Three Ways Life Insurance Can Help Your Estate Plan

Three Ways Life Insurance Can Help Your Estate Plan

Sometimes, life insurance can do more than protect your family in the event of your unexpected death.

It can also help you in long-term planning to pass on assets to the next generation. 

Let’s look at an example. A 60-year old single man with a pension and more than $1 million in IRAs wants to convert his IRA to a Roth, then pass them on to his children tax-free. The plan is to convert $100k every year over the next 10 years. He can avoid required minimum distributions after 70 ½ and delay Social Security to 70, thereby getting the maximum benefits. He’ll owe around $35k in conversion tax each year.

Sure, that works. However, there’s a better option. What if he bought a $1 million life insurance policy instead? With a 10-pay premium of the same $35k per year, he’ll keep the IRAs, which can still grow. Even though he’ll be subject to RMDs, he can change the beneficiary to a charitable trust. When he dies, the children get the life insurance tax free and the charities get all of the future value, also tax free. With the IRA distributions, add to the insurance policy. Death benefits could grow in the future that way.

There are more benefits. Twenty years ago, people often bought second-to-die life insurance policies to pay estate taxes. With today’s estate tax exclusions (up to $11.4 million), fewer people owe federal estate tax. But IRAs, 401(k)s and the like are still taxable. The stretch IRA option remains for the moment, but it could go away.  Life insurance can still be used to pay taxes at the second death, providing liquid, tax-exempt funds to satisfy any tax obligations. 

There are also spouse benefits to consider. Life insurance on an individual can be used to pay “conversion tax” at death using tax-exempt insurance benefits. When a retiree dies, the surviving spouse beneficiary can convert all IRA money to a Roth IRA, which is tax exempt. The tax-free death benefit can pay the taxes on the conversion, and the beneficiary will enjoy a lifetime of income that is free of tax and there will be no required distributions from the IRA.  Social security benefits could be tax-free as well, since Roth withdrawals don’t count as income in determining SS benefits. 

For more clever ways to use life insurance to enhance your estate plan, please visit:
3 Ways Life Insurance Can Help Your Estate Plan | Forbes

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