Life Insurance Funding from Traditional IRA
Client Profile: Divorced Female, DOB 7/21/1942, good health, 3 grown kids with 8 Grandkids (11 Gifting oppurtunities). $13k X 11 = $143k for 2012 and $154k for 2013. Client is Retired, Est Annual Income of $250k mostly from Tax Free Muni Bonds and some Rental Properties. Estimated Net Worth of $8 Mil. Currently has $2.125Mil of Permanent Life/Guaranteed insurance in an ILIT.
Looking to liquidate Traditional IRA’s of $750K by using other Non-IRA assets to pay the taxes and purchase an additional $1.76 Mil Permanent/guaranteed Life insurance to remove this from her Estate and make it Tax Free to her heirs.
Regarding her legacy to her kids/Grandkids and in terms of Cost Effectiveness, it this the best use of leverage vs. passing the IRA’s to the kids via the Stretch method and paying taxes in the future at higher rates; taking RMD’s to buy inusarance each year at a higher rate, assuming she still qualifies; or leaving the IRA assets in tack, subject to market volatility and potential losses withoug buying additional insurance which she can qualify for now.
Plese advise.
Randy
Permalink Submitted by Bruce Steiner on Fri, 2012-09-28 21:58
If she’s worth $8 million, she should consult with counsel who can give her specific advice based on her situation and her objectives.
Some things to consider are (i) Roth conversion, either all at once or over time, (ii) whether she needs more insurance since she’s retired, (iii) making gifts this year to take advantage of the gift tax exempt amount, (iv) if she makes gifts, which assets to give.
Before you become involved in her cashing in her IRA, you may wish to consult with counsel as to your exposure when she finds out the value of the lost tax benefits, both compared to stretching them out as long as possible, as well as compared to converting to a Roth and stretching them out as long as possible.