Broker Check

Using Leverage in Your Estate Plan

| March 25, 2022

Estate tax law is changing, and perhaps sooner than you think.  

The Tax Cuts and Jobs Act expires at the end of 2025 – That means in just over three years the current exemption amount of north of $12 million per person will get cut in half!

Risk assets like stocks and crypto, real estate and business values have swelled during COVID to a point where this tax change will leave many families exposed to the tax who aren’t subject to it today.  

When estate taxes are due, they must be paid in cash within nine months of death. Federal estate tax is 40% and dependent on what state you live in there could be a lot more.  Families need liquidity to handle the tax bill to ensure there is no forced liquidation of assets at the wrong times. 

One of the most common solutions to these often-enormous tax bills is to utilize life insurance owned in an irrevocable trust.  One of the biggest knocks on life insurance is opportunity cost though.  Instead of dedicating these resources to a life insurance bill I could be investing the money elsewhere.

The current interest rate environment presents a uniquely interesting opportunity to utilize leverage as a tool in your estate plan though.  Low borrowing costs create an arbitrage situation where savvy investors can utilize their equity and fixed income portfolios as collateral to borrow to purchase life insurance. 

The life insurance ultimately provides the funds internally in cash value to pay off the loan. If the insurance is owned appropriately in an irrevocable trust, the proceeds are not subject to estate taxes, creating an income tax and estate tax-free influx of funds to offset any estate tax liability. This is called premium financed life insurance. 

This dramatically reduces the opportunity cost of creating a lasting, tax-preferred legacy and dramatically offsetting potential federal and state tax bills.
This isn’t a new strategy, it’s been around for decades.   The beauty of it is the ability to maintain current investments and not devote your stock or bond portfolio to paying for the future tax liability.  It certainly is not right for everyone.  If you have a net worth of at least 5 million though – it is a technique worth considering.  If you’d like to discuss and see if it is a strategy that is right for you, don’t hesitate to reach out. 


Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.