Leveraging Taxable Gifts with Life Insurance

Melvin A. Warshaw (attorney, Boston, MA) recently published his article entitled A “One of a Kind” Opportunity is Closing: Leveraging Large Taxable Gifts in 2010 with Life Insurance, ABA RPTE Publications, Sept. 2010. The conclusion is below:

Integrating the use of life insurance to lock in the potential significant transfer tax savings available from a large taxable gift made in 2010 assures a successful wealth transfer planning transaction. The biggest risk – that the donor dies within three years of making a large taxable gift on which significant tax is paid and that must be included in the donor’s gross estate – has been hedged by purchasing some life insurance.

Careful policy selection can provide either short-term optionality or predictable long-term investment returns. For those policyholders and insureds who want to reassess their options once the donor survives the three years lookback (estate inclusion) period, use of a UL policy with an “early cash value rider” preserves a variety of options: surrender the policy for the amount paid (and no tax consequences), settle (sell) the policy perhaps for an amount in excess of the cash value or exchange for a new policy that might provide access to favorable mortality tables.