Insurance Dedicated Funds May Help Avoid Certain Taxes

 Posted on June 28, 2017 in Estate Planning

The maxim that nothing in life certain except death and taxes has persisted in American culture since Benjamin Franklin used it as a quip in a letter more than two centuries ago. While death and taxes are undoubtedly certain for most people, it is the combination of the two that can be troubling for many individuals and families. Between estate taxes, inheritance taxes, and other tax obligations, it can be expensive when a loved one dies. Through proper estate planning, you and your family may be able to limit your tax liabilities, however, and a relatively new tool may be available to help you do so.

What Is an IDF?

Insurance dedicated funds (IDFs) were introduced in the early 2000s, and despite their bland name, they have quickly become a hot item in the world of finance and asset protection. Such funds are rather complicated and subject to complex rules and regulations, but their appeal is based primarily on their ability to legally avoid taxes by meeting certain requirements.

Without going into too much detail, an insurance dedicated fund works like this: An individual looking to provide future security for his or her family purchases a private-placement life insurance policy, which relies on hedge funds and other alternative investments for growth. While profits on such investments may be subject to capital gains taxes in other situations, an IDF operates under guidelines that govern insurance companies, which means that growth is not taxable. When the insured individual dies, his or her chosen beneficiaries will receive the proceeds from the policy. If the IDF has been set up properly, there are no taxes on the death benefits either.

Limitations and Restrictions

There are a number of restrictions regarding the amount of control that the policyholder has over the money in an IDF. The institutions who manage the funds are also subject to various limitations in terms of how the money can be invested. If the owner of the account tries to exert too much control, taxes are levied immediately. If he or she tries to take money out of the fund, taxes will apply. As you can see, such financial decisions should only be made after careful consideration and guidance from financial experts and legal professionals.

We Can Help

If you are looking for ways to create long-term security for your family without losing more than is necessary to taxes, contact an experienced Lombard estate planning attorney. Call 630-426-0196 for a confidential consultation at A. Traub & Associates today. We will work with you in finding the right estate planning tools for your unique situation.

Sources:

https://www.bloomberg.com/news/articles/2017-06-28/hot-tax-avoidance-plan-joins-millionaires-hedge-funds-insurers

http://www.barrons.com/articles/new-ish-tax-planning-instrument-gathering-billions-1498675108