Personal Financing Alternative Using Grats As An Exit Strategy

PREMIUM FINANCING

SunSolutions For Life

SM

The Personal Financing Alternative Using GRATs as an Exit Strategy Financial Situation Many individuals have established a gifting program to take advantage of their annual exclusions to buy life insurance. Based upon the performance of their estate going forward, there may be a need for larger amounts of life insurance calling for premiums that exceed their annual exclusions. Such individuals will usually create an Irrevocable Life Insurance Trust (ILIT) to own the insurance, which could result in significant gift tax when gifting the needed dollars to the ILIT.

Possible Solution

Keep in mind however, that if loan interest is being gifted, the longer the loan is outstanding the greater the chance of incurring gift tax. Also keep in mind that if interest is being deferred, and the plan is to use the death benefit to pay off the loan, the longer the loan period goes, there is a chance that the net death benefit after paying off the loan will be less than the desired face amount unless addressed from the outset of the agreement. Through the use of Grantor Retained Annuity Trust (GRAT) clients can fund an ILIT with enough assets to pay off a Personal Financing loan, and ultimately avoid gift taxes.

Financial Strategy Note at applicable AFR Rate

Grantor The Grantor establishes the ILIT, makes either annual loans or a lump sum loan to the trust. The interest due on the loan is gifted or deferred for the life of the loan.1

Irrevocable Life Insurance Trust (ILIT) Loan

Premiums

Death Benefit

Life Insurance Company The ILIT applies for a life insurance policy on the life of the Grantor. The Trustee borrows a series of premiums from the Grantor to fund the life insurance policy. The trustee then pays the annual premium to the insurance company and either pays the loan interest to the Grantor each year, or has the option defer it. The applicable AFR loan rate will be determined by the length of the loan.

*Subject to applicable gifting codes and regulations. 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 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 liftime gift tax unified credit exemption of up to $1,000,000. Gifts in excess of these exclusions and exemptions will be taxable gifts.

1

XMSD 44/528 SLPC 19208 08/08 Exp. Date 08/09 PAGE 1 OF 2

FINANCING

Personal Financing may be able to provide an alternative method for funding annual premiums. Once an ILIT is established, cash is loaned either on an annual basis or in single lump sum to pay the premium. Because the loan is usually coming directly from the insured, and going to his/her trust, there are not the usual collateral requirements associated with Commercial Financing.

Advanced Markets Group | P R E M I U M

Advanced Markets Group

GRAT Exit Strategy Remainder Value

Asset(s)

Grantor The Grantor transfers appreciating assets to the GRAT. The transfer may be subject to gift tax depending on how the GRAT is structured,2 and may qualify for a discount on the asset valuation based upon the nature of the asset.

Annuity Payments

GRAT

ILIT

The GRAT makes payments in the form of an annuity to the Grantor for a fixed term of years or lifetime.

Loan Repayment

Grantor At the conclusion of the GRAT term, the remainder value is transferred to the ILIT. The trustee can use the assets from the GRAT to repay the loan. The loan repayment may be subject to estate tax if the insured is the lender.

Results Through the use of a Personal Financing arrangement, one can provide the necessary funds to pay life insurance premiums in a tax advantaged manner. Since the Grantor makes loans to the ILIT, gift taxes may be avoided. In most inter-family loan arrangements there is no risk of having the loan called by a third party lender, or collateral issues. The GRAT affords the Grantor the opportunity to not only leverage existing assets, and shift future appeciation, but also provides the Grantor the ability to pay off the loan prior to death, leaving the total death benefit amount inside the ILIT.

Advantages

Disadvantages

 The property may be gifted at a reduced value  The value of the property is frozen for gift tax purposes  Retain right to receive income, while property appreciates outside of the Grantor’s estate

 If the Grantor dies during the GRAT term, the property will be included in the Grantor’s estate at current fair market value  The GRAT property may under-perform during the GRAT term

A “zeroed out” GRAT occurs when the value of the Grantor-retained annuity is essentially equal to the value of the asset transferred to the trust, resulting in a nominal gift or no gift because the remainder interest has virtually no value for gift tax purposes.

2

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 44/528 SLPC 19208 08/08 Exp. Date 08/09 Page 2 of 2