2. A Deep Dive Into Private Financing with
Presented by
Richard L. Harris, CLU AEP TEP Bob Finnegan, J.D., CLU, AEP

3. Funding Hierarchy (Simple to Complex)
Clients Funds
Existing Funded Trusts
$14,000 AGTE
$5.49 Lifetime Gift & GST
Transfer Assets
Discounted Gift to DGT
Discounted Sale to DGT
Discounted GRAT (DGT)
Loan
Premium Structure
Full Premium
Split $ - Economic Ben.
Private Financing
Private Financing & Gift
Split-$ Demand Loan
Pay Gift Tax (> $5.45M)
OPM (Premium Financing)
Commercial Lender
Local Banking Relationship
Bank Specialize in Premium Financing
Intermediary
Dual Loan
For Advisor and Producer Use Only. Not For Public Distribution.

4. Split-Dollar Life Insurance Arrangements:
Exciting Estate Planning Opportunities
What Allows Split-Dollar to Function So Well

5. Split-Dollar Basics CONSIDER THIS:
CONSIDER THIS:
Take a dollar bill and cut it in half. Give half to someone else.
Can either of you do anything with the dollar without the other?
VOILA: Split-Dollar

6. Split-Dollar Basics CONSIDER THIS:
CONSIDER THIS:
Instead of a dollar bill the money involved has to do with the purchase of a life insurance policy.
Two parties:
A party that provides some or all of the funding for a life insurance policy in exchange for getting their money back (either with interest or without)
A party that names a beneficiary of the policy – less the amount due the funder
Neither can exercise rights to the policy without the other.

7. Split-Dollar Basics In the old days (pre 2001)
In the old days (pre 2001)
One party advances money to another party to pay some or all of the premiums on a life insurance policy
The funder can get back premiums paid or the greater of premiums paid or the cash surrender of the policy
ADVANCE – not a loan
The other party gets to name the beneficiary of the difference between the face amount of the insurance and the amount due the funder.

8. Split-Dollar Basics RENT Rev Rul 55-713 – interest-free loan
Rev Rul instead of interest-free loan PS58 – corrects Rev Rul
Rev Rul – insurance companies published term rates
Value is Annual Renewable Term rate based on amount the party who names the beneficiary of the difference

9. 2001-2003: The Split-Dollar World Changes
Split-Dollar Basics
: The Split-Dollar World Changes
PS 58 Table no longer available
Table 2001 – much lower term rates
Effectively ends reverse split-dollar
Carrier terms rates available only if Annual Renewable Term regularly offered and regularly sold (Notice (II)(3)
Any equity (cash value of policy greater than premiums paid) that accrues to the party who controls the death benefit is subject to income tax

10. 2001-2003: The Split-Dollar World Changes
Split-Dollar Basics
: The Split-Dollar World Changes
New regulations in Sept. 2003
90 Pages including preamble § §
Creates New Opportunities

11. What the Regulations Say
Economic benefit split-dollar §
§ (a)(b) and (c) provide the definition of split-dollar for both economic benefit and loan arrangements
§ (b)(2) excerpted and paraphrased
In General – arrangement between owner an non-owner of a policy where either party “…pays directly or Indirectly, ALL or any portion of the premiums on the life insurance contract….”(emphasis added)

12. What the Regulations Say Loan Split-Dollar – New Game in Town
Important provisions
§ (a)(2)(i)(C)
The repayment is to be made from, or is secured by, the policy's death benefit proceeds, the policy's cash surrender value, or both.

13. What the Regulations Say Loan Split-Dollar – New Game in Town
Important Provisions
§ (d)(i) & (ii)
Loan treatment can be guaranteed – even if nonrecourse
“Requirement. An otherwise noncontingent payment on a
split-dollar loan that is nonrecourse to the borrower is not a contingent payment under this section if the parties to the split-dollar life insurance arrangement represent in writing that a reasonable person would expect that all payments under the loan will be made.”

14. What the Regulations Say Loan Split-Dollar – New Game in Town
Important Provisions
§ (e)(5)(ii)
Loan can be repayable at death of the insured
Applicable Federal Rate (AFR) determined by life expectancy using table in §1.72-9
If life expectancy is more than nine years, long-term AFR is used
August, 2018 long-term AFR – 2.95%

15. What the Regulations Say Loan Split-Dollar – New Game in Town
Important Provisions
§ (g)(4)
(See also Examples in § (h)(5))
Interest can be accrued
Grantor Trust rules §§ and §
No OID if Grantor Trust
(Successor Grantor?)

16. WHAT WE CAN DO NOW Lump sum loan for all premiums
With interest accrued no taxable gifts or GST inclusion
Guarantees loan treatment
A loan for the life of the insured(s)

17. Private Financing The Perfect Hedge for Uncertain Times
A Strategy to Fund Any Life Insurance Policy

18. Private Financing
Clients lends funds (cash or securities) to a Dynasty Trust
Trust invests loan proceeds side fund in order to:
Pay each annual premium as it becomes due
Repay the loan at the end of the loan term
Defective grantor trust
Trust taxes paid by grantor.
In effect, a gift and GST tax free transfer!

19. Private Financing Clients lends funds to a Dynasty Trust
Trust invests loan proceeds side fund in order to:
Pay each annual premium as it becomes due
Repay the loan at the end of the loan term
Defective grantor trust
Trust taxes paid by grantor.
In effect, a gift and GST tax free transfer!
Lump sum loan locks in current favorable 4/2018 AFRs:
Mid-Term 2.72% Loan Term (3 years,9 years]
Long Term 3.04% Loan Term > 9-years
Accrue interest (a powerful long term benefit)

20. Mr. and Mrs. Valued Client
*** BASELINE PRIVATE FINACING EXAMPLE ***
Insureds: Male Age 57 (Preferred NT), Female Age 56 (Preferred NT)
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
July 2018 AFR 
DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
(SHORT)/Gain
NET TO FAMILY
End of Year
Beginning of Year
End of Year  
End of Year 
2.87%
MT AFR 
Value of 10
6.00%
Repay Loan
Insurance
Total in
Loan
Trust
Annual
Pre-Tax
End of Year
Side Fund
Death
Yr.
Age
Balance
Premiums
Earnings 9
Loan Bal.
Benefit
@ Death
Beg.
5,561,507 1
57/56
5,721,122
(168,545)
323,578
5,716,539
(4,583)
10,000,000
9,995,417 2
58/57
5,885,318
332,880
5,880,874
(4,444)
9,995,556 3
59/58
6,054,227
342,740
6,055,069
842
10,000,842 4
60/59
6,227,983
353,191
6,239,715
11,732
10,011,732 5
61/60
6,406,726
364,270
6,435,440
28,714
10,028,714 6
62/61
6,590,599
376,014
6,642,909
52,310
10,052,310 7
63/62
6,779,749
388,462
6,862,826
83,077
10,083,077 8
64/63
6,974,328
401,657
7,095,938
121,610
10,121,610
65/64
7,174,491
415,644
(7,174,491)
168,545
10,168,545
66/65
(0)

21. The Perfect Strategy for Uncertain Times
Design so that the client is fully secured in all years!
Transfer Tax Efficient (Gift, Estate & GST)
Income Tax Efficient
Use any type product!
Design Flexibility

22. Design to Secure Client
In most if not all years
If 9-year note
Use cash value policy
CSV + trust assets > Loan Balance
The trustee can choose to repay the loan early.
Ability to unwind the transaction = Clients can feel more comfortable entering into the transaction.

23. 2. Transfer Tax Efficient
Moves wealth to a dynasty trust without
Gift Taxes
Estate Taxes
GST taxes.
The dynasty trust protects against repeat estate taxation.
The plan is not dependent upon making a gift, it is a loan.
It rides out whatever tax regimen we have in place.
If the gift tax comes and goes, the strategy is unaffected.

24. 3. Income Tax Efficient Grantor pays trust income taxes – a free gift!
Income tax free death benefit.
Preserve gift/estate exemption for stepped up basis on second death.

25. 4. Use any type product! Single life Survivorship UL/SUL Whole Life
Current Assumption
VUL
IUL
Whole Life
Term
Note:
In contrast, Private Split $ (economic benefit regime) works best with
Low CSV product
Survivorship life

26. 5. Design Flexibility Use with non-insurance strategies
Dual Spousal Lifetime Access Trusts that give non-grantor spouse access to trust assets.
Gift/Sale to defective grantor trust.
Combine with gifting
Use closely held assets
The wait-and-see gift

27. A Strategy to Fund Any Life Insurance Policy
Reducing the Loan
A Strategy to Fund Any Life Insurance Policy

28. Reducing the Loan Longer Note & Longer Premium Paying Terms 6% Pre-Tax Return
Note Terms
$10M Life Insurance
***
Note
July 2018
Annual
Years Pay
Required
Scenario
Duration
Term
Rate
Premium
Premiums
Loan 1 9
2.87%
2.86%
168,545 10
5,561,507 2 20
3.06%
107,061
3,025,368 3 30
91,463
2,341,491 5 65
86,227 53
1,781,133

29. Private Financing With Gifts
A Strategy to Fund Any Life Insurance Policy

30. Mr. and Mrs. Valued Client
*** BASELINE PRIVATE FINACING EXAMPLE ***
Insureds: Male Age 57 (Preferred NT), Female Age 56 (Preferred NT)
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
July 2018 AFR 
DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
(SHORT)/Gain
NET TO FAMILY
End of Year
Beginning of Year
End of Year  
End of Year 
2.87%
MT AFR 
Value of 10
6.00%
Repay Loan
Insurance
Total in
Loan
Trust
Annual
Pre-Tax
End of Year
Side Fund
Death
Yr.
Age
Balance
Premiums
Earnings 9
Loan Bal.
Benefit
@ Death
Beg.
5,561,507 1
57/56
5,721,122
(168,545)
323,578
5,716,539
(4,583)
10,000,000
9,995,417 2
58/57
5,885,318
332,880
5,880,874
(4,444)
9,995,556 3
59/58
6,054,227
342,740
6,055,069
842
10,000,842 4
60/59
6,227,983
353,191
6,239,715
11,732
10,011,732 5
61/60
6,406,726
364,270
6,435,440
28,714
10,028,714 6
62/61
6,590,599
376,014
6,642,909
52,310
10,052,310 7
63/62
6,779,749
388,462
6,862,826
83,077
10,083,077 8
64/63
6,974,328
401,657
7,095,938
121,610
10,121,610
65/64
7,174,491
415,644
(7,174,491)
168,545
10,168,545
66/65
(0)

31. DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
Reducing the Amount Needed to Fund LI Loan: $1,314,936 (Pays Premiums) Gift: $1,004,039 (Repays Loan) Total $2,318,975
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
July 2018 AFR 
DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
(SHORT)/Gain
NET TO FAMILY
End of Year
Beginning of Year
End of Year  
End of Year 
2.87%
MT AFR 
Value of 10
6.00%
Repay Loan
Insurance
Total in
Loan
Trust
Annual
Pre-Tax
End of Year
Side Fund
Death
Yr.
Age
Balance
Premiums
Earnings 9
Loan Bal.
Benefit
@ Death
Beg.
1,314,936
1,004,039
Gift to Trust 1
57/56
1,352,675
2,318,975
(168,545)
129,026
2,046,275
730,263
10,000,000
10,730,263 2
58/57
1,391,497
112,664
1,990,394
673,306
10,673,306 3
59/58
1,431,433
109,311
1,931,160
612,994
10,612,994 4
60/59
1,472,515
105,757
1,868,372
549,128
10,549,128 5
61/60
1,514,776
101,990
1,801,817
481,494
10,481,494 6
62/61
1,558,250
97,996
1,731,268
409,865
10,409,865 7
63/62
1,602,972
93,763
1,656,486
334,003
10,334,003 8
64/63
1,648,977
89,276
1,577,218
253,652
10,253,652
65/64
1,696,303
84,520
(1,696,303)
168,545
10,168,545
66/65
(0)

32. Reducing the Amount Needed to Fund LI Gift Alone: $1,314,936
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
(SHORT)/Gain
NET TO FAMILY
NO LOAN
Beginning of Year
End of Year  
End of Year 
Value of 10
6.00%
Repay Loan
Insurance
Total in
Trust
Annual
Pre-Tax
End of Year
Side Fund
Death
Yr.
Age
Premiums
Earnings 9
Loan Bal.
Benefit
@ Death
Beg.
Loan
1,314,936
Gift to Trust 1
57/56
(168,545)
68,783
1,215,175
10,000,000
11,215,175 2
58/57
62,798
1,109,427
11,109,427 3
59/58
56,453
997,335
10,997,335 4
60/59
49,727
878,518
10,878,518 5
61/60
42,598
752,571
10,752,571 6
62/61
35,042
619,068
10,619,068 7
63/62
27,031
477,554
10,477,554 8
64/63
18,541
327,550
10,327,550
65/64
9,540
168,545
10,168,545
66/65
(0)

33. Not Applicable (No Loan)
Reducing the Funds Committed to the LI Program Loan and Gift 6% Pre-Tax Return
Note Terms
$10M Life Insurance
Amount to Fund LI
Note
July 2018
Annual
Years Pay
Loan & Gift
Scenario
Duration
Term
Rate
Premium
Premiums
Loan
Gift
Total
1 A 9
MidTerm
2.87%
168,545 10
5,561,507
1 B
1,314,936
1,004,039
2,318,975 1C
Not Applicable (No Loan) 2 20
Long Term
3.06%
107,061
2,893,711
3,025,368 3 30
91,463
2,093,815
2,341,491 5
Life
86,227 60
1,738,131
1,781,133

34. The Wait and See Gift

35. The Wait and See Gift
Private Financing offers the opportunity to gift in the future.
Clients have a substantial estate including a highly successful closely held business.
They are uncomfortable using the increased exemption today.
They are in excellent health and have been underwritten at preferred rates.
They understand the benefits of Private Financing including locking in favorable AFRs today.

36. Mr. and Mrs. Valued Client
*** BASELINE PRIVATE FINACING EXAMPLE ***
Insureds: Male Age 57 (Preferred NT), Female Age 56 (Preferred NT)
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
July 2018 AFR 
DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
(SHORT)/Gain
NET TO FAMILY
End of Year
Beginning of Year
End of Year  
End of Year 
2.87%
MT AFR 
Value of 10
6.00%
Repay Loan
Insurance
Total in
Loan
Trust
Annual
Pre-Tax
End of Year
Side Fund
Death
Yr.
Age
Balance
Premiums
Earnings 9
Loan Bal.
Benefit
@ Death
Beg.
5,561,507 1
57/56
5,721,122
(168,545)
323,578
5,716,539
(4,583)
10,000,000
9,995,417 2
58/57
5,885,318
332,880
5,880,874
(4,444)
9,995,556 3
59/58
6,054,227
342,740
6,055,069
842
10,000,842 4
60/59
6,227,983
353,191
6,239,715
11,732
10,011,732 5
61/60
6,406,726
364,270
6,435,440
28,714
10,028,714 6
62/61
6,590,599
376,014
6,642,909
52,310
10,052,310 7
63/62
6,779,749
388,462
6,862,826
83,077
10,083,077 8
64/63
6,974,328
401,657
7,095,938
121,610
10,121,610
65/64
7,174,491
415,644
(7,174,491)
168,545
10,168,545
66/65
(0)

37. The Wait and See Gift Keep the loan in place (Baseline Example)
Forgive the loan (See below)
If it looks like the increased gift exemption is “sunsetting” (going away)
And the client is comfortable making the gift
Surrender the policy and repay the loan (not illustrated) or reduce the death benefit
Note: Decision to surrender policy or reduce face amount would be made by trustee.

38. The Wait-and-See Gift Example
Gift Analysis
DYNASTY TRUST: Cash Flow & Value of Side Fund (SF)
NET TO FAMILY
End of Year
Beginning of Year
Exemption
Forgive Loan
Value of 10
6.00%
Repay Loan
Insurance
Total in
Loan
Inflated at
6,421,153
Trust
Annual
Pre-Tax
End of Year
Death
Balance
2.00% 7
Side Fund
Premiums
Earnings 9
Benefit
@ Death
5,561,507
5,590,000
57/56
5,721,122
5,701,800
(168,545)
323,578
5,803,796
10,000,000
10,072,108
58/57
5,885,318
5,815,836
343,054
6,060,624
10,153,545
59/58
6,054,227
5,932,153
358,464
6,332,860
10,245,025
60/59
6,227,983
6,050,796
374,798
6,621,431
10,347,309
61/60
6,406,726
6,171,812
392,112
6,927,317
10,461,206
62/61
6,590,599
6,295,248
410,465
7,251,555
10,587,581
63/62
358,597
(6,421,153)
429,920
7,148,509
17,148,509
64/63
368,888
423,737
7,486,019
17,486,019
65/64
379,475
443,988
(379,475)
7,843,780
17,843,780
66/65
465,453
8,223,006
18,223,006

39. Private Financing with Closely Held Assets

40. Private Financing with Closely Held Assets
Clients may want to fund a private financing transaction with closely held assets. The following discussion focuses on the use of
Commercial real estate
Closely held business interest
And then briefly discusses a special case, a portfolio of marketable securities

41. Private Financing with Closely Held Assets Benefits
Client may continue to manage the asset
Client may be more comfortable with the closely held asset as an investment as opposed to being invested in the market
Low valuations of the closely held asset may be available making the transaction more efficient as a wealth transfer vehicle.

42. Private Financing with Closely Held Assets Limitations
The closely held asset may not have stable cash flow to pay premiums
Since private financing liquidates principal to repay the loan, the loan will be repaid in kind”, i.e. with the asset itself
Qualified valuations will be needed for each “in kind” payment
The loan must provide for sufficient interest (more below)

43. Split-Dollar Life Insurance Arrangements:
Exciting Estate Planning Opportunities
Loan Split-Dollar Asset Transfer Plan

44. Facts
Husband age 67 Wife age 64
Health okay – Standard & Standard Plus NS
Own LLC Interest worth $15,000,000
Interest produces 4% cash flow – $600,000/yr
Interest appraised for $10,000,000
Applied for $40,000,000 second-to-die
Approved with premium $550,000/yr

45. Step 1
Set up ILIT
ILIT is Grantor trust
ILIT

46. Step 2 Create loan split-dollar documents Loan for $10,550,000
Loan for life of insureds
AFR August %
Interest accrued
Representation made by taxpayer(s) that loan will be repaid
Loan, interest payments and accruals documented
Grantor
ILIT
$10,550,000 Loan
$10,550,000 Note

47. ILIT pays first premium on life insurance policy
Step 3
ILIT pays first premium on life insurance policy
ILIT
Insurance
Company
$550,000 Premium
$10,550,000
$40M 2nd-to-Die

48. ILIT buys LLC interest from Grantor
Step 4
ILIT buys LLC interest from Grantor
Grantor
ILIT
$10,000,000
$10,0000,000
LLC Interest
LLC Interest

49. Results No gifts No GST inclusion Loan respected by IRS Loan for life
Interest accrued
ILIT
LLC Interest
Grantor
$40,000,000 Life Insurance Policy
$10,550,00 Note

50. Contact Us Richard L. Harris, CLU, AEP, TEP Managing Member Richard L
Contact Us Richard L. Harris, CLU, AEP, TEP Managing Member Richard L. Harris LLC Robert W. Finnegan, J.D., CLU, AEP Senior VP, Advanced Planning Attorney Highland Capital Brokerage