Death and taxes are certainties for everyone, including people worth $500 million or more, whose estates are subject to significant taxation when they pass away. While they make extensive and adroit use of various wealth planning strategies and structures to mitigate estate taxes, most opportunities are underutilized.
“Even though family offices have proven capable of helping billionaire clients tackle nearly any challenge that arises, you still can’t ‘take it with you.’" said Rick Flynn, managing partner at FFO and author of "Elite Wealth Planning: Lessons from the Super Rich." "By using life insurance in estate planning, however, super-rich families can more effectively orchestrate the transfer of assets—protecting the family fortune and legacy for future generations.”
It's best for clients to find an advisor who specializes in the area, he said.
“Sourcing life insurance for billionaires, for example, is today the domain of a few high-end specialists," Flynns said. "Since there are only a few ways to secure the levels of coverage needed, policy portfolios tend to look very similar. Therefore, what we look for is an exceptional life insurance expert who can work closely with us to optimize coverage for our exceptionally wealthy clients.”
Preferably, life insurance is only used to pay the estate taxes owed after all the applicable wealth planning has been done. However, in many situations, certain wealth planning strategies aren't available, so wealthy clients must turn to using life insurance.
What is very telling is that many super-rich clients—especially billionaires—are unable to purchase enough life insurance to cover all the estate taxes they owe. The estate tax obligation for someone with $1 billion could approach or exceed $550 million. Meanwhile, the total amount of life insurance across more than 25 carriers, including reinsurers, would not be enough.
Ways for wealthy clients to obtain higher amounts of life insurance include securing family coverage and combining different types of life insurance. “The ability to use private placement life insurance as well as specialty products can be very effective in obtaining hundreds of millions of dollars in additional coverage," said Frank Seneco, president of Seneco & Associates. "At times it is even possible to work directly with reinsurers. The key is how to tie all these pieces together in the context of the super-rich person’s estate plan.”
It is essential to recognize that life insurance is only part of the solution in managing estate tax obligations for the super-rich. All strategies and products need to be reviewed against the needs and capabilities of the family being served to ensure that the life insurance and related wealth planning are deployed optimally.
Russ Alan Prince, president of R.A. Prince & Associates, is a consultant to family offices, the ultra-wealthy and select professionals.