How about an estate tax-free IRA?

Life Insurance

With the federal estate tax returning next year at a rate of 55%, with only a $1 million exemption, planning to reduce estate tax should be on the forefront of the minds of those fortunate enough to have assets in excess of that amount.
One technique that was shared with me recently by Chad Virgil, CFP, works as follows (example scenario):
  • 75 year old man in standard health
  • $500,000 IRA
  • Taxable estate
  • The IRA is converted into a $500,000 single-life qualified annuity, which generates $48,145 annually for life, with no residual estate tax value.
  • After income taxation at the highest rates (35% federal, 7.75% NC), the net income per year is $27,563.
  • An irrevocable life insurance trust (ILIT) is formed, and purchases a $500,000 single person guaranteed universal life policy – premium is $24,058 per year.  This amount would be covered by the gift tax annual exclusion of $13,000 for just two beneficiaries of the ILIT (e.g two children).  The ILIT means that the $500,000 will be received estate tax-free by the children.
  • $3,505 of net income is left over each year – enough for a nice trip to the Caribbean!
Note:  the numbers used in this illustration are from March, 2010, with a MetLife annuity and Hartford life insurance policy.
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