Three Tax-Efficient Transfer Strategies
3 Simple, Tax-Efficient Ways
Your Clients Can Make Transfers
Your wealthy clients are looking for ways to make efficient transfers to family while paying as little tax as possible. There are three common—and simple—techniques they can use that employ a grantor trust and life insurance. Each helps to meet a specific objective:
1. Making a direct gift
A grantor trust allows the creator of the trust to retain certain powers to control or direct assets of the trust so that the trust income is taxable to the grantor, but not included in the grantor’s taxable estate.
2. Making a loan
3. Selling of an asset, outright or through an installment sale
Take a look:
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1A gift of “seed,” typically 10% of the trust balance, may be required. The client should always seek counsel from his or her attorney.
PREMIUM PAYING STRATEGIES AT-A-GLANCE
A snapshot of financing techniques commonly used with large life insurance premiums:
| Private Split Dollar(Family Split Dollar) | Private Financing(Intra-Family Loans/“Renting the Asset”) | Premium Financing¹ | Combining Techniques | |
|---|---|---|---|---|
| Description | The trust grantor,frequently a parent or parents,pay(s)the annual term costs portion of the premium or Table 2001 rates²and the trust pays difference | Intra-family loan transaction³ | A third-party lender provides a loan for purchasing life insurance | Combining premium financing with private financing to minimize loan interest costs and address limitations on liquidity and a lifetime exit strategy |
| Lender | Grantor | Grantor | Bank | Grantor and bank |
| Loan Interest Rate or Annual Cost of Financing | The value of the gift is calculated based on the “economic benefit” cost,which is either the term rate or Table 2001 rates² | Applicable Federal Rate(AFR)Short-term(0-3 years),Mid-term(3-9 years),and Long-term(9+ years) | LIBOR(Intercontinental Exchange London Interbank Offered Rate)or Prime + Spread | Rates linked to each type of loan arrangement |
| Gift Tax Impact | Minimizes gift taxes because loans are not gifts | |||
| How It Works | The grantor as the lender provides liquidity to pay large premiums on a needed policy | The grantor as the lender provides liquidity to pay large premiums on a needed policy | Bank or other third-party lender provides liquidity to pay large premiums on a needed policy | Provides liquidity from both the grantor and a third-party lender, while minimizing loan interest costs |
| Benefits | Minimizes gift tax costs | Minimizes gift tax costs and“recycles”family money | No need to liquidate taxable assets to fund a large life insurance need | Minimizes gift taxes and reduces the need to liquidate taxable assets to fund premiums |
| Collateral | Policy | Not required | Policy and/or other liquid assets | Collateral requirements of third-party lender only |
| Potential Generation-Skipping Transfer Tax(GSTT) | GSTT exemption should be allocated to the gift of economic benefit | GSTT exemption should be allocated to gifts of loan interest,if any made | GSTT exemption should be allocated to gifts of interest | GSTT exemption should be allocated to gifts of interest |
| Exit Strategy | Lifetime exit required | Typically built into the transaction design so that the return of the asset, or a sinking fund of cash, accounts for the repayment of the loan | Lifetime exit required and should be stress-tested | Lifetime exit required with third-party lender |
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