In today’s ever changing economy and political environment, there are several unique estate planning tools that one can consider. An essential piece that should be a part of every sound financial plan, is life insurance.
Knowing what product to use and how to fund it requires careful analysis but can make a significant difference in protecting your children’s inheritance.
Under current Federal tax codes each parent can provide a $12.92 million lifetime gift exemption in passing assets to children. But individuals with greater wealth to pass down may want to consider buying insurance versus making the IRS the big winner. One option to contemplate with some variables is a plan called Private Split Dollar, in which an individual or couple and their beneficiaries, using a specialized trust, enter into an agreement to split the costs and benefits of a life insurance policy among the different parties.
This strategy can open up estate planning avenues that were otherwise closed. The savings from a properly constructed “split dollar” plan could be massive. Inaction would be costly. Without acting, a 60-year-old couple in reasonable health, with a net worth of $50 million, may be leaving a $9 million tax bill if they fail to take action while the rules still allow it.
Essentially, YOU are the “bank” loaning money at the Applicable Federal Rate (AFR). The Annual short-term AFR for January 2023 is 4.50%; The Annual mid-term AFR is 3.85%; the Annual long-term is 3.84%.
Here is some important information you need to know:
■ “Split Dollar” can finance a permanent life insurance policy that ensures a maximum estate and generation-skipping transfer (“GST”) tax leverage. The policy is owned by an insurance trust to avoid estate and GST taxation of the death proceeds.
■ In a “private” split-dollar arrangement, the insured (or spouse) and the trust obtain a life insurance policy on the insured and/or spouse’s life.
■ The trust pays only the annual “term cost” for the trust’s share of the death benefit, and the insured (or spouse) pays the remaining premium. The trust’s share, in the early years, is usually only a small percentage of the annual premium.
■ The insured’s (or spouse’s) estate will receive a portion of the death benefit equal to his or her premium outlay, and the trust will receive the remainder of the death benefit. Cash value is split in a similar way.
At the point in time that there is sufficient cash value in the policy, the split dollar plan may terminate in what is known as a “roll-out.” The trust repays the insured (or spouse) for his or her premium outlay (usually by withdrawing cash from the policy), and the trust has full ownership of the policy.
Private split dollar plans can provide tremendous leverage. Call today to learn how to structure the numerous options that are available under a split-dollar approach.
