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Example of Recent Case:

A 63 year-old man has a $45 million estate that is relatively illiquid. His estate consists primarily of real estate, mostly leveraged, that he has acquired/developed over the years.  Based on the projected growth rate of his estate--at life expectancy--his advisors recommended that he purchase a $20 million life insurance policy to provide his heirs with the liquidity they’ll need at his death to pay estate taxes as well as for other generally liquidity needs that will arise.  After weighing his options, the client elected to use a FIT™ structure instead of an outright gifting approach thus avoiding the need to gift close to $5 million (before-tax) to pay for the life insurance premiums for the same $20 million policy.

The number one use for FIT™ is providing for Estate Tax Liquidity.  The differentiating factor and single biggest benefit of using FIT™ is its borrowing component. By utilizing a borrowing approach to fund the premiums and interest cost we effectively eliminate the need to make irrevocable gifts into the trust and thus free-up these funds to be used for other endeavors.

Estate Tax Liquidity

We recently used FIT™ to help a rapidly growing company create a deferred compensation (Golden Handcuff) program for 3 of their younger team members.  The firm had experienced some turnover due to their key team members being poached by competitors. Creating a program that would incentivized these younger people to stay for a long period of time was key.  However, reallocating cash from operating funds to pay for a meaningful incentive program was going to be very challenging. However, by implementing our FIT™ Strategy, we were able to create a cashless transaction wherein each key team member will receive, assuming they stay with the company, $350K a year for 20 years at age 60. This is the ultimate Golden Handcuff plan.

Creating additional income streams for retirement is obviously something that is desired by most people. However, the challenge of allocating money into an after-tax strategy is easier said than done. With FIT™ we can show clients (generally under the age of 50) how we can create a “tax-free” supplemental retirement income stream that requires zero dollars of out of pocket expense.

Retirement Income…

A couple, who have built a very successful closely held business (estimated to be worth $50M) are in their early 60’ and starting to think about succession planning.  They have three children, two of whom are actively involved in the business and will eventually take-over the day-to-day operations.  The concern/issue: When the parents die, where will the capital come from to buy-out the non-involved sibling? Life insurance is certainly a good choice but allocating the monies (premiums) will divert capital that could otherwise be invested back into the business.  Purchasing a life policy on Dad’s life using a FIT™ Structure i.e., cashless transaction was the preferable method. This cost the company zero out-of-pocket dollars.

Estate equalization using life insurance is ideal for business owners who are trying to pass down their wealth equally to their children. For instance, a challenge presents itself when one or more of the recipients, has contributed more towards the building of that wealth compared to other siblings. Other times, a beneficiary might not be interested in taking part in the running of the family business or having a stake in the estate.

A life insurance policy is purchased to ensure that the estate is distributed equally while ensuring each member of the family is treated fairly. The members of the family with an interest in the estate get to inherit the family business, while the other members are bequeathed an equivalent value to the estate from the life insurance policy.

Estate Equalization
Distributing Family Assets Fairly and Equitably...

A couple in their late 60s wanted to provide their kids with a life insurance program that would serve 2 important functions. First, create a significant Death Benefit that their families could count on in the case of the child’s untimely demise and 2) create a Supplemental Retirement Income at age 65.  This was accomplished by using FIT™ with zero dollars out of pocket.  The end result, each child has a multi-million death benefit while at the same time building a supplemental retirement income fund that will provide a $300k per year “tax-free” income stream from age 65 to 90. 

Funding a life insurance policy has long been a great planning tool.  However, utilizing FIT™ and its cashless approach will have you and your client rethinking the attractiveness of this approach. Imagine funding/creating a College fund, supplemental retirement income, a death benefit for family members etc.

Wealth Transfer Strategies for Grandparents/Parents…
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