The Washington Report: – Wealth Transfer Edition
“Although high net worth clients under the $50 million threshold (HNW clients) may continue to implement planning, we’re seeing some hesitancy now, since they have less total gifting capacity than UHNW clients and greater concerns about giving away too much. Many HNW clients prioritize control and flexibility, often viewed by them as the ability to “undo” planning if circumstances or laws change.”
To read the full report, click here.
“Jensen Huang, the chief executive of Nvidia, is the 10th-richest person in the United States, worth $127 billion. In theory, when he dies, his estate should pay 40 percent of his net worth to the government in taxes. He is also the beneficiary of a series of tax dodges that will enable him to pass on much of his fortune tax free….The savings for his family are on a pace to be roughly $8 billion. It likely ranks among the largest tax dodges in the United States.”
“’From an estate-tax-planning perspective, it’s a grand slam,’ said Jonathan Blattmachr, a prominent trusts and estates lawyer who reviewed Mr. Huang’s disclosures for The Times. ’He’s done a magnificent job.’”
To read the full article, click here.
The Washington Report: – Business Edition
“The Court removed from the taxpayer’s arsenal of arguments the theory that a redemption obligation necessarily reduces the net value of a corporation. But even before the Court’s decision, many advisors had been hesitant to rely on that theory because of its flawed logic. Taxpayers still have multiple avenues available for structuring redemption agreements funded with life insurance. Given the Connelly decision, it is highly recommended that taxpayers review their sale and redemption agreements to determine what changes, if any, should be made in light of the Court’s decision.”
To read the full report, click here.
“While a very important tool, premium financed arrangements should be carefully evaluated and actively managed post implementation. Since the success of the arrangement is based on a positive economic arbitrage, advisors should carefully evaluate and stress test (i) fluctuations in interest rates; (ii) fluctuations in the insured’s portfolio; (iii) the parties assigned to monitor performance; (iv) exit strategies; and (v) tax implications.”
To read the full report, click here.
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.
“Life insurance continues to play a vital role in legacy planning because of its unique value proposition – a source of income tax efficient liquidity, efficient wealth transfer on a multi-generational basis, a mortality hedge, a non-correlated asset class, and strong internal rates of return relative to the current stock market. Nonetheless, advisors should evaluate how higher rates and a volatile market may impact the performance of both new and existing life insurance funding approaches.”
Click here to read the full report.
“The “step transaction” doctrine is alive and well. In the foot-race to beat potential tax law changes, families often miss the forest from the trees. The economic realities and entity formalities must be respected in the execution of a gift transaction….On November 10, 2021, the Tax Court rendered its decision in the case of Smaldino v. Commissioner, which involved a purported gift of LLC interests by Mr. Smaldino to his wife, followed by a purported gift of the same LLC interests, the very next day, from Mrs. Smaldino to a dynasty trust for the sole benefit of Mr. Smaldino’s children from a prior marriage. The Court found a series of ignored formalities, and that as a practical matter there was never a time when Mrs. Smaldino would have been able to effectively exercise any ownership rights with respect to the LLC interests “given” to her. The Court held that Mr. Smaldino never effectively transferred any LLC interest to Mrs. Smaldino, and consequently the dynasty trust received its entire LLC interest from Mr. Smaldino, creating a taxable event.”
To read the full report, click here.
“While conventional estate plans focus on a “traditional” family notion of one husband, one wife, and their children, families today often involve far more complex relationships. Thus, modern-day families often present unique planning issues, such as the need to satisfy obligations under marital agreements, the goal to provide simultaneously for both the surviving spouse and children from prior relationships, and the desire to ensure “fair” treatment of children from prior relationships, all while minimizing potential conflicts between the spouse and those same children. The acquisition of life insurance, as well as other “tweaks” to the conventional core plan, can address these objectives.”
To see the full report, click here.
“As part of their comprehensive legacy plan, clients who are charitably inclined, hold significant highly appreciated assets, and wish to create a lifestyle “annuity” should consider a CRT, especially if they can benefit from an income tax charitable deduction. Selling an appreciated asset inside a CRT may provide an economically superior result compared to selling the same asset in a client’s own hands, especially when done in conjunction with purchasing additional life insurance through an irrevocable life insurance trust (“ILIT”).”
To read the full article, click here.