I have previously written about the high tax rates that apply to taxable trusts, and how those income tax rates might frustrate the goals of the Grantor, especially in the case of Generation Skipping Trusts.
A common misperception is that the use of life insurance as a cash accumulation and disbursement, strategy is a bad investment because of the policy charges.
A recent study by Roger Edelen, Richard Evans and Gregory Kadlec (The University of California, The University of Virginia and Virginia Tech, respectively) concludes that high trading costs of Mutual Funds puts a significant damper on the returns that investors take home. [1] According to this study, the total average annual costs of a non-taxable account are 3.17%[2] and 4.17% for a taxable account.[3]
With a properly-structured insurance policy, the net policy costs may be less than the mutual fund costs, with the result that more after-tax money is available to the Trustee during the pre-death policy years.
Every case is different, and any comparison must factor in the policy owner’s risk/reward tolerance, budget and anticipated need to access cash value in the future, and a realistic assumed gross rate of return both for the mutual fund investment and the applicable insurance alternative.
If high taxes and mutual fund fees are not providing the desired after tax return, or are frustrating the purposes of the trust, it makes a lot of sense for the trustee to explore this alternative.
We, at MKA Executive Planners are available to provide a detailed analysis that is tailored to your specific situation, goals and investment philosophy.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC. 444 Washington Street, Woburn, MA 01801 (781) 933-6100.
This article should not be considered as providing accounting, business, financial, investment, legal, tax, or other professional advice or services. It is not a substitute for such professional advice or services, nor should it be used as the basis for any decisions or actions that may affect your business or you personally. This should only be one part of your research. You should seek authoritative guidance from a qualified accountant or attorney before taking any action.
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[1] Financial Analysts Journal, January/February 2013 | Vol. 69 | No. 1
Source: CFA Institute
Roger Edelen | Richard Evans | Gregory Kadlec,
[2] Average expense ratio (.90%), average trading cost (1.44%, average cash drag (.83%).
[3] Average expense ratio (.90%), average trading cost 1.44%, average cash drag (.83%)., average tax cost (1.00%)
