The purchase of life insurance products and their implementation into a client’s broader legacy planning strategy requires clients to navigate through a complex web of financial and cashflow management strategies, transfer tax considerations, and tax reporting obligations that must be approached differently on a client by client basis. Failure on the part of advisors to work together can result in avoidable planning gaps, most notably: (1) inability to fund premium payments on a sustainable basis; (2) inefficient use of lifetime estate, gift and GST tax exemption; and (3) poor product maintenance leading to negative outcomes.
Although the Internal Revenue Service (“Service”) disfavors formula transfer clauses, a line of court decisions sanctions their use. Donors and their advisors should be able to use either type of formula clause to cap the value of hard-to-value gifts to predetermined amounts.