In a world where consumers are increasingly seeking financial advice tailored to their specific needs, it’s more important than ever for insurance producers to offer their clients custom-fit solutions. When it comes to wealth transfer planning, private financing can be just such a solution.
Is private financing right for your client?
As an insurance producer, you know what a valuable service comprehensive life insurance coverage can be. Life insurance gives your clients the ability to protect assets and maximize the wealth they can pass on to their loved ones. Through the use of an Irrevocable Life Insurance Trust, which protects proceeds from both estate and income taxes, this wealth could last for generations. However, like with most things in life, it’s not quite as simple as creating a strategy and putting it into action.
There’s a chance your clients may have reached their limit when it comes to their lifetime gift exemption.
According to the IRS, any transfer to an individual, either directly or indirectly, where money is not received in return, is considered a gift. While exclusions exist, it’s quite easy for high-net-worth individuals to surpass this threshold and find their wealth transfer plans complicated. In cases such as these, private financing may be called for.
If you’re unsure if private financing is the right course of action for your client, ask yourself a few simple questions. First, does your client want to minimize or completely eliminate gift taxes? Chances are this will always be met with a resounding yes.
Next, has your client already reached their threshold for their federal lifetime gift exemptions and annual gift exclusions? Even if the answer is no, some clients may not wish to use these up in order to have them available for other uses besides estate planning.
Finally, does your client have the funds necessary to lend money to a trust in order to potentially reduce gift tax liability? Lending money through a private financing transaction instead of gifting it can protect trusts from taxation.
Once you’re able to answer these questions, you’ll be in a better position to determine whether private financing is right for your client.
Weighing the pros and cons
While private financing can be an ingenious solution to a complicated problem for many people, it may not be the right choice for everyone. It’s essential to keep your client apprised of the potential disadvantages of such a strategy.
For instance, while the whole point of private financing is to avoid gift taxes, income taxes may be due on the loan interest if the trust is a non-grantor trust. Additionally, the loan interest will be paid to the grantor’s estate, which will then be subject to estate tax. It’s important to determine whether the trade-off of minimized or eliminated gift taxes is worth it.
Additionally, private financing can require more time and money spent on administration than other estate planning strategies. It’s important for the client to keep track of their loans and interest.
However, despite these potential complications, private financing can be an ideal wealth transfer solution for many clients, especially those with available liquidity to make loans to the trust so that the life insurance coverage can be purchased to help accomplish the clients’ goals of transferring wealth to the next generation.
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