In a post-SECURE Act world, the tax-efficient transfer of your IRA wealth can now be best accomplished through the benefits of using tax-free life insurance.
By Bill Monte, CLU, ChFC, CLTC, LTCP, RICP
As a legacy planning and wealth transfer expert, my objective is always to educate my clients on specific planning strategies that will help them maximize the financial legacy that they leave to their chosen heirs (e.g., children/grandchildren) at their eventual passing. Ideally, I want my clients to have the peace of mind and the comfort of knowing that the IRS will never be a beneficiary of their estate, that they have “Disinherited the IRS.” Proactive planning can accomplish this objective.
What The SECURE Act Changed
With the passage of the SECURE Act at the beginning of 2020, the IRA beneficiary distribution rules have substantially changed. Prior to the SECURE Act, when a non-spouse beneficiary, such as a child, inherited a parent’s IRA account, they could spread out the distribution of these inherited IRA assets by taking a required minimum distribution (RMD) over their remaining life expectancy. Doing so would allow them to stretch out the income taxation of these distributions over a potentially very long period of time. A 42-year-old child, for example, would have 44.6 years to do so. That is no longer the case.
The SECURE Act now forces a non-spouse beneficiary to completely deplete and pay income taxes on the entire inherited IRA account within 10 years of the parent’s passing, substantially accelerating the income taxes to those beneficiaries. What makes things even worse is that the beneficiaries will most likely be in their peak earning years when the IRA inheritance occurs. They will also most likely be paying taxes at a federal tax rate that will be much higher than it is today, especially with the rapidly increasing level of debt the U.S. government is racking up these days. Marginal income tax rates WILL RISE. No one is really refuting that. It’s a foregone conclusion.
How To Protect The IRA Inheritance From The IRS
Ed Slott, widely recognized as the nation’s IRA expert, suggested that one particular planning tool will quickly rise to the top post-SECURE Act as the best way to negate these accelerated income taxes to IRA beneficiaries. I couldn’t agree with him more when he says, “In some ways, what the SECURE Act really did, what Congress really has done, is incentivize people to do better planning, the kind of planning they probably should have been doing all along.” His favorite planning strategy post-SECURE Act? Life insurance. He calls it “the single biggest benefit in the tax code” and “the most tax-efficient way to pass IRA wealth to the next generation.” [B2] [B3]
I recently created and gave a webinar entitled How Your Kids Can Inherit Your IRA 100% Tax-Free. It is posted on my practice’s website at www.legacyandltcplanning.com. You should make a point of watching it if you haven’t already done so. It speaks to how permanent life insurance, funded with available resources such as discretionary income (or possibly with withdrawals from IRA assets), as well as any non-IRA investment assets or savings are not needed for retirement income generation (Roth IRA assets being a perfect example). These available resources can be used to create a substantial tax-free life insurance amount for the benefit of the children as beneficiaries.
This tax-free amount will allow your estate to “disinherit the IRS,” providing the necessary funds to negate the income taxes that your children will confront when the IRA assets are inherited. This will also give the beneficiaries the flexibility to choose how they want to deal with the new 10-year rule. They could remove the IRA inheritance all at once or use all or a portion of the 10-year period to do so knowing that they have the tax-free life insurance proceeds to pay the taxes.
Life insurance can be implemented up to an issue age of 90, so you are never too old to explore it. I always tell my clients to at least take the time to quantify what can be created in their particular situation. The independence of my practice allows me to work with all available life insurance companies to research and locate the very best plan based upon your current age and health.
Is Life Insurance The Solution For You?
The moral of the story here? Life insurance allows you to pass your IRA assets to your children completely whole without the worry of the government unnecessarily taking a big chunk away from your IRA beneficiaries to taxes. I’d rather have my kids receive 100% (or more) of my IRA and not 65% (or possibly less), wouldn’t you?
If we haven’t discussed this option with each other yet, let’s make a point of doing so. You can reach me at 585-721-2385 or send me an email at firstname.lastname@example.org to schedule a free consultation.
Bill Monte is the president of The Estate, Legacy & Long-Term Care Planning Center of Western NY, with 33 years of experience in the financial industry. Bill is the leading legacy and long-term care planning expert in the area and has helped hundreds of Rochester area residents implement personalized plans that help solidify their legacy and long-term care planning. As an independent financial professional, Bill prides himself on putting his clients first and always working in their best interest, designing plans that are tailored to each person’s specific financial situation and goals. Bill holds multiple professional designations, including Chartered Financial Consultant® (ChFC®), Chartered Life Underwriter® (CLU®), Long-Term Care Professional (LTCP), and Certification for Long-Term Care (CLTC®). To learn more about Bill, connect with him on LinkedIn or schedule a free consultation by contacting him at (585) 721-2385 or email@example.com. You can also register for his recent webinar “How Your Kids Can Inherit Your IRA 100% Tax-Free” here.