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The Best Way to Transfer Wealth & Reduce Taxes

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The best way to transfer wealth and reduce taxes

As we move through our working years, a plan for retirement and final expenses are key issues individuals assess when it comes times to leave the workforce. There are considerations in how to save funds and transfer to loved ones while reducing liabilities such as taxes. The best way to transfer assets to a spouse, children, and favorite charities are through different tools. A lawyer can draw up a will or a trust; however these tools are used to transfer assets, protect the estate and inheritances; not to generate wealth. Permanent life insurance is the best way to create wealth or transfer wealth on a tax favorable basis.

A tool that can leave funds behind, transfer wealth on a tax-favorable basis is through a life insurance policy. A term policy can not carry a cash value and individuals may opt for one to pay final expenses, and income replacement because of an unexpected death of an income earning spouse. However, a universal, variable universal or whole life policies can provide the transfer of wealth.

There are other uses with a permanent life insurance policy such as loans, savings, or providing an income stream if you need it now versus giving it later. A policy holder can use the benefits of a life insurance policy while the policy holder is alive and leaves benefits for loved ones and charities.
• Can take a loan against the cash value in the policy.
• Generate an income stream from the cash value once they pay it up.
• Single pay policies give options in transferring wealth to charities and loved ones.
• Some policies will deliver a death benefit and the cash value combined.
• The recipient of the death benefit proceeds does not have to pay income taxes from the benefits. (must be reported to IRS however)
• Life Insurance is not probated if there is a will.
• Alternative to risky investments in the stock market.

Generate Income

What about after the working years have passed? What if you want to supplement your retirement? Maybe you want to retire early? Maybe you just want to make sure that when you pass away your wealth transfers to your loved ones without the worry of other aspects such as probating a will.

If you own a permanent life insurance policy, then these types build a cash value over time, minus the cost of insurance. Each year your insurance company should send an illustration that shows your death benefit, the cash value, and what your annual premiums are. If you want to retire early and take a distribution of the funds from your policy, the great news is, that it is an F.I.F.O. or (first in, first out) meaning your principal comes out first and interest comes out last so you won’t be taxed until you collect your money that came from interest.

Beneficiary Does Not Pay Taxes on the Funds

Life insurance does not exempt an estate from paying federal or state estate taxes and any wealth distribution. They calculate any proceeds of an estate toward the total estate, and each year those figures are subject to tax laws. However, a person can transfer cash and build wealth through life insurance, avoiding probate and income taxes to the recipient. As always, consult your certified public accountant if you have questions regarding estate taxes and laws.

Check Policy Provisions

If you are looking for a way to transfer a large sum of money upon your death, there are some policies out there that can pay out a death benefit and the cash value. Be careful, not all policies do this, and it is important to ask before you drop a large amount of money for a single pay life insurance policy. If you opt for the cash value and the death benefit, the initial investment will be a little more than if you are funding the death benefit only.

C.D. Alternative

For those of you who do not want to expose your funds to risk in the stock market, or you have exhausted your contribution limits with IRAs or 401ks, then instead of putting money in the bank where it draws little to no interest, check into the interest rates the life insurance policies are paying. A good solid company will offer a reasonable rate of return on cash inside the policy with a guaranteed interest rate when the optimal interest rate drops.

Life Insurance Can Generate Wealth and Security

There are many tools for retirement and planning for final expenses. As we move toward our golden years, it is important to reallocate investments to reflect what stage in life you are in. In our younger working days, we have the time to recoup the losses from the cycles of the stock market. As we age and seek ways to generate income in retirement, our resolve in high-risk investments quells and many need to reevaluate where funds should be allocated. Life insurance is a tool that can generate wealth, transfer wealth and have a death benefit attached. Talk to your accountant and estate attorney to find out what is best for you and your family. Consult a financial representative and find out what life insurance policies are suitable for your unique situation. A financial representative can assist you in positioning your assets based on your needs.

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Annuities

Thinking About Annuities? Here Are 10 Things You Need To Know

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Thinking About An Annuities? Here Are 10 Things You Need To Know

Most people think annuities are simple: you hand over a lump sum payment, agree to wait a certain amount of time, and then you start receiving monthly checks. But annuities are complex investments that come in many different packages. They can offer tremendous benefits if set up correctly and provide a steady stream of income during retirement.

If you are thinking about an annuity, here are 10 things to know before you buy.

1. Deferred Annuities Offer Tax-Advantaged Savings For Retirement

A deferred annuity has two parts: the accumulation phase and the payout phase. In the accumulation phase, your money sits and grows over time, building up the value the longer you wait. You are in control of when you decide to start drawing income from the annuity. Therefore, you are also in control of when you will start paying taxes. During the payout phase, you will likely be in a lower tax bracket than during your working years, allowing you to keep a larger portion of your income.

2. There Are Ways to Reduce The Taxes You Pay

One of the potential drawbacks of a deferred annuity has to do with the way you withdraw money and the taxes owed on the payments you receive. Essentially, you are receiving earned interest first, which is taxable, before being paid back your principal, which is tax-free. A way around this is to convert a deferred annuity into an immediate deferred income or immediate income annuity. With these types of annuities, the monthly payment you receive is a mix of principal and interest, so only a portion of the payment is taxable.

3. You Can Switch Out Of One Annuity And Into Another

If you decide that your current annuity no longer fits your needs, under most circumstances you can switch into a different annuity without any tax consequences as a “1035 exchange.” For example, if you invested in one type of annuity in your 40’s or 50’s and now find that in your retirement years you prefer a fixed-rate annuity, you can make the switch, and as long as you had your original annuity long enough, there would be no surrender fees.

4. A Life Insurance Policy Can Be Swapped For An Annuity

If you have a cash-value life insurance policy that is no longer needed, you can use a “1035 exchange” to switch the life insurance policy into an annuity tax-free. As an example, if you convert a life-insurance policy into an income annuity, your policies’ cash value immediately becomes a stream of income when converted. And by converting to an annuity, you decide how long you want to receive that income by setting the terms of the annuity.

5. Red Flag: Fixed Index Annuities Have Some Drawbacks

The allure of a fixed index annuity is strong. You get to participate in the gains from a rising stock market without any worries of losing money in down markets. But the upside gains are capped, and depending on those caps, you may be losing a considerable amount. For example, a fixed index annuity may have a 6% cap rate. If the index gains 5% in a year, you may get all 5% credited to your account. But if the index gains considerably more, like 10%, you would only get 6% since your gain is capped. The annuity could also carry a participation rate, meaning you’ll get even less of the actual index gain. Be sure to read the fine print and shop for the best deal.

Come back to The Capitalist tomorrow for part 2 of the list.

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Business

Stocks Soar Again, Yet Doubt Remains That This Rally is Real

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Stocks Soar Again, Yet Doubt Remains That This Rally is Real

Stocks climbed across the board on Monday, at least temporarily reversing the losses the market experienced last week.

The Dow Jones Industrial Average gained 1,627 points to close 7% higher, following a 7% gain for the S&P 500 and a 7.3% gain for the Nasdaq.

Coming off a week that saw the Dow lose ground for the third time in a month, Monday’s market rally was due to positive news in the fight to contain the coronavirus pandemic.

Stocks and Coronavirus Peak

Newly reported cases fell to 28,200 on Sunday. This reversed a trend that saw 30,000 new cases on Thursday, 32,100 on Friday and 33,260 on Saturday according to the latest data from Johns Hopkins.

While it is far too early to tell if the number of new cases has peaked, the market took the decline in new cases on Sunday as an indication that things could get back to normal much sooner than even the most optimistic predictions.

New York State reported the first daily decline in coronavirus-related deaths, with 594 new coronavirus deaths on Sunday after a reported 630 on Saturday.

“Incoming data suggests NY state might peak sooner than (Governor) Cuomo’s optimistic case,” said Tom Lee, head of research at Fundstrat. “With better visibility on the healthcare crisis in the US, particularly, on a potential to model a national peak, we believe buyers are now taking control.”

Billionaire Bill Ackman, who famously bet the coronavirus outbreak would tank the stock market and turned $27 million into $2.6 billion, has now turned bullish on stocks.

“I am beginning to get optimistic,” said Pershing Square’s Bill Ackman in a tweet on Sunday. “Cases appear to be peaking in NY. Almost the entire country is in shutdown.”

Peter Boockvar, chief investment officer at Bleakley Advisory Group added “It seems that each day that passes we seem to be getting to a better place on containment. It’s still a long road ahead, but some of the more dangerous places seem to be getting some control of it.”

Doubt Still Remains

Despite the growing optimism, many investors believe there’s still plenty of trouble to come for the markets.

Citigroup’s chief global equity strategist Robert Buckland says corporate earnings could fall by 50% in 2020 due to the coronavirus pandemic. He also mentioned that stock prices should drop an equal amount to reflect the expected decrease in profits.

“Typically, stock markets fall the same as EPS in a recession, but with a lead/lag relationship. With global equities currently down around 30%, we are not convinced they are pricing in the likely EPS collapse.”

Matt Maley, chief market strategist at Miller Tabak, believes another significant drawdown is in the cards.

“This is more a bear market trap. I just think we’ve had a first period of liquidation. But I think we could have more of it,” he told Yahoo Finance.

“We’re in a de-risking process and now we have to have the companies, which have loaded up to the gills in terms of debt over the last 12 years. As they de-risk and deleverage themselves, that is going to keep the economy from picking back up the way it did following the 2018 deep correction” he added.

For investors who do not worry about another significant decline, Maley does have some advice.

“With the market already down as much as it is, you can start dipping your toe back in. You just want to be able to go into the the high-quality companies with great management … that have great balance sheets.”

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Business

Investors Are Bullish Right Now, and That’s a Bad Sign for the Market

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Investors Are Bullish Right Now, And That’s a Bad Sign for the Market

A recent survey by Royal Bank of Canada showed that 58% of institutional investors are “bullish” or “very bullish” on the market right now. This could spell bad news for those hoping the worst of the drawdown is behind us.

The survey, conducted between March 25 and 31, shows that even after last month’s tumultuous ride, investors are more bullish today than they were back in December when everything was sailing along smoothly.

Even more concerning, 57% of investors say stock valuations are “attractive” or “very attractive” today. This is a new record for RBC’s survey.

“I’m concerned that we have not seen the lows yet,” said Lori Calvasina, RBC’s head of U.S. equity strategy.

“This surprisingly high level of bullishness supports our own view that we haven’t yet seen investor capitulation, echoing what we’ve seen in other data sets. We view capitulation as a necessary, though not sufficient condition for stock market bottoms in major drawdowns” she added in a note to clients last week.

These bullish investors believe that the Federal Reserve will continue supporting the economy with its zero-interest-rate policy and the $700 billion quantitative easing plan. They also believe that the economic impact of the coronavirus pandemic will be “manageable.”

The 58% “bullish” or “very bullish” reading is the highest the RBC U.S. Equity Investor Survey has had since it debuted in early 2018.

Perhaps the most surprising data from the survey shows that despite the record-level of bullish optimism, a significant number of respondents believe there’s still plenty of pain to be doled out by the market.

Possible Outlooks

Only 19% of those surveyed believe the market hit bottom in the first quarter. Meanwhile, 57% believe that we are going to see the market head lower and reach a new bottom this quarter. Additionally, 15% don’t anticipate stock bottoming until Q3 2020. The 9% of those surveyed believe we won’t see the bottom until Q4 2020 or later.

And despite all the chatter in the news about a quick economic recovery once new cases of coronavirus plateau, the RBC survey shows that investors aren’t quite as optimistic as some may hope.

Only 19% of respondents believe we will get a “V”-shaped recovery. 41% believe that we will see a ‘W’-shaped recovery and 35% see the country going through a slower “U”-shaped recovery.

Some banks on Wall Street are expecting massive GDP contracting as high as 30% during the second quarter. Those responding to the survey, however, weren’t quite so bearish.

Most believe that the country’s GDP won’t contract by more than 20% in any quarter. They also think that if we do get a recession, it will end in the fourth quarter.

It could be more bad news for the market if those numbers end up worse than predicted.

“If evidence that the most negative GDP quarter will be worse than 20% and that the contraction will last beyond 3Q emerges, it is likely to destabilize the market,” the RBC strategists wrote. “If evidence emerges that the impact will be less severe, it can help the stock market stabilize and move higher” they added.

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