Posts Tagged ‘potfolio’
Sunday, April 5th, 2009
Through the years, our office has listened to an endless stream of taxpayers complain about the income tax.
But if you ever want to see anger, frustration and bitterness, meet with the beneficiaries (usually the kids) of an estate when they are told to write a seven- or eight-figure check to the IRS — for estate taxes.
Taxes that could have been avoided with proper planning.
Tragic!
A recent post-death estate planning consultation got us thinking about what you are now reading. Yes, the estate tax was exactly $3,167,000 after Mom died; Dad had died six years earlier. The really sad part of this story is that Dad’s and Mom’s entire estate tax liability could have been legally avoided with a rather simple estate plan.
Mom and Dad were survived by three kids and eight grandchildren. The business that Dad started back in the mid-50s was worth $4.5 million and owned 100 percent by Mom when she died.
According to Dad’s estate tax return, the business, which he left to Mom, was worth $2.9 million when he died. No estate tax (because of the marital deduction) was paid when Dad died.
Dad and Mom had a typical estate plan: a will and a trust. The trust created two trusts: one trust to take advantage of passing $1 million tax-free (the amount that was tax-free when Dad died) and a second trust to capture the marital deduction.
The tax-free amount is $2 million in 2006, rising to $3.5 million in 2009 and back to $1 million in 2011.
There is no estate tax if you die in 2010. I’m betting Congress will change these amounts before 2010 (or sooner).
The real answer (to why many people procrastinate and don’t complete a comprehensive estate plan during their life) is the deceased person whose estate caused the tax did not have to personally write that big check to the IRS.
Whenever we are about to plan an estate, we estimate the amount of estate tax that ultimately will be due.
Then we ask the client to write a check to the IRS for that amount. The client always gets the point. Then, we plan the estate so the client’s wealth goes to their family, instead of the IRS.
The plan must be a lifetime plan, that implements the proper strategies, as necessary, during your life. A plan contained in the typical will and trust-like Mom’s and Dad’s above-only enriches the IRS.
The person (your executor) who must write the check to pay your estate tax is helpless when it comes to minimizing or eliminating the estate tax. Only you, while you are alive, can eliminate the estate tax… by creating the proper comprehensive estate plan.
Here are the three things you can do to drive the estate-tax devil away:
(1) Learn all you can (this column is a good start);
(2) No matter what your age, put a complete estate plan into place now (then monitor it every two to four years);
(3) Only work with experienced professionals who can show you how to pass all your wealth — intact —to your family (if you are not sure, get a second opinion).
Tags: 1 million, 401 k plans, annuities, balance sheet, beneficiaries, business life, business succession plan, capital gain, conservative investments, consultation, deceased person, employee benefit plan, endless stream, estate planning, Estate Tax, estate tax return, income in respect of a decedent, income tax, Insurance, IRA, IRS, marital deduction, moneymaker, potfolio, predictable response, professional advisers, profit, qualified retirement plan, return, sacred cows, stock market, strategy, tax deffer, tax free, tax free investments, tax liability, taxpayers, trusts
Posted in Estate Tax, Family Tax Issues, General Tax Strategies | No Comments »
Saturday, April 4th, 2009
Professionally, my second love is writing this column. My first love is consulting with the people who read it.
Every family I work with is different. So are their businesses, their situations, their problems. In spite of these differences, I’m rarely surprised by anything totally new. But one reader sent me something I had never seen before.
Here’s the story.
After about an hour on the phone discussing an estate plan, son Sam calling at the request of dad Joe agreed to send me some typical information: tax returns, financial statements and a copy of the existing plan. About one week later, a heavy box arrived with a five-inch stack of documents. About four inches worth were nine separate family limited partnerships. They were the same except each partnership owned a different asset: the family business, a residence, investments, etc.
As I thumbed through the papers, I couldn’t help thinking about the drunk who was told, “A shot of whiskey each day is good for you.” The guy who did Joe’s estate plan was clearly drunk on partnerships.
One thing should be made clear: I am an enthusiastic cheerleader for the use of limited partnerships in estate planning. Use ‘em all the time. But this overkill of a single strategy just didn’t do the best possible job.
Using the computations of the adviser, the IRS would get more than $2 million in estate taxes. Another $1.1 million of IRS enrichment was likely because of a gross misuse of the partnership strategy.
What does a family limited partnership accomplish? It allows you as a general partner to totally control the use of any asset transferred to the partnership yet reduce the value of the assets transferred. For example, $1 million of assets transferred to a partnership are usually worth only about $650,000 for tax purposes. That $350,000 discount in a 55 percentestate-tax bracket would reduce your estate-tax burden by $192,500. Not bad!
A familylimited partnership is also a great asset-protection strategy. Creditors can’t get at the assets in the partnership. Neither can divorcing spouses of your kids, who are usually the limited partners.
Used properly, a partnership is almost a perfect tax tool. In general, don’t use them to own the stock of your family business. Nor should one be used for non-income-producing personal assets, like a home or car. It’s a valuable strategy for almost every other asset you might own: publicly traded stocks and bonds, real estate, you name it.
Without covering every detail, we terminated the partnerships that held the family business and two family homes. The business elected S corporation status and was transferred to an intentionally defective trust, and the residences were transferred to qualified personal residence trusts. Those are similar concepts that allow you to heavily discount the value of the assets transferred to them.
We used the liquid assets in two other partnerships to pay the premiums on second-to-die life insurance on Joe and his wife, which was owned by an irrevocable life insurance trust that we created. That trust removes life insurance from the taxable estate of the husband and wife.
When all the smoke clears, Joe and his four children, including Sam, will be enriched $4 million to $7 million more than the original overkill plan, depending on how long Joe and his wife live.
One warning: This is an example of overindulgence in one tax strategy. Although the above descriptions cover the main points of how Joe’s problems were solved., this is not a do-it-yourself kit. There are a number of traps and exceptions. Only proceed with the help of an expert.
Tags: annuities, asset protection, computations, creditors, estate planning, Estate Tax, family business, family limited partnership, family limited partnerships, general partner, gross misuse, income tax, information tax, Insurance, IRA, IRS, partnership strategy, potfolio, profit, protection strategy, qualified retirement plan, return, son sam, stock market, strategy, tax burden, tax deffer, tax free, tax free investments, tax purposes, tax returns, whiskey
Posted in General Tax Strategies, General Tax Talk, Uncategorized | No Comments »
Friday, April 3rd, 2009
This article is about an old IRS letter ruling that is one of my favorites. It might be labeled “The lazy man’s way to plan your business transfer.“
The ruling shows you how to take advantage of some favorable tax law while avoiding pitfalls. Good stuff!
Well, there is one slight problem to using the technique: You must drop dead before your family can enjoy the benefits of Letter Ruling 9116031.
But wait, hold the phone. The ruling has one redeeming quality. Really!
First, the facts: Joe, his wife, Mary, and their children owned all the stock in a family business. Joe died in 1990 and Mary inherited all of his stock.
(Note: Mary’s tax basis — for computing capital gains — is the fair market value (FMV) of the stock on the day Joe died. For example, if the FMV was $1 million and she sold it for $1 million, there would be no capital gains tax.)
The fact that Joe’s tax basis, while he was alive, was $25,000, is immaterial. Mary immediately sold all of her stock back to the corporation.
Here’s the general rule: When you or any member of your family sells stock back to your corporation (called a redemption), the redemption is usually taxed as a dividend — a tax disaster.
But there is a special tax-saving exception for a family member who has owned the stock for 10 years or more: If he/she divests all interest in the company (including any position as an officer or director), the redemption is treated as a sale (gets favorable capital gains treatment, instead of being a dividend).
Since Mary sold all (stock she owned before Joe died and stock she inherited from him) of her interest in the corporation, the purchase by the corporation of her shares was considered a bona fide sale (redemption) and not a dividend — a big tax victory.
When all the smoke cleared, not only had Mary escaped a big dividend income tax bill, but she had succeeded in effectively transferring the business to her children. How? Since the kids now owned all the remaining issued and outstanding stock, they owned 100 percent of the business.
To sum up: Mary walked off with a near-tax-free capital gain, (the price paid to Mary for the stock was a bit more than the exact FMV of the stock inherited from Joe) while the kids walked off with the business.
A fantastic tax result.
Stop and think about your own business succession plan for a moment. Isn’t that the result you want — a fantastic tax-free (for income, gift and estate taxes) result? Yes, you can get that tax-free result every time.
More often than not, succession plans are implemented during life, which means there is a second issue (the first issue is tax-free): control.
The typical business owner wants control of his business for as long as he lives. So, when you sit down with your professional advisors, make sure you accomplish a perfect solution to the two key issues: (1) a tax-free transfer and (2) keeping control for as long as you live.
If any other result is offered (no matter how good or smart it sounds), get a second opinion.
Tags: 1 million, 401 k plans, annuities, business transfer, capital gains tax, computing capital, dividend income, employee benefit plan, estate planning, Estate Tax, family business, family limited partnerships, family member, favorable tax, fmv, good stuff, income in respect of a decedent, income tax, income tax bill, Insurance, insurance premium, investment interest, IRA, IRS, irs letter ruling, lazy man, note payments, one of my favorites, painful subject, pitfalls, potfolio, predictable response, profit, qualified retirement plan, redemption, return, sacred cows, stock market, strategy, tax deffer, tax disaster, tax free, tax free investments, tax victory, wife mary
Posted in Corporate Tax, Estate Tax, Tax Strategies | No Comments »
Friday, April 3rd, 2009
Often, I feel like an old-fashioned country doctor makin’ house calls. But there is a difference: my patients are sick of paying taxes.
Recently, I visited a successful family business in North Carolina, owned by a semi-retired 64-year-old named Joe and run by his son, Sam, a 36-year-old.
Joe called me. He wanted a second tax opinion for a business transfer plan and an estate plan put in place by Sam (with the advice of his professional advisors, the “best” estate planning team in the county) almost two years ago.
Wow, this patient was really sick (running a high tax fever, bleeding lots of tax dollars).
This is the story of the symptoms, the diagnosis and the “magic tax potions” that cured the patient.
First, the facts:
Joe owns 98 percent of two corporations: a profitable S corporation (Success Co.), which operates a string of stores, and a C corporation (a tax-paying corporation, called R/E Co.), which owns real estate leased to Success Co.
The real estate has an income tax basis of $1 million, but a current fair market value of about $6 million. Sam owns the remaining two percent of the stock of both corporations. Each of the corporations is the owner and beneficiary of a separate $1 million insurance policy on Joe’s life.
Four more little details:
• Joe’s second wife, Mary, is 45 years old and they have a premarital agreement that gives Mary the income from one-half of the value of Joe’s assets at his death for as long as Mary lives. But get this: none of the stock of Success Co. can be used to provide Mary her income.
• An artificially low price in a buy/sell agreement would force Joe’s estate to sell his stock in Success Co. back to Success Co. and the same for R/E Co. (Result: Sam would then own 100 percent of both corporations.)
• Joe has two other grown children who are not in the business.
• Joe is not insurable.
The diagnosis:
• The $1 million in life insurance payable to R/E Co. would kick up an unnecessary alternative minimum tax.
• The full $2 million of insurance would be included in Joe’s estate because he controls both corporations, but the $2 million (less the alternative minimum tax of about $150,000) would belong to the corporations, not Joe’s estate.
• There are not enough liquid assets to satisfy the obligation to Mary. Worse yet, if the obligation to Mary is met, there would be zero dollars (outside of the corporations) to pay an estimated $3.5 million estate tax liability. Simply put, the estate would be broke.
Our objectives to cure Joe’s tax illness are clear:
• Reduce the value of Joe’s estate.
• Get cash to fund the obligation to Mary.
• Pay the estate tax.
Here are the five major tax medicines I recommended to cure Joe’s business transfer and estate plan:
• Merge R/E Co. into Success Co. This maneuver is tax-free. R/E Co. is worth about $6 million as a real estate investment company but, as part of the operating company, its value is reduced by at least $2 million for estate tax purposes. Estate tax saving — over $1 million.
• Transfer the nonvoting stock (created after the merger) to a grantor retained annuity trust (GRAT), which reduces the value of Success Co. by about 40 percent for estate tax purposes. This maneuver saves about $.5 million in estate taxes.
• Joe takes the $2 million in insurance policies out of the corporations and gives it to his children. Result: The value of Joe’s estate drops about $2 million and will save another $1 million plus in estate tax.
• Change Joe’s will to put the entire estate tax obligation on the children. The $2 million in income tax-free/estate tax-free insurance proceeds will handle the entire estate tax load when Joe dies.
• Make sure Joe’s will qualifies for the 100 percent marital deduction for Mary’s one-half share, thus deferring any estate tax on this portion of Joe’s estate until Mary dies. Yes, there are other details and nuances in the plan, including gifts to Joe’s children, but these five tax medicines cured the patient.
What’s the lesson to be learned from this true-life Joe/Sam/Mary story? Always, yes always, get a second opinion after your estate plan is done, preferably before any documents are signed.
Tags: 401 k plans, alternative minimum tax, annuities, business transfer, c corporation, employee benefit plan, estate planning, Estate Tax, family business, income in respect of a decedent, income tax, Insurance, insurance policy, investment income, IRA, IRS, jonathan blattmachr, painful subject, pension plans, planning team, potfolio, premarital agreement, professional advisors, profit, profit sharing, qualified retirement plan, return, s corporation, stock market, strategy, successful family, tax basis, tax bracket, tax deffer, tax dollars, tax free, tax free investments
Posted in General Tax Strategies, General Tax Talk, Uncategorized | No Comments »
Monday, March 30th, 2009
While browsing though my small mountain of files looking for ideas on what to write, I ran across a timely and interesting article in an old issue of Newsweek titled, “Darling, It’ll All Be Yours — Soon.” The article explains how “the inheritance boom is quietly reshaping how we think about death.” How true.
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.
Tags: 1950s, 401 k, 401 k plans, adviser, annuities, asset mix, berkshire hathaway inc, boom, c corporation, certified public accountant, elders, employee benefit plan, estate planning, estate planning lawyer, Estate Tax, estate tax purposes, fact number, family wealth, free wealth, generations, grandkids, income in respect of a decedent, income tax, inheritance, Insurance, insurance premium, IRA, IRS, irs estate tax, jonathan blattmachr, key management, life insurance policy, lifetime plan, millionaire, millionaires, mom and dad, municipal bonds, newsweek, newsweek article, nonqualified deferred compensation, number 72, order of business, painful subject, pension plans, potfolio, predictable response, professional practice, profit, profit sharing, qualified retirement plan, return, robert j samuelson, sacred cows, second generation, stock market, stock market investors, stocks and bonds, strategy, tax blunders, tax bracket, tax deffer, tax free, tax free investments, tax monster, tax returns, transferable insurance policies, wills and trusts
Posted in Irv Talk, Planning, Uncategorized | No Comments »
Saturday, March 28th, 2009
There are three main ways the federal tax law picks your pocket and becomes your legal partner: payroll taxes, the income tax and the estate tax. So, how can you fight back? Here are five areas in which you can save money from taxes.
Would you believe that the basic tax law, the Internal Revenue Code and regulations, is about 50,000 pages long with no logical, organized theme? There’s also a constant stream of Internal Revenue Service rulings and case law. No one person can know it all—not Congress, which passes the law, nor the IRS, which enforces it.
There are three main ways the federal tax law picks your pocket and becomes your legal partner: payroll taxes, the income tax and the estate tax. So, how can you fight back? One day, just for fun, we (four tax guys) started to count the ways to legally get around paying the three taxes listed. We were just getting warmed up when we counted 227 options and stopped. The following are five areas in which you can save money from taxes:
1. Payroll Taxes. This money-stealing parasite is persistent and expensive: This year, $16,404 on the first $106,800 of your earnings goes to the tax man. That’s a scandalous 9.76 percent. For earnings of more than $106,800, you pay an additional 2.9 percent.
Here are examples of the three most common ways to lose payroll taxes to the IRS: The first mistake involves Joe, the owner of an S corporation who taxes a large salary (often $500,000 or more) and takes a huge bonus at the year’s end to bring down profits. For this S corporation, a tax-free dividend instead of compensation would save a bundle of unnecessary payroll taxes and would cost no more in income taxes. A second payroll tax mistake is when owners’ wives and moms take a salary when they either don’t work or are overpaid. It is much better tax-wise to give them a gift. The third mistake is operating a business as an LLC, which makes all income to the owner(s) subject to payroll taxes.
2. Asset Protection. In a heartbeat, your family wealth, including your business, can be depleted or even destroyed by a lawsuit.
Keep your business thin by keeping only those assets—typically, necessary cash, inventory and receivables—needed for operations in your business. Here are some basic sub-strategies: Elect S corporation status; personally own (via separate LLCs) any new real estate or expensive equipment, and lease it to your operating company; and never own delivery vehicles in your operating company. Put the vehicles into a separate corporation or LLC.
The sad fact is, we can’t protect the assets inside of your operating company, but we can protect you and your spouse. All of your significant assets are simply retitled using typical lifetime planning documents—such as family limited partnerships, LLCs and appropriate trusts.
3. Life Insurance. You can save money in taxes whether you, your spouse or your kids own the insurance.
Critical issues concerning life insurance are premium cost, the death benefit and the tax due on the benefit at death (usually the estate tax). The following are common ways to modify insurance plans to save premiums or increase the death benefit without additional costs:
• For single life or second-to-die insurance, you can get a cash-surrender value of more than $200,000 on a policy that is 9 years old or older. This results in significantly more death benefit for the same premium cost or a significantly reduced premium cost for the same death benefit.
• If you, the husband, are at least 55 years old, worth more than $5 million and have insurance on your life only, you are wasting premium dollars. Second-to-die coverage with your wife will typically give you the same death benefit for about 35 percent less premium cost.
• If you have more than $400,000 in a qualified plan such as a 401(k) or IRA, that amount is subject to a double tax (income and estate) of as much as 73 percent to the IRS. On average, you can turn every $270,000 of after-tax dollars into $3 to $5 million (tax-free), depending on your age and health. This plan works for second-to-die or single life insurance.
4. Business Succession. This affects your business and your business kids. The typical business owner wants to transfer the business to his kid(s) so that he and his kid(s) don’t get killed by taxes. He also wants to treat his non-business kids fairly, ensure that he controls his business for as long as he lives and ensure that the company stock stays in the family by never going to a kid’s ex-spouse. Every one of these goals is easily accomplished. Best of all, the business can be transferred tax-free, with no income tax, gift tax or estate tax for the owner or the kids.
5. Estate Plan. A proper estate plan is actually two plans: a lifetime plan and a death plan. The plans are designed to cover every significant tax-saving possibility—from the minute the lifetime plan is created until after you get hit by the final bus (covered by the death plan).
Tags: 401 k plans, annuities, average rate of return, business owner, business succession plan, case law, charity, conservative investments, consulting contract, dividend, earned wealth, earnings, estate planning, estate planning lawyer, Estate Tax, family wealth, federal tax law, financial statements, first mistake, income tax, income taxes, Insurance, insurance company, internal revenue code, internal revenue service, IRA, IRS, irving l blackman, legal partner, life insurance, life settlement industry, lifetime plan, moneymaker, one person, ow, parasite, payroll tax, payroll taxes, plan business, potfolio, predictable response, professional advisers, profit, qualified retirement plan, return, s corporation, salary, stock market, strategy, tax blunders, tax deffer, tax free, tax free investments, tax man, tax purposes, tax returns, u s treasury bonds
Posted in Estate Tax, General Tax Strategies, Irv Talk, Retirement Tax Advice | No Comments »
Saturday, March 28th, 2009
Do you know how to make a grown man cry? Tell him his business has been destroyed by fire, flood or an act of God.
Yes, a tragedy. Bad stuff. But, most likely, the loss was insured — a bit of help. It’s even more important if Joe Owner is there on the scene to assess the damage, make plans and start rebuilding. Chances are he will make the business bigger and better than before.
End of Scene 1.
Here is Scene 2. Even the most successful, egotistical and immortal business owner knows that some day he must go to the “big business in the sky.” That will not make Joe Owner cry. He is too realistic for that. But tell him that after he is gone, his present plans, or better yet — lack of a plan — mean the Internal Revenue Service will dismantle his business.
Imagine our departed Joe in heaven; sitting on a cloud; talking to a representative of the revenue service. Joe speaks first.
“Why?” he asks.
“To pay taxes,” answers the tax representative.
“How?” he asks.
“By selling off the assets necessary to pay the tax.”
“When?” he asks.
“Within two years.”
“Why?” Joe demands.
“To pay your federal estate tax liability.”
“How much?” he queries.
“That depends on the value of your business.”
“Good,” says Joe. “I can show you just how little the business is worth without me.”
“Sorry,” responds the IRS representative. “It’s too late for that now.”
The curtain goes down.
Welcome back to earth. Is the above scenario realistic? Yes.
Crazy as it sounds.
If you own a closely held business and don’t pin down its value for tax purposes while you are alive, you are setting yourself up to be mugged by the IRS.
Every business — like it or not — must some day be valued for tax purposes. It is best for it to be done voluntarily, by you (the owner) during life. If not, the valuation will be done in an involuntary situation, after death, by the revenue service.
The only “out” is to sell the business in a real transaction during your life. For most business owners, selling doesn’t make sense for many reasons.
The two most common reasons are: First, the typical business owner wants to transfer the business to his or her kids; or second, wants to keep on working until he or she goes to business heaven.
The message should be clear: Want to save your business and your family untold aggravation, not to mention savings of 55 percent, the highest estate tax bracket in 2011? Then do three things: Find out the value of your business for tax purposes by getting an appraisal. Put a transfer plan, usually to your kids, in place during your life.
And then dovetail the first two steps with your estate plan.
Done right, you can transfer your business to your kids tax-free during your life, beat the estate tax collector legally, and control your business for as long as you live.
Tags: 401 k plans, annuities, asset protection, assets, bad stuff, business owner, business owners, charity, curtain, egotistical, employee benefit plan, estate planning, Estate Tax, federal estate tax, gross misuse, income in respect of a decedent, income tax, Insurance, insurance premium, investment interest, IRA, IRS, irs representative, jonathan blattmachr, man cry, money strategy, painful subject, pin down, potfolio, profit, profit sharing, sacred cows, scene 1, second opinion, sitting on a cloud, tax blunders, tax deffer, tax free, tax free investments, tax liability, tax monster, tax purposes, tax representative, tragedy, transferable insurance policies, welcome back to earth
Posted in Corporate Tax, Estate Tax, General Tax Strategies, Insurance, Tax Strategies | No Comments »
Friday, March 27th, 2009
Tax-free investments are big.
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.
Tags: 401 k plans, annuities, annuity, fixed annuities, indexed annuities, IRA, liquidity, municipal bonds, potfolio, profit, profit sharing, return, roth iras, stock market, tax deferred annuities, tax deffer, tax free, tax free investments
Posted in General Tax Strategies, Investment Strategies, Tax Strategies | No Comments »
