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AFR Arbitrage

Matt Erpelding   |   June 2021   |   1-minute read

The story

Clients are a couple in their late 50s with a current net worth of $25M. The husband is also the beneficiary of a family trust with significant assets. The clients would like to acquire $6M of survivor life insurance in a new life insurance trust, but the annual premium exceeds the Crummey gifts available. (Their estate planning attorney wants to preserve their lifetime exemption for other assets.) The advisor engaged with Ash for a way to fund the trust-owned insurance.

The challenge

  • High-net-worth couple with potential estate-tax exposure seeking to acquire significant trust-owned life insurance policy (Does not require survivorship to work)
  • Limited gifting capacity

Client profile

  • Age between 55 – 75
  • High-net-worth individual or couple with potential estate tax exposure
    • Individual: $12M+
    • Couple: $25M+
  • Overall asset portfolio is very liquid or highly liquid
  • Nonsmokers in generally good health
  • Unwilling to commit to a large lifetime exemption gift (or already exhausted lifetime exemption)
  • Would prefer to avoid committing to a lifetime of making annual premium gifts to a trust

How it works

  • The clients will loan their trust $3.5M on a nine-year note with interest accruing at 0.52%
  • The trustee will invest the loan proceeds for a target return of 4.50%
  • The trustee will make annual premium payments of $125,956 on a 10-pay policy
  • At the end of the nine-year note, the trustee will have enough funds remaining to repay the clients the loan principal plus accrued interest and to pay the final premium on the policy
  • The trust now owns a $6M policy outside the clients’ estate with no future gifting or Crummey notices required

The result

The trust acquired a $6M SVUL policy with a lifetime no-lapse guarantee based on a male age 59 and female age 58, both PNS. The target premium was $93,640.

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Matt Erpelding
About the Author

Matt Erpedling has been with Ash since 2005, developing a broad-based understanding of life insurance and advanced markets strategies. His primary focus is answering advanced markets questions, working closely to develop strategies that tie in the proper product and design to fulfill client planning needs.