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If you’re approaching retirement, or even if you’ve been retired for ten years already, you probably know the importance of planning for your financial future.
Now, many of us have reached that age where we start thinking beyond our own future—and thinking about what will happen when we’re gone—and our family, children, and grandchildren remain.
As you address the issues of asset protection, wealth maximize, and estate planning you’ll want to consider the benefits of developing a sound financial strategy—one that utilizes multiple investment vehicles and asset classes—with the hope of maximizing your wealth and passing that wealth to your heirs.
If you considering leaving assets behind, you should know that certain assets in your investment portfolio may be subject to income taxes. Have you considered the consequences for your heirs or beneficiaries if they forced to pay an estate tax, inheritance tax or other income tax on the assets you choose to bequeath? What if your assets are taxed by the state or federal government at the time of your death?
Bottom line: if you want to preserve the wealth you’ve accumulated for the next generation you need to think about wealth maximize and put together a strategic plan that takes advantage of the various investment vehicles at your disposal.
Because the truth is: taxation can significantly erode a portion of your asset’s value.
Why Life Insurance Could be a Good Addition to Your Investment Portfolio
The death benefit of a life insurance policy generally passes to the beneficiary income tax free*, providing valuable cash that can be used to pay taxes, debts and long-term obligations.
Unfortunately, we’ve found that many of our clients are unfamiliar with how life insurance can help diversify and enhance the predictability of an overall investment portfolio. And that’s why we’ve written this brief guide on wealth maximization—so you know your options, and have an example of an effective strategy to avoid the erosion of assets at the time of your death.
Here’s two dead simple reasons life insurance may be a good addition to your strategy:
The dependability of a life insurance policy’s death benefit can give your investment portfolio balance and diversification.
The features of a life insurance policy also make it an important tool when developing a strategy to recover and transfer wealth on a tax-advantaged basis.
Now, These Strategies are Not For Everyone…But This May be Appropriate for People Who:
- Have accumulated different types of assets to grow capital and wealth during their lifetime, and have reserved these assets to pass to their spouse, children and/or grandchildren and that will not be needed to meet their future income or emergency needs.
- Are typically higher net worth individuals, ages 60 – 80, single/married, widowed, and insurable.
- Want to transfer wealth to loved ones with greater predictability and less risk.
- Desire a wealth recovery strategy that may help offset declines in portfolio values or stock market volatility.
- Have the need for life insurance and its death benefit protection.
- Own assets that may include:
- Certificate of Deposits (CD’s)
- Widows/widowers with B-Trust assets
- Rental Property
- Stocks and Bonds
Want a Real Life Example? Meet Jeff Spencer
Jeff Spencer, widower, age 69, owns an investment portfolio that includes $1.5 million in bonds and $4.5 million in stocks.
His investment portfolio has experienced a decline over the last year due to market losses and volatility—which has impacted the financial legacy Jeff wants to leave to his heirs.
Jeff’s retirement income needs are being satisfied by a pension plan and income from rental properties. He has some flexibility with how he structures his investment portfolio because the cash flow he receives from the rental properties and pension provide a comfortable lifestyle.
Jeff wants to diversify his portfolio, transfer wealth more predictably to his children, and implement a wealth recovery strategy to offset recent declines in portfolio values.
After a thorough review of Jeff’s situation, Jeff decided that he is willing to gift a portion of his bonds to an irrevocable life insurance trust (ILIT), using his available gift tax exclusion and exemption amounts.
Here’s the Steps We Took to Create a More Predictable Transfer of Wealth
Step 1: Jeff and his Big Lou® advisor select a life insurance product type that best fits his objectives. Various premium payment amounts and methods can be compared (single-pay, level-pay, etc.).
Step 2: Jeff and his Big Lou® advisor evaluate the benefits of purchasing a Universal Life Insurance policy from one of our many insurance carrier partners. It’s determined that $250,000 paid for five years would purchase a face amount of $2,785,000 of death benefit protection guaranteed until Jeff turns 105 years old.
Step 3: Jeff and his Big Lou® advisor plan to liquidate investment assets into cash over the next five years and transfer the cash to a newly-created Irrevocable Life Insurance Trust (ILIT), using available gift tax annual exclusions and/or a portion of his lifetime exemption amount. The trust uses the funds to acquire the universal life policy that was previously chosen. The death benefit will be free of income and estate taxes, assuming a properly drafted ILIT. The policy’s death benefit produces internal rates of return (IRRs) that compare favorably to his existing portfolio assets and help diversify Jeff’s overall wealth transfer strategy.
The Results of Developing a Sound Strategy
The strategy helps Jeff accomplish a number of important financial goals.
Diversification: The reliability of the life insurance policy’s death benefit and cash accumulation helps Jeff diversify his overall investment strategy.
Wealth Transfer: Jeff converted investment assets that were subject to estate taxes, income taxes and market fluctuations into life insurance in an ILI T. By doing so he secured the transfer of part of his wealth to his heirs, income-tax free, estate-tax free and without market fluctuations.
Wealth Recovery: The death benefit of the life insurance adds value to Jeff’s overall wealth transfer strategy by helping to potentially recover some of the portfolio value lost due to recent market declines.
Jeff accomplished his goals by thinking beyond matter-of-fact estate planning—and considering the consequences of his current portfolio structure—especially the tax consequences that would impact his heirs when he was long gone. Jeff feels relieved that he took the time to learn about wealth maximization strategies from his Big Lou® advisor.