Attention Life Settlement Providers, Funders, Brokers, and Potential Sellers: Do you have a prospective life settlement case but it’s been squashed due to the tax bill the settlement would create? Does this scenario sound familiar?
Client: They’re gonna buy my life insurance policy for $1 Million dollars? Fantastic! And I don’t have to pay premiums anymore? Where do I sign? Oh, wait… This sale is going to generate a $350,000 tax bill? I just can’t justify that. No thanks.
Here’s an exit strategy that can save this case. The Charitable Bargain Installment Sale. It’s traditionally been a strategy used for highly appreciated assets such as stocks and real estate, but it’s become an important tool for life settlement cases in the past few years due to the incredible tax problem they create.
The plan involves two strategies: An installment sale and a bargain sale.
Installment Sale — Rather than selling the policy and taking a lump sum, the seller, or settlor, takes an income stream (typically over 10 years). In the case above, a 75 year old client would receive approximately $130,000 annually for 10 years ($1.3 million cumulative).
The Bargain Sale – The settlor, or seller, exchanges the lump sum value of his policy for an installment payment from a 501(c)(3) not-for-profit foundation. Just before the sale, the seller transfers ownership of the policy to a foundation/charity. The foundation then sells the policy, but keeps a small percentage (the charitable bargain amount) and guarantees payments to the original seller pursuant to the installment agreeement.
Tax Benefits — In the case above we had an estimated $350,000 tax problem. However, if income is taken over 10 years, the tax is effectively stretched out over the term of the installment payments. So $35,000 over 10 years rather than one tax bill of $350,000. But the strategy does more than defer the taxable gain.
The bargain sale launches a huge tax deduction, typically 3-4 times the amount gifted to the foundation, wiping out (or at least taking a big chunk out of) your the seller’s $35,000 tax bill every year. The deduction can be stretched out over as many as 6 years.
There are additional tax and asset protection benefits to this strategy as well. For more information or for help with a case you’re working on, give me a call, Chris Huntley, at (619)564-4873, or email me at ChrisH@huntleywealth.com. I am a licensed life agent and IAR in San Diego, and a certified Charitable Bargain Installment Sale Advisor.
{ 0 comments… add one now }