If a CPA (including me) doesn't know how to solve a particular problem for a client, then we must find someone who can. But recognize that often your CPA's (or any other professional advisor's) ability to help you is more a matter of experience than knowledge.
And of course, no matter how knowledgeable or experienced, none of us know it all. That’s why often the use of a specific strategy, method or concept that could have helped many clients falls through the cracks, unnoticed. This article is about a simple strategy that few CPAs (lawyers or other professionals) know exists.
As you are about to learn when this strategy is used, those clients and their families who use it enjoy a huge increase in the amount of their wealth, tax-free, and no additional out-of-pocket cost. Your author has helped implement this strategy hundreds of times. What guides me? Not personal knowledge, but my years of experience. My job is to recognize the opportunity and then call in an expert who implements the strategy with ease. The client is always delighted.
Let’s introduce the strategy by starting with some basic facts, based on my experience: 70 percent of life insurance policies with cash surrender value are outdated. What does this mean? These policies, typically 10-years-old or older, are simply not capable of performing like the new policies available in the current marketplace.
What makes the strategy a financial bonanza? Ninety percent of the time when the old policy is replaced with a new policy, the client winds up with a significantly increased death benefit, but no increase in out-of-pocket cash for premiums. And every dollar of those death benefits is tax-free. No income tax. No estate tax.
Aha! Legally avoiding taxes are in the CPA’s realm. But life insurance? Forget it. Almost every CPA is like a fish out of water when it comes to life insurance. We have pinpointed the problem: Neither the client nor the CPA knows those old life insurance policies are a treasure trove of opportunity to increase the client family's wealth.
The best way to understand how the strategy works is to look at some real-life examples. The following three examples are taken from my private client files. (A little side note: My partners are not happy with me revealing this strategy — or the examples — to the world.)
Example #1. Joe (age 82) and his wife Mary (84) had a 45-year old policy on Joe with a death benefit of $396,000 and a cash surrender value (CSV) of $355,000. Joe stopped paying premiums many years ago. My insurance consultant used the $355,000 CSV to purchase a second-to-die policy (on Joe and Mary) with a $706,000 death benefit. That’s a 78% increase over the original $396,000 death benefit, and, as is typical, not one cent of out-of-pocket cost to Joe.
Example #2. Larry (age 58 and single) had a 15-year-old policy on his life: death benefit of $788,631 and CSV of $239,027. Larry paid a $9,000 premium annually. This time my insurance guru traded-in (tax-free under the Internal Revenue Code) the old policy for a new policy with a $1,702,127 death benefit (a 116% increase). The $9,000 annual premium continued. Larry said, “Wow!”
Example #3. Mildred, a young 71-year-old widow, owned a 26-year-old policy: $10 million death benefit, $2,880,000 CSV. Mildred’s premium was $68,000 per year, but because the CSV was large enough to self-carry the policy, her intent was to pay no more premiums out-of-pocket (instead borrowing against the CSV). My insurance consultant pulled another rabbit out of the hat: He traded Mildred’s old policy (tax-free) for a new one with a $12,670,000 death benefit guaranteed with no further premium payments by Mildred.
Okay, so you are wondering if you can join the tax-free, wealth-building fun like Joe, Larry and Mildred. Actually, it’s easy to join. Just meet the following three requirements:
- You are 48-years-old or older
- Your policy is about 10-years-old or older with a CSV of about $250,000 or more. (Sorry, term policies cannot get in the game)
- You are healthy for your age (If married, at least one of you is healthy; best if both are healthy)
Do you meet the requirements? If yes, then this strategy is a must for you to follow through (to determine how much additional tax-free wealth can be created for your family).
Now, the next question is why do I want your CPA involved? Here’s the opportunity and the explanation.
First, the opportunity. My guess is that there are millions of hidden policies like the three examples above, where the insured will go to heaven and the insurance company will be enriched (unjustly), instead of the insured’s family enjoying those additional death benefit dollars. But how do we get those millions of policies looked at and the strategy implemented?
Second, the explanation: Your author has a simple plan to convert those hidden policies to their largest dollar potential. Here’s the plan: Get this article to your CPA (in person, fax, email, snail mail).
Have your CPA read this paragraph: Every year— and I mean EVERY YEAR — when you do your client’s tax return or year-end business audit, determine if your client meets the requirements. If so, bingo, call me (847-767-5296). I have twisted my insurance guru's arm. He will analyze your situation. No charge. No obligation. And, secondly, when you’re doing a year-end business audit, any insurance carried to fund a buy/sell agreement, keyman insurance or any other life insurance (owned or paid for by the company) should be put through the above routine as part of your audit program.
Yes, a new subject like this always leads to some good questions. So, do you or your CPA have a question? Call me (Irv) at 847/767-5296.
Irv Blackman, CPA and lawyer, is a retired partner of Blackman Kallick LLP and chairman emeritus of the New Century Bank, Chicago. He can be reached at 847/767-5296, email [email protected] or on the web at www.TaxSecretsOfTheWealthy.com.