Tuesday, October 23, 2018

Gift Tax Problem Solved

Mr. and Mrs. Hall are working with an estate attorney. They have a life insurance need and the ability to pay the premium but have limited ability to make gifts to a trust. They would like to secure life insurance coverage but do not want to pay gift taxes. The attorney determined the amount needed, and the task was to figure out how to pay for it.

Financing life insurance premiums is a gift tax efficient method of getting assets into an irrevocable life insurance trust (ILIT) to pay life insurance premiums. Premium financing involves the trustees of an ILIT to enter into a financing arrangement with either commercial lenders or with the grantors of the ILIT. This concept is especially useful in situations where the cost of the life insurance premium exceeds the gifting ability. Leveraging the loan interest and the donor's gifting ability usually allows large life insurance premiums to be paid at a fraction of the gift tax cost.

The Solution
Female, age 54 Issued Preferred Non-smoker

Male, age 54, Issued Preferred Non-smoker               

Policy #1:
  • $2.5m death benefit with Chronic Illness Rider, the Family Insurance Trust is the owner and beneficiary
  • Survivorship Indexed Universal Life Policy
  • $21,000 annual premium
Policy #2:
  • $7.5m death benefit with a Chronic Illness Rider; his personal ILIT is the owner and beneficiary
  • Indexed Universal Life Policy
  • $138,000 annual premium
First Year Target Premium for Both: $104,000 and $55,000 in excess premium

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