When a Retirement and Legacy Arrangement (RALA) Makes Sense for You

A Loan Regime Split Dollar arrangement is an innovative strategy designed to address multiple wealth planning objectives, including retirement, estate, and asset protection planning. If properly designed, funded, and maintained, this strategy can be utilized to supplement your retirement income while creating a legacy for your family in a tax-advantageous and asset-protected manner.

Who might benefit from such a strategy? Anyone who currently has an estate tax issue or is likely to have an estate tax issue in the future.

Most estate planning professionals are familiar with an Irrevocable Life Insurance Trust (ILIT), and how to utilize it to remove life insurance from your taxable estate. However, the funds gifted to an ILIT to pay the premium on the life insurance policy would most likely use the annual exemption amounts each year and excess amount would be covered by the unified tax credit.

Some may find this appealing, because it’s an asset shifting technique, when done over a period of time, can be substantial. But for other, this may not be enough. Even after using both spouse’s unified tax credits, they may have a vast estate that face potential estate taxes. This is where loan regime split dollar arrangements may be utilized as an additional planning strategy that could benefit you and your beneficiaries.

The basic order of this technique consists of the following:

  • You create an irrevocable life insurance trust (ILIT) to purchase and own a cash value life insurance policy on your life.
  • Instead of gifting cash to the ILIT, you lend cash to the grantor trust in exchange for an interest-bearing note.
  • The trustee of the ILIT utilizes the cash (loan proceeds) to pay premiums on the life insurance policy.
  • During your retirement, the trustee supplements your retirement cash flow needs by making payments on the promissory note to you.*
  • At death, you leave an income and estate tax free – as well as asset protected legacy -- pursuant to the terms of the trust for the beneficiaries of the ILIT in an amount equal to the life insurance policy death benefit, reduced by outstanding premium loans and accrued interest.
  • In addition, besides the remaining death benefit that is left inside the trust (after the loan repayment *), the return of loan principal and interest payment back to the grantor may be income tax-free.

While the structure of the note and the type of life insurance product chosen are important, the key to a successful usage of this strategy turns largely on the design of the ILIT. The ILIT must contain the appropriate provisions, such as: (1) to make you the owner of the trust assets for income tax purposes (“grantor trust rules”); (2) to exclude the death benefit legacy from your taxable gross estate for estate tax purposes; and, (3) to incorporate appropriate asset protection provisions to shield the legacy from the heirs’ (or other beneficiaries’) creditors.

Please consult with your legal counsel to see if this technique may be appropriate for you. It may not be a right fit for everyone, nevertheless, it may be a technique that is worth a look.

If you're a CPA or estate planning attorney who has encountered a scenario like this, please reach out to our firm to obtain information.

Andrew Martin, Founder and President of Atlas Financial Strategies, LLC is a financial adviser who has a passion for helping clients gain clarity on their financial plan and helping them find creative solutions to address their needs. He strives to provide his clients with the highest quality service possible and holds the strong relationships he has with clients in high regard.

*The ILIT should be designed to grant the trustee access to cash values and loans from the life insurance policy. Note: loans and withdrawals will accrue interest at current rates and decrease the cash surrender value and death benefit of the life insurance policy.

Andrew Martin, Registered Representative offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, a Licensed Insurance Agency. 125 W. Romana St. Suite 720, Pensacola, FL 32502, 251.460.4606.

Andrew Martin, Financial Advisor offering investment advisory services through Eagle Strategies LLC, a Registered Investment Adviser. Atlas Financial Strategies LLC is not owned or operated by NYLIFE Securities LLC or its affiliates.