Passing the Torch: Life Insurance in your Estate Plan

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M: Welcome to our Wealth Advisory Series, where we discuss issues relating to Life and Legacy. My name is Mike and I am a wealth advisor with JPM Private bank based in Singapore.

S: … and I am Stan, and I work as wealth advisor with JPM Private Bank based in France.

M: Today we are going to spend some time talking about life insurance, and how it can be used as a useful succession planning and wealth planning tool. In general, insurance can be used as a tax planning tool or a solution to compliment the client’s succession and liquidity needs –the ultimate solutions are usually tailored-made plans adapted to each client’s place of residence, specific asset situation, family context and individual preferences. 

So Stan, I understand that in European jurisdictions, for example, it is very common to use insurance solutions as part of succession planning strategies. How does it work there?

S: Exactly Mike. Each country typically has different rules regarding life-insurance from a legal or tax standpoint, which explains why life insurance is widely used in some countries and not at all in others.

Some countries have “forced heirship” rules, which essentially mandate what percentage of a estate should be passed to certain family members. In those countries, life insurance provides clients with additional flexibility to decide who will receive assets and in what amount.

For example, one of our clients had given his 4 children his business, much of his real estate and his art collection. However, he wanted a significant portion of his fortune, around 30%, to be donated to various charities upon his death. Thanks to life insurance, he was able to transmit these sums to the foundations of his choice. In a conventional will, those donations will have been capped at 25% of the total value of the estate, as per French laws.

M: That’s very interesting, Stan! I’m sure our listeners are wondering the tax planning benefits of insurance in these contexts. Could you tell us a little bit about it?

S: Absolutely. Another reason that some clients in Europe use life insurance is to optimize tax burdens.

In France, for example, life insurance is a very effective tool in terms of alleviating income and inheritance taxes. It is a real capitalization wrapper. In a nutshell, there are no income tax obligations for as long as the policy holder does not redeem the policy. In the event of death, the gains achieved throughout the live of the policy are exempt from income tax—for good. The amounts remitted to beneficiaries are subject to lower taxation than ordinary inheritance tax.

I often think back to this client who wanted to leave some assets to the person who took care of him for the last 20 years of his life. With a will, the legacy would have been taxed at 60% because she is not a family member! With life insurance, the inheritance tax was not more than 20%. I mean… there’s quite a difference!

M: Very: different, indeed! Another important benefit of life insurance is to fund the liquidity needs of the family after a client has passed away. Some of the most frequent expenses are related to:

*…paying for any estate duty or taxes that may be triggered when the asset owner passes away

*…covering any outstanding liabilities or loans the insured may have,

*… or even to ensuring that any family needs for liquidity are covered, particularly if the insured does not have other liquid assets, or such assets will not be readily available.

S: Yes. And, to expand on that point, the deceased client may have illiquid assets, like a privately owned operating company or real estate, which may be subject to significant estate or inheritance taxes. Rather than obligating the family to sell these assets in a rushed manner, or to dip into the liquid assets that the family has, the proceeds of life insurance can be utilized to cover these liabilities. That way, the “legacy assets” of the family may be preserved. In addition, the tax treatment of the insurance proceeds may be favorable—if structured properly. 

Clients should always discuss insurance needs with their legal and tax advisors together with licensed insurance brokers to ensure that they purchase the a type of insurance product that can meet their specific needs.

M: Life insurance also may be used to fund a specific inheritance, such as establishing a philanthropic legacy or caring for the special needs of a loved one, without otherwise reducing the inheritance of other family members. For example, I have a client who wanted to fund up to 3 charities after his lifetime. He wanted to provide each charity with USD20 million dollars of capital which each charity can then use to generate income for future needs and distributions. Instead of setting aside USD60 million in his estate, the client decided to buy an insurance policy with a death benefit of USD60 million instead. He worked with us on how to pay for the policy using the annual income of his portfolio. To allow his family to continue this legacy, he also established that the trust fund for his children and future generations would continue contributing an annual share to the same charities. This allows him to cultivate a culture of giving within his family.

S: Life insurance also is used to equalize inheritances among children. I remember this family of two children where only the oldest was ready to take over the family business, the second being more of an artist. The father wanted to pass on to his eldest a clear majority in the business, to allow him to run it alone and effectively. Thanks to life insurance, he was able to compensate his second son in a different way, while giving him a minority share of the company.

M: Another use of life insurance in the context of a family business is to provide funding to enable family members to exit from a family business while receiving a fair value for it. As an example, a family owned-business purchased life insurance on the life of the key family member. When he died, the three children who inherited the business did not agree on the direction for the business, and one child wanted to be cashed out. The liquidity from the insurance policy enabled this exit without the other two children having to scramble to purchase the shares from the third sibling.

S: Mike, you also mentioned that liquidity planning is also important to Asian clients. Can you share any example with us?

M: Sure, in fact recently I worked on a case with a group of founders of a major listed company in Hong Kong. These founders are based in China, and a large majority of their assets are shares of the company their started. They want to continue holding the shares as part of their family assets in the long term. However, they are concerned that if China introduces estate tax in the future, they may find a significant part of their assets depleted to pay for the taxes. They also want to leave a specific legacy for their parents and their alma mater. As such, an insurance solution can provide for their needs. In the end, each of them is looking for an insurance coverage of around USD30 million each, after we referred them to our insurance broker partners at the client’s request.

From your sharing Stan, it would seem that these tax positions will depend on the tax rules and legislation in each country. I guess whether it works in your jurisdiction is something which you should discuss with your own advisors. At JPM, our wealth advisors can facilitate this discussion for you and can also share our experiences in dealing with clients and their needs in different situations.

S: And that is it for our session today. Thank you for joining us. Your Wealth Advisors are here to engage with you and your family. We look forward to hearing from you.

The statements, views, and opinions that will be expressed during the event are those of the presenters and are not endorsed by, nor do they reflect the views or positions of, JPMorgan Chase Bank, N.A. or any of its affiliates. JPMorgan Chase Bank, N.A. or any of its affiliates are not liable for decisions made or actions taken in reliance on any of the information covered during the event. Please consult with your personal tax advisor on all tax-related matters.

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