An Attorney’s Point of View


By Robert E. Hales, ESQ

I have personally been involved in the preparation of over 5,000 living trusts, and having done that many estate plans in the last seventeen years and having taught the subject for six years at Santa Clara Law School, I can only reach one conclusion as to the role the life insurance product plays in the estate planning process.  IT IS IMPOSSIBLE TO PROPERLY PLAN WITHOUT IT.

Many of my colleagues devote a great deal of time to showing their clients how to minimize the consequences of tax at the death of a husband or wife.  Some of them, unfortunately, too few, even attempt to show their clients how to avoid unnecessary legal procedures, such as probates and conservatorships.  Some even try to do in-depth designing of the estate plan to try and preserve the family land, farm or business, for, not just their children, but their grandchildren. It is my opinion that regardless of how much time and documentation is spent on the above estate planning problems, the estate planning attorney has not completed his services to the client until one very important question has been asked and answered, prior to the clients’ deaths.

The answer to the question, “Whose money do I use?” is, we will either use the client’s money, or the insurance company’s money.  Please keep in mind as the attorney, it really isn’t that important whose money is used to pay taxes because the money doesn’t belong to the attorney.  But it makes no sense to me to use the client’s money if insurance monies are available.

For example, if I have kept a $2million estate free of probate, and I have minimized the death taxes and I have designed a plan that will assure the assets will pass to whom the clients directed, what good is all of this, it at the time of the death of my clients, it is necessary for their beneficiaries to liquidate almost half of everything that the clients owned?

What is curious is, my clients have their automobiles insured so that the do not have to use their money to replace them in a time of loss, but they usually don’t have themselves insured which is a certain loss as compared to the automobile which is an improbable loss.

I had a client once who owned 60 single-dwelling homes.  I asked him, “whose money do we use to pay death taxes?”  He answered that all he had were his homes.  Not having given it much thought before, he was curious as to how many of his homes would have to be sold to pay his death taxes.

I noted approximately 30 to 35, recognizing that selling 30 homes in nine months would probably deflate that market, not counting the costs of selling those homes.  I asked him to list the homes that would need to be sold.  When he got to number 10, he found it very difficult to continue.

I told him to sop and go back to the top of his list and jus sell the first three homes he checked.  “Can I pay all of my death taxes just by selling three homes?” he  queried.  “You told me you would have to sell 35.” 

I said, “Yes, that’s the difference.”

“If you will sell the three homes now to get enough equity out of your estate to purchase all the life insurance you need to pay your death taxes, your family won’t have to sell 35 homes when you die.”

An interesting fact about that situation is that his two adult sons were present and when the father began to think about whether he should sell three homes not or 35 later on, his oldest son looked at him and said:  “Dad, you aren’t really going to think about that, are you?

So many times, estate planning attorneys have reduced taxes, eliminated probate, and have seen to it that the estate is distributed as the clients wanted.  But in so many cases, we have seen that those beneficiaries have had to sell the 35 homes instead of the father selling the three.  Isn’t it easier for someone to sell $20,000 of stock to buy a million dollar policy than it is for the attorney to sell a million dollars worth of stock to pay the death taxes?  Isn’t it easier for the dairy person to sell five cows a year to pay his insurance premiums than it is for any attorney to sell his whole heard when he dies?

If clients can be make to see these choices, and if clients can be make to see the ultimate liquidation of their estates vs. the partial liquidation to pay insurance premiums, in my opinion, the attorney, not the life underwriter is then full doing his job in the estate planning process.

Mr. Hales is an attorney whose practice is devoted entirely to estate and business planning.  His firm, Hales, Hales & George, has offices in San Francisco and Saratoga, California.