Background: A husband and wife had retired and were enjoying financial independence. The husband and primary bread earner passed on rather suddenly and the estate plan developed came to the forefront.
Our Case: One of our clients has been enjoying retirement for many years. We had previously established several financial strategies that would act to manage risk and secure cash flow. One of the moves was an insurance arbitrage in which we utilized an immediate annuity and life insurance policy simultaneously to capture the spread between the two products. This spread resulted in approximately $10,000 of annual cash flow for the couple. When the husband passed away that spread was gone but the surviving spouse received a tax free lump sum payment equal to what we began with years ago.
The Question: The questions then became: What do we do with the lump sum received from the death benefits?
The Results: Through our review process we noticed that total net worth had continued to climb during retirement even with market fluctuations. The reduced Social Security, IRA and pension income would be adequate to support the surviving spouse going forward. This was proved simply by the increase in the number and size of these accounts since our planning began.
- First, we could invest the proceeds in a tax efficient manner in a revocable trust to ensure an efficient transfer to the children beneficiaries at the death of the surviving spouse. We would also consolidate the numerous other savings and CD’s that the two have massed over time in order to simplify the surviving spouse’s life. If additional income is needed by the spouse or if she wanted to begin gifting to the kids or grandchildren, access to this account would be immediate.
- The second option is an extension of the first option. We would still consolidate the nine plus after tax accounts into a single trust account but that trust account would be well over $600,000 and the surviving spouse would likely never need to access this amount of capital. So, for a portion of the capital we would set it aside to prepay some tax. We calculated how much of the current IRA we could convert to trigger a $100,000 tax. This amount we would convert to a Roth IRA. A Roth IRA can grow tax free, qualified withdraws are tax free, and there are no requirements for her to take distributions annually from this account so it can accumulate for her heirs tax free.
Bottom Line: In this case the surviving spouse was able to reduce taxation on forced IRA withdrawals by limiting the amount she would have to take out, reduce potential tax on Social Security benefits, and reduce the taxation of the interest and dividends created by the trust account’s holdings. This created a permanent tax free nest egg for her enjoyment, her children’s wealth creation and even her grandchildren’s. Real estate planning may not involve Estate Taxes depending on the size of the Estate but there are other taxes that need to be planned for and legacies that are waiting to be created.
This is a hypothetical example for illustrative purposes only. Theexperience of this client may not be representative of the experience of all clients and is not indicative of futureresults. 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 financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc. Business & Estate Advisers, Inc. and B & E Investment Advisers, Inc. are separate entities from ValMark Securities.