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.