High Net Worth Estate Planning with Life Insurance [Top 8 Strategies]

Updated February 26, 2018

High net worth means different things to different people. To an average household, high net worth may be viewed as someone with a few million stashed away. For wealthier households, the perception may be that only the top 1% with assets in the tens of millions are really defined as high net worth (HNW). When it comes to high net worth life insurance conversations in the context of wealth building and legacy creating, suffice to say that the greater the wealth, the more challenging the planning becomes.

This article will tackle the reality of high net worth estate planning with life insurance by first touching on an overview of estate planning in general and then reviewing some common problems and potential solutions that include life insurance strategies for high net worth individuals and households.

We recommend many of the following strategies to our HNW clients, as well as some other advanced high net worth life insurance planning strategies. Please give us a call for more information on the different services we provide.

Estate Planning Review for High Net Worth Individuals & Households

Contrary to popular misconception, EVERY household needs some estate planning and NOT just high net worth people. However, the level of damage that can be faced by families due to a lack of planning can exponentially increase with greater wealth.

This hold particularly true for the wealthiest households with a lot of assets and minimal liquidity. More on that in a second.

Estate planning for everyone starts with certain estate planning documents such as a last will and testament, durable power of attorney AND revocable and irrevocable trusts. How these documents are used is extremely important and this is why do it yourself (DIY) estate planning should be avoided at all costs.

Revocable living trusts are usually a minimal first step toward protecting loved ones from the hassle and expense of a probate administration and this is especially important for high net worth households because probate costs rise as a percentage of asset values.

Planning Tip: probate attorneys love high net worth households without any trust planning due to large statutory fees.

Where high net worth households tend to separate from the pack, in terms of estate planning households, is the use of irrevocable trusts with a much greater emphasis on asset protection and federal estate tax planning.

Estate Tax Planning

High net worth households are THE only one’s under current laws that are tasked with planning for federal estate taxes. Thus, our top 1% will continue to benefit greatly from irrevocable trust planning that uses what is called qualified gifting to an irrevocable trust in order to reduce or limit the size of the estate for estate tax exposure.

Gifting to an irrevocable life insurance trust has been particularly effective because gifted proceeds are used to purchase life insurance to further the estate planning goals and utilizing financial leverage with the gift.

Charitable planning strategies such as using a charitable lead trust or a charitable remainder trust can also offer significant estate planning benefits to reduce estate tax exposure (while also offering income tax benefits while living) and those strategies are unpacked in the linked article above.

The Tax Cuts and Jobs Act has effectively raised the federal estate tax exemption limits to $11,200,000 for individuals and $22,400,00 for married couples and this means that only estates with assets in excess of these amounts are subject to federal estate taxes as of this writing.

Grantor trusts are also often used for various strategies such as using intentionally defective grantor trusts with a “gift and note” concept in order to gain income and estate tax savings.

We also work with clients looking for life insurance for foreign nationals. Different rules and laws may apply for foreign nationals and non U.S. residents.

8 Life Insurance Strategies for High Net Worth Estates

1. Providing Liquidity and Leverage

Liquidity and financial leverage are two major benefits that can be obtained through using life insurance for high-net-worth estate planning. The cash value in a policy can be accessed with little effort. And the liquid death benefit is available from the life insurance company quickly, so that your trustee of your estate and beneficiaries promptly have the liquid assets needed, rather than have to sell off other assets to create needed liquidity.

2. Paying Estate Taxes

When it comes to high net worth estate planning with life insurance, ensuring that the estate has liquidity to pay debts, facilitate a buyout of a family business OR pay federal estate taxes is often the first priority. Federal estate taxes must be planned for if the estate is project to exceed the exemption amounts noted above because this tax is due within 9 month of the estate holder’s date of death and is a heavy tax of approximately 40%.

For example, assets that are being held in what is called “B Trusts” due to huge changes over the years in estate tax laws can be converted to life insurance policies thereby reserving an estate tax free death benefit.

3. Paying for Business Continuity Succession Planning

Maintaining the continuity of a closely held business is a major focus of estate planning with life insurance for high net worth households. This strategy uses a life insurance policy to fund the buyout of a closely held business.

Generally a buy sell agreement funded by life insurance is used for this purpose. Family business succession planning is another aspect of this strategy and death benefit proceeds are often used to allow key family members to purchase a deceased family member’s interest with the life insurance proceeds.

4. Gifting to Pay Life Insurance Premiums

Qualified gifting means that an individual may give a certain amount per beneficiary without incurring what is called a federal gift tax. The federal gift tax is similar to the estate tax in that a there is a lifetime exemption amount. In additional the exempt amount per beneficiary just increased to $15,000 per beneficiary.

5. Funding Irrevocable Trusts

Where gifting interrelates to life insurance for high net worth households is that proceeds that are gifted to an irrevocable trust may be used to purchase life insurance. The power of this strategy is that the life insurance death benefit will NOT be included in the taxable estate of the trustmaker.

This strategy has been so popular that the coined term irrevocable life insurance trust (ILIT) has been earmarked for this strategy. One strategy to fund an ILIT that may be more common with high net worth household is using a second to die life insurance policy to fund an ILIT. This planning is effective when the surviving spouse will have no need for the death benefit proceeds. Other strategies involving second to die life insurance may also benefit high net worth families.

ILITs are often used to hold life insurance for high net worth households as a way to provide the estate with liquidity AND also provide dynasty trust planning for future generations.

6. Premium Financing

Ultra-high net worth individuals are more likely to make use of what is called life insurance premium financing. The logic behind this strategy is why pay for the life insurance if I can get someone else to do it for me (i.e. Other People’s Money OPM), thereby increasing my rate of return. Premium financing is generally reserved for ultra high net worth households due to the approval requirements and amount of cash-value life insurance involved.

7. 1035 Exchanges for Life Insurance

High net worth estate planning may require using strategies such as the 1035 exchange for life insurance due to potentially high cash values and the need to assure that policies are performing optimally after many years.

8. Long-Term Care Insurance

Long-term care life insurance hybrid policies can be purchased which provide death benefit coverage as well as insurance coverage for long-term care expenses, if needed. The advantage of these asset based long term care insurance policies is you get both a death benefit or long-term care benefit in one.

6 Types of Permanent Life Insurance Policies to Accomplish High Net Worth Estate Planning Goals

Dividend paying whole life insurance is a time tested conservative life insurance asset that offers a minimum guaranteed return on cash value accumulation within the life insurance policy. Whole life insurance tax advantages offer tax deferred growth and cash be accessed in the form of life insurance policy loans.
Universal life insurance comes in a few flavors depending upon your risk tolerance and goals.
Variable life insurance is life insurance for high net worth individuals with higher risk tolerance, who wish to take advantage of the financial market returns.
Guaranteed universal life is on the other end of the spectrum which is mostly used to secure a permanent death benefit at a lower cost than whole life but with little cash value accumulation.
Indexed universal life insurance is a middle ground that offers market based return based upon indexes but with a ceiling and floor to offset the risk factor.
Private placement life insurance is another strategy akin to variable life but with added flexibility reserved for accredited investors who want the benefits of investing in various assets, such as hedge funds, but with the built in tax advantages of life insurance.