Silicon Valley Billionaire Takes Out $201 Million Life Insurance Policy 300
Hugh Pickens DOT Com writes "The Mercury News reports that somewhere in Silicon Valley, a 'mystery billionaire' has bought what the Guinness Book of World Records says is the most valuable life insurance policy in history — a policy that will pay his survivors a cool $201 million. Was it Larry Ellison? Eric Schmidt? Elon Musk? Zuck? Nobody knows because the name of the buyer is a closely guarded secret. 'We don't want hit men running around Palo Alto trying to find him — or members of his own estate,' joked Dovi Frances, the Southern California financial services provider who sold the policy. By last count, California boasts 111 billionaires with more than a third of them in tech, while San Francisco has 20 billionaires alone so it could be any of them. But why does a billionaire even need to take out life insurance when he or she has so many other assets. The most likely answer to this question is taxes and estate planning.
Upon death, an estate would be liable to pay off loans on any leveraged properties, plus a lot of money as part of the death taxes owed. This could force the estate to liquidate holdings to raise the money to pay off these liabilities even if it weren't the most opportune time to sell the assets. By taking out the life insurance policy, it would give the estate more flexibility in paying off the taxes and other debts owed, without necessarily having to sell assets to do so. 'In California, there are state death taxes that are exceptionally high (45 percent),' says Frances adding that the policy is actually a combination of more than two dozen policies, underwritten by 19 different insurers because if any single company had to pay out such a lavish benefit, it could be crippling. 'If your properties are leveraged then those loans are called immediately and need to be paid off, you want to hedge yourself against such a risk so [your beneficiary] can receive the proceeds without being exposed to taxes.'"
Upon death, an estate would be liable to pay off loans on any leveraged properties, plus a lot of money as part of the death taxes owed. This could force the estate to liquidate holdings to raise the money to pay off these liabilities even if it weren't the most opportune time to sell the assets. By taking out the life insurance policy, it would give the estate more flexibility in paying off the taxes and other debts owed, without necessarily having to sell assets to do so. 'In California, there are state death taxes that are exceptionally high (45 percent),' says Frances adding that the policy is actually a combination of more than two dozen policies, underwritten by 19 different insurers because if any single company had to pay out such a lavish benefit, it could be crippling. 'If your properties are leveraged then those loans are called immediately and need to be paid off, you want to hedge yourself against such a risk so [your beneficiary] can receive the proceeds without being exposed to taxes.'"
Re:We need to stop big tax dodgers useing loop hol (Score:3, Informative)
We need to stop big tax dodgers useing loop holes to pay no taxes.
We can assume they paid their taxes when they received their paychecks. Why should their heirs pay them again?
In this case, this life insurance policy isn't to stop anyone from paying taxes. The purpose is to pay the taxes rather than having all the assets sold off to pay them. For example, if I were to leave a taco hut family business to my kids, if they can't scrape up the cash to pay the taxes on what the state guesses the hut is worth, they would be forced to sell it to pay 45% tax, thus losing the business me and my family spent a lifetime building. A life insurance policy would allow them to pay the taxes in cash and keep the business. Unfortunately, this may not be an option for those who do not have "extra" income to afford an life insurance policy.
Re:Estate Taxes (Score:5, Informative)
Re:Estate Taxes (Score:5, Informative)
By the way, this lower limit has increased dramatically in the last decade, from $1,500,000 in 2004. I have to agree with the parent, though, that if you're inheriting over $5 million you probably are not considered "middle class."
Re:Estate Taxes (Score:5, Informative)
You'd be surprised how low the 50% bracket reaches (Score:5, Informative)
Re:We need to stop big tax dodgers useing loop hol (Score:4, Informative)
You may be thinking of income - the cutoff to enter the top 1% of annual household income is indeed about $700,000. But the discussion is about household net worth. It's frustratingly hard to find exact numbers, but as far as I can tell, somewhere around 8% of American households have a net worth above $1M, not counting primary residence (9.6 million households according to CNN out of ~120 million households according to the Census Bureau). It takes about $5M in non-house wealth to make the 1%. Including home equity, between 15% to 20% of households are millionaire households, as far as I can tell.
Having said that, I agree with you that very few Americans have to worry about the estate tax. The first $5.4 million of an estate is exempt from taxation, and two spouses can join their exemptions onto a single estate if they want, for a total exemption of $10.8 million. I'm no real fan of the inheritance tax, but even I'll admit that the tax in its current form only affects those who are truly loaded. I think that the law we have now (40% tax on anything over 10.8 million) is a vaguely reasonable compromise between the soak-the-rich folks and the no-taxes-ever folks. However, for many years prior to 2011, the exclusion was much lower, and the inheritance tax and really did impact a number of people who had relatively large amounts of money tied into illiquid assets like the proverbial family farm. Many of the "save the family business" arguments actually did make sense prior to the law change in 2011.