Juvenile Life Insurance and Estate Tax Planning
Robert Ives* is a 47 year old corporate executive with a net worth of $7 million. Robert asked Abbott Solutions to develop tax-advantaged, multigenerational wealth strategies that would provide generously for his children and grandchildren. Robert was concerned about federal and state estate taxes scheduled for 2011 that could ultimately subject his estate to a tax bill of over $3 million. In discussing his planning goals, we learned that Robert was not ready to use his lifetime gift-tax exclusion, and plans to develop family and charitable trusts to assist in the efficient distribution of wealth.
Abbott Solutions recommended the purchase of a juvenile life insurance policy for each of Robert’s four children, each with a total annual contribution of $26,000, one half of which is contributed by each spouse. The contribution of each spouse on behalf of their own children is excluded from gift tax and IRS gift reporting requirements. Robert was able to take advantage of very attractive premium rates because of the age of his children. The cash value of the policies will grow in a tax-deferred environment, creditor and lawsuit remote, and receive a guaranteed interest rate and a consistent annual dividend. The cash value may be withdrawn free from any income tax up to the cumulative premium contribution, or can be borrowed in whole or in part. The withdrawal or policy loan can be used for a variety of purposes, including college, a wedding, a down payment for a new home and charitable giving. The children’s knowledge of and access to the policies, will be at a time chosen by Robert and his wife. At the life expectancy of the children, the policies are anticipated to transfer a total of $100 million to Robert’s grandchildren free of any income, gift, estate, and generation-skipping taxes, privately and not subject to probate.
Valuation and Insurance Planning
Rabbi Eli Schwartz* is a well-respected religious figure living in Los Angeles. He is 80 years old, in declining health with a modest net worth of $1 million. Rabbi Schwartz did not have a financial plan in place to provide for his current financial obligations or the medical care he will likely need as his health deteriorates. He met with Abbott Solutions to review what he assumed would be very limited options. After a thorough review of his assets and debts, we determined that the Rabbi’s most valuable asset is an original manuscript, including publication and associated intellectual property rights, hand-annotated by a revered 20th century religious leader. Abbott Solutions was able to obtain an appraisal for the rare manuscript and worked with a preferred banking institution to secure a $10 million life insurance policy using the manuscript as collateral. The policy was later sold on the secondary market for $500,000 providing needed income to Rabbi Schwartz and his wife.
Charitable Trust Financing and Transactional Advice
A prominent charitable trust was the owner and beneficiary of a $20 million life insurance policy. The charitable trust had suffered significant market losses and declining contributions during the recent economic downturn and was no longer able to meet the $700,000 annual premium to maintain the policy. Facing the painful choice of a forced sale in a distressed secondary market or forfeiting the policy entirely, the trustees contacted Abbott Solutions to review other available alternatives.
Abbott Solutions has significant experience dealing in the secondary life insurance industry and worked with the trust to raise short-term financing from several leading market participants to finance the premiums. Meanwhile, Abbott Solutions solicited an independent insurance advisory firm to review the medical reports and life expectancy evaluations for the insured to determine a more accurate valuation for the policy. When market conditions improved, Abbott Solutions found a buyer in the secondary market offering a very attractive price that provided immediate liquidity to the charity sufficient to support their ongoing philanthropic initiatives without interruption.
Irrevocable Life Insurance Trust with Premium Financing
Maria Carlos* is 47 years old, married with two children and has a net worth of $3 million. Maria came to Abbott Solutions looking for retirement, estate and insurance planning recommendations offering lifetime income options, a significant death benefit for her husband and children, and a plan to reduce the size of her estate so her wealth will pass to her loved ones rather than the federal government.
Abbott Solutions helped create an Irrevocable Life Insurance Trust (ILIT) with Spousal Access provisions. We also structured a $5 million life insurance policy with premium financing to substantially reduce Maria’s annual contribution.
Although the proceeds of a life insurance policy are income tax-free and pass tax-free to a spouse, the funds are included in the calculation of the estate tax following the death of the second spouse.
With an ILIT, the insurance policy and the resulting proceeds would be excluded
from Maria’s taxable estate. When Maria retires the trustee can make tax-free distributions to Maria’s husband and Maria would be able to indirectly benefit from these regular distributions. Upon Maria’s death, the trust would receive the proceeds of the policy estate tax-free (a savings of over $3 million) and the trustee would continue making regular payments to Maria’s designated beneficiaries.
Richard Turner* is a 51 year old senior executive at a large investment bank. His annual salary (inclusive of bonus) is approximately $1.1 million and his net worth of $7 million includes several IRA, 401(k), brokerage and deferred compensation accounts he maintains after working at several financial institutions. Richard also has annual stock option and restricted stock unit grants with his current employer, with differing strike price and vesting characteristics. Richard’s professional and charitable activities allowed very little time for sophisticated financial planning. He turned to Abbott Solutions to help synthesize a complex web of personal and family savings and investments and provide strategic advice to manage his wealth in the most tax-efficient manner.
* Names and certain personal details have been changed to protect the privacy of our clients.