May 06 2008
dividend distribution tax mutual funds
» Escrito en Business Tips por writer3 a las 13:47
dividend distribution tax mutual funds
Many of us have chuckled at the sight of a common bumper sticker often seen on many recreational vehicles - “Spending my Children’s Inheritance”. While a secure retirement is something we all believe in, very few subscribe to the notion that leaving one’s children nothing except debts to be paid at the time of our death is a very worthwhile idea. In fact, most express a strong desire to provide their children and grandchildren with a measure of financial security.
Building an Infrastructure
One of the most tax-advantaged means of securing a financial infrastructure is to establish and fund a Tax-Free Inheritance Trust. It should be considered by anyone who has a life insurance policy. Here’s how it works:
• The process is set in motion by you (the ‘Grantor) in establishing the trust. You select a ‘Trustee’ (a trusted friend or relative) who has integrity and common sense. The trust agreement is then drafted, signed and funded (with enough cash to pay the premiums on a life insurance policy on the life of the Grantor).
• A life insurance policy is funded with the deposits made by the donor, with the Tax-Free Inheritnace Trust being the owner and the beneficiary of the death benefit in the event the insured dies.
• Owned in this fashion, the life insurance death benefit will not only be income-tax free, but it will also be estate tax free. Given the sizeable term insurance and permanent insurance death benefits being acquired today ($500,000 or $1,000,000 or higher), the use of the Tax-Free Inheritance Trust can significantly reduce the taxable estate while increasing the financial security of family members.
A Grandparent’s Greatest Gift
Grandparents sometimes use this type of trust to own life insurance not on themselves but rather on the lives of their own adult children (who serve as the insured), with the grandchildren being the beneficiaries of the Tax-Free Inheritance Trust. When used to purchase life insurance (owned by the trust) it can result in a large tax-free inheritance created with ‘pennies on the dollar’. This gifting strategy allows parents and grandparents to jointly build a very nice tax-free inheritance for the grandchildren.
The ‘Family Bank’ Provisions
Properly crafted with the right provisions, the Tax-Free Inheritance Trust can provide for a veritable ‘family bank’. Cash accumulates and grows tax-free inside of variable and universal type life insurance policies, and rather than waiting until the insured dies, funds can be borrowed out on a tax-free basis to be used for the needs of the beneficiaries. These might include such needs as:
• Low-cost loans for college tuition and living expenses. The 6% or 7% loans made against the policy’s accumulated cash fund are significantly less expensive than the 12% to 14% student loans otherwise available to the student;
• Seed money to help start a business. A family member just starting out in business often finds himself or herself struggling to build credit, establish cash flow, make initial purchase acquisitions, etc. This ’seed money’ from the Tax-Free Inheritance Trust can help ease the transition, and it can be paid back in installments gradually over time as the young business owner achieves stability;
• Emergency medical care. Sometimes families find themselves in a financial bind when a medical condition is more expensive than anticipated or medical insurance coverage is not adequate enough to meet the needs. A grant or a loan from the ‘family bank’ of the accumulated cash pool inside the trust may be welcome relief when it is needed the most.
Lawsuit and Divorce Protection
Funds held inside the Tax-Free Inheritance Trust are outside the estate of the grantor. Thus, whether they are invested in mutual funds or life insurance or stocks or real estate, they cannot be seized by the grantor’s lawsuit adversaries. Instead, the funds belong to the trust for the sake of the beneficiaries you select. Not only can your lawsuit creditors not seize the funds, neither can ex-spouse, creditors or lawsuit adversaries a beneficiary. Since the trust is irrevocable, the funds inside are beyond the reach of a lawsuit adversary so long as the gift was made as part of one’s estate planning and not as part of a scheme to delay, hinder or defraud a legitimate creditor. The same is true in a divorce context. The assets contributed to the trust are no longer part of the property being divided by a divorce court, and once inside the trust, they are the property of the trustee who is responsible for investing them for the good of the beneficiaries.
Is This Type of Trust for Everyone?
It’s easy to see that the Tax Free Inheritance Trust has many uses: owning life insurance, reducing your taxable estate, protecting assets and becoming more tax-efficient. By removing the policy’s death benefits from your Taxable Estate, you can pass more of your non-insurance assets to your children through your Living Trust and can ensure that funds received from the payment of the death benefit go to the benefit of your children or grandchildren instead of to the checking account of the Internal Revenue Service. Short-sighted advisors might tell you that your estate is ‘not big enough’ to consider this strategy - but they assume your estate will never grow larger, and the overlook the benefit of getting life insurance ‘out of the way’ of taxation so that you are free to grow your estate as large as you want. The Tax-Free Inheritance Trust should be considered by anyone who has a life insurance policy. We’ll discuss this tool in detail in our upcoming Asset Protection and Wealth Preservation workshop.
ABOUT THE AUTHOR:
Michael Potter, Esq. is CEO of Wealth Preservation Advisors and a familiar face to many business owners and investors. His Integrated Planning practice is focused on Tax-Advantaged Wealth Accumulation, Accelerated Retirement Planning, Advanced Asset Protection, Business and Estate Planning, and values-based Multi-Generation Legacy Planning. To learn more, visit http://www.WealthAdvisors.Net
dividend distribution tax mutual funds
