While the first $10,000,000.00 a couple has can legally avoid U.S. Federal Estate Tax, much larger estates face tax bills in the millions of dollars. The rate of tax can be 40%. That is 40% of principal; not just the income on it. And it is due 9 months from the date of death.
THE PROBLEM
Families with large estates likely still have a big generational tax bill due (often in the tens of millions of dollars). That affects continuing growth of the dynasty. Where will they get that cash?
For example, many families own closely held businesses and real estate worth $100,000,000.00 or more. Tax on that might total $36,000,000.00. Of course, good planning might lessen that, but let's say that is the tax for purposes of discussion. That leaves the family $64,000,000.00 which is not bad. But where are they getting $36,000,000.00 in cash? Families will not want to sell or get mortgages on valuable, but illiquid, family businesses and long-term (perhaps generations old) real estate holdings to pay tax.
Life insurance is the classic answer to at least part of that problem. The death benefit provides cash to pay the tax. (Common planning uses Irrevocable Life Insurance Trusts to keep the death benefit out of the gross estate. That same planning works here too.)
Even if life insurance is the answer, premiums tie up cash. Again, the cash needed for premiums may be important for existing investment strategies or business working capital.
THE SOLUTION
My organization works with a gentleman who, for 20 years, has been doing nothing else but arranging transactions that solve this problem. The challenge he has mastered is putting together the team of credible and institutional players to make it happen. The plan works this way.
The insurance company (that has done this before) issues a policy contract providing the needed death benefit. An Irrevocable Life Insurance Trust drafted by the insured's lawyer owns the policy.
HOW IT WORKS
Premium overfunding helps assure the policy works. The schedule of payments assures treatment of the policy as Life Insurance under the Internal Revenue Code. A bank that also has done all this before lends that premium to the Irrevocable Life Insurance Trust. The insured does not need to sign or guarantee the loan.
Bank security for repayment is the policy itself and the cash surrender value build up. During certain years of the life of the loan some limited collateral is needed. That typically goes away as the cash surrender value catches up.
The total out-of-pocket is from interest on the loan and professional fees. Interest is flexible and after a few years capitalizes into the loan balance. This further cuts out out-of-pocket expenses.
Index Universal Life methods of producing interest grows the cash surrender value with no risk of market loss. Some of the interest grows based on performance of a stock market index. The S&P is usually among the choices for the Index.
The plan calls for a time when the loan can be paid back to the bank. Further growth of the net cash surrender value continues to support the necessary death benefit.
Arranging such a transaction is complex. So, an existing team of players is valuable to smooth out the process. Our colleague has that team. Plus, his own organization stays involved as the resulting arrangement is managed over the years.
Where it works, this is an excellent program. His minimum is a death benefit of at least $10,000,000.00. Interested parties or advisers receive a full illustration, sometimes 65 pages long. It includes a description of every working part, assumption, and the supporting data that justifies them. The parties and their advisers review and agree to the individually crafted transaction before there is ever any commitment.
All in all, this ability to finance premiums of life insurance contracts is not fancy. There is no unusual sophisticated tax structure (other than the common and widely used Irrevocable Life Insurance Trust). Some clients prefer to have this technique result in cash to fund income tax-free retirement benefits. The team can make that happen; of course, at the cost of the estate tax exclusion for the death benefits.
FOLLOW-UP
Like any other life insurance sale, an illustration can be presented with a date of birth and the total death benefit desired. An insurability exam will obviously be needed before a policy issues. Once the idea is considered attractive; fine tuning to meet individual needs and preferences can happen.
CONCLUSION
In other words, for those who qualify and suitable circumstances, there is a rather easy transaction to create cash to pay estate taxes so a dynasty can last beyond the current generation. There is no mystery or magic. The result is due to an existing, successful, team that has done it before and is in the business of doing it again.
If you want help and direction to complete your Retirement & Estate Planning, come to http://www.scottfbarnettconsulting.com for EVERYONE's RETIREMENT & ESTATE PLANNING ONLINE WORKSHOP. I guide, not just teach you, to finish the work you need to do. It is easier and when completed, you will have PEACE OF MIND knowing you, your family, and your kids are protected. I look forward to working with you.
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