High Net Worth Life Insurance Estate Planning

High Net Worth Life Insurance Estate Planning – Jason Mericle | June 1, 2022 | Estate Planning, Irrevocable Life Insurance, Planning Ideas, Premium Funded Life Insurance

When it comes to estate planning, life insurance is an important tool for high-income individuals and families. Generally, life insurance is used by private industry to provide liquidity for estate taxes, balance the estate, pay current expenses and maintain business continuity.

High Net Worth Life Insurance Estate Planning

Net worth life insurance estate planning is an estate planning process that includes life insurance as a tool to help effectively transfer your assets to your heirs. Tax results and benefits.

High Net Worth Life Insurance Estate Planning

Life insurance can help families avoid liquidating or using estate assets to pay estate taxes, expenses and other liabilities. This can play an important role when ownership of real estate or other liquid assets cannot be easily converted into cash.

Without a proper plan, your life insurance policy may roll over to your property and become subject to property taxes.

One of the common reasons why high-income families choose to purchase life insurance is to provide the ability to pay some or all of their property taxes.

Estate tax is a tax imposed on the transfer of property after death. Estate taxes are calculated according to the value of the property at the time of death.

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In 2022, each person is exempt from property taxes worth $12,060,000. That’s $24,120,000 per couple. Any amount above the exemption is subject to an estate tax of 40 percent.

Under current law, on January 1, 2026, the estate tax exemption will increase to an inflation-adjusted amount of $5.49 million.

In addition to the federal estate tax, there are 17 states that have an estate or inheritance tax. Taxable property values ​​also vary from state to state. Click here if your state requires an estate or inheritance tax.

One of the main benefits of using life insurance for estate planning is that death benefits are often tax-free.

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However, personal ownership of a life insurance policy may include or add a death benefit to the value of the insured’s property. As a result, the death benefit is subject to a tax rate of 40 percent of the estate.

An irrevocable life insurance trust (ILIT) is a type of trust established to be the owner and beneficiary of one or more life insurance policies.

There are many benefits associated with using an irrevocable life insurance fund for estate planning purposes, including the ability to reduce estate taxes, avoid probate, protect against creditors, and provide financial security to loved ones.

Establishing an irrevocable trust for life insurance begins with drafting and execution. A qualified attorney should do this. In this process, the insured(s) usually act as trustee. The grantor will also appoint a trustee and successor trustees for the beneficiaries of the trust.

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You can also include any terms in the trust that you think are necessary. For example, a beneficiary must be of a minimum age to receive trust assets.

The trustee is responsible for signing on behalf of the trust. The trustee is responsible for overseeing the trust and making decisions based on the language of the trust.

One benefit of using an irrevocable life insurance trust (ILIT) is that it can help reduce estate taxes. When a high net worth person dies, their assets are usually subject to estate taxes.

However, assets held in an irrevocable trust are generally exempt from these taxes. This saves the heirs of the estate a significant amount of money.

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Another benefit of using an irrevocable life insurance fund is that it can help prevent probate. Probate is the legal process of probating a will, and the process can often be long and expensive. However, if a person’s assets are held in an irrevocable trust, these assets are not subject to probate. This will expedite the distribution of assets after the death of the person who created the trust.

Finally, an irrevocable life insurance fund can provide financial security to loved ones in the event of death. ILITs can offer many benefits to individuals and families looking to plan their estate efficiently.

If you are considering using an ILIT in your own estate planning, it is important to work with an experienced attorney who can assist you in drafting and executing the appropriate documents.

Typically, high-net-worth individuals and families pay into their irrevocable life insurance trusts with a tax-free portion of the gift’s annual amounts. A tax-free annual gift is an amount you can give to someone each year without tax on that amount.

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In 2022, the annual tax-free gift amount is $16,000 per individual donor. If you and your spouse are the grantors of an ILIT with four beneficiaries, you can contribute up to $128,000 annually to the trust tax-free.

This is done by writing a check from your property to your ILIT. The ILIT must establish a checking account before the trustee can make a gift. The trustee will deposit the gift into the trust’s checking account. The trustee then writes an ILIT check to the insurance company.

If your life insurance premium exceeds the annual gift tax exemption, you may be subject to gift tax.

However, there are ways to reduce or avoid gift taxes, such as using life insurance or a private sponsor to fund premiums.

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Private financial life insurance is an arrangement where a high net worth individual or family makes a personal loan against their irrevocable life insurance trust.

In most cases, the family will grant an annual loan to the trust or a sum of money in lieu of promissory notes from the trust. The promissory note will bear interest equal to or greater than the applicable federal interest rate (AFR).

The trust uses the borrowed money to pay insurance premiums from the trust to the insurer. If the lender takes out a lump sum loan, the trust can invest additional funds and/or use them to pay interest to the family.

At the end of the loan period, the trust will repay the loan using the trust’s assets. This can be done using the cash value from the life insurance policy or the proceeds from the policy’s death benefit when the death claim is paid.

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In some cases, it may be reasonable to use a portion of the tax-free annual gift amount and then borrow the balance required to pay the remaining life insurance premiums.

Including loan repayments and liable for property tax. The total death benefit balance will be subject to trust income relief and estate tax.

Financing life insurance premiums is the process of borrowing premiums from a third party lender – usually a bank. When life insurance premium financing is used in an ILIT, both the borrower and the loan guarantor are the trustee.

The lender pays the premium to the insurance carrier. The ILIT will contribute the interest on the loan made by the granting trust. The trustee will make interest payments to the senior financial lender from the current account in trust.

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Senior financial lenders require collateral for balances. In most cases, the trustee can pledge cash values ​​under the policy to secure the lender’s collateral claim.

However, if the cash value is less than the loan balance, the issuing lender will have to provide additional collateral.

In these situations, the issuer will often pledge the money in the form of a checking or savings account. A portfolio can also be used.

The trust can repay the loan while the insured is alive, in cash or other liquid assets from the lender. In case of death, the premium is returned to the borrower from the amount of the death benefit. After ILIT, the balance of the debt minus the death benefit will be received.

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Funding a life insurance premium usually makes the most sense for a net worth life insurance plan when an individual or family:

Since high net worth individuals and families use life insurance for wealth planning, it is important to choose the right life insurance policy. In most cases, some form of permanent life insurance makes the most sense.

Choosing the right type of permanent life insurance policy can often vary depending on your needs and what you and your family are trying to achieve. Permanent life insurance is a type of whole life insurance or universal life insurance.

When using life insurance for estate planning purposes, we recommend some type of general life insurance.

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Universal life insurance can be the most cost-effective because the cost of coverage is usually lower than whole life insurance. Universal life insurance offers more flexibility than whole life insurance.

When designing net worth life insurance, the main goal in designing a policy is usually to ensure the most coverage at the lowest cost.

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