For many high net worth individuals who have enjoyed rapid growth of assets over the years, their IRAs may be an asset they do not need. They may have sufficient retirement income and have no plans of making withdrawals from IRAs, which they plan on passing to their children or grandchildren. In the meantime, they will still need to compute and take the required minimum distributions (RMDs – Traditional IRAs & Traditional Rollover IRAs) each year once they attain age 70½. When they die, their estate will owe estate taxes on the full balance of the IRA, the majority of which will be taxed at ordinary income tax rates of the heirs. Let’s assume for our example that an individual has a $1,000,000 IRA, and a $8,000,000 taxable estate. At death, after exemptions and payment of estate taxes and income taxes on the IRA assets, loved ones could be left with approximately 39 to 44 cents on the dollar, depending upon where federal and state income tax rates go and where federal and state estate taxes are.
If the individual does not need the money and would like to pass the money on to loved ones, then why not use IRA assets to maximize what the family receives at the individual’s death? If the individual purchases for a life insurance policy in a Wealth Replacement Trust and then purchases a Single Premium Immediate Annuity (SPIA) in the IRA, the after-tax SPIA payments can fund gifts to the wealth replacement trust to pay insurance premiums. In this way, you are able to take an asset that the you will not need; an asset where heirs could possibly only net out 39-44% of the total value and leverage this heavily taxed asset into a potentially tax-free benefit that can provide funds for family members several times larger than they otherwise would receive. And, you will no longer have to worry about making sure you have correctly computed and taken your RMDs each year after turning age 70½.
It’s very important to note that the insurance policy that is intended to leave a death benefit to the policy’s beneficiaries could lapse. If the insurance policy does lapse (as a result of not paying your premiums), the beneficiaries of the policy will not receive a death benefit from the policy. An individual wishing to utilize this strategy should be reasonably healthy (be able to qualify for “Standard” rates) in order to make the cost of insurance viable when matching the cost of insurance with the cash flow from the SPIA. The individual should also consider using a "Guaranteed-No-Lapse" Universal Life (GUL) policy, rather than any type of cash value policy to keep costs low. This strategy is only appropriate for individuals who will not need the assets held in the IRA. Establishing a trust for the purpose of owning a life insurance policy on an individual may place the policy and any future death benefit outside the taxable estate of the individual (based on the current federal estate tax law).
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*This blog is strictly the opinion of Michael A. Malleo and not those of
ASH Brokerage Corp., nor any of our affiliates.
Malleo Financial Services LLC cannot and will not give any specific tax or legal advice.
Please consult your tax professional or legal professional for such advice.