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How a ‘Wait and See’ ILIT Strategy Can Help UHNW Clients

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A Wait and See ILIT (Irrevocable Life Insurance Trust) strategy can provide an essential UHNW (ultra-high net worth) financial planning tool. Among its uses: funding life insurance needs inside an ILIT, even if clients have used up their lifetime exemptions. That’s because a properly designed loan from the client to the ILIT will satisfy IRS requirements for a commercially valid loan, eliminating the need to make taxable gifts.

Here’s an example of how the strategy works.

Steve (52) and Jane (50) Benson have enjoyed lucrative careers. Steve has built a medical practice over the past 20 years while Sarah’s business has substantially expanded over the past 30 years. They have a combined net worth of $200 million and have asked Thomas, their financial advisor, to help them reduce their estate tax exposure.

Thomas, unfortunately, doesn’t have a good or easy solution at hand. The Bensons have already made sizable gifts to their two children and used up their entire lifetime exemption (currently $22.8 million 2019). In addition, Thomas has learned from the Benson’s attorney that their estate has nearly doubled over the past 10 years, rendering their existing estate plan obsolete.

They agree that the couple needs additional life insurance to cover the projected federal estate tax liability. However, the Bensons balk at the idea of paying gift taxes to fund additional life insurance inside a traditional ILIT. Thomas suggests holding a conference call with Highland Capital Brokerage’s Advanced Planning group.

During the call, Highland’s Advanced Planning advisor recommended the Bensons use the Wait and See ILIT strategy. Rather than gifting the funds to the ILIT to pay the premiums and then paying the resulting gift tax, the Wait and See ILIT would allow the Bensons to loan the funds into the ILIT to pay the life insurance premiums, thus eliminating their gift tax exposure. The Bensons are pleased with the solution and agree to move forward.

The Strategy in Action  

  1. The Bensons lend $500,000 to the trust for 10 years ($5 million total)
  2. They are repaid with interest beginning in year 25 and lasting 14 years (Jane’s death)
  3. Total estate tax-free death benefit remaining in trust in year after repayment: $12,477,505
  4. Total income-tax free repayment back to clients: $9,602,810
  5. Once the clients have been fully repaid, a substantial death benefit remains in their estate that can used for liquidity purposes

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To find out more about how this strategy can help your clients,  email AdvancedPlanning@highland.com.

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