The Modern Estate Plan

Retirement planning and health care costs

After creating the Federal Estate Tax in 1916, American families have been doing whatever possible to mitigate or shield their estates from erosion resulting from those taxes. Since its inception, the Federal Estate Tax has varied in its severity, with the top tax rate reaching as high as 77% in 1941. On January 1, 2013, the American Taxpayer Relief Act of 2012 passed which made the Federal Estate Tax exemption $5 million per person. It remained permanent for tax years 2013 and beyond, meaning the vast majority of Americans would no longer be subject to any Federal Estate Tax.

Healthcare In Retirement Is The New "Estate Tax."

With most estates well below the new threshold, the advisory community concluded that estate planning is no longer an important topic for the typical family. Even though the estate taxes have eroded, has the Federal Estate Tax been replaced with a new, onerous villain; one whose hand will reach into the pockets of even the most modest of estates?

Life expectancy rising faster than ever and with it comes to a greater risk, the risk that Healthcare In Retirement may become a greater threat to estate erosion than any tax. Today, perhaps discussions among advisors and their clients should now focus on "The Modern Estate Plan."

A Quick Examination of Estate Planning - Past & Present

In the spring of 2000, Sam & Sally Saver turned 50 years old and with their three children out of college they turned their attention to retirement and estate planning. With a thriving business, their current estate valued at approximately $2 million, and their advisors estimated that at 3% growth rate it would increase to more than $6 million by age 90. Based on input from their advisors, including their CPA, attorney and investment advisor, it concluded that at age 90, their estate tax liability would amount to roughly $2 million.

Their next step was to create an Irrevocable Life Insurance Trust (ILIT). Once in place, the Sam & Sally began funding a survivorship variable life insurance policy (SVUL) with a $2 million death benefit and a $30,000 annual premium as, according to Price Waterhouse Coopers, the ILIT would be "one of the best estate-planning tools available" and it is a "key vehicle for letting large portions of an estate escape estate, gift, and generation-skipping transfer tax permanently".

Problem identified and problem solved....

The Realities of Estate Erosion from Healthcare Expenses

Now age 65 and entering retirement, Sam & Sally have decided to review their financial planning as they've seen first-hand the impact of health care expenses for their parents. Sally's mother, Shirley, received a diagnosis of Alzheimer's disease in 2009 and spent nearly most of Shirley's retirement assets paying for her Long-Term Care and nursing home expenses until she passed away in 2014.

Additionally, the couple had done their research and now has some concerns today which are different from those when they created their estate plan 15 years prior. Fidelity Benefits Consulting estimates that those retiring in 2014 will spend, on average, $220,000 for health care expenses throughout retirement. Cognizant of that number or not, it's not surprising that Boomers "rank health care expenses as their top financial worry in retirement", according to Merrill Lynch and AgeWave Consulting.

Sam & Sally are quite comfortable after transitioning out of their business and selling it to their oldest daughter. However, they are unsure if they should continue to fund their ILIT and insurance policy as it is unlikely their estate will be subject to Estate Taxes based on the 2013 changes.

They are also very concerned that future healthcare expenses might become inflict more estate erosion damage than their estate taxes ever could; especially after their experience with Sally's mother. Their advisors never discussed potential future health care costs, and whenever there was a cursory mention of Long-Term Care it glossed over a recommendation that the couple could "self-insure" and it was better to use their cash flow for the ILIT and estate planning purposes.

The Modern Estate Plan At Work

Sam & Sally decide to engage another financial advisor to discuss their concerns to determine if there might be a better strategy for their ILIT and sizable cash accumulation in life insurance policy owned by the ILIT. After a number of discussions, and detailed analysis of the ILIL and SVUL, the new advisor made her recommendations.

  • She made is clear that terminating the ILIT could result in the gift, estate, generation-skipping tax, and even income tax consequences.
  • Next, the new advisor noted that their insurance policy in the ILIT, even after market declines in 2000-01 and 2008-09, provided roughly $650,000 helping to alleviate their concerns.
  • Lastly, to make it clear, even though their assets did not exceed the current estate tax threshold, there is no guarantee what the threshold would be when they pass away.
  • While the Federal Estate Tax is "permanent" in January, 2013, the Estate Tax has been, and likely will be, subject to debate and changes in the future. So, assuming the estate taxes will remain unchanged in the future could be a very expensive mistake.


  • Continue to fund the ILIT but at a lower amount, but do so with their new "Estate Planning" goals in mind with respect to addressing their potential Long-Term Care needs.
  • Move part of the existing cash value in the SVUL (via a 1035 exchange) into a Hybrid Life/LTC solution to provide $12,000 per month of current benefits, growing with a 5% inflation protection option. In the event Long-Term Care is never needed, a $300,000 death benefit would be available for the ILIT and its beneficiaries.
  • Lower the annual ILIT contribution - to about $24,000 - as this would provide add a Lifetime benefit on to the Hybrid solution. This would provide sufficient protection even if Sam & Sally both experienced a massive level of Alzheimer's related expenses.
  • Move the remaining cash value in the existing SVUL (also via 1035 exchange) into an Indexed Survivorship Life policy which could provide a $1.4 million death benefit. The ILIT owned death benefit would be available in the event a future Congress lowered the Federal Estate Tax.

With the evolving of our financial planning, at some point, even those with modest assets need to ask their advisors a very important question:"Although estate taxes aren't a concern now, should we consider "The Modern Estate Plan?"

More on Financial Planning