Written by: Stanley M. Vasiliadis Esquire, CELA
A recently-enacted federal law, The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, eliminated a giant tax break for children (adults and minors) who inherit an IRA from a parent. With limited exceptions, they can no longer stretch withdrawals over their actuarial life expectancy. Instead, they must withdraw the entire amount within 10 years. So, why is this a big deal? Because assets in a traditional IRA grow tax-deferred. Money withdrawn from a traditional IRA is generally 100% taxable as regular income. By limiting annual required minimum distributions to a relatively small amount stretched over one’s lifetime, the fund can grow exponentially.
Various planning strategies have emerged to offset the tax hit from accelerated IRA withdrawals. One such stratagem involves the use of “second-to-die” life insurance as a way to replace wealth lost from income taxation on withdrawn IRA benefits. This kind of life insurance, also referred to as joint & survivors life insurance, does not pay out until both insureds have died. It’s not as expensive as insurance just on the life of one person.
Second-to-die life insurance can itself be costly. But not so much if one’s affairs can be structured to make the insurance premiums fully tax-deductible. That’s possible for persons who transfer income-producing property into a properly structured trust. Here’s how it works:
A married couple creates and funds a joint trust which owns rental commercial or residential real estate. The trust, which qualifies as a “grantor” trust under the Internal Revenue Code, buys second-to-die life insurance on the joint lives of the married couple. Alternatively, the couple can transfer stock in a family-owned business or an ownership interest in a limited liability company (LLC) to the trust. The trust distributes its net income to the couple. The life insurance premiums are a deduction against the trust’s income. The couple effectively receives an above-the-line deduction on the full amount of the premiums. The substantial tax savings thus reduce the overall cost of the insurance. After both spouses die, their children receive tax-free life insurance proceeds that the children use to offset the income taxes they pay from their inherited IRA.
Contact Vasiliadis Pappas Associates if you think this may be right for you, or to discuss your estate and long-term care planning concerns.