It can be difficult and costly to purchase life insurance at older ages. However, sometimes changing circumstances in your estate planning would be well-served by obtaining additional coverage. One potential way to solve this problem is to look at how you may be able to maximize your existing in-force policies.
Meet George. He is 70 and has retired from a very successful career as a partner in a major international law firm. As part of earlier estate planning, he created a grantor dynasty trust (the “Trust”) that currently holds $90 million in liquid investments and a retail insurance policy with a $30 million death benefit.
As a resident of New York City, he faces a combined tax rate of 53.5% between federal, state and local income taxes[1]. He is engaging in a second round of planning with the hopes of reducing that tax exposure. However, insurability issues may prevent him from obtaining the additional death benefit that he may need to meet his planning needs.
Our Private Mortality Coverage (“PMC”) program may provide the solution for George.
George will use excess death benefit capacity from his existing retail policy to provide part of the death benefit in a newly issued private placement life insurance (“PPLI”) policy. The remainder of the death benefit in this new PPLI policy will come from a separately managed account (the “SMA”) which will initially be funded with $22 million of cash from the Trust’s current investment portfolio. The new policy will therefore have an initial death benefit of $52 million, which is projected to grow over time as the SMA increases in value.
The new policy is owned by a newly formed single member limited liability company (the “LLC”) which is owned, in turn, by the Trust. The LLC is a disregarded entity for purposes of taxation, allowing the $22 million of investments to be moved into the LLC to fund the new policy. This structure ensures the new policy remains inside of the Trust and outside of George’s estate.
The administration of George’s existing retail policy is taken over by IPL’s PMC program to ensure it performs sufficiently to support the death benefit in the PPLI policy.
With this new arrangement in place, George and his estate will see several benefits:
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[1] 53.5% tax rate comprised of: (i) federal taxrate of 37%, (ii) federal health care tax of 3.8%, (iii) New York state tax of8.8%, and (iv) New York City tax of 3.9%.
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