Asset Protection

We live in a litigious society. Too bad but some people are see-you-in-court crazy. As a result, asset protection has become a big and essential subject. Articles. Books. Seminars. If you have wealth, prudence dictates that you protect it from others.

For asset protection purposes, "others" fall into four distinct categories:

1. The IRS and other tax collectors.
2. Creditors.
3. Plaintiffs in a future lawsuit against you.
4. Divorcing spouses — for example, an ex-son-in-law or ex-daughter-in-law who divorces one of your children.

Your Wealth Transfer Plan is not complete unless it protects your personal assets from the four categories of potential asset-eating predatory (human-type) animals. Your business assets are a different story: You may have to change your business structure to accomplish the "best" asset protection results.

DO YOU HAVE TO GO OFFSHORE?
No, generally you can accomplish effective asset protection by using the appropriate Strategies right here in the good-old USA.

Life Insurance

First, the bad news: Life insurance premiums (subject to few exceptions) are not deductible. The good news: Depending on your age and health, a small amount of premium can multiply your after-tax wealth. Why?… because life insurance, courtesy of the Internal Revenue Code, puts you in a tax-free environment: during your life, at your death and beyond.

Why the rich buy life insurance

A tax-free environment gives the rich — who are always in the highest income tax and estate tax brackets — an easy way to make money. Here’s something most people don’t know: the tax-free tricks you can do with life insurance.

1. During your life
   1. Earnings. The cash surrender value (CSV) of an insurance policy accumulates tax-free. A simple example: If the CSV of Joe’s $1 million policy is $100,000 at the beginning of the year and the insurance company earns 6 percent (or $6,000) during the year, that $6,000 is added to his CSV tax-free and carried over to start the next year.
   2. Policy Loans. Joe can borrow the CSV (loans are tax-free) and create a tax-free flow of cash. Loans are repaid (also tax-free) at Joe’s death out of policy proceeds.
2. At death
   1. Policy proceeds. The excess of the death benefit Joe’s heirs receive over the amount of premiums paid (say $250,000) is tax-free. The excess in this example is $750,000 ($1 million minus $250,000)… and is a clear profit on the entire transaction. But, by law, this profit is tax-free.
   2. The estate tax. The policy proceeds are not subject to estate tax if Joe uses any one of a number of tax-free strategies.
3. Beyond

   Suppose Joe is married to Mary and causes one of the many tax-free environments (typically a trust, but could be some other entity) to buy a $10 million policy on his life. Joe dies and the $10 million death benefit is paid — tax-free — to the trust. No estate tax at Joe’s death. Mary dies many years later, and the amount in the trust has grown to $15 million. Every penny of that $15 million will pass to Mary’s heirs tax-free: No estate tax, no income tax. (Note: The trust’s annual earnings are subject to income tax.)

WARNING
Yes, life insurance is the only product we know of that can deliver lifetime tax-free (income tax) benefits and also deliver tax-free (both income tax and estate tax) benefits at death. But to receive the benefits of these tax-free goodies, you must do the specific strategy selected (as explained on this website) exactly right. Do it wrong, and the tax law will crush you.

Is $1 million a lot of money?

In a taxable environment, more than you think (because of the double tax). How many dollars must you earn to leave your family $1 million after taxes? Try this:

*Rate may change from year-to-year

AN EXAMPLE OF TAX-FREE WEALTH CREATION
A premium of about $17,500 per year for 15 years (for a 50-year-old male) or about $263,000 does the work of $3.7 million. The annual premium for a second-to-die policy (husband and wife, both 60 years old) is about $15,900 for 15 years (a total of about $239,000)… much easier than earning $3.7 million.

In a taxable environment the IRS pays 55 percent of the premium

Suppose you are in the 55 percent estate tax bracket, pay $500,000 in premiums (from the day you bought $2 million in coverage to the day you die). The $500,000 is gone. It’s just not there to be taxed in your estate. Result: If you had not paid the premium, your family would have received at death only an additional $225,000 ($500,000 less $275,000 to pay the estate tax).

Your family gets the entire $2 million (because the policy was owned by a tax-free trust). So, the real out-of-pocket, after-tax cost of the policy is only $225,000.

THE POINT
Why do the rich buy life insurance?… To get some of their discretionary dollars out of a taxable environment and into a tax-free environment.

The math above, shows you why insurance is often the investment — as opposed to all other investments available — of choice. Remember why: earnings on CSV are tax-free; so are profits (the excess of death benefits over premiums paid); and the same happy result for death benefits.

If you would like to protect your wealth, call Irv at 847-674-5295.