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.)

Is there an investment that can match the potential high returns of successful stock market investors, yet has the prime characteristic (no-risk) of traditional safe investments?

Yes!

Chances are you have never heard of investments called life settlements. They also are often called Transferable Insurance Policy or TIP(s). The best way to understand how a TIP works is by an example.

Let’s say Joe, 68 years old, owns a life insurance policy with a $500,000 death benefit and a $60,000 cash surrender value (CSV). Joe would like to stop paying premiums. Of course, he can cancel the policy and get the $60,000 CSV from the insurance company.

An investor (really a group of investors) buys Joe’s policy for $150,000 — paid in cash to Joe immediately. The investors now own the policy. The investors will receive the $500,000 death benefit when Joe dies.

Let’s say you are one of the investors. You invest $100,000. You will wind up with a diversified portfolio of TIPs. One of the TIPs will be a fractional interest in Joe’s $500,000 policy — say 3 percent — or $15,000.

This TIP (Joe’s) will pay you exactly $15,000 (includes your principal — amount invested — and profit) when Joe dies. The insurance companies love people like Joe when they terminate their policies. And why not? The insurance company pays a mere $60,000 for the CSV and is off the hook for a $500,000 death benefit.

Terminated policies are highly profitable for insurance companies. Of course, they want to keep the entire life settlement industry a secret. Why? Because investors — like you — now have found a simple and easy way to help the Joes of the world and at the same time stand tall in the profit shoes of the insurance companies. Neat!

As a TIP investor, you can enjoy:

• An average rate of return of 16.32% per year.

• Not worrying about the market being volatile or whether it goes up or down.

• The guaranteed return of your principal, as well as your profit.

• And best of all, keep 100 percent of the profit because there are no fees or costs when you buy a TIP.

What are the tax consequences of your TIP profits?

There are only two simple rules: (1) The tax on your profit is deferred until you actually receive your principal and profit; (2) Your profit is taxed as ordinary income (profit earned by a qualified plan-profit-sharing, 401 (k), IRA and the like-are deferred until distributed).

The list goes on and on. Always has, always will.

Yet the pride of the American capitalistic system is the successful family business. These entrepreneurs have found their way through, around or over the seemingly endless obstacles to become a “successful business owner.”

An SBO for short.

For the purposes of this article, SBOs have excess funds to invest (other than back into the operation of their business that produced the funds in the first place). Typically these excess funds are in one (or more) of three places: (1) still in the business, (2) in their (or spouse’s) name or (3) in a qualified plan (profit-sharing, 401(k), IRA or similar plan).

Over the years, the quote that follows has been nicknamed the SBO’s lament:

“I know how to make money in my business, but when it comes to making money with my investment money, either I don’t have time to watch it, don’t know how to watch it or rely on my investment advisor. When the market is up, my advisors do fine, when it’s down they do lousy.”

For the past couple of years, the lament usually ends with, “Now the market is lousy (or down, or uncertain, or similar words). What should I do?”

Now, regular readers of this column know that I am a tax planner prone to finding legal ways to avoid all types of taxes — particularly estate taxes. To do this requires, among other things, getting my client’s personal balance sheet.

Here’s what I can tell you that the balance sheets reveal about the investments of SBOs (and also other estate planning clients). Their success (or failure) in the stock market and a myriad of other investments, in general, mirrors the Dow Jones: happy on the way up and painful on the way down.

Usually, real estate investments are a winner.

Now what about that excess cash? Terrible results. Almost always the investments are conservative: divided between (1) CDs and money market funds, (2) municipal bonds and (3) a “zillion” variety of annuities. After taxes and inflation, your net earnings on (1) investments are typically less than 3 percent, sometimes even negative. Those income tax free bonds, (2), not only have a low rate of return, but fall in value when interest rates rise. Annuities, (3), could fill a large book to describe all the varieties and, most of all, the complaints from clients.

Never has a client told me that he/she is happy with the results of an annuity. (Sure would like to hear from a reader who has personally had a positive experience with any annuity.)

As you can imagine, almost every estate planning consultation with an SBO — and other clients — requires serious consideration concerning the client’s investments: safety, risk, tax consequences, rate of return and other factors. We discuss alternate investments, considering, among other things: profitability, risk and how taxed.

Currently, the most popular alternative investment is senior settlements (SS), also called Life Settlements. The following quote from The Wall Street Journal and USA Today (and other sources) tells you why SS are becoming such a popular investment.

“Life Settlements (have become a) trillion dollar industry, dominated by institutional investors including Berkshire Hathaway (billionaire Warren Buffet’s company), AIG and CNA. Their pursuit of this market is related to the degree of safety, high yields in excess of 15 percent per year and the fact that a Life Settlement is not affected by market forces.

“Life settlements are a very good option for the investor who has as his or her investment philosophy a desire for a secure, safe and ‘no risk’ investment. It is for your ‘nest egg’ money. It is not considered a security by SEC. Therefore it is not normally provided as an investment option by stock brokers.”

Of course, your question is: “Can a little guy (as opposed to an institutional investor) invest in SS?

Yes, it’s all made possible by a small, publicly traded (on the NASDAQ) company. Its average rate of return an SS investments has been 16.28 percent per year on average during the company’s 14-year operating history.

If you want to make a killing on your investments, SS are not for you. But if a 16 percent-plus rate of return, with no market risk is of interest to you (or your IRA, 401(k) or other qualified plan) fax me (847-674-5299) your name, address, phone numbers (business/home/cell) and estimated amount to invest ($50,000 minimum, for accredited investors).

When I began my professional practice as a certified public accountant and lawyer back in the 1950s, a millionaire was hard to find. Today, millionaires are plentiful. And when it comes to estate planning, they scurry around trying to find a professional who can lower their estate tax before they get hit by the “final bus.” The Newsweek article by Robert J. Samuelson, like so many other articles, entertainingly explored the problem but offered no solutions.

Let’s set the scene for how you — whether mom and dad trying to give it away tax-free or one of the kids on the receiving end — can, in fact, solve the problem. Let’s start with the elders, mom and dad, who have the wealth.

Fact number one: You aren’t dead yet. Typical estate plans, such as separate wills and trusts for him and her, don’t speak until you are dead — too late to beat the tax collector. The solutions lie in lifetime planning. A lifetime plan keeps you in control of your wealth for as long as you live, yet transfers it—including your business—to your kids (and grandkids) while you are alive.

Fact number two: Years of experience have taught us that wealth is always passed to the younger generations of the family. And then the younger generations step into mom’s and dad’s shoes and typically increase the family wealth.

This gives the second generation an even bigger estate tax problem than mom and dad had.

Here’s how we solve this do-not-enrich-the-IRS estate-tax problem:

Logic tells you that children, particularly business children, are likely to become wealthy.

Usually these children accumulate more wealth than their mom and dad — to be repeated again when the family wealth goes to the grandchildren two generations later. Because of this generation-to-generation wealth transfer, we view each generation of the family separately in terms of their special needs and objectives.

Yet, the plan should not be just for mom and dad. It should be a comprehensive and integrated plan for the entire family. Following is an overview of how it’s done.

Keep your wealth — every dollar of it — in your family, instead of losing it to taxes.

• First Generation. Install a lifetime plan that removes wealth from your taxable estate during life. Use strategies like a qualified personal resident trust for your residence; an intentionally defective trust for your business; a subtrust for your profit-sharing plan, rollover IRAs and similar plans; a family limited partnership for your other assets (typically investments, like stocks, bonds and real estate); and an irrevocable life insurance trust for insurance, probably second-to-die. All of these strategies — and there are many others — begin their work now while you are alive and allow you to stay in control of your assets, including your business, for as long as you live.

Of course, we’ll dovetail your will and trust (death documents) with your lifetime plan. But when done right, your death documents just clean up what’s left. The first part of the family plan, including a business succession plan, and your wealth transfer plan are completed tax-free while you and your spouse are alive.

• Your Kids—Second Generation. After completing a comprehensive plan for mom and dad, it is easy to project what the financial future of the kids might look like. As soon as we finish the plan for the first generation, we start a plan for each of the kids, based on their individual assets and objectives.

• Your Grandchildren— Third Generation. The plans for this generation are closely tied to the plans of the two older generations. Probably the most important point to keep in mind, because of the young ages in this generation, is getting the children into a tax-free environment as soon as possible, a wealth-building must. These plans center on short-term and long-term tax-advantaged strategies that fulfill lifetime needs: education, buying a house, starting a business and, if they don’t go in to the family business, building a retirement fund.

The interesting ones are even bigger. Logically, tax-free should be No. 1. But the cruel fact is that with the exception of life insurance — you must die to get your tax-free reward — or municipal bonds (plagued by low return rates), there just isn’t much to talk about that is tax-free.

Tax-deferred is a different situation. That’s where the action is. The biggest tax-deferred “sandbox” is qualified plans.

Profit-sharing plans, 401(k) plans, IRAs of all sorts and others abound. Billions of dollars pour into these plans every year. Employer-sponsored plans are usually the tax weapon of choice. Non-employer plans, such as traditional and Roth IRAs, give every taxpayer an opportunity to play in this sandbox.

While IRAs have dollar limits, tax-deferred annuities have none. You can toss as many after-tax dollars as you like into annuities. Not one cent is deductible. But annuities are lower earners and result in severe penalties if withdrawn early. 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 in one magic phrase: tax-deferred.

A word about annuity return rates:

• Fixed annuities are the most popular. They currently pay 3 percent to 3½ percent per year. Older annuities, purchased when interest rates were higher, paid more.

• The new darling is indexed annuities. Yield is pegged to some index, typically Standard & Poor’s, on an annual basis. Often in a loss year, indexed annuities guarantee a smaller yield, usually 1½ percent to 3 percent.

When the index rises to 4 percent, that is the percentage investors get. A large rise is capped at 6 percent to 8 percent. For example, at an increase of 14 percent, investors would receive only 7 percent.

What’s a tax-deferred investment that doesn’t have all the impediments of annuities and has a huge return rate without risk?

• The answer is senior settlements. The following example is the easiest way to explain.

Suppose Joe, 68, has a $400,000 life insurance policy with a cash surrender value of $50,000. Joe would like to stop his annual premium payments.

Instead of canceling the policy and taking the $50,000 from the insurance company, Joe sells his policy as a senior settlement and receives $120,000.

Joe’s a happy camper.

Investors bought Joe’s policy.

Senior settlements have been around for about 35 years. Their tax consequences are a delight. Tax liabilities on profits are completely deferred until the investor receives back the entire investment and profit.

There’s a public company that trades on the NASDAQ Stock Market offering senior settlements. The average rate of return is 16.36 percent per year and has been over 16 percent throughout the company’s 14-year history.

If your goal is to make a killing on your investments, senior settlements are not for you.

It should be noted that American International Group, the giant insurance company, and Warren Buffett’s Berkshire Hathaway invest in senior settlements.

But if an average return rate of more than 16 percent with no market risk is of interest to you, learn more about senior settlements. Just fax your name, address, phone numbers and estimated amount to invest to me at 417-9045.

What makes me think so?

Well, the last time I wrote about this specific subject, I received a blizzard of responses.

I hope to cover the subject again in this column and answer the questions that were posed by my readers. So, if you have a bent for conservative investing, you’ll love what follows.

Every conservative investor tells me: “I don’t want to risk losing my investment.” Fine. A worthy goal. But here’s the problem.

Most conservative choices are in low-yield, fixed-rate stuff like CDs or U.S. Treasury bonds. But municipal bonds are the hands-down favorite for conservatives.

Watch out, when inflation rears its ugly head, conservative investments are anything but conservative. Consider just one additional value-eating bandit who walks hand-in-hand with inflation: interest rates.

Consider the three ways that bandit steals your money and hard-earned wealth when you are heavily invested in municipal bonds:

• The value of the bonds go down as interest rates go up.

• You are locked into a low-interest rate until the bond matures or you sell it (probably at a painful loss).

• Nasty inflation reduces not only the value of the interest you receive, but the already reduced value of the bond has less buying power due to inflation.

What’s the long-term impact?

Here’s a quote from the Currency Options Hotline Operating Manual that drives home the devastating economic impact of inflation over time: “If you were somehow able to take one of today’s greenbacks [dollars] back in time to 1940, you would find it worth only about 6.5 cents.”

Sorry, but it looks like inflation, plus the falling value of the dollar against most foreign currencies, will be our rather unwelcome bedfellow for at least the foreseeable future.

What is a conservative investor to do?

Actually, we all know the answer: Find an investment vehicle that overcomes the three evils of the rising interest-rate bandit.

First, let’s outline the attributes of such an investment, second identify the investment, and finally, give an example of how the investment works.

Here are the attributes of the investment:

• A higher rate of return than on traditional conservative investments like CDs, treasury bills, notes and municipal bonds.

• The interest rate tends to go up as inflation goes up.

• Your investment will never go down in value, and in fact, will always guarantee you a profit.

• The interest earned and your investment profit are income tax-free.

• Your total investment at time of death including original investment, interest earned and profit escapes the clutches of the estate tax (when properly structured).

What’s the identity of this picture-perfect investment? It is simply a type of life insurance, which I call conservative investment life insurance.

Next, let’s look at an example. Joe and his wife, Mary, are both 70 years old. They buy a $1 million policy (it could be any amount, usually more) of second-to-die life insurance with an annual premium of $23, 516. The policy currently earns 5.7 percent.

The payoff on their investment comes after the second death. For the purpose of this example assume after 10 years, at age 80, both Joe and Mary get hit by the same bus.

Their heirs would receive:

1. Death benefit: $1 million.

2. Premiums paid: $235,160 ($23,516 times 10 years).

3. Interest earned on premiums paid (at 5.7 percent, but could be higher if interest rates rise, or lower, if interest rates fall): $75,411.

The total amount (tax-free) to their heirs is $1,310,571.

Next, suppose the second death of either investor happens at age 90. Their heirs would get a total of $1,816,458 (tax-free).

The easy way to summarize the investment is as follows: You get the premiums paid back, dollar-for-dollar, plus earnings on the premiums paid. You get a guaranteed bonus in the death benefit (here $1 million), and best of all, it’s all tax-free with no income tax and no estate tax.

If you are single, or married and your spouse is uninsurable, conservative investment life insurance can be purchased on a single life. However people younger than 50 years of age should not buy this insurance whether single or married. You have better insurance alternatives.

Here’s the big question most readers asked: “How does the insurance company make money?”

Don’t worry, those guys are not about to serve you a free lunch. Companies simply charges you enough premium in the first place to actuarially cover the final anticipated death benefit based on your age, sex, health and other factors.

For more information on how a conservative life insurance might work for you, your parents or your grandparents, contact me and I will get you the information you need and will answer your questions.

Then they prove it. They tell me they have parked all or a large amount of their extra cash in what they consider conservative investments.

Most conservative investments are in low-yield, fixed-rate stuff like CDs or U.S. Treasury bonds. But municipal bonds are the hands-down favorite conservative investments.

Here’s a well-known fact: When inflation rears its ugly head, conservative investments are anything but conservative.

Consider just one additional value-eating bandit that walks hand in hand with inflation: interest rates.

Here are the three ways the bandit steals your hard-earned wealth when, for example, you are heavily invested in municipal bonds:

1. The value of the bonds goes down as interest rates go up.

2. You are locked into a low-interest rate until the bond matures or you sell it, probably at a painful loss.

3. Nasty inflation reduces not only the value of the interest you receive, but also the buying power of the already reduced value of the bond (see No. 1 above).

Here’s a quote from the Currency Options Hotline Operating Manual that drives home the devastating economic impact of inflation over time: “If you were somehow able to take one of today’s greenbacks (dollars) back in time to 1940, you would find it worth only about 6.5 cents.”

Sorry, but it looks like inflation — plus the falling value of the dollar against most foreign currencies — will be our rather unwelcome bedfellow for at least the foreseeable future.

What is a conservative investor to do?

Actually, we all know the answer: Find an investment vehicle that overcomes the three evils of rising interest rates.

First, let’s outline the attributes of such an investment; second, identify the investment; and finally, give an example of how the investment works.

Here are the attributes of the investment:

• A higher rate of return than on traditional conservative investments like CDs, Treasury bills and notes, and, of course, municipal bonds.

• The interest rate tends to go up as inflation goes up.

• Your investment will never go down in value and, in fact, will always guarantee you a profit.

• The interest earned and your investment profit are income tax-free.

• Your total investment when you die — original investment, interest earned and profit — escapes the clutches of the estate tax when properly structured.

And now — drumroll, please — the identity of the investment: a particular type of life insurance that I call conservative investment life insurance, or CILI.

Finally, let’s look at an example. (Note: This investment concept works for any age, but is typically used by an individual or a married couple who are 50 or older.)

Joe and his wife, Mary, are both 70. They buy a $1 million second-to-die CILI policy (it could be any amount) with an annual premium of $23,516.

The policy currently earns 5.7 percent.

The payoff on Joe and Mary’s investment comes after the second death. It is determined assuming that after 10 years — age 80 — Joe and Mary get hit by the same bus.

Their heirs, children and grandchildren would receive:

• Death benefit — $1 million.

• Premiums paid ($23,516 times 10 years) — 235,160.

• Interest earned on premiums paid (at 5.7 percent, but it would be higher if interest rates rise or lower if interest rates fall) — $75,411.

• Total amount tax-free to heirs — $1,310,571.

Next, suppose the couple’s second death happens at age 90. Their heirs would get $1,816,458 tax-free.

To summarize the investment:

1. You get your investment (premiums paid) back, dollar for dollar, plus earnings (5.7 percent here).

2. You get a guaranteed bonus, the death benefit ($1 million here).

3. It’s all tax-free (no income tax, no estate tax).

Is there an investment that can match the potential high returns of successful stock market investors, yet has the prime characteristic — no risk — of traditional, safe investments?

Yes!

Chances are you have never heard of this investment: life settlements, often called transferable insurance policies or TIPs. The best way to understand how a TIP works is by an example.

Joe, 68, owns a life insurance policy with a $500,000 death benefit and a $60,000 cash surrender value (CSV). Joe would like to stop paying premiums. Of course, he can cancel the policy and get the $60,000 CSV from the insurance company.

A group of investors buys Joe’s policy for $150,000, paid in cash to Joe immediately. The investors now own the policy. The investors will receive the $500,000 death benefit when Joe dies.

Let’s say you are one of the investors. You invest $100,000. You will wind up with a diversified portfolio of TIPs. One of the TIPs will be a fractional interest in Joe’s $500,000 policy — say 3 percent, or $15,000.

Joe’s TIP will pay you exactly $15,000 — including your principal (the amount you invested) and profit — when Joe dies. Insurance companies love people like Joe when they terminate their policies. And why not? The insurance company pays a mere $60,000 for the CSV and is off the hook for a $500,000 death benefit.

Terminated policies are highly profitable for insurance companies. Of course, they want to keep the entire life-settlement industry a secret. Why? Because investors — like you — now have found a simple and easy way to help the Joes of the world and at the same time to stand tall in the profit shoes of the insurance companies.

As a TIP investor you can enjoy:

– an average rate of return of 16.28 percent per year;

– not worrying about the market being volatile or whether it goes up or down;

– the guaranteed return of your principal, as well as your profit; and, best of all,

– keeping 100 percent of the profit because there are no fees or costs when you buy a TIP.

What are the tax consequences of your TIP profits? There are only two simple rules:

– The tax on your profit is deferred until you actually receive your principal and profit (always a fixed amount).

– Your profit is taxed as ordinary income.

Even the big-hitter investors are buying life settlements. Following is a quote from the May 18 issue of The Wall Street Journal:

“AIG (American International Group Inc., the insurance giant) has bought less than 1,500 policies since 2001. … A few years ago, Berkshire Hathaway Inc., the investment vehicle of billionaire investor Warren Buffett, began buying life settlements, according to securities filings.”

Ask your professional adviser to check out life settlements for your personal investments and qualified-plan funds.