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ATRA and RDB Life Settlements: A Marriage Made in Heaven

By March 10, 2015November 9th, 2021No Comments

Here is A Case Example Showing How ATRA and RDB Life Settlements Are a Marriage Made in Heaven

Two years following the enactment of the 2012 American Taxpayer Relief Act (ATRA), many families that had purchased life insurance to finance estate taxes are now making premium payments for multimillion-dollar insurance coverage they no longer need.

ATRA set the basic exclusion amount at $5 million per individual (adjusted upwards each year for inflation), resulting in an adjusted exclusion amount of $5.43 million in 2015. Coupled with exemption portability for married couples, today spousal owners of estates valued at $10.86 million or less are evaluating their options as it relates to the best exit strategy for large policies that have outlived their original purpose.

In the following case example, Abacus Life Settlements was successful in funding a multiplex transaction that illustrates the powerful problem-solving capacity of a “retained death benefit life settlement.”

Landowners’ Best-Laid Plans Change  

In 2005, when the estate tax exclusion amount was $1.5 million per individual, the owners of a land-rich estate took out a $10 million life insurance policy as an estate planning strategy so that their six children would have sufficient funds to pay the federal inheritance taxes upon their death.

Ten years later, it is ironic to note that the six siblings have found themselves heavily burdened with making $900,000 annual premium payments to keep the $10 million policy in force for their 97-year-old mother.

With no cash value left in the policy, the children had taken out a $2.6 million premium finance loan against the policy to help pay the expensive premium payments. The loan, coupled with the premiums, were essentially eating away the death benefit and mom may be with us for much longer.

The six siblings realized that their dilemma was becoming more untenable and financially complex, and creating great stress on the entire family. However, they were determined not to let the policy lapse.  It was important to them to maintain enough life insurance coverage to pay the estate taxes in order to avoid selling the land that had been in their family for generations. With the new exemption (ATRA) only $3 million was needed for estate taxes.

Family’s insurance agent illustrates the light at the end of the tunnel

Recognizing the complexity of the siblings’ dilemma, the family’s insurance agent presented a creative solution involving a life settlement with a retained death benefit. $2.6 million in cash was needed to pay off the premium finance loan and $3 million was needed in retained death benefit with all future premiums paid by the buyer.

The agent proposed that a large portion of the $10 million death benefit be sold in the secondary market and that the proceeds from the $7 million settlement be used to eliminate the balance on the loan and any future premium payments.  By retaining $3 million in life insurance coverage on their mother, the siblings would have sufficient funds to cover any future estate taxes upon her death.  The agent presented the situation to Abacus Life Settlements, and we were successful in funding the transaction.

Landowners’ legacy was kept intact 

The entire family was relieved of the financial stress surrounding this policy.  Estate tax burden was buttoned up with no future premiums needed. The six children were grateful to their insurance agent and Abacus for their expertise, and for recommending the perfect solution to maintain the family’s legacy of land ownership.


Author Abacus

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