ING trusts, also known as Incomplete Non-Grantor trusts, have gained popularity as a tax planning strategy for high-net-worth individuals. These trusts offer significant benefits, but recent scrutiny from the IRS and state tax authorities has raised concerns about potential risks. In this blog, we will delve into the world of ING trusts, exploring their advantages and drawbacks, and shedding light on the evolving landscape of IRS regulations.
Understanding the risks versus benefits of ING trusts will enable you to make informed decisions about your wealth preservation strategies.
What is an ING Trust?
An ING trust is an irrevocable trust that is designed to be an “incomplete” gift. This allows the settlor to avoid an immediate gift tax implication. Incomplete non-grantor trusts are structured in a way that requires the grantor to retain certain rights or powers over the trust assets. These rights might include the ability to change trustee composition, or the ability to indirectly access trust income. By keeping certain powers, the settlor ensures that the trust is treated as an incomplete gift for gift tax purposes. At the same time, other specific powers need to be given away so that you can achieve non-grantor trust status. In so doing, income is not taxed as part of the settlor’s individual income tax return (usually in their high-tax home state); rather, the income is taxed at the trust level (in a state that does not have a state income tax on trust income). This can result in significant tax savings, especially for high-income earners.
Benefits of ING Trusts
Control over Assets
By utilizing an ING Trust, you can (and actually must) maintain some control over these trust assets. You can guide the originating terms of the trust, such as how the assets are managed and distributed, while still enjoying the income tax benefits associated with transferring ownership to the trust.
Gift Tax Avoidance
One of the objectives of an ING Trust is to avoid triggering gift taxes. By retaining enough control to characterize the gift as incomplete, you will not need to utilize any of your lifetime gift exemption, leaving a larger amount of exemption to be used on other strategies that focus more specifically on gift and estate tax minimization. This can help ensure that more of your hard-earned wealth ultimately goes to your intended beneficiaries rather than to taxes.
Income Tax Reduction
If structured correctly, assets transferred to the trust can be sold without paying the income tax that would otherwise be due in the settlor’s state of residence. In addition, ongoing earnings inside the trust can escape state income taxation. This can materially add to your long-term wealth.
Creditor Protection
Another advantage of an ING Trust is the added layer of protection it provides against creditors. Assets held within the trust are shielded from potential claims, providing an extra level of security for your wealth.
IRS Scrutiny and Risks
While ING trusts offer attractive benefits, they have come under increased scrutiny from the IRS and state tax authorities. The primary concern is that some taxpayers may abuse the incomplete gift status of the trusts to engage in tax avoidance or reduction strategies that may be perceived as aggressive or abusive.
Legislative Proposals and Regulatory Changes
Recent legislative proposals and regulatory changes aim to address these concerns and prevent taxpayers from using ING trusts as a means to avoid legitimate tax liabilities. For instance, California recently passed Senate Bill 131 which requires that net income derived from incomplete non-grantor trusts be subject to California income tax if the trust’s grantor is a California resident. Similar measures may be introduced in other states as well. In circumstances such as these, there are tested methods to work around the new rules – that is beyond the scope of this post.
Caution and Compliance
It is essential to be cautious when structuring an ING trust and ensure that it complies with all applicable tax laws and regulations. Engaging with experienced estate planning attorneys and tax professionals can help navigate the complexities of ING trusts and ensure that your estate planning strategies remain compliant and effective.
Finding the Right Balance: Risk vs. Benefit
When considering an ING trust as part of your tax planning strategy, it is crucial to strike the right balance between risk and benefit. These trusts can be powerful tools for tax planning and asset protection, but they should be approached with care and transparency.
Working with a knowledgeable and experienced team of professionals will help you understand the potential risks associated with ING trusts and design a plan that aligns with your financial goals and priorities. Properly structured and executed ING trusts can offer significant advantages while adhering to legal and ethical standards.
Final Notes
ING trusts can be a valuable addition to your tax planning toolkit, providing income tax efficiency, asset protection, and (indirectly) wealth transfer benefits. However, the increasing IRS scrutiny and potential regulatory changes require careful consideration and adherence to tax laws.
Consulting with experienced professionals will enable you to make well-informed decisions about ING trusts, ensuring that your wealth transfer and tax planning strategies are both effective and compliant. Protecting and preserving your wealth for future generations requires thoughtful planning, and an ING trust can play a pivotal role in achieving your financial objectives.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1452895746.jpg14142121Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2023-09-15 18:28:002024-08-19 18:34:45ING Trusts and IRS Scrutiny: Risk Vs Benefit
The Power of an ING Trust: Reducing State Income Taxes
For high-net-worth individuals living in high-tax states, state income taxes can be a significant financial burden. However, there is a way to lower these taxes without physically moving: an Incomplete Non-Grantor (ING) Trust. In episode 83 of Live Life Liberated, Centura Wealth Advisory’s Kyle Malmstrom and Roby Kotcamp explain how ING Trusts work, their benefits, and potential pitfalls to avoid.
Why Consider an ING Trust?
“Moving your assets, not your address, is a key strategy for minimizing state income taxes,” says Malmstrom.
State tax rates vary dramatically across the U.S. While some states, like South Dakota, have no state income tax on trusts, others, like California and Hawaii, impose rates exceeding 10%. By transferring assets to an ING Trust domiciled in a zero-tax state, individuals can reduce their tax liability without uprooting their lives.
Who Can Benefit from an ING Trust?
Not all assets are suitable for an ING Trust. Kotcamp outlines the ideal candidates for this strategy:
Business owners planning an equity sale (not asset sales)
Individuals with highly appreciated stock or other investment assets
Those with income-generating portfolios who do not require immediate access to the funds
“Anything in the capital gains category, like a concentrated stock position or a business sale, is a prime candidate for an ING Trust,” Kotcamp explains.
The Mechanics of an ING Trust
To take full advantage of this strategy, it’s crucial to follow the correct sequence of steps:
Establish the Trust: The ING Trust is created in a state with no income tax on trusts (e.g., South Dakota, Wyoming, or Nevada).
Transfer Assets: The highly appreciated assets are re-registered in the name of the ING Trust before any sale.
Complete the Sale: Once inside the trust, the assets are sold, ensuring that the transaction occurs in the tax-friendly state.
Reinvest the Proceeds: The funds remain in the trust and continue growing tax-free from a state income tax perspective.
By executing these steps correctly, individuals can legally avoid paying state income taxes on qualifying transactions.
Potential Pitfalls to Avoid
While an ING Trust can be an effective tax-saving tool, there are key considerations:
Bad Drafting: Incorrect trust language can jeopardize the tax benefits. “You need an experienced attorney who understands ING Trusts inside and out,” warns Malmstrom.
State-Level Challenges: Some states, like California and New York, have passed legislation that disqualifies ING Trusts.
Misuse of Distributions: Pulling money from the trust improperly can negate the tax savings. Instead, structured loans or strategic distributions should be considered.
Step Transaction Doctrine: The IRS may scrutinize the timing of asset transfers and sales to determine if the trust was established solely for tax avoidance.
Alternatives for California Residents
With the passage of SB 131, California has effectively eliminated the use of ING Trusts. However, Kotcamp highlights alternative solutions:
Inter Vivos QTIP Trust: This strategy can achieve up to 75% of the tax savings an ING Trust offers.
ESBT Election for S-Corps: Certain business owners can structure their income in a way that minimizes state taxes.
Strategic Relocation: If planned correctly, physically moving at a later date can still offer tax advantages.
Is an ING Trust Right for You?
“ING Trusts have been around for over 20 years, but they require precise execution,” says Malmstrom. If you’re considering selling a business or managing highly appreciated assets, working with an experienced wealth advisory team is essential.
Centura Wealth Advisory specializes in tax-efficient planning for high-net-worth individuals. To explore whether an ING Trust or alternative strategy is right for you, contact us at Centura Wealth Advisory or call (858) 771-9500.
Disclaimer: The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Centura Wealth Advisory. The content has been made available for informational and educational purposes only. The content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning. Centura Wealth Advisory Centura is an SEC registered Investment Advisor with its principal place of business in San Diego, California. Centura and its representatives are in compliance with the current registration and notice filing requirements imposed on SEC registered investment advisors in which Centura maintains clients. Centura may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Past performance is no guarantee of future results. Tax relief varies based on client circumstances and all clients do not achieve the same results.
https://centurawealth.com/wp-content/uploads/2025/03/ING-Trusts_-How-to-Minimize-State-Income-Taxes-Ep.-83.jpg8351257centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-08-31 08:59:002025-03-14 21:02:15Ep. 83 ING Trusts: How to Minimize State Income Taxes
When planning to pass wealth to future generations, minimizing estate and gift taxes is a key consideration. One strategy that offers significant tax advantages is the Qualified Personal Residence Trust (QPRT). In this episode of Live Life Liberated, Seth Meisler, CFA, CFP®, CPA/PFS, MBA, and Samantha Lawrence, CFP®, discuss how the QPRT strategy works, its tax benefits, and who is an ideal candidate.
What is a Qualified Personal Residence Trust (QPRT)?
A QPRT is an irrevocable trust designed to transfer a primary or secondary residence to beneficiaries while reducing the taxable value of the gift. The grantor retains the right to live in the home for a set period, after which ownership transfers to the beneficiaries at a reduced gift tax value.
Key Benefits of a QPRT
Reduces the taxable value of the residence, lowering estate and gift taxes.
Ensures the home remains in the family while mitigating tax burdens.
Provides asset protection by placing the property in a trust.
Allows grantors to continue living in the home for a predetermined term.
“This is the vanilla ice cream of tax planning strategies,” says Seth Meisler. “It’s simple, IRS-approved, and works every time.”
How Does a QPRT Work?
The grantor transfers the residence into the QPRT.
The grantor retains the right to live in the home for a set term (e.g., 10-20 years).
At the end of the term, the property transfers to the beneficiaries at a reduced gift tax value.
If the grantor wants to continue living in the home after the term, they must pay rent to the beneficiaries, further reducing their taxable estate.
Maximizing Tax Benefits with QPRTs
Two key methods help reduce the taxable value of the residence:
Fractional Interest Discounting: By splitting ownership into multiple QPRTs, grantors can claim valuation discounts, reducing the taxable gift amount.
Term Length: The longer the retained interest period, the lower the gift tax value—though this increases the risk that the grantor may not outlive the term.
“We call it the ‘squeeze, freeze, and burn’ technique,” explains Samantha Lawrence. “We squeeze down the value, freeze it outside the estate, and burn down the taxable estate over time.”
Who is a Good Candidate for a QPRT?
A QPRT is most effective for individuals with:
A high-value primary or secondary residence they intend to keep in the family.
An estate large enough to be subject to estate tax.
Children or heirs who will receive the property.
Good health, ensuring they outlive the QPRT term to maximize benefits.
“It’s a heads-you-win, tails-you-tie strategy,” Meisler says. “If you survive the term, you win. If you don’t, you’re back to where you started.”
Potential Risks and Considerations
While QPRTs provide significant tax advantages, there are some risks:
The grantor must outlive the QPRT term for the tax benefits to apply.
If the home is sold before the term ends, additional planning is required.
If the grantor wants to stay in the home post-QPRT, rent payments are required.
The property does not receive a step-up in basis, potentially leading to higher capital gains tax for heirs if sold.
Enhancing QPRTs with a Protected Strategy
One variation is the Protected QPRT, which pairs the trust with an intentionally defective grantor trust (IDGT) and life insurance to:
Offset estate taxes if the grantor passes before the QPRT term ends.
Fund property maintenance to prevent financial burdens on heirs.
Provide liquidity for estate equalization among beneficiaries.
A QPRT is a highly effective tool for individuals looking to transfer their homes to heirs while minimizing estate and gift taxes. It is a time-tested, IRS-approved strategy that ensures wealth preservation across generations. However, careful planning is essential to navigate potential risks and ensure the strategy aligns with long-term goals.
For more details on QPRTs and other wealth planning strategies, listen to the full Live Life Liberated episode linked above.
Disclaimer: The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Centura Wealth Advisory. The content has been made available for informational and educational purposes only. The content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning. Centura Wealth Advisory Centura is an SEC registered Investment Advisor with its principal place of business in San Diego, California. Centura and its representatives are in compliance with the current registration and notice filing requirements imposed on SEC registered investment advisors in which Centura maintains clients. Centura may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Past performance is no guarantee of future results. Tax relief varies based on client circumstances and all clients do not achieve the same results.
https://centurawealth.com/wp-content/uploads/2025/03/The-QPRT-Strategy_-How-to-Reduce-Estate-and-Gift-Taxes-.jpg8361254centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-08-16 08:54:002025-03-14 20:57:18Ep. 82 The QPRT Strategy: How to Reduce Estate and Gift Taxes
Private fiduciaries can play a critical role in managing and protecting the assets of their clients. They also help ensure that their clients’ wishes are carried out after they are gone and their assets reach their desired beneficiaries.
Estate planning is a crucial process that allows individuals to protect and distribute their assets and ensure their wishes are fulfilled after their passing. Within this realm, private fiduciaries play an essential role. Private fiduciaries, also known as professional trustees or estate administrators, are trusted individuals or organizations appointed to manage and oversee the affairs of an estate.
In this blog, we will explore the significance of private fiduciaries in estate planning and shed light on their responsibilities and benefits.
What is a Private Fiduciary?
A private fiduciary is a person or entity designated to act on behalf of an individual or their estate in the event of incapacitation, disability, or death. They are responsible for carrying out the wishes outlined in the estate plan and ensuring the smooth administration of the estate. Unlike family members or friends who may lack the necessary expertise, private fiduciaries are trained professionals with a deep understanding of the legal and financial aspects of estate planning.
Key Responsibilities of Private Fiduciaries
Private fiduciaries assume various critical responsibilities throughout the estate planning process. These include:
Asset Management: Private fiduciaries are entrusted with managing and safeguarding the estate’s assets. This involves overseeing investments, handling financial transactions, and ensuring the estate’s value is preserved.
Estate Distribution: Following the instructions outlined in the estate plan, private fiduciaries oversee the distribution of assets to beneficiaries. They ensure that the process is carried out accurately, fairly, and in compliance with legal requirements.
Debt and Tax Obligations: Private fiduciaries handle the settlement of debts, payment of taxes, and filing necessary documentation, relieving the family of these complex and time-consuming tasks.
Legal Compliance: They ensure that the estate administration complies with local laws and regulations, minimizing the risk of legal complications.
Conflict Resolution: Private fiduciaries can mediate and resolve disputes that may arise among beneficiaries, heirs, or family members, promoting harmony during the estate distribution process.
Benefits of Engaging a Private Fiduciary
Expertise and Experience: Private fiduciaries are trained professionals who possess extensive knowledge in estate planning, tax laws, and financial management. Their expertise ensures that the estate is administered efficiently and effectively.
Impartiality: By appointing a private fiduciary, individuals can ensure that the estate’s affairs are handled impartially, avoiding potential conflicts of interest that may arise within the family.
Continuity: Private fiduciaries provide stability and continuity in estate administration. They are available throughout the process and can navigate any unforeseen challenges that may arise.
Privacy and Confidentiality: Private fiduciaries prioritize maintaining privacy and confidentiality, protecting the estate owner’s sensitive information and minimizing the risk of public exposure.
Professional Network: Private fiduciaries often have extensive networks of professionals, including lawyers, accountants, and investment advisors. They can tap into these resources to provide comprehensive support during the estate planning process.
Selecting a Private Fiduciary
When choosing a private fiduciary, it is essential to consider their qualifications, experience, reputation, and fees. Engaging in thorough research, seeking referrals, and conducting interviews will help ensure that the selected private fiduciary aligns with the individual’s goals and values.
The Distinction Between Private Fiduciaries and Trust Banks
Private fiduciaries and trust banks both provide professional services in estate planning and administration, but there are notable differences between the two:
Personalized Attention: Private fiduciaries often offer a more personalized approach, taking the time to understand the unique goals, values, and circumstances of their clients. They typically have fewer clients, allowing for a closer client-fiduciary relationship.
Flexibility: Private fiduciaries can often provide more flexibility in tailoring their services to individual client needs. They are more adaptable to changing circumstances and can offer customized solutions.
Cost: Trust banks generally have a higher fee structure compared to private fiduciaries. Private fiduciaries may offer more cost-effective options, especially for smaller estates or clients with specific needs that do not require the extensive resources of a trust bank.
Expertise: Private fiduciaries bring specialized expertise in estate planning and administration. They often have a comprehensive understanding of tax laws, investment strategies, and legal requirements, enabling them to navigate complex situations effectively.
Client Focus: Private fiduciaries typically work with a select number of clients, allowing them to provide a higher level of attention and personalized service. Trust banks may handle a larger volume of clients, which can result in a more transactional approach.
How Private Fiduciaries and Wealth Advisors (Centura) work together to make UHNW individuals and family’s lives easier:
Private fiduciaries and wealth advisors (such as Centura) work together to make the lives of Ultra-High-Net-Worth (UHNW) individuals and families easier through seamless coordination and specialized expertise. Here’s how they collaborate:
Coordination on Compiling Information for Tax Returns:
Private fiduciaries and wealth advisors collaborate to gather all the necessary financial information required for preparing tax returns accurately. They work together to ensure that complex financial situations, such as multiple sources of income, various investment types, and international assets, are properly accounted for and compliant with tax regulations. By coordinating efforts, they minimize the chances of errors and ensure tax efficiency for their UHNW clients.
Trusted Professional to Complete Trustee Duties:
For UHNW individuals, managing trusts can be highly complex, time-consuming, and require specific legal and financial expertise. A private fiduciary can act as a professional trustee, handling the duties and responsibilities associated with trust administration. By doing so, they relieve the family members or friends of the UHNW individuals from this burden and ensure that the trust is managed impartially and in line with the client’s wishes.
Dealing with Matters for Larger Families Impartially:
Large families with diverse financial interests often face complex decision-making processes. Private fiduciaries and wealth advisors work together to navigate these complexities impartially. They act as neutral third parties, taking into account the interests and objectives of all involved parties, and strive to achieve consensus on important financial decisions. This ensures fair and equitable handling of family matters and preserves family harmony.
Reflecting Trust Terms and Client’s Wishes in Investment Management:
When managing UHNW individuals’ investments, wealth advisors collaborate with private fiduciaries to ensure that the investment strategy aligns with the terms of the trust and the client’s overall wishes. They consider any restrictions or guidelines specified in the trust document and develop an investment approach that meets the client’s financial goals while adhering to the trust’s requirements. By working together, they provide a comprehensive and well-aligned approach to wealth management.
Overall, the partnership between private fiduciaries and wealth advisors streamlines financial management for UHNW individuals and families, providing them with expertise, objectivity, and a coordinated approach to their complex financial affairs.
Interested in Learning More About Private Fiduciaries? Check Out Our Podcast
In this episode, Derek Myron speaks with David Stapleton, President of Stapleton Group, Inc., about private fiduciaries, their role in managing assets and estates, and the benefits they can provide to individuals and families.
Derek and David discuss:
Services and benefits offered by private fiduciaries
How private fiduciaries differ from trust banks
The pros and cons of choosing family members to act as your trustee
Real-world examples of what it’s like to work with a private fiduciary
And more
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1413762212.jpg14142121Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2023-08-04 18:37:002024-08-19 18:41:19Private Fiduciaries and Their Role in Estate Planning
Transferring real estate to future generations can be a complex process, often accompanied by significant tax implications. However, with careful planning and the right strategy, you can minimize the estate tax burden and efficiently pass on your real estate assets to your loved ones. One effective tool for achieving this goal is the Qualified Personal Residence Trust (QPRT).
In this blog post, we will explore QPRT trusts, their benefits, and how they can help you transfer real estate with reduced tax implications.
Understanding QPRT Trusts
What is a QPRT?
A Qualified Personal Residence Trust (QPRT) is an irrevocable trust that provides a unique opportunity to transfer interest in your primary or secondary residence (i.e. vacation home) to your beneficiaries while still maintaining the right to live in the property for a predetermined period. The trust is established for a fixed term, typically ranging from 10 to 20 years. The QPRT can only own interest in one property, however, that interest can be a fractional interest in the property. An individual can only own 2 QPRTs at a time – primary residence and secondary residence.
Establishing a QPRT:
To set up a QPRT, you create the trust and transfer the ownership of the property into it. As the grantor, you can designate your chosen beneficiaries, who are typically family members, loved ones, or a trust. The trust agreement outlines the specific terms and conditions, including the length of the trust term and the rights and responsibilities of all parties involved.
Retaining the Right to Reside:
During the trust term, you retain the right to live in the property, preserving your ability to enjoy the comforts and memories of your home. This benefit can be especially valuable if you have a strong emotional attachment to your residence.
Transfer of Property:
If you were to pass-away during the trust term, the QPRT is unwound and the asset reverts back into your estate. However, you are no worse than if you never did the QPRT in the first place. If you live through the trust term, then at the end of the trust term, ownership of the interest in the property is automatically transferred to the remainder beneficiaries. This seamless transition ensures that your loved ones receive the property according to your wishes. However, once the trust term expires, you no longer have the right to reside in the property unless a separate agreement is reached with the beneficiaries and you may need to pay rent to continue living or using the residence.
Benefits of QPRT Trusts
Reduced Gift Taxes
By transferring the property to a QPRT, you are effectively making a gift to your beneficiaries. The value of the gift is determined by the fair market value of the property and the length of the trust term. Since you retain the right to live in the property for a specific period, the value of the gift is reduced for gift tax purposes, potentially resulting in significant estate tax savings.
Future Appreciation
One of the key advantages of a QPRT is the ability to transfer the future appreciation of the property to your beneficiaries. As the property appreciates in value over time, that growth occurs outside of your taxable estate. This can provide substantial estate tax savings and ensure that your beneficiaries receive the full benefit of any appreciation.
Continued Use and Control
Even though the property is transferred to the trust, you can still reside in it for the specified trust term. This allows you to continue enjoying your home while making arrangements for its transfer to your beneficiaries. Additionally, you can retain certain control over the property during the trust term, such as the ability to sell or rent it with specific provisions outlined in the trust agreement.
Important Considerations
Trust Term:
The length of the trust term is a crucial factor to consider when establishing a QPRT. The longer the term, the greater the potential gift tax savings. However, the greater the trust term, the greater mortality risk during the trust term. It’s essential to balance this with your own housing needs and goals, ensuring that the trust term aligns with your plans and overall health.
Stepped-Up Basis:
It’s important to note that when real estate is transferred through a QPRT, the beneficiaries receive the property with your original basis. This means that if they sell the property after your passing, they may be subject to capital gains tax on any appreciation that occurred during your ownership. Proper planning and consideration of potential income tax consequences are vital in maximizing the benefits of a QPRT.
Estate Tax Considerations:
While a QPRT can help reduce gift taxes, it does not eliminate estate taxes entirely. The value of the property at the time of transfer, minus the retained interest, remains in your taxable estate. It’s crucial to consult with an experienced estate planning attorney or tax professional to understand the overall impact on your estate tax planning.
Final Notes
A Qualified Personal Residence Trust (QPRT) can be a powerful tool for transferring real estate to your beneficiaries while minimizing gift taxes and maximizing tax efficiency. By utilizing a QPRT, you can reduce the taxable value of the gift and retain the right to reside in the property for a specified period. However, it’s crucial to consider factors such as trust term, stepped-up basis, and estate tax implications when incorporating a QPRT into your estate planning strategy. Seeking guidance from professionals specializing in estate planning and tax laws is highly recommended to ensure that you make informed decisions and optimize the benefits of a QPRT. With careful planning and the expertise of professionals, you can transfer your real estate assets to future generations with reduced tax implications, preserving your wealth and securing a lasting legacy for your loved ones.
If you need further assistance or guidance regarding QPRT trusts and estate planning, feel free to reach out to our team at Centura Wealth Advisory. We specialize in providing comprehensive estate planning solutions and can help you navigate the complexities of transferring real estate with reduced tax implications. Contact us today to schedule a consultation and take the first step towards efficient wealth transfer.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
Centura Wealth does not make any representations as to the accuracy, timeliness, suitability, or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice. We recommend that you seek the advice of a qualified attorney and accountant.
For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1413758192.jpg14142121Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2023-08-03 18:41:002024-08-19 18:43:58QPRT Trusts and Gift Tax Efficiency: Transferring Real Estate with Reduced Tax Implications
Understanding Private Placement Life Insurance (PPLI) for High-Net-Worth Individuals
For high-net-worth and ultra-high-net-worth individuals, protecting and growing wealth while minimizing taxes is a key priority. However, not all assets generate tax-efficient income, making tax planning strategies essential. One such strategy is Private Placement Life Insurance (PPLI), which offers tax efficiency, flexibility, and investment customization.
In this episode of the Live Life Liberated podcast, host Derek Myron speaks with Christopher Hyman, Director of Insurance Solutions at Centura Wealth Advisory, to break down PPLI and its benefits for wealthy investors.
What Is Private Placement Life Insurance (PPLI)?
PPLI is a specialized life insurance policy designed for individuals with a net worth of $10 million or more. It allows tax-inefficient assets—such as hedge funds, private credit, or highly appreciated assets—to grow in a tax-advantaged environment.
“PPLI is a bucket that has low fees, very high flexibility, and high investment customization. It’s a tax-efficient bucket for tax-inefficient income.” – Christopher Hyman
Key Benefits of PPLI for Wealthy Investors
PPLI offers several significant advantages, including:
Tax efficiency: Investment gains within PPLI grow tax-deferred and can be accessed tax-free.
Lower costs: PPLI policies typically carry insurance fees of 1% or less of the account value.
Investment flexibility: Unlike traditional insurance policies, PPLI allows for a wide range of investment choices, including private equity and hedge funds.
Estate planning benefits: PPLI can be structured to transfer wealth tax-efficiently to future generations.
“You’re basically trading tax drag for minimized insurance charges. If structured properly, it’s not even close; it’s such a valuable trade-off.” – Christopher Hyman
Who Should Consider PPLI?
PPLI is best suited for high-net-worth individuals who:
Have at least $10 million in net worth
Own highly appreciated assets or tax-inefficient investments
Seek a tax-advantaged wealth accumulation strategy
Want a customized investment approach with flexibility
The Role of Professionals in PPLI Planning
Implementing PPLI requires a team of experts to ensure compliance and optimal structure. According to Christopher Hyman, the four essential professionals in a PPLI strategy include:
Investment Advisor: Manages and selects investments within the PPLI structure.
Insurance Design Expert: Ensures proper structuring to minimize fees and optimize benefits.
Attorney: Drafts the necessary legal entities and trust structures.
CPA: Advises on tax implications and compliance requirements.
“This is not a set-it-and-forget-it strategy. You need an experienced team to design and maintain it properly.” – Christopher Hyman
Potential Risks and Considerations
While PPLI provides significant benefits, investors should be aware of potential risks:
Investment risk: Like any investment, returns are not guaranteed.
Loss of control: The policyholder cannot dictate specific asset purchases, adhering to investor control rules.
Compliance complexities: Policies must meet diversification requirements and legal guidelines.
Legislative risks: Tax laws could change, impacting the tax advantages of PPLI.
Is PPLI Right for You?
PPLI is a powerful tool for high-net-worth individuals seeking tax efficiency, investment flexibility, and estate planning benefits. However, proper structuring and professional guidance are essential for success.
To learn more about PPLI and its application to your financial situation, contact Centura Wealth Advisory or ask to review their monthly Private Placement Life Insurance Webinar Series.
For more insights, listen to the full episode of the Live Life Liberated podcast linked above.
Disclaimer: The information covered and posted represents the views and opinions of the guest and does not necessarily represent the views or opinions of Centura Wealth Advisory. The content has been made available for informational and educational purposes only. The content is not intended to be a substitute for professional investing advice. Always seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment planning. Centura Wealth Advisory Centura is an SEC registered Investment Advisor with its principal place of business in San Diego, California. Centura and its representatives are in compliance with the current registration and notice filing requirements imposed on SEC registered investment advisors in which Centura maintains clients. Centura may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. Past performance is no guarantee of future results. Tax relief varies based on client circumstances and all clients do not achieve the same results.
https://centurawealth.com/wp-content/uploads/2025/03/How-to-Achieve-Tax-Efficiency-With-Private-Placement-Life-Insurance-With-Christopher-Hyman-Ep.-81.jpg8371254centurawealthhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngcenturawealth2023-08-02 08:50:002025-03-14 20:54:20Ep. 81 How to Achieve Tax Efficiency With Private Placement Life Insurance With Chris Hyman
Move over, FAANG! The Magnificent Seven have taken over the markets. Representing the seven largest companies in the S&P 500, Alphabet, Apple, Meta, Microsoft, Amazon, Tesla, and Nvidia have been anointed by investors as leading the market and tech rally.
The first half of 2023 was powered by mega-tech stocks, with the rest of the companies in the S&P 500 contributing an incremental amount to the indices’ return. The NASDAQ Composite registered its strongest first-half performance in 40 years, with Apple stock paving the way for an all-time high closing price on June 30, 2023 of $193.97, becoming the world’s first $3 trillion company.
Like the dot-com euphoria, artificial intelligence (AI) has offered tailwinds for the tech industry. AI has sparked big investments by companies and investors wanting to capitalize on the Generative AI race. Meanwhile, the June 1st debt ceiling ‘deadline’ was practically a non-event. The final agreement passed by the House and Senate suspended the debt limit until after the next presidential election and restricted government spending through 2025. However, that hasn’t stopped them from increasing the deficit. As the markets look past signs of economic cooling, indices push higher in the year’s second quarter.
Market Recap
Equities – The Fed has remained steadfast in its fight against inflation, and the prospects of higher interest rates for longer have been unable to derail the tech-heavy NASDAQ 100 momentum, on its way to a second quarter return of 15.16%, bringing the index’s 2023 return to 38.75%.
Driven primarily by the returns of the index’s largest constituents, the S&P 500 has rebounded more than 20% since bottoming in late 2022, joining the bull market rally with the NASDAQ 100. Higher rates coupled with tighter financial conditions and more stringent lending standards have dampened the outlook for smaller companies. The small-cap Russell 2000 index has only gained 7.24% for the year, more than half of that occurring in the last week of the quarter.
While market participants expect the Fed to continue lifting rates and no longer anticipate a pivot this year, recent economic data and stronger earnings have given bulls optimism that a recession might be avoided. For now, with an eye on the future, it appears the market is discounting the lagged impact of monetary policy; gravitating to AI-centric companies; pushing interest-rate-sensitive equities higher; and creating a larger gap between market technicals and economic fundamentals.
Bonds – Bonds, on the other hand, have been sending conflicting signals. Driven by fears of a US government default and potential Fed-induced recession, bond volatility continued in the year’s second quarter, posting a -0.84% return; bringing the overall return on bonds to 2.09% in 2023. The current climate reminds us that while investing in ‘safe-haven’ Treasury securities removes credit risk, investors are still very much exposed to interest rate risk and ensuing volatility from changes in yields. Experiencing swings ranging from as high as 4.10% to as low as 3.37%, the yield on the 10-Year U.S. Treasury Note sits at 3.81%, or a mere 0.07% below where it started the year.
Source: YCharts. The Bloomberg US Aggregate Index was used as a proxy for Bonds; the Bloomberg US High Yield 2% Issuer Capped Index was used as a proxy for High Yield Bonds; the Russell 2000 Index was used as a proxy for Small Cap Equities; and the MSCI ACWI Ex USA Index was used as a proxy for Foreign Equities.
Despite declines in economic growth and activity, the economy has remained resilient as economists contend whether we are currently in or headed towards a recession.
Economy: What recession?
The economy continues to defy expectations and march higher in an environment with one of the most anticipated recessions in history. The last week of June delivered the final revisions to first-quarter GDP growth from 1.3% to 2%. Major gains came from robust consumer spending and surging exports, likely supported by the nearly 9% cost-of-living adjustment for Social Security participants. The 4.2% rise in consumer spending, as measured by personal consumption expenditures, was the fastest pace since the second quarter of 2021, and exports rebounded sharply, up 7.8%.
While Real GDP may be growing at a decent pace, several indicators point towards further contraction or possible recession.
May marks the 14th consecutive month that the Conference Board’s Leading Economic Index (LEI) contracted, an early indication that a recession is all but certain. Senior Manager of Business Cycle Indicators at The Conference Board Justyna Zabinska-La Monica said:
“The US Leading Index has declined in each of the last fourteen months and continues to point to weaker economic activity ahead. Rising interest rates paired with persistent inflation will continue to further dampen economic activity. While we revised our Q2 GDP forecast from negative to slight growth, we project that the US economy will contract over the Q3 2023 to Q1 2024 period. The recession likely will be due to continued tightness in monetary policy and lower government spending.”
While Treasury Secretary Janet Yellen, President Joe Biden, and the Fed all believe a recession will be avoided, the question is not whether we will enter a recession but, rather, when and how deep the recession will be.
Inflation & Interest Rates
April and May’s headline Consumer Price Index (CPI) came in at 4.93% and 4.05%, respectively, while core CPI (excluding energy and food) registered 5.54% and 5.33% year-over-year readings over those same periods. The persistence of pricing pressure on core services, particularly shelter, has proven problematic. Shelter represents about 1/3 of CPI and has remained elevated, increasing 8% over the last year. Although the Fed’s restrictive monetary policy appears effective in bringing year-over-year inflation off its June 2022 peak of 9.06%, price pressures have proven painstakingly resilient and remain elevated more than the Fed prefers.
On a positive note, rents are coming down and home prices are off their June 2022 peak, indicating lower inflation readings ahead. While the downward trend in CPI is reason for optimism, we are more concerned with the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE), which has remained relatively flat at 4.62%, the same level reported in December 2022.
As highlighted in the previous quarterly market overview, uncertainty regarding the Fed’s inability to dampen inflation while avoiding an economic contraction has led to an almost certain harbinger of a recession: an inverted yield curve. Inverted yield curves occur when yields on longer-dated bonds are lower than yields on short-term notes and have proven to be solid predictors of recessions.
Debt ceiling negotiations, or lack thereof, consumed headlines through June. While the negotiations were essentially a non-event, one of the most meaningful outcomes has been the US government’s subsequent issuance of new debt since June 5th, which received little recognition in the media.
It was anticipated that a whopping $1 trillion of new Treasury securities would be issued by the end of the third quarter. Surprisingly, those estimates were off. The U.S. Treasury has already issued approximately $800 billion of new debt in less than a month, pushing the nation’s deficit beyond $32 trillion. Issuance of new securities serves as additional quantitative tightening to support higher yields and may lead to an equity pullback and widening of credit spreads according to both Citigroup and JPMorgan.
Don’t Expect a Pivot
True to their word, the Fed is committed to doing whatever is necessary to bring inflation back to its long-term target of 2%. In March 2022, the Fed embarked on its current Quantitative Tightening (QT) cycle, resulting in ten consecutive rate hikes over fifteen months and a federal funds rate of effectively 0% to 5%. During this period, Federal Reserve Chairman Jerome Powell additionally led the $95 billion per month balance sheet reduction, shedding approximately $625 billion since assets peaked in April 2022.
June’s Federal Open Market Committee (FOMC) meeting marked the first time since March last year that the FOMC voted not to hike rates further. The decision was telegraphed and highly anticipated. The Fed also conveyed that they are likely not finished raising rates, further tightening is likely required to lower inflation, and their June decision should be considered nothing more than a pause.
June’s FOMC release and updated economic projections showed a target peak Fed Funds rate of 5.6%, indicating another 0.50% of increases in 2023. Following the Fed’s June decision and updated Dot Plot, the market finally accepted our base case and what the Fed has been saying all along: rates will remain elevated to ensure inflation is under control. Barring a catastrophic event, no Fed pivot is expected in 2023. The first rate cut is now expected in early 2024.
One of the Fed’s primary concerns is wage growth. Although wage inflation has been trending lower, it remains elevated at 4.3%, which worries the Fed. Strong wage inflation increases the risk of a wage-price spiral that could prolong elevated inflation. While May’s CPI print showed headline CPI back below wage growth, core inflation measures remain higher, indicating that earnings are not keeping pace with cost-of-living increases.
The labor market remains robust, despite some conflicting signals. May’s Labor Market Report registered the 29th consecutive month of job gains, though it showed signs of tightening. Estimates called for 195,000 jobs added in May and the market surprised to the upside with 339,000 jobs. Unemployment jumped 0.3% to 3.7%, marking the largest monthly bounce since April 2020. More than 440,000 people entered the unemployment market in May, also matching the largest monthly loss since the onset of the pandemic.
Surprisingly, as measured by the JOLTS, job openings unexpectedly reversed course and surged back over 10 million. Due to the higher number of unemployed, the ratio of job openings to those unemployed remained relatively flat at 1.65:1.
Centura’s Outlook
The Fed remains resolute in combatting 40-year high inflation, despite ‘pausing’ for a break, not letting concerns of a potential recession derail its tightening efforts. Interest rates remain at levels not seen since the Great Financial Crisis and will likely move higher over the next couple of months. The Fed’s goal to tighten financial conditions and slow the economy just enough to lower inflation back to their 2% mandate is a move that will likely force a recession.
Earnings for the first quarter were stronger than expected, leading many to believe higher rates and inflation aren’t wreaking as much havoc as initially feared. However, higher rates for longer periods spells lingering bank liquidity concerns and potential economic recession have prompted analysts to revise earnings forecasts lower.
According to FactSet, the estimated earnings growth for the S&P 500 in the second quarter has been revised lower from the expected -4.7% in March to -6.8%. If accurate, this would represent the largest decline the index delivered since the second quarter of 2020 of -31.60%. These negative revisions highlight companies’ challenges in 2023 to produce profits. Given that higher rates are likely to persist, additional pressure may be applied over the coming quarters.
A company’s ability to service debt is negatively impacted by elevated rates. The road ahead will likely remain a challenge given the increased cost of labor and companies’ struggle to pass increased cost of goods onto consumers.
Forward 12-month P/E ratios have risen to approximately 18.9, slightly above their five-year average of 18.5. This indicates that equities are slightly overvalued and additional drawdowns may be in store before equities become attractive from a valuation standpoint. When banks kick off earnings season in mid-July, executive managements’ comments on the health of their companies’ and consumers’ balance sheets should prove insightful, particularly as it pertains to banks’ revisions to loan loss reserves. This should provide an indication of the direction and magnitude of companies’ future expected defaults, which we expect to increase.
Until inflation breaks lower, we remain cautious and anticipate that equities could experience turbulence in the second half of the year, particularly if inflation remains elevated or resurges. We also believe the market is discounting the impact of the Fed’s aggressive monetary tightening actions. Bankruptcies are quietly rising, and defaults are starting to tick up. As rates go higher, we expect further stress on companies and consumers.
Conversely, we also recognize that the market is forward-looking, often pricing in future economic recoveries before they occur and that investors are irrationally exuberant. While we do not subscribe to, or make investment decisions based on FOMO (Fear of Missing Out), it exists and can often be the catalyst a market needs to continue to push higher. Through our experience, we have found when a large disconnect between economic fundamentals and market technicals exists, we should consider shifting allocations towards our neutral strategic allocations.
Like many institutional investors, our cautious outlook has guided our allocations and we remain underweight to respective equity targets in client portfolios. [MT3] [CO4] Our quality bias, which served investors well in the angst of 2022, has served as a headwind in the first half of the year. Given the strength of the equity market recovery since late last year, we began bringing some of our equity positioning back toward our long-term target allocations. We intend to exercise caution while also monitoring opportunities to capitalize on any future market dislocations.
Our fixed-income allocation has seen a reduction in non-traditional fixed-income investments that served portfolios well, as interest rates rose sharply. With end-of-rate increases in sight, over the last several months, we have been extending duration and increasing the quality of underlying bonds, emphasizing U.S. Treasury and investment grade fixed income securities. At this stage in the cycle, we believe this positioning should provide long-term benefits to portfolios and be benefactors of a ‘flight to quality’ that may ensue with any equity market volatility.
We continue to succeed in improving returns and reducing risk by incorporating many private and liquid alternative investments into our allocations. Spiking interest rates have impacted private real estate, and we expect additional downward valuation adjustments across many sectors and markets. Our focus on real estate industries possessing a largely favorable supply/demand imbalance, like multifamily real estate, should help mitigate losses relative to other real estate sectors not possessing similar disparities. Despite the expected challenges in the real estate market, we maintain our dedication to exercising patience and selectivity in our decision-making process. For example, we are finding great opportunities in private credit. Most private credit is floating rate, possessing short durations and experiencing lower price sensitivity to spiking interest rates than similar public credit while also delivering a high-level of income production. We are beginning to observe defaults increase in the market, though they remain well below historical averages. With higher rates expected, additional pressure on borrowers’ ability to service debt will be applied. As such, our focus is on partnering with high-quality managers who have a proven track record of reducing loss. While we face significant uncertainties, we remain anchored by our core principles. Thank you for your continued confidence and support. If you have questions or concerns, please contact your Centura Wealth advisor.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on the market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Centura Wealth Advisory is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Centura Wealth Advisory and its representatives are properly licensed or exempt from licensure. 12255 El Camino Real, St. 125, San Diego, CA 92130.
Life insurance is an important consideration when it comes to securing your family’s financial future. In the event of your death, life insurance policies can provide financial protection to your loved ones, ensuring that they are taken care of in your absence. However, not all life insurance policies are created equal. For high net worth individuals, a private placement life insurance (PPLI) policy can offer unique advantages over traditional life insurance policies.
In this article, we’ll explore the differences between PPLI and traditional life insurance, and explain why PPLI may be the better choice for high net worth individuals & families.
Traditional Life Insurance
Traditional life insurance policies operate in a relatively simple manner. Policyholders pay a premium in exchange for a death benefit that is paid out to their beneficiaries when the insured dies. After premiums are paid, insurance charges are deducted and the net premium is invested in some sort of mechanism, dictated by the policy type. In the case of traditional variable universal life (VUL), this net premium is allocated to the carrier’s “segregated” account that is separate from the general account (thus not subject to the carrier’s creditors).
Limited Investment Pool
One of the main drawbacks of traditional VUL policies is that they limit investment choice to a pre-selected pool of options. Similar to the investment selection of a 401k menu, there are typically anywhere between 75-150 funds to choose from. Also, these funds do not include alternative style investments, thus limiting the potential growth of the cash value. As a result, traditional life insurance policies may not be an ideal option for qualified purchasers and/or accredited investors who are seeking to grow their wealth tax-efficiently and with more significant returns.
Accessibility
It’s essential to note that traditional life insurance policies are generally more accessible than PPLI policies, as they do not require nearly as significant investment upfront. However, traditional life insurance policies do not offer the same level of flexibility and customization over investment selection as PPLI policies.
PPLI (Private Placement Life Insurance)
Private placement life insurance (PPLI) policies operate in a similar manner to traditional life insurance policies. However, PPLI policies are specifically designed for serving as a tax efficient wrapper for tax inefficient assets.. Also, with a PPLI policy, the policyholder can invest in a separately managed account (SMA), which can be customized relative to the fixed menu of “off the shelf” offerings on the carrier’s platform. These SMAs can hold a range of investment types, including hedge funds, private equity, private credit and real estate to name a few.
Tax Efficiency
One of the most significant benefits of cash value life insurance policies is tax efficiency. PPLI policies allow policyholders to defer taxes on their investment gains and income while the policy is active. Additionally, PPLI policies can provide tax favored access to policy distributions, either by withdrawing up to cost basis tax free or utilizing tax free policy loans. The death benefit is also received tax free by the policy holder’s heirs.
Asset Protection and Estate Planning Benefits
PPLI policies can also offer asset protection and estate planning benefits. PPLI policies are typically structured to provide a level of asset protection, shielding investments from creditors and lawsuits. Additionally, PPLI policies can be designed to reduce estate taxes, providing a tax-efficient way to transfer wealth to the next generation.
PPLI vs. Traditional Life Insurance
When comparing PPLI and traditional life insurance policies, the key differences lie the investment flexibility, costs and liquidity. Since life insurance policies grow tax deferred, they trade off investment tax drag for insurance costs. Assuming the policies are designed properly, these insurance charges for the death protection are minimized and this can be a very favorable trade-off. PPLI amplifies this trade-off versus traditional coverage in two ways:
PPLI tends to have much lower upfront fees relative to traditional coverage
PPLI allows the underlying investments to be comprised of assets with higher return potential but that would normally come with higher tax drag. PPLI eliminates the tax drag while keeping the higher return potential
PPLI vs. Traditional Life Insurance: Which Is Right for You?
For high net worth individuals who seek to grow their wealth and manage their investments in a tax efficient manner with greater flexibility, PPLI policies may be the better option. However, PPLI policies require a significant investment upfront and may not be accessible to everyone.
If the goal is to minimize premiums paid for maximum death benefit coverage traditional life insurance policies can serve as a very effective tool for estate liquidity and generational wealth leverage for your loved ones. However, if you’re a high net worth individual looking to grow your wealth tax-efficiently, protect your assets, and provide ancillary estate planning benefits, a PPLI policy may be the better choice for you. By working with a knowledgeable wealth advisor, you can explore your options and make an informed decision that meets your unique financial goals and needs.
If you’re interested in learning more about PPLI and how it can help you achieve your financial goals, contact Centura Wealth Advisory today. Our experienced advisors can help you create a customized wealth management strategy that meets your needs and provides the protection and growth you deserve.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
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For additional information about Centura, please request our disclosure brochure as set forth on Form ADV using the contact information set forth herein, or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Please read the disclosure statement carefully before you engage our firm for advisory services.
https://centurawealth.com/wp-content/uploads/2024/08/iStock-1188909800.jpg14142119Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2023-07-01 18:51:002024-08-19 18:53:20PPLI vs. Traditional Life Insurance: What’s the Difference?
It is not the strongest or the most intelligent who will survive but those who can best manage change.
-Charles Darwin
Recap
The investment landscape is constantly evolving.
Over the last 6 weeks, we’ve experienced 3 of the 4 largest US Bank failures in history, with First Republic Bank the being most recent domino to fall. JPMorgan Chase quickly acquired the majority of First Republic’s assets, and assumed the deposits and certain other liabilities of First Republic Bank from the Federal Deposit Insurance Corporation (FDIC) for $10.6 Billion, with FDIC providing 80% loss coverage of First Republic’s single-family residential mortgages for 7 years. The fair value of the single-family residential loans is ~$22 Billion, with an average LTV of 87%.
In previous communications, we stated we did not anticipate further bank contagion following the demise of Silicon Valley Bank and Signature Bank. We have since adjusted our outlook and acknowledge the possibility of more regional banks failing in the near term. While we shift our outlook and advise clients to consider limiting regional bank deposits to FDIC-insured amounts of $250,000 (or your bank’s threshold as several banks possess multiple charters, allowing for more than the standard $250,000 limit), we believe larger national and international banks maintain much more resilient capital structures and controls in place which offer greater safety in deposits.
Hike rates until it Breaks!
The Fed has an abysmal track record playing their part in several former crises. They generally tighten until something breaks.
The Savings & Loans (S&L) Crisis
In the early 1980s, the Federal Reserve increased interest rates to combat inflation, which made it more expensive for S&Ls to borrow money. Many S&Ls had funded their investments in real estate and other ventures with borrowed funds, so the interest rate hikes increased their borrowing costs and squeezed their profits. At the same time, the S&Ls were offering fixed-rate loans to homebuyers, which meant that they were locked into low interest rates and couldn’t adjust their rates to match the higher borrowing costs. When the real estate market declined in the late 1980s and early 1990s, many S&Ls were left with significant losses and were unable to repay their debts, leading to a wave of bank failures and government bailouts. The historic interest rate hikes contributed to the S&L crisis by increasing borrowing costs for the S&Ls and reducing their profits, which led to risky investments and fraudulent practices[1] to try to recoup losses. The crisis resulted in the closure of over 700 S&Ls and cost taxpayers over $100 billion in bailout funds.
The Dot Com Crash
From the late 90’s to early 00’s, investors engaged in speculative investing in internet-related companies which led to a market crash. At the time, many of these companies relied on debt financing to fund early expansion. Companies were able to sell ideas to investors through the novelty of the dot-com concept, most of which were unprofitable.
The Fed’s rate hikes to combat growing inflation pressures made it more difficult for companies to obtain financing and led to a decline in investor confidence, which subsequently followed with a stock market sell-off. Although greed served as the main driver of the crash, the Fed’s hiking cycle served as a catalyst.
The Great Financial Crisis
The hiking cycle of interest rates played a significant role in causing the Global Financial Crisis (GFC) of 2008. In the years leading up to the crisis, the Federal Reserve had lowered interest rates to stimulate economic growth following the dot-com crash and the September 11 terrorist attacks. These low interest rates, combined with lax lending standards, led to a housing boom as many people took advantage of the easy credit to buy homes, invest in real estate, and even take second and third mortgages on their homes. However, in 2004, the Federal Reserve began to raise interest rates to combat inflation stemming from cheap money. This made borrowing more expensive and slowed down the housing market. At the same time, many of the homeowners who had taken out adjustable-rate mortgages (ARMs) found themselves unable to make their payments as the interest rates on their mortgages increased. This led to a wave of foreclosures This, in turn, led to a credit crunch, as banks became reluctant to lend money to each other or to other borrowers, exacerbating the economic downturn. The hiking cycle of interest rates played a key role in causing the GFC by slowing down the housing market, leading to a wave of foreclosures. This, in turn, created a chain reaction of losses and defaults throughout the financial system, ultimately leading to a credit crunch and a global economic downturn.
Current Day
The current hiking cycle of interest rates to combat 40-year high inflation is creating a regional bank crisis. Banking institutions, heeding the Fed’s guidance that inflation was transitory and rate hikes would not occur in the near future, searched for ways to increase yields on excess deposits invested in fixed-income securities. Many banks began increasing duration, reducing convexity[2], and taking greater interest rate risk to capture a positive return on investments. When the Fed began aggressively increasing interest rates, these investments lost value, and institutions holding these investments began to experience stress on their capital stack. Simultaneously, bank deposits continued to yield nearly zero. Regional banks with the most exposure to these investments have experienced significant outflows, and in some cases, failure.
Fed tightening cycles tend to have a way of exposing weaknesses formerly masked by easy money environments; similar to the economic environment investors have enjoyed since the GFC. When the Fed starts raising rates, the impact generally takes months before working through the system and affecting markets. We’re now witnessing the impact of the Fed’s most aggressive tightening cycle in four decades, and stress is being felt throughout the financial system.
What is happening now, and why did we adjust our outlook?
On Wednesday, May 3rd, the Fed continued its war against inflation and raised the target Federal Funds Rate (FFR[3]) by 25 bps to a target range of 5.00% – 5.25%. In 14 months, the Federal Reserve has increased rates 10 times, for a total increase of 500 bps. While the Fed will likely hit the pause button on rate increases in future meetings, they intend to keep rates elevated, adding additional pressure on banks and the debt service on corporate balances sheets.
Unlike their national and international counterparts, regional banks typically have less diversified business lines, less hedging (hedging is quite expensive and requires expertise), and more operational risk. Cracks within the foundation of Regional Banks subsequently began to appear during the current hiking cycle when depositors, unhappy with their meager deposit yield (most savings accounts were yielding <1%, while checking accounts were paying 0.01%) began withdrawing deposits and allocating funds to higher-yielding instruments like US Treasury Bills and money market funds. For example, from Q1 2022 to Q4 2022 (when the hiking cycle began), Money Market Funds total assets grew from 5.032T to 5.223T[4]. To free up liquid capital to maintain capital adequacy requirements from bank outflows, regional banks were forced to sell financial assets. Most fixed-rate bonds have lost value, forcing these banks to realize losses. Because banks are highly leveraged businesses, it doesn’t take much for a bank to get wiped out if it experiences an exorbitant amount of excess deposits invested in fixed-rate bonds during an extraordinary rising interest rate environment. We saw this with First Republic Bank (FRC).
By providing the concessions to JPMorgan Chase in the FRC deal discussed earlier, the Fed set the blueprint for larger banks to wait for FDIC to seize a failing bank and subsequently purchase the institution for pennies on the dollar. If regional bank failures persist, we anticipate this trend will continue and large banks will be successful in consolidating market share.
PacWest, a Beverly Hills, California-based bank is working to solicit interest in the sale of its lender finance arm to strengthen its balance sheet. Through May 9th, PacWest subsequently has lost approximately 75% of its value in 2023. Hence why we believe PacWest, among other regional banks are suffering the wrath of the Fed and lack of consumer confidence.
We continue to monitor the situation closely and assess possible contagion to other sectors of the economy. We do not believe that regional banks are out of the woods quite yet as they are one of the primary lenders to commercial real estate operators, and we expect that they will remain under pressure as they look to navigate the billions of dollars in maturing commercial real estate loans this year and next. At the current level of interest rates, we expect to see defaults across commercial real estate increase in the coming quarters, particularly for those operators using primarily floating-rate debt to finance their operations.
Further, we recommend clients review their banks’ FDIC limits and proceed with caution if choosing to hold cash above the insured amounts. While many banks have started to increase the rate they pay on savings accounts, we would still caution against holding above-insured limits, and encourage clients to explore options such as holding excess funds in investments like Treasury Bills, government-backed money market funds, or even brokerage CDs to name a few. We are happy to discuss which options would be optimal for you. We encourage you to reach out to your advisor to make appropriate changes.
If you have any questions, please do not hesitate to contact us.
[1] One example of Securities fraud was the chairman of Lincoln Savings and Loan, Charles Keating. Keating used his position and influence to engage in fraudulent practices that ultimately led to the collapse of Lincoln Savings and Loan. He convinced depositors to invest their savings in high-risk junk bonds issued by his own company, American Continental Corporation (ACC), which was the parent company of Lincoln Savings and Loan. Keating misrepresented the quality and risks associated with these bonds, assuring investors that they were safe and would provide high returns. In reality, these bonds were high-risk and lacked sufficient collateral. Keating used the funds from these investments for personal gain, supporting an extravagant lifestyle and making political contributions.
[2] Convexity is a measure of the curvature in the relationship between bond prices and interest rates. It reflects the rate at which the duration of a bond changes as interest rates change. Duration is a measure of a bond’s sensitivity to changes in interest rates. It represents the expected percentage change in the price of a bond for a 1% change in interest rates.
[3] Federal Funds Rate. The target interest rate range set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
[4] Taken from Fred Economic Data
General Disclosures
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Our tax system has two critical components that impact the transfer of wealth from one generation to the next: gift tax and estate tax.
The gift tax applies to the transfer of property from one individual to another during their lifetime, while the estate tax is levied on the transfer of property at death.
The IRS adjusts the federal estate and gift tax exemption amounts for inflation each year and has announced the exemption amounts for 2023. Let’s take a closer look.
What Are Gift and Estate Tax Exemptions and Why Are They Important?
Gift and estate tax exemptions are the amounts that individuals can give away during their lifetime or pass on to their heirs at death without incurring any federal taxes. The federal government imposes these taxes on the transfer of property or money.
Understanding these exemptions is crucial for tax planning and managing one’s assets to minimize tax liabilities. Knowing the exemption amounts and how they work can help individuals make informed decisions about their wealth transfer strategies.
The Federal Gift and Estate Tax Exemption
The federal gift and estate tax exemption has increased from $12,060,000 to $12,920,000. This means that married couples can gift up to more than $25 million in assets without incurring federal estate and gift taxes. However, this exemption is set to expire in 2026 and will revert back to the prior exemption amount of $5 million.
For surviving spouses, the unlimited marital deduction for gift and estate taxes remains, except for those who are not U.S. citizens. Non-citizen spouses have a marital deduction of $175,000 for 2023.
Annual Exemption
The annual gift tax exemption, in addition to the lifetime exemption, will increase from $16,000 to $17,000 in 2023 for each person you gift to in 2023.
If you have not yet utilized your 2022 annual or lifetime exemption, now is a good opportunity to do so. Many investment assets have experienced a decline in value of 25%-35% since the beginning of the year, but are expected to recover in the medium to long term. Gifting investments now to your beneficiaries will allow you to do so at a discounted rate.
When the exemption reverts in 2026, it will be crucial to understand how it will be applied. If you gift an amount less than the current exemption amount of $12,920,000 by 2025, you will be limited to the lower exemption amount, which is currently set at $7 million for gifts made after 2025.
Planning Opportunities
Clients can make lifetime gifts outright to an individual or in a trust to take advantage of the increased exemption amounts. It is crucial to consider making gifts to reduce estate tax before the exemptions decrease at the end of 2025. For those who have already used their gift and estate tax exemption in prior years, the increase from 2022 to 2023 provides an opportunity to avoid or reduce estate tax by making additional lifetime gifts.
Americans increasingly favor a wealth tax on the ultra-wealthy, but despite an uptick in proposals, these policies have struggled to gain traction.
You never know what may happen in the future, so it’s important to consider taking advantage of the current higher exemption amounts while they are still available. There are various planning strategies that can be implemented to make the most of these higher exemption amounts before they potentially revert to lower amounts in the future.
Connect With Centura
At Centura Wealth Advisory, we go beyond a traditional multi-family office wealth management firm to offer advanced tax and estate planning solutions which traditional wealth managers often lack in expertise, knowledge, or resources to offer their clients.
We invest heavily into technology and systems to provide our clients with fully transparent reporting and tools to make informed decisions around their wealth plan.
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https://centurawealth.com/wp-content/uploads/2024/08/iStock-1328352067-1.jpg14142120Magdi Cookhttps://centurawealth.com/wp-content/uploads/2024/07/Centura-Logo-Grey.pngMagdi Cook2023-05-04 20:02:002024-08-19 20:04:092023 Updates to Gift Tax and Other Estate Limitations