Lifetime Settlement
How does lifetime settlement (life settlement) work as a problem-solving tool?
The number and kind of innovative applications of the lifetime settlement concept have grown rapidly and dramatically since the concept first took shape a few years ago. Strategies focus on businesses and high net worth individuals whose current and future financial planning circumstances have made existing policies no longer necessary.
For example, you may have initially purchased life insurance to achieve the liquidity needed to pay your estate taxes, but changing circumstances may have made your estate highly liquid now. If the money that was to be received at your death were now available during your lifetime, it could be reinvested to maximize asset growth or to purchase alternative risk management vehicles, such as long term care coverage.
If your estate has reduced in value, the resulting estate tax liability will be reduced as well. The amount of life insurance purchased for your heirs to meet this liability may now be more than is necessary or desired. In addition, lifetime settlement proceeds can be gifted to heirs or given to charity during lifetime as a method of reducing your estate, and its resulting taxes, even further.
Perhaps you now have a need to remove your insurance policy from your estate to avoid higher estate taxes. Removing it simply by transferring it from personal ownership to trust ownership may be subject to the three-year “lookback” rule of Sec. 2035. This rule prevents taxpayers from transferring certain assets simply to escape estate taxes. However, a lifetime settlement is considered a transfer for value and is, therefore, not subject to this rule.
Another reason to consider a lifetime settlement is when the policy becomes too expensive to maintain. The problem may be as simple as lower income or premiums that did not vanish because of lower interest rates or company dividends. Also, interest payments on large policy loans will make it expensive to maintain.
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