Imagine having a thriving family business that you would like to leave to your heirs. Or, maybe you want to leave your children a substantial piece of land. In your estate planning, however, you discover that your estate will be subject to a $10 million tax bill. The only way for your estate to pay this tax liability, in the absence of additional advanced planning, may be to sell the family business or land you wish to pass on. You don’t want them to be forced into a fire sale, where they have to take any offer just to liquidate as quickly as possible. Fortunately, there is another way to address these potential liquidity needs.
Life insurance can be both a tax-efficient and cost effective source of funds for addressing these issues. Many high net worth individuals use life insurance and trusts in their overall estate plan to help preserve their estate from tax liabilities and other expenses. To pay for these large premiums, life insurance premium financing may be an attractive option.
Premium financing is a planning strategy that enables you to pay the premiums for the coverage you need without having to liquidate assets. It involves an arrangement through which you borrow money at a competitive interest rate from a bank to pay for your life insurance policy. The policy cash value is generally used as the majority of the collateral for the loan.
By leveraging a lender’s capital rather than your own to pay annual premiums, you can retain your capital in high returning investments. The loan could be paid off from 1) a portion of the death benefit proceeds upon the death of the insured(s), 2) a tax-free withdrawal from a portion of the cash value, or 3) an asset sale in the future.
Premium Financing can be a very valuable tool for those who want to maximize their estate with a substantial life insurance death benefit, without having to liquidate and pay taxes on higher returning investments in order to pay large premium payments. Premium financing also avoids using up your annual gift exclusions ($14,000/individuals, $28,000/couples) and reducing your overall lifetime exemptions ($5.49 million/individuals, $10.98 million/couples). When the death benefit is paid to the trust, it is generally paid income tax and estate tax-free leaving more for your heirs.
While Premium Financing is a very advantageous strategy for some, it does have associated risks. Lending rates may increase more than projected, which may require their required collateral to be posted with the bank. If securities are posted as collateral and those securities decrease in value, the lender may require additional collateral to be posted.
To determine if Premium Financing may be appropriate for you and your financial situation, please contact our office to schedule a complimentary consultation.