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For producer use only. Not for presentation to the public. OLA 1371 1009 Premium Financing Loan Exit Strategies.

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Presentation on theme: "For producer use only. Not for presentation to the public. OLA 1371 1009 Premium Financing Loan Exit Strategies."— Presentation transcript:

1 For producer use only. Not for presentation to the public. OLA Premium Financing Loan Exit Strategies

2 2 For producer use only. Not for presentation to the public. This material was not intended or written to be used, and cannot be used, to avoid penalties imposed under the Internal Revenue Code. This material was written to support the promotion or marketing of the products, services, and/or concepts addressed in this material. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely solely on their own independent advisors regarding their particular situation and the concepts presented here.

3 3 For producer use only. Not for presentation to the public. Premium Finance: Avoiding Erosion of Death Benefit Sometimes its critical to net a specific amount of the policy death benefit. But absent proper planning, a premium finance loan that relies on death as an exit strategy will erode the death benefit.

4 4 For producer use only. Not for presentation to the public. Ways to Preserve Death Benefit: Return of Premium (ROP) feature Gross-up policy Withdrawal from cash value Growth on trust assets Grantor Retained Annuity Trust Premium Finance: Avoiding Erosion of Death Benefit

5 5 For producer use only. Not for presentation to the public. What is Return of Premium? A policy option that causes the death benefit to grow every year by the amount of the annual premium. May not exceed 4 times the face amount of base policy Assuming interest is paid every year, borrower will be left with full face amount of base policy upon death

6 6 For producer use only. Not for presentation to the public. How Does Grossing Up the Policy Work? Borrower/Insured applies for a policy face amount that exceeds actual insurance need Upon death, the borrower is left with an approximate net death benefit that is sufficient to satisfy insurance need Disadvantages to Borrower: Bigger policy translates into bigger premiums Permanently reduced insurance capacity

7 7 For producer use only. Not for presentation to the public. Is Withdrawal from Cash Value an Option? Maybe. Paying off a premium finance loan through cash values may be an option if the financed policys cash values exceed 100% of the loan balance. Index ULs or policies with high cash surrender value riders are a good fit

8 8 For producer use only. Not for presentation to the public. How Does Growth on Trust Assets Extinguish A Loan? Borrower can make initial gift to trust Gift can be sheltered from gift tax by using annual gift tax exclusions and/or $1 million lifetime gift tax exemption Growth on trust-owned assets can be used to gradually pay down the debt or completely repay the loan

9 9 For producer use only. Not for presentation to the public. What is a Grantor Retained Annuity Trust (GRAT)? An estate-planning device that allows a client to reduce his or her taxable estate by making a deferred gift to beneficiaries at a discount for gift tax purposes 1 A trust for a specified term of years to which the client makes a one-time transfer of an asset. For the term of the trust, the client is entitled to an annuity At the end of this term, the remaining trust assets will be distributed to beneficiaries. 1 Grantor must survive the GRAT term to reap gift and estate tax benefits.

10 10 For producer use only. Not for presentation to the public. 10 For producer use only. Not for presentation to the public. GRAT GRAT In Action Client Grantor Remainder Interest Beneficiaries

11 11 For producer use only. Not for presentation to the public. Right Now Is a Great Time to Set Up a GRAT §7520 rate has dropped to a historic low The §7520 rate is an interest ratepublished monthly by the IRSwhich is used to calculate the gift tax liability due upon the initial transfer to the GRAT A low §7520 rate translates into reduced gift tax liability

12 12 For producer use only. Not for presentation to the public. 12 For producer use only. Not for presentation to the public. The Effect of a Low §7520 Rate What a Difference 2 Years MakeGRATs Compared July 07July 09 §7520 Rate6%3.4% Initial Gift$1,000,000 Grantors Age60 % Payout5% Term15 years Assumed Income/Growth 7% Gift Tax Value of Remainder $565,275$485,775

13 13 For producer use only. Not for presentation to the public. GRAT 13 IDGT $10 Million Death Benefit $3 Million Distribution $1.5 million after-tax remainder Total Inheritance $11.5 million GRAT Loan Exit Strategy IRS Approximately 50% Taxable Estate Per Self-Finance Transaction $3 Million $3 Million Loan Repaid

14 14 For producer use only. Not for presentation to the public. 14 For producer use only. Not for presentation to the public. Benefits of Premium-Finance Transaction with a GRAT Loan Exit Strategy Grantor Retains Income Stream for GRAT Term Reduced Gift Tax Liability Favorable § 7520 rate translates into greater discount Reduce Estate Tax Liability Remove highly-appreciated asset from estate by transferring to GRAT and surviving term Maximize Amount of Death Benefit Passing to Loved Ones

15 15 For producer use only. Not for presentation to the public. Transamerica Life Insurance Company, Transamerica Financial Life Insurance Company (collectively Transamerica), and their representatives do not give tax or legal advice. This material is provided for informational purposes only and should not be construed as tax or legal advice. Clients and other interested parties must be urged to consult with and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Discussions of the various planning strategies and issues are based on our understanding of the applicable federal income, gift, and estate tax laws in effect at the time of publication. However, tax laws are subject to interpretation and change, and there is no guarantee that the relevant tax authorities will accept Transamericas interpretations. Additionally, this material does not consider the impact of applicable state laws upon clients and prospects. Although care is taken in preparing this material and presenting it accurately, Transamerica disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of September 2009.

16 For producer use only. Not for presentation to the public. OLA Premium Financing Loan Exit Strategies


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