The Double-Edged Sword

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


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This column has historically covered ways to help you keep more of what you earn—passing more of your accumulated wealth to your loved ones rather than to the hands of the IRS. For 40 years, I’ve been telling readers how to keep it. But another, less-explored side of estate planning—how to make it—deserves some special attention in this time of economic recession.

One wealth-building strategy uses life insurance to pay estate taxes. This strategy helps solve two continuing problems: huge losses in the stock market and the enormous tax costs on gains once the good times roll.

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.

PPLI is not a fancy concept, just an investment held in a life insurance wrapper. The type of investments you could make to cover estate taxes are wide-ranging, including hedge funds, derivatives, real estate investment trusts, even timber and others.

But here’s how PPLI works. You and/or your advisor negotiate a very large life insurance policy directly with an insurance company to cut out the middleman and attain lower, commission-free rates. Gains are shielded from income taxes during your life (and even at death), and when you die the value of the policy has ballooned enough to cover the 55% estate tax. The death benefit from the policy is not only income-tax free, it can also be set up to escape estate taxes.

And 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 wealth-building strategy is to purchase PPLI on a younger member of your family. Compounding earnings tax-free is a real wealth-builder.

If you are a high-net-worth investor, PPLI is a technique you must look into. Just make sure you work with experienced professionals.

Finally, I want to remind readers that nobody—especially this author—knows it all. This column authoritatively covers a wide array of topics with the help of a large national network of experienced and knowledgeable experts. We are constantly exchanging ideas and 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.