Transferring In-Kind Assets into a Non-Grantor Trust

Avoiding Investor Control Issues

Part 2

Read Part 1: Non-Grantor Trust as Owner of PPLI Policy

Transferring In-Kind Assets into a Non-Grantor Trust

Transferring In-Kind Assets into a Non-Grantor Trust Before Purchasing a PPLI Policy

A non-grantor trust can be an effective owner of a Private Placement Life Insurance (PPLI) policy, as discussed in our previous blog post. To avoid potential investor control issues, it is important to first transfer in-kind assets into the non-grantor trust before the trust purchases the PPLI policy.

Summary

Why Transfer In-Kind?

  1. Investor Control Issues: When a non-grantor trust purchases a PPLI policy, it must avoid any appearance of investor control. Transferring assets in-kind (without selling them first) helps maintain this separation.
  2. Avoiding Capital Gains Tax: By transferring appreciated assets directly into the trust, you avoid triggering capital gains tax. The step-up in basis provision ensures that the trust’s beneficiaries inherit the assets at their current market value for tax purposes.

Key Considerations:

  1. Timing: Transfer assets well in advance of purchasing the PPLI policy to prevent inflating their value and maintain compliance with tax regulations.
  2. Asset Types: Consider various assets—stocks, real estate, or other investments—for in-kind transfer. Each has its implications, so consult with a financial advisor or attorney.
  3. Documentation: Properly document the transfer to demonstrate that the assets are no longer part of the grantor’s estate.

By transferring assets into the non-grantor trust prior to the PPLI policy purchase, the trust becomes the legal owner of the assets. This helps establish that the trust, rather than the individual grantor, is directing the investment decisions within the PPLI policy.

This structure can provide important tax and asset protection benefits compared to an individual owning the PPLI policy directly.

The key is to ensure the non-grantor trust is properly established and funded with the desired assets before the PPLI policy is acquired. This helps demonstrate that the trust, not the grantor, is in control of the investment decisions within the PPLI policy. Careful planning is required to execute this strategy effectively.

What are the benefits of transferring in-kind assets into a trust before purchasing a PPLI policy?

Transferring in-kind assets into a non-grantor trust before purchasing a Private Placement Life Insurance (PPLI) policy can provide several key benefits:

1. Establishing the trust as the legal owner of the assets helps demonstrate that the trust, rather than the individual grantor, is directing the investment decisions within the PPLI policy. This can help avoid potential investor control issues.

2. By having the trust own the assets first, it becomes clear that the trust is in control of the investments, not the grantor. This helps maintain the tax and asset protection benefits of the PPLI structure compared to an individual owning the policy directly.

3. Careful planning is required to execute this strategy effectively. The key is ensuring the non-grantor trust is properly established and funded with the desired assets before the PPLI policy is acquired.

4. Placing PPLI within certain trust structures enables the death benefit to pass to the beneficiaries free of wealth transfer taxes. This allows investors to grow their assets income tax-free and pass them on estate tax-free.

5. PPLI policies can be placed in a trust to facilitate the transfer of wealth to beneficiaries. The death benefit from the PPLI policy, when paid out to the trust upon the policyholder’s death, can be used to provide liquidity for estate taxes, debts, or other expenses, or it can be distributed according to the terms of the trust.

In summary, transferring assets into a non-grantor trust before purchasing a PPLI policy helps establish the trust as the legal owner of the assets and the party directing the investments. This can provide important tax and asset protection benefits compared to an individual owning the policy directly.

Remember, strategic planning is essential to maximize the benefits of a non-grantor trust. Seek professional advice to navigate this complex landscape effectively. Contact EWP Financial today! your best source for PPLI and EWP.

 

by Michael Malloy, CLU TEP RFC.
CEO, Founder @EWP Financial

~ Your best source for PPLI and EWP
Michael Malloy CLU TEP RFC