Irrevocable Assets and the Loss of Basis Step-Up

Irrevocable Assets and the Loss of Basis Step-Up

Our insurance team was one of a number of coordinating advisors that participated in a holistic client portfolio review. The client holds a considerable amount of assets in irrevocable trusts outside of their estate. Although they planned well and strategically transferred assets into irrevocable trusts, they will not receive a basis step-up at death. At historically reliable rates of return, this will lead to millions of dollars in gains that would otherwise be zeroed out with a step-up in basis.

We explored two options to synthetically create a step-up in basis for greater tax efficiency.

The first option is a private placement life insurance policy (PPLI). In this policy design, clients contribute assets to a privately underwritten variable universal life insurance policy (VUL). The value of this policy is that all gains and income are tax-deferred and typically tax-free. In fact, the client’s least tax-efficient assets (hedge funds) are allowable holdings inside this structure. Dividends, distributions, income, and gains are all tax-deferred and tax-free. Since death benefits are tax-free, it stands in place of a step-up in basis and acts the same way.

The other option is a traditional VUL. This works much like PPLI but is made up of sub-accounts that act like mutual funds. In this case, our team professionally manages the asset allocation of the funds inside the VUL. All forms of dividends, distributions, income, and gains are tax-deferred and tax-free as long as the policy remains in place.

In the end the client decided to go with a traditional VUL, managed by our analysts, because the fee structure allowed more potential for cash accumulation in later years and a higher chance of an increasing death benefit. In addition, the client will receive streamlined access to the cash value of the policy in a traditional VUL.

Key Takeaways

In the absence of a step-up provision, a strategically placed life insurance policy may be a valuable tool that adds income and estate tax efficiency, access to cash, and flexibility.

Non-guaranteed assumptions assume that scales for interest and cost of insurance rates will continue unchanged by the Company for all years shown. This is not likely to occur because interest and cost of insurance rates are subject to change by the Company based on various factors such as claims and investment experience, persistency, expenses, taxes and the overall economic environment. Policy owner actions may influence the values as well. Actual results may be more or less favorable than those shown. Death benefits are backed by the financial strength and claims paying ability of the life insurance company. The guarantee is dependent on minimum premium amount and premium timing requirements as well as provisions related to use of certain policy features or benefits. All premiums are tentative until formal underwriting has been completed by the carrier. Term conversions reflected above are for full term or age Securities offered through Valmark Securities, Inc., a Member FINRA, SIPC. Marcum Insurance Ss. Is a separate entity from Valmark Securities, Inc.