Money Clinic: Skip-Over Technique

So, you’ve worked hard, played the investment game well and have accumulated plenty of money for retirement. You’ve done some basic estate planning to make sure your heirs don’t get clobbered in probate. You’ve made sure that you and your spouse have enough income to last for your lifetime. Everything seems to be working out as planned.

One thing that you may be overlooking is that it could be very possible that you simply cannot spend all the money that you’ve accumulated. Even if you or your spouse live past your life expectancy, there is a risk that a good chunk of your money won’t stay in your family.

There are a few solid strategies that help to make sure the money you’ve worked hard for stays in the family. You’ve heard of the Mellon’s, Rockefellers, Kennedy’s and countless other billionaires that use creative money strategies to hold on to their wealth generation after generation, right?

Well, you don’t have to be a billionaire to use some of the same strategies they use to grow and protect your wealth.

Relatively common examples of wealth transfer planning include making annual gifts to children and/or grandchildren, paying tuition for grandchildren, creating irrevocable life insurance trusts, and using all or part of your gift tax exemption sooner rather than later. Without setting up corporations or family limited partnerships or complicated trust funds, which are often irreversible, you can apply a few simple techniques to keep more money in your family instead of giving it to the government.

One of the simplest strategies is to use a “skip-over” tactic where you put money into a single premium life insurance contract (or a single premium annuity if you are uninsurable) and still retain ownership of the contract while you are alive. The trick is to name your children as the primary beneficiaries instead of your spouse.

While this may seem to be a disheartening gesture toward the love of your life, it is actually an extremely practical money maneuver if it is implemented properly.

First of all, if your spouse has generous savings and more than enough income to live a prosperous lifestyle, the last thing he or she needs is more money than they can possibly spend that ultimately gets wasted in estate and income taxes when he/she dies.

Secondly, if your kids are in a higher tax bracket than you, it becomes very difficult to pass money to them without them incurring more tax than necessary. Its not that the kids are looking for a handout but there is no reason to waste hard-earned capital in taxes instead of keeping that money in the family.

Furthermore, if you can maintain control of the money while you are living, you still have the opportunity to use the source of funds if something devasting happens and you need to use it. In some cases, it could make sense to earmark this money for future medical or nursing home care costs on a tax-favored basis. Of course, the best financial product to use with this strategy is life insurance since it escapes federal income tax and inheritance tax upon death of the insured. Many policies also include provisions for tax-favored withdrawals as well, if used for critical health care or terminal illness.

The only drawback with the “skip-over” technique is that you have to plan this out while both spouses are still living. It just doesn’t work as well if there is nobody to skip over. Kind of dry humor, but true nonetheless.

The simple fact is that it becomes more difficult to use creative gifting techniques when there is only one spouse living. The gift tax exemptions are smaller, and the risks of gifting large sums of money are greater. Wealthy people understand this and often implement wealth protection strategies as early as the beginning phase of their retirement.

I always say that the purpose of the money dictates where you should put it.

Well, the best money maneuvers enable your money to serve multiple purposes. Since a “skip-over” strategy allows for control and tax-favored use of the money while alive, while providing potential tax savings at death, it makes an ideal multipurpose money maneuver and should be utilized whenever it is appropriate.

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