The Double-Edged Sword

 There are two sides to estate planning—how to make it and how to keep it.


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Historically, this column has taken the “you ain’t dead yet” approach to estate planning. My point is that you need two plans because even a perfect, traditional estate plan only takes care of your affairs after you get hit by the final bus. Simply put, it’s a “death plan.”

What about the rest of your life, though? Whether you live 5 or 40 more years, doesn’t common sense tell you that your lifetime plan (tax and economic) for those years should be put into place now, at the same time as your estate plan?

Since the economy started to head south, my readers have been hit in two ways: Their Wall Street portfolios show an average loss of 30 percent, and their businesses are down from previous years. Suddenly, they want to talk about “how to make it” (lifetime planning) and “how to keep it” (estate planning).

This column traditionally targets legally beating up on the IRS and saving taxes, primarily estate taxes. However, in keeping with these tough economic times, we will now add a new area of interest to this column: “How to make it.” Most of the time this will have a tax-saving twist.

One wealth-building strategy uses life insurance to avoid estate taxes. This strategy helps solve two continuing problems: huge Wall Street losses and the enormous tax costs on gains once the good times roll. Simply put, we want to cut the losses to really make a profit and cut taxes.

This is an investment strategy that takes advantage of a tax-free opportunity in the Internal Revenue Code. It’s called “Private Placement” life insurance (PPLI), and it’s a legal way for wealthy investors to make their investment gains tax-free. Gains are shielded from income taxes during your life and even at death. The death benefit from the policy not only is income tax free, but also can be set up to escape estate taxes.

PPLI is not a fancy concept—it’s just investments held in a life insurance wrapper. The types of investments you could make are wide-ranging, including hedge funds, derivatives, real estate investment trusts and others.

If you think you might need some cash down the road, a PPLI can be set up so you can take tax-free loans from the policy. If you are uninsurable, a neat wealth-building strategy is to use PPLI on a younger member of your family. Compounding earnings—tax-free—is a real wealth-builder.

And finally, I want to remind my readers that nobody knows it all. This column authoritatively covers a wide array of subjects with the help of a large, national network of experienced and knowledgeable experts. We are constantly exchanging ideas to help each other solve client/column reader problems.

So, come on readers: Join our How-to-Make-It, How-to-Keep It Club. Show this article to everyone you know. We want their ideas. Of course, we’ll give them credit and pass on (only the good stuff) the winning ideas to you, through this column. Together, we’ll prosper even before the economy picks back up.