Category Archives: AEG

WSJ Sounds the Alarm on Premium Financing Plans

In recent years, many of your clients were sold (yes, sold) commercial premium financing plans. A recent Wall Street Journal article entitled “Rising Rates Make Life Insurance Funded with Debt More Costly” raises significant concerns:

“Even before rates started to rise, consumers were being forced to make big payments when strategies failed to deliver the promised returns. Many sued their agents and insurers….The lawsuits claim that agents misled them about the strategy’s risks. The policies are supposed to generate enough income to repay the loans, which can also be repaid through the death benefit….Since rates started to rise, a benchmark used in many premium-financed transactions, the 12-month Secured Overnight Financing Rate, has jumped from less that half a percent a year ago to more that 4% now. Borrowers pay 1.5 percentage points to 3 percentage points above this rate….”

The WSJ article which can be found clickin g here.

In short, many clients who implemented these plans are experiencing the perfect storm of substantially higher borrowing rates, poor policy performance and significantly higher collateral requirements – and with no relief in sight.

I have never promoted or sold a premium financing case. In fact, in 2001, I co-authored an article with Steve Leimberg in Estate Planning magazine which raised many of the issues that are even more relevant 20 years later. As we wrote in our article,

“For decades, one of the most common expressions among life insurance professionals has been, ‘Clients do not object to owning life insurance; they simply object to paying for it.’ In a never-ending quest to satisfy clients’ wishes, a growing number of life insurance agents have been working overtime to devise new strategies to propose to clients and their advisors in the sophisticated, high-income, high net worth marketplace….” There is no such thing as free insurance!

Exiting these plans can be a thankless, time consuming and costly exercise. My goal is simply this: to inform you about this important issue.

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What You Know and What You Might Not Know – Increases in Lifetime Exemptions

Many ultra-high net worth clients used all of their available gift/estate and GST exemptions in 2020 or 2021. For an individual, the exemption increased by $120,000 in 2021, $360,000 in 2022 and is estimated to increase by $860,000 in in 2023. We can make assumptions for the increases in 2024 and 2025. What would it look like if we used the increases to fund additional life insurance.
Click here to find out.

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WSJ – “Who Will Inherit the Family Business? Often It’s Private Equity”

“Neal Rosenthal found a different kind of heir when he set out to craft a succession plan for his wine-importing business a few years ago…Mr. Rosenthal sold a stake in the business to a buyout firm and stayed on as CEO….The industry that made its name taking private big corporations has shifted its focus to smaller targets, snapping up car washes, pet-food makers and specialized manufacturers, some of which have been family-owned for several generations….Many are finding that their own children aren’t interested in taking over. Those whose children want to remain involved recognize that their offspring will need additional technological and financial know-how”

Click here, to read the full article.

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Finseca (AALU): “Time to revisit grantor trust transactions?”

“Rising interest rates, degrading asset valuations, and future legislative uncertainty coupled with high wealth transfer tax exemptions mean it’s a great time to revisit installment sales and similar transactions using grantor trusts.”

To read the full report, click here.

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Finseca (AALU): “The IRS Proposed Exception to the Elimination of Estate Tax Clawback. Is the Clawback…back?”

“In legacy planning, the “clawback” refers to the additional estate taxes that could be triggered by lifetime gifts if the unified federal gift and estate tax exemption is less at the time of death than at the time of gift. If there is a lower exemption at death, without a special rule, the estate tax rules could recapture and tax the value of the gift that was originally sheltered from gift tax under a higher exemption. While final regulations issued in 2019 eliminated this clawback, the preamble to these final regulations acknowledged that the IRS needed to further consider whether gifts that they deem as not true inter vivos transfers should be excepted from this special rule.”

To read the full report, click here.

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Reflections on Life Hacks and the Ethics of Implementation

An interesting David Brooks column appeared in the NY Times on Friday, June 3, 2022 entitled, “The World’s Greatest Life Hacks, For Now.”

Two of the life hacks caught my attention:

“When you have 90 percent of a large project completed, finishing up the final details will take another 90 percent.”
“Just because it’s not your fault doesn’t mean it’s not your responsibility.”

Those life hacks reminded me of what I wrote in an article for Trusts & Estates several years ago entitled, “Beyond Competence: The Ethics of Implementation.”

“What is the answer? It is a change of attitude, a paradigm shift. It is moving away from the notion that responsibility for and commitment to the client can be divided, i.e., if there are four advisors working for the client, then each is 25 percent responsible. No that’s not good enough. Each of us is 100 percent responsible for our client and the proper implementation of the plan. None of the advisors should sleep at night until it is clear that all of the i’s have been dotted and all of the t’s have been crossed. When flawless implementation has been achieved, that is when the client has been served and we, the advisors, ‘prove’ our care and concern.”

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Finseca: Private Split-Dollar – Applying the Tax Courts Lessons in Levine

“The IRS, clearly interested in intergenerational private split-dollar, attempted to secure a third victory. After Morrissette and Cahill, it looked like intergenerational split-dollar was trending the way of the dinosaurs. Then in Estate of Marion Levine, the Tax Court not only resurrected intergenerational split-dollar life insurance planning, but it also offered a roadmap for successfully structuring traditional private split-dollar plans as well.”

Click here to see the full report.

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Finseca: Highlights from the 2022 Heckerling Institute on Estate Planning

“Synopsis: Presenters at the 2022 Heckerling Institute on Estate Planning identified several enhanced areas of focus for legacy and life insurance planning, including: (1) recent developments in areas like intergenerational split-dollar; (2) private placement life insurance; (3) spousal estate planning; (4) business succession planning; and (5) trends in modern trust laws.”

To read the full report, click here.

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Bloomberg Tax – “Private Split Dollar: How Clients Can Capitalize on Exemptions”

“In anticipation of potential tax legislation in 2021, many ultra-high net worth clients took advantage of the large exemption amount to transfer assets outside of their taxable estate. Despite this planning, numerous clients will still have a significant estate tax liability that will need to be funded. Trust-owned life insurance is a helpful planning solution that creates future liquidity outside of client’s taxable estate to help fund this liability.”

An excellent primer in Bloomberg Tax on the benefits of Private Split Dollar.

Click here to read the full article.

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Finseca (AALU): Optimizing Beneficiary Designations For Retirement Plan Beneficiaries

“For many clients, especially public company executives, retirement plans can constitute a significant portion of their wealth. Determining the proper beneficiary for a client’s retirement plans is an integral part of their overall legacy plan. The identity of the selected beneficiary (e.g., spouse, descendants, trust, charity) can greatly affect the income tax impact and thus a family’s lasting legacy.”

To read the full report, click here.

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