Many high net worth clients need liquidity for which life insurance is the solution. However, when it comes to paying the premium, cash is required. Often, clients, regardless of wealth, have a hard time giving away large amounts of cash, especially when they consider that they will not see it again.
Tax practitioners aren’t the only ones grappling with how to navigate the new complex rules of the 2017 Tax Act. State officials of high-tax states, too, have been busy considering options to help mitigate the effects of the limitations placed on the federal SALT (state and local taxes) deduction, which is capped at $10,000 under the new law.
The recent Estate of Cahill tax court case gives us a glimpse into the court’s view of intergeneration split dollar arrangements (GSD). In particular, the court focused on, among other things, the valuation of the loan repayment for estate tax purposes, as well as the appearance of the transaction as a vehicle for below market transfers to family members. Although the tax court did not issue a summary judgement and the case will now move to trial for a decision, the comments of the tax court are telling.
For many years Premium Financing was used by the Property & Casualty industry to allow employers to finance hefty commercial liability premiums. Fast forward to the last two decades and Premium Financing has evolved to fund a client’s large life insurance needs.
Premium Financing refers to the funding of premiums through a third-party lender, like a bank.
Clients who need a large life insurance policy to create liquidity for estate planning, wealth transfer or business succession may consider establishing a loan for the annual premiums through a commercial lender. This type of loan is similar to other loans: the arrangement requires approvals from both the bank and the insurance company issuing the policy, a fair market rate of interest is charged, and collateral in the form of the life insurance policy and additional personal assets must be posted.
Both business owners and executives can benefit from non-qualified benefit plans. When considering which options make the most sense, the questions revolve around:
Business owners can use life insurance to protect their businesses and provide important benefits to their employees. Without proper planning and funding, many businesses fail to continue to the next generation.
Here are 4 ways life insurance is used in business planning: