The gift tax annual exclusion allows each individual to give up to $13,000 per year (indexed annually for inflation and subject to specific rules) to an unlimited number of people without paying federal gift taxes.
Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including generation-skipping tax). Failure to do so could result in adverse tax treatment of trust proceeds.
Estate Liquidity - Premium financing can be used in tandem with estate planning if you wish to obtain a large amount of life insurance for purposes of estate tax liquidity.
Business Planning - Businesses can use premium financing in a variety of different ways. The business might borrow the funds to obtain life insurance for key person coverage, finance a nonqualified deferred compensation plan, set up a death benefit only plan or obtain coverage for a buy-sell arrangement.
Need for an Exit Strategy for Premium Leveraging Arrangements - Certain risks are inherent in premium leveraging arrangements, such as interest rate uncertainty (loan arrangements), increasing economic benefit costs (split-dollar arrangements) and decreasing net death benefits due to the collateral assignee’s increasing interest in the policy. A well-planned exit strategy provides an effective way to terminate a premium leveraging arrangement by providing the funds necessary to repay the debt and maintain your desired level of insurance protection. However, in wealth transfer situations, creating an efficient exit strategy can be difficult due to the potential gift tax consequences.
Obtaining Additional Gifting Leverage for Exit Strategy - Combining any of the popular exit strategies with other estate planning techniques, such as a family limited partnership (FLP), can significantly increase the leverage and reduce the value of the taxable gift. By incorporating assets that are subject to valuation discounts due to lack of marketability and/or lack of control (e.g., FLP interests, limited liability company interests, or non-voting stock) into the exit strategy, you can effectively increase the value of the remainder interest by 40-100 percent when compared to exit strategies utilizing transfers of assets not subject to valuation adjustments.
*Premium Financing is complex and involves many risks, such as the possibility of policy lapse, loss of collateral, interest rate and market uncertainty, and failure to re-qualify with the lender to keep the financing in place and maintain the desired level of insurance protection. Financing is subject to the lender’s collateral and financial underwriting requirements. Financing lenders typically require additional collateral during the early years of a policy in the form of cash, cash equivalents, marketable securities, a personal guaranty or a letter of credit from a bank approved by the lender. Interests in closely held businesses and real estate are not generally acceptable collateral. In certain situations, additional out-of-pocket contributions may be required to retire the debt and/or maintain the desired level of insurance protection. Insurance proceeds will be lessened by the loan amount and the any required level of coverage should take this fact into consideration.
Private financing premiums can make great economic sense when there is a positive arbitrage between the policy’s internal rate of return or the trust’s investment return and the loan interest rate.
Are you reluctant to incur debt from a third-party lender? Like all commercial lenders, premium financing lenders have strict financial underwriting and collateral requirements. Premium financing borrowers are required to undergo rigorous financial scrutiny from the lender, pledge collateral in addition to the policy itself and, in some cases, there is a risk of the loan being called by the lender.
Do you own assets that do not qualify as collateral for third-party premium financing purposes? Premium financing lenders typically require you to provide additional collateral during the early years of a policy in the form of cash, cash equivalents, marketable securities, a personal guaranty or a letter of credit from a bank approved by the lender. Interests in closely held businesses and real estate are not generally acceptable collateral.
Is it possible to fund your life insurance premiums with minimal gift tax impact AND avoid incurring debt from a third-party lender? Private split dollar may be a cost-effective approach to acquire your needed death benefit while maintaining your privacy and avoiding the need to pledge additional collateral.
*Split dollar agreements are complex and involve tax and legal considerations. Please consult with appropriate counsel before entering into such an arrangement. National Financial Partners Corp., its affiliates and subsidiaries do not offer tax or legal advice.