All Forum Posts by: Thomas Rutkowski

@Mark S.

The Family Bank strategy is a little different from infinite banking and be your own banker. Their concept revolves around funding a business with a loan against an overfunded policy. The weakness that I see in it is funding the initial premium that gets it all started. The business essentially operates out of the credit line secured by the cash value. It also looks like the business will be carrying a tremendous amount of debt over time. Who would buy a business with that much debt? If the debt is forgiven, the owner is likely going to get a very big bill from the IRS.

infinite Banking and the subject of leveraging high cash value life insurance policies was beat to death on this thread...

https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

There are financial examples and a lot of tips on making sure the policy is designed right. If your cash value to premium ratio is not 85% +/-, the policy is not designed as efficiently as it could be (Death benefit too high).

It is not a new strategy. It's been around for at least 25 years that I know about. The clients I know who have done this have hired a tax attorney to write a legal opinion letter. I've read the opinion letters, and while I'm not an attorney, the strategy seems legally sound to me. It is simply an installment sale. And because of the fact that it is done through a qualified intermediary, the depreciation recapture is deferred for the same reason that it is in a 1031 exchange. 

The only area that it seems the IRS could really rule on is whether the monetization loan violates the pledge rule. And since the loans are not secured, that seems unlikely. 

The advantage for utilizing this approach is not perpetual tax deferral. A seller will do this because they want cash in their hand. Maybe they're tired of investing in real estate and would rather put their money elsewhere. 30 years of tax deferral lets you hold onto the government's money for 30 years. If I invested $100,000 at 7.2% for 30 years, it would turn into $800,000 (Rule of 72). At the same time, inflation would have reduced the tax cost in real dollars about 50%. Conversely, if I set aside $12,500, it would grow into enough money to pay the future tax bill. The seller would have 7/8ths of their tax cost to re-invest. I recommend that my clients use life insurance to plan for the future tax obligation: either there will be a death benefit to pay the tax or there will be cash value that can pay the tax.

Even if the seller chooses to remain in real estate, when they buy their next property, they will start off with a fresh depreciation schedule. The present value of the new depreciation will outweigh the benefit of infinite tax deferral for some sellers. 

The investor does not receive a step up in basis. The investor's heirs receive the property with the step up in basis. When the investor dies, the value of the property at that time is included in their estate. So if their estate is subject to estate taxes, the heirs may be forced to sell the property just to pay the taxes (assuming they made no other plans).

@James Whitney

That is total nonsense. You are doing your clients a disservice because you don't understand the products you sell.

https://www.biggerpockets.com/member-blogs/7595/86513-should-you-buy-term-and-invest-the-difference

@Arty Fresh

I think you are confusing the cash value with the death benefit. You can certainly over fund a life insurance policy to build up cash value that can be leverage immediately. Just understand that the cash value is not the death benefit.

In order to have $250,000 of cash value, you would have had to pay a premium of about $295K. Or $50K of annual premium for 5 years. or $25K of annual premium for about 8 years...The death benefit associated with that much premium would be much higher (>$10M, depending on age).

Here is a good tutorial on life insurance...

https://www.biggerpockets.com/...

The concept of leveraging cash value to invest in real estate is thoroughly examined in this thread...

https://www.biggerpockets.com/forums/519/topics/245380-paradigm-life-infinite-banking-whole-life-insurance?page=3

Hope this helps!

@Jason Hartman

I know several attorneys who have advised/prepared a legal opinion letter for my clients who have done monetized installment sales. I know a few CPAs that are familiar with the concept as well. My opinion is that a CPA really shouldn't be advising clients on legal matters. Interpretation of the codes is for attorneys, not accountants.

@Adam Edwards - Yes. From a pure retirement income perspective only. Especially since he is only 22 years old. At my age (54), the life insurance retirement plan would probably win out. The income generating capacity of the life insurance policy is about 2-3 times that of money in traditional retirement assets (think 4%-rule). In the short term, the life insurance policy has the advantage... even with more money going to the 401(k) from the match.

Take away the match and the life insurance retirement plan wins.

Bob - I agree with your first sentence: the policy should be funded right up to the MEC Limit. The problem is that the policies offered by IBC practitioners are NOT funded right up to the max. They are over-funded, but they leave plenty of room for the client to add paid up additions later. 

This results in a higher death benefit and higher commissions for the agent. 

Shane - A properly-designed, overfunded policy will result in cash value of about 85% relative to the premium. So you would take a haircut on every dollar you stuff into a policy. But that cash value will earn 6%-ish returns with principal protection. So in a few years time, you will certainly have more than you would had you stuck the money in CDs. And if you opted for a stock market approach instead, you could either find yourself with much more or much less if the market tanked. The market is not a good place for money needed in a short time.

As someone who specializes in designing and selling properly designed and overfunded policies, I wish I could tell you that you would be better off doing the life insurance than taking the match and investing in the market. 

High cash value policies can provide about 3 times the retirement income of money in a 401(k). But even assuming modest growth of market based 401(k) assets, it will never make up for the immediate 50% return offered by a 6% match. 

I have a model that compares the two scenarios with the match and growth assumptions being user-definable.

Give it a try. You've got nothing to lose. 

Capital gains will not be avoided, just deferred until the gain is realized. So unless the loan is interest only, there will be tax on the amount of gain realized.

Also, depreciation recapture cannot be deferred at all unless the deal is done through a qualified intermediary.

Yes.