“A rising tide carries all ships” – Dave Mallach, my boss and mentor at Merrill Lynch in the early 1980s
A group of accountants discussed a financial planning strategy using a cash value life insurance policy to accumulate wealth for a variety of family and charitable purposes. These strategies often incorporate the use of a charitable trust to further leverage the financial benefits. Midway through the discussion it became clear to me that tax accountants can easily lose track of something that is more obvious to investment advisers. The merits of any such financial planning strategy are only as good as the performance of the underlying assets. In other words, it really doesn’t matter if the tax aspects are optimized if the investment flops.
Is is likely true that some individuals have built wealth through such a strategy. Certainly the strategy is tax effective. However, it makes more sense for us to focus on the large number of individuals who have been financially hurt by the collapse of cash value life insurance in the past two decades of falling interest rates.
My own family is among those that planned a multi-generational trust based on 8% interest rate assumption only to have a life insurance policy collapse with disastrous consequences when rates of return fell dramatically. Many clients have been similarly affected.
Investment professionals know that a rising market makes all financial planning strategies look good and a falling market makes even genius tax planners look like idiots. Of course, we only like to talk about the first case. My mentor at Merrill Lynch instilled this lesson in my first year of working at his firm. I was studying portfolio management in an MBA program and he was explicit in his opinion that all this education was ultimately worthless in a declining market.
The message should be clear: focus on solid investment strategies first, then look at tax efficiency and other financial planning factors as secondary goals.