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Estate Planning Opportunities with One-Time Gifts & Split-Dollar Life Insurance

Updated: Dec 10, 2019


A key element of The Tax Cuts and Jobs Act of 2017 (the Act) is recognizing that the Act will expire on January 1, 2026 and then revert to 2017 level indexed for inflation. It is impossible to predict what might happen to estate and gift taxes over the next eight years, so we recommend taking action now.

How Does This Affect You?

Regardless of your estate size, this is an excellent time to evaluate making additional gifts and transferring assets outside of your estate. Those additional gifts can be used to acquire assets or provide additional funding for existing assets.

Question 1: My estate (with spouse) is under $22,400,000

The law reverts on January 1, 2026 to the 2017 level (indexed for inflation ~ $6,750,000 per person). In addition, the estate tax law can change at any time (there have been 3 significant changes over the last 20 years). If you are financially secure and have a desire to transfer assets on a tax-efficient basis, now is the time to make gifts.

Question 2: My estate (with spouse) is over $22,400,000

Use available exemptions today, not tomorrow. We are advising clients to take advantage of the additional exemption amounts now versus waiting, particularly if there is a change to the law before it reverts back on January 1, 2026.

Some planning options to consider:

  • Gifting: An additional $5,710,000 (per person) is now available for gifts

  • Trust Planning: Use trusts regardless of estate taxes for protection from creditors, remarriage/divorce, and proper asset management

  • Life Insurance: Evaluate new funding for an existing policy if needed and a new acquisition of life insurance (law reverts in 8 years)

  • Business Planning: Consider additional transfers of ownership; move more of a business to the next generation

  • State Estate Tax Planning: 18 states still impose separate estate or inheritance taxes

One-Time Gift to a Trust

An additional $5,710,000, per spouse, is available to make gifts to a trust outside of your taxable estate. Life insurance is an ideal asset to fund with the cash flow generated from a one-time gift today.

Example: Trust-Owned Managed Portfolio

Let’s say you make a $5,000,000 one-time gift to a trust outside of your taxable estate:

  • $5,000,000 deposited into a Managed Portfolio

  • Allocated across multiple investments

  • Target a minimum annual after-tax earnings rate of 4.00%

Trust Acquires Life Insurance; Insuring one or two lives with level annual premium funding to maximize leverage on the one-time gift. Below is a hypothetical example:

Leverage the New Exemption with Split-Dollar Life Insurance

Split-dollar life insurance plans offer an effective means to limit or eliminate gift tax issues associated with funding of a life insurance policy owned by an Irrevocable Life Insurance Trust (ILIT), by reducing the amount deemed to be gifted from the full premium funded. A split-dollar plan may be implemented under two regimes. One is the economic benefit regime, which uses the economic benefit on the death benefit, and the other is the loan regime, which involves a loan whose proceeds are used to acquire a life insurance policy.

Although both approaches are available, it's more common to see the loan regime than economic benefit when focused on tax-efficient cash growth within the life insurance policy. A major advantage with a properly structured loan regime plan is that the policy is owned by the ILIT, and cash values and growth remain available to the ILIT and its beneficiaries. The estate of the insured / trust grantor retains a right to the repayment of its loan and accrued interest, either at termination of the agreement or at death of the insured.

In a typical loan regime arrangement, the estate owner will be the grantor of a grantor ILIT and will loan the premium amount to the ILIT. The ILIT can either pay or accrue the interest on the loan. As an alternative, the amount of unpaid interest can be imputed as a current gift by the grantor / donor to the beneficiaries of the ILIT. Properly designed, when the loan interest is deemed to be at an applicable federal rate (AFR) or higher, no additional gift will be imputed.

The term of the loan dictates the AFR that applies. An optional approach to consider is a demand loan, which allows the use of a blended rate. Blended rates are published solely in July of each year and used for transactions for the given calendar year.

Contact us today to engage our firm to help you evaluate your options.

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