Category Archives: AEG

The Washington Report: – Wealth Transfer Edition

“As Congress and the Biden administration continue to consider the grantor trust rules, some practitioners have turned their attention to the little-used nongrantor irrevocable life insurance trust (“ILIT”) as a planning alternative.  The ILIT, one of the most commonly used legacy management tools, is typically established as a grantor trust for income tax purposes for many reasons but the most important being the ability to use the trust income to pay life insurance premiums.  The nongrantor ILIT is possible but not ideal.  In most situations, the grantor ILIT will remain the preferred structure.  However, it is possible to structure the ILIT as a grantor trust from the outset and allow for a future toggling-off of grantor trust status to manage possible changes in the law.”

Click here to read the full report.

Robert W. Finnegan has an excellent article in the current issue of Trusts & Estates (April, 2023) entitled, “The GRAT Enhancement Strategy.”

From the article:

• Grantor retained annuity trusts (GRATs) have been a great wealth transfer success story…the shortcoming of successful GRATs is that their assets will be included in the children’s taxable estates.
• With the GRAT enhancement strategy, the GRAT remainder makes a split dollar loan to a dynasty trust to purchase life insurance, moving appreciation of GRAT assets via the policy death benefit to the dynasty trust.

Finnegan provides a robust and detailed Case Study illustrating the benefits of this planning and concludes with “The GRAT enhancement strategy is a powerful wealth transfer tool in and of itself.  It’s applicable to GRATs, staged distribution trusts and any trust in which the assets have been removed from the clients’ estates but will be taxed in the children’s estates.  Clients may be more receptive to additional planning if they can minimize their involvement and expenses and use assets that have already been transferred.”

I highly recommend this article for your review and consideration.

The GRAT Enhancement Strategy – Trust & Estates – 3.20.23

The Washington Report: Business Uses Edition

“A rabbi trust is a vehicle that provides for such informal funding without running afoul of tax or ERISA compliance issues resulting from “funded” NQDC plan benefits. This article addresses key questions to consider when adopting a rabbi trust, including (i) whether the rabbi trust should be irrevocable; (ii) even if irrevocable, when can assets revert to the employer; (iii) should the rabbi trust include enhanced protections upon the employer’s change in control; (iv) what kind of investments should the rabbi trust hold and what kind of control over those investments should the employer retain; and (v) can the rabbi trust hold employer stock?”

Click here to read the full report.

The Washington Report: – Wealth Transfer Edition

“With perceived threats to grantor trusts and increasing desire for flexibility, some practitioners gravitated to the “Family LLC” as an alternative to the conventional irrevocable life insurance trust (“ILIT”).  The Family LLC provides a flexible vehicle for legacy planning that is here to stay. When life insurance is owned by a Family LLC, there is a tradeoff between the flexibility afforded by the Family LLC and the risk of estate tax inclusion to the parent/insured. And given the upcoming Corporate Transparency Act, the Family LLC may also have more complexity than previously thought.”

Click here to read the full report.

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 clicking 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.

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.

“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.

“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.

“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.

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.”