Let’s take a look at a special piece of property you might want to consider buying. Consider making this proposition to your banker. Benjamin (Woody) Woodson made the proposal some years ago.
I am interested in buying a piece of property: a vacant lot. He told the Banker, “This property is well situated and I am virtually certain the value will rise. I don’t particularly need income right now, so bare land works for me. The price is about $28,000. I don’t want to lose money on the deal so I am asking the bank to work with me.
I would like a written guarantee of the following:
1) Guarantee the property will be worth $100,000 in 35 years, at my age 65 and the bank will buy it from me at that time and at that price.
2) I am prepared to take a little shrinkage in the value within the next few years, after all it is a long term investment. However I want a guarantee that starting in the 3-5th year the property will have a market value proportionate to the $100,000 that it will be worth in 35 years, and you will buy it back any time I wish at the stated value, increasing annually.
3) I want the bank to guarantee to my family that should I die any time after I sign the agreement, the bank will guarantee the $100,000 value free of income tax to my family, even if I die the day after the deal is signed.
4) I want the bank to absorb any maintenance costs for this property: no taxes or fees will be charged to me while the property is growing
5) If I decide not to pay the $28,000 up front, I want the bank to guarantee me the right to buy the lot in installments. If I were to pay 20 level annual payments at about 6% per year I would pay about $2200 per year. If I die prior to the end of the 20 year installment period, the bank must guarantee the sum to my family and cancel any future payments on the lot.
6) If I become disabled during the installment period, the bank must guarantee that after 6 months of disability, they will relieve me of all future payments, as long as I am disabled, and refund me the payments I made during the prior 6 months.
So, by now his banker was laughing. Woody had described a $100,000 life insurance policy with a single payment or payments over a 20 year period. Life Insurance is a unique financial instrument.
One case I had was early in my career introduced me to estate planning. I met a prominent real estate developer who insisted like most people, “I have all the insurance I need”. Upon a review of his estate (multi-millions in 1978) I found that he had no life insurance on his wife. He did not think he needed any.
I prepared an estate analysis that showed his estate taxes and final expenses would be in the hundreds of thousands of dollars. We agreed that he could sell property to pay these expenses. Of course, realtors would not work for free, so that would cost him at least 6% and it may not sell immediately. There was a not a huge chunk of cash in the estate, so using it would mean using up the reserve funds that allowed him to be a developer.
In the analysis, I showed how he could fund that debt with discounted dollars. He could buy life insurance on his wife. We structured the policy so a 3rd party trust owned the policy. Annual gifts that were not taxable were made to the trust to pay the premiums.
When his wife died, the trust received the funds and used the money to purchase assets from her estate. Voila! The estate had the cash it needed to pay expenses. The assets were in the trust benefitting the heirs. Over the years, dividends had been paying the premium, so the estate had paid about $70,000 for the $200,000 of income and estate tax free property. The policy did what it was intended to do.
Since then we have done many such transactions. Some have been structured as “Second to die” policies that only paid on the death of the second spouse to die. This works well when the bulk of the estate goes to the surviving spouse to take advantage of an unlimited marital deduction. Life Insurance is unique property. Since this is Life Insurance Awareness Month, the reader may want to take a different look at the product.
