Charlie came to me not all that long ago. He’s a pretty high earning professional ($200,000+), living on the east coast. He’s just 29 years old, wicked smart, but more importantly, fun as all get-out to talk to. His only bad point is that he’s a Red Sox fan. I can hear him now, muttering under his breath, ‘at least I’m a fan of a winner’. Touché.
So Charlie came to me already the proud owner of an ancient three unit, located in his hometown in New England. He liked the idea of investing in Texas. Liked even better the concept of having a Purposeful Plan. Having lived frugally he’d saved more than enough to acquire a new duplex there. It closed awhile back. Part of his Plan was to get an EIUL (Equity Indexed Universal Life) started, once he’d closed his first purchase in Texas.
He gave David Shafer a call and together they started the process. Charlie called me out of the blue today to let me know it’s done. Here are the details. I think you’ll find them more than a bit interesting.
His monthly premium is $1,000 monthly. David structured it for 30 years. Charlie is to pay the premiums for 15 years. Then he’ll simply let everything simmer for another 15 years. Just before turning 60 he’ll begin to receive the income developed by the EIUL. In Charlie’s case it’ll be about $100,000 a year — for the rest of his days.
However, I’ve suggested a twist.
As young as he is now, Charlie will no doubt have employed strategies allowing him to sell one or two properties while paying very little or no capital gains taxes or depreciation recapture. I would have him execute this move virtually simultaneous to the end of his EIUL premiums. My experience says the dollar figure resulting from the sale(s) should be about $250-500,000. It’ll depend on how David says to get it done, but bottom line, those funds will be put into his policy either in one lump sum, or over four years and a day.
I’ll let David chime in at this point if he wishes, but my educated guess is that putting that much cash inside the policy 15 years or so before income is triggered, would increase the yearly income substantially. I wouldn’t be surprised at all if it increased by more than 100%, especially if the amount was at the range’s high end.
Charlie will likely carry out a tax deferred exchange in the not too distant future, using his New England triplex. I strongly suspect that by the time he’s in his 40s he’ll own many small income properties, finished off his EIUL premiums, and moved an equity or two into the EIUL. Let’s have some fun and look into our cracked crystal ball to discern his potential retirement income at age 50 and upward.
Retirement at 50
I’m gonna assume, being relatively conservative, and using my knowledge of Charlie’s ability to save, that he’ll have acquired no less than half a dozen small income properties. Probably more, but let’s error on the understated side of things. A tad over 20 years from now his real estate income might look like this.
Income of approximately $120,000 a year. That number is also fairly understated, but it’s one with which I’m comfortable publishing. It assumes that in 20 years his Net Operating Income (NOI) on all properties never increased, not a penny. Much of that income would be tax sheltered.
The decision Charlie would make at that point was whether he would sell one or two of them to pay the aforementioned lump sum EIUL payment. Ah, but there’s another option I’ve been keepin’ under wraps.
By the time he’s 50, Charlie will’ve owned these properties free and clear. Some for a few years, some for 7-12 years. Do ya see what’s comin’?
See, if he’s able to eliminate debt on all his properties by the time he’s 45, which is even money from where I sit, he’ll have more options available. Let’s take a look.
• Instead of selling a property or two, he can simply kick back and actually increase his premiums over the next 15 years. What would happen if he took $5,000 a month out of the $10,000 monthly cash flow and for the next 15 years applied it to his EIUL. This is where we must call on David Shafer to put in his 2¢ when he has time.
• Another option would be sell just one property, put the proceeds into the EIUL as a lump sum, then take the same $5,000/mo mentioned above for the next 15 years. There’s simply no way that either of these choices will not literally blow up his retirement income in the most positive of ways.
Bottom Line
As posted here Tuesday in ‘. . . Theoretical Retirement’, these numbers result from analysis solidly anchored in the principle that the real estate investment properties acquired stand the test of time — wait for it — AS ACQUIRED.
In other words, and in plain English: No appreciation and no escalation of any kind to the NOI.
Charlie’s ultimate income won’t be known ’til he actually retires. We do know what is a reasonably reliable lowball figure though. If he acquires just six properties, sells just one when he’s 45, keeps the rest while doin’ nothin’ else, his real estate income should be roughly $100,000 a year.
If he then elects to carry out my second option, his EIUL should be around $200,000 yearly, give or take. (That figure is an educated guess on my part. I plan to ask David for more or less exact numbers, which I’ll then publish.) Oh, have I been remiss in not mentioning the fact that all income derived from his EIUL is freakin’ tax free for life? Or that when he dies, his heirs won’t pay a dime of taxes on it?
When Charlie’s celebrating his 60th birthday, he’ll be smilin’ big time. His monthly income should be in the neighborhood of $25,000 a month — over 65% of it completely tax free. NOT tax deferred, or tax sheltered — TAX FREE.
Happy 60th birthday, Charlie.
You lookin’ for a birthday like that? Duh. Gimme a call and together let’s start makin’ it happen. You’ll reach me at 619 889-7100 — OR — send me a note using the Contact BawldGuy button up top. Have a good one.
Related posts:
- How A Purposeful Plan Makes Use Of A Partial 1031 Tax Deferred Exchange — A Case Study
- Attention Real Estate Investors – Is Your Plan Really The Best Case Scenario?
- There’s The Best Way To Go — And Real Life — A Case Study
- Real Estate Investors – Create Synergy Between Short and Long Term Investing – A Projected Case Study
- How To Minimize Your Retirement Income – A Case Study
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How can the money from selling an investment property be rolled into a UL without a) capital gains on the sale, and b) turning the UL into a MEC/exceeding TAMRA limits? I would think the proceeds would be incompatible for both a 1031 and 1035 exchange. As a RE investor with a Life license, I’m very keen on finding out how this could all work.
Welcome, James. The phrase ‘rolled into’ isn’t what I said. In the strategy mentioned, the cap gain taxes would be massively reduced or completely eliminated via a boatload of unused depreciation. That strategy would also offset the depreciation recapture accumulated over the holding period(s) of the property(s) in question.
In plain English, James, there is no attempt whatsoever to combine sections 1031 and 1035. Nor was it ever implied. The taxpayer/policy holder can always add lump sums to their EIULs, assuming it was structured correctly from Day 1. On that point I’ll yield to Dave Shafer. The only modification he might add to the recipe would be spreading the lump sum premium over four years and a day, if that regulation applied.
It’s a relatively simple strategy to execute with competent professionals like Shafer at the helm on his side of the equation. Make sense, James?
Re”‘ I can hear him now, muttering under his breath, ‘at least I’m a fan of a winner’. Touché.” – But sitting in the beach breeze at Petco Field and cathcing an In and Out Burger after the game beats freezing in September (because it’s already cold there) in Fenway any day!
- On another note, would you address using an inheritance in the same way as Charlie’s sold properties, adding it my EIUL? How is that done exactly? I guess that might be a question for David.
Hey Shaun! Good to hear from ya.
Using inherited money depends upon whether or not it’s taxable or not. Contrary to popular belief, there are many cases where inheritance tax doesn’t apply. Once you know the after tax amount you can then figure out how you would structure/add to your EIUL. Though you’re right, Dave is the guy to answer this question best, it’ll come down to a couple things.
First, will the rules require you to spread your initial capital/premium to be in one lump sum, or will you need to spread it over four years and a day? Second, your current/future financial situation will help dictate exactly what ongoing premium, if any would also be structured into the policy.
EIULs are much like real estate investing, especially when making strategic moves. It must be structured very carefully, and with an eye towards keeping the most options available on your menu.
If you wanna talk, please calll, Shaun. Or, you can get a hold of Dave. You can catch him between ski runs.