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Equity.harvesting Presentation Transcript

  • 1. Building a Tax-Favorable Retirement Plan through “ Equity Harvesting ” By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB Founder: The Wealth Preservation Institute Co-Founder: The Asset Protection Society
  • 2. This presentation is based on:
    • The HEMGB is a completed guide for how to properly implement an EH plan.
    • Includes the pros and cons as well as the appropriate tax code sections.
    • This presentation is an overview of parts of the book so you can determine if you should sit down with a trusted advisor to see if an EH plan is right for you .
  • 3. Definition
    • Definition of Equity Harvesting (EH):
    • EH is removing equity from a personal residence through refinancing (or an equity loan) where the money borrowed is repositioned into cash value life insurance *.
    • If you have not viewed the presentation explaining how to build a tax-favorable retirement nest egg using over-funded cash life insurance, it is recommended that you do so shortly after viewing this presentation.
  • 4. Why build wealth with EH?
    • -To leverage a “ dormant ” asset in a more beneficial manner to build wealth.
    • Ask yourself the following question:
      • If you could borrow money with an interest rate of 5-7% and earn a tax-free return of 6-9% would you do it?
      • The answer should be all day long .
      • The essence of EH is borrowing money at an interest rate of X and earning a tax-free return on that borrowed money at X++.
    • As you will see, from a financial standpoint, EH is one of the most powerful wealth building tools at your disposal.
  • 5. Why build wealth with CVL?
    • When using the “ right ” policy with minimum expenses and maximum cash, your policy will have the following characteristics.
    • 1) Tax-Free accumulation and tax free withdrawal .
    • 2) An annual minimum return guarantee
    • 3) Growth pegged to the S&P 500 index.
    • 4) Principal protection (no downside due to negative market returns).
    • From 1987-2007, the S&P 500 still averaged in excess of 10% * (even though the stock market had a “ crash ” from 2000-2003).
    • *(Moneychimp.com)
  • 6. CVL is a Protective Wealth Building
    • $100,000
    10% S&P 500 Gains Are Locked In $110,000 -15% $93,500 5% 5% $115,500 $98,175 17.6% Equity Indexed Universal Life locks in the gains in up years and does not participate in the down years .
  • 7. Cash Contributions Compound Interest Year 5 $ Minimum Death Benefit Maximum Premiums Funding Life Insurance A Tax Free Non-Qualified Retirement Plan Yr. 1 $ Yr. 2 $ Yr. 3 $ Yr. 4 $ Mortality & Expense Charges
  • 8. Considerations when implementing an EH plan
    • You must:
      • 1) own a home with equity .
      • 2) be able to service the debt created with an equity removal*.
      • 3) be healthy .
      • 4) use a life insurance policy is a good cash accumulator .
      • 5) not have an immediate need for the borrowed funds (you should commit to letting your plan progress for 5-10 years before accessing tax-free retirement income).
  • 9. EH is a simple concept
    • Your are simply removing equity from a home to reposition into cash value life .
    • The question most people will have is how well will EH work out from a financial standpoint and what are the pros and cons of implementing a plan?
    • The financial viability of the plan will obviously be improved if you can “ write off ” the interest.
  • 10. Writing off home equity debt
    • Title 26 Section 163 ( $100,000 limit on HED)
    • Title 26 Section 264(a)3 ( no deduction if money goes into cash value life).
      • Exceptions
        • DOW and the 4 out of 7 rule as a way around 264(a)3.
        • Use other money first.
    • For a complete discussion about the interest deduction on home equity debt, please reach chapter 2 of the Home Equity Management Guidebook: How to Achieve Maximum Wealth with Maximum Security .
    • The upcoming examples will illustrate the finances when the interest is deductible and when it is not .
  • 11. Example
    • An example is the best way to explain how EH works.
    • Facts : Mr. and Mrs. Smith combined income = $250,000 a year (pre-tax).
      • Their income is stable and they have $150,000 in stocks and mutual funds in a brokerage account (that used to be $200,000 before a recent stock market downturn )
    • Both are age 45 and in good health.
    • They own a home worth $400,000 with $200,000 of current debt with a 30-year mortgage at 6%.
    • They have $200,000 of equity in the home.
  • 12. Illustrating the numbers
    • For this presentation, it is assumed that Mr. and Mrs. Smith will remove $ 100,000 of the equity from their home (the 163) limit .
    • Smith are well positioned to setup an EH plan that will allow them to write off the debt on $100,000 of home equity debt*.
    • *See chapter 2 of the HEMGB.
  • 13. Funding the plan
    • The Smiths will reposition $100,000 of borrowed funds into an EIUL insurance policy on Mr. Smith life over five years where the average rate of return pegged to the S&P 500 index is assumed to be 7.5% a year.
    • How much could the Smith removed income tax-free from the life insurance policy from ages 66-85?
    • $30,470
  • 14. What was the cost?
    • What is the annual cost to the Smiths to have this $100,000 of borrowed funds repositioned into the life insurance policy?
    • $6,000 annually with an interest only loan.
    • However, because the Smith are positioned to write off the interest, the actual out of pocket costs in the 40% income tax bracket is $3,600 .
  • 15. Question:
    • Would you borrow $100,000 if the costs was $3,600 a year if earned you a tax-free retirement benefit of $30,470 every year from ages 66-85?
    • The answer should an emphatic YES!
  • 16. The comparison
    • If no EH plan, the Smith would not incur a $3,600 after-tax expense ever year the loan was in place
    • Most people grow wealth with mutual funds so that will be the comparison.
    • The same 7.5% gross investment rate of return will be assumed in the mutual fund.
    • -20% blended dividend/capital gains tax.
    • .6% mutual fund expense (industry average is over 1.2% a year.
  • 17. Retirement using mutual funds
    • How much could be removed from their mutual funds after taxes and expenses from 66-85 ?
    • $14,402
    • Do you remember how much could be removed from the EIUL insurance policy?
    • $30,470
    • How much better did they do using EH?
    • $16,068 (each year for 20 years) or $331,360 better over the twenty-year retirement period.
  • 18. Illustrative charts
  • 19. Paying back the debt
    • If the Smiths funded mutual funds instead of an EH plan they would not have incurred $100,000 worth of new debt.
    • With a proper life insurance policy design, there should always be enough death benefit to pay back the $100,000 interest only debt.
    • At Mr. Smith’s age 85, the policy’s death benefit would be $125,041 debt benefit .
  • 20. What EH when the interest is NOT deductible
    • Let’s use the same example except assume the interest is not deductible.
    • Except now $6,000 would be repositioned into mutual funds every year for the comparison instead of $3,600 ).
  • 21. Continued
    • How much could the Smith remove from their brokerage account after funding $6,000 into a brokerage account every year the loan is in place?
    • $ 24,003 from age 66-85.
    • How much could they remove from their EIUL policy?
    • $30,047 from ages 66-85.
    • How much better was the EH plan when the funds are NOT deductible?
    • $6,044 annually or $120,880 better over the 20-year period.
  • 22. The sales/educational charts
  • 23. Summary on EH
    • Using real world assumptions, EH is a very powerful and viable way to build a tax-favorable retirement nest egg.
    • There is no one size plan that fits everyone, but if you
      • have a stable income
      • have a home with equity
      • Like the idea of using a wealth building tool that
        • Allows money to grow tax-free and come out tax-free ,
        • Locks in gains and no downside market risk , and
        • Protects the family in the event of an early death…
    • … .then you are a candidate to build wealth through Equity Harvesting.
    • For help on this topics, contact your locally trusted advisor.