“The vehicle used to transfer money after death will have to change from the IRS to the more tax-friendly life insurance,” writes Ed Slott in Financial Planning. What’s more, Slott adds, the clients most affected by the Secure Act are the ones with the largest IRA balances.

Ed Slott is referring to one particular item in the spending bill signed by President Trump at the end of last year. That new rule is that IRA beneficiaries need to “clean out” inherited IRA accounts within ten years, rather than continuing to “stretch” withdrawals over his or her entire lifetime. At Geyer Law, where we are members of the National Academy of Elder Law Attorneys (NAELA), we are particularly interested in the new provisions of the SECURE Act to which Slott refers and the effect those new provisions will have on our clients’ estate planning.

Rather than building up very large IRA balances, naming a trust as the beneficiary, Slott recommends, clients should consider drawing down their taxable IRA balances, taking advantage of today’s low tax rates (scheduled to remain in effect only until 2026). The net proceeds of those IRA withdrawals can be used to pay annual life insurance premiums. The life insurance proceeds may be set up to be payable to trusts (the beneficiaries will be the same as those named on the IRA accounts).

What’s better about that? Life insurance proceeds paid to the trust after death are income-tax free. Clients, Slott maintains, can stop worrying about the many IRA tax rules and focus on the legacies they want to leave for each beneficiary. (While at Geyer Law, we do not sell life insurance, working with each client’s insurance and tax advisors to formulate plans, the concept Ed Slott describes is certainly worth exploring.)

Ironically, the latest stimulus bill unlocks IRA dollars, allowing penalty-free early distributions of up to $100.000 for those who have experienced “adverse financial consequences” from the coronavirus pandemic. Tax would need to be paid on distributions from traditional IRAs, but the bill can be paid over a three year period rather than all at once. Since “adverse consequences” include being subject to a quarantine or being unable to work due to childcare changes, the opportunity for penalty-free withdrawals is apparently available to the type of high net worth clients to whom Ed Slott is recommending a shift in estate planning focus from IRAs to life insurance.

Life insurance may be taking on a whole new role as part of estate planning.

– by Rebecca W.Geyer