PRIVATE FINANCING

If your client needs more insurance, but does not want to pay gift taxes, entering your client into a Private Financing arrangement may be a solution. In this arrangement, your client creates an ILIT and lends the ILIT money at the current Applicable Federal Rate (AFR). The ILIT uses the loan to purchase a life insurance policy on the client’s life. The ILIT will owe loan interest to the client. Loan interest may be paid annually or deferred and added to the total loan amount. The loan is then repaid from the policy proceeds at death, or earlier from trust assets if desired.

Benefits:

  1. Gift tax cost of the plan may be avoided or significantly lowered since the gift is only the loan interest and not the full premium
  2. The loan can be made annually, or in a lump-sum to provide the trust funds to purchase an income-producing asset
  3. No collateral deposits are required to secure the loan
  4. There is no risk of the loan being called by a 3rd party lender, and no loan approval process is required

Considerations:

  1. Client must have the cash flow or assets to pay full premium or make a lump-sum cash loan