Professional Documents
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Prem Financing Alternative
Prem Financing Alternative
Prem Financing Alternative
Possible Solution:
Premium Financing may be able to provide an alternative method for funding annual premiums and/or to minimize
the gift tax issue.
Strategy:
FINANCING
Loan Interest
Gifts*
The Grantor establishes the The ILIT applies for a life insurance policy on the life of
ILIT, secures the trust loan the Grantor. The Trustee borrows a series of premiums
with additional collateral, and from a third party lender to fund the life insurance
gifts the amount of loan policy.3 The trust utilizes the insurance cash value as
interest annually to the ILIT.1 part of the required collateral. The Trustee then pays
The additional loan collateral the annual premium to the insurance company and pays
may include the Grantor’s the loan interest to the bank each year as due.
assets in the form of
marketable securities or a The applicable loan rate is typically linked to an outside
letter of credit from the index such as London Interbank Offered Rates (LIBOR),
Grantor’s own banking source.2 plus an add-on of additional basis points. The interest
rate is in effect for one year at a time and the entire loan
*Subject to applicable gifting codes will renew each year at the then effective interest rate.
and regulations.
Loan Repayment
The Trustee may repay the loan at some future date while the Grantor is alive.
Or
Upon death, the life insurance proceeds will pass through the ILIT. The Trustee will repay the loan
and the remaining balance will be distributed to the Grantor’s heirs, free of federal income and estate taxes.4
Results:
In the early years of the arrangement, the Grantor’s outlay is limited to the interest due on the loan, which is
considerably less than the insurance premium itself. This can minimize the problems of gifting the full premium
amount to the Trust and/or the problem of liquidating assets to pay for the premium.
XMSD 44/240
SLPC 19205 08/08
Exp. Date 08/09
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Repayment Options:
Notes:
Any gift to an ILIT that is intended to be a present interest and completed gift must be made to an ILIT which contains Crummey power language. Annual
1
exclusion gifts made to an ILIT can be gift-tax free if they do not exceed $12,000 per individual beneficiary in 2008. In addition, lifetime gifts can be
made using the lifetime gift tax unified credit exemption of up to $1,000,000. Gifts in excess of these exclusions and exemptions will be taxable gifts.
The amount of collateral required will usually include the life insurance cash value and will depend on the type of asset used. For example, stocks may be valued
2
at 70% of market value while bonds may be valued 90% of face amount.
Banks will only allow Premium Financing with fixed interest rate products such as Universal Life. Variable Universal Life polices cannot be financed.
3
This assumes no transfer for value has been made or that the insured has had no incidents of ownership over the policy during his life. Neither Sun Life Financial nor any
4
of its employees or representatives may give tax advice. If you have questions about your personal tax situation, please consult your financial or tax advisor.
This information is for general education of producers and contains references to concepts that have significant legal, accounting and tax implications. It is not
intended as legal, accounting or tax advice. Clients should consult with their own tax advisor regarding the application of these concepts to any particular situation.
Not FDIC/NCUA insured. May lose value. No bank/credit union guarantee. Not a deposit. Not insured by any federal government entity.
Universal life insurance is issued by Sun Life Assurance Company of Canada (Wellesley Hills, MA) or in New York, Sun Life Insurance and Annuity Company of New York
(New York, NY).
All guarantees are based on the claims-paying ability of the issuing company, Sun Life Assurance Company of Canada (Wellesley Hills, MA), or in New York,
Sun Life Insurance and Annuity Company of New York (New York, NY). All are members of the Sun Life Financial group of companies.
©2008 Sun Life Assurance Company of Canada. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of Sun Life
Assurance Company of Canada.
XMSD 44/240
SLPC 19205 08/08
Exp. Date 08/09
Page 2 of 2