October
4, 2005
By
John Dietz, Senior
Advisor of Trustmakers
Last
week we spoke of dealing
with your highly appreciated
real estate capital
gains problem. For
generations, high,
net-worth families
have been enjoying
the benefits of keeping
there gains within
their families and
somehow enjoying the
money while they are
alive. Most of us have
been under the impression
that these wealthy
families have somehow
managed to make incredible
gains in the marketplace.
I think the real answer
is that they may have
employed a better strategy.
As
I mentioned in last
week’s article, a 1031
like kind exchange
can be a good answer
for converting real
estate. Unfortunately,
I have personally witnessed
many of them go bad
at the 11th hour. If
you have been pondering
taking some money off
the real estate table,
but the capital gains
has stopped you dead
in your tracks, read
on. It’s time to move
beyond the 1031 exchange
into more advanced
planning.
By
carefully structuring
your family’s affairs
for short and long
term planning you can:
1.
Defer the capital gain
taxes on the sale of
the appreciated asset.
2. Eliminate this asset
from any of your future
estate tax considerations.
3. Invest the sale
proceeds tax-free over
your life time.
4. Have complete access
to your assets over
your life time.
5. Pass assets onto
the next generation
without taxation.
6. Protect assets from
future creditors.
So
how does this work?
Step 1: Form an Asset
Protection Trust.
Step
2: The Trust purchases
a Variable Universal
Life Insurance Policy.
Step
3: The Variable Universal
Life Insurance Policy
forms and owns a “Company”
for investment purposes.
Step
4: The highly appreciated
asset is sold (for
fair market value)
to the “Company” that
is owned by the Variable
Universal Life Insurance
Policy, in return for
a private annuity agreement
(like an installment
sale).
Step
5: The “Company” can
then sell the asset
to the highest bidder
available in the market,
and the proceeds are
then invested on a
diversified, tax-free
basis. The invested
proceeds are then borrowed
out of the insurance
policy to make the
specified and contractual
annual annuity payments
to the original seller
of the highly appreciated
asset. The capital
gains tax is recognized
only as these payments
are made each year.
If
this sounds complicated
it’s not.
Let’s
examine it:
*You start out with
a highly appreciated
asset (real estate,
private operating business
or publicly held stock).
*You
then sell the highly
appreciated asset (full
market value) to a
Limited Liability Company
in exchange for a private
annuity agreement (installment
sale).
*The
LLC can sell the asset
in the open market
place for full market
value. The cash proceeds
now held in the LLC
are owned by the Variable
Universal Life Policy
and are invested tax
free.
*Annuity
payments begin with
the sale to the LLC,
and taxes are paid
as you receive cash
each year (capital
gains and ordinary
income).
We
could go more in depth
with the particulars,
but suffice it to say
that with a properly
designed Kinetic Asset
Protection Trust, you
will have enormous
flexibility where and
how your money is invested.
While
these ideas have traditionally
been for the super
rich, the time has
come for them to be
available to you and
me.
Until
next time,
John
If
you would like more
information regarding
asset protection, trusts,
family limited partnerships
or the subject of this
article please call
or email our office.
