How to Use Life Insurance Instead of a Stretch IRA for Wealth Transfer
In these uncertain economic times, your clients want peace of mind. They want to preserve existing assets, and ensure those assets remain viable enough to provide for themselves and their loved ones.

The stretch IRA provision used to give them an easy way to do this. That's no longer an option, but luckily, we have an even better value life insurance.

If you read Van Mueller's monthly newsletter, you know how he refers to cash value life insurance: pennies that buy dollars. With stock portfolios reeling and every economic indicator showing we're on the verge of a recession (if not a depression), that's a phrase that'll get your clients' attention.

No time to read? Watch our video overview:

But First…What Happened to the Stretch IRA?

Before the SECURE Act, clients who didn’t need the money they’d saved in an IRA could leave it to their kids or grandkids. The kids or grandkids could then choose a provision called “stretch,” which allowed them to withdraw money from that IRA based on their life expectancy. In other words, they could let most of that money sit for decades, compounding tax-free.

The recent SECURE Act changed those rules, effectively eliminating the stretch IRA in all but a few special cases. Now, those kids and grandkids would need to start withdrawing money from an inherited IRA much earlier. A 10-year clock starts ticking when the account owner dies. The heirs can either: (a) take the money all in year one, (b) distribute withdrawals evenly over the next 10 years, or (c) take it all in a lump sum at the end of the 10th year. No matter which option they pick, the account needs to be emptied within 10 years of the account owner’s death.

Keep in mind that there are a few exceptions to the 10-year rule: it will not apply to spouses, minor children (until they’re of age), chronically ill or disabled beneficiaries, and beneficiaries less than 10 years younger than the deceased account owner.

Need help with advanced planning cases?

Call us at 800-823-4852 and ask for a brokerage manager, or click the button to send us a message. We're always happy to help!

Drawbacks of the New 10-Year Rule

So…what’s so bad about these changes? The kids or grandkids still get the money, right?

Well, yes, but many parents and grandparents would prefer their kids to wait before they access that money. Maybe they don’t want the kids getting full access until they hit a particular age – 35 instead of 18, for example. But even if the kids wanted to obey those wishes, without a stretch provision, they'll be forced to empty the account within 10 years – perhaps before they’re responsible enough to use it wisely, as the parents or grandparents intended.

And here’s another drawback.

If your client’s heirs inherit a traditional IRA, that money hasn’t been taxed yet. When they start withdrawing money, it could have a significant impact on the amount of income tax they owe. If, for example, a grandchild is in her 40s and in her peak earning years, adding extra income via forced IRA withdrawals is probably going to bump up her tax bracket, forcing her to pay more.

Most parents and grandparents don’t want to leave behind a tax burden.

But that’s exactly what could happen with the elimination of the stretch provision.

Get estate planning case design tips!

Call us at 800-823-4852 and ask for a brokerage manager, or click the button to send us a message. We're always happy to help!

Life Insurance = A Better Opportunity

So what are your clients supposed to do with the money in that IRA?

They can still leave it to the kids or grandkids – that hasn’t changed.

All that’s changed is the vehicle for getting it to them. It’s far more efficient for your clients to withdraw their qualified money and buy a cash value life insurance policy. This creates an income-tax-free death benefit for the kids or grandkids, free of probate. Plus, in most states, some or all of the death benefit is protected from creditors (as long as the insured didn’t file for bankruptcy).

Another benefit? Cash value policies with an LTC rider can act as a hedge against the need for long-term care. If your clients don't want to commit to buying expensive stand-alone LTC coverage, spending a fraction of that cost on an LTC rider allows them to dip into the policy's death benefit later, should they need it. Even if they prefer all that money to go to the kids, in these uncertain economic times, it never hurts to have a plan B. If they were confident about self-insuring before the COVID-19 pandemic's economic fallout, they may not feel the same way right now.

Life Insurance Trust = A Better Opportunity with More Control

Removing the tax burden from their heirs and creating a financial plan B for themselves are great reasons to use this strategy. But those aren't the only advantages. Your clients can also control how and when their heirs spend the proceeds. By funding a life insurance trust, they can dictate how the death benefit is distributed to their beneficiaries. For example, they can specify that some or all of it must be used for:

  • Education
  • A wedding
  • A house
  • Starting or continuing a business

This can all happen without the limitations previously imposed on their qualified money. No RMDs, no 10-year rule, no confusing IRA “see-through” trust rules. Just a straightforward transaction with no tax or probate implications. Putting stipulations on an inheritance may seem a bit draconian - but think about how people's priorities have changed since the pandemic. Now that many small businesses are fighting to stay afloat, owners may think differently about having a say in how their legacies are spent. Others are starting new businesses to serve needs we didn't know we had, and they can ensure there's money to help their heirs continue the tradition. It's entirely up to them - and that's the whole point.

That’s our look at how to use life insurance instead of a stretch IRA to transfer wealth!

Have you heard from clients whose priorities have changed since the COVID-19 outbreak? Or clients who are worried about the safety and stability of their retirement portfolio? Tell us in the comments!

Need help with an irrevocable life insurance trust (ILIT)?

Call us at 800-823-4852 and ask for a brokerage manager, or click the button to send us a message. We're always happy to help!