Ok, so you read my previous post about the incredible legacy you can create by “Supercharging” your IRA. The logical questions are: what are the drawbacks to the “traditional” approach to IRA beneficiary planning and how do I do the “supercharged” strategy? Well, I’m glad you asked. That is what this post is about.
So, how is IRA beneficiary planning typically done and what are the drawbacks? Usually, a married couple will name each other as the beneficiary of their IRAs. This is done for many reasons, two of the most common being love and the additional “rollover” options provided to a surviving spouse by the tax code. Yet, there is a problem . . . spouses are usually near the same age. That means when the first spouse dies, the “stretch” tax deferral period of the deceased’s spouse’s IRA will typically be rather short. This goes against the goal of many IRA holders’ desire to maximize the “stretch” period to take full advantage of the tax-deferred growth of their IRA after their passing.
One option is to name a person from a younger generation as the beneficiary of the IRA. There’s a problem with that too . . . the surviving spouse is left out of enjoying the “fruits of labor” from the IRA. The “Supercharged IRA” strategy mentioned above is the way to have your cake and eat it too.
In this strategy, a younger person is named as the beneficiary of the IRA. Or better yet, an IRA Legacy Trust for the benefit of younger people is named so that you can not only maximize the “stretch” tax-deferral period but also make sure the IRA proceeds are asset protected for future generations (from creditors, predators, divorce and poor spending habits). As mentioned in my previous post, the required minimum distributions from the IRA are used to purchase a permanent life insurance policy on the life of the IRA holder with the spouse named as the primary beneficiary (or better yet, an Irrevocable Life Insurance Trust purchases and holds the policy so that it is asset protected from the insured’s creditors, predators and potential divorce).
What is accomplished? The IRA tax-deferral stretch is much greater because a younger person is beneficiary and the surviving spouse doesn’t miss the IRA benefits because he or she receives the insurance proceeds, which can be much greater than the IRA due to leveraging the life insurance premium. An additional benefit of this strategy is that it can be used for non-traditional couples and single individuals.
Make sure to discuss this strategy with a financial adviser, life insurance agent and estate planning attorney who are familiar with it and accustom to the mechanics of implementing it in your situation.
Michael Lichterman is an estate planning and business planning attorney who helps families and business owners create a lasting legacy by planning for their Whole Family Wealth™. This goes beyond merely planning for finances – it’s about who your are and what’s important to you. He focuses on estate and asset protection planning for the “experienced” generation, the “sandwich generation” (caring for parents and children), doctors/physicians, nurses, lawyers, dentists, professionals with minor children, family owned businesses and pet planning. He takes the “counselor” part of attorney and counselor at law very seriously, and enjoys creating life long relationships with his clients – many of which have become great friends.