فصل 5 بخش 5

CHAPTER 5.5

SECRETS OF THE ULTRAWEALTHY (THAT YOU CAN USE TOO!)

It’s viewed as an insider’s secret for the affluent: a legal way to invest . . . all without paying taxes on the gains.

—NEW YORK TIMES, February 9, 2011

A NEW WORLD RECORD

In early 2014 the Guinness Book of World Records announced that a new world record had been established. No, it wasn’t for the Tallest Man in the World, or the World’s Longest Fingernails. It was a record that went largely unnoticed: “Mystery Billionaire Buys Record-Breaking $201 Million Life Insurance Policy.”

Why in the world would a billionaire buy life insurance? Won’t his kids be just fine if he passes away prematurely? Or was the media missing the point? Believe it or not, the ultrawealthy do indeed buy astronomical amounts of life insurance, but it’s not the billionaires who buy the most. The biggest buyers are banks and large corporations, from Wal-Mart to Wells Fargo. As an example, Wells Fargo’s balance sheet shows $18.7 billion of its Tier 1 capital deposited in life insurance cash value (as of May 27, 2014). By the way, Tier 1 capital is the core measure of a bank’s financial strength! Contrary to what the media says, corporations and the ultrawealthy are not looking to benefit from anyone’s death. What they really want is a place to park their cash in an IRS-sanctioned vehicle that allows them to grow their investments tax free. Sound too good to be true? In fact, it’s very much like a Roth IRA in terms of tax treatment. You pay taxes when you earn your money (income), but once you deposit your after-tax dollars within a specific type of life insurance policy, the IRS says you aren’t required to pay taxes as it grows; and if structured correctly (more below), you aren’t required to pay taxes when you pull out money. So while it is life insurance, it’s really designed to benefit you while you are alive!

If it’s good enough for billionaires and the world’s largest corporations, it’s probably good enough for us! Let’s dive in and figure out how to take this powerful tax-planning tool and accelerate our path toward financial freedom.

RICH MAN’S ROTH

The strategy in the pages ahead, known as private placement life insurance (PPLI), has been called “the secret of the affluent” by the New York Times—and for good reason. I was introduced to this tool by two of the wealthiest individuals I know. But you don’t have to be ultrawealthy to take advantage. Many high-income earners, such as doctors, lawyers, and small business owners will find tremendous value in the pages ahead, but those with as little as a few thousand to invest will learn how to create a version of the structure that will provide all the same benefits. Here are the astounding benefits available to all: • unlimited deposit amounts (with no income limitations)

• no tax on the growth of your investments

• no tax when accessed (if structured correctly) and

• any money left over for your heirs cannot be taxed.

Let’s not just breeze over this as a pretty cool strategy. This is essentially removing part or all your nest egg from the tax system entirely! Never again will you pay tax on growth of your investments or the money you access within this structure. This is why the media sometimes calls PPLI the “rich man’s Roth.” Consider this quote from the Wall Street Journal: The main attraction: Because the investments are held within an insurance wrapper, gains inside the policy are shielded from income taxes—as is the payout upon death. What’s more, policyholders may be able to access their money during their lifetimes by withdrawing or borrowing funds, tax-free, from the policy, depending on how it’s set up . . . One big reason for the growth: In recent years, the Internal Revenue Service has issued a series of rulings and regulations that have laid out more clearly what’s allowable and what’s not in private-placement life insurance and annuities. That, in turn, has removed uncertainty among insurance and investors.

By taking taxes out of the equation, the time it takes to reach your critical mass and financial independence will be massively accelerated. No longer do you have to worry about how much of your money will actually be yours to spend after the tax man takes his bite of your apple. In fact, one of the biggest challenges in knowing how much money you will really need in the future is the unknown of what tax rates will be for you in the future. Remember, taxes can easily be raised, and suddenly the amount of spendable income you have shrinks. If you’re planning on a 50% tax rate, but in the future taxes on the wealthy increase to 70%, or you’re currently at 30% and taxes grow to 50% for your income class, the amount of money you thought would get you to financial freedom will no longer get you there.

Let’s look at an example of how you can use this tool to achieve financial security or independence in less than half the time. Or double the amount of spendable cash you have if you keep the same investment horizon.

If you’re a high-end earner, like a doctor, dentist, lawyer, or small business owner, you may be fortunate enough to earn $250,000 per year of pretax income. As a high-income earner, that means that after tax (assuming a 50% combined federal and state rate), you will net approximately $125,000. This is the amount you need today to support your current lifestyle. It’s your total spendable income. Traditional financial planning would say you need to accumulate 20 times your current income, or $5 million in critical mass, to generate $250,000 of pretax income (assuming a 5% withdrawal rate). But if you aren’t required to pay tax, and the actual income you need is $125,000 without taxes, you really need to accumulate only 20 times $125,000, or a total critical mass of just $2.5 million within this structure. That means you get to your goal 50% faster or you get twice the spendable income if you reach your original goal of critical mass in the same time.

Now, if you make $50,000 a year, you may be saying, “So what? Isn’t that nice for the rich man or woman?” Stay with me here while I explain how this works for the rich, and then I’ll show you how to make this work for anyone who wants to get to his or her financial goals 30% to 50% faster—and all with the total support of the IRS, just as it supports 401(k)s or Roths.

ISN’T LIFE INSURANCE EXPENSIVE?

When my attorney initially told me about PPLI, I had an immediate aversion to the words life insurance. Like most, I had been sold expensive “retail” life insurance in the past and wasn’t going to be taken again.

She went on to explain, “Tony, this is not your typical retail life insurance. You can’t buy this off the shelf from a salesman with well-coiffed hair and a gold Rolex. This is an institutionally priced policy with no commissions, no surrender charges, or other nonsense you encounter from retail agents. Think of it as an ‘insurance wrapper’ you are buying to place around your investments. And because of the specific tax code, which has been around for many decades, all of your deposits will be legally sheltered from tax in this insurance wrapper. They can be invested in a variety of different funds, and you will not pay tax on the growth or when you access your cash if we do it right.” TAX-FREE COMPOUNDING

Compounded over time, the advantage of private placement life insurance is astounding. Let’s look at an example of how the identical investment compares when wrapped inside of PPLI versus taking the standard approach of paying tax each year.

Let’s take a healthy male, age 45, and assume he makes four annual deposits of $250,000 (for a total contribution of $1 million over four years). If he makes a 10% return and has to pay tax each and every year, after 40 years, his total account balance will be $7 million. Not bad, right? But if he wraps the investment within private placement life insurance and pays a relatively small amount for the cost of insurance, his ending balance (cash value) is just over $30 million! Same investment strategy, but he is left with more than four times (or 400%) as much money for him and his family simply by using the tax code to his advantage. (Please note that there are very strict rules around the investment management, which must be done by a third-party investment professional, not the policy owner.) By the way, this same powerful advantage applies even to smaller investment amounts. This is compounding without taxes! But then I wanted to know, “What about when I want to access my money?”

TAKING OUT MONEY

The power of PPLI is that you don’t have to worry about what tax rates are in the future. During the course of your investment lifetime, you will never again pay taxes on the gains that are within this policy. But what if you need the cash? Well, like any vehicle in which the government grants the benefit of tax deferral, you will have to pay tax if you take a withdrawal. But—and it’s a huge but—you also have the ability to “borrow” from your policy. In other words, you can call the insurance company and access your cash value, but it’s legally deemed and actually is a loan—and loans are not taxable. You can repay the loans at a future date of your choosing or allow the life insurance proceeds to pay off the loans when you pass away. It’s a legitimate loan, and it does get paid off. One more huge benefit to stack on? Life insurance death benefit proceeds are income tax free when your kids receive the benefit.

DO YOU QUALIFY?

In order to access PPLI, you must be what’s called an accredited investor22 and the typical minimum annual deposits are $250,000 for a minimum of four years. However, there is a “version” of PPLI that is now available to nonaccredited investors with as little as a few thousand to invest. Founded in 1918 by visionary Andrew Carnegie to serve teachers, TIAA-CREF “functions without profit to the corporation or its shareholders.” It now offers financial services to the general public, but TIAA-CREF’s unique not-for-profit structure allows it to offer a life insurance product with no sales or surrender charges. The underlying investment options within the policy include low-cost index funds (such as Dimensional Fund Advisors), which is in keeping with what we have learned from many experts in the book. And the tax benefits are no different from what we have learned regarding PPLI. Remember, being a no-load product with no commission, there won’t be insurance agents knocking down your door to sell you this product, so you will need to visit its website (www.tiaa-cref.org/public) and acquire it on your own or ask a fiduciary advisor to help guide you in setting up a policy.

As a fiduciary, your representative cannot take commissions. If she is skilled in this area and has a full understanding of how to set up this tax-efficient strategy, she will be doing you a great service. Depending on your current tax rate, it could help you achieve your goals 30% to 50% faster with no additional risk. Of course, if you are a Stronghold client, we have a team that can arrange all these details for you.

THE “BILLIONAIRE’S PLAYBOOK”

What a journey we have been on! We conquered the jungle with Ray Dalio and learned how a portfolio designed for all seasons has provided a smooth ride for nearly 75 years. We learned how to create a guaranteed lifetime income plan and achieve upside without downside with income insurance. And finally, we learned how a rare no-load life insurance policy can give us the equivalent of a Roth IRA without income or deposit limitations. Now it’s time for the opportunity—the gift—to sit down and learn directly from some of the most brilliant minds in the financial universe; to hear what has shaped them into who they are today and what they would teach their children on how to be successful investors. So let’s turn the page and meet the masters.

LIVING TRUST

One more quick but important note about protecting your family: the wealthy are diligent about planning to protect their families. One of the simplest things you can do to protect your family is to establish a living revocable trust. The key benefit to using a living trust to own your core assets (your home, brokerage account, and so on) is that if you pass away, those assets will avoid probate—a costly and lengthy procedure of allowing the courts to sort through your assets (and make everything public record). But unlike a will, a living trust can also protect you and your family while you are alive. If you become ill or incapacitated, you can include an incapacity clause that allows someone to step in and handle your bills and other affairs. Don’t let experts tell you that a living trust costs thousands. You can get a template document for free by visiting http://getyourshittogether.org. Chanel Reynolds started this nonprofit site after her husband was killed in a bike accident, and she wanted to make sure that nobody else went through the same experience of being unprepared. If you want to understand more about how simple and important living trusts are, go to her site.

In addition, if you want assistance, you can always find an expensive attorney, but you can also use LegalZoom and set up one for as little as $250 with the help of its attorneys (www.legalzoom.com/living-trusts/living-trusts-overview.html).

I’m including this reminder for you here because even though this book is not designed to be an estate-planning tool, one important responsibility we all have is to make sure that whatever wealth we build, however large or small it may be, our families benefit from it and don’t get stuck in a legal process that drains the gift from our heirs. As you begin to succeed, please seek out quality assistance when thinking about estate planning, but in the meantime, don’t wait to set up a living trust. Everyone needs one.