Private / SELF Financing

Happy family portrait.One of the most challenging issues in Estate Planning is overcoming gifting limitations. In 2018 each person is allowed to gift $15,000/person. (This amount is scheduled to be indexed each year hereafter). So a couple could gift $30,000/person. But what is a couple to do when for, example, $10 million of insurance has been recommended as part of their overall plan and the premium is say, $200,000/yr and the couple only has 3 children, no granchildren? Up until now, this presented an enormous problem for planners. The choice to pay the premium and the gift tax on top of that is unacceptable. This has been a frustrating problem that, frankly, was insurmountable.

Until now.

With Private Financing, this same couple would transfer the $200,000 to the insurance trust but instead of calling it a gift and possibly paying substantial gift taxes, they consider the transfer a loan to the ILIT. By doing so, they pay NO gift taxes yet are able to fund the insurance. The loan rate is pegged to the current IRS Mid Term rate (currently in the high 3% range). And at some point, the loan is paid back.

How do you pay the loan off? It can be done in a few ways but the most effective is to use a GRAT, specifically a Walton, or zeroed out GRAT. A GRAT is a trust that the client uses to pass on assets. Because the GRAT has a term or length of years until the assets pass, the amount gifted is not the amount counted for gift tax purposes. In a Walton GRAT, by its design there will be virtually NO gift taxes. In addition, during the term the GRAT pays an income stream back to the couple. At the end of the term, the remaining assets pass to the beneficiary, in this case the ILIT. The ILIT now has the funds by which to repay the loan to the donor couple.

So in effect, we have purchased $10 million of coverage, paid up and completed it with NO gift tax. This solution is truly the “silver bullet” that estate planners have long looked for. It allows a crucial piece of the Estate Planning puzzle to be put in place, the insurance, without paying gift tax.