Building a legacy with IRA strategies using life insurance

Tax saving alternatives using life insurance
If an IRA owner is looking to protect loved ones and to help maximize wealth transfer, he/she can utilize life insurance to help minimize the tax burden that inheriting an IRA may impose on a beneficiary. With two different strategies identified, individuals can help maximize the after-tax value of their inheritance or even eliminate taxes paid on the IRA inheritance.3

Alternative 1: Offset IRA beneficiary income taxes
Options include the purchase of a life insurance policy equal to the anticipated income tax due from the beneficiary at the projected time of inheritance. Life insurance death benefits may be used to pay the income tax due, maintaining the full value of the IRA even after taxes are paid.

Alternative 2: Eliminate IRA beneficiary income taxes
By naming a charity as the IRA beneficiary, and funding a life insurance policy with your children as the beneficiaries, you can leave a significant legacy to both your children and your charities, while the federal income taxes on your children’s IRA inheritance can be completely eliminated.

The chart below provides a hypothetical comparison of what IRA distributions look like on the same IRA account before (“Current” bar) and after the two solutions were used (“Tax Offset” and “Tax Elimination” bars).

These strategies can help maximize the amount of money beneficiaries receive and provide greater flexibility in how the assets are ultimately put to use.

After-tax benefit amounts

Comparison of wealth transfer alternatives for a $500K IRA

1 Cerulli Associates, U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2018: Shifting Demographics of Private Wealth. 2018.

2 Depends on life expectancy factors, the assumed annual rate of return and additional deposits or withdrawals made.

3 American General Life Insurance Company and their distributors and representatives may not give tax, accounting or legal advice. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Such discussions generally are based upon the company’s understanding of current tax rules and interpretations. Tax laws are subject to legislative modification, and while many such modifications will have only a prospective application, it is important to recognize that a change could have retroactive effect as well. Individuals should seek the advice of an independent tax advisor or attorney for more complete information concerning their particular circumstances and any tax statements made in this material.