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.