5 years of funding for tax-free income. In this episode, we are going to
address the question "Why can't you fund a universal life insurance policy with
one lump sum?" This is number 5 video in a series of twenty one titled Secrets
To a Tax-Free Retirement. I implore you to watch all of these 4
hours of your time could generate an extra million dollars of cash tax-free
that will generate $100,000 a year of income for the rest of
your life.
So, my name is Doug Andrew and I've been a financial strategist, retirement
planning specialist for more than 45 years. My favorite financial vehicle
especially for retirement, business owners, college funding, real estate
management bar none is a max-funded, tax-advantaged indexed universal life
insurance contract. Because it passes the liquidity safety and rate of return
tests with flying colors and it's tax free to boot. So, in this episode, we are
going to talk about why you cannot put all of your money in one lump sum into
an indexed universal life insurance policy since June 21st 1988. So, in
episodes 1 through 4, I talked about the history behind the emergence of
universal life insurance, the brainchild of EF Hutton. And when they came out with
the idea in 1980, it was like, "Wow!" And there was this massive exodus of money
that began to go from the banks and the credit unions and the brokerage firms
into these contracts with a multi trillion dollar insurance industry, the
backbone of America and the backbone of the world. And so the IRS came in and
they challenged it and in the last episode I talked about tax citations
Tefra and Defra. That dictates the minimum amount of insurance required
based upon your age and gender to have your money accumulate tax-free and be
able to access that money tax-free. Well, there were a lot of brokerage firms,
banks and credit unions that were jealous back in 1984, '85, '86, '87. They
couldn't compete. And they were pouting. We cannot compete with this. You've got
to help us out. People are coming and taking money out of our banks out of our
brokerage firms and they're putting them into these max funded insurance policies
because they're safer. They pay higher interest, they don't have near the risks,
the safety is way higher. And they're tax-free. And when they ultimately pass
away, they blossom. They couldn't even come close to doing
that. So, you know what? They all got together and lobbied congress. And they
succeeded in 1988. The exact date, June 21st. I will never forget that day. They
convinced congress under the technical and miscellaneous Revenue Act of 1988.
Now, that spells the acronym TAMRA. T-A-M-R-A. They convinced Congress to slow the flow
of money from their institutions which were actually inferior into these
which were superior. They said, you've got to slow the flow. Make it so that people
aren't coming in and grabbing a big lump sums and putting him over to these
institutions. Well, I thought this is going to come back and hurt them. But
they wanted to make sure that the money took at least 5 years to leave their
institution. So, Tamra said this. After June 21st 1988, if you wanted to maximum
fund a universal life insurance contract up until that point, okay? If you wanted
to put in let's say 500,000 in a month fell swoop. Which many of my clients put
in $500,000, a million. You could do that and you could hit the
ground running at a 10% net internal rate of return. People would put
in a million dollars and start accessing 100,000 a year of tax-free
income. Well, that all changed June 21st. 1988, what happened is when you went in
and put in a lump sum... By the way, if you had an insurance contract prior, you
didn't have to abide by the new law. See, people who had universal life before
Tefra, Defra or Tamra were grandfathered. So, that's why it's so
important to grandfather yourself so that you don't have to adhere to new tax
law changes. Now, thank goodness, they haven't had any other tax law changes as
they relate to universal life since then. But if they ever did, you want to make
sure your grandfathered. But after June 21st, if somebody came to me and they
wanted to throw in let's say a half a million dollars into the insurance
policy, they could still do that. But it would only grow tax-free. And if they
died for the 60-year-old under Tefra Defra, the death benefit minimum would be
a million two fifty. If they died, they would leave behind a million 250,000 tax-free.
Well then, what did they change? So, your money accumulates tax-free still. When
you die, it transfers tax-free. Oh, what about the access? What about the tax-free
income? See, universal life was the brainchild of Hutton for living benefits.
Tamara said this: "If you throw in a big lump sum and you want to start taking
out income, now it's taxable." And it's taxable LIFO. Now, that means last in
first out. That means you have to start paying tax on all the interest first
just like annuities and most investments. If you wanted tax-free income, you had to
comply with Tamra. So, what did you have to do? So, let me explain Tamra in this
way: I often compare a max funded universal life insurance policy to a
bucket. This is a bucket where you want to put your money to accumulate cash. And
so many times the people would tell me how much money they want it to be
grandfather to put into the bucket. You don't have to put this all in at once.
But prior to June 21st 1988, if I had somebody that wanted to come in and fill
it up in one fell swoop with $500,000, they could do that. And they could start
taking out income immediately or this would double to a million and 7 to
10 years. And whatever it grows and however it grows to, you can then start
taking out income tax-free. The income was tax-free. Tamra changed that. And they
said, "Well, if you put that in in one fell swoop, it will only grow tax-free." And
when you die it blossoms and transfers tax-free. What does that blossom to if
you die the next day? For a 60-year old, that would be
$1,250,000, okay? So a million two hundred fifty. Okay? A million two fifty. But this is the amount or
what is called the guideline single premium. Tamra said this: 'If you want to
take tax-free income out of here, this bucket as it grows, you cannot put this
in all at once. You have to spread it out over at least 5 years of its
universal life. If its whole life, you have to spread it out over 7 years."
That's one of the reasons why I like universal life over whole life. I get my
money in faster and it's more flexible. So, since we're talking about universal
life, that means that the most I could put in would be about 20% of that
or about $100,000. This varies plus or take a few dollars depending upon your
age. But basically you can only fill up the bucket 20% of the way. A
$100,000. Now, why did they do that? Because they were slowing the flow.
If you have a half a million, you want to reposition and you can only put in
100,000 here. Most banks and brokerage firm said, "Oh, we still get
to keep the other 400,000 for another year." And then next year, you can
put in another 100. In other words, you can have up to 200,000
in there. And the next year, okay? This is one year and one day later. You can have
up to 300,000 of deposits into here. And then
400,000. And finally, you can put in the last 100,000. Now, if you put
this in the first day of the first year, in 4 years and one day, you could put
in the 100.Now, you've complied with Tamra. And now, forever after, the
income you take out of here, the 500 it doubles to a million, to
2 million, to 4 million, to 8 million. Whenever you start taking out income,
it's tax-free. Because you complied with Tamra by not funding the policy, the
bucket faster than 5 years. This is 7 years or what is called the 7
pay test with whole life. I can maximum fund this. Now, what's neat is I don't
have to put in 100(thousand). put in 10,000. That covers the cost of
the insurance easy. That means I have 90,000 of room that I could have put in
that I didn't use. Tamra is one of the rules that if you don't use the room, you
don't lose the room. So, I've had people put in 10 thousand, 10 thousand, 10 thousand. And in 3
years and one day or 4 years and one day, they finally got a windfall and
inheritance. And if they've only put in 40,000 and they could have now put in
500(thousand), they can put in 460,000 in one year
because they're making up for the room they didn't use. So, this is very powerful
when you're designing a maximum-funded insurance contract in compliance with
Tamra. So, let me tell you what happens if you violate Tamra. If your objective is
death benefit, you don't really have to worry about Tamra because if you're
putting in the money and you're trying to leave behind the most money when you
die with a tax-free death benefit, you don't even have to worry about Tamra in
my opinion. But if you're wanting to preserve the right to make sure you can
have access to tax-free withdrawals or income in retirement, you want to make
sure you comply with Tamra and not fill up your insurance policy any faster than
5 relatively equal installments. That's the fastest you can fill it up.
You could take 20 or 30 years to put in your money. But the fastest you can put
it in is 4 years and one day. Does that make sense?
Now, what if you put in more? First of all, the insurance company will refund you
the amount. If you put in more than Tefra never allows, they have to refund
it to you. Because now you violated the definition of tax-free insurance. But if
you put in more money, in other words, if you put in 100,000 the first
year and all of a sudden you put in another hundred thousand on the 365th
day, not the 366th day, you violated Tamra. Bells,
whistles go off. And it goes Mec! Mec! Mec! Like a dump truck backing up, okay?
What's a MEC? M-E-C, that's a modified endowment contract. That means
that when you violate Tamra, you've created a modified endowment contract.
And if you go to access money, it's going to be taxable now instead of tax-free.
That's not the end of the world. Because the IRS says sometimes people just make
mistakes and they pay money sooner than they needed to. And so you can perfect a
Mec, okay? So, as I often say, if you MEC it up,
you can unmec it. You actually have a 60 day window after the next policy
anniversary to perfect the Mec, how do you do that? You just tell the insurance
company, "Oh, I made a mistake, refund me. Refund me the money I put in there." So, if
you put it in on the 360 fifth day, you have basically 61 days to ask for a
refund and then you can put the money back in again and now it's perfected. If
I put in a whole half a million on the first day of the first year and created
a mec, I actually have that year plus 60 days of the next year to perfect the
mec. And they would refund me the 400,000 and the interest on
that. And then I could redeposit just another 100,000. When you fund
it according to the Tamra guidelines, you now preserve the right ever after to
have tax-free income. So, sometimes when I teach audiences about Tefra, Defra and
Tamra, they hear about Tamra and they go, "Shucky darn." Well, yeah. Sometimes we have
to spread it out but it's well, well worth it to do it. It doesn't mean you
have to wait 5 years to access money. If I put in 100,000 the first
year, a 100,000 the second, 100,000 on the third and all of
a sudden I have an emergency, I can go grab money. This has nothing to do with
when you can access money, you don't have to wait 5 years. But if you are going
to be using a retirement income and you want tax-free income, it would behoove
you to wait four years and one day at a minimum, get the money in there, maximum
fund it and then start taking out income somewhere there after after it continues
to grow tax-free and provide that incredible tax-free rate of return. So,
this is why Tamra was pass to slow the flow. Do you know that
within 3 weeks after the Tamra law was passed in 1988, the insurance
industry came out with temporary sight buckets where you could park the excess
money for 3 or 4 years or annuities. And so, it really didn't solve
or give the brokerage firms in the banks the money. But they never rescinded the
law. So, we must comply with Tamra to this day. We are the number one experts that
teach tax attorneys law firms all over the country, CPAs about Tefra, Defra and
Tamra as it relates to section 72E, 7702, and 101A. If you want to learn about
this, my eleventh book, The Laser Fund is 300 pages of charts graphs explanations.
And you flip it over and there's 12 chapters with 62 actual clients stories.
I'll tell you what, I'll buy this book for you and send it out to you. You just
pay $5.95 shipping and handling by going to laserfund.com. And you can also get
an audio version or a digital version. There's an 18-hour master class. But I
implore you to watch this episode next and connect the dots on how powerful
this can be for all kinds of financial goals.