A.        Captive Insurance Companies

A high net-worth individual or owner of a business should consider forming a Captive Insurance Company to cover professional negligence, directors and officers indemnity, and/or casualty risks.  A Captive Insurance Company will allow such an individual who is otherwise paying excessively high premium payments to self-insure at lower premium rates.  This is especially attractive if the individual has a history of few claims or no claims, and therefore, is a low insurance risk.  Also, forming a Captive Insurance Company can provide substantial income tax benefits.  Not only are the premium payments made to a Captive Insurance Company tax deductible to the individual, but the company will receive those premium payments income tax free.  Thus, the profit to the Captive Insurance Company becomes the individual’s own profit.  Also, all investment income, including capital gains, is tax free to a Captive Insurance Company. If a Dynasty Trust owns the Captive Insurance Company, then the premiums paid to the company will ultimately benefit your children because the profits of the company will enhance the value of the stock which is owned by the Dynasty Trust.  Your children can also benefit from a Private Annuity sale which will remove appreciated assets from your estate to be later sold by the Captive Insurance Company.

For example, this affluent plan will include the use of a Captive Insurance Company, an LLC, a Nevada Dynasty Trust, and a Private Annuity.  First, a Dynasty Trust is created by you and then the trust forms a Captive Insurance Company.  Next, you form an LLC and transfer appreciated real estate or other assets into it in exchange for membership units.  Finally, you sell the membership units to the Captive Insurance Company in exchange for a Private Annuity.

In addition, you can transfer up to $350,000 in appreciated real estate or other assets directly to a Captive Insurance Company in any given year and deduct the value of these assets as payment of insurance premiums.  The Captive Insurance Company can then sell the appreciated assets without having to pay tax on the gain.  Fractional interests in high value real estate can be transferred directly to the Captive Insurance Company in order to keep the amount transferred within the $350,000 limitation.  These interests are discounted for lack of marketability and for lack of control, and thereby enhance the tax benefits of this technique.

In conclusion, if you are a doctor or other professional or business owner with risk management needs, then this affluent plan will provide the following substantial benefits: (1) Gift tax free transfer of assets; (2) Removal of appreciated assets from estate; (3) Tax efficient investing; (4) Assets are safe from creditors; and (5) Steady stream of income for life.

B.        Recourse Premium Financing

This affluent plan will include the use of an LLC, a Nevada Dynasty Trust and an Installment Note with a balloon payment.  First, a seed gift of at least 10% of the fair market value of the LLC membership units is made to the Dynasty Trust.  This gift may be subject to gift tax depending on how much of the gift, if any, exceeds the annual exclusion of $12,000 per beneficiary per year.  Second, the membership units are sold to the Dynasty Trust in exchange for an installment note with a balloon payment.  Third, the Dynasty Trust borrows the premiums (with interest on the loan capitalized for a predetermined number of years (e.g. years 1 through 9)) from a third-party lender to purchase a Guaranteed Life Insurance Policy on your life; the Dynasty Trust being the owner and the beneficiary of this policy.  The Guaranteed Life Insurance Policy includes a very favorable zero interest catch-up provision.  Thus, at a predetermined time (e.g. the beginning of the 10th year) the Dynasty Trust will borrow an additional premium from the third-party lender to place the policy in a paid-up status. The entire loan (for premiums and capitalized interest) is then paid by the Dynasty Trust or interest payments on the

Premium Financing

This affluent estate planning technique will provide the following benefits: (1) Reduce the size of the taxable estate; (2) Transfer assets to future generations with little or no gift tax; (3) Maintain positive cash flow; (4) Life insurance is purchased with no out-of-pocket cost; and (5) Guaranteed Life Insurance Policy is paid-up and owned by the Dynasty Trust which will provide a tax free death benefit to your family at the time of your death.

C.        Life Settlement

The secondary market for life insurance is reshaping the landscape within the financial services industry for high net worth individuals.  Life insurance provides financial solutions to meet various needs of businesses and families.  Over time, however, needs change, and therefore, a life settlement can be a viable option for the following reasons: A spouse has passed away; Loans are repaid; Key executives retire; and Businesses are sold or dissolved.  In other cases, with interest rates down, a policy may have become too expensive to maintain.  So-called “vanishing” premiums have not vanished, and the financial objectives of the policy are not being met.  In any case, you may simply want out of the policy, either to move the cash value into another asset or to buy a more efficient insurance policy such as a Guaranteed Life Insurance Policy.  According to Millman and Robertson, a leading actuarial consulting firm, 89.5% of all universal life policies are either surrendered for the cash value in the policy or permitted to lapse.  Today, it is no longer necessary to surrender an underperforming or unneeded cash value life insurance policy.  A life insurance policy can now be sold for its fair market value.  And the fair market value of your policy is generally a function of your age and medical history.  If you are 78 years of age or older, your policy is probably worth considerably more than its surrender value.

The secondary market has realized spectacular growth and is expected to exceed $45 billion by 2007.  The amount of life insurance where market value exceeds surrender value currently totals more than $100 billion.  Institutional backing provides a secure funding source and also the highest degree of consumer protection with regard to privacy and confidentiality.  At no time will your policy, or your personal information ever be in the hands of an individual investor.  Also, the settlement funds are placed in an escrow account to assure they are available before you approve the transfer of your policy. 

Generally, the kind of policy that is most desirable to companies that make up the secondary market is a Guaranteed Life Insurance Policy.  A Guaranteed Life Insurance Policy is a cash value policy in which the Insurance Company guarantees level premium payments for your lifetime.  The premium payments will never go up even if there is no cash value in the policy to support the level of premium payments.  It is like having a term policy to age 100.  At age 100 the premium payments stop.  Also, if you live beyond age 100, the Insurance Company guarantees they will pay the death benefit at the time of your death.  A Guaranteed Life Insurance Policy is very attractive in the secondary market because the company that purchases such a policy knows that the premiums will remain the same for the lifetime of the insured.  In other words, they know a Guaranteed Life Insurance Policy will not blow-up on them like a term policy or universal life policy can. 

A high net worth individual 78 years to 90 years of age and insurable can benefit substantially from the purchase of a Guaranteed Life Insurance Policy.  For example, the premium on a $1 million Guaranteed Life Insurance Policy on an individual 80 years of age will run approximately $55,000 per year.  You must keep the policy for 2 years (because of the suicide clause) before it can be sold in the secondary market.  After 2 years you will have paid about $110,000 in premium payments.  At that time, however, the Guaranteed Life Insurance Policy will have a fair market value in the secondary market ranging from $200,000 to $300,000.  And there is no down side. If you die during the first 2 years, then your family will receive $1 million tax free.  Also, if your health declines during this period, the policy will be worth even more. 

However, these substantial profits come with a price.  The price is your insurable capacity.  For example, if you have a $10 million estate, your insurable capacity is at least half the value of your estate or $5 million.  You may have an existing $2 million policy for estate planning purposes, leaving $3 million in insurable capacity.  One of the benefits of the secondary market is that you can monetize your insurable capacity.  However, your insurable capacity is a time sensitive asset that has substantial value as long as you use it.  Thus, using your insurable capacity for life settlement purposes is very beneficial as long as you do not need it for estate planning purposes.