By Boyce F. Lowery, CLU®, ChFC®
I’ll bet you learned in school that 1+1=2, right? Well, what if I told you that 1+1 could = 3? Pretty bad for a financial professional, huh? But, it’s true. One plus one can equal three. It’s called synergy.
What Is Synergy?
Synergy is defined as, “the interaction or cooperation of two or more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.” Basically, when things are combined to make something greater than the sum of their individual parts, like 1+1=3, that enhanced result comes from synergy. Let me explain how you can put financial synergy to work for you.
Example of Financial Synergy
Certain states, such as Utah, have laws on the books that can be a part of some powerful financial synergy. With the passage of last year’s Tax Cuts & Jobs Act (TCJA), some business owners can now take up to 20% of annual business earnings and purchase specially designed life insurance policies that have tremendous growth and tax advantages in their own right. But now, we can use financial synergy to accomplish a lot more:
- NEVER pay tax on up to 20% of qualified business income,
- NEVER pay tax on the interest gained on that money,
- In Utah, once the funds are cured, the funds are PROTECTED from potential creditors (even if bankruptcy occurs),
- The owner can have UNLIMITED future access to the money in the policy, still tax-free, and
- NO income taxes will be due when received by policy beneficiaries.
That means 1+1+1 = 5. How?
TCJA + Utah Law + Specially Designed Life Insurance = All 5 benefits listed above.
That is financial synergy. For those readers who don’t want to see some of the details of the TCJA and an applicable law in Utah, skip to the next page. If you enjoy details, read on.
1 : Tax Cuts & Jobs Act
Under the TCJA, Section 199A of the Internal Revenue Code allows for some business owners to take a 20% deduction from their taxable income based their qualified business income. The deduction applies to partnerships, S-corporations, LLCs taxed as a partnership or an S Corp and sole proprietorships, which is why it is commonly called the “Pass-Through Deduction.”
The deduction could be limited for business owners who earn over $157,500 filing individually and $315,000 for joint tax filers. For specified service businesses and those where the principal asset is the reputation or skill of one or more of its employees or owners, the deduction is completely phased out once an individual earns $207,500 or for a couple who earns $415,000. Engineering and architectural firms are not considered specified service businesses for purposes of the deduction. For other types of businesses, other than service businesses, the potential limitation is determined differently.
Other businesses, where the owner is above the phase-out threshold, have to apply one of two tests to determine the limit to their deduction. It is limited to either a maximum of 50% of W-2 wages paid or 25% of W-2 wages paid plus 2.5% of the unadjusted basis of all qualified property. Visit this page for more information: https://www.journalofaccountancy.com/issues/2018/may/sec-199a-deduction-for-qualified-business-income.html
+ 1 : State Creditor Protection Laws
A number of states have very generous laws in place to protect certain life insurance policy cash values and death benefit proceeds. One of the most generous is Utah’s Code Ann. § 78b-5-505. It states that as long as a policy has been in place for a continuous unexpired period of one year, any proceeds or benefits payable to a spouse or children of a debtor or any trust where they are the beneficiaries when the debtor dies are protected from creditors. Further, a person’s debts cannot affect the benefits that their spouse and children receive from their life insurance policy. Importantly, exempt are any proceeds and avails (the policy’s cash values) of any unmatured life insurance contracts owned by the debtor or any revocable grantor trust that they create.
+ 1 : Life Insurance
So, how does this all come together? Life insurance is what ties the TCJA and Utah law together to create financial synergy. As the owner of a pass through business, you can use the money that you save through the TCJA qualified business income deduction to purchase a life insurance policy. When your money is in a properly structured life insurance policy, it will then be able to grow completely tax-free and it can be accessed without taxation by the individual policy owner. Then when the policy owner passes away, any money left in the policy passes on to the beneficiaries income-tax free as well.
Equals 5 Great Financial Benefits
So, if you are a qualifying pass through business owner you don’t have to pay taxes on 20% of your qualified business income. Then, if you take advantage of the available opportunity we’ve discussed in this blog, you don’t have to pay taxes on the interest that money earns. It can be completely protected from creditors, even in bankruptcy. You have unlimited future access to the money tax-free, and it passes on to your beneficiaries tax-free as well. That’s what I call financial synergy.
If you would like to create some financial synergy of your own, we can help you craft a life insurance policy that takes into consideration every aspect of these various laws in order to earn you the greatest financial benefit. Just call us today at 888-827-0146 and we can make 1+1+1=5.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.