Why This Works 2


The Internal Revenue Code has for decades provided that assets held outside of the deceased’s control are not part of the taxable estate. For an equal number of decades, wealthy individuals and their advisers have worked diligently to devise methods to transfer wealth to subsequent generations and bypass the gift and estate tax. For an equal number of decades the Federal government has tried to close the loopholes.

However, the one recognized strategy that consistently works and has been upheld by court after court is to utilize an ILIT or FLP to hold a life policy insuring the patriarch/matriarch of the family. In a typical scenario, the insured makes gifts to the ILIT equal to the gifting allowance times the number of beneficiaries. This annual exclusion gift is used by the ILIT to pay the premium on the policy. However, for the ultra wealthy, the amount of premium required to support larger death benefits exceeds the annual gifting limit.

For an equal number of decades, the IRS recognizes that a loan is not a gift. If it must be repaid, it does not count against the annual gifting exclusion or lifetime exemption. Thus, we rely on premium financing.

In premium financing, a small contribution from the insured multiplied by a bank financed loan of the remainder of the premium accomplishes the objective – funding a life policy of enough size to meet the needs of the insured without creating a gifting event or stripping the current estate of cash.