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IRA Maximization

Senior womanIn today’s estate planning world it is quite common to work with a client who has an IRA that is a very large percentage of their overall estate. Typically, this was not by design. In fact, the usual scenario shows the client simply put away the maximum each yr in to a plan, benefited from a long period of market growth only to find their IRA is now the largest asset in their estate. So why is this a problem? Because IRA assets, or any tax deferred asset such as an annuity, are double taxed at death; the beneficiaries must pay both income AND estate tax. Usually, the IRA is double taxed at a combined 65-70% tax rate. That leaves only 25-30 cents on the dollar for the heirs.

So how can you correct or solve this problem? Very simply. Each year the client takes distributions, mandatory after age 70 1/2, and reposition those dollars OUTSIDE the estate into an insurance trust (ILIT) to purchase insurance. It is as simple as moving the asset from the “double taxed” bucket to the “tax free” bucket, i.e. from the IRA to the ILIT. Because the insurance is held in a trust outside the estate, estate taxes are NOT assessed on the trust asset. And because the trust asset is insurance, there is no income tax on the proceeds at death either. And because of the leveraged dollar effect by using life insurance, the heirs receive far more than if the asset was simply invested.

Bottom line: The heirs receive far more with IRA Max than they would have by simply doing nothing and passing the IRA to your heirs.

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