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Insurance secrets – all easy to do, create tax-free wealth and legal – they don’t want you to know about (11/09)

Thursday, March 11th, 2010

You’ll be delighted by what you are about to read. The real subject – courtesy of flaws in the tax law – is tax-advantaged investment strategies…. The kind of stuff they don’t teach you to become a lawyer, CPA or other professional advisor.

Few people know how generous the Internal Revenue Code is to life insurance… and the industry lobby that knows the right buttons to push to make sure the tax laws stay that way. You are about to learn some of those tax laws.

Before we get to some jaw-dropping, wealth-creation strategies, let’s run through the basic life insurance concepts that turn life insurance into profitable investment strategies by taking advantage of the tax-law flaws.

Concept #1. The dollar amount you must earn to leave your kids/grandkids $1 million… Would you believe $3 million. Here’s an example of how the numbers (all rounded) are determined.

So you earn that $3 million and are in a 40% tax bracket (35% Federal, plus 5% State). You are bludgeoned with an income tax bill of $1.2 million. Only $1.8 million left. When you get hit by the final bus, the 45% estate tax robs $800,000 more… leaving your heirs that $1 million. Not a pretty tax picture.

Concept #2. The dollar amount your must invest in a life insurance product to leave $1 million to your kids/grandkids. Of course, your investment (the amount of your premiums) varies, depending on your age and health.

Suppose you and your spouse are both 60 years old, and you decide to buy a $1 million 2nd-to-die policy to be fully paid in 15 years (called “15-year-pay” because premiums stop after 15 years.)

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My insurance guru – a genius at finding the lowest premiums with top-rated companies – quoted $18,149 per year, making the total premium $272,235 ($18,149 X 15).

Simply put, your $272,235 investment will get your heirs $1 million – all tax-free – from the insurance company.

NOTE: As long as you are insurable – no matter what your age – the numbers always work.

Concept #3. The tax benefits – yours for the taking – of life insurance.

1. The cash surrender value (CSV) of your policy earns money, increasing your CSV. These earnings are tax-free.
2. Your profit (the excess of your death benefit over your premiums cost) is income tax-free.
3. There are many ways to keep the death benefit of your policy free of the estate tax monster. The most popular is an irrevocable life insurance trust (easy to do).

Let’s summarize… Using the above example: Your after-tax cost of $272,235 (investment in the form of premiums) does the work of earning $3 million (to leave $1 million to your heirs).

Most clients say, “WOW”… and smile a lot.

Now, using the basic concepts above, let’s take a look at three life insurance strategies that few (very few) professional advisors know about.

Strategy #1. “Health Guard” combining long-term care and life insurance.

Here’s a typical example: Mary is 65 years old and wants long-term care (LTC) coverage. But she’s healthy now and wonders how smart it is to pay premiums that would be a total waste if she never has a need for LTC.

Enter Health Guard: Mary pays a one-time premium of $100,000. Here’s how the policy works: (a) She can get the $100,000 back at any time (prior to a claim). (b) If she never has a LTC claim, the policy is considered a life insurance policy and will pay a death benefit of

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$166,406. (c) Whenever Mary has a LTC claim, it reduces the death benefit – dollar for dollar – by the amount of the claim. For example, if she has a LTC claim of $16,406 the death benefit would be reduced to $150,000.

Health Guard is a smart idea for smart people who are considering LTC.

Strategy #2. the “Charity Loan Tax Magic” (CLTM)

A front-page article in “The Chronicle of Philanthropy” titled “Sharing the Pain,” bemoans the prediction that contributions for the nation’s largest charities “will decline this year [2009] by a median of 9 percent.” Ouch!

Here’s a strategy – CLTM – that will help you and your favorite charity. The strategy works at any age, but let’s use Joe (age 60) as an example.

Joe is earning 4% per year (subject to a 40% – State and Federal – income tax rate) on a $1 million investment. Joe would love to give part of that $1 million to his Favorite Charity (FC), but he doesn’t want to give up any of that $40,000 of income, nor does he want to reduce the amount that will ultimately go to his kids.

Let’s see how the CLTM strategy is a win-win for Joe (increases his annual income) and FC (gets a substantial gift immediately, with no cost to Joe). Sounds like tax magic. It is. Here’s the simple two-step process.

Step #1. Joe creates a family limited partnership (FLIP) and loans it $1 million, payable at his death, with interest at 4% per year ($40,000).

Step #2. The FLIP purchases (a) a $1 million policy on Joe’s life (annual premium $19,160) and (b) a single premium immediate annuity on Joe (pays the FLIP an annuity every year – starting immediately and for as long as Joe lives – for $59,160).

Every year (until Joe dies) the annuity will come into the FLIP and go out as follows:

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1. Interest to Joe. $40,000

2. Pay $1 million policy premium 19,160

Total $59,160

Three cheers for charity:

Cheer #1. The way the numbers work out in Step #2 above (after buying the policy and the annuity), the $1 million loan has exactly $114,972 left over, which is immediately donated to FC.

Cheer #2. Of course, Joe gets a $114,972 income tax charitable deduction… in his 40% tax bracket Joe saves $45,989 in income tax.

Cheer #3. Every year Joe saves (because of the annuity) income taxes and has more spendable income. Here’s how:

Before After

Income to Jim

From $1 million investment $40,000

From annuity $40,000

Less – Tax

40% 16,000

NOTE below* 9,631

Spendable Income $24,000 $30,369

*NOTE: A large portion of the annuity is tax-free, substantially lowering the income tax.

So Joe has $6,369 ($30,369 minus $24,000) more every year to spend.

And finally, someday Joe will go to heaven. No cheers. But more tax savings. When Joe dies the FLIP will collect the $1 million death benefit and pay off the $1 million loan in Step #1 above. The transaction will be structured to sidestep the estate tax on $1 million… estate tax savings $450,000.

Strategy #3. Make all your investment income – capital gains, interest and dividends – tax-free: Use private placement life insurance (PPLI).

Sounds almost too good to be true, doesn’t it? Should the truth be known, PPLI is simply

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an investment portfolio in insurance clothing. Usually the investments are stocks and bonds, but can include derivatives, real estate investment trusts, timber and many others.

Stop for a minute and write down two numbers: how long do you think you will live? ______ … And the dollar amount of your current investment portfolio $ ____________.

Suppose you wrote down 21 years and $10 million. Can you guess how much your portfolio (say at a conservative compounded rate of 7%) will grow to in 21 years?… If in a tax-free environment (like PPLI)? … The answer (a drum roll please): $40 million. Simply, the growth of your tax-free cash surrender value of your PPLI.

What if you need some of that CSV?… Just borrow it. Repayment can be deferred to the day you go to the big business in the sky.

NOTE: PPLI premiums (a) start from a low of $1 million (for example, $250,000 per year paid over four years), (b) to a more typical $5 to $10 million or more (paid in the early years) or (c) a large ($5 million or more) paid as a single premium at inception. Yes, $50 to $100 million policies can be arranged.

Okay, you lucky readers with a large amount of investable assets… look into PPLI.

The above are just three of over two dozen strategies that can help make you rich and if you are affluent; significantly increase your net worth.

One warning: When working in the area of life insurance and annuities make sure you work with experienced and competent professionals. Always get a second opinion.

Any questions, call me (Irv) at 847-674-5295.

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An easy way to maximize your investment income…private placement life insurance (09/09)

Tuesday, March 9th, 2010

This article continues my quest to lead the education parade for my readers in the areas of “How to make it” and “How to keep it.” Today’s subject matter – a little-known strategy – goes to the head of the class not only as (1) a star income tax saver, but also (2) an estate tax destroyer and (3) a superior asset protection device.

Yes, there is a single strategy that does all three… What is it?… Private placement life insurance (PPLI). If you are fortunate enough to consider yourself an affluent individual, you’ll love every word you are about to read.

Who falls into the affluent category? Well, the most recent IRS data available (for 2007) shows the top 1% of taxpayers (earned $410,000 or higher) paid a whopping 40.4% of all federal income taxes. Astounding!… because those taxpayers made only 22.8% of the reported adjusted gross income for 2007.

In my book, this 1% group really deserves a tax break. Note: Now more than ever, because the elected Washington geniuses are a sure bet to raise the income tax rates on upper income earners.

Now, what is PPLI? It is a form of variable universal life insurance that is offered privately, rather than through a public offering. Variable life insurance has cash value that is dependent on the performance of one or more investment accounts in the policy. Since the insurance company cannot know the specific investment goals of each traditional policy purchaser, the carrier, often settles for registering a set offering, including a selection of mutual funds or hedge funds as investment options within the policy. On the other hand, the carrier customizes the investment options to meet the needs of each PPLI owner/investor.

The prime purpose of PPLI is to make your investment profits (whether capital gains, dividend income or interest income) TAX-FREE. Simply put, all policy investments are wrapped in a tax-free insurance envelope.

Just how significant are the wealth accumulation results of taxable vs. tax-free?… An example is the easiest way to grasp the difference. The following example (created by Lewis Schiff, an Austin, Texas lawyer) will astound you.

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Facts: A PPLI policy insurers a 45-year old male paying $2.5 million in premiums for 5 years ( a total of $12.5 million). The assumed rate of return is 10% (net of investment-management fees), taxed as ordinary income (at 40%, including Federal and State taxes).

Results: in $ millions (rounded):

		___________PPLI________
End ofYear	TaxableInvestment	CashValue	DeathBenefit

1	$ 2.650	$ 2.665	$ 43.900
5	12.288	13.351	43.900
10	16.445	20.508	43.900
20	29.450	50.071	61.087
30	52.740	125.095	133.851
40	94.449	312.915	328.560

Two huge advantages pop out: (1) the death benefit is always king, and (2) in the long-run, use every opportunity (notice the huge higher amount in “cash value” after 20 years compared to “taxable investment”) available to get into an income tax-free environment. Neither the “cash value increases” nor the “death benefit” is subject to income tax.

Note: PPLI premiums (a) start from a low of $1 million (for example, $250,000 per year paid over four years) (b) to a more typical $5 to $10 million or more (paid in the early years) or (c) a large ($5 million or more) paid as a single premium at inception. Yes, $50 to $100 million polices can be arranged.

Now let’s look at a three-step example (courtesy of Donald D. Cameron, CLU, a long-time PPLI guru) that uses PPLI to create an effective private retirement plan.

Facts: A 50-year old male, non-smoker, with cash value compounding at a 10% annual rate (after investment management fees).

Step #1. Pays a $1 million premium for a PPLI for 5 years… total premium of $5 million.

Results: Step #2. After 15 years (age 65) receives $1,213,538 per year for life.

Step 3. After 50 years (age 100) $9,856,418 is payable as a death benefit. (Payments in Steps 2 and 3 are income tax-free.)

Let’s take a look at some other advantages of PPLI:

1. Liquidity. When needed, you can borrow a portion of the “cash value,” which can be paid back at any time or out of the “death benefit.”
2. Asset protection. Your investments are placed in separate accounts, avoiding any risk of insurance company illiquidity.

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1. Risk minimization. Insurance is a risk-shifting strategy in the event of a premature death, always supplementing the tax-free investment results (at any age).
2. Estate tax free. The PPLI arrangement can be set-up so the ultimate death benefit is not subject to estate taxes.
3. Investment flexibility. You can, with the help of the insurance company, if desired, select from a large number of hedge funds. Or work with a third party advisor (whom you select). Can even switch advisors or have more than one. Also permissible to invest in a private equity deal (maybe one of your own companies or someone else’s) that you think has great upside potential.
4. Low investment cost. Traditional agent’s commissions are eliminated, letting more funds “work” inside your policy… True “no-load” insurance. Typically, PPLI is placed with an offshore insurance company, further reducing the policy costs. Also, there are no surrender charges or other insurance company penalties.
5. What if your health or age prevents you from getting insurance, including PPLI? Then you can purchase a private placement deferred variable annuity (PPDVA). This type of annuity is similar to a PPLI, except the income is deferred until the policy owner takes a distribution (taxable at ordinary income tax rates).

If you have a large investment portfolio, whether CDs, municipal bonds, hedge funds, stocks or bonds, or any of the other endless parade of investment vehicles… then PPLI is something you should look at. Your investment wealth is sure to compound at an accelerated pace because you won’t lose one cent in income taxes.

You’re sure to have questions. Just call me (847-674-5295) to discuss how a PPLI or PPDVA can be designed just for you.

Posted in Insurance, Investment Strategies | Comments Off

AT last, a tax law (captive insurance) that actually cuts your cost of doing business, while you are your business enjoy tax advantaged benefits

Tuesday, May 12th, 2009

The Internal Revenue Code is not a friendly creature. It is designed to “taketh” your money; “giveth” is not in its vocabulary. Yet, there is a section of the Code [Section 831(b)], dealing with captive insurance companies (Captives) that when properly used, is primarily an income tax-saving machine for your business and can be structured to offer tax-advantaged benefits that create wealth for you (or even your heirs).
A real tax winner.
About 80% of the Fortune 500 take advantage of the Captive benefits. But much smaller businesses can join the tax-saving/wealth-building fun. If you own all or a part of a business, listen up, you’ll love what you are about to read.
Note: The Obama administration has made it clear: Income tax rates on high earners are going up. As you are about to learn, a Captive is an especially welcome friend in a rising-tax-rate environment.
It’s difficult to find a CPA or lawyer who has even heard of Captives. The few that know Captives exist (like yours truly for many years) don’t have a clue of how to take advantage of the many benefits offered by Captives for family owned businesses or small public companies.
Just what is a Captive?… First and foremost it is a bona fide insurance company, an insurer established to provide coverage for the company or people who founded it. An example is the easiest way to explain Captives.

First, a simple example: Joe owns Success Co, which has some “uninsured risks” (explained in greater detail later) that his current property and casualty insurance (PCI) company will not insure. Joe creates New Co. (a Captive), a corporation, which is an insurance company (covering Success Co.’s uninsured risks). The stock of New Co. is owned by Joe’s children.
Now for the fun part. Suppose the insurance premium for the uninsured risks are determined (professionally by a consulting actuary) to be $500,000 per year. Success Co. pays the $500,000 premium to New Co. The entire premium is immediately deductible by Success Co. like any other PCI. You’ll like this: Under the Captive rules, all of the $500,000 is income tax-free to New Co.
Say Success Co. is in a 40% tax bracket (state and federal combined). Success Co. is only out of pocket $300,000 ($500,000 less $200,000 in tax savings). New Co. has the entire $500,000 to invest. A good start. But remember, New Co. is a Captive and must hold the $500,000, plus earnings as a fund to pay potential claims for the risks it insurers.
Next, let’s explain “uninsured risks.” Every business has risks: some insured, some uninsured. The most common risks – like workmen’s compensation, vehicle, property and general liability – are transferred to a third-party (your traditional property and casualty insurance carriers) and are insured risks.
Now let’s list some typical “uninsured risks,” the kind that you can’t buy coverage for in the traditional insurance market (as you scan down the list below, check off those that apply to your business):
• Litigation defense/asset protection
• Loss of a key customer
• Loss of a key supplier
• Change in a law/regulation/ruling
• Product warranty
• Product liability
• Professional liability
• Strikes/labor problems
• Traditional policy exclusions/deductibles
• Employment practices

The list could go on and on. You probably have one or more uninsured risks peculiar to your business. Go ahead, add ‘em on.
Let’s face it, your business is self-insured for all of the above risks, either by choice or because the risk just can’t be insured commercially. A Captive reduces the amount needed to fund such possible future losses. How?… The premiums paid to your Captive are immediately deductible.
There are many more ways that the use of a Captive can save your business significant insurance costs. Following are two (of dozens of possible) examples:
Example #1. You own a new (or very up-to-date) building in an area with “zone coverage.” Your building is in total compliance with stringent building codes. Many older buildings in the zone are not complaint. Your building can obtain lower rates from your Captive if you can show that your building is a better risk than the Zone’s rating.
Example #2. Success Co. pays premiums to the Captive to insure for litigation defense, strikes and product warranty. Remember with a commercial insurance company (CIC), if the insured has no losses, the CIC keeps the entire premium. No refunds.
Even though a Captive cannot reduce (actuarially determined) premiums, a financial windfall results (unused reserve) if the insured’s actual losses are less than actuarially predicted. For example, suppose Joe’s Captive (New Co.) has an unused reserve. A portion of the unused reserve can be (a) refunded to Success Co.; (b) reduce future premiums; or (c) paid to the
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Captive’s shareholders (Joe’s children) as a dividend. Three nice fringe benefits.
There are a number of other what I call “fringe benefits” to a Captive structure. Following are a few: (a) Someday liquidate your Captive and take out the unused reserve at capital gains rates; (b) have the Captive invest a portion of its reserve funds to pay premiums for life insurance on the Captive’s founder or his family members (in effect, deducting the life insurance premiums); (c) use the Captive as an estate planning strategy, passing the Captive (and any life insurance proceeds) to your heirs.
Make no mistake, your Captive must be formed and operated for a business purpose. The Captive must demonstrate that it is, in fact, acting as a proper insurance company. Follow the rules and the IRS is not a problem. Try to fool the IRS by forming your Captive to take advantage of only the tax-advantaged fringe benefits, without a real business purpose, is almost certain to cause the loss of the sought-after benefits.
No attempt is made in this article to explore all the rules, traps and opportunities in forming your own Captive. It is essential that you work only with qualified, experienced advisors that specialize in Captives. The right advisors can easily tailor your Captive to fit you, your business and your circumstances perfectly.
Now the key question: Is a Captive for you?… If costs were not an issue, the answer would be a resounding ‘YES’ for almost every business. Unfortunately, costs are a factor. For a Fortune 500 company, it’s a slam dunk: The insurance cost savings and tax-benefits are well worth the required costs to create and administer a Captive.
If you can answer ‘Yes’ to any of the following questions, you should strongly consider forming a Captive:
1. Is your before-tax profit $1 million (or more) per year?

2. Are your traditional insured property and casualty expenses $1 million (or more) per year?
3. Is one (or more) of the “uninsured risks” listed above (or one you added) a significant factor in your business?… and worth a premium of about $200,000 a year (or more)?
Logic tells you that the larger your business, the more likely a Captive should be a top priority for your next year’s business plan (i.e. make $1 million – before-tax – or more, Captive is a must). Costs are easily covered by Captive benefits.
But what about smaller family businesses?… The answer can be ‘Yes’ with a new strategy the experts have perfected, if your before-tax profits are in the $250,000 per year range. Benefits are the same as for a larger company but costs are substantially reduced.
What, you are even smaller?… well, we need your help. Show this article to the decision maker(s) of your trade association. Have your trade association adopt a Captive program… then you and the other members can participate. The cost is minimal.
Finally, if you are lucky enough to be a Florida resident and your business is located in any other state there is a little known – legal – tax strategy that enhances your tax savings.
How can you learn if a Captive will work for your business? Please fax the following (on your company letterhead) to 847-674-5299: Your name, title, type of business, total number of employees and any other information you think would be helpful. Also include all phone numbers where you can be reached (business, home, cell). If a trade association, please fax on your letterhead and include number of members and name of decision maker. Please mark “Captive” at the top of your fax.

Posted in Estate Tax, Insurance | No Comments »

A time-tested method for making a tax-advantaged investment

Tuesday, April 28th, 2009

Do you have a large amount of retained earnings and excess cash in your corporation, but the double taxing power of the law has your cash locked in the corporation? Most business owners think they are stuck, but there’s an easy way out.

Here’s a true story of one way to get the job done and I think you’ll like it. Joe called me with this problem. He and his brother Jeff each owned 30 percent of Success Co., which they managed. Their mom (age 66) owed 20 percent in her own name, and a trust (created when their dad died) owned the other 20 percent. Mary’s professional advisors recommended that Mary obtain $2 million of life insurance using an irrevocable life insurance trust (ILIT) to pay the estate tax liability that would be due at her death (because of the value of the assets she owned directly in her own name and indirectly as a beneficiary of her deceased husband’s trust).

The advisors were right. Mary needed the insurance, but she did not have a ghost of a chance of coming up with the annual premium requirements of $32,000 per year for as long as she lived.

I asked Joe lots of questions, conferred with the advisors and requested a large pile of information — stuff like tax returns, financial statements, etc. After discovering that Success Co. had $2.5 million in excess cash, this is what I recommended.

Mary gifts $1.2 million of her Success Co. stock (the total value of Success Co. was appraised at over $8 million) to a charitable remainder trust (CRT). The CRT agrees to pay Mary $72,000 per year for as long as she lives. At Mary’s death, the balance (called the “remainder”) in the CRT will go to charity. Each year Mary must pay $25,000 in income tax (on the $72,000 of income from the CRT) and $32,000 in premiums (for the $2 million policy, which is owned by an irrevocable life insurance trust, ILIT for short), or a total of $57,000. This leaves Mary an extra $15,000 per year to buy presents for her grandchildren.

The ILIT will give Mary’s children $2 million (in insurance proceeds) when she dies. The entire $2 million will be tax free — no income tax, no estate tax.

But where does the CRT get the income to pay Mary? The CRT sells the gifted stock back to Success Co. for $1.2 million. Let’s summarize Mary’s tax picture: Mary avoids all capital gains tax on the sale of the Success Co. stock. The balance in the CRT (estimated at $1.1 million) at Mary’s death goes to Mary’s favorite charity and is free of income tax and estate tax. In addition, Mary gets an immediate income tax deduction of about $200,000 for her charitable contribution to the CRT. Simply put, even though Mary avoids both the capital gains tax and the estate tax, the IRS writes her a check. For what, you ask? For the present value of the remainder (of the $1.2 million) gifted to the CRT.

This $200,000 (immediate deduction) results in about $70,000 in cash income tax savings for Mary. Lots more expensive presents for the grandchildren. (Note: If Mary had sold the $1.2 million of Success Co. stock directly to the company, it would have been taxed as a dividend, resulting in a whooping tax of $180,000.)

A side note before concluding: There are many other ways to get cash (or other types of property out of your C corporation) in a tax-effective manner. If you have such a problem, as a service to readers of this column, contact me.

The use of a CRT in tandem with an ILIT is a time-tested method for making a tax-advantaged investment for your family. You actually create wealth (make a real economic profit) by gifting to charity.

Tags: beneficiary, brother jeff, business owners, charitable remainder trust, deceased husband, excess cash, financial statements, ghost of a chance, grandchildren, income tax, irrevocable life insurance trust, life insurance trust, premiums, professional advisors, tax liability, tax returns, total value
Posted in Corporate Tax, Family Tax Issues, Featured, Insurance | No Comments »

A Time-Tested Method For Making A Tax-Advantaged Investment

Friday, April 17th, 2009

The advisors were right. Mary needed the insurance, but she did not have a ghost of a chance of coming up with the annual premium requirements of $32,000 per year for as long as she lived.

The ILIT will give Mary’s children $2 million (in insurance proceeds) when she dies. The entire $2 million will be tax free — no income tax, no estate tax.

The use of a CRT in tandem with an ILIT is a time-tested method for making a tax-advantaged investment for your family. You actually create wealth (make a real economic profit) by gifting to charity.

Tags: 5 million, beneficiary, business owners, charitable remainder trust, deceased husband, excess cash, financial statements, ghost of a chance, grandchildren, income tax, irrevocable life insurance trust, life insurance trust, premiums, professional advisors, tax liability, tax returns, total value, true story
Posted in Corporate Tax, Insurance, Investment Strategies | No Comments »

Turn Common Insurance Mistakes Into Tax-Free Wealth

Tuesday, April 14th, 2009

It’s frustrating. Year after year, our office is asked to give a second opinion on the completed estate plans of owners of family businesses. It is rare — very rare — to analyze the estate plan (particularly the life insurance policies) of a real-life client and find that all is as it should be. Typically, we find the wrong kind of insurance. Wrong ownership. Wrong beneficiaries. Wrong tax consequences. It goes on and on.

This is a big deal. We are talking big money.

Typically, the IRS gets 50 to 55 cents out of every life-insurance dollar. Imagine owning a $1 million policy, and the IRS gets $550,000. Your family gets only $450,000. It happens all the time. A needless tax travesty .

Let’s review the three biggest mistakes business owners make concerning life insurance.

Mistake No. 1 — A corporation should never own insurance on the life of a shareholder, particularly a majority shareholder. Why? The trouble starts as soon as the shareholder dies: The policy proceeds are subject to the claims of corporate creditors.

Worse yet, if a C corporation, the proceeds can be subject to the alternative minimum tax (AMT) that can steal up to 20 percent of the proceeds — and the net proceeds (after the AMT) can only get into the hands of your family by paying a second tax via a taxable dividend (ouch!).

If an S corporation, the proceeds (although not subject to the AMT) are still locked in the corporation and can only be paid out tax-free if all old C corporation surplus is first paid out as a dividend (a terrible and tax-expensive idea).

Mistake No. 2 — The life insurance policy is owned by you or your spouse. Someday the policy proceeds will be included in your estate (or your spouse’s estate). You just guaranteed the IRS a big — unnecessary — payday.

Mistake No. 3 — The policy (with cash surrender value) is old and the cash surrender value is half or more of the death benefit. You no longer have a life insurance policy but a lousy investment.

So what should you do? Here are the typical recommendations we give to our clients so that, you and your family — instead of the IRS — win the insurance tax game.

For Mistake No. 1 — Transfer the policy from the corporation to your name, paying the corporation only the amount of the cash surrender value (a tax-free transaction). Next, transfer the policy to a Wealth Creation Trust (an irrevocable life insurance trust that eliminates all income and estate taxes).

For Mistake No. 2 — Transfer the policy to a Wealth Creation Trust.

For Mistake No. 3 — If you are insurable, dump the old policy and replace it with a new policy to be owned by a Wealth Creation Trust. First, if you are married, make sure that replacing the policy on your life is the right type of policy. About 80 percent of the time a second-to-die policy (insures you and your spouse) will give you significantly more bang for your insurance premium dollar. Second, determine how to reduce the premium cost:

(1) if your company has a 401(k) or other qualified plan look into a “Subtrust.” The plan, not you, pays the premiums. Even your IRAs — traditional or rollover — can join in the premium-saving fun.

(2) Whether you need single life (only you are insured) or second-to-die, check out “premium financing.” You don’t pay any premiums to get a large ($5 million or more) amount of insurance, nor do you pay interest, just the low fees to the bank to initiate and maintain the loan.

This article does not even begin to explore all of the economic possibilities and tax tricks that you should learn to win the insurance tax game. Also, there are exceptions and traps, but simple to avoid when you know the tax ropes.

Here’s an easy way to get started: List the policies on your life and your spouse’s life, whether owned by you, your corporation, a trust or otherwise. Then ask this question about each policy: What is the ultimate tax cost-income and estate-while I’m alive? … When I die? … When my spouse dies?

The answer should be zero. If not, do what is necessary to make the answer zero. This usually means implementing one or more of the recommendations listed above for each of the above mistakes.

Tags: alternative minimum tax, alternative minimum tax amt, beneficiaries, c corporation, cash surrender value, creditors, dividend, family businesses, insurance dollar, IRS, life insurance policies, life insurance policy, lousy investment, majority shareholder, net proceeds, s corporation, second opinion, tax consequences
Posted in Corporate Tax, Estate Tax, Insurance, Planning | No Comments »

Old-Time Tax Religion Yields To New-Time Tax Religion

Monday, April 13th, 2009

If you are a tax sinner, please step forward. Today’s sermon at The First Anti-Tax Church is entitled, “How You Can Enrich the IRS When Transferring Your Business.” Strange title? Not really. It’s the conventional wisdom or what our preacher calls “The Old-Time Tax Religion.”

Following is a true story of good against evil taken straight from the pages of the ever-growing-tax-business bible. If you’re a business owner with two or more children-listen up.

A business owner (age 68) (we’ll call him Joe) from Alabama told me how three employees (ages 38, 45, and 52) had helped build his business (Success Co.) over the years. Profits were plowed back into the business. Today its worth $10 million, with 80 percent owned by Joe and 20 percent owned by the employees. Joe and his wife, Mary, have three children, none active (and not likely to be) in the business.

Joe’s goals are simple: After he passes on, the business should go to the three employees; his three children should get the value ($8 million) of Joe’s share of the business. What’s the conventional wisdom? Have Success Co. own life insurance. The actual amount of insurance is now $11 million. The extra $3 million allows for growth.

The insurance funds a buy-sell agreement. After Joe dies, Success Co. will buy Joe’s stock. Then the employees will own 100 percent of the business. (Good! That’s what Joe wants.) The kids will get the $8 million or more, which is also what Joe wants. Perfect? Joe’s lawyer, accountant, and insurance consultant assured him that this is — by conventional wisdom — the “best” way to go.

What’s wrong with the picture? Each dollar of those insurance proceeds used to buy Joe’s stock will be divided two ways: 55 cents to the IRS; 45 cents to the kids. Unwittingly, the IRS, not Joe’s family will benefit the most from Joe’s business, which took him a lifetime to build.

What to do? The solution may vary with your particular situation (for example, how many kids you have in the business, how many are nonbusiness children, your age, your wife’s age, the value of your business and the value of the rest of your assets). But here’s a plan to beat the pants off of the conventional wisdom and the IRS, legally. And it’s easy to do.

Step one: Get the insurance out of the corporation into Joe’s name and then into an irrevocable life insurance trust. No, the insurance proceeds will be free of the estate tax.

Step two: Recapitalize Success Co. (which will create voting and non-voting stock) so Joe can keep voting control (a tax-free transaction) for as long as he lives. Say there is 100 shares of voting stock and 10,000 shares of non-voting stock. Joe will keep the 100 shares of voting stock (and absolute control) for as long as he lives.

Step three: Create an annual stock-bonus/stock-gift program. Success Co. will give stock bonuses of non-voting stock to the employees. (In a more typical example, the employees would be Joe’s children.) Joe would make annual gifts of Success Co. stock to his children and grandchildren.

This sermon does not attempt to cover all the details of the plan outlined above. Find a professional who knows how to use this structure to craft that transfers most (in many cases all) your wealth free of the estate tax. More importantly, your estate tax liability (whatever the amount) will be transferred, in effect to the insurance carrier.

When all the smoke clears, either your estate tax will be zero or paid 100 percent by tax-free insurance proceeds. It’s time for you and your professionals to get that new-time tax religion.

Want a head start on how to win the transfer/succession/estate tax game? Visit my Web site or call to discuss your specific concerns.

Tags: 10 million, accountant, business bible, business owner, business success, business today, conventional wisdom, extra 3, insurance consultant, insurance funds, IRS, old time, own life insurance, preacher, sermon, sinner, strange title, tax business, true story, wife mary
Posted in Corporate Tax, Estate Tax, Family Tax Issues, Insurance | No Comments »

How To Turn A Tax Tragedy Into A Miracle

Monday, April 13th, 2009

Do you have a large amount of money in an IRA, profit-sharing plan, 401(k) or other qualified program? Or know someone — family, friend or co-worker — who does? If so, this article will save you a ton in taxes and show you how to dramatically increase your after-tax wealth.

This is one of those good-news, bad-news situations. First, the bad news. Someday the money in your plan will be distributed: to you or your beneficiaries. If you happen to be wealthy, those beautiful bucks which took decades to accumulate will be worth somewhere in the 27 percent range. The IRS gets the rest in taxes. Yep, typically you lose around 73 cents out of every dollar because you are required to pay two taxes on your plan distributions: income tax and estate tax. It’s even worse in high-tax states like New York (check with your accountant). How do I define wealthy? You are irrevocably in the highest income tax bracket (say 40 percent, state and federal) and highest estate tax bracket (55 percent, using 2011 rates). Sorry, but the tax collector will take the lion’s share of your plan’s assets whether you get distributions during life, or they go to your heirs after death.

Can anything be done to prevent this robbery? Yes! Here comes the good news. Regular readers of this column know I’m part of a national tax network (other professionals who work together and share tax knowledge). Some experts in the network have devised two tax concepts to enrich your family instead of the IRS. These concepts are designed to help individuals who have accumulated large amounts (from $200,000 to millions of dollars or more) in their plans.

Suppose you have $1 million (fill in your own exact number) in one plan or all of them combined. If you fail to take advantage of one or both of these concepts you will lose $730,000 (or more) in taxes to the IRS. Just take 73 percent of the amount in all your plans, and you can clearly see the full tax-disaster picture. Of course, your local tax collectors (state, as well as your local county or city) may grab an additional piece of the action.

Now, let’s look at each concept separately.

The first concept — called the “Single Premium Strategy (SPS)” — combines three strategies: (1) an immediate-pay annuity (typically a joint-life annuity if you are married); (2) a life insurance policy (second-to-die if you are married) and (3) an irrevocable life insurance trust. In one real-life case, an unmarried reader of this column turned $325,000 into $2,878,385 (all taxes paid). Another reader, who is married, turned $270,000 into $3,496,063 (all taxes paid). Single or married, it’s smart to get an exact quote of how much tax-free wealth an SPS would create for you and your family.

Another concept, called “Retirement Plan Rescue” (RPR), uses the funds in the plan to buy the insurance: either for a single life or second-to-die for a husband and wife. A married reader (Joe) used an RPR to buy $10 million of second-to-die insurance, which will go to his kids tax-free. Joe actually turned $567,900 into $10 million. Joe’s wife Mary called the entire transaction a “tax miracle.”

You’ll also be surprised at how easy these strategies are. So, if you are lucky enough to be wealthy, but unlucky enough to have a substantial amount of assets in a qualified plan — IRA, profit-sharing, 401 (k) or similar plan — you owe it to your family to take a closer look at the tax-miracle concepts. It’s easy.

I have arranged for readers of this column to get a free analysis of their plans for both of these concepts. Just fax (1) your name and birthday (also your spouse if married); (2) total amount in all your plans combined; and (3) all phone numbers (business/home/cell) where you can be reached to (847-674-5299). You are welcome to include other information, questions or problems concerning you, your business or your family.

Tags: 1 million, accountant, amount of money, beneficiaries, co worker, exact number, family friend, good news bad news, heirs, income tax bracket, IRA, IRS, lion, plan distributions, profit sharing plan, robbery, tax collectors, tax disaster, tax knowledge, tax states
Posted in Estate Tax, General Tax Strategies, Insurance, Investment Strategies | No Comments »

Don’t Get Stuck In These IRS Tax Traps

Wednesday, April 8th, 2009

If you own a business and your estate plan uses or intends to use any of the four commonly used techniques (actually tax traps) discussed in this article, you will unnecessarily enrich the IRS.

Guaranteed!

Let’s set-up the typical family-business situation we see at least 100 times every year. Joe, who is married to Mary, owns Success Co. Sam, their son, runs the business and someday will replace Joe. They have other children who are not active in the business.

The traps are listed here in order of the most serious and most frequent blunder.

The marital deduction. After Joe’s death, Mary will own Success Co. or a large portion of it in her own name or in some kind of marital trust. That’s great, when Joe dies. No estate tax. But when Mary goes, the IRS gets its pound of flesh. Remember, the marital deduction only defers tax; it’s not intended to be a tax saver.

A Section 303 redemption. Success Co. can redeem as much of Joe’s stock as necessary, free of any income or capital- gains tax to pay Joe’s (or Mary’s) death taxes and other estate costs. Sounds good. But the fact is, the money that comes out of Success Co. goes straight to the IRS.

Section 6166. Because Success Co. is a major asset in Joe’s (or Mary’s) estate, the estate tax can be paid in installments for up to 15 years with interest at a very low rate. Not only does the IRS get the estate tax, it now gets (even though a low percentage) interest to boot.

Normally this column tells you what to do to win the tax game, as opposed to telling you what not to do. OK, then. Here’s what you must do to check your estate plan and know it’s right for you and your family:

• The strategies you use must be initiated during your life (such as gifts, a grantor retained annuity trust or a family limited partnership), not at death (the three traps described in this article).

• When the entire plan is in place, your advisor should show you clearly that your total wealth will go to your family without being reduced in value by even one dime of estate taxes.

• Your advisor must get you into some kind of tax-free environment, such as an irrevocable life-insurance trust or some kind of charitable trust, immediately.

• You control your assets for as long as you live (or at least as long as you want) with the use of voting/nonvoting stock, a family limited partnership or various trusts.

• Finally, your assets are protected from creditors and lawsuits.

Tags: capital gains tax, death taxes, family business situation, family limited partnership, grantor retained annuity trust, installments, marital deduction, marital trust, money, redemption, stock, tax game, tax traps, typical family
Posted in Estate Tax, Family Tax Issues, General Tax Strategies, Insurance | No Comments »

An Easy Way For The Kids To Buy Their Parents’ Stock — Tax-Free

Tuesday, April 7th, 2009

Do you want to transfer your business to your kids? Read this:

Mom or Dad wants to transfer the family business to one or more of the children. But the money to fund the buyout at the death of the parent/stockholder —insurance on the parent’s life — is in the wrong place.

Here’s a foolproof way of getting the job done, according to an IRS letter ruling:

The father, Joe, worked with his son, Sam, in a business founded by Joe. The stock of the corporation was owned 25 percent by Joe, 4 percent by Sam and the balance by five other children not active in the business.

Joe had two main objectives: First, to have his stock go to Sam after his death and, second, to make sure that his wife, Mary, would be financially secure for the rest of her life.

Joe and his son developed a plan to accomplish these objectives. They entered into a buy-sell agreement requiring Sam to buy his father’s shares from his estate after his death at fair market value. To fund the purchase, Sam would use the proceeds of a life insurance policy on his dad’s life.

The corporation owned the insurance policy and paid the premiums. Joe intended to buy the policy from the corporation for its cash-surrender value and gift the policy to his son. From then on, Sam would pay all premiums. Great news!

The IRS ruled that, under these conditions, Sam could collect the insurance proceeds income tax-free (IRS Letter Ruling 8906034).

There are two more tax goodies that flow as a result of this ruling.

One, when Sam buys Joe’s stock from his estate, the sale of the stock by the estate is income tax-free.

Why? Under the tax law, the estate gets a new tax basis equal to the stock’s fair market value at the date of Joe’s death.

Two, since Mary is the beneficiary of Joe’s estate, there is no estate tax. Why? An estate is entitled to a 100 percent marital deduction for all property passing to a spouse, Mary in this case.

What could be better? No income tax. No estate tax.

Sam owns 100 percent of Joe’s stock.

Mary is financially secure.

Perfect!

Tags: beneficiary, buy sell, cash surrender value, family business, great news, income tax, Insurance, insurance proceeds, irs letter ruling, life insurance policy, premiums, tax basis
Posted in Estate Tax, Family Tax Issues, Insurance | No Comments »