Heir to wealthy Florida family has $12M of will wiped out due to federal estate tax after forced fire sale of real estate assets.
Florida resident David James learned a tough lesson last week when he ran into a federal law assessing a 40% federal estate tax within 9 months of his father’s passing. The tax applies to any amount over the $11.4M estate tax exemption for an individual.
James said that his parents always kept their financials in private and that his father’s sudden death left him astonished since he was not prepared with enough liquidity to pay over $8M in estate taxes. In a desperate attempt to stave off debt, he resorted to a fire sale of his cash-producing real estate assets. Due to the urgency of the situation, he sold them for significantly less than the actual market value, wiping out nearly $4M of his wealth.
The culprit of the situation, James said, was his father’s aversion to purchasing life insurance. “My old man was against it. He didn’t see the value in tying up his cash to pay premiums,” he said. What his father didn’t plan for, was that James would have to pay a massive estate tax within 9 months of his passing. “He was an investor, and a good one, and he wanted cash flow. But he made a big, costly mistake that I am now paying for.”
Saddled with the burden of a massive tax bill, he had to quickly sell his real estate assets without the proper preparation. Worse, the bulk of his family’s regular cash flow was based on income from the real estate, which suddenly put him in a position of having barely any income.
Ran Regev, a financial planner at RSB Life, explained the necessity of having a well-designed tax strategy and described one such strategy for purchasing life insurance:
“Real estate owners can finance their insurance premiums by using their hard assets as collateral for a loan. In many cases they can pay back the loan principal in full after 10 to 15 years using the policy’s cash value. If this gentleman’s parents would have managed their financials in this manner, Mr. James may have been able to remain with the cash-producing real estate assets while paying the entirety of the estate tax out of the life insurance policy itself.”
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