Dear Mr. Berko:

I’m an attorney with a client who recently received a $1 million insurance settlement. She’s a wonderful and healthy 79-year-young lady who needs to earn no less than 7.5 percent after taxes on this sum, or $6,250 a month, or $75,000 a year (she’s in the 25 percent bracket). I know that sounds like a lot of income for a single senior citizen, but for reasons I can’t discuss, this income is vitally important to her. She also insists the $1 million principal be entirely intact so when she meets her Maker, all of it will pass to a very important great-grandchild.

I’ve consulted with several brokers and advisers, and each had suggestions, but none could provide a tax-free risk-free 7.5 percent return plus 100 percent principal return. If you can give her a solution, you would be doing this wonderful lady a great service. However, I fear this might be impossible.

D.S., Cincinnati   Dear D.S.:

Difficult things are easy to do, but the impossible takes me a little bit longer. Your quest is far from difficult – if one will think outside the box.

It’s possible to generate 10 percent to 12 percent returns with high-yielding preferreds and junk bonds. But their safety factor is not unlike lighting a match in a room full of gas fumes. Hedge funds have produced some impressive positive returns during the past few years, but now they’re beginning to produce some impressive negative returns, too.

However, there’s an easy, common-sense, guaranteed and bankable solution. It’s a combination of a single premium immediate annuity (SPIA) plus an irrevocable life insurance trust, or ILIT. Here’s how it spills.

Invest that $1 million into an SPIA. Because your client is a female, age 79, an SPIA would pay her 12 percent on her $1 million, or $120,000 each year. At age 79, the amount of income excluded from taxation will be 85 percent. This exclusion lasts for her life expectancy, based on current government tables. At her age, the exclusion will last for 11 years, at which time she will be 90 or playing bridge with the angels.

Your lovely lady would receive $120,000 a year from the SPLI, and 15 percent of that amount, or $18,000, is taxable. Because she is in the 25 percent bracket, she would pay $4,500 in taxes (25 percent of $18,000), and so her net after-tax income would be $115,500 annually ($120,000 less $4,500), or $9,625 every month. That’s an 11.5 percent after-tax return.

She will get $120,000 (before taxes) annually, even if she lives to be 109 or 117 or 136 years old. That’s the risk the insurance company takes. However, if she passes next year or four years hence, the insurer keeps every remaining penny of what’s left. That’s the risk your client must take.

But this doesn’t solve the problem of guaranteeing a $1 million bequest to her great-grandchild.

Here’s the $1 million solution: A $1 million life insurance policy will cost your client $36,000 in annual premiums, or $3,000 a month. So after paying and subtracting a $36,000 life insurance premium from the $115,000 SPIA income, your client keeps $79,000 in annual income, or $6,625 each month for every month she’s vertical. That’s a healthy 7.9 percent tax-free return and $4,000 of wiggle room from her necessary $75,000 yearly income. When she passes, the $1 million death benefit (owned by an ILIT) will be excluded from income and estate taxes.

Most complicated problems involve simple solutions. I hope you will bill according to the solution.

Please address your financial questions  to Malcolm Berko, P.O. Box  1416, Boca Raton, Fla. 33429 or  e-mail him at malber@adelphia.net.  © Copley News Service