Tag Archives: Estate Planning

Finseca (AALU) “California Amends Tax Code Affecting Incomplete Gift Non-Grantor Trusts”

The Washington Report: – Wealth Transfer Edition

“Taxpayers should exercise caution in implementing ING trusts, particularly in light of California’s new law, which is effective retroactively.  While the ING trust remains a viable wealth preservation strategy in many states, it is unclear how long this will continue.  Taxpayers who implement this strategy are well advised to craft an exit strategy as well.”

Click here to read the full report.

 

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Finseca (AALU): Buy-Sell Agreements in Light of Connelly Part 2: Redemption Buy-Sell Agreements and Life Insurance Proceeds

The Washington Report: – Wealth Transfer Edition

“Valuation appears to be trending within the Internal Revenue Service (“IRS”) these days: insurance policy valuations, CCAs regarding GRATs, charitable planning targeted, and now the Connelly case.  The U.S. Court of Appeals for the Eight Circuit found that the value of life insurance proceeds funding a redemption buy-sell agreement should be included in the value of a closely-held business for estate tax purposes, changing conventional thinking.  Business owners should consider a cadence of regularly reviewing their buy-sell agreements. These are living, breathing documents. If their buy-sell agreement happens to be a redemption agreement, the economics should be reviewed assuming the same treatment as the Connelly case. It may be that these buy-sell agreements are woefully underfunded, triggering an audit of their life insurance plans. And if the owner has an agreement in place, they should follow it to the letter, not set-it-and-forget-it.”

To read the full report, click here.

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Finseca (AALU): The IRS Takes an Unprecedented Position Against Perceived GRAT Valuation Abuse

The Washington Report: – Wealth Transfer Edition

“Abusive taxpayer transactions simply continue to raise the ire of the IRS. Commonly seen as a very conservative planning technique, the Internal Revenue Service (“IRS”) has recently taken extreme positions to challenge the use of grantor retained annuity trusts (“GRATs”).  The IRS in a recent CCA takes the position that by undervaluing the assets transferred to a GRAT, the GRAT annuity interest is not a “qualified interest,” and therefore the entire transfer is a taxable gift. The IRS finds that the transferred interest can be undervalued to such an extent that it ceases to be a qualified interest under IRC § 2702.  While the CCA is not precedent, it is a clear indication of how the IRS may deal with perceived abusive (valuation) transactions. A softer touch could have permitted use of the self-adjustment regulations to correct the transaction. Instead, the IRS uses a hammer to address, in our view, bad taxpayer behavior. To avoid costly disputes with the IRS, when funding a GRAT or any irrevocable trust with hard-to-value assets, obtain a qualified appraisal as of the date of the transfer.

Click here to read the full report.

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Finseca (AALU): “The Nongrantor ILIT: A Discussion”

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.

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Trusts & Estates – “The GRAT Enhancement Strategy”

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

 

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Finseca (AALU) Rabbi Trusts: Key Legal and Business Considerations

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.

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Finseca (AALU): The Family LLC: An ILIT Alternative

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.

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WSJ Sounds the Alarm on Premium Financing Plans

WSJ

 

 

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 clickinhere.

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”

WSJ

 

 

“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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