THE PROBLEM: Estate Tax
The 2017 the tax code provides that every penny in excess of $5.49 million dollars is taxed upon death at rates that rapidly escalate to 40%. For the truly wealthy, a $5.49 million dollar estate tax exclusion doesn’t begin to preserve the substance of what you’ve worked so hard to accumulate.
The solution: Life Insurance held in an ILIT (Irrevocable Life Insurance Trust).
Life Insurance is the time tested solution of leveraging assets into dollars needed to pay future taxes so you can pass on what you’ve worked so hard to accumulate.
THE PROBLEM: Paying the Premium
It is universally agreed that Life Insurance when structured correctly is the least expensive way to pay estate taxes. However, you have to pay the premium, which can be daunting and deplete your available cash reserves.
The solution: Premium Financed Life Insurance.
Premium financing is a technique that utilizes a loan from an independent lender to fund the premiums on a life insurance policy. Business owners and ultra wealthy individuals who need protection, but don’t want to tie up significant sums of available cash in a life policy use this technique.
In this solution, a policy is purchased inside an ILIT or FLP (family limited partnership) that is established to keep the death benefit outside of the estate. The ILIT/FLP, resides outside of the taxable estate, owns the policy and directs the asset to pay the taxes owed upon death.
A properly structured premium financed life insurance policy is designed to significantly reduce the amount of out-of-pocket capital needed to purchase life insurance. Here is where the arbitrage lies. Bank Financing is arranged at a fixed rate from an independent lender and by utilizing an indexed universal life policy to obtain a crediting rate on funds deposited greater than your borrowing rate. This spread assists in building internal cash value such that the policy is able to repay it’s own loan.