When estate planners talk about annuities and IRAs, they say those vehicles are the worst to be holding when you pass away. I generally agree with the statement. Moreover, planners focus on the estate tax and reducing the impact of it. The deferred gains in a tax-deferred product – qualified or non-qualified – has the tendency to force the gain to be taxed at the recipient’s highest marginal tax bracket.
Because those assets become taxed at the highest marginal bracket, it’s important to have plans for the tax deferral or qualified accounts in a client’s estate. Many planners should look to life insurance as a way to create the necessary capital to pay for the tax. Life insurance also provides the liquidity needed in order to pay the tax without invading the IRA.
Other planners look to leverage the power of the stretch IRA to minimize taxes and reduce the burden of the overall tax on the beneficiaries. Unfortunately, it appears that Congress is making plans to limit the amount that can be stretched to $250,000. For the mass affluent and middle-America clientele, the loss of the stretch provision might be devastating to wealth transfer.
So, how can life insurance work in conjunction with IRAs and tax-deferred vehicles like non-qualified annuities?
Look at your tax-deferred vehicles and identify clients who will pass along not only a big inheritance, but also a big tax bill. Talk to them about using life insurance to reduce overall costs or completely eliminate the federal income tax on the transfers of wealth.
Life insurance can be meaningful for those with larger IRAs or accounts with tax-deferred gains. These vehicles are the worst to have in your estate on the date of death. There are strategies to eliminate or reduce the income tax.
Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”
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