Worried about property taxes? A strategy to try


Imagine having a thriving family business that you plan to pass on to your heirs.

Or maybe there is some important ground that you want to leave for your children.

However, during the estate planning process, you find out that your beneficiaries will be subject to a $ 10 million tax bill. (It might seem impossible, given the exclusion of the $ 11.4 million federal inheritance tax, but it can happen with a large family business – especially if you factor in possible state taxes. .) And the only way for your estate to pay this tax, without additional advanced planning, may be to sell the family business or land you hoped to pass.

You don’t want your heirs to be forced into a fire sale, where they have to take any offer just to liquidate as quickly as possible. But what can you do?

Fortunately, there is another way for people with multi-million dollar estates to meet these potential cash needs by using an Irrevocable Life Insurance Trust (ILIT) strategy.

How it works

High net worth individuals and families often wonder how best to create a seamless estate plan. While there are many options, life insurance held in trust (TOLI) is often a good choice for those with illiquid assets (such as businesses, land, or qualified plans). It allows the trust to balance the inheritances between the beneficiaries tax-free, which is one of the main problems for high net worth people. It is also useful for people who wish to donate to charity upon their death.

With an ILIT strategy, the assets held by the trust pass to the beneficiaries according to the wishes of the settlor, without being subject to federal inheritance tax. This is possible because the owner is the trust, which now takes the proceeds from the insured’s estate. The trustee then maintains the policy (s), opening up the family to a variety of important tax planning and charitable giving opportunities. Upon death, the proceeds of the death benefit will be paid to the designated beneficiaries of the trust tax-free of income and inheritance.

TOLI bounties are usually funded by annual exclusion donations, but they can also be funded using private funding or bounty funding.

An illustration: the story of a couple

To see this strategy in action, let’s take an example. Dr and Mrs Anderson have an estate of $ 30 million and are approaching a $ 10 million tax bill upon their death. They are a bit cash-strapped but don’t want to liquidate their assets. The financing of the premiums will prove to be beneficial for them. Let me explain how.

Basically, premium financing is a planning strategy that allows Dr. and Mrs. Anderson to pay premiums for the coverage they need without having to liquidate assets. The Andersons will come to an agreement whereby they will borrow money at a competitive interest rate from a bank to pay off their life insurance policy with a death benefit of around $ 15 million. The cash value of the policy is generally used as the majority of the loan collateral.

Put visually, it would look like this:

By leveraging the lender’s capital rather than their own to pay the annual premiums, they will be able to keep their capital in high return investments. The loan could be repaid from: 1) part of the proceeds of the death benefit of the insured, whether Dr. or Mrs. Anderson, 2) a tax-free withdrawal part of the cash value, or 3) a sale of assets in the future.

Benefits of life insurance held in trust

This strategy can not only help with effective tax planning, but it also allows the proceeds to be used to help the estate pay expenses and taxes after the settlor has passed away. This liquidity opportunity is available through a provision that gives the trust the discretion to purchase assets from either spouse’s estate or make loans to either estate, which keeps cash available.

An ILIT also gives an individual the opportunity to donate to a charity while preserving a legacy for the chosen beneficiaries. ILIT provides a death benefit that replaces the value of the donation made to charity.

In addition, donations made to ILIT will ultimately reduce the overall value of the estate, which in turn will reduce the amount that would be calculated in the taxable amount.

Potential pitfalls

If you are considering donating to your life insurance policy, it is important to be aware of the tax payable on donations. For 2019, any donation greater than $ 15,000 for the year ($ 30,000 for married couples) applies to the exclusion of tax on donations and requires the filing of Form 709. Thus, the maximum premium that you could offer without being subject to donation tax would be $ 30,000. Often, this is not enough to properly plan your succession.

Many people need large policies that charge a lot more than the annual exclusion of donations allows to cover their needs. This is where premium financing can be a valuable tool for those who wish to maximize their wealth with a large life insurance death benefit and without having to liquidate and pay taxes on other investments to make investments. large premium payments. Premium funding also avoids using your annual gift tax exclusions and reducing your overall lifetime exemptions.

Plus, by leveraging a lender’s capital rather than your own to pay annual premiums, you retain a significant amount of capital that you can use to maintain or make investments or preserve your savings or cash flow needs. If the performance of the policy is favorable relative to the interest rate on the loan, premium financing offers you the opportunity to potentially earn a higher level of interest on the policy than the interest you pay on the loan. Basically, we fund our homes, our businesses, and pretty much everything else, so why shouldn’t we fund our life insurance?

But financing premiums involves certain risks. For example, lending rates may rise to a higher level than expected, which may require the establishment of a guarantee with the bank. Financial institutions generally require borrowers to provide collateral from liquid assets, such as securities, and if the value of those securities declines, the lender may require additional collateral. Longevity can also be a risk; the longer the insured lives, the greater the amount of principal and cumulative interest on the loan, which could reduce or even eliminate the remaining net death benefit of ILIT.

It’s complicated, so get help

While an ILIT strategy can be a valuable option for those who wish to protect their estate from a hefty (if not nightmarish) tax bill, it requires several complex legal and financial decisions. A plan funded by premiums, in particular, may require constant monitoring. To help you navigate the nuances, you’ll want to hire an experienced, independent finance professional and an estate attorney.

As difficult as it is for you and your loved ones to think about your passing, having a plan in place is the only way to ensure that your inheritance lasts. Donations, taxes, and charitable giving should be a priority if you hope to effectively and efficiently transfer the estate you’ve worked so hard to build. If you don’t have a plan, I can assure you the government has one for you.

Kim Franke-Folstad contributed to this article.

President and CEO, Wealth Planning Network

Michael Jankowski is President and CEO of Chicago’s wealth management and estate planning firm Wealth Planning Network (www.wpn360.com). A seminar leader and frequent speaker, he specializes in working with physicians, business owners and business leaders.

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