Joe Stanganelli’s 2009 Action Plan for Suze Orman

(Suze Orman, for those of you who live under a rock, is the woman on TV who yells at people for spending too much money.)

I saw, as I flipped through the book near the pharmacist’s counter, that Suze Orman recommends to her readers that, in almost all cases, they opt for term life insurance over any other kind of life insurance.

To me, this is pretty ridiculous.

LIFE INSURANCE: BING!

When I think of a life insurance agent, I think of Ned Ryerson, the ineffectual insurance salesman from the movie Groundhog Day. As grating as old “Ned the Head” may be, however, non-term life insurance is often a key component of a good estate plan.

Obviously, a young, healthy, single person with no dependents most likely has little need for any kind of life insurance. Indeed, because of the very nature of life insurance, the longer you can wait to get it, the better.

Nonetheless, the unexpected does happen; that is why people have estate plans.

One obvious benefit of whole, universal or a similar life insurance plan is to maximize the transfer of wealth tax-free. Life insurance is usually not subject to estate taxes when it pays out. Thus, a substantial policy is often a great way to transfer wealth.

Additionally, estate liquidity can be a major issue in estates – especially those that are just barely large enough to be subject to estate tax. Estate representatives sometimes have to sell the family home, the family business, and other valuable and/or sentimental assets to pay estate taxes that are due. With a sufficient life insurance policy in place, the problem is easily solved; the taxes can be paid with the life insurance money without having to sell the estate’s major assets.

Life insurance is also commonly used in business succession plans, wherein the business partners are designated the beneficiaries, and then use that money to buy the decedent’s share of the business back from the spouse, children, or whomever received the business in the will.

Life insurance is not for everybody, and there are many different types of life insurance that can be used for many different things. Life insurance has a great many uses for estate planning (but term life insurance – while it has its uses – can tend to be of limited utility for estate planning needs). For more information on this topic, you should contact a competent attorney, CPA, CFP, or similar, neutral professional who won’t be compensated when you purchase a life insurance policy (unlike an insurance agent).

But not Suze Orman. At least, not on this issue.

(In all seriousness, I admire Suze Orman. She started off as a waitress living in a van and is now a multimillion-dollar success. To me, she is a living Horatio Alger story and an embodiment of the American Dream, and has earned my respect.)

Speaking of Suze Orman, apparently her own financial concerns could in fact be solved with life insurance and other estate planning mechanisms.

DOCTOR, HEAL THYSELF

According to an interview with The New York Times, Suze Orman is concerned about losing lots of money to estate taxes. More specifically, according to the interview, she is in a committed same-sex relationship with another wealthy individual (her producer). She is concerned that, because she and her partner cannot legally be married, they cannot make use of the marital deduction – and therefore a substantial portion of their substantial estates will be lost to estate taxes.

This presents an important, burgeoning issue in the estate planning field: GLBT planning. Neither the federal government nor any other jurisdiction in the United States (save Massachusetts) recognizes same-sex marriages (although some states have other, similar mechanisms, such as civil unions). This presents an additional challenge when it comes to estate planning for people in committed same-sex relationships. Typically, because of the marital deduction (i.e., the mechanism by which you can give things to your spouse tax-free), one common goal of estate planning is to reduce or eliminate estate taxes at the second death – because upon the first death between the married couple, the decedent spouse has presumably left everything (save for their initial $2,000,000 estate tax exemption) or most everything to their surviving spouse, tax-free. For couples who cannot enter into a marriage recognized by current federal law, like Suze Orman and her female producer, this is not an option.

First and foremost, Suze and her partner could each benefit from substantial life insurance policies, respectively (and it’s not like they can’t afford it, either; according to the same interview, Suze Orman’s liquid net worth is in the $25,000,000 neighborhood). This policy easily turns a few million dollars into several million dollars once it pays out. Furthermore, the life insurance payouts would be tax-free. This could easily make up for the loss to estate taxes.

Furthermore, Suze and her partner would each benefit from irrevocable living trusts set up for their partner’s benefit, set up to not pay out until the first death between them. This is especially ironic because Suze recommends to her readers in her 2009 Action Plan that they set up revocable living trusts. The problem with revocable living trusts is they are still subject to taxation as part of the grantor’s estate; because of their revocability, the grantor is still deemed to “control them,” and therefore own them as part of her estate.

“ACTION” ESTATE PLAN FOR SUZE ORMAN

Because Suze Orman is a good sport (I am assuming), I am going to give her some fun, free “legal advice” (I put “legal advice” in quotation marks so nobody can sue me later; this is all rhetorical and hypothetical, and not intended or presented as actual advice forming an attorney-client relationship. Please see the Notices Page for more information). Based upon the limited information I have, with all other things being equal, I would advise Suze to and her partner to each do the following:

• Set up irrevocable living trusts wherein:
  • The present interest income beneficiary is some favorite 501(c)(3) charity (say, PBS – an entity that Suze Orman has done a lot fundraising for). In other words, all of the income that the money in the trust earns goes to this charity. Suze, this is a great option for you. This not only avoids estate taxes later by foregoing all control between the two of you in your lifetime, but has additional tax benefits because the money is going to a 501(c)(3) organization – and is therefore subject to the charitable deduction.
  • Upon the death of the trust grantor, the money will be paid out to your life partner.
• Set up life insurance trusts for each other’s respective benefit. Take on life insurance policies for each other’s benefits (NOT TERM! That is, unless one of you is expecting to shuffle off this mortal coil soon), and designate the beneficiary of the policy to be the trustee of the life insurance trust benefiting your partner.
• (EDIT: For this to work, the beneficiary would have to be the owner of the policy.  Life insurance will not be free from estate taxation if the owner retains any incidences of ownership, such as being able to change the beneficiary.)
• Set up a Unified Credit Trust in your will to make use of your $3,500,000 estate tax exemption (note: $3.5 million is only the estate tax exemption amount for 2009; this amount is subject to change after 2009).
• Consult a knowledgeable attorney today about other aspects of your estate plan.

And Suze, if you’re reading this and this information helps, feel free to mention my blog on your show.

- Joe Stanganelli, Esq.