Private Financing – Putting needed life insurance coverage in force while mitigating gift taxes.
Private Financing, which is also known as self financing, is funding of life insurance premiums through a personal loan between the dentist or a family member and an Irrevocable Life Insurance Trust (ILIT). Credit Shelter Trust (CST) or Family Limited Partnership (FLP) can also be used in a loan arrangement with an ILIT.
The benefit of Private financing is that by having a closely related entity or individual act as the lender is the loan repayment remains within the insured's family. As compared to other financing options were collateral deposits or premium increases are needed to repay the loan.
is a valuable tool available to clients who recognize the need for life insurance in their estate plan and have the cash liquidity to pay the premiums but are unwilling to incur gift taxes associated with simply gifting premiums to an Irrevocable Life Insurance Trust (ILIT). Private Financing can also put a needed life insurance policy in force today while the rest of the estate plan is being finalized.
In a Private Financing arrangement, the policy is typically owned by an Irrevocable Life Insurance Trust (ILIT). The ILIT borrows premiums from the client, although other family members or entities such as Family Limited Partnerships or LLCs can also advance the premium loans. Loan interest is normally charged at the Applicable Federal Rate (AFR) and can either be paid annually or accrued. Collateral is not required in Private Financing transactions,
however nothing prohibits it. Closing costs and origination fees are not charged.
Depending on the structure, the loan can either be repaid during the insured’s lifetime or at his/her death. The outstanding loa