Frequently, prospective clients will ask me this question: ” I understand the benefits of purchasing life insurance for estate planning purposes, but where am I going to get the money?”
Most people forget about their retirement accounts. For people who have created a substantial estate, you may not require the money in your retirement account to maintain your current lifestyle. However, for those of you who are over 70 ½, you don’t have a choice. The government requires you to take mandatory distribution.
So here is a quick story. A gentleman once asked me, “Where would I get the money to purchase insurance and how can I optimize different assets that I may have?” He had a $4 million I.R.A. He realized that if he did nothing that I.R.A. would be worth less than $1.3 million to his children after income taxes and estate taxes were paid upon death. I told him, “Right now, don’t worry about the IRS distribution amounts. Let’s go above and beyond what you are earning on your money.” He told me he was making 6% on this $4 million. I told him to take out $240,000 a year; pay his income tax. That would leave him with $140,000 a year. After tax, we took that money and were able to purchase $10 million of insurance on his wife, a premium that would be payable every year, until she passed away. And we made the assumption, since she was in her 60’s at the time, that 27 years was a good number to assume to figure out whether this made financial sense.
Well, at the end of the day, what was the bottom line? Upon her death, the family will receive, not $4 million which was the value of the I.R.A., not $1.3 million, which is what it would have been worth after income and estate taxes, but rather $10 million dollars completely income and estate tax-free. Now, since we only took income out each year from that I.R.A., what happens with the theoretical $4 million dollars that’s still in there? They can leave that to their favorite charity or their own foundation. And by doing that, pay no income tax or estate tax whatsoever. Bottom line, $10 million to the children $4 million to charity, $14 million dollars.