The passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act provides a phenomenal opportunity for you to revisit planning techniques and solutions that you may not have looked at in a while.
A New Use for a Traditional Planning Technique
The SECURE Act was established to encourage more Americans to save for retirement. Unfortunately, in an effort to raise future tax revenue it also eradicated an established estate planning tool known as the “stretch” IRA. This provision requires non-spousal beneficiaries to draw down inherited IRA funds within a 10-year window. The result is a substantially higher income tax.
By introducing your clients to a concept called IRA Max in combination with a survivorship life insurance policy (SUL), you can show them that by redirecting a portion of their RMDs they will still be able to leave a legacy consistent with their intentions. Upon the death of the second spouse, this type of policy triggers a tax-free death benefit payable to heirs.
The following is a scenario that we were recently asked to review. A husband and wife, ages 70 and 68, respectively, are committed to leaving their heirs an inheritance – but not at the cost of their lifestyle.
The Details: The husband’s qualified plan balance is currently valued at $1,300,000 with a projected 6% growth rate.
- Husband’s RMD at age 72 will be approximately $53,000
- Client and Beneficiary Tax Rates are both projected to be 35%
- 2nd Spouse is projected to pass away at age 90
- Remaining account balance will generate an income tax bill for the ultimate beneficiaries of $509,520, significantly diminishing their inheritance over time.
This client couple decides to leverage a portion of the husband’s RMD to purchase a survivorship life insurance policy at a cost of $9,075* annually to:
- Create an asset replacement device,
- Eliminate the impact of the income tax, and
- Restore the inheritance to the full value intended for their heirs.
New legislation like the SECURE Act makes advanced planning more critical than ever before. We believe that in your book of business you have clients similar to the ones in our example and these same solutions exist for them, as well.
As a collaborative insurance partner, Belman Klein Associates strives to identify new ways of implementing strategies using tried-and-true products. Together we can be proactive when underwriting and pricing are more favorable. By revisiting survivorship policies, you can help your clients plan for newly created taxation brought on by the SECURE Act and to pave the way for a sound financial legacy.
This is Part Two in an ongoing series of communications to guide you through the opportunities presented by the SECURE Act. Stay tuned for our next piece on restoring flexibility to one’s legacy using life insurance.
* John Hancock’s Protection SUL run 1/30/2020 solving for the level premium on a lifetime projection for MD clients.
In some instances, a Tax Advisor and/or Attorney should also be contacted for counsel. Although the information contained here is presented in good faith, it is general in nature may require additional consideration of other matters. This report is for informational purposes only.