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Eric Wilson
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Published on 8/10/2018
For additional information  Click Here

Phil Mickelson has threatened to leave the state based on his total tax rate of over 60%.  Can others be far behind?  Maybe, and if you work in the ultra-affluent market then you may have some clients on the move.  For those simply dealing with high income earners who are feeling the tax bite a bit more acutely than they want, there are other, less drastic measures that can be taken.

As an example, let’s take a closer look at Phil.  You can read the details here , but it comes down to this: his combined tax rate jumped 9.6%, pushing him over the 60% mark.  Clearly, this has his attention, and his strategy is to think about moving out of California.  For the rest of us, and maybe even Phil, there is a way to deal with this without having to leave behind friends and family, and that is to defer more of our income.

I did some quick calculations using the following assumptions:

» Total tax rate in 2012 – 50%

» Total tax rate in 2013 – 59.6%

» Income – $1MM

» Salary Deferral of 10%

You can see from this chart , that by deferring 10% of a $1MM salary that someone in Phil’s position could actually see more of their money stay out of the tax man’s pocket ($463K 2013 “retained income” vs. $404K 2013 retained income with a 10% deferral).  Sure, the net income drops (far right column of the table), but the goal is to actually hang on to your money, not spend it all.  Further, the reduction in net income is just over 4%, far less than the 9.6% reduction with no deferral.

The other aspect of this discussion is the future income side of the equation, and the obvious solution is the use of life insurance to create a non-taxable income stream through the use of life insurance.  This is not a new strategy by any means, but it just became a lot more attractive based on increased tax rates.  Changing the way a client allocates their investment capital to include a life contract may make sense simply from a tax diversification perspective.   While some may use this as a rallying cry for the use of Indexed UL, I think it demands a more sophisticated approach considering the various accumulation focused life products available: Whole Life, Variable, Current Assumption and Indexed.

In fact, having a subject matter expert on life insurance and deferral programs to work with is critical.  There are any numbers of ways to structure these plans, as well as a myriad of regulations that may or may not apply to an individual case.

Thanks to Adam Cavalier of Kestler Financial Group for this article.

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