Advanced Underwriting Consultants

Question of the Day – June 16

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client is the 100% owner of a C corporation, who also has an estate tax problem.  The C corporation has excess retained earnings, and the client is trying to manage that problem.  The client wants to remove the excess earnings from the company without have to pay income tax on the money twice.  Also, the client wants to ultimately transfer the money to his heirs without extra tax results. What should I recommend?

Answer: The client’s goals are

  • Reduce excess retained earnings in the company
  • Get the insurance death benefit to the heirs at a low income tax cost
  • Transfer wealth to the client’s heirs at a low transfer tax cost

Here’s a possible solution that might maximize those three objectives:

  • Have the insured’s company pay for a low cash value, high guaranteed death benefit policy on the life of the insured
  • Have the insured create an irrevocable life insurance trust (ILIT)
  • Have the ILIT and the company enter into a split dollar agreement (economic benefit regime) that leaves the policy’s cash value with the company, and the death benefit with the ILIT

There are several potential drawbacks of this strategy that might not make it a fit for the customer.  For example, the economic benefit cost of the plan—based on Table 2001—creates a lingering income tax result that can be annoying.  However, the proposed solution is an excellent starting point for discussion with the client’s advisors.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.