Mattson Financial Blog
In the 1960s and into the early ‘70s, wealthy individuals would buy life insurance policies and throw a million dollars into it. Then, after they passed, the money from the policy would be paid out tax free.
After the ‘70s, the government figured out this loophole that allowed the transfer of wealth without incurring any taxes and decided to put a stop to it. This is where TAMRA and TEFRA come in.
TEFRA, the Tax Equity and Fiscal Responsibility Act, was implemented in 1982. TAMRA, the Technical and Miscellaneous Revenue Act, arrived in 1988. These two acts prevent someone from putting “too much” into your life insurance policy. The benefits are now taxed as ordinary income, which does away with the idea of having a tax-free asset.
You might be saying, “If the laws have changed, Gary, why are you telling me this? Besides, I don’t have a million dollars sitting around to put into something like this.”
I bring this up because, due to COVID-19 and the CARES Act, new legislation has made it possible for life insurance contracts to serve as a new way to pass on substantial wealth without being taxable.
Here’s an example of what I mean. I was recently talking to a client who was considering his options in passing his wealth to his children and grandchildren. I told him that he could pass a million dollars to his kids with very little effort.
We could set it up for 30 cents on the dollar. Basically, for $300,000, he could put $1 million into the hands of his heirs, tax-free. And no, you don’t even have to put $300,000 in upfront. You can make lifetime payments.
He said, “Gary, this is exactly what I’m looking for. Tell me, what’s the investment?”
I explained it was a life insurance contract. Naturally, he had his reservations. He said, “When I first met you, I knew you were a big life insurance guy. I had no interest or need for life insurance. Why would I need it now?”
His goal was to pass as much of his wealth as possible to his heirs. He wanted to know how this was set apart from things like retirement or investment accounts.
One form of investment that people once used to pass wealth to the next generation was the stretch IRA. But like the life insurance policies of the ‘60s and ‘70s, the government put a stop to it.
In the past, a stretch IRA was an IRA passed from generation to generation. It could generate tax-free growth for decades. Now, the law requires an IRA to be paid out within 10 years after it’s passed to the next generation.
However, if you took the IRA money as it’s paid out over 10 years and put it into a life insurance contract, you could pass that wealth down to the next generation. If that means $300,000 paid out over 10 years, that could turn into a tax-free $1 million through that life insurance contract.
Now, I’m not suggesting you run out and buy a life insurance policy. But, if you have qualified retirement assets in a 401(k), 403(b), 457, Roth IRA, or anything else, look at how those assets are doing. Would you want your assets generating a 300% tax-free return?
As they say in the fashion industry, if you wait long enough, the fashion will come back around. Right now, the ‘90s are in vogue. Wait long enough, and we’ll be back in bell bottoms and platform shoes.
The same can be said for the financial industry. Tax-saving strategies from decades ago are back in vogue. It’s just a matter of deciding what is right for you.
If you want to look at the potential of taking your IRA money to the next level, please go to our website at MattsonFinancial.com or give us a call to learn more. I also encourage you to view our webinars, which are full of great information you can use to strategize your next move. We have many webinars planning in the upcoming months, and if there is a topic you would like us to cover, just let us know.
So, as you rake leaves this fall and dream about the warmer months, don’t forget to think about your financial health! Now is a great time for a financial checkup to make sure everything is just the way you want it.