Although this is a brilliant marketing move for an ambitious family office, a true heavyweight could actually use more aggressive estate planning and income replacement.
[caption id="attachment_13330" align="alignright" width="269"] Who bought the policy? Rule out almost all of the "usual suspects."[/caption]
Santa Barbara family office SG LLC is getting a lot of mileage out of putting together the biggest life insurance package in history, but the real question is whether the underwriters actually left money on the table.
We know that the client is a California technology billionaire and that SG had to wrangle a consortium of 19 insurance carriers to make the deal happen at all.
Beyond that, details are fragmentary. However, anyone who reads between the lines can see that the insurance companies probably wouldn’t budge for even one more dollar of death benefit.
By any standard of “billionaire,” this client could easily benefit from double or triple the coverage – and the premiums on that huge policy would have been vast, but ultimately cheaper than the ultimate estate tax bill.
So let’s tackle the big questions and see if we can narrow down the profile a little.
Russian connection or red herring?
Previous media coverage of this story has failed to point out that the firm that brokered the deal is a family office initially chartered to manage the wealth of one billionaire in particular.
The “SG” stands for Sergey Grishin, a Russia-born magnate who has been a formal resident of California since 2008 and whose net worth is generally pegged around $1.2 billion.
Starting in 2009, the firm opened up to other ultra-high-net-worth families and seems to have had quite a bit of luck prospecting multi-millionaires and up.
While it’s tempting to speculate about Grishin as the $200 million policyholder, it’s a little unlikely.
For one thing, any family office on the ball would have set up Grishin’s estate plan years ago. We are probably looking at a new client here – and in fact, SG reportedly just won this account through a direct mail campaign.
Furthermore, although Grishin is still counted as one of the 70 top “Russian” technology investors despite his expat status, he is really better known as a banker with interests in logistics and real estate. Calling him a high-tech billionaire would be a stretch.
Of course, there may still be a Russian connection, which would open up Silicon Valley names like Sergei Brin as well as more obscure “dot-ru” entrepreneurs.
But a direct introduction would eliminate the whole reason to approach the billionaire by mail, so any mutual background is probably coincidental.
Tesla angle may be a non-starter too
Similar logic may rule out Tesla genius Elon Musk, a bona fide California high-tech billionaire often put forward as someone who might be in the market for $200 million in estate planning.
It turns out SG principal Dovi Frances keeps his Series 7 registration at San Francisco brokerage firm Gordian Investments, which through a somewhat circuitous chain of control is majority owned by Craig Harding – the former general counsel at Tesla.
Harding and Musk may no longer work together, but they evidently have plenty of history. Once again, Frances could simply have gotten a direct introduction from Harding instead of sending Musk a brochure and hoping the notoriously busy Tesla man reads it.
So factor out the Russians and the Tesla crew, and rule out the previous generation’s high-tech heroes like Larry Ellison, who at 69 years of age and $48 billion to his name had better have an estate plan by now.
Silicon Valley still has plenty of billionaires to work with who are rich enough to need this much coverage and early along enough in their career that nobody’s set them up with it yet.
Facebook alone created close to a dozen billionaires, and then there’s always Twitter founder Evan Williams, who lives in San Francisco and whose company only went public last year.
An unorthodox strategy
Mention of Twitter’s IPO highlights the probability that anyone in the market for that much life insurance is very new to the big money world.
A sophisticated investor would have transferred a big block of shares into a trust years before they were worth enough to trigger gift tax limits.
Then, a public offering would swell the value of the trust’s holdings and the newly minted wealth would be safely out of the estate and away from the IRS.
As it is, we can rule out a common estate planning vehicle like an irrevocable life insurance trust (ILIT) here for the simple reason that no post-IPO billionaire could ever transfer enough wealth into the trust to pay the premiums.
Frances has been quoted as saying the $200 million in life insurance is costing his client “single millions” every year.
At best, a couple funding an ILIT would blow out their lifetime gift tax exemption before transferring $11 million, so either their life expectancy is very low or we’re not looking at a trust at all here.
Besides, even the transfer of a $200 million policy would set off alarms once the cash value touches the gift tax trigger, so once again, this looks like more of a catch-up strategy than anything an estate planner would create from ideal conditions.
With the benefit of hindsight, the mystery client could have bought a token policy, transferred pre-IPO shares to fund it, let them skyrocket in value and then directed the trust to buy as much additional coverage as it needed and could afford.
Granted, a few million dollars in additional insurance bills are not going to bankrupt a true Silicon Valley billionaire. At worst, the marginal cost here is something like 20 basis points a year.
And the ability to pass on $200 million of a fortune currently valued at more than five times that size, without triggering estate taxes, is still worth that cost.
The mystery client is reportedly worried about dying in a 45% estate tax bracket, which would mean this “better than nothing” strategy could easily save his or her heirs up to $90 million in the long run.
Calling the premium $9 million a year would incidentally indicate a relatively short remaining expected lifespan, but as the implied premium moves lower down the “single millions,” even the youngest Silicon Valley star should see real tax benefits.
Naturally, as the premium drops and the policyholder gets younger, the insurance carriers get more nervous, which may be why SG was unable to fully eliminate the estate tax liability here.
Frances has implied that the 19 underwriters he brought to the table were initially only willing to come up with a death benefit of around $120 million for the money his client wanted to spend.
Getting them to boost the benefit by 62% was probably a herculean effort. Any attempt to line up coverage on a full $1 billion was just not going to happen.
Either way, this is a coup for Frances and his team. They took in a client who didn’t already have the benefit of the best planning money can buy, and they worked hard to improve the situation as much as they could – saving the heirs tens of millions of dollars.
They apparently don’t even get a commission for selling the policies, which would otherwise be a substantial chunk of cash.
And now that SG is on the Silicon Valley map, they may get the joy of doing it again and again.