The scene is acquainted one. The shopper, seated on the head of his massive convention room desk, is the only real proprietor of a profitable enterprise that contains a good portion of his taxable property. Becoming a member of him across the desk are his property planning and company attorneys, audit and tax companions from his accounting agency and his life insurance coverage agent. Additionally sitting in, and leaning very near the dialog, are two senior members of the shopper’s govt staff.
A Very Taxing State of affairs
The topic of the assembly is methods to take care of, which means pay, the very appreciable property tax that shall be due when the shopper dies. You see, the shopper is a widower, so there’s no marital deduction to defer the tax to the loss of life of a surviving partner.
The shopper established an irrevocable life insurance coverage belief (ILIT) some years in the past. The ILIT owns a coverage that’s nowhere close to enough to cowl the property tax. The beneficiaries of the ILIT have been initially his spouse and two, now often grownup, youngsters, neither of whom are concerned within the enterprise. In case you pay attention rigorously to the banter among the many professionals on the desk, you’d hear them describing the ILIT as a grantor belief for earnings tax functions. You’d additionally hear them level out that the ILIT has the same old provision about offering liquidity to the property by the use of loans or purchases of property.
Discussions with this shopper about property tax planning have by no means been fruitful. He has steadfastly refused to do any planning that may lead to his having something lower than full management of the enterprise. Even the acronyms for the assorted planning methods are actually crying out from the slide decks, “Hey, sufficient. He’s simply not into us! By no means was and by no means shall be.” However the shopper, now extra rich than wholesome, is below some not-so-subtle stress from his govt staff to “do one thing” in regards to the property tax state of affairs. So, he despatched a message to the advisors, attaching a slide from considered one of their displays. The slide is titled “Part 6166 – Deferral of Property Tax.” He famous within the margin, “Let’s speak about this.” And so, the group has assembled in his convention room. What’s notably totally different about this assembly is that the shopper requested the company legal professional and accountant to attend. He should be getting critical.
To arrange for the assembly, the property planner, tax accomplice and insurance coverage agent received collectively to collaborate on a slide deck. This shopper has no concept how lucky he’s to have these professionals working for him as a staff. That’s as a result of using IRC Part 6166 is commonly, perhaps even traditionally, the premise for what I’ll politely consult with as a “sturdy level and counterpoint dialogue” amongst skilled advisors and insurance coverage brokers. Not right here. The property planner and tax accomplice know that whereas Part 6166 permits for deferral of the tax, it’s silent on the place to provide you with the cash to pay that tax. That’s why, after they’re in a state of affairs like this one, with a shopper like this one and with executives like these two, to not point out a few very succesful and inquisitive colleagues, they’d higher be prepared to inform the entire story and nothing however. Meaning, embrace the skilled who can tackle the funding. For his half, the insurance coverage agent is aware of that in such a setting, the shopper and sure, he himself, are greatest served by contemplating Part 6166 as a tailwind to life insurance coverage, not a headwind.
The Presentation Unfolds
The property planner and tax accomplice open the dialog by saying that they usually regard Part 6166 as a method of final resort. Their rationale for this place turns into evident as they stroll the shopper, the executives and their colleagues by way of Part 6166, together with coordination with IRC Part 303 redemptions by the corporate. They pay particular consideration to the “tripwires” in Part 6166 and elsewhere within the tax regulation that may pose actual issues for the property, the corporate and the household over the last decade and a half that comprise the deferral interval.
However at this stage of the sport, all the things must be on the desk. Based mostly on present valuation, there’s no query that the property would qualify for Part 6166 deferral. However qualifying for the deferral is one factor. That’s simply rote stuff for the shopper and his associates. Discovering the cash to pay the curiosity and principal is one other and, for the shopper and his associates, that is the point of interest of the dialogue. Sure, as shall be defined, the funds could be generated by the enterprise. However the shopper ought to undoubtedly take into account the tax and financial advantages of utilizing life insurance coverage to complement these funds.
Accordingly, the property planner and tax accomplice flip the presentation over to the agent, who goes by way of some slides and coverage illustrations depicting variations on the theme of the ILIT’s deploying the insurance coverage proceeds in a Part 6166 context.
Getting All the way down to Enterprise
The presenters pause to permit the remainder of the group to digest all the fabric they’ve heard for the previous hour. They assume issues are going nicely, up to now anyway. They justifiably take satisfaction in the best way they’ve collaborated.
The group regroups. The company legal professional and accountant undoubtedly wish to hear extra. They know the shopper, they know the corporate and so they understand how worthwhile this relationship is to their respective practices. They assume this “Part 6166 factor” may very well be a breakthrough in a state of affairs that’s changing into extra acute with each passing 12 months. The engagement of those two professionals is totally vital as a result of, on the finish of the day, the shopper will flip to them for recommendation. The engagement of the 2 executives can be key, as a result of they’ll must be snug that no matter is proposed will “work.” That’s why, when the assembly resumes, the presenters get right down to enterprise. “OK everyone. Let’s speak about how this might work. Don’t maintain again in your questions.” One govt quips, “I feel we’re gonna want an even bigger slide deck.”
The shopper raises his hand. “Proper off the bat, I’ve received two issues with this. First, I’m not considering paying these massive premiums with my very own, after-tax cash. Second, I received bored with all that rigamarole with my ‘irredeemable life insurance coverage belief’ years in the past. You know the way unsettled my life is lately. The very last thing I want is to place more cash and extra life insurance coverage into one thing that’s irrevocable. I’ll pay attention. In spite of everything, that’s why you’re all right here. However you higher know I’m involved about these issues.”
It takes a staff effort to beat these preliminary objections. The property planner rushes to the protection of the ILIT, saying that it’s principally the one present on the town for holding the insurance coverage proceeds out of his property, which is a sine qua non for somebody with a taxable property. And it was drafted to be as versatile as attainable. The agent, in flip, addresses the shopper’s reluctance to pay the premiums himself by suggesting a split-dollar plan between the corporate and the ILIT, which, conveniently, is a grantor belief. And it simply so occurs that he has an illustration for that as nicely. The shopper is initially taken with how split-dollar would take a few of the burden off him. However the executives, who’ve been there and carried out that with split-dollar, stay to be satisfied.
That is the place it will get fascinating, belief me.
The shopper turns to his executives, “What do you assume?” Anticipating a enterprise and financially-oriented response from these two enterprise and financially-oriented people, the presenters and their colleagues are stunned when the executives reply, “Frankly, our main concern is along with your children. No offense, in fact. However they don’t have any stake within the enterprise. Additionally they have very lavish existence. We might completely see them saying to the trustee of the ILIT, ‘Don’t even take into consideration lending our insurance coverage proceeds to the corporate or the property or to anyone for that matter. We would like the cash now.’ And that may be an issue!”
The shopper smiles. Sensible guys! So, the company legal professional means that they get the shopper’s relationship supervisor on the belief firm on the road. Positive sufficient, the trustee says that they must take the beneficiaries’ objections critically. The trustee might envision a situation during which the children object to the ILIT’s loans to the corporate or the property on the grounds that the return on the mortgage is just not enough or that, with out the management of their father, the creditworthiness of the borrower can have been impaired. The trustee will surely require the children to log off on any plan to lend proceeds or purchase property or no matter. “However,” says the trustee, “As your property planner is aware of, there are a few issues that may be carried out to present you extra assurance that the funds shall be used as you plan. We will speak about that when the time comes.”
The executives ask whether or not the corporate might personal the insurance coverage coverage and apply the proceeds to a collection of redemptions. That might alleviate the issues in regards to the shopper’s private money circulate, the ILIT and the children. “You will need to have learn forward within the deck,” says the agent. “That’s one thing we have to assume by way of,” say each the property planner and the tax accomplice. “There are points. Just like the affect of the insurance coverage proceeds on the valuation of the corporate for property tax functions. We’d additionally must be involved that the children would contest the inventory worth for the redemptions, and so forth.” The company legal professional asks, “Can’t we set the value with an settlement?’ To which the property planner replies, “That might work contractually, however may very well be an issue for different causes. Not saying we will’t get there from right here, however we’d must be very cautious.”
Collaboration is Key
Collaboration creates openings for all professionals.
We’ll go away the dialog right here to let the presenters end their work and lead the group by way of a recap of the fabric. It’s been a productive assembly, and so they’re on their strategy to an answer, which can or could not in the end contain Part 6166. Most necessary, the shopper is in good fingers, and with the entire key advisors now concerned, no person’s going to let him make at the moment’s resolution tomorrow’s drawback.
The purpose of this hypothetical state of affairs, and this text specifically, is that each the issue and the answer contain way over taxes and insurance coverage. They contain individuals, lots of people, which signifies that the planning must be holistic, multi-dimensional and multi-disciplinary. As a result of the technical experience to plan the plan might not be as vital because the talent to get it throughout to a various viewers and carried out by a control-oriented shopper, the entire group of execs has to work as a staff. That’s referred to as collaboration.
My hope is that readers will use this case examine of their examine teams, various the info and circumstances to assist them take into account the case from totally different enterprise, tax and insurance coverage planning views.