Technical Webinar
©2014. InKnowVision LLC. All rights reserved. www.inknowvision.com
InKnowVision Technical Webinar
Split Dollar and Intra Family Loans
Powerful Wealth Shifting
(630) 596-5090 www.InKnowVisio...
www.InKnowVision.com All Content Copyright © 2014
• Loan at the AFR
• From a wealthy family member
• To a grantor trust
• ...
www.InKnowVision.com All Content Copyright © 2014
Why do it?
• Ability to shift opportunities to heirs
• Ability to effect...
www.InKnowVision.com All Content Copyright © 2014
Facts
• Father loans
 $10M to a defective trust
 Interest rate at curr...
www.InKnowVision.com All Content Copyright © 2014
1. Ability to shift
wealth to heirs
• Under these facts, this strategy w...
www.InKnowVision.com All Content Copyright © 2014
Investment Interest Rate
Paid
Growth Rate Change Growth
Rate in Year
New...
www.InKnowVision.com All Content Copyright © 2014
2. Make income tax free gifts
• Assume same facts as above but add that ...
www.InKnowVision.com All Content Copyright © 2014
3. Value Adjustments
for the Note
• Why do this?
 Gift tax savings
 Es...
www.InKnowVision.com All Content Copyright © 2014
Example
• Using the facts as described above, assume that
Dad makes a lo...
www.InKnowVision.com All Content Copyright © 2014
Present Value
• The present value of a 25 year $10M loan at its stated
r...
www.InKnowVision.com All Content Copyright © 2014
How to Get There
• Reg § 20.2031-4. Valuation of notes.
• The fair marke...
www.InKnowVision.com All Content Copyright © 2014
How to Get There
• Evidence must be submitted that the note is worth
les...
www.InKnowVision.com All Content Copyright © 2014
How to Get There
• The burden of proof is on the estate.
www.InKnowVision.com All Content Copyright © 2014
Key Elements
• Cases where the burden has been established fall
into 3 b...
www.InKnowVision.com All Content Copyright © 2014
Estate of Hoffman
• 17 year note
• Interest rate of 7.61%
• Due at matur...
www.InKnowVision.com All Content Copyright © 2014
Estate of Meyer B. Berkman
• Interest rate at 6%
• Prime Rate of 9.75%
•...
Split Dollar Loans
www.InKnowVision.com All Content Copyright © 2014
www.InKnowVision.com All Content Copyright © 2014
The 3G Concept
• Assumed facts: Grandfather, age 70 (G1) looking to
pass...
www.InKnowVision.com All Content Copyright © 2014
The 3G Concept
• There are five loans, totaling $2.5M.
• Each loan has a...
www.InKnowVision.com All Content Copyright © 2014
Split Dollar
• Think old style collateral assignment
• Trust is policy o...
www.InKnowVision.com All Content Copyright © 2014www.InKnowVision.com All Content Copyright © 201
Split Dollar
G1
Pays Pre...
www.InKnowVision.com All Content Copyright © 2014
The 3G Concept
• Present value calculation, using a market interest
rate...
www.InKnowVision.com All Content Copyright © 2014
Key Advantages
• Transfer of wealth to G2 and G3 without gift or
GST tax...
(630) 596-5090
715 Enterprise Drive
Oak Brook, IL 60523
All Content Copyright © 2014
www.InKnowVision.com
Questions?
Scott...
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InKnowVision July 2014 HNW Technical PPT - Split Dollar

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This concept, which most people thought went away ten years ago with changes in the law, is still a very vibrant technique. Pair it with several other techniques for high net worth clients and you have a powerful solution for wealth transfer.

Review the recording as we look at some of the simple strategies for bringing this particular technique to life and learn how to present it to your clients and planning partners as a significant solution in the wealth transfer arena.

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InKnowVision July 2014 HNW Technical PPT - Split Dollar

  1. 1. Technical Webinar ©2014. InKnowVision LLC. All rights reserved. www.inknowvision.com
  2. 2. InKnowVision Technical Webinar Split Dollar and Intra Family Loans Powerful Wealth Shifting (630) 596-5090 www.InKnowVision.com All Content Copyright © 2014
  3. 3. www.InKnowVision.com All Content Copyright © 2014 • Loan at the AFR • From a wealthy family member • To a grantor trust • For an unsecured promissory note What is it?
  4. 4. www.InKnowVision.com All Content Copyright © 2014 Why do it? • Ability to shift opportunities to heirs • Ability to effectively make income tax free gifts • Possibility of discounting the value of the note at death
  5. 5. www.InKnowVision.com All Content Copyright © 2014 Facts • Father loans  $10M to a defective trust  Interest rate at current AFR of 1.22%.  10 year term • The family believes that they will be able to achieve a total annual return on investment of 6%.
  6. 6. www.InKnowVision.com All Content Copyright © 2014 1. Ability to shift wealth to heirs • Under these facts, this strategy would allow the father to effective transfer $5.9M in 10 years without gift tax.
  7. 7. www.InKnowVision.com All Content Copyright © 2014 Investment Interest Rate Paid Growth Rate Change Growth Rate in Year New Growth Rate 10,000,000 1.22% 6% 11 8% 1. Ability to shift wealth to heirs BOY Balance Growth Interest Payment EOY Balance 1 10,000,000 600,000 (122,000) 10,478,000 2 10,478,000 628,680 (122,000) 10,984,680 3 10,984,680 659,081 (122,000) 11,521,761 4 11,521,761 691,306 (122,000) 12,091,066 5 12,091,066 725,464 (122,000) 12,694,530 6 12,694,530 761,672 (122,000) 13,334,202 7 13,334,202 800,052 (122,000) 14,012,254 8 14,012,254 840,735 (122,000) 14,730,990 9 14,730,990 883,859 (122,000) 15,492,849 10 15,492,849 929,571 (122,000) 16,300,420 Less Principal 6,300,420
  8. 8. www.InKnowVision.com All Content Copyright © 2014 2. Make income tax free gifts • Assume same facts as above but add that all income is annually taxable to the grantor. • The after tax advantage to having the grantor pay the tax at the end of 10 years is $2M. • Combining the results achieved with loans in items 1 and 2 above, your client has the ability to shift $7.9M to his kids without gift tax or to grandkids without GST tax over a 10 year period.
  9. 9. www.InKnowVision.com All Content Copyright © 2014 3. Value Adjustments for the Note • Why do this?  Gift tax savings  Estate tax savings
  10. 10. www.InKnowVision.com All Content Copyright © 2014 Example • Using the facts as described above, assume that Dad makes a loan to a defective trust for $10M at current AFR of 1.22% at a time when market interest rates for a similar loan would be 6.00%.
  11. 11. www.InKnowVision.com All Content Copyright © 2014 Present Value • The present value of a 25 year $10M loan at its stated rate of interest is $10M. However, the present value of a 25 year $10M loan with stated interest of 1.22% is much less if the discount rate used to calculate present value is a FMV rate of 6.00%. • In fact, the PV of this loan would be $6.48M. A 35% adjustment from face. The adjustment could also be affected by other issues, such as the borrower’s ability to repay the loan, whether or not the loan was secured, the size of the loan, etc.
  12. 12. www.InKnowVision.com All Content Copyright © 2014 How to Get There • Reg § 20.2031-4. Valuation of notes. • The fair market value of notes, secured or unsecured, is presumed to be the amount of unpaid principal, plus interest accrued to the date of death, unless the executor establishes that the value is lower or that the notes are worthless.
  13. 13. www.InKnowVision.com All Content Copyright © 2014 How to Get There • Evidence must be submitted that the note is worth less than the unpaid amount because of:  interest rate  date of maturity, or  other cause, or  the note is uncollectible, either in whole or in part (by reason of the insolvency of the party or parties liable, or for other cause), and that any property pledged or mortgaged as security is insufficient to satisfy the obligation.
  14. 14. www.InKnowVision.com All Content Copyright © 2014 How to Get There • The burden of proof is on the estate.
  15. 15. www.InKnowVision.com All Content Copyright © 2014 Key Elements • Cases where the burden has been established fall into 3 basic categories: 1. Market rate of interest for similar notes is substantially higher than the stated rate of interest at the time of decedent’s death. 2. Maturity date of note is far into the future making the note more susceptible to potential long terms negative impact of fluctuating interest rates and borrower creditworthiness. 3. The borrower did not have a strong ability to repay the note.
  16. 16. www.InKnowVision.com All Content Copyright © 2014 Estate of Hoffman • 17 year note • Interest rate of 7.61% • Due at maturity • Ultimate Discount Rate for note 12.5% • Discount from face of approximately 50%
  17. 17. www.InKnowVision.com All Content Copyright © 2014 Estate of Meyer B. Berkman • Interest rate at 6% • Prime Rate of 9.75% • Lack of security • Considerable length of time to maturity • Court finds approx 50% discount
  18. 18. Split Dollar Loans www.InKnowVision.com All Content Copyright © 2014
  19. 19. www.InKnowVision.com All Content Copyright © 2014 The 3G Concept • Assumed facts: Grandfather, age 70 (G1) looking to pass wealth to child, age 45(G2) and grandkids (G3)  Create a GDOT with G3 as beneficiaries.  GDOT purchases insurance on life or lives of G2 (or G3)  G1 (Lender) loans money to GDOT (Borrower) for premium payments  Loan calls for repayment of principal and accrued interest at the then current AFR at the death of G2(of G3).  G1 continues to make premium payments of 500k per year for 5 years  At the end of year 6, G1 dies  What is the value of the loan in G1’s estate?
  20. 20. www.InKnowVision.com All Content Copyright © 2014 The 3G Concept • There are five loans, totaling $2.5M. • Each loan has a term equal to G2’s life expectancy- approx. 28 years. • Assume that all loans carry 3% interest rate • Also assume that we can sustain the burden of proving that the value of the loan is lower than that determined under Reg § 20.2031-4.
  21. 21. www.InKnowVision.com All Content Copyright © 2014 Split Dollar • Think old style collateral assignment • Trust is policy owner • G2 or G3 is insured • G1 is premium payor • The policy is collateral • AFR rate for interest is charged on the loan
  22. 22. www.InKnowVision.com All Content Copyright © 2014www.InKnowVision.com All Content Copyright © 201 Split Dollar G1 Pays Premium Trust Owns Policy • Payment of premium constitutes a loan • Policy is assigned as collateral What is the Value of the Loan Obligation at death or gift?
  23. 23. www.InKnowVision.com All Content Copyright © 2014 The 3G Concept • Present value calculation, using a market interest rate assumption of 6.0%, the present value of the loan is $1.4M. • A 60% valuation adjustment. • Split dollar governed by Reg § 1.7872-15. Split- dollar loans.
  24. 24. www.InKnowVision.com All Content Copyright © 2014 Key Advantages • Transfer of wealth to G2 and G3 without gift or GST tax • Valuation discounts • Tax free cash buildup in policy • Life insurance death benefit
  25. 25. (630) 596-5090 715 Enterprise Drive Oak Brook, IL 60523 All Content Copyright © 2014 www.InKnowVision.com Questions? Scott@ikvllc.com (630) 470-6480 www.inknowvision.com

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