A Gifting Strategy for Grandparents
Examining a Possible Scenario
- Grandparents, age 68 and 71, are retired with a desire to leave a legacy behind
- They have two adult children ages 31 and 35 with their own careers
- Each has three children ranging from infant to age 11
- Grandmother is a retired nurse and Grandfather sold his business when he retired providing them more than enough income
- They are now facing a potential estate tax issue
The Clients’ Concern
These grandparents are seeking a way to provide a legacy for their grandchildren that will last throughout their lives and beyond, and that could serve to reduce their estate as well. These grandparents can benefit from a strategy that features permanent (whole life) life insurance, using a portion of their annual gift tax exclusion as the life insurance premium.
A Gifting Strategy
Using their annual gift tax exclusion, Grandma and Grandpa can purchase whole life insurance policies on all six grandchildren using a portion of the exclusion to pay the annual premium for each policy. Should they choose to, Grandma and Grandpa can combine their annual gift tax exclusion.
Grandma and Grandpa decide to purchase a whole life insurance policy for each grandchild that is fully paid up in 10 years. Each grandchild’s respective parent will own the policy as custodian under their respective state’s Uniform Transfers to Minors Act (UTMA). When a grandchild reaches the age of majority, he or she will take over complete ownership of the policy. The premiums are treated as gifts from the grandparents to each grandchild and will fall within the grandparents’ annual gift tax exclusion. The death benefit amounts for the policies, which fall within underwriting guidelines, 1 will vary depending on the age of the grandchild. Annual gifts will be made for ongoing premium payments.
Benefits for Today and Tomorrow
The whole life insurance policy not only provides valuable lifetime protection, it will build cash value — tax deferred — over time. Cash values are a “living benefit” that can be accessed for important life events, like paying for college, repaying student loans, buying a first home, or starting a business. 2 A rider that can guarantee future insurability can be added to the policy, for an additional cost.
A Gifting Strategy
Using their annual gift tax exclusion, Grandma and Grandpa can purchase whole life insurance policies on all six grandchildren using a portion of the exclusion to pay the annual premium for each policy. Should they choose to, Grandma and Grandpa can combine their annual gift tax exclusion.
Grandma and Grandpa decide to purchase a whole life insurance policy for each grandchild that is fully paid up in 10 years. Each grandchild’s respective parent will own the policy as custodian under their respective state’s Uniform Transfers to Minors Act (UTMA). When a grandchild reaches the age of majority, he or she will take over complete ownership of the policy. The premiums are treated as gifts from the grandparents to each grandchild and will fall within the grandparents’ annual gift tax exclusion. The death benefit amounts for the policies, which fall within underwriting guidelines, 1 will vary depending on the age of the grandchild. Annual gifts will be made for ongoing premium payments. See how it works below.
Benefits for Today and Tomorrow
The whole life insurance policy not only provides valuable lifetime protection, it will build cash value — tax deferred — over time. Cash values are a “living benefit” that can be accessed for important life events, like paying for college, repaying student loans, buying a first home, or starting a business. 2 A rider that can guarantee future insurability can be added to the policy, for an additional cost.
How It Works
IMPORTANT DISCLOSURES
1. There are specific underwriting guidelines for insuring minors, some of which vary by state. Generally, insurance coverage will be limited to a maximum percentage of the coverage on a parent and all siblings must have an equivalent amount of coverage. Whole life insurance policies for children must be owned by parents, grandparents, or a trust. There are multiple ownership options to consider when deciding which ownership arrangement is most appropriate for your situation, such as parent-owned and the Uniform Transfers to Minor Act (UTMA).
2. Distributions under the policy (including cash dividends and partial/full surrenders) are not subject to taxation up to the amount paid into the policy (cost basis). If the policy is a Modified Endowment Contract, policy loans and/or distributions are taxable to the extent of gain and are subject to a 10% tax penalty. Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Product availability varies by carrier, state, and individual eligibility. Not all products listed are available in all states or to all applicants. Product descriptions on this page are for general informational purposes only and do not constitute a solicitation or offer to sell any specific insurance or annuity product. All products are subject to underwriting approval and applicable state insurance regulations. Riders and benefits are subject to additional charges, terms, conditions, and limitations. Variable products involve investment risk, including possible loss of principal, and are sold by prospectus. FundaDream Insurance Solutions, Inc. is a licensed California insurance corporation. Consult the applicable carrier contract for full terms, conditions, and limitations. FundaDream’s charitable giving is made from general corporate revenues at the sole discretion of FundaDream leadership and does not constitute compensation to any licensed insurance professional.
The decision to purchase life insurance should be based on long-term financial goals and the need for a death benefit. Life insurance is not an appropriate vehicle for short-term savings or short-term investment strategies. While the policy allows for loans, you should know that there may be little to no cash value for loans in the policy’s early years.
The information provided is not written or intended as specific tax or legal advice. FundaDream, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
Insurance products and services are offered through FundaDream Insurance Solutions, Inc., California License No. 0M95835