Bad Ad-vice vice, Baby!

Should you get your financial and estate planning advice from 90s rapper-turned-YouTuber Vanilla Ice? (aka Robert Van Winkle?)

The answer seems like it should be an obvious “Hell no!” But apparently, some people disagree. At least, that’s what I gathered from his YouTube channel. I was not aware of this, but the rapper formally known as Vanilla Ice is now a somewhat prominent YouTube star. Judging by the comments section, a lot more people than I would have estimated are very happy to receive financial and estate planning advice from the from the 90s icon who parlayed being white and sampling the main riff from Queen and David Bowie’s “Under Pressure” into Platinum-level record sales.

The reason I was even aware that Mr. Van Winkle had a YouTube channel (I was not searching for videos of “Ice Ice, Baby”, I promise) is that he made news this week for some rather laughable things he said in one of his videos. You can link to the news article here (https://www.investmentnews.com/tax/news/former-rap-star-vanilla-ice-disses-death-taxes-253793). I don’t recommend actually watching the video because its just 30+ minutes of Ice’s mostly incoherent rambling while holding court in front of an audience of dewy-eyed groupies who hang on his every word. (I like to poke fun at Taylor Swift’s groupies, but at least they are unhealthily worshiping someone who is very musically talented and extremely successful as an artist. I can’t say the same about people who worship Vanilla Ice. It just seems weird to me).

To be fair, and to put his statements in some context, his channel is more about real estate and home-flipping than it is about financial planning. Once his fifteen minutes of pop music fame were over, Van Winkle focused on renovating and flipping homes, and has had a fair amount of success doing so. In 2009, he got his own home renovation show on the DIY network that ran for nine seasons. He continues to renovate and sell homes, and posts videos about home renovation to his YouTube channel. The video that is attracting attention starts out with Van Winkle talking about buying a distressed property and renovating it can save a lot of money, and giving an example of how he was able to find one such property in a very toney area of Palm Beach, FL. From there, he goes off on several tangents relating to real property assets. Some of his more interesting advice and observations:

• He believes inheritance taxes (technically, Estate and Gift Taxes, which he calls the “Death Tax”) are unfair.
• He talks about his friend Mark, who, along with Mark’s siblings, was supposed to inherit his parents’ extremely valuable real estate. But they ended up losing “80% of the profits” (whatever that means) due to taxes.
• In apparent contradiction to the above parable of his friend Mark, he doesn’t think estate planning lawyers have your best interests at heart, and can’t help you. “If you ask a lawyer: ‘How do I save all [my] money and give it to my kids without the IRS taking it, without … lawyers and probate court taking over?’ A lawyer’s … going to tell you a hundred different things that are going to confuse you.”
• But apparently, Vanilla Ice has it all figured out how to beat those without involving shyster estate planning lawyers. His solutions are 1) “maxing out” your life insurance (whatever that means), and putting your property in an irrevocable trust (although it’s not clear how he envisions doing that without hiring lawyers who like to confuse people).
• Ice is a friend of Donald Trump, but he didn’t vote for him, because he doesn’t vote.

He is indeed killing your brain like a poisonous mushroom. There’s a lot to unpack here.

I’m going to resist the temptation to debate the fairness or unfairness of inheritance taxes. Instead, I will point out that the amount a single person can pass to their heirs, as of 2024, without paying a penny of inheritance tax is $13,610,000. If that sounds to you like more than you would ever need, then keep in mind that the IRS allows for a widow or widower to add their deceased spouse’s unused portion of their $13,610.000 exclusion, as their own. It also bears mentioning that spouses are allowed to transfer or leave to their spouses unlimited assets, estate tax-free. So, if a husband dies and leaves everything to his wife (for which she will pay no taxes), the wife can then leave up $27,220,000 in assets to their children, without their children having to pay anything in inheritance taxes.

I confess that I don’t know Vanilla Ice’s net worth. Perhaps between his TV show, his profits from house flipping, his royalties from “Ice Ice Baby”, and whatever residuals he gets from his appearance in the 1991 film, “Teenage Mutant Ninja Turtles II: The Secret of the Ooze”, Mr. Van Winkle is over the 27.22 million dollar threshold below which there is no estate tax liability. I’m guessing not, but I could be wrong. (While it’s possible that Vanilla might have an estate valued at more than 27 million, I’m reasonably confident that the fawning minions in his video, or who are praising him in the comments section on YouTube, do not) Regardless, it is only a tiny tiny fraction of estates that are going to have any estate tax liability. How tiny of a fraction? Well, in 2019, there were only 172,000 households nationwide that had assets of over 25 million (still 2 million less than the combined estate/gift tax limitation) That’s roughly .014% of households. The other 99.986% have nothing to worry about. If Vanilla Ice’s estate is likely to be at or even close to 27 million when he leaves this earth and is called before his maker to account for his crimes against music, then the financial strategies he’s talking about may make sense for him. If not, then he’s been getting bad advice. (Or maybe he’s getting good advice but not taking the good advice because he was “confused” by it)

With regard to his friend Mark, since I don’t know the specifics, I can’t offer any kind of opinion or explanation for why his parents’ estate got eaten up in taxes and lawyers’ fees (if that is indeed what happened). But it sounds to me, and I think any other reasonable observer, that his parents probably could have used more estate planning, not less.

That brings us to Ice’s advice on using life insurance as way of passing your estate to your heirs tax-free. This suggestion is not quite as hilarious as some of his other suggestions, because there is a kernel of truth in here. However, it’s a kernel of truth that isn’t going to be very helpful to most people. I’ll explain why, but it’s helpful to have a basic understanding of how life insurance works.

When people talk about “Life Insurance”, there’s usually referring to the two most common types: There is what is called “Term life” insurance, and there is “Whole life” insurance. (There is also a third type, commonly referred to as “Universal Life” insurance, which is a sort of hybrid of term and whole life). Term life insurance is a death benefit, and nothing more. You pay a certain amount, a premium, per term (which is generally a year), and in exchange for that premium, if you die within that year, you’re paid an agreed upon amount as a death benefit. As you get older, your odds of dying increase. So most people buy level-premium policies that lock in a fixed premium amount for 10, 20, or 30 years. The longer the period of level premiums, the more the policy costs. The greater the death benefit, the more the premium costs. And the older you are when you start the policy, the more the policy costs. For example if you purchase a thirty-year level-premium when you’re 25, the last year of the level policy premiums is when you’re 55, which is still pretty young. But if you purchase the same policy when you’re 40, the level premiums end when you’re 70, and you’re chances of dying are increased from when you’re 55. So you pay more for starting later.

Term life insurance is intended to protect an income stream, specifically, the income you receive from working. Once you’re retired, and no longer bringing income from working, you generally don’t need it anymore. And that’s convenient because a term-life policy stops being in any way affordable the older you get. Once you stop paying the premium, the death benefit goes anyway. There’s nothing “left over” because all you’re getting for your premium payment is the death benefit.

By contrast, “whole life” insurance contains both a death benefit, and some residual benefits that you receive even if you stop paying the premium. So, even if you don’t end up collecting the death benefit (by not dying while the policy is in force), there is still some level of payout.

On paper, whole life insurance sounds better. But almost all financial advisors recommend getting a term life policy rather than a whole life policy. Why is that? Because I haven’t told you the downside yet: Whole life policies are a lot more expensive. Significantly so. They have to be, because in addition to possibly paying out a death benefit, the insurance company has to give you the residual policy benefits. So they have to charge you a lot more. They are, after all, a for-profit business. You’re far better off buying a term life insurance policy, with the vastly lower premiums, and investing the difference in premiums in securities that are held in a 401K, an IRA, a Roth IRA, or even a non-tax sheltered brokerage account. That money will continue to grow, and it will likely dwarf whatever residual benefit payout you would have received from a whole-life policy.

The reason why Vanilla Ice thinks life insurance is so great is because life insurance benefits are tax-free to the beneficiaries. But there’s more that needs to be considered. The proceeds of a life insurance death benefit may be tax-free to the beneficiaries, but the death benefit proceeds will, if the insured owns or retains incidents of ownership of the policy, count towards the value of the estate. If the value of the estate is under the estate and gift tax limits (the 13.61/22.22 million limitations), then there’s no taxes to be paid. But if it’s over that, then there will be tax liability on the estate if the insured was the policy owner or retained incidents of ownership. (There are ways around this, but that would probably involve an estate planning lawyer “telling you…things that are going to confuse you”). The point is, it’s not as simple as Vanilla is making it out to be. It’s still going to require the services of “confusing” estate planning lawyers.

Assuming that you’re not opposed to hiring “confusing” estate planning lawyers to make sure that a life insurance policy is set up to do what you want it to do, are there real tax advantages to having a life insurance policy? The short answer is “Maybe, but for the vast majority of people, no”, for reasons I will explain.

(A brief digression – I can understand the frustration that Mr. Ice and other lay people might have with hiring an estate planning lawyer and then having said lawyer tell you “a hundred different things that are going to confuse you.” But there’s a reason for that. Everyone’s estate planning needs are different. An estate plan isn’t a product you buy off the rack. If your estate planning attorney is doing their job, they are tailoring your estate plan to your specific needs and concerns, rather than simply plugging your name into the same pre-drafted form that is used for every client. There are different options, and some may make sense for you, while others may not. An attorney has to explain these options to you, and for the amount you’re paying them, they should be able to explain the options to you in a way that you understand. And if they don’t, then it’s time to find a new lawyer who can. If Vanilla Ice was confused by the options his lawyer was presenting him, then honestly, that’s on him)

When Vanilla Ice talks about “maxing out your life insurance” (whatever that means) as a tax avoidance strategy, he’s clearly talking about whole or universal life insurance. It couldn’t possibly work with term life insurance because as you get older, the policy premium costs increase to the point of completely dwarfing any death benefit payout. To put this in perspective, consider my own example. I purchased a 30-year term life insurance policy when I was 35 years old. It has a $1,000,000 death benefit. My policy premium amount of $980.00 annually is fixed for 30 years. But after that (when I turn 65) the premium jumps to over $35,000 per year, and it keeps increasing every year thereafter. When I turn 75, it would cost me $110,000 per year to keep the policy in force, and at 85, it would cost me $282,000. At 95, it would cost me $616,000. So unless you’re diagnosed with a fatal illness where you’re certain to die in the next few years, no sane person keeps a term life policy in place after the level-premium period expires.

Assuming (as we must) that Vanilla is talking about using a whole life or universal policy to get around estate taxes….well, it’s still probably bad advice. I say “probably” because it’s advice that only is helpful to the extremely wealthy. It’s the equivalent of someone telling you that the secret to making more money is to rent out your villa in French Riviera. It’s only good advice if you actually own a villa in the French Riviera. If you don’t, it’s spectacularly unhelpful advice, and has a sort of Marie Antoinette vibe. The life insurance solution only solves a problem that occurs if you and your spouse have an estate that is valued at over 27 million dollars. If your estate is valued at less than 27 million, you’re not paying any estate tax. So if you’re not butting up against the estate tax exemption maximum, and you’re thinking a whole or universal life insurance policy thinking it’s a good investment, you are just as incorrect as Vanilla Ice was in thinking that he would have a second hit song.

(By the way, please do not take away from this post that I am discouraging you from having term life insurance. Quite the opposite. I want you to have term life insurance, especially if you have a family that is depending on you having income from employment. I have it, and I think every working person with a family should have it because the financial consequences can be dire for your family if you die prematurely. But term life insurance is not an estate planning tool. It’s not something you buy to minimize taxes or administrative costs upon your death. It’s a financial planning tool, and a necessary and good one, but not an estate planning tool).

Finally, there is Vanilla’s endorsement of irrevocable trusts. Irrevocable trust are great as a bulwark against someone squandering the trust assets. But as a tax-efficient strategy, once again, if you’re not at or close to the 27 million dollar estate tax ceiling, it’s pretty pointless, and may actually be disadvantageous to you. An irrevocable trust, as opposed to a revocable one, is a recognized legal entity that has its own tax liability. And guess what? Trusts pay higher income tax rates than people do. Also, if you transfer your real property into an irrevocable trust, and the present beneficiaries are different than the owner-transferors, the property taxes are going to be re-assessed (increased), and likely by a lot. That means you’ll be paying the increased property taxes every year. Ouch, Ouch, Baby. And let’s not forget that the very nature of an irrevocable trust is one that cannot easily (if at all) be revoked. You are literally giving away your property to a legal entity, which necessarily requires some diminished level of control over the property.

Ice may think he rocks the mic like a vandal, but if you take his financial advice, you’re going to feel like its your finances that have been vandalized, like the chump whose been waxed like a candle.

Word to your mother.