Using Insurance to Reduce a Couple’s Taxes

The couple’s business had a banner year, generating about $1 million in profits–much of which they planned to take as personal income.

They’d worked with financial adviser Michael Turner to defer $100,000 of that income by establishing a Safe Harbor 401(k) and a profit-sharing plan. But the couple was interested in reducing their income taxes even further.

Unbeknown to Mr. Turner, they hatched an unusual plan to buy a second home in an income tax-free state, thinking it would exempt them from taxes. Mr. Turner had to explain that the laws regarding cross-state taxation meant that the second home likely wouldn’t have the effect they assumed.

“I told them that could still buy a second home if they wanted one, but if their goal was to reduce their income taxes, there were likely more effective options,” says Mr. Turner of Franklin Chase Wealth Management, which manages $5 million for 75 clients in Charlotte, N.C.

Putting additional money into their retirement plans wasn’t a good option, because the plan structures required that they also contribute more to their employees’ accounts at the same time. That wasn’t the couple’s immediate priority. So Mr. Turner found a solution that specifically benefited them: a Section 79 insurance plan.

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