Clients who are 70 1⁄2 years and older must take their annual Required Minimum Distribution (RMD) from their IRA or 401k. Many high net-worth individuals do not need the distribution income and prefer to maximize the amount of inheritance they plan to leave their beneficiaries. However, upon your client’s death, if the IRA or qualified plan is large enough, the heirs may face a significant tax bill that reduces the amount of the asset significantly.
By using the RMDs to purchase life insurance, your clients can leave their heirs a tax-free inheritance.
Consider this case:
Mike W. Jordin is a 70 year old male with $1,000,000 in a traditional IRA. He wants to leave his children the $1,000,000 but understands that the inheritance will be heavily taxed. Best case scenario, his children will inherit about $600,000 at his passing.
Instead, Mr. Jordin takes his RMD of $39,623, withholds $15,879 for taxes and uses the balance, $23,744 to purchase a $710,000 universal life policy current to age 95. The policy also possesses a long term care rider that allows him to access 2% of the death benefit per month ($14,206) in the event he becomes eligible for a long term care claim.
His beneficiaries will receive the full $710,000 federal income tax free. Any remaining balance in his IRA can be gifted to charity, or either stretch or lump sum the IRA to the children.
By utilizing this simple strategy, Mr. Jordin was able to leave to leave his heirs a substantially larger inheritance while also decreasing his own taxable estate.