Archive for the ‘Investment Strategies’ Category

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How to turn your hidden assets into cash

Wednesday, May 6th, 2009

Does $120,000, $200,000 or more paid to you — in cash — sound interesting? Without any investment, risk or work? We call it the “Hidden Asset Strategy” (HAS).

What is your hidden asset? Simply, it’s your unused insurance capacity. For example, Joe (age 73) has total assets of $5 million (counting the assets of his wife Mary). Joe’s insurance capacity is normally 80-percent of his marital assets or $4 million. Joe can use HAS to sell his insurance capacity for about three-percent, netting him $120,000 (three-percent of $4 million). The $120,000 is taxed as ordinary income.

Who owns the policy on Joe’s life? Investors. They will pay all premiums and receive 100-percent of the death benefits.

Joe is typical of millions of seniors: He owns an asset that he didn’t even know he has and does not need or want life insurance. Or if Joe has $1 million in life insurance, he still has insurance capacity of $3 million, allowing him to use a HAS to receive about $90,000.

There is an endless number of HAS variations. If you are 65 years or older, have insurance capacity, and are insurable (or if not, your spouse is insurable) you can get into the fun of playing one of the many profitable HAS games.

Now back to Joe’s specific example: In order to qualify for Joe’s HAS variation, you must be between the ages of 72 and 86, have assets (including your spouse) of at least $2.5 million and be insurable.

A side (but important) note: Many senior readers of this column don’t need or want life insurance. Sometimes these readers want life insurance, but, in spite of their wealth, can’t afford life insurance because they don’t have the necessary spendable cash flow. Finally, HAS is a way to help these senior readers.

So if you’re a senior (65 years or older), you owe it to yourself and your family to check how a HAS would work for you. If you are still a lucky young whippersnapper (not yet 65), give this article to a senior (typically, your dad or grandfather).

The real question for each and every senior reader is, “How will a HAS work for me?” (Either Joe’s HAS example in this article or the many HAS variations that might be just right for you.)

I have arranged for senior readers (65 years or older and insurable) of this column to submit the information to create a HAS just for you. Here’s the information you should fax (847-674-5299) to me (Irv Blackman): Your name, address, phone numbers (business/home/cell), your birthday (same for your spouse); your net worth (including your spouse). Write “HAS” at the top of the page.

Or if you are 65 (or older) and have any tax question (about insurance or otherwise, call me at 847-674-5295.)

¤

Irv Blackman is a certified public accountant who lives part-time on Marco Island and specializes in estate planning, business succession and asset protection.

Posted in Corporate Tax, Estate Tax, Investment Strategies | No Comments »

Do you have discretionary capital?

Wednesday, April 29th, 2009

Learn how to multiply it, tax free.

No question about it: Everyone would like to have “discretionary capital.” What is it? It’s spendable stuff (like cash or investments-for example, CDs, stocks and bonds-easily turned into cash). And you don’t need it now. Or ever. You could spend it, give it to charity or burn it without really missing it.

Yes, discretionary capital is nice to have. The IRS likes discretionary capital too; it will wind up with about 55 percent of it when you get hit by the final bus.

Just a little sidebar before we go on: The tax strategies and concepts you are about to read are not known by many tax experts or estate planners. Why? Because there are not many people with discretionary capital. So, it does not usually pay for professionals to go after such a small market. If you have any it, you’ll love what you are about to read. If you don’t, pass this article on to those who do. Then, they will love you.

The easiest way to grasp how a simple tax strategy turns discretionary capital from an “ho-hum” investment into an “exciting and wealth-building” investment is by looking at a real-life example.

Here’s the story: Joe (a reader of this column) is 77, has some serious health issues and is married to Mary (age 74 and in good health). Joe has lots of discretionary capital. Here’s the three-step strategy we structured for Joe and Mary:

• Step 1: Buy a $1 million second-to-die life insurance policy (on Joe and Mary). Pay for the policy with a single premium (just one payment; never pay another premium) of $347,103.

• Step 2: Gift the policy to you favorite charity.

• Step 3: Buy a second $1 million second-to-die policy. Pay annual premiums of $27,281. The policy will be owned by an (ILIT) irrevocable life insurance trust (to keep the $1 million death benefit out of the estates of Joe and Mary).

Final results of the strategy: After considering all the costs and benefits (i.e. premiums, time value of money, estate tax savings, income tax savings for the charitable gift and other factors) Joe’s net out-of-pocket investment is only $609,000. And look at the guaranteed return on his investment — $2 million: $1 million to charity and $1 million (tax-free) to his kids and grandkids via the ILIT.

Hey, not a bad deal. Joe can turn $609,000 into $2 million tax-free; or $1,218,000 into $4 million or any other number Joe and Mary feel best fits their charitable and financial goals. As a practical matter this discretionary capital strategy is really a tax-advantaged investment. For example, every $609,000 (using Joe’s numbers) you invest will get you back $2 million. Tax-free. Guaranteed.

And one more point: There are hundreds of variations of the above strategy. The exact strategy (and amount of your investment return) depends on your age, health, amount of discretionary capital and your goals. For example, some people use the concept to keep all the money (the $2 million, $4 million, whatever) in the family, or give it all to charity. Most people split it up (like Joe and Mary), but not necessarily 50/50.

If you are lucky enough to have discretionary capital, there are an endless number of tax-saving and tax-free-wealth-building opportunities. The concept works best if you are between the ages of 55 and 89, married or not.

Posted in Estate Tax, Investment Strategies | No Comments »

Don’t lose a lifetime of wealth to the IRS

Tuesday, April 28th, 2009

Many business owners spend a lifetime accumulating wealth for their families, yet lose it to the IRS why?

The tax law frustrates successful business owners at every turn. Never have I seen this frustration expressed better than in a letter from a reader (let’s call him Joe) of this column, a portion of which follows word-for-word (except the names have been changed).

“Mary and I spent the better part of a year creating a plan to leave our worldly goods [Joe and Mary are worth about 4.1 million] to our [two] single sons, one of whom is in our business.

“You can see from our wills, revocable trusts and the two green manuals from the Family Planning Group, [professional advisors specializing in business succession and estate planning], our tax attorney and our CPA, who sat in all of our meetings, that we are trying to do the right thing. Just what that means, I don’t know, but it seems that if Mary and I went to Vegas and lost every dime there would be no taxes, yet if we live a reasonably decent life and try to pass on our savings to our children and to charities, Uncle Sam steps in and decimates a lifetime of savings.”

The letter was accompanied by a stack of documents and financial data, (actually the same information made available to Joe’s threesome of advisors). What’s so interesting about Joe and Mary is that they are a poster couple for the six most common maintaining your lifestyle and estate tax problems — that follow — facing millions of family business owners:

• How to transfer your family business when you have one child (or more) in the business and one child (or more) not in the business;

• How to maintain your lifestyle (and your spouse’s) for as long as you live;

• How to invest your excess funds;

• How to treat your children fairly;

• How to get your wealth to your children (or other family members) without being “decimated” by the IRS;

• How to control your business for as long as you live.

It should be noted that all of Joe’s advisors were smart and experienced practitioners in their respective areas. Then, why was Joe still searching for better results than this group could deliver? Simply put, Joe saw blue every time he thought of the $1 million-plus tax bill he was told he must pay to the IRS. Since Joe and Mary are like so many other family business owners (the amount of wealth is almost immaterial, it could be $3 million, $30 million or more), following is the basic plan (as your read, think how the same or a similar plan would solve your problems: for the rest of your life and when you get hit buy the final bus) we implemented for them. It’s also the six-step core plan (the planning strategies are italicized) we create for most business owners, who want to (1) maintain their lifestyle for as long as they live and (2) to finesse the estate tax and get 100 percent of their wealth to their family. All taxes, if any, paid in full:

1. The business is transferred to the business child (or children) using an intentionally defective trust.

2. A subtrust or retirement plan rescue (using qualified plan funds, typically a profit-sharing plan, 401(k) or rollover IRA) is used to purchase second-to-die life insurance on Joe and Mary (proceeds to the children tax-free).

3. A family limited partnership (FLIP) is created to hold all of Joe’s and Mary’s assets (usually investments, like real estate, stocks and bonds).

4. Invest a portion of available funds (in your qualified plans, business or personal) in senior settlements (SS). Maintaining your lifestyle is easier with SSs, which earn over 15 percent — without market risk-per year. These SSs are made available by a public company (trades on the NASDAQ) that has been enjoying a 15.82 percent rate of return on average for 15 years.

5. An annual gifting program is started immediately to transfer the FLIP interests to the children (typically, the non-business children).

6. The death documents (will and trust) are designed to clean up all of their goals and asset distributions that were not accomplished during their life by the first five steps of the plan. Notice that the first five steps are done while Joe and Mary are alive — a must if you want to maintain your lifestyle and win the estate tax game. A will and trust (really a death plan — as opposed to a lifetime plan) just can’t get the job done.

Joe and Mary will control all their assets — including the business — for as long as they live. Again, we want to pound this point home: The plan is essentially a lifetime tax plan (the first five steps). The real secret is to do lifetime planning, not only death or estate planning (the sixth step), like Joe’s advisors did.

After our six-step plan was put in place, the wealth that will ultimately go to the children of Joe and Mary will be in excess of $5 million. We actually created additional tax-free wealth, instead of losing over $1 million to the IRS. Most importantly, Joe and Mary will be able to maintain their lifestyle — allowing for an inflation rate of up to five percent — for as long as they live.

As regular readers of this column know, we do a reader test from time to time (Joe was part of the last-reader test).

So, if you want to maintain your lifestyle for life, have an estate tax problem or own an interest in a closely held business (particularly if you want to transfer the business to one or more of your kids), you are invited to join the test.

In order to participate, please send the following information (send copies, do not send original documents):

1. For your business — Your last year-end financial statement.

2. Personal — A current personal financial statement for you and your spouse.

3. A family tree — Your name and birthday. Same for your spouse, kids and grandchildren.

4. Estate documents. It’s not necessary to send copies of your wills and trusts to start.

Send to Irv Blackman, Estate Plan Test, 3960 Deer Crossing Court, Unit 102, Naples, FL 34114. (If you have a question call, 239-417-9732).

Just one more point: If you want to learn more about SSs (whether or not you join the Estate Plan Test), please fax your name, address, phone numbers (business/home/cell) and estimated amount to invest (the minimum is $50,000 for accredited investors) to 847-674-5299.

Okay, that’s our plan to help your do your plan. Let’s hear from you.

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Posted in Estate Tax, Family Tax Issues, General Tax Strategies, Investment Strategies, Planning | No Comments »

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

Friday, April 17th, 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.

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Posted in Corporate Tax, Insurance, Investment Strategies | No Comments »

A Risk-Free Concept To Skyrocket Your Rate Of Return

Wednesday, April 15th, 2009

Tax-free investments are big. Interesting, tax-deferred investments are even bigger. Logically, tax-free should be number one. Sorry, but the cruel fact is that with the exception of life insurance (got to die to get your tax-free reward) or municipal bonds (plagued by low rates of return), there just isn’t much to talk about that’s tax free. Sad, but true.

Ah, but tax-deferred. That’s where the action is. The biggest tax-deferred sandbox to play in, by far, is the qualified plan area. They — profit-sharing plans, 401(k) plans, IRAs of all sorts, and others — abound. Billions pour in every year. Employer-sponsored plans are usually the tax-weapon of choice. Non-employer plans (traditional and Roth IRA) give every taxpayer an opportunity to play in this sandbox.

But IRAs have dollar limits. Tax-deferred annuities (annuities) have no limits. You can toss as many dollars as you like into annuities. All are after-tax dollars. Not one cent is deductible. Annuities earning powers are low (more about this defect later). Severe penalties murder your dollars if you want to get out in the early years. Simply put, there’s no liquidity.

So what’s the magnet that draws billions of dollars into this not-such-a-good-deal-investment? Here’s the answer and the magic words: tax deferred.

A word about annuity rates of return: Fixed annuities are the most popular. They currently pay in the three to three and a half percent range per year. (Older annuities, when interest rates were higher, paid more.) The new darling is indexed annuities. Your yield is pegged to some index, typically the S&P, on an annual basis. Often in a (say the S&P) loss year, you are guaranteed a small yield (usually in the one and a half to three percent range). A small percentage rise (say four percent) in the S&P is the exact percentage (four percent) you get, but a large rise is capped at six percent to eight percent (for example, the S&P increased by 14 percent but you only get seven percent.

Okay, so what’s a tax-deferred investment that doesn’t have all the impediments of annuities and has a huge rate of return without risk? Senior settlements.

An example is the easiest way to explain senior settlements. Suppose Joe, age 68, has a $400,000 life insurance policy with a cash surrender value (CSV) of $50,000. Joe would like to stop his annual premium payments. Instead of canceling the policy and taking the $50,000 CSV from the insurance company, Joe sells his policy as a senior settlement, receiving $120,000. Joe’s a happy camper.

Investors bought Joe’s policy. Senior settlements have been around for about 35 years. The tax consequences are a delight. Your tax liability for profits are completely deferred to the day you actually receive back your entire investment and your entire profit.

There’s a public company (trades on the NASDAQ) offering senior settlements. The average rate of return has been 15.82 percent per year throughout the company’s 15-year operating history. If your goal is to make a killing on your investments, senior settlements are not for you. (Just a note: AIG, the giant insurance company, and Warren Buffett’s Berkshire Hathaway Inc. invest in senior settlements.) But if an average rate of return (almost 16 percent), with no market risk, is of interest to you (or one or more of your qualified plans) you are invited to learn more about senior settlements. Just fax me (239-417-9045) your name, address, phone numbers (business/home/cell) and estimated amount to invest (minimum is $50,000 for accredited investors.)

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Posted in Estate Tax, Featured, Investment Strategies, Retirement Tax Advice | No Comments »

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by Irv Blackman

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