Advanced Marketing Forum Question

Planning for the Client with No Earned Income

Question:
My client is a 44 year old real estate developer who earns $350,000 a year in capital gains income. He has no other earned income. His net worth is $2,300,000 consisting of real estate and about $400,000 in cash. He has no qualified or non qualified retirement plans, no college fund and is high leveraged. He has about $750,000 in a 10 year term policy. He is married with 2 kids around 10 and 13.

I am wrestling with how to develop a retirement plan and college fund. He could afford to put aside $50,000 for these purposes. Without earned income, we may be limited to non qualified plans. The form of business ownership varies from deal to deal. He owns some property in his own name and sometimes sets up LLCs or S Corps to own others. All his income is reported as capital gain with offset of capital losses. He has reported no Schedule C income for the past 3 years…Nor any partnership or S Corp income.

Reply #1:
Unfortunately, contributions to qualified retirement plans can only be made with "compensation" as defined by the IRS and/or plan document. Most plans define "compensation" as wages, salary, professional fees or other amounts received for personal services. Capital gains simple doesn't fall into that category.

However, if tax deferral and saving for retirement is his ultimate goal, he may want to consider non-qualified annuities. Although, it doesn't offer all the benefits of certain qualified retirement plans (such as tax deductible contributions), your client can enjoy tax deferred growth of his investment and more flexible withdrawal options than allowed in most qualified retirement plans. For instance, there are no Required Minimum Distribution requirements for non-qualified annuities.

Brandon Buckingham, JD, LLM Director of Qualified Plans Special Markets Department Manulife Wood Logan

Reply #2
If he's like every other highly leveraged RE Developer I know he probably believes his real estate will be his retirement plan. But if he wants to hedge that with cash or non-real estate investments (highly recommended) he may want to show some income so he could use it in a ret plan - maybe a DB or even a sole-401K. He might be able to contribute what he showed, sheltering all or almost all of it. By the way my guess is he needs at least twice that life insurance.

Peter J. Nagle

Reply #3:
Consider replacing that term policy with a VUL contract designed for accumulation: tax-free growth, tax-advantaged distributions when he wants it, and a death benefit sufficient to meet estate needs. Good luck.

John Godfrey

* The foregoing is for broker/agent use only, and is intended solely for informational purposes. Nothing contained herein should be construed as legal or tax advice, and should not be relied upon for such. Legal and tax advice should only be obtained from your attorney or qualified tax professional.

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