A Fit Inheritance
David J. Murphy
September 2017

“Books are the treasured wealth of the world and the fit inheritance of generations and nations.”—Henry David Thoreau

In December, 2015, my mom passed away. Five days later, my wife’s mom also passed away. Losing these two charming, gentle and endearing women from our lives brought great sorrow. We began the sad task of settling their estates and dealing with their belongings. 

My mother-in-law was an avid reader and bibliophile. She owned numerous hardback books, generally thick novels that took up significant space. My wife and I enjoy reading, but we already had bookshelves full of books. The key word is full. With all respect to Thoreau, books are not necessarily a fit inheritance.

My wife and I downsized in 2017. After our youngest daughter got married and moved out, we sold our home of 25 years and bought a condominium. Greatly reduced space meant sorting out and giving away. We offered to give each of our kids the thick files we have gathered over the years of their drawings, report cards, notes, photographs and other memorabilia. They looked at these mounds of faded paper, smelled the faint mildew and graciously declined. Hoards of documented, stored memorabilia from our children’s upbringing, as it turns out, are also an unfit inheritance.

Cultural Reality
A shift has occurred in American society with regard to what the successive generation deems worth keeping from the preceding one.

“For generations, adult children have agreed to take their aging parents’ possessions—whether they wanted them or not. But now, the anti-clutter movement has met the anti-brown-furniture movement, and the combination is sending dining room sets, sterling silver flatware, and knick-knacks straight to thrift stores or the curb.”1

“The fact that one generation’s treasures are another generation’s trash is bad news indeed for stuffed-to-the-gills Boomers, who now range in age from 52 to 70 and fret about what will become of their family heirlooms and precious possessions should they downsize to smaller digs—or, well, move on to the great beyond.”2

In addition to the marked change in what one generation prizes from the former, attitudes are changing among the people currently in possession of the wealth that comprises potential inheritance.

It is estimated that Baby Boomers will pass down $30 trillion in assets to their children and grandchildren.7 There are two groups within the Baby Boomer demographic, divided by their commitment to leave an inheritance behind. One group plans to leave inheritances. The other is the no-inheritance camp. Interestingly, both groups share the same concerns:

  • They’re afraid of running out of money and becoming a burden to their families.
  • Both groups contribute financially to their children and grandchildren, but the no-inheritance camp prefers giving while they are still alive.

Laura Varas, co-founder of the Hearts & Wallets financial services research firm said, “There are different life philosophies and one isn’t right.”3

The no-inheritance camp is generally less wealthy than the other group. “But those who plan to leave inheritances are terrified of running out of money,” said Varas.3

“The parents who do plan to leave inheritances,” Varas noted, “view this generosity as ‘the ultimate insurance policy against ever running out of money.’ They carve out a portion of their assets for their children”3 and then force themselves to live on the funds they designated for retirement. These Baby Boomers fear having to tap into the funds they want to leave as an inheritance.

The MetLife Mature Market Institute published a survey in January, 2012, entitled, Multi-Generational Views on Family Financial Obligations. The study discovered that among Baby Boomers “who feel some responsibility to leave something behind for their heirs, the largest shares suggest the appropriate amount is either under $20,000 (30 percent) or between $20,000 and $50,000 (23 percent).”4

One of the studies concluded, “If leaving an inheritance is important, then it has to be planned for. This is especially true for Boomers nearing retirement, because ‘legacy planning’ needs to be incorporated into general plans for spending and saving in retirement.”4

Legacy Planning
In an article entitled What Keeps Senior and Baby Boomer Clients Awake at Night?5 Bryce Sanders identified four major worries facing Baby Boomers:

  1. Preparing for retirement and providing financial security for their surviving spouse.
  2. Costs of long term care and catastrophic medical expenses.
  3. Being squeezed by rising prices.
  4. Passing wealth to future generations.

If we combine these four concerns with what we learned above, we can build a solid blueprint for legacy planning. A successful plan will contain accommodations for the following concerns:

  • Providing an inheritance that will be appreciated (cold hard cash).
  • Maintaining access to the funds in the event they are needed (liquidity).
  • Designating even modest amounts as legacy funds.
  • Hedging against inflation.
  • Incorporating possible need of the funds to meet long term care and catastrophic medical expenses.
  • Maximizing the amount of the legacy fund.

In an article entitled Boomers Going Out with a Bang: A Historic Transfer of Wealth that appeared on Kiplinger.com, investment advisor Kirk Cassidy wrote, “There can be dozens of decisions that need to be made to help properly pass down this money —to help preserve it from taxes and avoid going to probate, to make sure it goes to the intended people.”6 

Legacy Planning Tool
The life insurance industry has created a product that meets all of these requirements! It is Single Premium Indexed Universal Life (SPIUL). Single Premium Indexed Universal Life may be one of the most favorable methods for building a legacy because it transfers funds efficiently. For the Baby Boomer client intent on legacy planning, SPIUL products will typically offer the following:

  • Leverage: Immediate leverage of a single premium into a larger guaranteed death benefit.
  • Efficiency: Life insurance death benefits pass to beneficiaries generally income tax free and outside probate.
  • Room to Grow: Beyond the death benefit guarantee, with non-guaranteed cash value growth, and non-guaranteed death benefit, may grow well beyond the guaranteed coverage amount.
  • Liquidity: Cash values can be accessed through withdrawals or standard policy loans. Some products offer withdrawals made in year two, and beyond that are surrender charge penalty-free for amounts up to 10 percent of the account value per year. In addition, SPIUL products often have a Return of Premium feature.
  • Access to funds for terminal or chronic illness conditions:  Policyholders can accelerate their death benefit for these needs.

Best of all, these products are not available to just the ultra-wealthy. In accord with the aim of many Baby Boomers to pass on modest amounts of legacy money to their heirs, SPIUL products have a minimum premium as low as $25,000. These funds represent assets that Baby Boomers do not plan to use for retirement. The funds may currently be held in an annuity, IRA, or savings or checking accounts.

Legacy Planning Client Profile
SPIUL insurance products are designed to optimize the legacy that Baby Boomer clients wish to leave to their heirs. The prime client for legacy building using SPIUL is typically the following:

  • Male or female, aged 50–80.
  • Can qualify for, and appreciates, the leverage of death benefit protection.
  • Has funds of  $25,000 - $200,000 currently parked in low-yielding instruments, unofficially designated for legacy but also intended for use in case of an emergency.
  • Readily identifiable on Facebook  because they are seen spending time with children and grandchildren and treating them to vacations or other activities.

Summary
The goal of leaving behind a legacy is as old as mankind. The question of what is a fitting inheritance changes with each generation. Cash generally never goes out of style. For those Baby Boomers inclined to engage in legacy planning, the life insurance industry has a very attractive solution in Single Premium Indexed Universal Life insurance products.

There is a huge opportunity for the independent financial professional to help even the somewhat hesitant Baby Boomer leave a legacy that can help please the next generation.

References:

  1. https://www.boston.com/news/local-news/2017/06/04/baby-boomers-are-downsizing-and-the-kids-wont-take-the-family-heirlooms
  2. https://www.usatoday.com/story/news/nation-now/2016/11/08/baby-boomers-rebuffed-heirlooms/93484620/
  3. https://www.forbes.com/sites/nextavenue/2016/01/21/how-boomer-parents-feel-about-leaving-inheritances/#6b0bc46877ac and http://www.heartsandwallets.com/a-segment-of-baby-boomers-use-legacies-as-ultimate-insurance-to-avoid-running-out-of-money-in-retirement/news/2015/12/
  4. https://www.metlife.com/assets/cao/mmi/publications/highlights/mmi-multi-generational-obligations-highlights.pdf
  5. https://www.accountingweb.com/practice/clients/what-keeps-senior-and-baby-boomer-clients-awake-at-night
  6. http://www.kiplinger.com/article/retirement/T021-C032-S014-boomers-will-see-a-historic-transfer-of-wealth.html
  7. Source: (CNBC 11-30-16, Morgan Stanley 2015, Accenture. The “Greater” Wealth Transfer – Capitalizing on the Intergenerational Shift in Wealth, 2012; Accenture 2016)

Indexed Universal Life Insurance products are not an investment in the “market” or in the applicable index and are subject to all policy fees and charges normally associated with most universal life insurance.

Income and growth on accumulated cash values is generally taxable only upon withdrawal. Adverse tax consequences may result if withdrawals exceed premiums paid into the policy. Withdrawals or surrenders made during a Surrender Charge period will be subject to surrender charges and may reduce the ultimate death benefit and cash value. Surrender charges vary by product, issue age, sex, underwriting class, and policy year.

Neither North American Company for Life and Health Insurance nor its agents give tax advice. Please advise your customers to consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements.

The opinions and ideas expressed by Dave Murphy are his own and not necessarily those of North American or its affiliates. North American does not endorse or promote these opinions and ideas nor does the company or agents give tax advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed as to accuracy. All information is for agent representative use only and cannot be used, in whole or part, with consumers.



Author's Bio
David J. Murphy
CLU, ChFC, FLMI, is sales vice president, national accounts, for North American Company. Murphy sold insurance after graduating from Miami University with a BA in economics. After several years as an agent he worked in marketing, advanced sales, product development, career-agency development, illustration design and distribution, agency management, agent recruiting and BGA recruiting. Murphy currently manages a region comprised of four states and 21 partner MGAs, and he also manages the company's eight national account relationships. Murphy can be reached at North American Company, 553 Meadowtrail Court, Cincinnati, OH 45231. Telephone: 800-800-3656, ext. 87612. Email: dmurphy@SFGmembers.com.















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