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TAX SOLUTIONS
Tax-advantaged investment strategies that are appropriate for any income
I
nvestors are suffering. Interest rates are at historic lows. The stock market, plagued with roller
coaster-like volatility, is like a Las Vegas casino. Many readers of this column complain that it feels like they have been fleeced by Wall Street. Most have either totally or partially (usually a large portion of their port- folio) abandoned the equity market. Where have these ex-equity players
put their money? In low-yield, fixed rate stuff like CDs, savings accounts and U.S. Treasury bonds. Even though the readers know I am
a tax guy, they seek my investment advice. Sorry, I just don’t have those skills. But according to almost every reader I talk to, neither do their pro- fessional advisors have the skill to
Table 1
win in a down market or get them out without suffering a big loss.
What to do? Would you believe that a hated
enemy — the Internal Revenue Code — has the answers? There’s an old saying that goes, “You must know your enemy before you can defeat him.” We are about to apply some rules found in the enemy’s Code that will delight those who are conserva- tive investors by nature or who have become conservative because of cur- rent conditions. But first, let me tell you what my
survey with clients and column read- ers who call me has taught me about the typical goals of a conservative in- vestor:
• Increase income •Minimize risk • Lower taxes • Maximize inheritance (to their
family). Okay, let’s go to work. For tax pur-
poses there are two types of funds you can invest: •Qualified funds (in an IRA, profit-
sharing, 401(k) or similar plan) • Non-qualified funds (usually in
your personal bank account or funds you control in a business, trust, part- nership or other entity). There are an endless variety of tax-
advantaged strategies to accomplish the four goals listed above. Following are examples of the three strategies we most often use in our real-life tax practice.
BY IRVING BLACKMAN Tax and estate specialist
Start by purchasing a lifetime in-
come contract that pays a fixed annual amount every year for as long as you live. Divide the annual income into two parts: one part for income, the second part to pay premiums on a life insurance policy to replace the cost of the income contract. The schedule in Table 1 is an exam-
ple that shows the results for Lenny (invested $250,000) and Joe (invested $2.5 million). Both were earning 2% on their funds before starting their HES. The numbers speak for themselves:
more “Spendable Income,” more “To Family.” Thank you Internal Revenue Code. (The numbers for Sam the su- pervisor would be similar.)
Qualified plan rescue (QPR) For this example, the cast of char-
acters is identical and everything is the same except that the funds are in a qualified plan (IRA, 401(k) profit- sharing, etc.), in this case a rollover IRA that was earning 2%. This time the IRA funds are used to
buy the income contract, a tax-free transaction at its inception (again, thank you Code). However, each an- nual income (when received by Lenny and Joe) is subject to the full income tax rate, the same as if a dis- tribution had been made by the quali- fied plan. You’ll love the results in Table 2. Lenny locked in $250,000 (at his
Hidden Equity Strategy (HES) Table 2 Lenny is the little guy (in a 25% in-
come tax bracket, not enough wealth to worry about estate taxes), Sam is the supervisor (a bit higher income tax bracket, no estate tax problem) and Joe is the business owner (35% income tax bracket, 55% estate tax- bracket, using 2011 rates). All are 70 years old, retired (except Joe) and in good health. HES is a simple strategy.
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death) for his family while he will enjoy a $10,150 income per year for life (4.06% after tax on the $250,000). Joe, on the other hand, does not need the income and chose to use all of his “after-tax income” to purchase life in- surance for the extraordinary amount of $4,642,800, 100% tax-free (from the estate tax). How much would Joe’s family
have received if he got hit by the proverbial bus? Only about $750,000, because of the double tax — income and estate — on qualified plan money. So the QPR strategy turned $750,000 of after-tax money into $4,642,800 (tax-free) for Joe’s family. Wow! Obviously the QPR strategy is very
flexible and can be designed to do tax (Turn to Payoff... page 76.)
•THE WHOLESALER® — MARCH 2011
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