There are three assets we want our clients to have:

  • A business
  • Cash Value Life Insurance
  • Real Estate

Why you ask???

Because these are what the IRS says are the most tax efficient.  If you only have one of these then we can help you get the other two.  But if you don’t have any of these then you need to figure out how to get one so you can get two then three.

If you have other assets beside these three then you may have a tax problem. If not now then you will have one later.

You see each asset has a life cycle.  There are three stages to an asset.

Beginning = Contribution

Middle = Accumulation

End = Distribution

The IRS has guidelines of how they tax each asset in each part of the asset’s stage (life cycle).  So for example let’s start off with an easy asset, cash.

When you have cash it has to have come from somewhere, typically as income from another asset like your job.  So you earn a paycheck (W2 income) from your employment which is taxed as ordinary income. So when it has hit your checking account (cash) it is net income or post tax income.

Now that it is in your checking account what can you do with it? You can transfer it to your savings account where you earn an interest rate form your bank.  That is the beginning (contribution) of this asset.  Let’s say 2%, I know generous but we will say 2% anyways. That is the middle (accumulation) of this asset.

$1,000 x 2% = $20

At the end of the year what happens to the $20? The bank sends you a 1099 saying you earned $20 in income at which time you have to place it on your personal tax return as income.  That’s the end (distribution) of this asset.

So taxed as income when you received it and any growth is taxed as income.  Cash as an asset was taxed at each stage.

This is what we mean by the IRS has guidelines of how they tax each asset in each part of the asset’s stage (life cycle).