What Are TEFRA And DEFRA Tax Citations?

Tetra and Defra tax citations are acronyms that stand for the Tax Equity Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984, respectively. These acts were created in response to the introduction of max funded insurance contracts by E.F Hutton in 1980, which allowed individuals to put in the most premium possible while having the least amount of insurance that the IRS would allow.

The IRS challenged this concept, leading to court cases and eventually the creation of Tefra and Defra, which dictate the minimum amount of insurance required for establishing an insurance contract primarily for living benefits. Understanding the concepts of Tefra and Defra is crucial for individuals seeking to accumulate and access their money tax-free, and ultimately transfer it tax-free upon their passing.

Key Takeaways

Tefra and Defra tax citations were created in response to the introduction of max funded insurance contracts by E.F Hutton in 1980.
These acts dictate the minimum amount of insurance required for establishing an insurance contract primarily for living benefits.
Understanding Tefra and Defra is important for individuals seeking to accumulate and access their money tax-free while also being able to transfer it tax-free upon their passing.

Understanding Tetra and Defra Tax Citations

Tetra and Defra tax citations are acronyms that stand for the Tax Equity Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984, respectively. These acts were created to redefine what tax-free life insurance is under sections 72(E) and 7702 of the tax code. The purpose of these acts was to prevent people from abusing these sections of the code, which allow for tax-free accumulation and access in insurance contracts.

When setting up an insurance contract for the purpose of living benefits, the minimum amount of death benefit required under Tefra and Defra must be justified. The amount of insurance required goes down as the insured gets older, which means that the cost of the insurance also decreases. The cost of the insurance is like a spigot on the bucket and must be present under Tefra and Defra.

The key to understanding Tefra and Defra is to establish an insurance contract, a bucket, or a repository to put money primarily for living benefits. The minimum amount of insurance required must be justified, and the amount of money put into the contract is the maximum allowed. The compound interest earned on the money put into the contract is tax-free under Section 72(E).

Tefra and Defra gave parity, which means that the cost of insurance goes down as the insured gets older. This ensures that people of all ages have an equal opportunity to establish an insurance contract primarily for living benefits. The parity provision ensures that people of all ages can benefit from the tax-free accumulation and access in insurance contracts.

Origins of Tefra and Defra

Tefra and Defra are tax citations that were created under the Tax Equity and Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984, respectively. These acts were created in response to the popularity of max funded insurance contracts, which allowed individuals to put in the least amount of insurance and the most premium, resulting in a tax-free accumulation of money that could be accessed tax-free and transferred tax-free upon death.

The IRS challenged these contracts, claiming that they were being abused, and went to court with E.F Hutton, the creator of max funded insurance contracts. E.F Hutton won the case, but the IRS went to Congress to redefine tax-free life insurance under the sections of the code that allowed for tax-free accumulation and access in insurance contracts.

Under Tefra and Defra, a minimum amount of insurance is required to be purchased in order to justify the amount of money being put into the contract. This minimum amount of insurance is required to ensure that the contract does not move over to taxable investment sections of the code.

The amount of insurance required under Tefra and Defra decreases as the individual gets older, which means that the cost of insurance also decreases. This gives individuals of all ages an equal opportunity to take advantage of max funded insurance contracts. The technical and miscellaneous Revenue Act of 1988, also known as Tamra, requires that the funding for these contracts be spread out over a minimum of 5 years for universal life and 7 years for whole life.

In summary, Tefra and Defra were created to regulate max funded insurance contracts, ensuring that a minimum amount of insurance was purchased to justify the tax-free accumulation of money. These acts provided parity, allowing individuals of all ages to take advantage of these contracts, and required that the funding for these contracts be spread out over a minimum number of years.

Concept of Max Funded Insurance Contracts

Max funded insurance contracts were first introduced by E.F Hutton in 1980. The concept involves having the least amount of insurance that the IRS will allow and putting in the most premium possible. This strategy converts the insurance contract into a living benefit, which can be accessed tax-free while the policyholder is still alive. Furthermore, when the policyholder passes away, the policy blossoms and transfers tax-free.

To ensure that these contracts are compliant with tax regulations, the IRS introduced Tefra and Defra tax citations. Tefra stands for the Tax Equity Fiscal Responsibility Act of 1982, while Defra stands for the Deficit Reduction Act of 1984. These acts redefined what tax-free life insurance is under sections 72(E) and 7702 of the tax code.

Under Tefra and Defra, a minimum death benefit is required to qualify for insurance. The policyholder must also have a certain amount of income or net worth to justify the amount of insurance they are applying for. The minimum death benefit required under Tefra and Defra is the least amount of insurance that a policyholder can have, while still being able to put in the maximum amount of premium.

For example, if a policyholder wants to reposition $500,000, they are allowed to put in that amount as premium. The compound interest that they earn on that $500,000 is tax-free under Section 72(E). However, to ensure that the policyholder is not abusing these tax-free benefits, Tefra and Defra require a commensurate amount of life insurance to come along for the ride. This means that the policyholder must still qualify for insurance and have a reason and justification for the amount of insurance they are applying for.

The cost of the insurance required under Tefra and Defra tax citations decreases as the policyholder gets older. This means that older policyholders can have a lower amount of insurance and still be grandfathered to put in the maximum amount of premium. This is where the concept of parity comes into play. Parity ensures that the cost of the insurance required under Tefra and Defra tax citations is fair and equal, regardless of the policyholder’s age or health status.

In summary, max funded insurance contracts are a strategy for accumulating money tax-free, accessing it tax-free, and transferring it tax-free upon death. Tefra and Defra tax citations ensure that these contracts are compliant with tax regulations, while also providing a fair and equal opportunity for policyholders of all ages and health statuses.

IRS Challenge and Court Case

In the 1980s, EF Hutton, the company behind max-funded insurance contracts, introduced the concept of having the least amount of insurance allowed by the IRS and putting in the most premium. This allowed for tax-free accumulation and access to the money, with the added benefit of tax-free transfer upon death. However, the IRS challenged EF Hutton and its clients, resulting in a court case that EF Hutton won. The IRS then went to Congress to redefine tax-free life insurance under sections 72(E) and 7702 of the tax code. This led to the Tax Equity and Fiscal Responsibility Act of 1982 (Tefra) and the Deficit Reduction Act of 1984 (Defra), which established the Tefra, Defra tax citation or corridor.

Under Tefra and Defra, a minimum amount of insurance is required for an insurance contract primarily used for living benefits. The minimum amount of insurance required decreases as the insured person gets older, ensuring parity among all ages. The cost of the insurance required under Tefra and Defra tax citations decreases with age as well. This allows for the establishment of an insurance contract, or a bucket, for the purpose of living benefits with the least amount of insurance and the most premium allowed by the IRS. The compound interest earned on the premium is tax-free under Section 72(E), and the growth is accessible tax-free. Upon death, the money blossoms and transfers tax-free under sections 72(E), 7702, and 101(A). The amount of money that can be put into the insurance contract is not limited, but a commensurate amount of life insurance is required to ensure that the contract stays tax-free. Tamra, the Technical and Miscellaneous Revenue Act of 1988, requires that funding for universal life insurance contracts be spread out over a minimum of five years.

Tefra, Defra and Tamra Tax Citations

Tefra and Defra are acronyms that stand for the Tax Equity Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984, respectively. These acts were introduced after the IRS challenged EF Hutton’s max funded insurance contracts, which allowed clients to put in the least amount of insurance possible and the most premium allowed by the IRS. The IRS challenged EF Hutton, and they went to court, where they won. However, the IRS went to Congress and said that EF Hutton was abusing the tax-free accumulation and access sections of the code for insurance contracts.

In 1982, under the Tax Equity Fiscal Responsibility Act (Tefra), the IRS attempted to redefine tax-free life insurance under the sections of the code that allowed for tax-free accumulation and access in insurance contracts. Two years later, they had to redefine it again under the Deficit Reduction Act (Defra). This became the Tefra, Defra tax citation or corridor, which established the minimum amount of insurance required for an insurance contract to be grandfathered to grow tax-free, be able to access growth tax-free, and transfer tax-free when the policyholder dies.

The Tefra and Defra tax citations require that the policyholder establishes an insurance contract, a bucket or repository, primarily for living benefits. The minimum death benefit required under Tefra and Defra is established to qualify for insurance and have a reason and justification for the amount of insurance applied for. The policyholder is allowed to put in the amount of money they choose to, but the minimum amount of insurance required under Tefra and Defra must come along for the ride to ensure that the contract does not move over to the taxable investment section of the code.

The Technical and Miscellaneous Revenue Act of 1988 (Tamra) requires that funding for universal life insurance contracts be spread out over a minimum of 5 years. If it is a whole life insurance contract, it is usually spread out over 7 years, known as the 7-pay test. The Tefra and Defra tax citations give parity, which means that the amount of insurance required goes down as the policyholder gets older, ensuring that the cost of insurance is fair for all policyholders, regardless of age.

Insurance Contract as a Living Benefit

The concept of max funded insurance contracts, introduced by E.F Hutton in 1980, emphasized the idea of having the least amount of insurance with the most premium in order to turn it into a cash cow as quickly as possible. However, the Internal Revenue Service (IRS) challenged this approach, leading to the creation of the Tax Equity and Fiscal Responsibility Act of 1982 (Tefra) and the Deficit Reduction Act of 1984 (Defra).

Under Tefra and Defra, establishing an insurance contract for the purpose of living benefits requires justification for a minimum death benefit and a commensurate amount of insurance. The minimum death benefit required under Tefra and Defra serves as the foundation for the insurance contract, while the premium amount can be chosen by the client. The compound interest earned on the premium amount is tax-free under Section 72(E) of the Internal Revenue Code.

To ensure that the insurance contract remains tax-free, Tefra and Defra require a commensurate amount of insurance to accompany the premium amount. This is where the concept of parity comes in. Parity ensures that the cost of insurance required under Tefra and Defra tax citations decreases as the client gets older, making it fair for all clients regardless of age.

In summary, establishing an insurance contract for the purpose of living benefits requires justification for a minimum death benefit and a commensurate amount of insurance. Tefra and Defra tax citations ensure that the insurance contract remains tax-free and fair for all clients.

Minimum Death Benefit Requirement

Under the Tefra and Defra tax citations, there is a minimum death benefit requirement that must be met in order to establish an insurance contract for the purpose of living benefits. This requirement is in place to ensure that the insurance contract does not move over to the taxable investment section of the code and stays tax-free.

The minimum death benefit required under Tefra and Defra varies depending on the age of the individual. As individuals get older, the amount of insurance required under Tefra and Defra tax citations goes down. For instance, a 22-year-old individual who wants to be grandfathered to put in $500,000 into their bucket may be required to have $5 million of life insurance. On the other hand, a 67-year-old individual who wants to be grandfathered to put in $500,000 may only need $1,250,000 of insurance.

It is important to note that individuals still have to qualify for insurance and have reason and justification for the amount of insurance they are applying for. There is a certain amount of income or net worth required to have a certain amount of insurance. When setting up an insurance contract for the purpose of living benefits, the goal is to have the least amount of insurance required under Tefra and Defra. The amount of money an individual chooses to put in is up to them, but it is recommended that they put in the maximum amount allowed to be grandfathered to grow tax-free, be able to access their growth tax-free, and have it transfer tax-free upon their death under sections 72(E), 7702, and 101(A).

All of the compound interest earned on the amount put into the insurance contract is tax-free under Section 72(E). The funding of the insurance contract must be spread out over a minimum of 5 years if it is universal life and 7 years if it is whole life under the Technical and Miscellaneous Revenue Act of 1988 (Tamra). Universal life is more flexible and usually outperforms whole life by about 2 percentage points.

In summary, the minimum death benefit required under Tefra and Defra tax citations is in place to ensure that insurance contracts established for the purpose of living benefits stay tax-free. The amount of insurance required varies depending on the age of the individual, and individuals must still qualify for insurance and have reason and justification for the amount of insurance they are applying for. It is recommended that individuals put in the maximum amount allowed to be grandfathered to grow tax-free, be able to access their growth tax-free, and have it transfer tax-free upon their death under sections 72(E), 7702, and 101(A).

Establishing an Insurance Contract

When setting up an insurance contract, the first step is to understand the hoops that need to be jumped through in order to accumulate money tax-free, access it tax-free, and transfer it tax-free when the person passes away. The Tax Equity and Fiscal Responsibility Act of 1982 (Tefra) and the Deficit Reduction Act of 1984 (Defra) are two acts that help establish the minimum death benefit required for an insurance contract.

The idea behind Tefra and Defra is to have the least amount of insurance necessary to justify the maximum premium. This approach allows for the accumulation of money tax-free and access to growth tax-free. When the person passes away, the money blossoms and transfers tax-free under sections 72(E), 7702, and 101(A).

The minimum death benefit required under Tefra and Defra is determined by the amount of money the person wants to put into the contract. For example, if a person wants to put in $500,000, the minimum death benefit required would be dictated by Tefra and Defra.

It is important to note that a person must qualify for insurance and have a reason and justification for the amount of insurance they are applying for. The amount of insurance required under Tefra and Defra decreases as the person gets older. This means that a 22-year old may be required to have $5 million of life insurance to put in $500,000, while a 67-year old may only need $1,250,000 of insurance to put in the same amount.

Tefra and Defra also require a commensurate amount of life insurance to come along for the ride. This means that the person must have a certain amount of insurance to ensure that the contract does not move over to the taxable investment section of the code.

In summary, Tefra and Defra help establish the minimum death benefit required for an insurance contract. The amount of insurance required decreases as the person gets older, and a commensurate amount of life insurance is required to come along for the ride. By using these acts, a person can establish an insurance contract that allows for tax-free accumulation and access to growth, as well as tax-free transfer upon passing away.

Understanding Parity in Tefra and Defra

Tefra and Defra are tax citations that were established under the Tax Equity and Fiscal Responsibility Act of 1982 and the Deficit Reduction Act of 1984, respectively. These citations were created to regulate tax-free accumulation and access in insurance contracts and to ensure that individuals were not abusing the sections of the code which allowed for such benefits.

Under Tefra and Defra, individuals are required to establish an insurance contract with a minimum death benefit. This minimum death benefit is determined based on the amount of money an individual chooses to put into the contract. For instance, if an individual wants to put in $500,000, they must establish a minimum death benefit that justifies the amount of insurance they are applying for.

The neat thing about Tefra and Defra is that they give parity, which means that the cost of the insurance required under these citations goes down as individuals get older. This ensures that individuals of all ages have an equal opportunity to establish an insurance contract for living benefits, regardless of their age or health status.

The amount of insurance required under Tefra and Defra tax citations is commensurate with the amount of money an individual chooses to put into their insurance contract. This ensures that the contract stays tax-free and does not move over to taxable investment sections of the code.

In summary, Tefra and Defra tax citations were established to regulate tax-free accumulation and access in insurance contracts. These citations ensure that individuals establish an insurance contract with a minimum death benefit that justifies the amount of money they are putting into the contract. Additionally, Tefra and Defra give parity, which means that the cost of the insurance required under these citations goes down as individuals get older. This ensures that individuals of all ages have an equal opportunity to establish an insurance contract for living benefits.