Posted by Recap:OnAbove, American Life Insurance Guide Network analyzed after 2020"Retirement Security Act"After entry into force, the traditional"Stretch IRAsThe method formed a fatal blow and explained in detail the specific use of "Stretch IRA" in the past. Because of "Decade of Storm"Impact,When parents and elders want to leave IRA to the next generation of young people, what are the common structures and solutions to maximize the inheritance and distribution of IRA?It is the theme shared by financial expert Jim in this column.
case study:
1nd generation: John's father, 68 years old
2nd generation: John, 45 years old
3nd generation: John's two children, 20 and 18 years old
Goal: To prepare for the ten-year distribution storm, to ensure that the assets earned during the lifetime are reserved for the next generation
Option 1: Buy life insurance by the first generation
This program helps pay the income tax due to inheritance of the first-generation IRA distribution.
The first generation of elders-John's father wanted to plan ahead toHelp John get the most benefits after inheriting the IRA and pay the taxes that should be paid.
John's father decided to buy life insurance by himself, and appointed the second-generation John as the beneficiary of the insurance.
Upon the death of John's father, John will receive tax-free death compensation.At that time, John will inherit his father's retirement account, and must be distributed, and must completely empty the first generation retirement account by the end of the tenth year after his father's death.
John can use his father’s life insurance claims to pay what he should pay for the income allocated to inherit the first-generation IRAIncome tax or plus inheritance tax.In this way, John can make full use of all the money received from the IRA he inherited from his father.
The 2nd generation John can choose to obtain the maximum allocation from the IRA in one of the following three ways:
- The second generation John can choose to withdraw the entire balance of the inherited IRA, and then use the life insurance of the first generation to pay income tax with the death compensation of the second generation as the beneficiary of the insurance.
- John can distribute the income over a 10-year period and use the first-generation life insurance death compensation income to pay income tax every year.
- John can choose to keep the IRA funds in the inherited IRA until the 10th year, allowing the value of the account to increase by compound interest.Although this can bring greater benefits to John, it may also result in greater income tax impact.
If John chooses to keep the funds in his father’s IRA retirement account until the 10th year, John can use the father’s life insuranceTax-free death compensation, as his personal annual supplementary retirement income,Instead of taking money from the inherited retirement account.
When John must clear the IRA account in the 10th year, any remaining from the father’s insured death benefitDeath compensation can be used to help pay income tax.
Option 2: Life insurance purchased by the second generation
Or, John's father does not plan to buy life insurance by himself, and uses life insurance for his son John to realize the plan.
During his lifetime, John's father gave cash to John to pay the premium (the premium of the second-generation insurance was paid by the first generation).
When John's father was alive, the cash value in the policy had enough time to grow.After the death of John’s father, John can start a 10-year distribution from the IRA account and continue to use the IRA distribution to pay premiums.Then fromWithdrawal or loan from the policyPay the income tax owed by the distribution.
Or, if John can use part of the IRA distribution or other sources of funds to pay income tax, he can wait until he retires before using the cash value of the policy, and then withdraw and loan from the policy to supplement his own income.Pension incomeOr other needs.
Similar to the previously discussed strategy, The second-generation John owns the policy, and John treats his children as the beneficiaries of the policy. In the event of John's unexpected death, the third-generation children will receive tax-free death benefits from the policy when John dies, and use the death benefits To pay the income tax that must be paid because the IRA fund account of the first generation must be cleared.
More discussion about the inheritance between generations
In the first generation, John's father worked hard for many years to save every year's income tax from the IRS and build his own IRA assets, hoping to eventually have enough money to pass on to his grandchildren.
However, due to the "Security Law", it was fundamentally cancelled."Extended IRA(Stretch IRAs)", so this also means,The non-spouse IRA beneficiary must accept the distribution within 10 years and clear the account.
Another way to ensure that the third generation inherits the first generation's inheritance, John can use the IRA funds inherited from the inheritance to pay for his own life insurance premiums to benefit his children. After John's death, his children will receive a tax-free death claim, and finally get the inheritance that grandfather has always hoped for his grandson.
If John himself may be liable for inheritance tax in the future, John’s father or John himself can set up an irrevocableLife Insurance Trust, Making John's child (grandson of the original IRA account owner) the beneficiary of the trust.
John's father or John can use the method of donation to donate the funds allocated from the IRA to the trust beneficiary, use the trust to purchase and own John's life insurance policy, and pay John's life insurance premiums in the name of the trust.
Since it is an irrevocable trust, assuming its structure is correct, the value of the policy will be outside the scope of John's taxable estate.Upon John's death, the trust will receive death claims and distribute the claims to John's children according to the terms of the trust, the 3rd generation; achieving the purpose of inheriting wealth from his IRA distribution to the next-generation heirs.
Article summary
Although the emergence of the "Retirement Security Law" interfered with the initial wealth inheritance of high-net-worth families and the financial planning of saving money for their children, it is not without good solutions.In order to satisfy many elders who want to leave the IRA retirement assets that are almost unused and inexhaustible for their children to inherit, using life insurance as a tool and reasonable plan design and use can effectively reduce the tax on children inheriting this asset Influence, so as to smoothly pass on the wealth of the elders to the next generation. (End of full text)
Appendix summary:
- Effective for distributions with respect to IRA account owners who die after December 31, 2019.
- For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include , but are not limited to the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (ie, the “transfer-for-value rule arrangements that lack an insurable interest based on state law and an employer-owned policy unless the policy qualifies for an exception under IRC Sec 1010.
- According to the Tax Cuts and Jobs Act of 2017, the federal estate, gift and generation-skipping transfer (GST) tax exemption amounts are all $10,000,000 per person (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%. In 2026, the federal estate, gift, and generation-skipping transfer (GST) tax exemption amounts are scheduled to revert to $5,000,000 per person (indexed for inflation for tax years after 2011).
- As of January 1, 2020, the annual gift tax exclusion is $15,000 per donee (as indexed for inflation).
