Let's start at the beginning. My firm, Coordinated Financial Services, based in
Pittsburgh, is a national firm dealing primarily with fundraising for nonprofit
organizations across the country. Our focus is creating major gifts, both immediate and
planned gifts for our nonprofit clients.
I was asked to make a presentation to the Hemisphere investment conference in
Nicaragua in January of this year. Part of my presentation to the conference attendees
was explaining the “Mercedes Plan.”
The “Mercedes Plan” is one that we use for fundraising for immediate gifts for our nonprofit
clients, but the strategy can also be used for a Mercedes (or what ever you like)
..
How does the “Mercedes Plan” work?
We identify a low yielding asset in a person’s portfolio, e.g. a bank CD paying a low rate.
We transfer this asset, say $200,000, to a special insurance policy with historic earnings
around 6+%. The policy cash value in year one is $200,000. No money is lost in this
transfer.
At the beginning of the second year, the insured has the right to obtain a loan from the
insurance company. This loan is not from the policy which still has $200,000 cash value
earning interest even after the loan. The loan can be any amount up to 40% of the prior
year’s premium or in this case $80,000.
The insured takes the $80,000 down to the Mercedes store and buys a new, shiny
Mercedes.
So now where are we?The insured still has $200,000 cash value earning a higher interest rate.
The $80,000 loan is secured by the policy’s death benefit. At the end of ten years, the policy cash value is close to what the yield would have been if the $200,000 had stayed in the CD at the local bank. And there’s the Mercedes looking better than ever. They do seem to last and age gracefully, don’t they?
How else can this concept be used?
In our everyday practice dealing with fundraising for nonprofits, the $80,000 would have been a tax-deductible gift to a charity. But the point is that the ability to borrow funds directly from the insurance company and not deplete the policy values is the key to the strategy. The loan never needs to be repaid. It can be recovered by the insurance company out of the policy death proceeds.
What other strategies are there?
How would you like to leave each of your children or grandchildren a million dollars at no out of pocket cost? We can structure planned gifts to anyone, your children or grandchildren your alma mater, your local hospital or church. Huge planned gifts can be created with no out of pocket if you qualify. This article can’t go into the specifics of our plans but we use them everyday in our practice and they work great. We have a long list of satisfied clients.