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42 MMS June 2014 mmsonline.com blackman on taxes Columnist The term "tax-free" always has a nice ring to it. The higher the income tax rate, the nicer the ring. Previously, the maximum federal income tax rate was 35 percent, and that was bad enough. At 39.6 percent, the current rate has created a flurry of activity among high-income earners to legally avoid paying it. And there is an additional surtax on passive investment income that can bite you for another 3.8 percent. Plus, your home state may impose an additional income tax. Some, like Nevada and Florida, have no income tax, while others charge killer rates: New York at 8.82 percent, California at 9.3 percent and Hawaii at 11 percent. So, if you have a large amount of investment income, your tax burden can range from a low of 42.4 percent to as high as 53.4 percent. That is a worthy target to make tax-free. How? Private placement life insurance (PPLI). With a PPLI, you put after-tax dollars to work in the form of an insurance premium. There are two compo- nents to a PPLI account—one is a tax-deferred investment, and the other is an insurance benefit. Let's review how your wealth accumulation is impacted by a taxable vs. tax-free scenario. The following example was created by Lewis Schiff, an Austin, Texas, lawyer: Joe, 45, owns a PPLI policy and will pay $2.5 million a year in premiums for five years. The assumed rate of return is 10 percent (net of invest- ment/management fees), taxed as ordinary income at 40 percent (including federal and state taxes). This table illustrates the results: (Dollar figures are rounded and in millions.) So, if Joe lives to age 75, his taxable investment of $52.7 million will produce a cash value of $125 million, and the death benefit will add a tax-free bonus of almost $9 million. The primary purpose of PPLI is to make your investment profits (whether capital gains, dividend income or interest income) tax-free. It is a form of variable universal life insurance that is offered privately rather than through a public offering. The cash value of variable life insurance is depen- dent on the performance of one or more investment accounts in the policy. There are a seemingly endless number of tax magic tricks you can do with PPLI that can save you a huge amount of tax dollars. For example, with a private placement variable annuity (PPVA) investment account, a wealthy person like Joe can put after-tax dollars to work in a tax-deferred account. As long as the assets stay within the account, Joe does not recognize any income. However, if he withdraws any money from the account, he will gain income, and it will be taxable. The minimum size for a PPVA is $1 million, and many ultra-affluent families put $100+ million into Tax Magic Turn every dollar of your investment income into tax-free income. irving l. blackman Contact Irving Blackman by sending an email to blackman@ estatetaxsecrets.com. End TaxablE dEaTh of InvEsTmEnT Cash bEnEfIT YEar 1 $2.7 $2.7 $43.9 5 $12.3 $13.4 $43.9 10 $16.4 $20.5 $43.9 20 $29.5 $50.1 $61.1 30 $52.7 $125.1 $133.9 40 $94.5 $312.9 $328.6 0614_MMS_blackman.indd 42 5/13/2014 4:28:49 PM