Page 44 - MetalForming June 2014

Blackman on Taxes
By Irving Blackman
Tax Magic—Turn Every Dollar of Investment Income into Tax-Free Income
“Tax-free” always has a nice ring to it. The higher the income-tax rate the nicer the ring. The old top rate, at 35 percent, was bad enough. The current highest rate— 39.6 percent—has created a flurry of
activity to legally avoid the tax.
But wait, there is an additional sur- tax that can bite you for another 3.8 percent on passive investment income. And there can be more: Your home state may have an income tax. Some states (including Nevada and Florida) have no tax. And other states—New York at 8.82 percent, California at 9.3 percent and Hawaii (the highest) at 11
percent—have killer top rates.
So, if you have a large amount of investment income your tax burden can range from a low of $42.4 percent to
as high as 53.4 percent.
This gives us a worthy target to make
tax-free. But how? The answer, as you will learn in this article, lies in private- placement life insurance (PPLI).
To start, let’s see how your wealth accumulation is impacted by taxable vs. tax-free. The following example (creat- ed by Lewis Schiff, an Austin, TX lawyer) will astound you.
Facts: A PPLI policy insures a 45- yr.-old male ( Joe) paying $2.5 million each year in premiums for 5 yr., a total of $12.5 million. The assumed rate of return is 10 percent (net of investment-
Irv Blackman, CPA and lawyer, is a retired found- ing partner of Blackman Kallick Bartelstein, LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult? Need a sec- ond opinion? Contact Irv:
tel. 847/674-5295
ir v@ir vblackman.com www.taxsecretsofthewealthy.com
management fees), taxed as ordinary income at 40 percent, including Federal and State taxes.
deferred account. As long as the assets stay within the account, Jim does not recognize any income. However, if Jim
withdraws any money from the account, then he recognizes taxable income. The mini- mum size for a PPVA is $1 million, with many ultra- affluent families putting $100+ mil- lion into these accounts. Because the asset commit- ment is much high- er than for a retail annuity, the costs are much smaller,
usually under 1 percent/yr. Those look- ing to defer more assets in addition to traditional retirement accounts should consider a PPVA account.
Here’s a smart way to use a PPVA to endow your foundation or a public charity. Let’s say you have $100 mil- lion of wealth and you know with rea- sonable certainty that you will never need to touch $25 million of that wealth. So, you put $25 million in a PPVA and the money grows tax- deferred. If you need to access the money, you can do so. But if you don’t touch the money, all of it will go to a charity or foundation at your death. At current tax and life-expectancy assumptions and reasonable growth rates, three to four times more money will go to charity using your PPVA.
With a PPLI, you put after-tax dollars to work in the form of an insurance premium. There are two components to your PPLI account—a tax-deferred investment account and an insurance benefit. When you put money into a PPLI, one of two scenarios play out. In one, you never touch the money during
PPLI
End of Year
Taxable Investment
Cash
Death Benefit
1
$2.650
$2.665
$43.900
5
12.288
13.351
43.900
10
16.445
20.508
43.900
20
29.450
50.071
61.087
30
52.740
125.095
133.851
40
94.449
312.915
328.560
Results, in $ millions (rounded)
Take a moment to study the results above. If Joe lives to age 75, his cash value is $125 million, vs. $52.7 million for the taxable investment; the death benefit gives him a tax-free bonus of nearly $9 million—certainly a worthy target.
The prime purpose of PPLI is to make investment profits (whether cap- ital gains, dividend income or interest income) tax-free. Simply put, all policy investments are wrapped in a tax-free insurance envelope.
What is PPLI?
PPLI is a form of variable universal life insurance offered privately rather than through a public offering. Vari- able life insurance has cash value dependent on the performance of one or more investment accounts in the policy.
There are an endless amount of tax magic tricks you can do with PPLI. For example, with a private-placement variable annuity (PPVA) investment account, a wealthy client (Jim) can put after-tax dollars to work in a tax-
42 MetalForming/June 2014
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