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Will tax rates be going up? What happens to retirement income when taxes increase?

Currently, income tax and capital gains tax rates are at historically low levels.

The US government debt is now $31+ trillion, with $170+ trillion unfunded liabilities. State and individual debt loads are similarly bad.

How are various government entities going to finance skyrocketing debts and deficits?

Well, of course, the US government could simply “print money” to finance its spending, as usual. (The 50 states are not allowed to print money, so their financing options are limited.)

Assuming, however, that the federal government does not abandon its fiscal habits, we can further assume that federal and state income tax rates will rise sharply in the future. [See Deficit Myth by Stephanie Kolten for a different, more sensible monetary approach.]

So, a strategy to reduce future taxation of retirement income probably makes financial sense.

Too many people have too much of their retirement savings in taxable investment accounts and pre-tax tax-deferred retirement plans (e.g., IRA, 401(k), 403(b) plans). Even though many people will be earning less income in retirement, it is likely that higher overall income-tax rates will erode retirement income. Furthermore, investment accounts and tax-deferred retirement plans that are heavily invested in the stock market are subject to the downside risks and market volatility, as 2022 markets have shown us.

SOLUTIONS

Solutions to get tax-free income: (1) Shift some assets from taxable investment accounts, CDs, money market accounts into indexed universal life insurance (IUL). (2) While tax rates are still low, pay taxes on current income and invest the post-tax amounts in Roth accounts or (even better) in IUL. (3) If you are 10 years or more away from retirement, start “rolling over” pre-tax retirement plans (e.g., IRA money) into post-tax Roth plans. (4) Transition assets into one or more asset-based tax-advantaged long-term care (LTC) policies, which provide tax-free LTC benefits. (5) Invest pre-tax earnings in a 401(h) medical savings account (the tax trifecta: contributions, growth and distributions are tax-free).

Caveat: If your employer offers matching contributions in a pre-tax 401(k), 403(b) or other tax-qualified retirement savings plan, then without a doubt contribute to the deferred-tax plan up to the maximum matching amount.

In a Roth conversion, funds from an IRA, 401(k) or other tax-deferred plan are “rolled over” into a Roth plan and taxes are paid on the converted amount. If conversion of a large account value is contemplated, since the converted amount is immediately taxed as income, it can be done over a number of years to avoid being catapulted into high tax brackets.

Simply reducing taxable income in retirement can bring benefits. Reducing taxable income lowers so-called “provisional income”, which determines taxation of social security income. Taxable income also influences “modified adjusted gross income” (MAGI), which determines the level of Medicare premiums. Thus, reducing taxable income not only saves taxes on that income, but also reduces taxation of Social Security benefits and reduces Medicare premiums.

Generally, as with pre-tax plans, a 10% penalty is paid on Roth-plan withdrawals before age 59½. Roth IRAs have no required minimum distributions (RMDs), but Roth 401(k) plans do have RMDs starting at age 72 (currently), just like standard pre-tax plans. Furthermore, when the owner of a Roth IRA or Roth 401(k) plan dies, the beneficiary is subject to RMDs.

So, is there a better way than a Roth account to include tax-free income in retirement and legacy planning? Yes. A properly-designed IUL policy (indexed universal life insurance) can provide benefits of tax-free growth and tax-free income similar to a Roth plan, while providing other important advantages that Roth plans lack.

For example, cash value in a IUL policy never goes down in a bear market. Although conventional retirement plans often allow investing in risk-free annuity policies, assets in both pre-tax standard plans and post-tax Roth plans are typically invested in equity stocks and are, therefore, subject to market risks, such as volatility and extreme downturns (e.g., the financial crises of 2000 and 2008, and 2022′s inflation and recession), or in conservative, low-return bonds. In contrast, IUL has a 0% floor, meaning its account values do not go backwards as a result of negative market returns. Yet, IUL grows in a positive market because its account values are linked to the percentage growth (but never the negative returns) of one or more market indices. Another major benefit of IUL is the leverage of the insurance death benefit, which is effective immediately upon policy purchase. For example, if the insured happens to die in year 1 of the policy year, the policy beneficiary receives a large insurance death benefit. In contrast, if you start saving in a standard pre-tax plan or in a post-tax Roth plan, and if you suddenly die in year 1, then your beneficiary receives your initial year-1 investment and its year-1 growth, that is, not much. Additionally, IUL typically includes so-called accelerated benefits (or living benefits), based on the death benefit, for an insured who is chronically, seriously or terminally ill. Also, IUL does not have RMDs. Finally, IUL (and life insurance generally) can be owned by an irrevocable trust for estate and legacy planning.

With a time horizon of 10-15 years or more, building wealth using IUL is almost always a good choice.

Visit Law Office of Thomas J Swenson to learn more about estate and legacy planning, wealth building and asset protection.

Copyright © 2022 Thomas Swenson

Disclaimer: This information is intended for educational use only.

No client or potential client should assume that any information presented or made available on or through this article or linked websites may be construed as personalized planning or advice. Personalized legal advice can only be rendered after engagement of the firm for services. Please contact Law Office of Thomas J Swenson for further information.

Tax-Deferred Savings of $200K to $500K Annually for Business Owners, with Minimal Employee Costs

Using a defined-benefit cash balance plan, solo and small business owners, professionals and profitable entrepreneurs can readily save three to ten times more than in traditional tax-deferred retirement savings plans, while minimizing the portion of total plan costs allocated to employees. As a result, 90% or more of total plan contributions are allocated to selected participants, in full compliance with IRS non-discrimination and participation rules.

What is a Cash Balance Plus Plan?

A cash balance plan is a defined benefit plan with some of the characteristics of a 401(k) plan. The Pension Protection Act of 2006 (the “PPA”) enabled the combination of a defined benefit plan with traditional 401(k) and profit-sharing plans. The PPA expanded tax-deferred retirement planning beyond the limits of traditional IRA, 401(k), and other qualified accounts. The PPA offers flexibility for designing a specific, customized retirement plan that raises limits on tax-deferred saving and ultimately provides each covered individual a funded pension. PPA plans fall under ERISA (Employee Retirement Income Security Act of 1974) rules and thus are fully asset-protected.

With traditional pre-PPA qualified retirement plans, an owner must make significant contributions to employees. Using PPA rules, however, the business owner significantly lowers the costs allocated to employees who are not owners. The percentage of the total plan contribution for owner(s) with employees can exceed 95%+ of the total.

Further, instead of maximum annual tax-deductible contribution limits of $61,000 ($67,500 at age 50+) in 401(k) profit-sharing plans, a business owner using a Cash Balance Plus plan can typically deduct from $200K to $500K, even up to $1 million, annually.

Supercharged Retirement Saving

Cash balance plans offer owner-employees a vehicle to defer tax on income well in excess of the annual contribution limits of traditional 401(k) and profit-sharing plans. At retirement, participants can take an annuity based on their account balance. Some plans also offer a lump sum, which can be rolled into an IRA or another employer’s plan.

Many older business owners are turning to these plans to supercharge their retirement savings. Cash-balance plans have generous contribution limits that increase with age. People 60 and older can readily save over $300,000 annually in tax-deductible contributions.

Tax-Deferred Retirement Saving

Traditional defined-contribution retirement plans are valuable and well-known methods of tax deferral, but federal limits on contributions to Sec. 401(k) and profit-sharing plans cap this tax-planning strategy at relatively low levels. The maximum contribution into defined contribution plans is $61,000 in 2020 (up to $67,500 for persons age 50+.)

Since cash balance plans are defined benefit plans, contributions are not subject to this cap. Instead, the limitation is on the annual payout the plan participant may receive at retirement ($245,000 as of 2022). To optimize tax deferral and retirement savings, a cash balance plan can be used in conjunction with one or more of a § 401(k) plan, a profit-sharing plan, and a § 401(h) medical expense account; hence, “Cash Balance Plus”. This paper focuses on cash balance plans because a cash balance pension plan under PPA rules is at the core of any Cash Balance Plus design.

The annual tax-deferred contribution limit of an individual in a cash balance plan depends on age and salary, and the amount is calculated by an actuary each year. An exemplary contribution limit for a person aged 45-49 might be $170K, while the limit for a person aged 60-62 could be $320K. These limits can be increased in a Cash Balance Plus design, however, through the combination of 401(k) accounts, profit sharing, 401(h) accounts, spousal participation and several other techniques.

An advantage of PPA pension plans is the flexibility to contribute large amounts for older owners and to minimize contributions for non-owner employees. This can be achieved in full compliance with nondiscrimination and minimum participation rules of Internal Revenue Code (IRC) §§ 401(a)(4) and 401(a)(26).

The Pension Benefit Guaranty Corporation (PBGC) is a federally chartered corporation established under ERISA in 1974. The PBGC guarantees voluntary private defined benefit plans. Professional service companies having fewer than 25 employees are non-PBGC, which status limits profit sharing to 6% of compensation (instead of 25% for PBGC businesses). A Post-Retirement Individual Medical Expense (PRIME) account under IRC § 401(h) can be used to increase tax-deferred saving for owners and key employees in non-PBGC companies. The PPA governs 401(h) plans, which are a type of pension plan.

Cash Balance Plans Protected against Creditors

Cash balance plans are protected against an individual’s (and a business’s) creditors by ERISA and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, as affirmed by the U.S. Supreme Court.

Valuable Features of a Cash Balance Plus Design

Cost. Cash balance plans can reduce overall retirement plan costs since benefit targets are based on current salary.

Flexibility. Plans provide maximum flexibility to reach cost and benefit goals. Particularly, plans can be designed to provide greater allocations to older and/or key employees and still satisfy non-discrimination rules. Plan benefits can be distributed as an annuity or in a lump sum.

Simplicity. Plan designs and benefits can be easily explained to employees, who can readily grasp the value and mechanics of the plan.

Portability. Plan values can be ported to other accounts upon retirement, termination of the plan, or end of employment.

Security. Plans are protected against creditors. For companies with more than 25 employees, plans are guaranteed by the PBGC.

Tax Deferral. Similar to other qualified pension plans, contributions are fully tax-deductible to the business and benefits grow tax deferred.

Qualified Business Income Deduction. The new tax laws effective 2018 provided a 20% income tax deduction on qualified business income (the “QBID”), but service businesses did not get an unlimited deduction. For professional service businesses, the QBID is gradually phased out when taxable income reaches about $170 ($340K for couples). Tax deductions from a qualified retirement plan, however, can help reduce taxable income and thereby save the 20% QBID benefit or at least part of it.

How a Defined Benefit Cash Balance Plan Works

The account balance (the plan benefit) grows in two ways: a contribution credit and an annual interest credit. Both the contribution and the interest credits are “defined’ (i.e., specified) in the plan documents and are subject to IRS rules.

At the end of every year, the plan’s actuary calculates the contribution credit (amount) for each participant based on plan design, actuarial assumptions, and IRS regulations. The annual interest credit is guaranteed and independent of the plan’s investment performance. The annual interest credit rate may be tied to an outside index, such as the one-year U.S. Treasury Bill rate. Often the annual interest credit rate is a fixed guaranteed return that all participants receive; for example, between 3% and 5%, and fixed for the duration of the plan.

This does not mean that the plan investment portfolio must have a return equal to the crediting rate. It often does not. When the portfolio return is below the annual interest credit rate very long, the plan becomes underfunded. Consistent portfolio returns above the credit rate result in an overfunded plan. At plan termination, the plan sponsor is liable for a shortfall in an underfunded plan. On the other hand, the excess amount in an overfunded plan could be subject to as much as 100% excise tax. So, it is advisable to manage the plan portfolio in a manner to avoid under- and overfunding. When a plan is underfunded, annual contributions can increase, while an overfunded plan lowers annual contribution limits.

A cash balance plan portfolio is usually conservative. Since the defined annual credit rate is usually 3 – 5%, high-risk investments to achieve high returns are unnecessary. Inversely, since the plan sponsor is liable for underfunded accounts, risky exposure to market downturns should be avoided. A conservative annual interest credit rate, however, should not be a deterrent to starting a Cash Balance Plus plan. Compared with after-tax investing, a cash balance plan is still a better choice for nearly everyone in higher tax brackets. Also, since a Cash Balance Plus design typically also includes a 401(k) component, an individual participant may maximize the 401(k) plan allocations (up to a limit) and invest 401(k) assets aggressively. Thus, the cash balance allocation could be viewed as the fixed-income bucket of an overall diversified, managed-risk retirement portfolio.

Assets in a cash balance plan are generally managed with the help of an investment adviser. On an annual basis, participants receive a statement illustrating their account balance, which equals the lump sum value of their benefits under the plan. In this sense, a cash balance plan is similar to a 401(k) plan, in which a participant can track his personal account balance. Statements include a beginning-of-year account balance, credited interest for the year, the employer provided contribution and an end-of-year balance.

When an individual’s account terminates for one reason or another, the account balance may be ported to another tax-advantaged account until distributions are needed.

As noted above, contribution limits of a cash balance plan differ from traditional qualified retirement saving plans and defined benefit plans. Contribution limits of a cash balance plan are age dependent, and they vary with each individual and set of circumstances. All other things being equal, a contribution limit is more for an older person than a younger one. This is because an older person has less time to reach the maximum pension benefit limit (discussed below). The age-based limits enable business owners and employees to “catch up” on retirement saving.

Company Demographics Make a Difference

A cash balance plan under PPA rules allows greater contributions for older individuals because they have less time to save. As a result, a dominant portion of a business’s total plan costs can be allocated to older participants and still satisfy non-discrimination and minimum participation rules. So, for example, if an objective of a plan is to allocate an overwhelming portion of total contributions to older owners and older key employees, then demographics matter. All other factors being equal, the greater the age differential between older owners and younger employees, the higher the proportion of total plan costs go to the older owners; for example, up to 95% or greater. For large businesses, the demographics are less important than in small businesses.

Solo Business Owner

A Cash Balance Plus Plan can also be designed for solo business owners with or without employees, depending on circumstances. As with plan designs generally, if the business includes employees, the greater the age differential between older owners and younger staff members, the more favorable are the allocations to owners. A Cash Balance Plus Plan makes sense for an owner who can afford to save at least $150K annually. A solo cash balance plan just for an owner who has no employees is less complicated, more flexible, and easier to administer.

Withdrawals Before Retirement Age (age 59½+)

If an individual leaves employment, a cash balance plan can be rolled over into an IRA or to another company’s retirement plan. Similarly, when a business terminates a plan, an individual’s account balance is rolled over into an IRA. An employer can “lock up” a plan to prevent withdrawals other than rollovers to other plans. Any early withdrawals from a company plan or from a solo plan face a 10% penalty charge in addition to regular income taxation.

The Maximum Amount That Can Be Saved

The lifetime maximum, indexed to inflation, is currently about $3.1M for an individual age 62+. For younger participants, maximums are considerably less (e.g., about $1.4M at age 40). The lifetime maximum is based on a “maximum annual benefit” based on an individual’s compensation. In 2022, the maximum annual pension benefit of a cash balance plan may not exceed $245K.

Plan Duration

For solo firms, plans typically exist for a short period of time (e.g., 10 years or less). At maximum contribution, a plan would be ‘maxed out’ after 10 years. An owner/partner can no longer make contributions into a cash balance plan after reaching the lifetime maximum amount. For plans with multiple participants, termination of one account from the plan does not substantially impact the plan. Contributions on behalf of other participants can continue and the plan can be adjusted indefinitely as new participants join the plan and older ones retire.

Good Candidates for a Cash Balance Plan

A good candidate for a cash balance plan is any business in which the owner(s) and/or key employees want to save $150,000 or more annually in a tax-deferred manner. A cash balance plan is particularly useful for older individuals who need to catch up on retirement saving and wish to minimize plan costs of employees. Professionals (e.g., CPAs, attorneys, health service providers) and other small business owners often get a late start saving for retirement. A Cash Balance Plus plan gives them the opportunity to condense decades of saving into a few years.

Administration, Set-Up Costs & Annual Management Costs of a Cash Balance Plus Plan

The cost of setting up and managing a Cash Balance Plus plan is comparable with the cost of a 401(k) plan when all necessary service providers are considered. Formally, the plan sponsor (business) is the plan trustee and has fiduciary duties to plan beneficiaries. Generally, the plan sponsor uses service providers to set up and administer a plan and to manage plan assets.

Setting up a plan requires an actuarial analysis of each plan participant and drafting of plan documents. The actuary calculates contribution limits for each participant and how contributions are allocated. Each year the actuarial analysis is updated and required documents are prepared and submitted. Usually, plan assets are held in a custodian’s account. Additionally, an investment adviser selected by the plan sponsor manages the plan’s investments.

There is no template for a Cash Balance Plus plan. Each plan is customized for each business and its plan participants. This author’s recommended plan designer includes Enrolled Pension Actuaries and is a third-party administrator (TPA). It provides initial actuarial analysis and set-up documents, and annually thereafter the required actuarial services and regulatory documents.

For example, a set-up fee could be about $6K, and initial and annual administration fees could be in a range of $6-10K, depending on business size.

Larger businesses with more than 25 plan participants must also pay insurance premiums to the PBGC.

Contact Thomas Swenson for additional information about Cash Balance Plus plans or to learn more about other products and services that reduce risk while building financial security and peace of mind.

Copyright © 2022 by Thomas Swenson

Disclaimer: This information is intended for informational and educational use only. Neither Thomas Swenson nor any other person or entity is bound by it.

No client or potential client should assume that any information presented or made available on or through this article or linked websites may be construed as personalized legal or financial planning or investment advice. Personalized legal and financial planning can only be rendered after engagement for services, execution of the required documentation, and receipt of required disclosures. Please contact the firm for further information.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained herein (including attachments and links) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

For the moderately wealthy, giving up Control (and Access) is a barrier in deciding to make irrevocable trusts. Techniques for grantor access to trust assets make the decision easier.

Irrevocable trusts famously provide many benefits when properly designed and funded. For example:

– Asset protection (e.g., against frivolous lawsuits, bankruptcy, angry spouses, spendthrifts)

– Estate-tax-free generational wealth transfer (even perpetually with a GST-dynasty trust)

– Impartial asset management & distribution (w. professional trustee)

– Continuation of grantor’s wishes/values (beyond the grave)

– Family business continuation

– Tax-free growth, income & death benefit in irrevocable life insurance trust (ILIT)

Grantor hesitation: While the benefits of irrevocable trusts are attractive to most grantors when they finally consider them, grantors often hesitate to relinquish complete control of the assets. To get trust assets out of the estate of the grantor (to avoid estate and GST taxes), the grantor must make a “completed gift”, that is, give up legal control of the assets to the trustee. Additionally, in most US jurisdictions, to protect trust assets against creditors of the grantor, a trust cannot be a “self-settled trust”, that is, the trust grantor may not be a trust beneficiary. That generally means the grantor may not receive any income or principal back from the trust. For the very rich, these are not great concerns – they have enough money to create irrevocable trusts and still have plenty for their financial security. The moderately wealthy, however, (e.g., net worth $2-10 million), understandably have reservations about giving away so much money that they might be left wanting in the future. What if their other investments fail or unexpected expenses arise after irrevocably giving away a substantial portion of wealth to the trust?

SOLUTIONS – GRANTOR ACCESS TO TRUST ASSETS

SLATs – Spousal Lifetime Access Trusts
Spouse 1 establishes irrevocable, discretionary Trust 1 naming Spouse 2 as primary beneficiary. Spouse 2 establishes non-reciprocal, irrevocable, discretionary Trust 2 naming Spouse 1 as primary beneficiary. Each trust may purchase a life insurance policy on the life of the other spouse for the value of the trust assets in case the other spouse dies young (thereby ensuring that the value of other spouse’s benefits remains available to the grantor spouse). An optional “floating spouse clause” in each trust provides that the current spouse of the grantor is the beneficiary (in case of death or divorce of the original spouse).

This technique avoids the problems of self-settled trusts because neither spouse is a beneficiary of that spouse’s trust. Also, the SLAT technique is usable not only by spouses. It can be used among siblings and relatives (a “RELAT”?) or even good friends. Help avoid the “reciprocal trust doctrine” by settling Trust 1 now, and Trust 2 later.

SPAT – Special Power of Appointment Trust
A trust grantor can create access to trust assets through one or more special (limited) lifetime powers of appointment in non-fiduciary, non-beneficiary individual(s). Appropriate powers for this purpose include, for example: the power to instruct the trustee to appoint trust property to the grantor; the power to order a trust loan to the grantor (if trust is non-grantor); a power to reimburse tax payments (if grantor trust status). The grantor can never be named a beneficiary.

THIRD-PARTY IRREVOCABLE TRUST (so-called “Hybrid DAPT”)
The grantor is not initially a beneficiary, so the trust is non-self-settled. The trust document, however, appoints a special power in a non-fiduciary, non-beneficiary individual (e.g., in the trust Protector) to add one or more beneficiaries from a class of potential beneficiaries, such as the descendants of the grantor’s grandfather (which class conveniently includes the grantor!).

DAPT – DOMESTIC ASSET PROTECTION TRUST
Self-settled trusts are statutorily sanctioned in 19 states. For residents of these DAPT states, asset protection is probably pretty good, although it might be a good idea for the grantor to become a beneficiary 10 years and one day after its start date to protect against inclusion under § 548(e) of the Bankruptcy Code. For non-residents of DAPT states who establish a DAPT in a DAPT state, the law regarding asset protection is less clear. Nevertheless, a DAPT can only help these non-residents, not harm. Further, it is probably a good idea to use some of the techniques described above together with DAPTs.

IAPT – INTERNATIONAL ASSET PROTECTION TRUST
For assets that can be moved out of the United States, an international trust provides the best asset protection. These structures can be versatile. For example, the law of a country with favorable trust laws can be used to govern a trust administered in another offshore jurisdiction. The trust can have a US-based trustee and a foreign trustee. During normal times, the US trustee is in charge and the trust is considered a domestic trust for tax purposes. But in perilous times, a trust protector dismisses the US trustee and the foreign trustee takes over. Since trust assets are located outside of the US and the foreign trustee is not subject to US courts, the trust assets are protected. Administration of international trusts is more complex and expensive than domestic trusts, but these trusts have other benefits in addition to asset protection. The trusts can be self-settled, that is, the grantor can also be a beneficiary. They have favorable fraudulent conveyance laws with short look-back periods (e.g., as short as one year). They have more investment flexibility; for example, an international trust can buy and own offshore PPLI (private placement life insurance), which is useful for building wealth in a dynasty trust.

Visit Law Office of Thomas J Swenson to learn more about estate and legacy planning, wealth building and asset protection.

Copyright © 2022 Thomas Swenson

Disclaimer: This information is intended for educational use only.

No client or potential client should assume that any information presented or made available on or through this article or linked websites may be construed as personalized planning or advice. Personalized legal advice can only be rendered after engagement of the firm for services. Please contact Law Office of Thomas J Swenson for further information.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained herein (including attachments and links) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Problems ahead in 2023: Markets down. Recession deep. Taxes up.

Solutions: (1) Irrevocable life insurance trust (eliminate all taxes legally forever); (2) Leveraged long-term care (LTC) insurance; (3) 401(h) health expense account: tax trifecta – tax-free contributions, growth and distributions. (See SOLUTIONS, further below.)

“Economists predicted 12 of the last four economic crises.” You need not be an economist, however, to have a good idea where things are headed.

The US is in a “perfect storm” of inflation, economic recession aggravated by high interest rates, high unemployment, deficit spending, continued “money printing”, and looming tax hikes.

Income, capital gains and transfer taxes are at historically low levels. Tax rates are likely to increase before the scheduled sunset in 2026.

The US government debt already stands at $31.5 trillion, and Congress just authorized new spending of $1.7 trillion. The US has joined the group of nations having a national debt greater than GDP (ratio of 120+%).

Economic activity across the 50 states has slowed to a stall. Thus, state and local government revenues from income, sales, and business taxes have slumped.

How are various government entities going to finance debts and deficits?

Well, of course, the US government could simply “print money” to finance its spending. Essentially, the Federal Reserve has been doing that already. The infusion of cheap money over the past 20 years artificially propped up the equity and debt markets to the extent there is now little correlation with the economy in recession. As the Fed has slowly closed the money spigot, markets and economic activity have sunk.

The 50 states are not allowed to print money or run budget deficits. So, their financing options are limited. If state and local governments cannot pay their employees, they will be joining the private sector’s unemployed.

Assuming that the federal government does not abandon its fiscal habits, we can further assume that federal and state income tax rates will rise sharply in the relatively near future to pay for federal spending and debt servicing. (See, The Deficit Myth by Stephanie Kolten for a different approach under “modern monetary theory”. Because it is sensible, however, it will never be adopted in the USA.)

As noted above, the US is in a recession. The equity and debt markets are volatile and . How long will the Fed keep creating money out of thin air? How long will the Treasury continue spending borrowed money? When the music stops, the markets could drop like rocks. If your investment and retirement portfolios are still invested in the markets, now is the time to get out.

The individual gift and estate exemption is now at an historical high of $12+ million. The GSTT exemption is also currently $12+ million. They are both scheduled to decrease to $6+ million after 2025.

Now is the time, therefore, to do preemptive estate and legacy planning. Inevitable tax-law changes wrought by Congress could be retroactive; generally, however, new tax laws “grandfather in” transactions and structures already completed.

Asset protection should not be ignored in estate and legacy planning. Asset protection is not just for the ultra-wealthy. Anyone can be sued anywhere anytime, even if only $100K is at stake. For example, if you own a house, work as a professional, or have a married child subject to divorce, your assets and your legacy are at risk. In a broad sense, estate planning and asset protection include wealth building and wealth preservation by reducing market risk, reducing tax risk, and reducing legal (court) risks.

In addition to the tax-law changes affecting estate and legacy plans, the fiscal pressures on federal, state and local governments will probably increase taxes across the board and those taxes will stay high for a long time. In other words, your reduced income during retirement could still put you in a relatively high tax bracket. Also, too many people have too much of their retirement savings in taxable investment accounts and pre-tax tax-deferred retirement plans (e.g., IRA, 401(k), 403(b) plans). So, it is probably wise to shift taxable and tax-deferred assets to no-tax assets. If not, your income-tax problem simply compounds with time, especially bad if you are relatively young now.

Further, investment accounts and tax-deferred retirement plans heavily invested in the stock market are subject to the downside risks and market volatility, as the recent few months have shown.

Thus, it is time to consider proactive strategies to reduce exposure to financial market losses, reduce future taxation of assets and income, and insulate assets against legal appropriation. As noted above, changes to the tax laws are generally not retroactive (although there are no guarantees). Therefore, planning and structures should be put in place now so they can be activated before any future changes go into effect.

SOLUTIONS

Irrevocable Life Insurance Dynasty Trust
— Tax-free growth

— Tax-free income

— Tax-free death benefit

— No estate or GST taxes, forever

— Risk-free growth (principal protected, 0% floor)

— Benefit you, your spouse & descendants (per your instructions)

— Preserve/continue family values, traditions, businesses

— Protect family assets (against taxes, lawsuits, frivolity)

— Provide financial security for you and family

Leveraged Long Term Care insurance
— LTC benefits are tax-free

— Policy cash value grows

— Death benefit to heirs if cash value is not used up by LTC [NO MORE "use it or lose it"]

— Single or joint policy (couples can be protected on one policy)

— Account value can be leveraged to extend total benefits 2X — 4X (even for lifetime)

— Existing life insurance and annuity policies can be 1035-exchanged to tax-free LTC policies

— Tax-deferred (taxable) retirement money (IRA, 401k, 403b, etc.) can be turned into tax-free LTC benefits

— Owners’ assets and retirement income are better protected if LTC needed

— LTC benefits (indemnity payments) may also be used to pay family members who provide care

401(h) Health Expense Account
— Part of a cash balance plan

— Funded with pre-tax money (tax deductible)

— Account funds grow tax-free

— Tax-free withdrawals when used for qualified health expenses (e.g., medicine, medical equipment, surgery, hospital, co-pays, dental care, eyeglasses, health insurance premiums, long term care (LTC))

— Withdrawals taxed as income if not used for health

— Account can be inherited tax-free by beneficiaries

Visit Law Office of Thomas J Swenson or call 303-440-7800 to learn more about estate and legacy planning, wealth building and asset protection.

Copyright © 2022 Thomas Swenson

Disclaimer: This information is intended for educational use only.

No client or potential client should assume that any information presented or made available on or through this article or linked websites may be construed as personalized planning or advice. Personalized legal advice can only be rendered after engagement of the firm for services. Please contact Law Office of Thomas J Swenson for further information.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained herein (including attachments and links) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.