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Success Stories

Spectrum Financial LLCSuccess Stories- Volume 1

Creating assets for grandchildren


              Sometimes, an example of a concept that has been applied and successfully operated over time illustrates the power of interdisciplinary approaches to financial planning and intra-family wealth transfer.  The following dialogue describes the history leading to my recommendations to a client, the process of transitioning to a new platform and the real time follow-up to the process several years later.


My client, a wealthy widow, and her deceased husband accumulated great wealth over the course of their 50+ years of marriage.  Along the way, they took the good advice of their advisors to protect their estates against erosion, gifted assets to their two grown children, funded life insurance trusts for the benefit of their minor grandchildren and annually gifted the maximum exempt amount to each of their heirs.

Upon the death of her husband and a lengthy administration of his estate, my client took the time to reflect on what goals she had for the remainder of her life.  First, there was a substantial charitable component which would be expressed as a bequest in her will at her death.

Understanding the effect that this bequest would have on her estate and her heirs, I was asked to provide some ideas and methodology for efficient transfer of additional wealth to her children and grandchildren.  The remainder of this memo will address only the planning involved for the creation of assets for the grandchildren.

The Plan:

My client had used up the entirety of her unified credit exemption, so gifting, especially to a skipped generation, would not be a very efficient program to consider.  This was especially the case in light of the long-term superior performance of the family’s wealth manager.

What was ultimately decided upon was two $2,500,000 loans to trusts for the benefit of each child’s children at the then current mid-term Applicable Federal Rate (AFR), which at the time was .93%.  The loan was to be in place for less than 9 years and interest would be paid to my client annually.  Prior to the end of the ninth year, my client would be repaid $2,500,000 by each of the trusts and that money would be reinvested for her benefit.  It was also discussed that at the end of the original loan term, after assessing the situation, the potential opportunity of renewing the loan was a possibility.

Because this is a loan at the prevailing AFR, no gift has occurred and no gift tax returns need be filed

              The trustee of each trust was given broad power to invest the trust’s assets.  The family wealth manager was happy to continue providing his services and an assumed 6% compound growth rate of trust funds was contemplated as it approximated the lowest annual performance the manager had experienced over the past 10 years.

The trustee was also given the power to apply for life insurance coverage on the parents of the grandchildren.  A Survivorship Indexed Universal Life policy (SIUL) was applied for using the parents as insureds.  Their ages are in the mid-40’s and their health excellent.  The annual cost for this policy was approximately $30,000 per year and the death benefit is $7,651,853.

Projected Performance:

After annual life insurance premiums and interest payments to my client, at the end of the trust term (9 years), the trust would have liquid assets totaling $2,737,326 after repayment of the original loan at the assumed 6% growth rate.  Additionally, the trust would own a life insurance policy payable at the last death of the grandchildren’s parents valued at $7,651,853.

In years 9+, not only will the invested assets of the trusts continue to grow outside of my client’s estate, but the repaid loans will also be invested for future growth.  Assuming my client survives 20 years (her life expectancy plus five years), projected benefits to her children will be $3,923,035 based on a 50% combined transfer tax rate plus trust investment values for her grandchildren totaling $7,275,853.  In addition, the trust also owns the above referenced life insurance policy as a long term asset.

To add perspective to the program, had my client not made these loans and survived for 20 years, her estate would have grown by almost $17,000,000 and net distributable assets  to a non-skipped generation would equal approximately $8,500,000 after 50% transfer taxes (substantially less to grandchildren).  Our program would have distributed over $11,000,000 during the same period plus substantial additional assets represented by life insurance values.

Today Looking Back:

Because the loan rates are locked in for the term of the loan, the .93% interest rate remains constant and will continue until maturity.  Similar term loans today, by contrast, would be issued at 1.63%.

Investment performance has been substantially better than projected rates.  We will continue to use 6% as our assumed rate and prefer that surprises be positive in future years.

Life insurance costs were locked in at the time of application and will remain constant for the term of the policy.  Similar policies today would be issued at higher premium rates reflecting an industry wide trend.