Tax Planning During the Biden Administration
In 2014, I began the path towards practicing advanced Tax Planning on a full-time basis. Due to my experience in the financial services sector, I understand unique life insurance products and have access to attorneys that specialize in unique tax planning strategies. My practice is largely built around a portfolio of niche tax strategies - (1) Private Placement Life Insurance and Annuities (from A to Z); (2) Malta Pension Plans; (3) Customized Pooled Income Funds and charitable tax strategies; (4) Puerto Rican Tax Incentives (without having to move to Puerto Rico); (5) Advanced tax deferral and reduction implementing multiple strategies together into a single integrated tax plan.
High net worth taxpayers have expected the worst regarding tax increases with the new administration and so far, the Biden administration has expressed its intent to meet taxpayer expectations. The Administration has taken direct aim at all the traditional advanced planning techniques such as sales to intentionally defective trusts and grantor retained annuity trusts et al. State governments on both coasts are fulfilling their promises to raise taxes as well. Frankly, the picture is ugly! The Department of Treasury is begging Congress for money for tax enforcement. My good friend's East German father (of blessed memory) of blessed memory would say that soon the IRS and tax enforcement will start to resemble the Stasi, the former East German version of the Russian KGB.
My view is that all the planning strategies that I promote appear to survive the proposed tax law changes unscathed. But I am not the only one that feels this way in fact Judge Hand has stated the following.
Judge Billings Learned Hand
(January 27, 1872 – August 18, 1961)
Was an American judge and judicial philosopher.
He served on the United States District Court for the Southern District of New York
and later the United States Court of Appeals for the Second Circuit.
Hand has been quoted more often by legal scholars and
by the Supreme Court of the United States than any other lower-court judge.
“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.”
Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)
“Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947) - dissenting opinion
If you are satisfied with the amount of taxes that you are paying and feel a patriotic duty to pay more than your fair share, you can stop reading here.
The Big Picture – An Overview of Strategies
I am known for a focus on Helping People as my primary purpose and educating end up in the process of handing over the playbook for my clients and competing advisors. The purpose of this article is to say that not only are we surprisingly good at coming up with good planning ideas, but we are also surprisingly good at implementing those ideas as well. We are asking the readers of this article to consider our team to help you implement strategies that we advocate for clients so that we are in business to keep helping people well into the future. Clients need these strategies now more than ever. This section briefly introduces the primary strategies. Subsequent articles will discuss each strategy in detail.
A. Private Placement Life Insurance and Annuities
Your neighbor, the life insurance agent was correct. Life insurance and annuities are the most tax-advantaged investment structures on the Planet. These particular products are no-load (no commission) life insurance products that allow the policyholder to customize investment options. The tax planning opportunity is structuring investments within the policy so that tax-inefficient investments, e.g., investment income taxed at the highest rates, is repositioned on a tax-free basis. Additionally, individually owned low basis assets may be sold and repositioned on a tax-efficient basis within the policy. The difference is investment income that is taxed versus investment income that is not taxed. You decide which is the better scenario.
B. Malta Pension Plans (MPP)
The MPP is an individual retirement plan that resembles the Roth IRA except that the MPP does not have any contribution limits and is not limited to cash contributions. The MPP allows for distributions as early as age 50 and provides for substantial tax-free distributions. The Plan is effectively self-directed through a client-designated investment advisor who may implement the participant’s investment choices.
C. Pooled Income Funds (PIF) – The PIF resembles the charitable remainder trust (CRT) in many ways, but not exactly. In the current environment, the PIF produces a higher tax deduction and is not subject to the limitations of the CRT. For example, the PIF is not subject to excise taxation on unrelated business taxable income. The PIF is not subject to the four-tier distribution rules of the CRT. The PIF is not subject to the ten percent minimum value of the remainder interest rule. As a result, it is possible for a taxpayer to contribute a long-term capital gain asset without gain and reinvest the proceeds in a manner so that the income distributions to the income beneficiary are received tax-free. We can also structure the charitable gift so that the deduction is not limited to the 30 percent AGI threshold. However, you must call me up to find out how!
D. Puerto Rican Tax – It is well known to my readers that I am a big Latin music fan particularly Afro-Cuban music aka Salsa. Also, I was a Spanish and Portuguese major at the U.S. Military Academy. It is only natural that I would gravitate to a Puerto Rican tax strategy. The reality is that most people do not have the will or interest to move to Puerto Rico full-time to take advantage of the tax incentives under Puerto Rican law. Everybody has a need for taxation at four percent instead of fifty percent. You can call on me to find out how! Take a chance on me!
We do “niche” and “cutting edge”. While we have a legal and moral obligation to comply with tax law, we have discretion on how much to pay towards that obligation. When you implement some of the available strategies, the amount and timing of the payment become an option to the taxpayer. Additionally, an internship in the “Club Fed” is not part of the deal!
The choice to pay high taxes is optional. Judge hand quotes still resonate with most Americans, judges and attorney's across the US today. Various niche strategies alone or in combination can provide tax deferral and convert income and capital gains into tax-free income outside of the taxpayer's taxable estate and beyond the reach of creditors.