Trump says he’ll do away with the estate tax, which has high net worth American’s converting traditional policies into private placement life insurance policies. These private placement life insurance policies will be the focus of both onshore and offshore tax planning in 2017.
First, let’s look at the estate and gift tax. There are two components of the tax – the estate tax and the step-up in basis rules.
The federal estate and gift tax exemption is $5.49 million per individual in 2017. This allows a married couple exclude about $11 million from estate tax… transferring this amount tax free to their heirs. If you’re worth more than $5.49 to $11 million, about 40% of your remaining estate will go to the government.
When your kids receive their inheritance, they get a step-up in basis. They receive the assets with an increase in basis from what you paid to what they are worth at the time of your death.
For example, you bought 1,000 shares of Microsoft stock in 1994 at $4 (well done). You sell MSFT in 2017 at $62. Your basis in the 1,000 shares is $4,000 and your gain is $62,000 less this $4,000 basis, or $58,000. You’ll pay Federal long term capital gains tax on this $58,000 gain.
Let’s say you don’t sell the shares, but pass away in 2017. On the date of your death, the shares are worth $62,000.
These shares will be transferred to your heirs with a step-up in basis to $62,000. If your children were to sell the stock while it’s worth $62, they will pay zero in capital gains tax. If they hold it for a while, and it increases to $70, they have a taxable gain of $8 per share.
Now for Trump’s estate tax plan.
Trump says he’ll eliminate the death tax entirely… so, if your net worth is $5 to $11 million, don’t die until Trump works his magic!
- About 0.2% of Americans who die in 2017, or about 5,200 people, are expected to have taxable estates, according to the Tax Policy Center in Washington.
The elimination of the estate tax will likely be balanced against a change to the step-up basis rules. Those with assets of more than $10 million will receive no step-up when transferring to their heirs.
So, in the example above, your children will get the MSFT stock with no estate tax due. However, when they sell it at $62, they would pay tax on the full gain of $58,000. Trump’s plan eliminates the basis adjustment we have today.
While the media has railed against repealing the death tax as a benefit to Trump and his billionaire buddies, it’s very possible this change will increase their tax rate rather than reduce it. If they’re holding long term assets, the increase could be significant.
Here’s why Americans are running to private placement life insurance.
An offshore dynasty trust, combined with an offshore private placement life policy, might allow you to defer capital gains tax indefinitely. With the estate tax gone, all planning will focus on deferring or eliminating the capital gains tax.
An offshore dynasty trust with a PPLI is the best tool for this. For a detailed article, see: Offshore Dynasty Trusts.
A private placement life policy inside a dynasty trust acts as a giant IRA with no contribution limits or distribution requirements. One might use this structure to defer gains on millions of dollars over multiple generations.
And private placement life insurance has other benefits not related to tax planning:
Distribution equalization: PPLI allows you to distribute your estate equally among your heirs. For example, you have a privately held business worth $10 million you wish to leave exclusively to your daughter. You might buy a private placement policy with a $10 million death benefit to leave to your son.
Privacy and asset protection: US complaint offshore life insurance provides the best privacy and protection. No other structure comes close to matching this level of legal protection from creditors.
Ability to borrow against the policy: PPLI inside of an offshore trust provides you maximum protection and flexibility. In most cases, you’re allowed to borrow against the policy with no negative tax consequences.
While traditional life insurance is focused on minimizing your estate tax, a private placement policy provides many more benefits. For this reason, the uber rich are expected to convert their traditional life policies to PPLIs once Trump’s tax changes come into effect.
I hope you’ve found this article on why Americans are moving towards private placement life insurance to be helpful. For more information on offshore dynasty trusts, or to be introduced to a PPLI expert, please contact me at info@premieroffshore.com or call us at (619) 550-2743. All consultations are confidential.
