Special Life Insurance

[Corduroy Frog]

Most savvy investment planners will not have anything to do with cash value insurance such as whole life or universal life.

However, I'm watching some of the wealthiest people in my area -- one of them in particular is worth at least $25MM, and approaching old age.

I've heard that for his estate tax strategy, there has been a life insurance policy taken out on his life for some $25MM. At his age, the premium is HUGE. Supposedly, he cannot pay the premiums himself, and cannot own the policy. He has four children in his family-owned business, and in order to pay the premiums: 1)He gives each of his children a bonus of some $150,000 then 2)each child pays $100,000 of after-tax money to pay the premium.

Is anyone aware of this device? (Sea-Tax, are you listening?)

[JohnH]

I've heard of it

I think he just needs to be sure and die early enough to make the gamble pay off.

I'll be interested in hearing what other more knowledgeable posters have to say about this (not that I need to do this type of estate planning personally).

[JoshinNC]

sounds like a variation of a buy-sell

Most savvy investment planners will not have anything to do with cash value insurance such as whole life or universal life.

However, I'm watching some of the wealthiest people in my area -- one of them in particular is worth at least $25MM, and approaching old age.

I've heard that for his estate tax strategy, there has been a life insurance policy taken out on his life for some $25MM. At his age, the premium is HUGE. Supposedly, he cannot pay the premiums himself, and cannot own the policy. He has four children in his family-owned business, and in order to pay the premiums: 1)He gives each of his children a bonus of some $150,000 then 2)each child pays $100,000 of after-tax money to pay the premium.

Is anyone aware of this device? (Sea-Tax, are you listening?)

where the kids are going to buy the shares of the business with the proceeds from life insurance, which is owned by a trust to bypass estate tax, and then they own the business and the old man's widow gets the $25 mill tax free because that's her basis in the stock of the old man's business.

Just a guess, but I have sold one of these policies. It wasn't this big though. At $600,000 per year in premium the agent just made between 1/2 mill and $750,000.

Good selling, maybe even good advice.

[sea-tax]

Most savvy investment planners will not have anything to do with cash value insurance such as whole life or universal life.

However, I'm watching some of the wealthiest people in my area -- one of them in particular is worth at least $25MM, and approaching old age.

I've heard that for his estate tax strategy, there has been a life insurance policy taken out on his life for some $25MM. At his age, the premium is HUGE. Supposedly, he cannot pay the premiums himself, and cannot own the policy. He has four children in his family-owned business, and in order to pay the premiums: 1)He gives each of his children a bonus of some $150,000 then 2)each child pays $100,000 of after-tax money to pay the premium.

Is anyone aware of this device? (Sea-Tax, are you listening?)

I personally have never seen this strategy or even heard of it. Guess you learn something new everyday.
I would guess that it is a way of providing the money to the Heirs to purchase the business from the Mother in the event the father dies. Mother gets a step up in basis to fmv on dod, heirs get tax free life insurance monies to purchase mom out.
I have seen the ultra wealthy use whole life cash value insurance . As it goes once they have maxed out any pretax retirement plans they then max out a cash value life contract. Why? So that they can take tax free loans against it while they are alive which once they die will be paid by the death benefit which is tax free.

[JoshinNC]

I've seen both these strategies work

I personally have never seen this strategy or even heard of it. Guess you learn something new everyday.
I would guess that it is a way of providing the money to the Heirs to purchase the business from the Mother in the event the father dies. Mother gets a step up in basis to fmv on dod, heirs get tax free life insurance monies to purchase mom out.
I have seen the ultra wealthy use whole life cash value insurance . As it goes once they have maxed out any pretax retirement plans they then max out a cash value life contract. Why? So that they can take tax free loans against it while they are alive which once they die will be paid by the death benefit which is tax free.

Pac Life has some great client brochures outlining the entire process, and even provides sample trust language for the attorney in assisting to draft the agreements.

For the right situtation they are great ideas.

[Corduroy Frog]

More benefits

1)He gives each of his children a bonus of some $150,000 then 2)each child pays $100,000 of after-tax money to pay the premium.

Note that in the arrangement described above, even the premiums are deductible in effect by declaring a bonus for family members.

Thanks folks for the responses. Sounds more and more like an effective strategy all the time.

[sea-tax]

Note that in the arrangement described above, even the premiums are deductible in effect by declaring a bonus for family members.

Thanks folks for the responses. Sounds more and more like an effective strategy all the time.

Well I guess the business gets to deduct the payroll but it still has the employer part of fica to contend with . plus the children have to claim the income .