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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Rangeley Capital and his value investing forum, Sifting the World (StW), search the world for misplaced bets. Rangeley exploits them for... More
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  • Back To School?* 9 comments
    Dec 17, 2012 8:12 AM

    * While sheltering capital gains and dividends from taxes at a scale that dwarfs IRAs and 401(k)s

    We are a few weeks away from what could be history's largest tax hike, so it might make sense to see how many dollars can be protected from capital gains and dividends taxes. It is worth maxing out IRA or 401(k) plans, but then what? What can you do to protect a substantial amount of dollars from capital gains taxes? Tax-advantaged retirement accounts are great, but the contribution limit is low.

    My idea is to use the 529 college savings plans for long-term tax-free compounding regardless of your intended use for the proceeds. In increments of up to $370,000, one can establish a 529 in Nevada with yourself as the donor and beneficiary. For couples, you can each do the same for a total of $740,000. Costs for a equity index fund are low and capital gains are not taxed. I invested mine in the Total International Stock Index Portfolio; you might consider doing the same.

    If you do not need this capital for a long time, ideally a whole generation or longer, this is an ideal way to protect assets from taxation. But what are the drawbacks? Well, to avoid penalties upon withdrawal, you need to spend it on education. But education inflation is meteoric, so it is likely that there will be educational expenses.

    But let's imagine that you want to withdraw money and lack education bills. One could barter: pay college bills for someone who could pay your bills in return of an equal pre-tax cost. One could take college courses during retirement (wine tasting course? golf class?). Or just pay the fee: on the back end the fee is less than the tax-free compounding effect within a few decades.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

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Comments (9)
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  • azbroker
    , contributor
    Comments (352) | Send Message
    Your article on Dominica got me thinking of tax advantages. One of Dominicas offerings is creating your own insurance business. If someone needs to shelter up to 740K in a 529 plan it seems that they will be creating enough wealth that it would justify the expense of creating a captive insurance company? So they earn 1 million dollars, pay 800,000 to their own Dominica based insurance company as premium expense. Bam -they have an expense of 800K and income of 200K. The insurance company calls it a liability and invests it tax free, compounds tax free and they can move that capital all over the world and dont pay tax until they take a dividend. Do I have that right?
    24 Jan 2013, 12:14 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11773) | Send Message
    Author’s reply » Good idea. Sounds right to me.
    24 Jan 2013, 12:31 PM Reply Like
  • Clint Edgington
    , contributor
    Comments (358) | Send Message
    You need free earnings of about $1m/year to make a captive insurance company work. There's about $50k/year in legal/actuarial fees to keep it running. Not sure of Dominicas legal protection for Captives...


    Obviously this is not intended as financial, legal, or tax advise.
    24 Jan 2013, 12:48 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11773) | Send Message
    Author’s reply » Thanks for the idea.
    24 Jan 2013, 12:51 PM Reply Like
  • arbtrader
    , contributor
    Comments (585) | Send Message
    I looked into this extensively in the late 90's and most easy loopholes are now closed, shut, finis! At one time you could invest in Swiss Annuities denominated in a major currency (GBP, SFR, GFr, Yen, US$) with AAA ratings and bulletproof asset protection. Bill Clinton shut this loophole at the urging of well paid insurance lobbyists. No more offshore annuities, to the point that your phone calls will not be returned by _any_ offshore entity that is, shall we say, trustworthy? FACTA has made this situation far worse.


    Creating your own offshore bank was one other attractive entity at one time. You can google Jerome Schneider for more fun info on that angle and how well it turned out.


    The Isle of Man private annuities were attractive if you could handle the annual fees of 3-5% annually. The flexibility to invest anywhere was great.


    Perhaps a better opportunity for the domestic-US rich guy would be a private pension plan. You are a 55 year old male making 1$m/year. You want to retire at 65. How much do you have to save yearly in order to guarantee an income of 1$m/year in retirement, invested in govt bonds?


    Yes, a hell of a lot of $! Solution: Create a private pension just like you are a labor union with one member. Make yearly contributions of say 100k (tax deductible) to your plan per a schedule an actuary creates and monitors for you.


    It's expensive but legally bulletproof as long as your income is not dirty. It's also great asset protection. A fellow named OJ is jetting around Florida courtesy of his NFL pension despite numerous judgments....
    Chris, great posts. Really enjoy them.


    and PS- the best part of the Swiss annuities? Guaranteed floor of 3.25% yield by law. This in a country where they charge you to hold cash in a bank account (negative carry). When/if the Swiss peg to the Euro breaks, you may want to consider a 1031 back to the US into a more flexible low cost annuity here. Just a thought.
    24 Jan 2013, 05:36 PM Reply Like
  • jaginger
    , contributor
    Comments (816) | Send Message
    Why Nevada?


    Is this the only state that allows you to "establish a 529 in Nevada with yourself as the donor and beneficiary"?


    Or is there another reason to use the NV 529?
    21 May 2014, 01:58 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11773) | Send Message
    Author’s reply » It is exempt from creditors claims, tax-advantaged at the Federal level, you can put in $740k (per couple), and there are no rules about the speed of spending it. Are there any other states better or equal in terms of those characteristics? None that I've seen. Why is NV so good? Probably because they lack a state income tax so need to attract people with benefits other than state income tax benefits. This is a much larger scale than most tax-advantaged accounts. Also, I like Vanguard, which manages one of the NV options.
    21 May 2014, 02:25 PM Reply Like
  • jaginger
    , contributor
    Comments (816) | Send Message
    Thanks, Chris. Vanguard helps. Some 529 plan fees are not so small.
    21 May 2014, 03:45 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (11773) | Send Message
    Author’s reply » I am a big skeptic of almost every financial firm. The few exceptions include Vanguard, TIAA-CREF, USAA, and State Farm. In short, I want to be the only one making a profit. For my team of high priced helpers, I like the high prices to be as reasonable as possible and prefer the mutual model.
    21 May 2014, 03:51 PM Reply Like
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