Keep Your Nest Egg Safe: Protect Your Assets
April 16th, 2014
At Paradigm Life, our concern is not limited to how you earn, use, borrow and grow your money—we are also concerned with how you protect your money. In fact, we recognize and stress the importance of protecting ALL of your assets. To achieve this level of maximum protection, we highly encourage our clients to create and implement a complete Estate Plan with the assistance of a competent and knowledgeable attorney in this field. Without this asset protection, even the “best” estate and financial plan can be rendered useless.
There are many ways to protect your assets, and you can start by looking at State and Federal Statutes and then take “action” by creating LLCs, Asset Protection Trusts, Insurance and other asset protection vehicles.
Besides having protection from lawsuits and carrying sufficient insurance, your personal asset protection has two main principal components:
1) Identifying and Maximizing your Exempt Assets, such as Homestead Exemptions, Qualified Retirement Plans, Life Insurance, Annuities and more.
2) Transferring your Non-Exempt Assets to Asset Protection Vehicles. Non-Exempt Assets are usually cash, stocks, other investments, second cars or homes.
In this article, we will only focus on maximizing Life Insurance and Annuities.
The use of cash value life insurance as a wealth building and asset protection tool has always been very popular. This is primarily due to the fact that once funded, the money can grow tax-free and can be removed tax-free in retirement without any 59 ½ age restrictions or penalties. Life insurance provides a guaranteed death benefit, and in some states enjoys uniquely preferential treatment under the Internal Revenue Code:
* All earnings accumulate free of taxes until withdrawal.
* The death benefit can pass to beneficiaries tax-free.
* Tax-free loans.
* Tax-free exchanges are possible.
Although life insurance and annuity contracts receive only minimal protection under the federal bankruptcy laws in most states, the laws exempt annuities and life insurance policies from some or all creditor claims. In many states, life insurance is protected against debtors of the insured and the insured’s spouse or dependents, to an unlimited dollar amount. Although almost every state protects the death benefit of an insurance policy from creditors where a spouse or child is the beneficiary, the policy’s cash value may not be exempt in some states or it may have a limit on the amount of the protection.
The better asset protection states will protect the owner’s cash value as well as the beneficiary’s death benefit. The worst states may not protect the life insurance at all, or only the proceeds paid to beneficiaries when the insured dies. However, total asset protection can be accomplished through the use of a Trust or an LLC.
One of the reasons it is difficult for a creditor to access life insurance and annuity policies is because when you purchase them you are contractually taking back the promise of future payments in exchange for your premiums today.
As you can see, the asset/creditor protection for life insurance is complicated and must always be researched as to the specific facts involved in each case.
An annuity is a contract where an insurance company, or other guarantor, agrees that in exchange for a single premium, or series of premiums, they will make a series of payments to someone for the rest of their life or joint lives (e.g., husband and wife) for a fixed number of years. The income earned within an annuity is tax deferred until you cash in the contract or receive payments from it.
The income component of the payments is subject to ordinary income tax. A 10% federal penalty tax applies to most annuity withdrawals before you reach age 59-1/2. Annuities are typically purchased for guaranteed income during one’s lifetime, rather than to pass assets to their heirs. There are many variables on how the income can be paid with the addition of riders, but for our purposes I will stay with the basic annuity use and asset protection.
In most states, for an annuity to be protected the payments must be payable to someone other than the contract owner.
When should I start?
There is a Chinese Proverb that says “The best time to plant a tree was 20 years ago, the second best time is now.” Like any strategy that includes an asset protection component, timing is of the essence. In most states, clients who have an existing lawsuit or other immediate creditor exposure cannot usually make an 11th hour move into life insurance and claim safety, so you want to start your asset protection/estate planning strategy as soon as possible.
Life insurance also requires an insurable individual for the policy to be written on. In many cases, the spouses of most income earners are underinsured, are often healthier and may have a lower chance of being sued, so don’t overlook using a spouse instead of, or in addition to, the primary insured or income earner.
While this information merely scratches the surface of using life insurance or an annuity in an asset protection/creditor protection plan, hopefully, it sheds a little light on how you may benefit from using the right vehicles to create a stable, liquid cash alternative in a difficult or threatening economic marketplace.
I am not an attorney and this article is not meant as legal advice. It is an overview and a starting point for your research.
Because there are many variables between state-to-state laws, please find the following links to various resources for state specific protections. These sites are updated frequently, but because of a changing legal field and individual situations I highly recommend seeking legal counsel for your specific state and situation.
Only two Things in Life are Certain
March 12th, 2014
How many times have you heard that there are only two things certain in life – death and taxes? We all seem to leave this life in the same way, and while we are alive we do everything we can to avoid taxes. Fortunately, there is a financial vehicle that makes the tax dilemma easier.
Imagine simply paying taxes on your money as it is deposited, AND from that moment forward as your account grows you don’t report the growth on your tax return, AND you get to access the entire growth while you are alive income-tax free, AND when you die the entire account balance transfers to your beneficiaries income-tax free! Sound to good to be true? You may be thinking this is a Roth IRA. Well think again, a Roth IRA has limitations as to the amount you can deposit on an annual basis but this financial vehicle does not. Still wondering what it is? I am talking about cash value life insurance.
At Paradigm Life we strategically design Dividend Paying Whole Life Insurance policies offered directly through highly rated Mutual Life Insurance Companies. We deal specifically with Whole Life Insurance because of the guarantees, ease of access to your cash value, tremendous tax advantages and protection that you get from creditors. We only use Mutual Life Insurance Companies because of their outstanding track record, these companies have been in business for well over 100 years. Because it is a Mutual Company you as a policyholder share in the profits of the company every year by receiving dividends. However, dividends are not guaranteed. If/When you receive a dividend there is no income-tax to pay as it is credited to your policy!
Imagine how simple your tax planning could be if you knew you were accumulating wealth inside a financial vehicle that did not require any tax reporting. We at Paradigm Life have helped 1,000’s of clients take advantage of this powerful financial vehicle. Let us help you design a custom policy suited for your needs!
‘Tis the Season for Taxes
March 5th, 2014
With the April 15th deadline for filing your personal income taxes looming, I figured it a good time to review the tax benefits of permanent life insurance. While I am not an advocate of investing solely for tax reasons it’s important to understand how your investing strategy is impacted by taxes. Let’s refresh together the income tax benefits afforded permanent life insurance.
1. Tax deferred growth on all cash value. This means that all increases in cash value, including your dividends, grow in your policy on a tax deferred basis. While tax deferred growth is good, what really counts is what you’ll have to pay when you want to use the money.
2. Tax free utilization of all cash value. Here is a key distinction between permanent life insurance and other types of tax favored accounts such as IRAs and 401ks. While you can get the same tax deferred growth in IRAs and 401ks, you are forced to give up access to your money until dates determined by the IRS, typically until age 59 ½. That means, with a few narrowly defined exceptions, you cannot use your money until that point without facing stiff penalties. If your permanent insurance policy is properly structured, you can utilize all of your money, at any time, for any reason, with no penalty. And, the money can be put back
3. Tax free transfer of death benefit to heirs. Here is another key benefit of permanent insurance. Any money left in the account is transferred via the death benefit to heirs of your choosing and your heirs receive the money 100% income tax free. This is particularly exciting when you think about perpetuating wealth across generations. Each generation can grow capital with no income tax, use the money with no income tax, then pass the remaining wealth on (you guessed it) with no income tax. It’s a sort of perpetual motion machine!
4. No contribution limits. Unlike other tax qualified plans, there are no contribution limits or phase outs. That means anyone, at any income level, can benefit from the system.
5. Privacy from the IRS. Because permanent insurance was around before the IRS itself was created, there is no reporting required to claim these benefits. As long as your policy remains incompliance with the IRS regulations of life insurance, contributions and distributions do not have to be reported. The IRS does not have to know how much is going in or coming out of your account.
As you can see, permanent life insurance provides some of the most powerful tax benefits available, without forcing you to compromise the use and safety of your money. So as you are preparing your taxes this year, take some time to analyze the tax advantaged investments you are making. If you find you are sick of giving up access to your own money, reporting everything to the IRS, and taking the risk of rising taxes in the future, contact us at Paradigm Life to learn more about setting up a plan or taking fuller advantage of the policy you already own.