The Tax Cuts and Tax Act of 2017 set the stage for seeking to perpetuate a financial legacy far into the future.
The tax law signed into law by President Donald Trump doubled the amount that can be passed on to heirs free of estate and gift tax. Single persons may have an exemption from tax of $11.18 million, and married persons can pass $22.36 million free of estate and gift tax.
But is this enough to make sure that the next generation and future generations financially secure? Will a lifetime of hard work, and overcoming risks, be lost through income tax, inflation, and investment uncertainty?
The estate planning and financial money management types offer their clients elaborate planning structures which promise to solve future financial and family problems.
Using various legal maneuvers, such as multiple trusts combined with tiered family limited liability companies and partnerships, these professionals create for their clients the mechanisms to protect assets from creditors, minimize or avoid entirely potential estate taxes, and set up a means to ameliorate potential family disharmony.
These legal arrangements can be established in various states that enacted special legislation allowing for establishing trust configurations literally in perpetuity.
A good thing for the service providers but additional costs to the trust.
A dynastic planning structure means fees for trust administration and investment management will be payable into perpetuity. The ongoing overhead costs could be substantial.
These costs added to the income tax on distributions, and the effect of inflation, means that the yield to the beneficiaries will be severely affected.
What if the dynasty plan was based on using generational life insurance?
The funding of the trust is used to buy insurance on the lives of the children and grandchildren.
Using life insurance allows for the investment build-up to be free of income tax. Money used to distribute to beneficiaries could then be borrowed from the cash surrender value of the policy. As borrowed money, it is income tax free.
When an insured dies, the death proceeds of the policy are income tax free and estate tax free.
The proceeds being paid into trust, then are used to obtain life insurance on the next following generations.
This structure also reduces investment management risks. Life insurance companies have a long-term investment horizon which enables them to execute a buy and hold strategy is reducing the volatility and uncertainty.
How good is life insurance as an investment vehicle?
Life insurance can be used as tier one capital for financial institutions.
The TCJA created a major estate tax free funding opportunity for those who may want to structure a dynasty plan. Well, at least until 2026 or another Congress changes the tax law again.
For those who want to establish a tax-smart dynasty plan with controlled costs and low investment volatility exposure, then using life insurance as a secure financial vehicle makes a lot of planning sense.
Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.
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