All Forum Posts by: Thomas Rutkowski

@Michael Plante - if you can't accept less than 20% returns, you'll probably have to keep your money in the market and at risk. 

If you wan't to keep your money, you need to hedge your risk. I'm sure there are a lot of investors that, looking back, wish they would have put their money on the sidelines in 2006. Most probably would have been pretty happy to simply not lose money when the market crashed. 

You need to understand risk-adjusted returns. 

@William Salas  One option to consider would be a Monetized Installment Sale. This is a way to structure the sale so that your father gets cash at closing and he can defer the capital gains tax and depreciation recapture for 30 years. This would let him sit on the sidelines while he takes his time to figure out what he wants to do with the proceeds. 

Private lending is the safest place to be. Let the borrower take the market risk and make sure you have a low loan to value. You want to come out ahead whether the borrower defaults or not and even if the market collapses. If you are an accredited investor, there are lots of lending funds that remove the underwriting responsibility... buy you'll still need to underwrite the fund as part of your vetting process.

@Lisa Wilson - Don't pay off the mortgages. If you can keep borrowed money working, you should never give it back. Paying off a mortgage is like sticking cash under your mattress. Only with a mattress the cash is easier to get to. You have to sell the house or refi in order to get it back when you pay off a mortgage.

Stay out of direct investments in real estate while the market is hot and look for smart debt investments where your money is protected by a good Loan-to-value. Let the investor take on the market risk. You want to make money whether the borrower pays you back or defaults. You can get back into direct investments in real estate when the market makes sense again.

The seller could also do a Monetized Installment Sale. This is a way to structure the sale so that the seller can get cash at closing and defer the capital gains tax and depreciation recapture for 30 years. This way he/she wouldn't have to worry about having a replacement property ready and you could get the property. And your seller would be able to go into their next deal with an all new basis and fresh depreciation. With a 1031 your gains and depreciation are rolled forward into your next property.

 I'm pretty sure the original poster was referring to a "Deferred Sales Trust". This works just as you described. You sell the asset to the Trust with a 30-year interest-only note. The Trust immediately sells the asset to the buyer you've already identified for cash. The Trust then manages the cash and makes the monthly payments to the seller. The taxes are deferred for 30 years because there is no "constructive receipt" of the sales proceeds. If you want to turn your asset into an annuity, this is one way to do it. As you might expect, its promoted by money managers who want the assets under management for 30 years.

Another way is to use a Monetized Installment Sale. This strategy lets you get cash after closing and defer the taxes/recapture for 30 years. The advantage of this is that you can sit on the sidelines if you think the market is too hot. If you do decide to get back into real estate, you start off with an all new basis in your new property (depreciation). 

Yet another strategy is a twist on the CRT that has been discussed. Swap out the trust with a LLC and gift the LLC membership units to a donor-advised fund (charity). The seller maintains role as manager of the LLC and invests the sales proceeds in future investments. The seller gets a huge charitable donation to offset their income tax. Future gains in LLC flow through to Charity on a K-1 but assets remain in LLC coffers. Since the Charity is tax-exempt, the money essentially grows tax free. You'll want to distribute a lot of that gain to charity. You'll use Life Insurance as the mechanism to replace the wealth you gave away, just as you would in a CRT.

This is a 10,000 foot overview of three very sophisticated strategies. 

@Thomas Witchard Can you provide some transaction details? What is the amount of gain?

Whoever is offering the securities needs to verify that you meet the definition of an accredited investor. When you return your financial statements, just make sure ALL of your assets are included.

Your best bet is to do a Monetized Installment Sale. This is a way to structure the sale so that you can get cash at closing and defer the taxes for 30 years. You can take your time and find your next investment. And the best thing is that you'll start the new investment with a fresh depreciation schedule. 

 I don't mind taking the time to respond. I'm sure you are not the only person that is following this thread.

Your first paragraph tells me that you "get it". That is it exactly. Now I just have to firm up your understanding of the life insurance side of it.

1. Policy Loans. Let's look at insurance company loans and bank loans separately.

A. Insurance company policy loans. All 50 states have language in their state insurance statutes that state something on the order of "Insurance companies must make loans to their policy holders secured by nothing but the cash value of those policies." All life insurance retirement plans are based around policy loans. Clients borrow against their policies and each year the insurance company loans the client the money to pay the interest. They just take on the new loan to the amount due. This goes on until the policy holder dies and then the death benefit pays off the loans and the remaining death benefit goes to the beneficiary. As long as the loan interest rate is at least equal to dividend/interest rate on the policy, you should be able to see how this can go on forever. Now take a policy with a loan rate that is capped at 5%. As long as their is some interest rate spread between the growth of the cash value and the policy loan interest, the cash value growth outpaces the loan balance.

So, to answer your question, you don't ever HAVE to pay off the loan, but I believe you should treat your policy loan as a business expense when deployed as we've discussed above. Insurance companies offer both fixed and variable loans. You want to use variable for this. I'll explain why privately. I don't want to go down that rabbit hole here.

B. Bank Cash Value Line of Credit. These loans are usually at prime and are a line of credit. Terms are dependent upon the bank, but a LOC is typically interest-only and you have checkbook-like access to it. The reason I believe you should use a CVLOC is that, if your investment company gets the loan, then the interest on the loan is a business expense. The bank gets an assignment of collateral against the policy. That's the best type of collateral and that's why the rates are so good.

The tax-deductibility of the interest is a huge benefit. Imagine a 10% return on a 1-yr performing note purchased with a policy loan. Tax rate is 25%. Policy loan is at 5%. If the interest IS NOT tax deductible, then you will pay tax on the full 10% ($2,500), pay back the loan with the remaining $7,500 leaving you with $2500.

If the interest IS tax deductible, then you will pay tax on only $5,000 of income ($1,250) and will end up with $3,750 in your bank account at the end of the year.

2 & 3. Index Returns. Here is a comparison of just the S&P500 index and what interest crediting would look like with the current 12.5% cap offered by this carrier. 

I'm not sure why you would think 3-4% when the index has returned 8.29% over 30 years. IUL 101. Insurance companies do not "invest" your cash value in the market. They invest your CV the way they always have: treasuries, high-quality corporate bonds, Mortgages, CREI. They take the interest earned from these and use it to purchase options on the indices. Their goal is to lock in as much movement in the index as possible. Why? Because the CV represents you saving up your own death benefit. The faster it grows, the faster their risk is eliminated. They have a vested interest in seeing your CV grow as fast as is reasonably possible.

One other note. Once you are outside of the first 10 years of the policy, the costs drop substantially. In a properly designed policy, the Cost of Insurance will be less than 0.25% of the cash value. This is on par with most index funds/ETFs. What you see in this chart is not eaten away by fees. 

https://www.biggerpockets.com/blogs/7595/47958-is-...

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