Transcript Split-Dollar & Premium Finance Plans

Split-Dollar
& Premium
Finance Plans
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Overview
• High net worth sales
• Split-dollar plans
• Premium finance plans
Please note: This document is designed to provide introductory information on the subject matter. MetLife does
not provide tax and legal advice. Clients should consult their attorney and/or tax advisor before making financial
investment or planning decisions.
For Producer or Broker/Dealer Use Only. Not for Public Distribution.
High Net Worth Sales Typical Case
• Client or couple is usually 55 or older
• Significant life insurance need
• Facing current gift tax outlays*
* In light of the $5,340,000 gift, estate and generation skipping transfer (GST) tax exemption per individual ($10,680,000 million per married couple) applicable
for 2014, a relatively small percentage of prospects will face current gift tax outlays. Note that states may have lower exemption amounts.
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High Net Worth Sales Typical Funding Options
• Taxable gifts
• Split-dollar non-loan plans
• Split-dollar loan plans
• Premium finance plans
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High Net Worth Sales Taxable Gifts
• Top tax rate of 40% for gift, estate and transfer (GST) taxes in
2014
• Annual client outlay equals annual premium plus current gift taxes
• Many clients are reluctant to pay gift taxes
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Split-Dollar Non-Loan Plans
• Personal or business plans
• Non-equity plans
• Annual economic benefit (AEB) rates based on Table 2001 (or Joint
Table 2001 rates) or Qualifying One Year Term rates if available
from the carrier
• Best for a younger insured or joint life case
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Split-Dollar Non-Loan Plans
Table 2001 rates per thousand
AGE
TABLE
2001
RATE
55
60
65
70
75
80
4.15
6.51
11.90
20.62
33.05
54.56
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Split-Dollar Non-Loan Plans
• Contributory plans may raise both income and gift issues
• Absent an increasing death benefit, value remaining in irrevocable
life insurance trust (ILIT) decreases over time
• Many estate plans use the collateral assignment method
• Restricted or “bare bones” collateral assignments (IRC 2042)
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Non-Loan Plans Rollout Issues
• Should you roll out? Can you roll out?
• Can create complex income, gift, estate and generation skipping
transfer tax issues
• Plans can become moot in an instant (death, tax law changes, etc.)
• Don’t overlook long-term death benefit needs & ongoing premiums
Reminder: The client’s tax and legal advisors should be providing the client with specific tax and legal advice as to their situation.
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Non-Loan Plans Rollout Strategies
• Gifts
• Bonus (combined with gift)
• Policy values (usually not practical)
• Third-party assets
• Combination of the above
• Loan conversion as a temporary
or long-term solution
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Non-Loan Plans Rollout Strategies
• Discounted gifts
• Deferred gifts (grantor retained annuity trusts or charitable lead
trust gifts)
• Defective grantor trust assets
• Transfers at death (e.g. decedent spouse or other relative)
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Split-Dollar Loan Plans
• The insured, couple, relative or business can be the lender
or “bank”
• Usually structured as term loans*
• Loans are usually tied to applicable federal rates (AFR)
• Each premium loan is a separate loan for tax purposes
* Use of a demand loan could result in unintended tax consequences.
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Split-Dollar Loan Plans
• Loan treatment is usually attractive to older clients
• May have less volatility than premium finance arrangements in
which loan interest rates are reset on an annual basis
• Loan treatment is required when there is a “material change” to a
pre-final regulation plan (Many believe an IRC 1035 exchange is
a “material change”)
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Split-Dollar Loan Plans
• AFR is based upon each premium loan’s duration:
– Short-term loans (1-3 years)
– Mid-term loans (3-9 years)
– Long-term loans (9+years)
• AFR loans avoid the below-market loan rules of IRC 7872
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Split-Dollar Loan Plans
• Loan interest may be paid or accrued
• ILIT death benefit decreases over time since principal and accrued
interest (if any) needs to be repaid
• Increasing policy death benefit maintains level benefits for ILIT
• Rollout strategies can have a
significant tax and legal impact
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Premium Finance Plans
• Third party loans money to ILIT to fund premium payments
• Loan and life insurance are independent transactions
• Clients must satisfy requirements of the lender and life insurance
company
• Typically used to fund fixed or general account contracts
• Ticket to large premium sales
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Premium Finance Plans Typical Prospects
• Net worth generally greater than $10 million
• Many lenders require significant liquid assets
• Lenders have different loan and collateral
requirements, experience and varying degrees
of interest in premium financing
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Premium Finance Plans Typical Estate Planning Sale
• Lender makes premium loans to ILIT
• ILIT pays premiums to insurance company
• ILIT pledges policy to lender
• Insured pledges any required personal collateral to lender
• Insured gifts annual loan interest to ILIT
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Premium Finance Plans Issues to Consider
• Will the lender make the initial and ongoing premium loans?
• Does the lender offer attractive terms and service (e.g. interest
rates, collateral requirements, interest and loan repayment
terms, ongoing loans)?
• Does the lender have significant premium finance experience?
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Premium Finance Plans Issues to Consider
• What happens if the client’s financial situation
deteriorates significantly?
• What happens if the pledged collateral declines in
value?
• What is the rollout or exit strategy?
• How will each party be affected?
• Will premiums be required after plan is
terminated?
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Premium Finance Plans Tax Issues
• Is the pledge of collateral considered a gift made by the insured?
• Is the annual loan interest deductible by the third party or insured?
• What are the tax issues raised by a termination or a rollout?
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MetLife Brand
• One of America’s largest financial companies, with
roots as far back as 1863
• Serves over 90 of the top 100 FORTUNE 500®
companies*
• Recognized as the Nation’s Largest Life Insurer**
*
**
MetLife. Quick Facts: Full Year 2009
Based on life insurance in-force as of December 31, 2008.
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Important Information
The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion
and marketing of insurance or other financial products and services. Clients should seek advice based on their particular circumstances from an independent
tax advisor since any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every situation.
an independent tax advisor since any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every
situation.
MetLife, its agents and representatives may not give legal or tax advice. Any discussion of taxes herein or related to this document is for general information
purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the
appropriateness of any product for any specific taxpayer may vary depending on the facts and circumstances. Clients should consult with and rely on their
own independent legal and tax advisers regarding their particular set of facts and circumstances.
MetLife life products have limitations, exclusions, charges, termination provisions and terms for keeping them in force. There is no guarantee that any of the
variable investment options in this product will meet their stated goals or objectives. The account value is subject to market fluctuations so that, when
withdrawn, it may be worth more or less than its original value. All product guarantees are subject to the claims paying ability and financial strength of the
issuing insurance company. February 2014
Life Insurance Products:
• Not A Deposit • Not FDIC-Insured • Not Insured By Any Federal Government Agency
• Not Guaranteed By Any Bank Or Credit Union • May Go Down In Value
BDVL23727 L0214361368[0416]
© 2014 METLIFE, INC. PEANUTS © 2014 Peanuts Worldwide
For Producer or Broker/Dealer Use Only. Not for Public Distribution.