passes away 3 years later, while Mrs. Jones passes away 6 years later. The policy would pay out the death benefit of $8,000,000 after Mrs. Jones’ passing directly to Mr. and Mrs. Jones’ heirs tax-free. Their heirs would also inherit an estate of $42,000,000 that would be subject to the estate tax.  If an ILIT was not used, the heirs would instead inherit an estate of $50,000,000 subject to estate taxes.

Qualified Personal Residence Trust

A Qualified Personal Residence Trust (QPRT) is a type of irrevocable trust that allows you to move up to two personal residences (a primary residence and vacation home or secondary residence, or a fractional interest in each) out of your estate. The catch is that you would need to gift the assets into the QPRT to the named beneficiary(ies) at the end of the time frame established by the QPRT (usually 10 years). If the QPRT is properly structured and the time constraint is met, then all appreciation on the real estate from the date of the transfer to the QPRT is considered tax-free and the grantors of the QPRT will pay gift tax on the original value of the property at the start of the QPRT. 

Basics of a QPRT

QPRT example:  Mr. and Mrs. Smith have an estate worth $35 million and have a primary residence worth $3 million, a vacation home worth $2 million, and a secondary residence worth $1 million. The Smiths set up a QPRT for a term of 10 years and have their kids as the beneficiaries of the QPRT. This would allow the Smiths to continue to live in and use the properties for 10 years but would give up ownership of the property after the 10 years are up. They then gift their primary residence and vacation home to the QPRT. After 10 years the primary residence is worth $6 million, and the vacation home is worth $4 million. These assets are out of the estate and their estate is now worth $30,000,000.  The Smiths pay a gift tax on $5,000,000 (the gift tax is on the original value of the property at the start of the QPRT). The Smiths instead of getting their checkbook out and paying the gift tax, decide to instead utilize their lifetime federal estate tax exemption, combined with the $32,000 gift splitting election, which would lower their federal estate tax exemption from $24,120,000 to $19,152,000. 

For the next installment, I would like to discuss how you can minimize your estate tax to have your heirs enjoy the appreciated value of your asset, while being able to have some benefits of your own during your lifetime.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Henry VanBuskirk, CFP®, Wealth Manager

A goal that many Americans have when approaching retirement is finding that “forever home” to enjoy their golden years in. When a loved one does pass away, they typically want to pass away in their own home. One of the main expenses that occurs during retirement is healthcare and this is typically an expense that increases with age. 

A big culprit of this increasing expense is the need for long-term care coverage that is generally not accounted for in a personal financial plan. Many Americans believe that Medicare can cover this expense, however this is not the case. Statistically, you are likely to need Long-Term Care Insurance at some point in your life. Not accounting for this type of coverage can mean that your “forever home” could turn into a “temporary home”, that could mean you would be spending your “twilight years” in a nursing home. Fortunately, there are ways to help mitigate or eliminate this threat from your financial plan so that you can live out your golden years in your own home.

What can Long-Term Care Insurance cover? Long-Term Care Insurance can help cover qualified medical expenses that would be incurred by a person who is not able to do at least 2 of the 6 activities of daily living (ADLs) which include:

1. Bathing
2. Dressing
3. Grooming
4. Toileting
5. Transferring from bed to chair
6. Feeding oneself

You can imagine that if you aren’t able to do at least 2 of those 6 items, that you would need a healthcare worker or family member to help you with most everything for the remainder of your life. If you have a family member that would be willing to do those tasks for the remainder of your life, then more power to that family member. Even if you have a family member, you could still run the risk of having that family member who is 5’2” and 120 pounds, trying to help someone who is 6’4” and 300 pounds and not being even able do those tasks. If you would rather pay someone to do those tasks, then the cost for staying in your own home is not cheap. In 2030, the expected monthly cost is $7,986 for in-home care for an average American.

Two options that Americans have so that they can stay in their home even when a long-term care need arises are:

1. Have enough money saved up so that this monthly cost wouldn’t be a concern. However, a good majority of people cannot afford an extra monthly expense of $7,986 for years. This would be considered “Self-Insuring”. If you can afford it, great. If not, you’ll have to sell personal assets to meet this need.
2. Buy a long-term care insurance policy to cover some or all the cost that would arise during a long-term care need.
   • If you cannot do at least 2 of the 6 activities of daily living (as confirmed by your physician), then you may be able to receive a tax-free benefit from the policy for a stated number of years.
   • The payments would be received in the form of a reimbursement or an indemnity. A reimbursement policy would only pay out the actual cost of the care, while an indemnity policy would pay a stated maximum daily or monthly benefit.

Many readers would believe that Option 2 sounds good, but one shouldn’t be quick to jump to conclusions. Purchasing long-term care insurance can be expensive, usually costing $8,000 – $12,000 per year for adequate coverage. That cost generally also increases during the life of the policy and there is a chance that you’ll never need long-term care anyway. 

Our team is available to discuss this in further depth if you have any questions and to evaluate if long-term care insurance makes sense for your current situation.

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy (including those undertaken or recommended by Company), will be profitable or equal any historical performance level(s). Please see important disclosure information here.

By:  Paul Horn, CFP®, CPWA®, Senior Financial Planner

At one point in my professional career, I sold insurance policies. I always joked that though I was raised a gentleman, I had to ask women the two things you are never supposed to ask, “How old are you?” and “What is your weight?” Luckily, we do not sell insurance at BFSG, which has saved me from having more of these awkward conversations.

When insurance makes sense:

Our clients’ insurance needs can vary from life, disability, long-term care, umbrella liability, medical, or even to business insurance. Insurance at its core tries to make you “whole” when a catastrophic event occurs. Simply put, when something major in life happens, insurance is supposed to provide enough benefit for the victim to maintain the same standard of living they enjoyed before the unfotunate event occurred.

When to avoid insurance:

Insurance products are not designed to be investment products. They are designed to solve a problem. Unfortunately, unscrupulous salesman pitch insurance as an excellent investment vehicle for retirement. If anyone pitches insurance as an investment, you should see nothing but red flags.

What to consider when looking at insurance:

Every insurance discussion is best held in the context of one’s comprehensive financial plan. Any discussion should be framed around two very simple questions:

If something happens, can you afford to pay the bill?

As we already stated, the idea of insurance is to make you “whole” if a catastrophe occurs. A very common example is, if a spouse dies prematurely, can the surviving spouse and kids maintain the same standard of living? If you do not have enough assets to handle the circumstances on your own, then insurance is needed.

If you do have sufficient assets, then I like to ask a second question:

If something happens, do you want to pay the bill or do you want someone else to pay the bill?

There are times where people may have enough assets but may still want to have insurance. A common example of this would be long-term care. If a spouse gets sick they may have enough assets to cover the costs for a while, but what happens if the need is longer than anticipated? In these situations, it can be beneficial to have insurance in case it is ever needed, and to provide our clients peace of mind and more assets for their heirs.

If you have an insurance-related question, please do not hesitate to ask for our opinion to see how we may be able to help!

Disclosure: BFSG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to BFSG’s website or blog or incorporated herein and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please see important disclosure information here.