FAQs

Expert Panel Q & A

• Acquisition indebtedness on multiple properties – A.I. is the amount of mortgage you can write off. A decent tax advisor will tell you, you can write off $1MM on your first and 2nd property. An even better tax advisor will tell you, you can go $100K above. AI is defined as the lowest the mortgage balance has been paid down to plus verifiable cost of improvements plus the $100K. The $100,000 of Home Equity indebtedness above and beyond the Acquisition Indebtedness is the additional mortgage interest deduction in question. Section 163 states that the additional $100,000 is deductible for any purpose with exceptions. The exceptions being Sec 264, which is an ambiguous rule that states if the proceeds from a mortgage transaction are placed into a single premium annuity or single premium life contract, the additional $100,000 of Home Equity Indebtedness is not deductable. AMT (Alternative Minimum Tax) may also negate this tax deduction. The best advice is that the deductibility is nearly irrelevant to the sale; it is the “cherry on top” and an added bonus if you can get it. The real benefit is in the separation of the two assets, the compound interest earnings vs the simple interest being paid, and the tax advantaged retirement income.
  
  
• 401K rollout procedures – You need to see the big picture before determining if a 401K rollover is wise. Things to consider are the tax situation of the client and AMT. You also need to know the type of 401K (Roth 401K?) and gain access to the plan documents. Some allow In-Service Distributions and some don’t. Many 401Ks can not be rolled over as dictated by the plan documents. JJ mentioned a little known provision called the NUA which in some cases gains a participant access to a large portion of the 401K at capital gain. Stage of life is a crucial consideration as well. More often than not however the best option is a redirection and not a rollover. Freeze the asset, Redirect the contribution, Spend the 401K down first @ retirement. Continuing to defer that frozen asset into retirement only causes a greater tax liability in future years.
  
  
• Mortgage accelerator programs – Mortgage accelerator programs such as MMA are actually contrarian to the missed fortune concept. They decrease the acquisition indebtedness and by simply using a comparison of a Missed Fortune plan next to a mortgage accelerator plan the argument is made.
  
  
• Most effective side buckets – The most effective side buckets are the ones that follow the basic principles of MF (Safety, Liquidity and Rate of Return) and in that order. Rate of Return is not crucial with the side bucket. What is crucial is taking the planned premiums out of the client’s bank account and positioning it into something that is secure and earmarked for the Missed Fortune plan. Commission is also not important on the side fund. Its purpose is to ensure that future premiums are available in subsequent years thus renewal commission will be paid and the integrity of the plan remains intact. The Equity Trust is a fantastic vehicle (attached).
  
  
• Determining the actual costs associated with an insurance policy – Though this rarely comes up if the education process is done correctly, the information can be found on the illustrations themselves. We have also developed systems to determine the costs which consist of Mortality (per thousand expenses and costs of insurance), Administration costs and Premium Loads (please see attached). If you’re running into questions like these on a consistent basis partner with one of the experts on your next case and learn how to perfect the education process.
• Using proceeds of the equity to pay the incurred mortgage debt – There is no one right answer for all clients. It is a matter of the individual client’s situation and a proper “cash flowing” plan. The idea is to get rid of the non-preferred debt and teach discipline as part of the overall plan. For example If a client is paying off a $13K credit card on a monthly basis we might use the freed up equity to pay off that debt but do not discontinue those monthly payments. Instead reposition them into the plan.
  
  
• Most effective crediting methods – The most effective crediting methods are the ones that are the simplest, easy to explain and have a history of performance. Robin mentioned that he likes the Old Mutual point to point as there are 4 Buy-In dates thus he can structure the policy with a quarterly premium. This allows the clients to hedge against any one poor performing indexing date. OM also has a 1% true annual guaranty meaning the client at minimum is credited 1% per year.
  
  
• Rolling out qualified money – A 72T can be used to roll out qualified money however the process itself can be very difficult. It is often more effective and less time consuming to pull qualified money out and pay the penalty and let it begin working immediately for the client.