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An Executive Summary Of The IQD Wealth Management System (IWMS)!

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We get asked all the time if we could provide an executive summary of the IQD Wealth Management System (IWMS) (that we originally built for ourselves, extended family and our clients), so other people could use it.

THE SHORT VERSION: The IQD Wealth Management System (IWMS) is comprised of an Asset Allocation Model (AAM) implemented using a variety of tax advantaged wealth management vehicles. It's objectives are to Keep More and Protect What You Keep. It is supported by The Wealth Management Group (WMG) Forum and a very experienced (over 100+ total years) group of Wealth Management Consultants.

THE LONGER VERSION:

BACKGROUND:
If you live in the US, you know there is a decided movement to attack the wealthy. Why? Simple, to redistribute the wealth, something like from each according to his ability to each according to his needs, but this isn't a political science discussion.

Taxes are going up in 2011, both from the sun setting of the 2001 & 2003 tax cuts and new ones that are in the budget, like an increase in the top ordinary income rate to 39.6%, and increasing long term capital gains and dividends to 20%. Then those of us in California, who are currently at a top rate of 9.55% with a extra millionaire's tax of 1.0%, are standing by for the other shoe to drop, because we have a state budget deficit of $20 billion.

OBJECTIVES: We didn't like the prospects of high taxation, so we went looking for an approach to build a pre & post IQD RV system which would accomplish two objectives:

(1) KEEP MORE by minimizing or eliminating taxes, specifically: (a) Income Tax (Individual and business) - taxes on what you earn from exchanging your talents, energies etc.; (b) Asset Accumulation or Investment Tax - taxes on interest, dividends etc.; (c) Asset Sales Tax - Capital Gains taxes; (d) Asset Transfer Tax - Gift Taxes, Estate Taxes; and (e) Qualified Retirement Plan Tax - Income with respect to a decedent (IRD) tax & Estate Tax.

(2) PROTECT WHAT YOU KEEP: by maximizing asset protection activities.

THE SYSTEM:

STEP 1: Develop an Asset Allocation Model (AAM) (i.e. part current budget, part wish list), ours had categories for:

  • debt elimination (JOB 1)
  • tax planning
  • gifts (family, business associates etc.),
  • charitable activities (church, veterans groups etc.),
  • income (current, deferred etc.)
  • personal projects (house renovation, vacation home, sailboat, travel etc.).

STEP 2:
Determine how much of your total assets (i.e. your IQD inventory) you want to allocate to each category. Since we don't know what the IQD RV rate will be, we used a system that expressed value in terms of "piles." (i.e. so many piles for this, so many piles for that). One pile consisted of how much money it would take to do JOB 1 (debt elimination) using a planning RV rate of 1 IQD = $1 USD. Easier for us to think about, adjust etc.

STEP 3: Determine what wealth management vehicles to use to implement your Asset Allocation Model (AAM). There are only three wealth management areas that can really meet our objectives: Retirement Planning, Charitable Planning and Asset Management (Cash Value Life Insurance).

We decided on using a series of tax-exempt and tax deferral vehicles from these areas, that have been in the IRS code for a long time, and are well tested:

(1) Personal Gifting: IQD at current value is gifted prior to RV, an individual can gift up $13,000 annually without reporting or gift tax.

(2) Qualified Retirement Plans: Roth IRA's and Roth 401(k)'s. IQD purchased in either of these type of accounts can be exchanged tax-free, the investment earnings are tax deferred and if the accounts are held for 5 years and the participant is over 59 1/2 the distributions are tax-free. Great if you purchased your IQD this way and can wait until 59 1/2 for a payout. The only negative is the potential 70% income/estate tax trap when you die.

(3) Charitable Remainder Unitrust (CRUT): Set up with you as the donor and the trustee. IQD's can be purchased anywhere, you donate them to the CRUT which exchanges them with no capital gains. A quarterly income distribution (a minimum 5% of the trust) is then paid to the income beneficiaries (you & your spouse, if applicable) for life. The tax on the income distribution initially is the capital gains taxes the CRUT didn't have to pay, spread out until the capital gain is used up. When the last of the income beneficiaries dies, the remainder of the trust assets goes to a designated charity which can be your private foundation or donor advised fund

Not tax free, but pretty good tax deferrals and immediate income distributions, plus after the initial capital gain is exhausted you can minimize taxes by controlling the investment strategy.

(4) Wealth Replacement Trust (ILIT): An irrevocable life insurance trust funded with part of the income distribution from the CRUT in #3, to give your heirs the same tax-free benefit as the charity got on your death.

(5) Charitable Remainder Annuity Trust (CRAT): Set up with you as the donor and the trustee and it's term is 10 years. IQD is donated one time, it is exchanged - no capital gains. Income (10% of the donated amount) is paid out to the income beneficiary. The payout (after taxes) is used to pay the 10 year premiums on a specially selected Cash Value Life Insurance (CVLI) policy.

When the 10 years are up, the remainder of the CRAT goes to the designated charity which can be your private foundation or donor advised fund. The paid-up CVLI continues to grow until you decide to use the tax-free funds.

Note: Scenario #4 uses the death benefit function of CVLI (maximum death benefit - minimum accumulation), #5 uses the living benefit (maximum accumulation - minimum death benefit).

(6) Private Placement Life Insurance: It is a form of variable universal life insurance that is offered privately, rather than through a public offering (i.e. less commission paid out=more available investment funds). The insurance carrier customizes the investment options to meet the needs of each PPLI owner/investor and wraps them in a tax-free insurance envelope. The prime purpose of PPLI is to make the investment profits (whether capital gains, dividend income or interest income) TAX-FREE.

(7) Private Foundation/Donor Advised Fund:

(a) A private foundation is a not-for-profit entity that can be established by a person, family or business and is organized exclusively for charitable, educational, religious, scientific and literary purposes under Section 501(c)(3) of the Internal Revenue Code. Donors may contribute a wide range of assets into the private foundation (including cash, securities, art and real estate) and retain full control of those assets, including control over investment decisions and grantmaking. Private foundations are generally multigenerational and often set up to last in perpetuity.

(b) A donor advised fund is a pool of charitable assets, typically offered by a public charity affiliated with a financial institution, such as Fidelity or Vanguard, or a local community foundation. With a donor advised fund, donors set up a charitable account and contribute assets, which are then administered by the third party fund. The donor’s role is that of an advisor, rather than final decision maker. Donors may recommend charities, but final granting authority and investment control reside irrevocably with the fund’s directors, who have ultimate authority to accept or reject the donor’s recommendations.

Do you have to use all of the vehicles in the system? NO, each vehicle functions independently and you can use as few or as many as you want or need to implement your Asset Allocation Model (AAM).

As an example, our personal Asset Allocation Model (AAM) uses the following vehicles:

  • Personal Gifting of IQD;
  • Roth 401(k) account for deferred income (funded with IQD), with our CRUT as the primary beneficiary;
  • 10% CRAT for immediate capital gains income for 10 years (funded with IQD); self-trusteed
  • 10% CRUT for immediate tax-free income for two lifetimes (funded with excess after tax distributions from the CRAT); self -trusteed
  • A private foundation which is the remainder charitable beneficiary to the CRAT, CRUT , and our son & daughters CRUT's.
  • Under review are: (1) A CRAT w/CVLI in an ILIT, insured is our daughter, beneficiary is our grandson (we call it the Grandparent's plan, funded with IQD), self trusteed, and (2) A PPLI contract funded with a Roth 401(K) distribution in 2011.

STEP 4: When appropriate execute your Asset Allocation Model (AAM) using the products/services offered by the individual Wealth Management Consultants.

STEP 5: Have the asset protection / estate planning consultant look over your executed Asset Allocation Model (AAM), as well as the rest of your assets to make sure they are protected from lawsuits etc., and that you are organized to minimize your estate taxes.

STEP 6: Utilize the resources in the Wealth Management Group Forum to continuously improve your financial literacy. As Robert Kiyosaki, (Rich Dad - Poor Dad Author) says: "A measure of your financial literacy is the amount of taxes you pay on the cashflow from assets you control."

SUMMARY: The IQD Wealth Management System (IWMS) consist of an Asset Allocation Model (AAM) implemented using a variety of tax advantaged wealth management vehicles. It's objectives are to Keep More and Protect What You Keep. It is supported by The Wealth Management Group (WMG) Forum and a very experienced (over 100+ total years) group of Wealth Management Consultants. (Well why didn't you say so in the first place)

The IWMS / WMG is the brick house in the story of the three little pigs, and we are hoping the IRS wolf and/or any other financial predators tries to blow it down, because they are going to be blowing a long time, with no results. In addition to being tax-advantaged, we have pretty good asset protection with the trusts and very little estate tax, because we (as Nelson Rockefeller said when describing the secrets of the super-rich), Don't Own Anything, But Control Everything.

http://mjgroup.com

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