A reminder that the next meeting of the Asset Protection society in Orange County will be on Tuesday, September 22 at 7:00 PM. We have had an overwhelming response to this event and we have had to change the location of the event due to that response. We currently have over forty certified public accountants, financial advisors, insurance agents, attorneys and other advisors who will be attending this event. If you are interested in attending, we do have a few more spots open so contact me to RSVP.
The speaker will be David Shaver of Ferruzzo and Ferruzzo, LLP. David Shaver's bio can be found here: ( http://www.ferruzzo.com/staff/dshaver.asp ). David is the partner in the firm that handles all of our trust, estate, and fiduciary litigation and he will be speaking to the CPA's, Financial advisors, and any other advisor who regularly works with trustees and others who are in fiduciary roles such as these about common mistakes that people in these positions make that generate liability not only for the trust, estate, or other entity, but also for the person individually and possibly for the other advisors.
If you advise fiduciaries, trustees, executors, administrators, conservators, guardians, or anyone else who has these increased duties, then you will not want to miss this presentation. Individuals who are acting in these capacities for family members may also want to attend as there will be a time for questions and answers on what they should and should not be doing in these roles. If you are interested in attending, please feel free to contact me at mziebold@ferruzzo.com to RSVP for this event. IF YOU DO NOT KNOW OF THE NEW LOCATION OF THIS EVENT, CONTACT ME FOR THE NEW ADDRESS.
Friday, September 18, 2009
Premium Financed Life Insurance Programs
A client recently asked me about his options for paying for life insurance. His agent told him that he should not own the policy as the death benefit would be included in his taxable estate, so he should have his children purchase the life insurance on his life and be the beneficiaries of the policy. His concern was over the method to transfer enough to the children to pay for the premiums without gift taxes. I told him that gift taxes in that context would be a concern but from an asset protection perspective he probably would not want the children to own the policy outright. If the death benefit paid out directly to them, then they would be open to lawsuits, transmuting the separate property gift to community property (and leaving it open to divorces), etc.
The conversation then turned to using an Irrevocable Life Insurance Trust (ILIT) but the same concerns arose regarding the gift tax consequences of funding the trust with enough assets to pay for the premiums on the life insurance. With the withdrawal notices that most estate planners draft into ILITs, the annual gift tax exclusion gifts can be used to place a certain level of assets into the trust, but otherwise (especially if a client has a small amount of heirs or beneficiaries) the gifts will be taxable or use up some of their lifetime gift tax exemption amount (currently 1.0 Million per person). We then had a discussion on premium financed life insurance and the client both enjoyed the idea and decided to move forward with implementing this strategy.
Premium Financed Life Insurance is a planning strategy that uses third party financing to pay for the premiums. Usually the Life Insurance Policy is used as the primary collateral and the lender will credit a portion of the cash value of the policy against the overall collateral requirement. Any shortfall in the collateral position must be made up by someone, either the trustee of the trust or the insured or a beneficiary. By borrowing the premiums, the Trustee can enter into a variety of strategies to fund the insurance policy, such as:
1) Using Equity Indexed Universal Life policies to attempt to grow the cash value faster than the loan.
2) Having the insured gift an amount of funds to the trust on an annual basis to cover the interest payments on the loan.
3) Do one of the above and enter into other advanced estate planning such as a rolling GRAT (Grantor Retained Annuity Trust) strategy to place other assets inside of the trust on a tax efficient basis.
4) One of the other various programs that are out in the marketplace today.
Some of the important issues to keep your eye on with regard to premium financed life insurance strategies is the management of the third party loan (ensuring that the LIBOR or other interest rate is kept as low as possible throughout the term of the loan), the growth of the policy (if using a cash value strategy), and the requirements to either pay interest or to manage those interest payments during the lifetime of the loan.
I have reviewed many of the premium financed life insurance programs that are out in the marketplace and have an opinion on the best strategies from the legal perspective (as I am not insurance licensed and do not share in any of the commissions paid on any of these insurance products). If it has ever been suggested that you enter into a premium financed life insurance program and it did not make sense to you or there was something about the program that you did not like, then you may have been told about some of the inferior programs that are out in the marketplace. I advise many clients about the proper use of life insurance in their comprehensive estate plans for the payment of taxes, replacement of income of a deceased spouse, for charitable gifting after death, or for other reasons. All of these can be met with a premium financed life insurance program if the plan makes sense for you and your situation. If you have questions about this or would like to talk further about what planning options are available for you, do not hesitate to contact me at mziebold@ferruzzo.com or 949-608-6900.
The conversation then turned to using an Irrevocable Life Insurance Trust (ILIT) but the same concerns arose regarding the gift tax consequences of funding the trust with enough assets to pay for the premiums on the life insurance. With the withdrawal notices that most estate planners draft into ILITs, the annual gift tax exclusion gifts can be used to place a certain level of assets into the trust, but otherwise (especially if a client has a small amount of heirs or beneficiaries) the gifts will be taxable or use up some of their lifetime gift tax exemption amount (currently 1.0 Million per person). We then had a discussion on premium financed life insurance and the client both enjoyed the idea and decided to move forward with implementing this strategy.
Premium Financed Life Insurance is a planning strategy that uses third party financing to pay for the premiums. Usually the Life Insurance Policy is used as the primary collateral and the lender will credit a portion of the cash value of the policy against the overall collateral requirement. Any shortfall in the collateral position must be made up by someone, either the trustee of the trust or the insured or a beneficiary. By borrowing the premiums, the Trustee can enter into a variety of strategies to fund the insurance policy, such as:
1) Using Equity Indexed Universal Life policies to attempt to grow the cash value faster than the loan.
2) Having the insured gift an amount of funds to the trust on an annual basis to cover the interest payments on the loan.
3) Do one of the above and enter into other advanced estate planning such as a rolling GRAT (Grantor Retained Annuity Trust) strategy to place other assets inside of the trust on a tax efficient basis.
4) One of the other various programs that are out in the marketplace today.
Some of the important issues to keep your eye on with regard to premium financed life insurance strategies is the management of the third party loan (ensuring that the LIBOR or other interest rate is kept as low as possible throughout the term of the loan), the growth of the policy (if using a cash value strategy), and the requirements to either pay interest or to manage those interest payments during the lifetime of the loan.
I have reviewed many of the premium financed life insurance programs that are out in the marketplace and have an opinion on the best strategies from the legal perspective (as I am not insurance licensed and do not share in any of the commissions paid on any of these insurance products). If it has ever been suggested that you enter into a premium financed life insurance program and it did not make sense to you or there was something about the program that you did not like, then you may have been told about some of the inferior programs that are out in the marketplace. I advise many clients about the proper use of life insurance in their comprehensive estate plans for the payment of taxes, replacement of income of a deceased spouse, for charitable gifting after death, or for other reasons. All of these can be met with a premium financed life insurance program if the plan makes sense for you and your situation. If you have questions about this or would like to talk further about what planning options are available for you, do not hesitate to contact me at mziebold@ferruzzo.com or 949-608-6900.
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