26
ID Trends
2019
The Secure Act from page 25
Strategy 1: Fund a life policy Strategy 2: Create a Charitable Remainder Unitrust (CRUT)
This strategy is very simple. Take distributions from the IRA and
fund a life policy on the beneficiary. The beneficiary can then use
the policy’s cash value to provide a tax-free income source. Case study: Chris has a $1,000,000 IRA. Chris names his
testamentary Charitable Remainder Unitrust as the beneficiary
of the IRA. Under its terms, the unitrust interest is payable to his
child Leslie, for Leslie’s life. Leslie is age 40 at Chris’ death. The
payout of the trust is 7%. The CRUT has 3% growth and produces
5% income.
Case study: Chris, the owner of an IRA, takes distributions of
$158,730 per year for 10 years, using a strategy discussed above.
After paying a 37% federal income tax on that amount, the net
amount is $100,000. Chris gifts that amount to the beneficiary
of his IRA, Ben. Ben age 40, purchases an indexed universal life
insurance policy.
The outcome
Age 40, Ben uses the gift to
pay annual premiums $100,000 for 10 years
His initial death benefit $2,739,943
Age 65, Ben takes annual
policy loans to supplement
his retirement income $369,077 income tax-free
for 20 years
His total retirement income
supplement $7,381,540
The hypothetical example assumes a male, age 40, preferred
nontobacco, indexed UL, death benefit option is increasing by
cash value for 10 years then switch to a level death benefit option,
solve for maximum annualized participating loans from ages 65
through 85. 100% premium allocation to Perform Plus Indexed
Account, 5.75% assumed index crediting. At 0% guaranteed
interest crediting and no policy loans, policy lapses at age 64.
The total income tax-free distributions
from life insurance is significantly more
than what the CRUT can generate.
The outcome
Leslie receives an income
supplement during her
life expectancy $3 million income tax-free
Chris’ estate gains a tax
advantage 10% charitable deduction
Case study variation: Leslie does not need income until she
reaches age 55. She is going to leverage the CRUT by taking
$70,000 of the payout for 15 years and put it into an indexed
universal life insurance policy. She will take 20 years of loans
commencing at age 66.
The outcome
Leslie receives an income
supplement for 20 years $244,754 per year income
tax-free
Leslie’s total income
supplement $4,895,080 income tax-free
The hypothetical example assumes a female, age 40, preferred
nontobacco, indexed UL, level death benefit, solve for maximum
annualized participating loans from ages 66 through 86. 100%
premium allocation to Perform Plus Indexed Account, 5.75%
assumed index crediting. At 0% guaranteed interest crediting
and no policy loans, policy lapses at age 60.
Conclusion
By using an advantageous distribution system, coupled with life insurance, the “inherited IRA” can
actually be improved. With this planning, one can overcome the proposed 10-year payout limitation.
A variation is to create a testamentary CRUT, which can also be enhanced with life insurance.
This is intended for educational purposes only and must not be considered financial, tax or legal advice.
Please work with your financial professional prior to making any decisions regarding your finances.
Lincoln Financial Group® affiliates, their distributors, and their respective employees, representatives and/or insurance agents do not provide tax,
accounting or legal advice. Please consult an independent advisor as to any tax, accounting or legal statements made herein.
Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates. Affiliates are separately responsible for their own
financial and contractual obligations.
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