Insurance Financing Options for Clients Who Have Used Their Gift Exemption Amount
2021 presents a unique opportunity for individuals to accomplish significant transfer tax planning. The reasons for this include the following:
- An individual can currently transfer $11.7 million of property without gift, estate, and generation-skipping taxes.
- The current top transfer tax rate is 40%.
- Several strategies utilize interest rates that are at historic lows.
However, the heyday for gifting could be coming to an end this year. A number of legislative proposals would reduce the amount that can be gifted without being subject to tax. This would also limit several transfer planning techniques like short-term GRATs, generation-skipping transfer trusts, and valuation discounts.
Some of your high-net-worth clients with large estates have likely been working with their legal and tax advisors to take advantage of this unprecedented opportunity to make large, tax-free transfers. Many of these clients will still have taxable estates after the transfer – so they continue to have a need for life insurance. While these clients have the assets and the liquidity to pay for the life insurance they need, they could lack enough annual exclusion gifts and/or gift tax exemptions to get the premium into an Irrevocable Life Insurance Trust (ILIT) without having to pay gift taxes. And while money is no object when it benefits their heirs, benefiting the government is another story. How can you help your wealthy clients fund their ILITs without incurring gift taxes? The chart below summarizes some of the options available to fund a large life insurance need.