With so many factors that go into figuring out what is best for taxes, it is important to know the best strategies to help protect your assets and know how certain strategies impact your bottom line. In one particular client’s instance (a 40-year-old male), it was decided after a meeting that after the client takes care of his children’s education, weddings and then eventually, retirement, taxes will indeed be higher than they are today. Groff showed his client a “private, non-qualified, tax-free solution” that is only offered through an insurance company, which is one of the many living benefits that is offered if designed correctly with the right insurance company.

“In this client’s case, we’ve designed it so he can contribute as much as $100,000 annually until age 55 (without violating IRS funding guidelines or limitations) and then begin taking tax-free withdraws and loans of $349,397 annually (which is equivalent to $582,328 at a 40 percent tax rate and $698,794 at a 50 percent tax rate) at age 65 for 20 years or $6,987,940 total income received by age 84. These numbers were based on current costs of insurance, 0 percent loan rates beginning in year six, and 6.5 percent hypothetical growth rate,” Groff expounded. Although history is not a guarantee of a future direction, there are many benefits of going with this type of tax-free investing, in which Groff firmly believes. Ultimately, the benefits speak for themselves.

There is no stock market risk, there is an upside growth potential and an annual reset provision which allows the owner to lock in gains and not lose them. With a cash accumulation based on FIFO (First In, First Out), it allows the owner to take out contributions as non-taxable withdraws. There is an income tax-free access to policy cash accumulation via a policy loan provision and an income tax-free death benefit to loved ones. Unlike other policies, there is no mandatory distribution at age 70 ½ and no IRS penalty. There are also no minimum age or income requirements and there is access to money prior to age 59 ½ without the 10 percent IRS penalty.

Additionally, the state of Arizona provides asset protection for this particular asset class from creditors. And it does not create taxation of Social Security since the income does not trigger a 1099 for the IRS. This policy also helps to avoid the costs, delays and settlement disclosures of probate and provides for flexibility with contribution so the policy owner can reduce or make up contributions as needed in the future.

There is also a chronic illness benefit feature, which allows access to up to 24 percent of the death benefit if you can’t perform two of the six ADL’s (Activities of Daily Living such as bathing, continence, dressing, eating, toileting and transferring). “According to 2011 Sourcebook for Long-Term Care Insurance, American Association for Long-Term Care Insurance: 70 percent of women and 40 percent of men over age 65 will have a chronic illness during their lifetime,” noted Groff.

There is a common oversight with successful business owners with the lack of legacy or succession planning and it involves the federal death tax or what is commonly referred to as the “procrastination tax” that can sometimes force a fire sale of a business after a death. This type of tax can be devastating to a family’s wealth. One prime example of this is with the estate of Joe Robbie. As Groff explained, “Robbie’s family lost their National Football League team, the Miami Dolphins, along with the family named Joe Robbie Stadium due to the need for cash to pay federal death taxes. This forced fire sale meant that the Robbie family was out of the football business.”

Another example of that procrastination tax coming back to haunt a family was when J.P. Morgan, who formed the first billion dollar corporation in the world, lost over 69 percent of his $12 million to taxes and costs to settle his estate. Likewise, John Rockefeller, Sr., Alwin Ernst (CPA of Ernst & Young), Frederick Vanderbuilt and William Boeing all lost more than 50 percent of their family wealth to estate taxes and related costs. Groff said, “In a survey among heirs to successful family businesses that failed, 97.9 percent failed because of liquidation to pay federal estate tax or also known as the ‘death’ tax. Even if a business owner has liquid assets, the family still faces a heavy tax burden. The process to prevent this problem is wealth transfer planning which also provides some additional asset protection which is often appreciated by wealthy individuals.”