1

Building a Tax-Favorable Retirement

Plan through “Equity Harvesting”

By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Founder: The Wealth Preservation Institute

Co-Founder: The Asset Protection Society

2

This presentation is based on:

• The HEMGB is a completed guide for how to properly implement an EH plan.

• Includes the pros and cons as well as the appropriate tax code sections.

• This presentation is an overview of parts of the book so you can determine if you should sit down with a trusted advisor to see if an EH plan is right for you.

3

Definition

• Definition of Equity Harvesting (EH):• EH is removing equity from a personal

residence through refinancing (or an equity loan) where the money borrowed is repositioned into cash value life insurance*.

• If you have not viewed the presentation explaining how to build a tax-favorable retirement nest egg using over-funded cash life insurance, it

is recommended that you do so shortly after viewing this presentation.

4

Why build wealth with EH?

• -To leverage a “dormant” asset in a more beneficial manner to build wealth.

• Ask yourself the following question:– If you could borrow money with an interest rate of 5-7% and

earn a tax-free return of 6-9% would you do it?– The answer should be all day long.– The essence of EH is borrowing money at an interest rate of X

and earning a tax-free return on that borrowed money at X++.

• As you will see, from a financial standpoint, EH is one of the most powerful wealth building tools at your disposal.

5

Why build wealth with CVL?

• When using the “right” policy with minimum expenses and maximum cash, your policy will have the following characteristics.

• 1) Tax-Free accumulation and tax free withdrawal.• 2) An annual minimum return guarantee • 3) Growth pegged to the S&P 500 index.• 4) Principal protection (no downside due to negative

market returns).• From 1987-2007, the S&P 500 still averaged in excess of

10%* (even though the stock market had a “crash” from 2000-2003).

• *(Moneychimp.com)

6

CVL is a Protective Wealth Building

$100,00010% S&P 500

Gains AreLocked In

$110,000

-15%

$93,500

5%

5%

$115,500

$98,175

17.6%

Equity Indexed Universal Life locks in the gains in up years and does not participate in the down years.

7

Cash Contributions Compound Interest

Yr. 1 $

Yr. 2 $

Yr. 3 $

Yr. 4 $

Year 5 $

Mortality & ExpenseCharges

Minimum Death Benefit

Maximum Premiums

Funding Life InsuranceFunding Life InsuranceA Tax Free Non-Qualified Retirement Plan

8

Considerations when implementing an EH plan

• You must: – 1) own a home with equity.– 2) be able to service the debt created with an equity

removal*. – 3) be healthy.– 4) use a life insurance policy is a good cash

accumulator.– 5) not have an immediate need for the borrowed

funds (you should commit to letting your plan progress for 5-10 years before accessing tax-free retirement income).

9

EH is a simple concept

• Your are simply removing equity from a home to reposition into cash value life.

• The question most people will have is how well will EH work out from a financial standpoint and what are the pros and cons of implementing a plan?

• The financial viability of the plan will obviously be improved if you can “write off” the interest.

10

Writing off home equity debt

• Title 26 Section 163 ($100,000 limit on HED)

• Title 26 Section 264(a)3 (no deduction if money goes into cash value life).– Exceptions

• DOW and the 4 out of 7 rule as a way around 264(a)3.• Use other money first.

• For a complete discussion about the interest deduction on home equity debt, please reach chapter 2 of the Home Equity Management Guidebook: How to Achieve Maximum Wealth with Maximum Security.

• The upcoming examples will illustrate the finances when the interest is deductible and when it is not.

11

Example

• An example is the best way to explain how EH works.• Facts: Mr. and Mrs. Smith combined income = $250,000

a year (pre-tax). – Their income is stable and they have $150,000 in stocks and

mutual funds in a brokerage account (that used to be $200,000 before a recent stock market downturn)

• Both are age 45 and in good health.• They own a home worth $400,000 with $200,000 of

current debt with a 30-year mortgage at 6%.• They have $200,000 of equity in the home.

12

Illustrating the numbers

• For this presentation, it is assumed that Mr. and Mrs. Smith will remove $100,000 of the equity from their home (the 163) limit.

• Smith are well positioned to setup an EH plan that will allow them to write off the debt on $100,000 of home equity debt*.

• *See chapter 2 of the HEMGB.

13

Funding the plan

• The Smiths will reposition $100,000 of borrowed funds into an EIUL insurance policy on Mr. Smith life over five years where the average rate of return pegged to the S&P 500 index is assumed to be 7.5% a year.

• How much could the Smith removed income tax-free from the life insurance policy from ages 66-85?

• $30,470

14

What was the cost?

• What is the annual cost to the Smiths to have this $100,000 of borrowed funds repositioned into the life insurance policy?

• $6,000 annually with an interest only loan.

• However, because the Smith are positioned to write off the interest, the actual out of pocket costs in the 40% income tax bracket is $3,600.

15

Question:

• Would you borrow $100,000 if the costs was $3,600 a year if earned you a tax-free retirement benefit of $30,470 every year from ages 66-85?

• The answer should an emphatic YES!

16

The comparison

• If no EH plan, the Smith would not incur a $3,600 after-tax expense ever year the loan was in place

• Most people grow wealth with mutual funds so that will be the comparison.

• The same 7.5% gross investment rate of return will be assumed in the mutual fund.

• -20% blended dividend/capital gains tax.

• .6% mutual fund expense (industry average is over 1.2% a year.

17

Retirement using mutual funds

• How much could be removed from their mutual funds after taxes and expenses from 66-85?

• $14,402

• Do you remember how much could be removed from the EIUL insurance policy?

• $30,470

• How much better did they do using EH?

• $16,068 (each year for 20 years) or $331,360 better over the twenty-year retirement period.

18

Illustrative charts

19

Paying back the debt

• If the Smiths funded mutual funds instead of an EH plan they would not have incurred $100,000 worth of new debt.

• With a proper life insurance policy design, there should always be enough death benefit to pay back the $100,000 interest only debt.

• At Mr. Smith’s age 85, the policy’s death benefit would be $125,041 debt benefit.

20

What EH when the interest is NOT deductible

• Let’s use the same example except assume the interest is not deductible.

• Except now $6,000 would be repositioned into mutual funds every year for the comparison instead of $3,600).

21

Continued

• How much could the Smith remove from their brokerage account after funding $6,000 into a brokerage account every year the loan is in place?

• $24,003 from age 66-85. • How much could they remove from their EIUL policy?• $30,047 from ages 66-85.• How much better was the EH plan when the funds are

NOT deductible? • $6,044 annually or $120,880 better over the 20-year

period.

22

The sales/educational charts

23

Summary on EH

• Using real world assumptions, EH is a very powerful and viable way to build a tax-favorable retirement nest egg.

• There is no one size plan that fits everyone, but if you – have a stable income– have a home with equity– Like the idea of using a wealth building tool that

• Allows money to grow tax-free and come out tax-free,• Locks in gains and no downside market risk, and • Protects the family in the event of an early death…

….then you are a candidate to build wealth through Equity Harvesting.

• For help on this topics, contact your locally trusted advisor.