BY IRVING L. BLACKMAN
ONE THING IS certain about practicing tax law. Nobody knows it all. What's the result? Specialization. A practitioner finds a little — but worthwhile — niche and quietly benefits his clients with spectacular results using his proprietary strategy. To the rest of the world, including tax guys like me, the strategy remains a secret.
The secret strategy you are about to learn is called a "Life Settlement/ Repurchase," or LIFSET for short. Hats off to David Jones, the specialist in LIFSET, of David M. Jones & Associates, Naples, Fla., (where your snow-bird author winters) for the information you are about to read.
To start, it is important to recognize that LIFSET is a true niche. Not for everyone. But when it fits, wow!
LIFSET is a simple, single-trick strategy. It eliminates or reduces your life insurance premiums, yet you still maintain the same death benefit. Your policy can be single coverage (only on Joe's life) or second-to-die (death benefits are only paid after Joe and Mary, husband and wife, are both gone).
If single coverage is involved, you must be age 70 (or older); if secondtodie, both husband and wife must be 70 or older.
A real-life example, taken from David Jones' private client files, is an easy way to show how this works. Joe and Mary (ages 82 and 78) owned a $4 million second-to-die policy, with a cash surrender value of $489,000 and paid an annual premium of $44,000. Now, following is the two-step process of every LIFSET.
Step No. 1. The old $4 million policy was sold for $1 million ($511,000 more than the $ 489,000 CSV). Step 1 is called a "Senior Settlement" or "Life Settlement."
Step No. 2. The $1 million received in Step 1 is used to purchase a new second-to-die policy on Joe and Mary for a single one-time premium of $1 million. Future premiums — none.
Result. Joe and Mary have exactly the same $4 million in death benefit coverage, but their annual premium payments will be zero, whether they live for one year or until one (or both) reach the biblical age of 120.
Simple, isn't it? Yet to implement a LIFSET requires a great deal of specific expertise and extensive contacts in the Senior Settlement marketplace and the insurance industry.
Now, a few more things you should know. A LIFSET:
- Can start with any policy that has a death benefit of $250,000 or more, whether a term policy or a policy with CSV.
- Can be flexible with Joe (or Joe and Mary) winding up with more or less coverage or even some cash in pocket.
- Can be magnified in dollar results (larger Life Settlement, larger new insurance policy or both) when Joe or Mary (or both) have a medical problem.
- Can be done when a policy is two years old, so (as long as you are still insurable) you can re-shop again in two years, saving or making even more money the second time around.
I have arranged for readers of this column to have their existing policies analyzed for a LIFSET without any cost or obligation. Send your contact information (name, address, and all phone numbers, work, home and cell) and insurance information (birthday, policy death benefit, CSV, annual premium and loans, if any) to Irv Blackman, 3830 Estes Ave., Lincolnwood, IL 60712. Call if you have any questions (847/674-5295).
IRS ups mileage allowance
If you use your car for business, listen up. Especially, if you hate keeping records of the actual expenses you pay for the business use of your car. The "optional mileage allowance method" is the name of this game.
Keep track of the business miles you drive and then apply the IRS's mileage allowance rate. Every year the IRS announces the rate for the next year. Good news. The rate for 2005 is 40.5 cents per mile; up from 37.5 cents in 2004.
But caution: The mileage allowance is not always your best tax bet. Take advantage of it only if you have neither the time nor the inclination to keep those expense receipts, or if past practice shows that your total actual expenses (including depreciation) are less than the allowance amount. If your actual expenses are more than the allowance, you must decide if the reduced recordkeeping (mileage only) is worth the smaller deduction. Hint: The more miles you drive, the more likely the mileage allowance will save you tax dollars, as well as time.
The 40.5 cents per mile includes depreciation. So instead of computing depreciation separately, 17 cents per mile for 2005 is assumed to be depreciation; 16 cents for 2004 and 2003; 15 cents for 2002 and 2001; and 14 cents for 2000.
When you sell or trade your car, just reduce your tax basis by the appropriate cents for each mile you used the optional method. Firms with up to four vehicles that are being used at the same time can claim the optional mileage allowance method.
Irving Blackman is a partner in Blackman Kallick Bartelstein, 10 S. Riverside Plaza, Suite 900, Chicago, IL 60606; tel. 312/207-1040, or via e-mail at [email protected].