Blackman on Taxes
How "The Retirement Plan Rescue" Saves a Ton of Taxes, Yet Creates Tax-Free Wealth
Raise your hand if you have a substantial amount in a qualified retirement plan (typically an IRA 401(k), profit-sharing plan or the like). For our purposes, substantial amount means $300,000 or more. The larger the amount, the bigger the problem or the better the opportunity (to apply the Retirement Plan Rescue and create tax-free wealth).
This is a bad-news/good-news article. First, the bad news, in the form of an example: Joe has $1 million (substitute your own real number) in his 401(k). Two taxes destroy Joe’s $1-million plan wealth. When Joe takes out just $1, income tax (state and federal) grabs 40 percent ($0.40), leaving $0.60. At Joe’s death (using 2011 rates) the estate tax steals 55 percent ($0.33) of the $0.60. What’s the result? The family gets only $0.27 out of every $1; the tax collector gets $0.73. If Joe dies with funds still in his 401(k), the tax collector still double-taxes the balance (as described above).
So, dead or alive, the tax collector will get $730,000 of Joe’s $1 million in his 401(k), the family only $270,000.
To make matters worse the IRS has, without warming, refused to favorably rule on a strategy called the “subtrust.” The use of this subtrust allowed us—depending on the client’s marital status, age and health—to turn that $270,000, as in Joe’s example, into a range between $2 million and $6 million, all taxes paid
The subtrust really only had one trick: It allowed you to use qualified plan funds to buy life insurance and the death benefit was free of the income tax and the estate tax. We’ll miss the subtrust.
So, it was back to the drawing board for me and my network of experts. Our goal was to come up with a strategy that would give us the tax-saving, wealth-building results of a subtrust but was free of even a remote possibility of an IRS naysayer.
And now the good news: We have come up with a new strategy—really a variation of various strategies we have been using for decades—that gives the same tax-saving, wealth-building results as a subtrust. We named the strategy the Retirement Plan Rescue (RPR).
The core concept behind an RPR is to shift from a highly taxed environment, a qualified plan, into a tax-free environment (life insurance). Sorry, but if you are uninsurable or highly rated due to serious health issues, an RPR won’t work for you. Have a healthy spouse? She/he will probably save the day and put an RPR in your planning picture.
The benefits of RPR are easy to summarize: Save a large amount of taxes and multiply the before-tax value of your qualified retirement plan (tax-free). However, the implementation of an RPR requires a great deal of expertise. In addition, each RPR, because of the many variables, is different and must be looked at on a case-by-case basis.
Finally, the big questions for readers are, “How will an RPR work for me and my family? What will my tax-savings be? How much tax-free wealth can I create?” I have arranged for readers of this column to submit the information necessary to create an RPR. Here’s the information you should fax (847/674-5299) to me: a) your name, address, phone numbers (business/home/cell); b) total amount in all qualified plans combined (if married, same for your spouse); and c) your birthday (also your spouse.) MF
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