As you know certain aspects of the Tax Cuts and Jobs Act will be sunsetting in 2025. Of particular concern is the Estate Tax, currently $12,920,000 per person, which will revert to $5,000,000* on January 1st, 2026. This means clients with a net worth of $7,000,000 and up need to start planning for an estate tax.
Let’s look at an example.
A male age 56 and his 52-year-old wife have an estimated net worth today of $30,000,000. Their estate over the current threshold of $12,920,000 (per person) would be $4,160,000. This would trigger an estate tax of $1,609,000 due six months from the date of death. However, in 2026, their estate exposure will be $17,600,000 and require an estate tax payment of $6,985,600!!! That’s roughly four times the amount their estate would owe prior to 2026.
Life insurance is an excellent tool for solving the estate tax dilemma. Structured properly, its benefit can be paid estate and income tax free and be used to pay the estate tax, versus having to liquidate estate assets. The problem with life insurance is that it is a cash intensive purchase.
For certain clients, life insurance premium financing can be a useful tool. By borrowing the money to pay premiums and paying smaller interest payments, clients can keep their cash flows invested in the assets of their preference. Many people think there MUST be positive arbitrage between the bank financing rate and the policy crediting for premium financing to work. This is not always the case. When factoring in the savings of premium financing with gift tax considerations and estate growth, life insurance premium finance becomes an excellent choice.
The two attachments show financing (with negative arbitrage), a comparison to non-financing and the savings of paying interest vs. non-financed premium.
Let CDP help you with your complex estate planning cases today.
*Estimated to be $6,200,000 with inflation
Source: CDP Insurance
Author: Cameron Greenlaw
Broker