Tax-Efficient Planning Ideas for a Post-COVID-19 World

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Higher taxes could be in our future, as a mechanism to “pay” for the government expenditures relating to COVID-19. This article examines two sophisticated custom-tailored wealth management strategies that seek to maximize tax efficiencies for high income and wealthy clients. I’ll look at the IRS qualified defined-benefit retirement (DB) plan and private placement life insurance (PPLI).

A DB retirement plan can be an excellent strategy for high-income employees and small and large companies looking to maximize tax-efficiencies. It is designed to supply a predictable income during retirement for those employees. As the IRS writes, “Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans. However, defined benefit plans are often more complex and, thus, more costly to establish and maintain than other types of plans.”

The IRS highlights some of the pros and cons of DB retirement plans on its website. It writes:

Pros and cons:

  • Substantial benefits can be provided and accrued within a short time – even with early retirement
  • Employers can contribute (and deduct) more than under other retirement plans
  • Plan provides a predictable benefit
  • Vesting can follow a variety of schedules from immediate to spread out over seven years
  • Benefits are not dependent on asset returns
  • Plan can be used to promote certain business strategies by offering subsidized early retirement benefits
  • Most costly type of plan
  • Most administratively complex plan
  • An excise tax applies if the minimum contribution requirement is not satisfied
  • An excise tax applies if excess contributions are made to the plan