Wealth Replacement Strategy
Donors frequently hear from their advisors that their Retirement Plan is the most tax-hostile asset in their estate and that the Retirement Plan should be the first asset donors use to create their charitable legacy. But given that a Retirement Plan is frequently the largest asset in a donor’s estate, Donors struggle with whether their children are receiving an appropriate inheritance, even though they know their children will have to pay income taxes on an inherited Retirement Plan.
There is a way to create your legacy at Emma Willard School, while at the same time increasing your children’s net inheritance. Here is an example of how it works:
The Donor has an IRA with a $600,000 balance. The Donor knows that if nothing is done, the Donor’s children will have to pay $180,000 (30% bracket) in income taxes leaving them with a net inheritance of $420,000. Instead the Donor names Emma Willard School the beneficiary of the IRA upon the death of the donor and the Donor’s spouse.
The Donor then creates an irrevocable life insurance trust to buy a $600,000 life insurance policy to replace the IRA assets which now go to Emma Willard School. The life insurance proceeds are paid upon the death of the second parent, which is the exact same time the children would have received the balance in the parent’s IRA. Since the proceeds are paid upon the second spouse’s death, the premiums are less than a single life policy. In our example of the donors being age 71, the annual premium is $12,600 and is funded with the Required Minimum Distributions (RMD) from the IRA.
HERE’S WHAT THE DONOR HAS ACCOMPLISHED:
Emma Willard School receives $600,000 tax-free from the IRA given its not-for-profit status.
The children instead of receiving $600,000 as beneficiaries of the retirement plan and netting $420,000 after taxes, receive $600,000 tax-free as beneficiaries of the life insurance policy.
The Donor leaves a philanthropic and family legacy of $1.2 million dollars, nearly three times the $420,000 legacy the Donor would have left had philanthropy not been part of the goal.
The information presented on these web pages is not offered as legal or tax advice. You are urged to seek the advice of your tax advisor, attorney, and/or financial planner to make certain any gift you are considering fits well in your specific circumstances.