Portfolio CHECK-UP

Name:Allen Fisher, MD

Residence:Central Florida

Age: 61

Family:Married; three children

Specialty: General surgery

Annual income:$300,000

Savings: None specified; $5-million estate

Financial concern:Dr. Fisher recently met with his tax attorney and,much to his dismay, discovered that his estate is projected to lose $2 millionthat would have to be paid by his beneficiaries at his and his wife's death.He was offered a second-to-die policy (designed to address these problems),which would pay $2 million tax-free to the irrevocable life insurance trustthat he would have to establish. Quoted an annual premium of $23,848from a major life insurance company, he would be obligated to pay this premiumfor the rest of his life. Assuming a life expectancy to age 85, his anticipatedoutlay would be $572,352. Dr. Fisher contacted me to see if there wasa more efficient way to address this problem.

The Finance Professor's Solution

There is a concept where a bank will loan an upfront single premium—inthis case, $559,000—to fund a death benefit of $2 million. The cash value ofthe insurance policy is pledged as collateral for the loan, which is equivalentto the first year's premium since this is a no-commission contract. A third-partytrustee acting on Dr. Fisher's behalf is responsible for the loan.

Assuming that the crediting rate on the policy and the cost of the bankloan are within no less than 2 percentage points of one another, it is projectedthat there would be no out-of-pocket expenses incurred by Dr. Fisherfor the next 21 years. There would be a small economic benefit that wouldhave to be reported annually, but the annual savings are dramatic.

Therefore, if Dr. Fisher adopts this strategy, he would be able to save$23,848 annually, which, assuming a tax-deferred investment rate ofreturn of 5%, he will have accumulated an additional $1.06 million. Uponhis death, his irrevocable trust would receive the $2-million death benefittax-free as needed.

For more information, call Mr. Kosky at 800-953-5508or visit www.assetplanning.net.

and his partner, Harris L. Kerker, are principals of the Asset

Planning Group in Miami, Fla, specializing in investment, retirement, and estate

planning. Mr. Kosky teaches corporate finance in the Saturday Executive and

Health Care Executive MBA Programs at the University of Miami.

Thomas R. Kosky