The Applicable Federal Rates (AFR) have hit an all-time low. Now is the time to be discussing with your high-net-worth (HNW) clients the opportunities presented by low interest rates, particularly with the November election looming and uncertainty surrounding the future of the estate tax exemption.
Watch this five-minute video to learn more:
Private financing loans
Private financing refers to a loan arrangement between a grantor and his/her irrevocable life insurance trust (ILIT) where the grantor makes a loan to the trust in return for a promissory note — with interest charged at the applicable interest rate designated for the month in which the loan is first made.
Click here to read about a recent case that used a private financing loan with an affluent client who was hesitant to make a large outright gift. The strategy used for this client highlights how private financing can create a “wait-and-see” approach that allows your HNW clients to purchase life insurance today, but easily make a gift in the future should circumstances change.
A sale to a defective grantor trust is very similar to private financing, but is used when the client wants to transfer illiquid assets — such as real estate or closely held business stock — into a trust in return for a promissory note charging interest. This strategy can be especially advantageous during times when there are depressed market values and low interest rates. Here's an example about a recent case utilizing both a sale to a defective grantor trust and premium finance.
Commercial premium financing can offer qualified HNW clients an opportunity to fund large insurance premiums while allowing their assets to grow in higher yielding investments while potentially minimizing out-of-pocket costs. Click here to learn about a case that combined third-party commercial premium financing and gifting.
Businesses and employers can also take advantage of low AFR rates for certain planning needs. For example, business owners may use split-dollar loans between the business and the owners themselves to help pay for a life insurance policy for business-succession purposes. Alternatively, a business could use split-dollar loans to provide a tax-efficient executive benefit to help retain and reward a key employee.
Here's an example about a case with a non-profit organization using this strategy as a key employee-retention plan.
Trusts should be drafted by an attorney familiar with such matters in order to take into account income and estate tax laws (including the generation-skipping tax). Failure to do so could result in adverse tax treatment of trust proceeds.
This material does not constitute tax, legal, investment or accounting advice and is not intended for use by a taxpayer for the purposes of avoiding any IRS penalty. Comments on taxation are based on tax law current as of the time we produced the material.
All information and materials provided by John Hancock are to support the marketing and sale of our products and services, and are not intended to be impartial advice or recommendations. John Hancock and its representatives will receive compensation from such sales or services. Anyone interested in these transactions or topics may want to seek advice based on his or her particular circumstances from independent advisors.
This material is for Agent and Institutional / Broker – Dealer use only. Not for distribution or use with the public.
Insurance products are issued by: John Hancock Life Insurance Company (U.S.A.), Boston, MA 02116 (not licensed in New York) and John Hancock Life Insurance Company of New York, Valhalla, NY 10595. Variable insurance products are offered through John Hancock Distributors LLC through other broker/dealers that have a selling agreement with John Hancock Distributors LLC, 197 Clarendon Street, Boston, MA 02116.
Insurance policies and/or associated riders and features may not be available in all states.
© 2023 John Hancock Life Insurance Company (U.S.A.). All rights reserved.
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