Private Financing is a strategy to pay for a life insurance policy owned by an Irrevocable Life Insurance Trust (ILIT) for estate planning purposes with no gifts and hence no gift tax costs. Traditionally, Private Financing has been promoted with a 10-pay policy and a 9-year note on the theory that using the low Mid-Term AFR is the best option. This is the second piece in a series on Private Financing strategies.
Premium financing is a very powerful planning tool when properly and responsibly constructed and administered. It can mitigate gift taxes and reduce the cost for a traditional permanent policy. Even in less than perfect economic scenarios, with less than optimal policy and loan performance, proactive management can help ensure that a premium financing program stays on track.
On April 13th, 2016, in Estate of Morrissette, the US Tax Court ruled in favor of the taxpayer in a generational split dollar situation. Following Mrs. Client’s death, the IRS assessed a gift tax deficiency of $13.8M and penalties of $2.7M. Ruling in favor of the taxpayer, the Court determined that a dynasty trust’s only economic benefit under the agreements was the current cost of life insurance protection. Note: This case did not address the valuation aspects of the estate’s interest in the generational split dollar plan.
Private Financing is a simple and powerful strategy for funding large life insurance policies with no gift, estate or even GST taxes. Current low applicable federal rates (AFRs) allow clients to lend funds to an irrevocable trust such that the earnings on loaned funds are sufficient to pay annual premiums and repay the loan plus accrued interested at the end of the note term. This is the first post in a series of Private Financing strategies.
This article introduces Premier Trust, a sister company of Highland Capital Brokerage. Premier Trust provides a full range of trust services and has a strong presence in the high net worth, ultra-high net worth and upscale markets.
Of note, Premier Trust:
- Does not manage investment portfolios, so they are not in competition with financial advisors.
- Has a deep understanding of the important role of life insurance in advanced planning — i.e. they’re insurance friendly!
- Offers extremely reasonable fees.