The Family Legacy
Wealth creation and wealth transfer planning are often looked at as two different issues. They are not. The Family Legacy is a wealth creation strategy that provides solutions to both problems.
Everything you know about financial planning is wrong. The “standards” that everyone knows are simply fictions that are given a veneer of credibility because so many people follow them that the act of following actually gives rise to some of the expected results. One needs look no further than to the idea of home ownership being a wealth creation tool. The housing market devastation of 2008 and 2009 has made many rethink that model. As bad as the housing market is, retirement savings are in worse shape. Let’s take a look.
Why do we save for retirement? Well, we obviously want to enjoy our golden years, but there is a practical reason as well. Saving makes sense financially. We can use pre-tax dollars with IRA and 401(k)s. We can use after tax dollars with a Roth IRA and get the benefit of tax free distributions when we retire. Right? Yes, but not for much longer. Why? National debt.
How much is our national debt? The number referred to as of the writing of this text is about 13.3 trillion dollars. This represents roughly 67 percent of our gross domestic product, which is a very large percentage. It is the equivalent of owing about 67 percent of your net worth in credit card debt and such. This equates to approximately $40,000+ per person in the country. The problem, of course, is this debt figure is much smaller than what we actually owe.
The national debt is set to explode. No, it is not due to the wars Bush started. It is not due to the bailouts and programs by Obama. It is not a political party issue. It is a demographic one and poor planning issue. More money is paid into social security every year than is paid out in benefits. What happens to this money? It is used by the government to pay for projects, interest on the national debt and so on. In exchange, Congress issues an IOU to the social security system. This slovenly practices is about to come due. In the next five years, social security will start taking in less than it pays out. Throw in the fact Medicare is undergoing huge cost increases as baby boomers age and you can see how government spending is going to go through the roof.
So, how bad is our national debt really? The current unfunded liabilities of the government are not $13.3 trillion. They are $57.8 trillion dollars. Put another way, you and your family members owe roughly $187,000 in debt. EACH! And the figure is going up with interest every day so fast we can barely keep track. You can see the latest figures at the US National Debt Clock here.
How is the federal government going to deal with these numbers? There are only two ways regardless of your political views. The first is to cut benefits. The second is to raise taxes. There is roughly $15 trillion dollars in retirement accounts as of 2009. It is just sitting and growing year after year. Where do you think Congress is going to look for money? Your retirement accounts are going to end up being taxed severely. There simply is no other choice.
At this point, you might be thinking it’ll be years before any of this comes to fruition. Wrong. It is happening now. California is the 8th biggest economy in the world. It is effectively bankrupt. Think about that. The state with the 8th biggest economy in the world is writing IOUs to cover its debts. If you or I did that, we’d be out on the street. The key to avoiding going down on this ship is to put a strategy in place that takes these problems into account.
When it comes to wealth creation and wealth transfer, you need to be smart and think through not only your current situation but the future. The middle class plans for today while the rich plan for the future…well, at least their advisors do! The good news is the primary strategy used to plan for the future is incredibly simple and fairly painless to fund. It is called The Family Legacy.
How is it that rich families like the DuPont’s’ and so on have money generation after generation after generation? Yes, they own property, but taxes have to be paid on that every time wealth is transferred upon the death of a parent. So there must be some other approach. There is and it is wickedly simply. It has to do with life insurance, but a twist that you have never heard of and will smack your head over once you do.
The Family Legacy solution is so simply that you’ll wonder why you did not think of it. I did when first introduced to it and I’ve been doing high end financial planning for years. The first step is to consider how life insurance works. Most people buy life insurance on themselves and then name their spouse, kids and/or others as the beneficiaries. This makes sense, but the life insurance is included in the estate of the parent and taxed upon death. That is not good wealth transfer planning because the wealth is being transferred to the government!
The Family Legacy twists this approach a bit. Instead of the parent buying life insurance for themselves, the kids pool their money and buy policies on their parents. The more kids, the less the premium burden on each of them. The advantage of this approach is the kids receive a large payout that is tax free when the parent passes. Depending on the policy purchased, money can even accumulate and grow tax free in the insurance policy. Let’s look at an example.
You have two kids named Mary and Paul. They are good kids. They graduate from college and get jobs. They are making decent money and the future looks bright. We set up a family legacy structure using your life as the basis for the policy. Paul and Mary are each required to pay in $400 a month to cover the premiums on a policy that pays out $1 million on your passing. You pass away in 15 years. They will have each paid in $72,000 and received $500,000 tax free even if you just use a basic term policy. That is tax free!
Obviously, this represents a simple example of how The Family Legacy works. That being said, the key to wealth creation planning is to foresee the future and come up with solutions to meet the problems presented. This strategy is the classic wealth transfer strategy used for ages by the wealthy. Given the low cost of life insurance these days, there is little reason why you can’t use it as well and set up your family for the future.
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