Leverage Your Legacy with Life Insurance

In today’s issue of The Activator, we’d like to share two strategies that we believe are both compelling and relevant for a great many average affluent families. Both strategies involve strategically leveraging the gift of life insurance. Importantly, this is something that you should consider if you have a taxable estate, if you are projected to have a taxable estate, and also even if you aren’t projected to have a taxable estate. So . . . , this means that all of you would be wise to reevaluate whether you personally may benefit by incorporating this often misunderstood and neglected asset class. We hope that by educating you better on these two strategies, that you’ll be motivated to give this more serious consideration.

Life insurance offers two very important types of leverage. First, it provides tax leverage, since any associated death benefit will never be subject to income or estate tax, if properly owned outside your taxable estate. Second, life insurance also provides inherent death benefit leverage. Simply understood, in exchange for some amount of your redeployed capital you’re able to create a legacy asset that is many multiples of that amount by way of the death benefit eventually payable to your chosen beneficiaries.

The first strategy we would like to share with you is commonly called the IRA Maximizer Strategy. The ideal context for this strategy is any successful individual or family that has the good fortune to have accumulated a large retirement plan in one or more IRA, 403(b), 401(k) or similar account, and to not need these dollars to live on during retirement. If this is you, then your retirement account is or will eventually become one of your largest single assets in retirement. At the same time, you may have arrived at the age of 70 ½ (or will eventually), and are disappointed to learn that the IRS is forcing you to begin taking an annual required minimum distribution from your qualified retirement accounts. You’d much prefer continuing to delay distributions, because these distributions are 100% taxable. Unfortunately, this is not a legal option. Over your lifetime, these forced distributions and associated income taxes are a substantial loss of legacy value that could have further blessed your chosen beneficiaries.

The IRA Maximizer Strategy is a very simple and often appealing strategy that has been used for many years. Here’s how it works. Take your required minimum distribution each year, subtract the amount of tax you’ll have to pay on it, and then redeploy the balance into a life insurance policy designed to maximize guaranteed death benefit. If you have, or are projected to have a taxable estate, this life insurance policy would best be owned in an irrevocable trust and you would gift this amount to the trust each year to ensure that the future death benefit would eventually pass to your beneficiaries’ estate tax free. If you do not have a taxable estate, or are not projected to have one, there would not likely be a need for an irrevocable trust.

To help you see this even more clearly, let’s look at an example. For an average male 70 years old, with a standard health rate class, in exchange for a $50,000 amount each year, you could create a $1.38M guaranteed death benefit. For an average female 70 years old, with a standard health rate class, in exchange for a $50,000 amount each year, you could create a $1.64M guaranteed death benefit. Again, this death benefit would be 100% income and estate tax free, if properly owned and managed. If you were to instead reinvest these annual amounts in a traditional mutual fund investment or the like, you would be hard pressed, in any reasonable time period, to create a comparable legacy value for your family. Even more so, it would be near impossible to create this kind of guaranteed and tax free value.

The Capital Asset Transfer Strategy is also a very simple and often appealing strategy that has been used for many years. As a starting point, its important to understand that no matter what assets you have now or the amount of capital you’ve accumulated to this point in your life, only after better understanding your future needs from your capital and the income it will produce, will you reasonably be able to consider leveraging strategies such as this that involve redeploying some portion of your capital into longer term legacy assets.

So, here’s how this very, very simple strategy works. Take some portion of your capital assets and move these into life insurance each year. Can’t get a whole lot simpler than that right? So why would you do this, you may be asking. Well again, let’s remember that by doing so you are exchanging assets that don’t provide this tax leverage or death benefit leverage for an asset that does! And the additional wealth creation that is often possible can be extremely compelling. This strategy can also create another level of value that many never consider. This is almost always an unexpected and a very welcome blessing. It’s discovering that you have more financial capacity than you thought you had, to support causes and organizations that you care about personally. How? By using the strategic lever of life insurance, you are effectively taking 1 + 1 and creating 3 or 4 instead of 2. Leverage. Remember? As a result, in many cases may have created excess wealth with which you can choose to either further increase your family legacy or give life to a whole new type of charitable or philanthropic legacy. If you are taking from what would have gone to the government in the form of taxes, it’s even more fun because you’re really taking back control of what was rightfully yours to begin with, by instead directing it to your personally chosen causes and organizations.

If you have, or are projected to have, a taxable estate, this will often mean moving portions of your capital outside of your taxable estate each year through annual exclusion gifts or by utilizing some or all of your lifetime exclusion. In such situations, you may be able to zero out federal estate taxes by putting a simple provision in your estate plan that provides for everything over your remaining federal estate tax exemption amount to be distributed to your family charity (usually a donor advised fund or family foundation). The irrevocable trust in this type of situation would then become the primary conduit for your family legacy. In non-taxable estate situations, there would be no need for the irrevocable trust. Instead, you would simply leverage the Capital Asset Transfer Strategy within your estate.

As an example, in exchange for $150,000 of redeployed capital per year for seven years, assuming a 60 year old husband and wife with a standard health rate class, you could create $2.25M of guaranteed survivorship death benefit payable at the death of the surviving spouse. Again, this would be completely income and estate tax free and you could design this however you want, based on your desired family legacy, the annual capital you’d want to include in the plan, or any other relevant goals. This makes it simple to observe the exponential leverage that may be able to be created through life insurance.

One additional consideration worth noting is that many of today’s life insurance carriers offer the opportunity to add what can often be a very valuable long term care insurance rider to your policy, which usually allows the policy’s death benefit to be available during your lifetime as a long term care benefit. This can be used for costs associated with home care, assisted living, or nursing home care. Many of our clients, perhaps like you, are planning to self-insure against this growing and potentially catastrophic risk of long-term care expenses. We are big proponents of adding this type of long-term care insurance rider to your life insurance, because it allows you to self-insure, at a low cost, and to essentially create yet another layer of strategic leverage within your plan.

Please consider evaluating one or both of these strategies with your advisor. Both are well understood and well tested strategies that many families are utilizing. And by all means please know that we would be delighted and privileged to talk with you personally about these strategies, if you would like to do so, as you seek out ways to take your estate and financial plan to another level of sophistication and success.

If you’ve been reading The Activator for any measure of time, you know that we are passionate about planning and protecting money because it’s about so much more than just money. In the next issue we plan to share a real life family story that powerfully and tangibly demonstrates this passion of ours.


The material contained herein is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation or needs of individual investors. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as insurance professionals and investment advisors.

Neither Wealth Impact Partners, Valmark Securities nor its affiliates and/or its employees/agents/registered representatives offer legal or tax advice. Please seek independent advice, specific to your situation, from a qualified legal/tax professional.

Securities offered through Valmark Securities, Inc. Member FINRA/SIPC. Investment advisory services offered through Valmark Advisers, Inc., a SEC Registered Investment Advisor. 130 Springside Drive, Suite 300 Akron, Ohio 44333. (800) 765-5201. Wealth Impact Partners is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc. BSW Inner Circle and AES Nation LLC are separate entities from Valmark Securities and Valmark Advisors.

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