Blackman on Taxes

Gifts divide family income by taking advantage of the zero or low-tax bracket of one or more family members. This strategy accomplishes two tax savings:

1) Income tax—transfers income (produced by the asset gifted) from Fred’s high bracket to the low bracket of his children and/or grandchildren, and

2) Estate tax—the asset is removed from Fred’s estate.

I’m about to use boxcar-dollar numbers to show the power of leveraged gifts. Adjust the numbers (raise or lower the amount of the gift) to your liking.

Here’s an example of a classic leveraged gift. Fred and Wilma (both 60 years old) would like to enrich their six grandchildren. Instead of making $24,000 gifts annually to each grandchild, here is what they do: Fred and Wilma create a wealth creation trust (an irrevocable life insurance trust that receives insurance death benefits free of income and estate tax). They find out that they can purchase a $1 million second-to-die policy (pays after the second death of Fred and Wilma) for a premium cost of only $12,709 per year, with premiums stopping after 15 years.

So, they make a gift of $12,709 each year to each of their six (total gifts each year of $76,254; $12,709 by six grandchildren) via a wealth-creation trust to pay an annual premium for six separate $1 million second-to-die policies for a 15-year period (then the policies will self-carry). After Fred and Wilma are gone, the grandchildren will have $6 million ($1 million each) tax-free at a maximum lifetime cost of only $1,143,810 ($76,254 x 15).

How much do you think Fred must earn to leave his children or grandchildren $6 million? Would you believe about $20 million? Try this: Fred earns $20 million in his life. After giving the IRS (and Fred’s home state) 40 percent for income taxes ($8 million) he has $12 million left. When Fred and Wilma die, the IRS gets 50 percent of the $12 million for estate tax. What’s left? $6 million.

Or put another way: An investment of only $1,143,810 over 15 years will do the same work as Fred earning $20 million.

What most people don’t know is that life insurance is—when properly purchased—the most tax-advantaged investment available under the entire tax law. If you have funds invested in a qualified plan (for example, an IRA, 401(k), profit-sharing plan or the like), or in traditional investments (CDs, stocks, bonds or the like), and if you (and/or your spouse) are insurable, it’s easy to turn thousands of dollars into millions of dollars. To learn how these time-tested strategies can work for you, call Irv at 847/674-5295. MF