STORY TOOLS

• E-mail story
• Comments
• iPod friendly
• Printer friendly

More Business

• Tax Secrets of the Wealthy: Easy to do winning tax combinations — part 1
• Business Buzz: July 15, 2008
• Women, Wisdom & Wealth: The three R’s of investment

Share and Enjoy [?]

Tax planning is an indoor sport, usually only played by adults. This particular tax game is played for the benefit of younger family members. Most are about 4 years old or younger… 50 is good, but the younger the better. Actually, we train our clients to call when the baby is born.

The name of this game is private retirement plan (PRP). A PRP is similar to a Roth IRA. Although you don’t get a deduction for your contributions to a Roth IRA, every dollar you take out after 5 years (as long as you are over 59 1/2) comes out tax-free. But sorry, you cannot play the Roth IRA game if you have no earned income (like almost every little kid) or you earn too much money.

Instead, unlike a Roth IRA, everybody can play the PRP game, where the amount of your earned income doesn’t count. And you can put as much money as you want into the game — or maybe a parent or grandparent will put it in for you — every year.

Exactly how the PRP game is played is best shown by real life examples. The following two examples — taken out of our private consulting files — will show you how and why many others have started a PRP.

The first plan is for baby Jordan, an 8-year old who obviously has no earned income. The second plan is for Jordan’s dad, Sam, a 34-year old, who earns $170,000 per year (helping his dad, Joe, run a successful family business).

Jordan’s PRP. The annual contributions (actually insurance premiums) to the PRP are gifts from Grandpa Joe. Joe will make a gift (during Joe’s life or at his death in his will) of $4,000 per year to the PRP for 42 years (Jordan will be 50 years old) or a total of $168,000. Starting at age 66, Jordan will receive $380,708 for life.

Appropriate trusts would provide for the details needed to implement the plan. The total benefits ($380,708 each year, plus death benefits) increase the longer Jordan lives. For example, if Jordan lives to age 80, the total benefits to him and his heirs would be $10,362,169… All from just $168,000 in gifts. Wow! Sure beats the old $12,000 or $24,000 annual gift idea.

Sam’s PRP. Sam waived out of the family business 401(k) plan and is providing the annual premiums for his own PRP. Sam decides on a plan to contribute $20,000 for 21 years, (a total of $420,000) with contributions to stop at age 55. Note: the exact amount of the annual contributions and the number of years to be paid is tailored to accomplish the specific results desired. Sam will receive a retirement benefit of $165,664 starting at age 65. Joe’s total benefits rise from $2,616,536 at age 65 to $5,255,342 at age 85. All from a total contribution of only $420,000.

What’s the secret behind the huge dollar results? Simply put, the large numbers grow because a PRP allows money to compound over time in a tax-free insurance environment.

Just a note: If everything in Jordan’s plan was identical, except Jordan is a 1-year old (instead of an 8-year old), the annual retirement figure would be $611,620. Really, an easy way to create future millionaires. As you can tell by the numbers, youth is rewarded by a PRP. And oh, yes, all the retirement figures, and death benefits would be 10 percent higher for a woman (because they have a longer life expectancy).

Want to learn more about how a PRP can enrich the young (age 54 or younger) members of your family, instead of the IRS? Fax me (Irv) the name and birthdays of the family members who might enjoy the huge economic and tax benefits of a PRP. Include all numbers where you can be reached (business, home, cell). Mark “PRP” at the top of the page.

---

Irv Blackman is a certified public accountant and lawyer who specializes in estate planning, business succession and asset protection. Contact him at Blackman@EstateTaxSecrets.com or call 417-9732. His Web site is www.taxsecretsofthewealthy.com.