Advanced planning

Family gifting strategies

After your client builds wealth and reaches a place of financial security, they are now in a position to begin sharing wealth with their loved ones. Lifetime gifting is a powerful estate planning technique that enables them to enjoy seeing loved ones benefit from their legacy during their lifetime.

How does family gifting work?

Under IRS guidelines, your client can give up to the annual gift tax exclusion amount ($18,000 in 2024) every year to any number of recipients, free of gift tax. Married couples can apply both of their exclusion amounts to a single gift − effectively doubling the exclusion amount − provided they both consent and properly file a timely gift tax return.

Magnify your client’s gift

Your client can leverage their annual gifts through the use of permanent life insurance. In addition to death benefit protection, permanent life insurance provides long-term, tax-deferred accumulation that is accessible through policy loans. Several options are available:

• Purchase life insurance for their child, protecting their family and supplementing their retirement income.
• Purchase life insurance for their grandchild, providing an education fund and eventually a cash accumulation fund.
• Purchase trust-owned life insurance on themselves, naming the trust as beneficiary.

Buying life insurance for children and grandchildren: Who should own the policy?

Parents of the Insured: Parents have total control over the policy and can manage until child is a responsible age. Gift taxes may apply when transferring ownership later.

Trust: A trust offers flexibility and control but involves legal fees to create and possible ongoing administration costs. Of all the options listed, a trust typically offers the most sophisticated planning and protection.

Child/insured: Generally, a minor child is not competent to own a life insurance policy. However, your client could set up a custodianship where an adult will manage the policy on behalf of the child until the child reaches adulthood (typically age 18, 21 or 25, depending on state law).

Grandparents of the insured: Grandparents have total control over policy but receive no current gift or estate tax benefits. Consider naming a successor owner to avoid probate.

The benefits

• When the time is right, parents or grandparents who own a policy on the child/insured’s life could gift the policy to the insured by submitting a change of ownership request. This allows the insured to personally own the policy. Your client should consult their tax advisor, as gift taxes may apply at the time of the transfer.
• By purchasing life insurance, your client can magnify annual gifts made to their heirs. In addition to death benefit protection, permanent life insurance provides long term, tax-deferred accumulation that is accessible through policy loans.
• Assets given away often pass outside of probate, simplifying the administration process for their heirs.
• Lifetime gifts can also provide estate tax savings by removing the asset and its future appreciation from their taxable estate.

Additional considerations

• Be careful of unintended tax consequences as your clients select a beneficiary when a contract owner is different from the insured. Consult with your client’s tax advisor for further guidance.
• If the insured is a minor, a parent must sign the application and there must be at least twice as much life insurance on the parents’ lives as there will be on the minor child. There should be at least a 2-to-1 ratio, parents to child.
• As a general rule, if your client is concerned about a beneficiary’s ability to manage money or their potential divorce, a trust is often the preferred vehicle for life insurance.
• As with any legal documents, your client should work with an attorney to recommend and draft trust documents and to assist with any ongoing trust formalities.