Disclosures

At Inception: Premium Financing

The preceding is not intended to be a comprehensive summary of the gift and estate tax consequences of the transfers depicted. Premium financing may add risk and cost (in the form of interest) to the purchase.

Loans are designed to be repaid during the insured’s lifetime as well as at death. Insurance company is not responsible for the loan made by the bank to the Trust and/or Grantor. There is a specific order in which the above outlined strategy must be established:

1. The Insured establishes a Trust that will be both the owner and beneficiary of the insurance policy. This insurance policy from inception is outside of the Insured’s estate. The proceeds of the insurance policy are paid to the trust who repays the lender if a loan balance is outstanding. The trust pays its beneficiaries any remaining proceeds according to the trust terms.
2. Coverage is underwritten by insurance carrier and assigned to the lender. The applicant for the insurance is the Trust.
3. Interest is gifted to trust by the grantor and paid to the bank by the trustee. When Insured is also the Grantor of the trust, the Interest payment to the lender may be made directly from the insured to the lender but constitute a gift to the trust. Gifts in excess of annual gifting limits will reduce lifetime gift-tax exemption. The loan agreement is between the lender and the trust.
4. External collateral, if necessary, is pledged to the lender. External Collateral is only needed when cash value within insurance policy is insufficient to cover the loan. Collateral may be gifted to trust or retained within estate as a personal asset. Amount of collateral required depends on valuation provided by lender. Cash and securities are the most common forms of collateral. Other options may exist based on your particular situation.
5. Lender pays premiums directly to the carrier on behalf of the Trust. Premiums are a loan to the trust. In subsequent policy renewals, annual interest is paid, additional collateral pledged if necessary and then the annual premium paid by lender.
6. Distributions from the trust must be made in accordance with the terms of the trust document. As the beneficiary of the policy is the trust, all proceeds are retained inside of the trust until paid out by the trustee to the trust beneficiaries. While there is a loan outstanding, the terms of the loan may dictate that the lender must be repaid prior to any distributions to trust beneficiaries.