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How to protect and grow your assets now

By Bruno Giordano, MBA, CFP

Usually, when one reads or hears about asset protection, the discussion centers around off-shore investing or Alaska Trusts or some other expensive, complex, esoteric and usually off-putting approach.

How about doing something that’s simple, inexpensive, absolutely foolproof and which can be a great benefit to your family as well as yourself?

My elegant and simple solution is to fund a Credit By-Pass Trust (sometimes called a Shelter Trust or By-Pass Trust or B Trust) Now!

Whatever you call it, it’s the trust that most of us have drafted into our will or living trust to serve as a repository for the applicable exclusion amount at our death. ($650,000 in 1999, growing, under current law, to $1,000,000 by 2006). When it’s handled in that way, which it usually is, it’s a testamentary trust—that is, it doesn’t come into being until it’s funded at our death. The normal purpose of this trust is of course to by-pass the exclusion amount around a surviving spouse’s estate.

What few people realize is that the exclusion amount, which is really the amount excluded from taxation by the unified credit allowed, is available during life, or as our legal scholars say, inter-vivos. I put emphasis on unified to make sure you get the point that the credit, or exclusion amount can be used at death, or at any time during life.

As an aside, when I give my estate planning seminars, I ask the attendees to make special note of this recommendation: “To the extent you can afford it, you should fund the By-Pass Trust now!”

One of the reasons for this recommendation should be obvious—a $650,000 tax-free gift today is worth a lot more than a $650,000 gift 10, 20, 30, or 40 years from now. For the financially or mathematically challenged souls reading this, given an appreciation rate of 8 percent, money doubles roughly every nine years, at 10 percent every seven years, at 12 percent every six years and so on. By way of example, assuming an 8 percent appreciation rate and a 27 year life expectancy, that $650,000 gift today would be the equivalent of a gift of $5.2 million at death. That’s powerful good news for the heirs.

What’s in it for you, now?

Quite a few advantages, some of which may appeal more to some of you than to others. To wit: The assets in the trust cannot be attached by creditors (assuming there was not a fraudulent conveyance—placing assets in an irrevocable trust when suit is pending against you).

If you transfer the assets before there are any claims against you, and if the trust is drafted properly, the assets are safe. Seems to me that might be attractive to some physicians.

The assets in the trust can be protected from a divorce. ‘Nuff said about that.

If you like, you can protect the assets from creditors, spendthrifts, divorce of children or grandchildren. Notice I said, “if you like.”

Given a friendly, independent trustee, you can take income from the trust.

That’s the good news. The bad news is that any trust income over $7500 is taxed at the confiscatory rate of 39.6 percent.

One way to dodge that bullet is to place the assets of the trust in tax deferred variable annuities (TDVA). As I’m sure you know, there’s no tax on the growth in a TDVA until the money is withdrawn to be spent.

Another, and in my opinion the superior way to fund the trust, is to place the assets in an over-funded, minimum death benefit, variable life insurance policy. The assets in a variable policy are invested in accounts that are virtual clones of many well-known and well-managed mutual funds. The cash value growth in a life insurance policy is tax deferred, and withdrawals of premiums paid are tax-free, and loans (given the right policy) can be made at 2 percent, or 0 percent if there’s a large balance—tax-free. That’s why it’s superior. No tax on the growth, no tax when you take some out to spend.

Believe me when I assert, that if assets are left in an over-funded, minimum death benefit, variable life insurance policy for 10 or more years, the money available to you to spend tax-free (withdrawal or loan) will be superior to that from a mutual fund with an identical rate of return, even taking into account all of the expenses intrinsic to life insurance policies. The key words are “tax-free.”

By the way, if two 65 year olds in standard health, gift the $650,000 to the trust today, and then phase in the $650,000 to an over-funded Variable Life Insurance Policy over a 5-7 year period, that would purchase approximately $2.5 million worth of insurance now!

That’s it in a nutshell! Fund the by-pass trust now, put the assets in an over-funded minimum death benefit variable Life Insurance policy (properly managed), and protect yourself, and your family if you wish, from creditors, divorce, spendthrifts, business failure, etc., and at the same time give yourself access to some tax-free income.

If you are especially well off, you may be more concerned about leaving large amounts of money to children and grandchildren than you are concerned about having superior growth of assets.

In that case, you could gift the $650,000 to the trust today, and then phase in the $650,000 to a Universal 2nd-To-Die insurance over a 7 year period. Again, assuming two 65 year olds in standard health, that would purchase $3.6 million of insurance now!

If you and your spouse are 45, it would purchase $9.5 million, and if you are 55 it would purchase $5.0 million now!

Not only can you create a dynasty for your family, but you can protect the assets from creditors, divorce, spendthrifts, and business failures. You can have the money distributed to your children or have it split into as many trusts as there are children and have it doled out any way you want to children, grandchildren, even great-grandchildren. Or, you can leave it up to your children to make the decisions.

It’s not too good to be true. There are a lot of T’s to be crossed and I’s to be dotted to make this work properly. It can’t be too tough, it’s how the Vanderbilts’ and Mellons’ and Kennedys’ have passed great wealth from generation to generation. If they can do it, so can you. All it takes is someone to guide you along the way.

Bruno A. Giordano, MBA, CFP, is president of Dorset Financial Services in Devon, Pa.

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