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Suddenly, a host of products allowing accredited individuals to invest in life settlements is coming to market.
Clients whose businesses have substantial risk should consider the benefits of a captive insurance company.
Players come and go as the life settlement marketplace races towards maturity.
A major Hollywood producer—you’ve seen the movies—needed $7.5 million of life insurance for liquidity at death. Now in his 70s with considerable wealth in real estate and film rights, the client had already consumed his $1 million lifetime gift-tax exclusion. His annual exclusion gifts were spoken for, too, explains Los Angeles wealth manager Nicholas Stonnington, president of the Stonnington Group LLC. Therefore the producer would have to pay gift tax on the $250,000 annual premium, given that his heirs or a trust benefiting them would own the policy to keep the death benefit proceeds out of his estate.
To many people, there’s something ghoulish about life settlements agreements: Selling your life insurance policy to a third party to wring more cash out and beat the surrender value is a practice that automatically brings up ethical questions. Who buys the policy? And how comfortable are you with the fact that they now have a vested interest in your death? The most common nightmare scenario, of course, is that your policy could be sold to a hit man. If not that, then maybe you’ll get fleeced by the strange kabuki pricing, critics say. Others feel the unregulated, Wild West feel of the life settlement market is ripe for all sorts of fraud and unscrupulous business practices, some say.
Advisors attempting to obtain large blocks of insurance death benefit on behalf of ultrahigh-net-worth clients will quickly find that there is a frustrating lack of supply regardless of price or demand. Despite this surprising state of affairs, an insurance broker can still obtain $100 million of death benefit, but only by proceeding very carefully through various obstacles. This is an area, though, where the broker must be both educated and intentional, for a mistake in the process can often result in the client being deprived of an otherwise available amount of death benefit for several years, perhaps permanently.
Advisors who have learned how to effectively use life settlement products to help clients attain their financial goals have another opportunity to use these transactions to help clients achieve charitable-gifting strategies and increased donations.
Life insurance products enjoy unique tax advantages—death benefits are usually exempt from income tax, the cash value grows on a tax-deferred basis and, with proper planning, can also be exempt from estate and generation-skipping transfer taxes. The flip side of the coin is that planners must operate carefully to preserve these benefits. We will review ten important tax traps to avoid in planning for the wealthy client.
If a life insurance policy is transferred from one person/entity to another in return for something of value, then the death benefit may become taxable as income. Of all the traps we have encountered, this is probably the most disastrous. Everyone expects life insurance to be free of income tax. Clients will look to the advisor if something goes wrong here.
While we view the development of a secondary market for life insurance policies in general as a positive one, advisors should approach proposed Stranger Owned Life Insurance (SOLI) transactions with caution, if at all.
The past several years have seen the rapid development of a secondary market for existing life policies: the so-called “life settlement” market. Unlike a “viatical settlement,” which is the tax-free purchase of a policy on a terminally ill individual (as defined by the Internal Revenue Code), a typical life settlement is a taxable purchase of a policy on the life of a relatively healthy person. The full tax consequences of a life settlement are as yet unclear and await IRS guidance, although it seems relatively certain that there is potential taxable gain to the policy owner (to the extent that the amount received in settlement exceeds the owner’s basis in the policy) and to the purchaser (to the extent that the proceeds received at the death of the insured exceed the amount paid for the policy). Despite the tax cost, though, as shown in the table, a life settlement, properly structured, can produce a very favorable result.
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Clients whose businesses have substantial risk should consider the benefits of a captive insurance company.
Players come and go as the life settlement marketplace races towards maturity.
A major Hollywood producer—you’ve seen the movies—needed $7.5 million of life insurance for liquidity at death. Now in his 70s with considerable wealth in real estate and film rights, the client had already consumed his $1 million lifetime gift-tax exclusion. His annual exclusion gifts were spoken for, too, explains Los Angeles wealth manager Nicholas Stonnington, president of the Stonnington Group LLC. Therefore the producer would have to pay gift tax on the $250,000 annual premium, given that his heirs or a trust benefiting them would own the policy to keep the death benefit proceeds out of his estate.
To many people, there’s something ghoulish about life settlements agreements: Selling your life insurance policy to a third party to wring more cash out and beat the surrender value is a practice that automatically brings up ethical questions. Who buys the policy? And how comfortable are you with the fact that they now have a vested interest in your death? The most common nightmare scenario, of course, is that your policy could be sold to a hit man. If not that, then maybe you’ll get fleeced by the strange kabuki pricing, critics say. Others feel the unregulated, Wild West feel of the life settlement market is ripe for all sorts of fraud and unscrupulous business practices, some say.
Advisors attempting to obtain large blocks of insurance death benefit on behalf of ultrahigh-net-worth clients will quickly find that there is a frustrating lack of supply regardless of price or demand. Despite this surprising state of affairs, an insurance broker can still obtain $100 million of death benefit, but only by proceeding very carefully through various obstacles. This is an area, though, where the broker must be both educated and intentional, for a mistake in the process can often result in the client being deprived of an otherwise available amount of death benefit for several years, perhaps permanently.
Advisors who have learned how to effectively use life settlement products to help clients attain their financial goals have another opportunity to use these transactions to help clients achieve charitable-gifting strategies and increased donations.
Life insurance products enjoy unique tax advantages—death benefits are usually exempt from income tax, the cash value grows on a tax-deferred basis and, with proper planning, can also be exempt from estate and generation-skipping transfer taxes. The flip side of the coin is that planners must operate carefully to preserve these benefits. We will review ten important tax traps to avoid in planning for the wealthy client.
If a life insurance policy is transferred from one person/entity to another in return for something of value, then the death benefit may become taxable as income. Of all the traps we have encountered, this is probably the most disastrous. Everyone expects life insurance to be free of income tax. Clients will look to the advisor if something goes wrong here.
While we view the development of a secondary market for life insurance policies in general as a positive one, advisors should approach proposed Stranger Owned Life Insurance (SOLI) transactions with caution, if at all.
The past several years have seen the rapid development of a secondary market for existing life policies: the so-called “life settlement” market. Unlike a “viatical settlement,” which is the tax-free purchase of a policy on a terminally ill individual (as defined by the Internal Revenue Code), a typical life settlement is a taxable purchase of a policy on the life of a relatively healthy person. The full tax consequences of a life settlement are as yet unclear and await IRS guidance, although it seems relatively certain that there is potential taxable gain to the policy owner (to the extent that the amount received in settlement exceeds the owner’s basis in the policy) and to the purchaser (to the extent that the proceeds received at the death of the insured exceed the amount paid for the policy). Despite the tax cost, though, as shown in the table, a life settlement, properly structured, can produce a very favorable result.
A life settlement is the sale of a life insurance policy by the policy owner to an institutional buyer. The buyer is called a life or viatical settlement company. Life settlements have become increasingly popular over the past five to ten years as a method of realizing more value from an unwanted policy.
|
Clients whose businesses have substantial risk should consider the benefits of a captive insurance company.
Players come and go as the life settlement marketplace races towards maturity.
A major Hollywood producer—you’ve seen the movies—needed $7.5 million of life insurance for liquidity at death. Now in his 70s with considerable wealth in real estate and film rights, the client had already consumed his $1 million lifetime gift-tax exclusion. His annual exclusion gifts were spoken for, too, explains Los Angeles wealth manager Nicholas Stonnington, president of the Stonnington Group LLC. Therefore the producer would have to pay gift tax on the $250,000 annual premium, given that his heirs or a trust benefiting them would own the policy to keep the death benefit proceeds out of his estate.
To many people, there’s something ghoulish about life settlements agreements: Selling your life insurance policy to a third party to wring more cash out and beat the surrender value is a practice that automatically brings up ethical questions. Who buys the policy? And how comfortable are you with the fact that they now have a vested interest in your death? The most common nightmare scenario, of course, is that your policy could be sold to a hit man. If not that, then maybe you’ll get fleeced by the strange kabuki pricing, critics say. Others feel the unregulated, Wild West feel of the life settlement market is ripe for all sorts of fraud and unscrupulous business practices, some say.
Advisors attempting to obtain large blocks of insurance death benefit on behalf of ultrahigh-net-worth clients will quickly find that there is a frustrating lack of supply regardless of price or demand. Despite this surprising state of affairs, an insurance broker can still obtain $100 million of death benefit, but only by proceeding very carefully through various obstacles. This is an area, though, where the broker must be both educated and intentional, for a mistake in the process can often result in the client being deprived of an otherwise available amount of death benefit for several years, perhaps permanently.
Advisors who have learned how to effectively use life settlement products to help clients attain their financial goals have another opportunity to use these transactions to help clients achieve charitable-gifting strategies and increased donations.
Life insurance products enjoy unique tax advantages—death benefits are usually exempt from income tax, the cash value grows on a tax-deferred basis and, with proper planning, can also be exempt from estate and generation-skipping transfer taxes. The flip side of the coin is that planners must operate carefully to preserve these benefits. We will review ten important tax traps to avoid in planning for the wealthy client.
If a life insurance policy is transferred from one person/entity to another in return for something of value, then the death benefit may become taxable as income. Of all the traps we have encountered, this is probably the most disastrous. Everyone expects life insurance to be free of income tax. Clients will look to the advisor if something goes wrong here.
While we view the development of a secondary market for life insurance policies in general as a positive one, advisors should approach proposed Stranger Owned Life Insurance (SOLI) transactions with caution, if at all.
The past several years have seen the rapid development of a secondary market for existing life policies: the so-called “life settlement” market. Unlike a “viatical settlement,” which is the tax-free purchase of a policy on a terminally ill individual (as defined by the Internal Revenue Code), a typical life settlement is a taxable purchase of a policy on the life of a relatively healthy person. The full tax consequences of a life settlement are as yet unclear and await IRS guidance, although it seems relatively certain that there is potential taxable gain to the policy owner (to the extent that the amount received in settlement exceeds the owner’s basis in the policy) and to the purchaser (to the extent that the proceeds received at the death of the insured exceed the amount paid for the policy). Despite the tax cost, though, as shown in the table, a life settlement, properly structured, can produce a very favorable result.
A life settlement is the sale of a life insurance policy by the policy owner to an institutional buyer. The buyer is called a life or viatical settlement company. Life settlements have become increasingly popular over the past five to ten years as a method of realizing more value from an unwanted policy.
|
Suddenly, a host of products allowing accredited individuals to invest in life settlements is coming to market.
Clients whose businesses have substantial risk should consider the benefits of a captive insurance company.
Players come and go as the life settlement marketplace races towards maturity.
A major Hollywood producer—you’ve seen the movies—needed $7.5 million of life insurance for liquidity at death. Now in his 70s with considerable wealth in real estate and film rights, the client had already consumed his $1 million lifetime gift-tax exclusion. His annual exclusion gifts were spoken for, too, explains Los Angeles wealth manager Nicholas Stonnington, president of the Stonnington Group LLC. Therefore the producer would have to pay gift tax on the $250,000 annual premium, given that his heirs or a trust benefiting them would own the policy to keep the death benefit proceeds out of his estate.
To many people, there’s something ghoulish about life settlements agreements: Selling your life insurance policy to a third party to wring more cash out and beat the surrender value is a practice that automatically brings up ethical questions. Who buys the policy? And how comfortable are you with the fact that they now have a vested interest in your death? The most common nightmare scenario, of course, is that your policy could be sold to a hit man. If not that, then maybe you’ll get fleeced by the strange kabuki pricing, critics say. Others feel the unregulated, Wild West feel of the life settlement market is ripe for all sorts of fraud and unscrupulous business practices, some say.
Advisors attempting to obtain large blocks of insurance death benefit on behalf of ultrahigh-net-worth clients will quickly find that there is a frustrating lack of supply regardless of price or demand. Despite this surprising state of affairs, an insurance broker can still obtain $100 million of death benefit, but only by proceeding very carefully through various obstacles. This is an area, though, where the broker must be both educated and intentional, for a mistake in the process can often result in the client being deprived of an otherwise available amount of death benefit for several years, perhaps permanently.
Advisors who have learned how to effectively use life settlement products to help clients attain their financial goals have another opportunity to use these transactions to help clients achieve charitable-gifting strategies and increased donations.
Life insurance products enjoy unique tax advantages—death benefits are usually exempt from income tax, the cash value grows on a tax-deferred basis and, with proper planning, can also be exempt from estate and generation-skipping transfer taxes. The flip side of the coin is that planners must operate carefully to preserve these benefits. We will review ten important tax traps to avoid in planning for the wealthy client.
If a life insurance policy is transferred from one person/entity to another in return for something of value, then the death benefit may become taxable as income. Of all the traps we have encountered, this is probably the most disastrous. Everyone expects life insurance to be free of income tax. Clients will look to the advisor if something goes wrong here.
While we view the development of a secondary market for life insurance policies in general as a positive one, advisors should approach proposed Stranger Owned Life Insurance (SOLI) transactions with caution, if at all.
The past several years have seen the rapid development of a secondary market for existing life policies: the so-called “life settlement” market. Unlike a “viatical settlement,” which is the tax-free purchase of a policy on a terminally ill individual (as defined by the Internal Revenue Code), a typical life settlement is a taxable purchase of a policy on the life of a relatively healthy person. The full tax consequences of a life settlement are as yet unclear and await IRS guidance, although it seems relatively certain that there is potential taxable gain to the policy owner (to the extent that the amount received in settlement exceeds the owner’s basis in the policy) and to the purchaser (to the extent that the proceeds received at the death of the insured exceed the amount paid for the policy). Despite the tax cost, though, as shown in the table, a life settlement, properly structured, can produce a very favorable result.
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