Record Low Interest Rates Let You Have Your Cake and Eat It Too – Life Insurance, Investments & Intra-family Loans

As of now, the lifetime estate tax exemption amount is $11,580,000, which is set to sunset in 2025. This means that the amount will revert back to $5,000,000 per person, adjusted for inflation, in 2026. That being said, many clients are attempting to take advantage of the larger amounts before it is gone. The difference between the two amounts is $6,580,000 and you do not have to be a mathematician to see that the difference is vast. 

The problem is, in the current economic environment, many people are unable to make outright gifts, but are still wanting to transfer some of their wealth. “Some have already utilized their estate tax exemption amount, but wish they could somehow transfer more wealth without incurring a gift tax.” Others are worried about transferring funds before the economy “sorts itself out”. 

The IRS has released record low Applicable Federal Rates (AFR). For August 2020 the rates are: 

• Short term loans must bear interest of at least 0.17%
• Midterm loans must bear interest of at least 0.41%
• Long term loans must bear interest of at least 1.12%.

The low rates are making it possible for families that want to transfer wealth without making gifts or utilizing their estate exemption amount. 

One way to do this is to set up an irrevocable life insurance trust to own a life insurance policy on your life. You can then lend the trust sufficient funds to purchase the policy plus additional funds for the trust to invest. “The trust signs a promissory note to the clients, promising to pay back the loan, with the long term AFR interest rate.” ” The promissory note is an interest only note with a balloon payment of the full principal due at the end of the term. The trust then invests the borrowed funds into a brokerage account.”

See Rebecca MacGregor, Record Low Interest Rates Let You Have Your Cake and Eat It Too – Life Insurance, Investments & Intra-family Loans , Bowditch Estate and Tax Planning Blog, August 12, 2020.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.