How to turn a million dollars into six million tax-free

June 26, 2024

By Guerra Wealth Advisors

Categories: wealth advisors, wealth management

Building a solid legacy for your kids and grandkids is something many of us dream about. The trick is knowing when and how to move your money smartly. Let’s dive into a strategy that can help you leave a bigger financial legacy for the next generation while keeping taxes to a minimum.

The family’s goal: Leaving a legacy

A couple, aged 60 and 56, had saved over six million dollars for their retirement, comfortably maintaining their lifestyle with just $10,000 a month. They had more than enough for their remaining years but were keen on leaving a larger legacy for their four grandchildren. They pondered the best method to allocate one million dollars specifically for this purpose.

Option 1: Bank accounts and low returns

Leaving money in a checking or savings account offers minimal returns. Even investing in a CD or money market account yields only modest gains.

  • Low returns: Bank accounts and money markets provide low interest rates, averaging about 2-2.5% over the last two decades.
  • Taxes: After accounting for taxes, the net return might drop to approximately 1.3-1.4%.
  • Time factor: By the time the couple reaches 85, their $1 million would grow to just above $1.4 million, to be split among the four grandkids.

Option 2: Stock Market investments

Investing in the stock market, particularly the S&P 500, typically offers higher returns, albeit with more volatility.

  • Higher potential returns: Historically, the S&P 500 yields about 8-10% per year.
  • Volatility: The stock market’s annual returns fluctuate, with some years significantly outperforming others.
  • Tax impact: After paying capital gains or ordinary income taxes, the net return might be around 5-6%.
  • Projection: In 25 years, the $1 million investment could grow to about $4.3 million.

Option 3: Life insurance strategy

The most compelling option involved using a life insurance policy. With one million dollars, the couple could purchase a joint life insurance policy, offering a $6 million benefit upon their deaths. This amount would be distributed to their four grandkids tax-free.

  • Life insurance policy: A $1 million premium could secure a $6 million policy.
  • Tax-free benefits: The $6 million is distributed without any income tax.
  • Certainty: The policy guarantees a payout upon the policyholders’ deaths.
  • Legacy: Each grandchild would receive $1.5 million.

Why choose life insurance?

  • Guaranteed payout: Ensures that $6 million will be distributed to the beneficiaries.
  • Tax advantages: The beneficiaries receive the amount tax-free.
  • Legacy planning: An effective way to secure financial stability for the next generation.

Considerations

When planning a legacy, it is crucial to consider all available strategies and their implications. Here are some key points:

  • Evaluate all options: Compare bank accounts, stock market investments, and life insurance.
  • Understand returns and taxes: Each option has different returns and tax impacts.
  • Consult with advisors: Collaborate with wealth advisory teams to determine the best strategy.

The life insurance strategy offers a unique combination of guaranteed returns and tax advantages, making it an appealing option for those aiming to leave a substantial legacy. This method ensures financial security for future generations without the burden of taxes, providing peace of mind for both the benefactors and their beneficiaries.

By exploring such strategies, individuals can maximize their wealth and effectively plan for the next generation, ensuring their legacy lives on in a meaningful and financially beneficial way.

Want to meet with an advisor at one of the top Miami financial planning firms? Select a time for a free with no obligation appointment.

More Timely Financial Wisdom

How to prepare for retirement within 5 years

Retirement is closer than you think, and those final five years are a critical time to get your financial plan…

READ ARTICLE

Financial strategies to beat inflation in retirement

Inflation is often called the “silent killer” of financial plans. It doesn’t make headlines the way a stock market crash…

READ ARTICLE

Is it worth paying a financial advisor?

When it comes to managing money, a financial advisor can make a world of difference—but is the cost worth it?…

READ ARTICLE