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Advanced Markets Group

PREMIUM FINANCING

SunSolutions For Life SM

The Personal Financing Alternative Using GRATs as an Exit Strategy

Financial Situation
Many individuals have established a gifting program to take advantage of their annual exclusions to buy
life insurance. Based upon the performance of their estate going forward, there may be a need for larger
amounts of life insurance calling for premiums that exceed their annual exclusions. Such individuals
will usually create an Irrevocable Life Insurance Trust (ILIT) to own the insurance, which could
result in significant gift tax when gifting the needed dollars to the ILIT.

Possible Solution
Personal Financing may be able to provide an alternative method for funding annual premiums. Once an
ILIT is established, cash is loaned either on an annual basis or in single lump sum to pay the premium.
Because the loan is usually coming directly from the insured, and going to his/her trust, there are not

FINANCING
the usual collateral requirements associated with Commercial Financing.
Keep in mind however, that if loan interest is being gifted, the longer the loan is outstanding the greater
the chance of incurring gift tax. Also keep in mind that if interest is being deferred, and the plan is to
use the death benefit to pay off the loan, the longer the loan period goes, there is a chance that the net
death benefit after paying off the loan will be less than the desired face amount unless addressed from
the outset of the agreement. Through the use of Grantor Retained Annuity Trust (GRAT) clients can
fund an ILIT with enough assets to pay off a Personal Financing loan, and ultimately avoid gift taxes.

Financial Strategy
Note at applicable
AFR Rate
Grantor Irrevocable Life Insurance Trust (ILIT)
Loan
The Grantor establishes the Premiums Death Benefit
ILIT, makes either annual loans
or a lump sum loan to the Life Insurance Company
trust. The interest due on the
loan is gifted or deferred for The ILIT applies for a life insurance policy on the life of the Grantor.
the life of the loan.1 The Trustee borrows a series of premiums from the Grantor to fund
the life insurance policy. The trustee then pays the annual premium to
the insurance company and either pays the loan interest to the
Grantor each year, or has the option defer it.
The applicable AFR loan rate will be determined by the length of
the loan.

*Subject to applicable gifting codes and regulations.

Any gift to an ILIT that is intended to be a present interest and completed gift must be made to an ILIT, which contains Crummey
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power language. Annual exclusion gifts made to an ILIT can be gift-tax free if they do not exceed $12,000 per individual beneficiary
in 2008. In addition, lifetime gifts can be made using the liftime gift tax unified credit exemption of up to $1,000,000. Gifts in
excess of these exclusions and exemptions will be taxable gifts.

XMSD 44/528
SLPC 19208 08/08
Exp. Date 08/09
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GRAT Exit Strategy
Remainder
Asset(s) Value
Grantor GRAT ILIT
Annuity
The Grantor transfers appreciating Payments The GRAT makes payments in the
Loan Repayment
assets to the GRAT. The transfer form of an annuity to the Grantor
may be subject to gift tax for a fixed term of years or lifetime.
depending on how the GRAT is
structured,2 and may qualify for a
discount on the asset valuation Grantor
based upon the nature of the asset.
At the conclusion of the GRAT term,
the remainder value is transferred to
the ILIT. The trustee can use the assets
from the GRAT to repay the loan. The
loan repayment may be subject to
estate tax if the insured is the lender.

Results
Through the use of a Personal Financing arrangement, one can provide the necessary funds to pay life
insurance premiums in a tax advantaged manner. Since the Grantor makes loans to the ILIT, gift taxes
may be avoided. In most inter-family loan arrangements there is no risk of having the loan called by a
third party lender, or collateral issues.
The GRAT affords the Grantor the opportunity to not only leverage existing assets, and shift future
appeciation, but also provides the Grantor the ability to pay off the loan prior to death, leaving the
total death benefit amount inside the ILIT.

Advantages Disadvantages
 The property may be gifted at a reduced value  If the Grantor dies during the GRAT term, the
property will be included in the Grantor’s estate
 The value of the property is frozen for
at current fair market value
gift tax purposes
 The GRAT property may under-perform during
 Retain right to receive income, while property
the GRAT term
appreciates outside of the Grantor’s estate

A “zeroed out” GRAT occurs when the value of the Grantor-retained annuity is essentially equal to the value of the asset transferred
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to the trust, resulting in a nominal gift or no gift because the remainder interest has virtually no value for gift tax purposes.

This information is for general education of producers and contains references to concepts that have significant legal, accounting and tax
implications. It is not intended as legal, accounting or tax advice. Clients should consult with their own tax advisor regarding the application of
these concepts to any particular situation.
Not FDIC/NCUA insured. May lose value. No bank/credit union guarantee. Not a deposit. Not insured by any federal
government entity.
Universal life insurance is issued by Sun Life Assurance Company of Canada (Wellesley Hills, MA) or in New York, Sun Life Insurance and Annuity
Company of New York (New York, NY).
All guarantees are based on the claims-paying ability of the issuing company, Sun Life Assurance Company of Canada (Wellesley Hills, MA), or in
New York, Sun Life Insurance and Annuity Company of New York (New York, NY). All are members of the Sun Life Financial group of companies.
©2008 Sun Life Assurance Company of Canada. All rights reserved. Sun Life Financial and the globe symbol are registered trademarks of
Sun Life Assurance Company of Canada.

XMSD 44/528
SLPC 19208 08/08
Exp. Date 08/09
Page 2 of 2